Carter Bankshares, Inc. [CARE] Filings

10-Q 1 care-20230630.htm 10-Q care-20230630

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, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39731

CARTER BANKSHARES, INC.

(Exact name of registrant as specified in its charter)


Virginia			85-3365661
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
1300 Kings Mountain Road	Martinsville	Virginia	24112
(Address of principal executive offices)			(Zip Code)

(Registrant’s telephone number, including area code) (276) 656-1776

(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 July 31, 2023 there were 23,329,523 shares of the registrant’s common stock issued and outstanding.

Table of Contents

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION			3
ITEM 1 – FINANCIAL STATEMENTS			3
Consolidated Balance Sheets - June 30 , 2023 (unaudited) and December 31, 2022 (audited)			3
Consolidated Statements of Income - Three and Six Months Ended June 30 , 2023 and 2022 (unaudited)			4
Consolidated Statements of Comprehensive (Loss) Income - Three and Six Months Ended June 30 , 2023 and 2022 (unaudited)			5
Consolidated Statements of Changes in Shareholders' Equity - Three and Six Months Ended June 30 , 2023 and 2022 (unaudited)			6
Consolidated Statements of Cash Flows – Six Months Ended June 30 , 2023 and 2022 (unaudited)			7
Notes to Unaudited Consolidated Financial Statements			8
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			37
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			62
ITEM 4 - CONTROLS AND PROCEDURES			64
PART II – OTHER INFORMATION			64
ITEM 1 - LEGAL PROCEEDINGS			64
ITEM 1A - RISK FACTORS			66
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			66
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES			66
ITEM 4 - MINE SAFETY DISCLOSURES			66
ITEM 5 - OTHER INFORMATION			66
ITEM 6 - EXHIBITS			67
SIGNATURES			68

Table of Contents

CARTER BANKSHARES, INC.

PART 1

ITEM 1 – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS


(Dollars in Thousands Except per Share Data)	June 30, 2023 (unaudited)		December 31, 2022 (audited)
ASSETS
Cash and Due From Banks, including Interest-bearing Deposits of $8,403 at June 30, 2023 and $4,505 at December 31, 2022	$	53,275	$	46,869


Total Cash and Cash Equivalents	53,275		46,869

Securities Available-for-Sale, at Fair Value	821,370		836,273
Loans Held-for-Sale	173		—

Portfolio Loans	3,330,442		3,148,913
Allowance for Credit Losses	(94,144)		(93,852)
Portfolio Loans, net	3,236,298		3,055,061
Bank Premises and Equipment, net	74,946		72,114

Other Real Estate Owned, net	3,379		8,393
Federal Home Loan Bank Stock, at Cost	19,403		9,740
Bank Owned Life Insurance	57,415		56,734
Other Assets	117,731		119,335
Total Assets	$	4,383,990	$	4,204,519

LIABILITIES
Deposits:
Noninterest-Bearing Demand	$	686,124	$	703,334
Interest-Bearing Demand	489,971		496,948
Money Market	422,780		484,238
Savings	526,588		684,287
Certificates of Deposit	1,451,540		1,261,526

Total Deposits	3,577,003		3,630,333
Federal Home Loan Bank Borrowings	407,135		180,550
Federal Funds Purchased	7,900		17,870
Other Liabilities	47,715		47,139
Total Liabilities	4,039,753		3,875,892

SHAREHOLDERS’ EQUITY
Common Stock, Par Value $1.00 per share, Authorized 100,000,000 Shares; Outstanding shares 23,371,835 at June 30, 2023 and 23,956,772 at December 31, 2022	23,372		23,957
Additional Paid-in Capital	95,506		104,693
Retained Earnings	307,344		285,593
Accumulated Other Comprehensive Loss	(81,985)		(85,616)
Total Shareholders’ Equity	344,237		328,627
Total Liabilities and Shareholders’ Equity	$	4,383,990	$	4,204,519

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,
	2023		2022		2023		2022
INTEREST INCOME
Loans, including fees
Taxable	$	34,529	$	31,323	$	77,657	$	59,068
Non-Taxable	803		916		1,635		1,868
Investment Securities
Taxable	7,688		4,452		15,081		8,184
Non-Taxable	166		187		328		354
Federal Reserve Bank Excess Reserves	209		58		388		95
Interest on Bank Deposits	6		3		27		28
Dividend Income	315		22		555		42
Total Interest Income	43,716		36,961		95,671		69,639
Interest Expense
Interest Expense on Deposits	11,782		4,412		19,301		8,811
Interest Expense on Federal Funds Purchased	71		4		247		4
Interest on Other Borrowings	5,152		86		8,627		143
Total Interest Expense	17,005		4,502		28,175		8,958
NET INTEREST INCOME	26,711		32,459		67,496		60,681
Provision for Credit Losses	85		1,814		1,500		2,444
Provision for Unfunded Commitments	360		269		444		33
Net Interest Income After Provision for Credit Losses	26,266		30,376		65,552		58,204
NONINTEREST INCOME
Gains (Losses) on Sales of Securities, net	3		76		(9)		52
Service Charges, Commissions and Fees	1,759		1,749		3,597		3,702
Debit Card Interchange Fees	1,934		1,850		4,039		3,782
Insurance Commissions	508		568		682		837
Bank Owned Life Insurance Income	341		334		680		668
(Losses) Gains on Sales and Write-downs of Bank Premises, net	—		(37)		—		346

Commercial Loan Swap Fee Income	—		756		114		756
Other	483		308		660		796
Total Noninterest Income	5,028		5,604		9,763		10,939
NONINTEREST EXPENSE
Salaries and Employee Benefits	13,649		12,444		27,301		24,201
Occupancy Expense, net	3,601		3,296		7,001		6,648
FDIC Insurance Expense	702		629		1,343		997
Other Taxes	786		819		1,590		1,623
Advertising Expense	431		267		770		506
Telephone Expense	412		454		839		942
Professional and Legal Fees	1,659		1,202		2,493		2,421
Data Processing	1,058		842		1,778		1,683


Debit Card Expense	771		659		1,250		1,292
Tax Credit Amortization	—		615		—		1,230



Other	2,467		2,183		4,747		4,378
Total Noninterest Expense	25,536		23,410		49,112		45,921
Income Before Income Taxes	5,758		12,570		26,203		23,222
Income Tax Provision	54		1,792		4,558		3,121
Net Income	$	5,704	$	10,778	$	21,645	$	20,101

Earnings per Common Share
Basic Earnings per Common Share	$	0.24	$	0.44	$	0.91	$	0.80
Diluted Earnings per Common Share	$	0.24	$	0.44	$	0.91	$	0.80
Average Shares Outstanding – Basic & Diluted	23,513,837		24,490,302		23,641,109		25,111,931

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)	2023		2022		2023		2022
Net Income	$	5,704	$	10,778	$	21,645	$	20,101
Other Comprehensive (Loss) Income:
Net Unrealized (Losses) Gains on Securities Available-for-Sale:
Net Unrealized (Losses) Gains Arising during the Period	(11,036)		(35,002)		4,597		(78,034)
Reclassification Adjustment for (Gains) Losses included in Net Income	(3)		(76)		9		(52)
Tax Effect	2,418		7,366		(975)		16,398
Net Unrealized (Losses) Gains Recognized in Other Comprehensive (Loss) Income	(8,621)		(27,712)		3,631		(61,688)
Other Comprehensive (Loss) Income	(8,621)		(27,712)		3,631		(61,688)
Comprehensive (Loss) Income	$	(2,917)	$	(16,934)	$	25,276	$	(41,587)

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, 2023
(Dollars in Thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
Balance at March 31, 2023	$	23,896	$	102,814	$	301,640	$	(73,364)	$	354,986
Net Income	—		—		5,704		—		5,704
Other Comprehensive Loss, Net of Tax	—		—		—		(8,621)		(8,621)
1% Excise Tax on Stock Buybacks	—		(93)		—		—		(93)
Repurchase of Common Stock (583,824 shares)	(584)		(7,569)		—		—		(8,153)
Forfeiture of Restricted Stock (2,007 shares)	(2)		(15)		—		—		(17)
Issuance of Restricted Stock (62,123 shares)	62		(62)		—		—		—
Recognition of Restricted Stock Compensation Expense	—		431		—		—		431
Balance at June 30, 2023	$	23,372	$	95,506	$	307,344	$	(81,985)	$	344,237


	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 or 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, 2023
(Dollars in Thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
Balance at January 1, 2023	$	23,957	$	104,693	$	285,593	$	(85,616)	$	328,627
Net Income	—		—		21,645		—		21,645
Other Comprehensive Income, Net of Tax	—		—		—		3,631		3,631
Cumulative Effect of the Adoption of ASU 2023-02	—		—		106		—		106
1% Excise Tax on Stock Buybacks	—		(93)		—		—		(93)
Repurchase of Common Stock (716,056 shares)	(716)		(9,697)		—		—		(10,413)
Forfeiture of Restricted Stock (3,694 shares)	(4)		(38)		—		—		(42)
Issuance of Restricted Stock (134,813 shares)	135		(135)		—		—		—
Recognition of Restricted Stock Compensation Expense	—		776		—		—		776
Balance at June 30, 2023	$	23,372	$	95,506	$	307,344	$	(81,985)	$	344,237


	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 January 1, 2022	$	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 or 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

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)	2023		2022
Net Income	$	21,645	$	20,101
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Provision for Credit Losses, including Provision for Unfunded Commitments	1,944		2,477

Origination of Loans Held-for-Sale	(3,527)		(4,955)
Proceeds From Loans Held-for-Sale	3,411		5,302
Depreciation/Amortization of Bank Premises and Equipment	3,079		2,977
Provision for Deferred Taxes	539		1,257
Net Amortization of Securities	2,528		3,156
Tax Credit Amortization	958		1,230
Gains on Sales of Mortgage Loans Held-for-Sale	(57)		(119)
Losses (Gains) on Sales of Securities, net	9		(52)



Commercial Loan Swap Derivative Loss (Income)	144		(443)

Increase in the Value of Life Insurance Contracts	(680)		(668)
Recognition of Restricted Stock Compensation Expense	776		704
Increase in Other Assets	(2,574)		(2,287)
Increase (Decrease) in Other Liabilities	1,397		(1,882)
Net Cash Provided By Operating Activities	29,592		26,798
INVESTING ACTIVITIES
Securities Available-for-Sale:
Proceeds from Sales	15,054		19,777
Proceeds from Maturities, Redemptions, and Pay-downs	26,856		50,033
Purchases	(24,938)		(135,634)
Purchase of Bank Premises and Equipment, Net	(5,977)		(2,528)

Proceeds from Sales of Bank Premises and Equipment, net	—		408

(Purchase) Redemption of Federal Home Loan Bank Stock, net	(9,663)		285
Loan Originations, net	(182,737)		(186,133)

Payments Received on Other Real Estate Owned	201		215

Proceeds from Sales of Other Real Estate Owned	4,818		3,718
Net Cash Used In Investing Activities	(176,386)		(249,859)
FINANCING ACTIVITIES
Net Change in Demand, Money Markets and Savings Accounts	(243,344)		138,772
Increase (Decrease) in Certificates of Deposits	190,014		(83,855)
Proceeds (Repayments) on Federal Home Loan Bank Borrowings, net	226,585		(7,000)

Repayments on Federal Funds Purchased, net	(9,970)		—
Repurchase of Common Stock	(10,085)		(32,415)
Net Cash Provided by Financing Activities	153,200		15,502
Net Increase (Decrease) in Cash and Cash Equivalents	6,406		(207,559)
Cash and Cash Equivalents at Beginning of Period	46,869		277,799
Cash and Cash Equivalents at End of Period	$	53,275	$	70,240

SUPPLEMENTARY DATA
Cash Interest Paid	$	23,697	$	9,040
Cash Paid for Income Taxes	5,550		333


Transfer from Fixed Assets to Other Real Estate Owned	—		1,584

Right-of-use Asset Recorded in Exchange for Lease Liabilities	—		2,879
Stock Repurchase Settled in Subsequent Period	(328)		—
Stock Repurchase Excise Tax Settled in Subsequent Period	(93)		—

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”). CB&T Investment Company (the “Investment Company”) is a subsidiary of the Bank. All significant intercompany transactions have been eliminated in consolidation.

Basis of Presentation: The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”), on March 10, 2023. In management’s opinion, the accompanying interim financial information reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position and the results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative to the results of operations that may be expected for a full year or any future period.

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

Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the Consolidated Financial Statements and the disclosures provided, and actual results could differ from those estimates. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, and changes in the financial condition of borrowers.

Accounting Standards Adopted in 2023

In March 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards (“ASU”) No. 2023-02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments in this ASU expands the use of the proportional amortization method of accounting, previously only allowable for Low Income Tax Housing Credits, (“LITHC”) investments, to equity investments in other tax credit structures that meet certain criteria. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted in any interim period. The Company reviewed its existing tax equity investment portfolios and evaluated the impact of the updated guidance on its Consolidated Financial Statements and elected to early adopt the amendments in this ASU as of June 30, 2023 on a modified retrospective basis, effective dated as of January 1, 2023. As a result, the Company recorded a transitional adjustment of $0.1 million to retained earnings.

The Company makes equity investments as a limited partner in various partnerships that sponsor historic tax credits (“HTC”) as a strategic tax initiative designed to receive tax credits and other tax benefits, such as deductible flow-through losses. The Company has evaluated all of the proportional amortization method qualifying criteria and has elected to apply the proportional amortization method at the HTC program level. The Company records the investment in the HTC as a component of other assets and uses the proportional amortization method to account for the investments in the HTC partnerships. Amortization related to these HTC investments is recorded on a net basis as a component of the provision for income taxes on the Consolidated Statements of Income. Prior to the ASU adoption, amortization was recorded as a component of noninterest expense on the Consolidated Statements of Income. The amendments in this ASU did not materially impact our Consolidated Financial Statements.

Accounting Standards Issued but Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts,

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION – (continued)

and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from the modification accounting requirements in GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022. In December 2022, the FASB issued ASU No 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendments in this ASU defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

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, effective January 1, 2022, the ICE Benchmark Administration Limited, the administrator of the LIBOR, ceased the publication of one-week and two-month USD LIBOR and ceased the publications of the remaining tenors of USD LIBOR (one, three, six, and 12-month) immediately after June 30, 2023. The Federal Reserve System (“FRB”) of New York 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 recommended the use of the Secured Overnight Financing Rate (“SOFR”) as a replacement index for LIBOR, and in March 2022 the U.S. passed legislation providing 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 FRB to identify a replacement benchmark based on SOFR. We ceased originating new LIBOR based variable rate loans as of December 31, 2021 per the ARRC’s guidance.

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 the following milestones required for a successful transition away from LIBOR: identified contracts that contain LIBOR language, documented the risks associated with the transition, reviewed existing contract language for the presence of appropriate fallback rate language, and developed appropriate loan fallback rate language for when LIBOR is retired. We have selected one-month term SOFR (published by the CME Group) as our replacement benchmark for LIBOR based loans. The financial impact regarding pricing, valuation and operations of the transition has been evaluated and is not expected to be material in nature. Our transition team is fully committed to working within the guidelines established by the FCA and ARRC to complete a smooth transition away from LIBOR.

As of June 30, 2023, approximately 5.3% of our loan portfolio consists of loans whose variable rate index is one month LIBOR.

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – EARNINGS PER SHARE

Basic earnings per common share is calculated by dividing net income allocated to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

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


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in Thousands, except share and per share data)	2023		2022		2023		2022
Numerator for Earnings per Common Share – Basic and Diluted
Net Income	$	5,704	$	10,778	$	21,645	$	20,101
Less: Income allocated to participating shares	49		69		168		110
Net Income Allocated to Common Shareholders - Basic & Diluted	$	5,655	$	10,709	$	21,477	$	19,991

Denominator:
Weighted Average Shares Outstanding, including Shares Considered Participating Securities	23,715,564		24,647,543		23,826,312		25,250,413
Less: Average Participating Securities	201,727		157,241		185,203		138,482
Weighted Average Common Shares Outstanding - Basic & Diluted	23,513,837		24,490,302		23,641,109		25,111,931

Earnings per Common Share – Basic	$	0.24	$	0.44	$	0.91	$	0.80
Earnings per Common Share – Diluted	$	0.24	$	0.44	$	0.91	$	0.80

All outstanding unvested restricted stock awards are considered participating securities for the earnings per share calculation. As such, these shares have been allocated to a portion of net income and are excluded from the diluted earnings per common share calculation.

NOTE 3 - INVESTMENT SECURITIES

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


	June 30, 2023
(Dollars in Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury Securities	$	14,371	$	—	$	(1,197)	$	13,174
U.S. Government Agency Securities	51,803		508		(803)		51,508
Residential Mortgage-Backed Securities	113,218		—		(13,055)		100,163
Commercial Mortgage-Backed Securities	35,844		426		(868)		35,402
Other Commercial Mortgage-Backed Securities	24,839		—		(3,256)		21,583
Asset Backed Securities	152,683		3		(13,964)		138,722
Collateralized Mortgage Obligations	183,193		—		(14,116)		169,077
States and Political Subdivisions	279,497		—		(46,066)		233,431
Corporate Notes	70,750		—		(12,440)		58,310
Total Debt Securities	$	926,198	$	937	$	(105,765)	$	821,370

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CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)


	December 31, 2022
(Dollars in Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury Securities	$	19,318	$	—	$	(1,452)	$	17,866
U.S. Government Agency Securities	50,334		218		(788)		49,764
Residential Mortgage-Backed Securities	115,694		—		(12,009)		103,685
Commercial Mortgage-Backed Securities	35,538		73		(936)		34,675
Other Commercial Mortgage-Backed Securities	24,987		9		(2,597)		22,399
Asset Backed Securities	156,552		—		(15,169)		141,383
Collateralized Mortgage Obligations	190,781		—		(14,159)		176,622
States and Political Subdivisions	281,753		—		(53,607)		228,146
Corporate Notes	70,750		—		(9,017)		61,733
Total Debt Securities	$	945,707	$	300	$	(109,734)	$	836,273

The Company did not have securities classified as held-to-maturity at June 30, 2023 or December 31, 2022.

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


	Three Months Ended June 30,			Six Months Ended June 30,
(Dollars in Thousands)		2023		2022		2023		2022
Proceeds from Sales of Securities Available-for-Sale		$	15,054	$	14,856	$	15,054	$	19,777

Gross Realized Gains		$	129	$	208	$	129	$	208
Gross Realized Losses		(126)		(132)		(138)		(156)
Net Realized Gains (Losses)		3		76		(9)		52
Tax Impact		$	1	$	16	$	(2)	$	11

Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold. The net realized gains (losses) above reflect reclassification adjustments in the calculation of Other Comprehensive (Loss) Income. The net realized gains (losses) are included in noninterest income as gains (losses) 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, 2023
(Dollars in Thousands)	Amortized Cost		Fair Value
Due in One Year or Less	$	5,188	$	5,071
Due after One Year through Five Years	14,152		13,007
Due after Five Years through Ten Years	252,246		217,945
Due after Ten Years	144,835		120,400
Residential Mortgage-Backed Securities	113,218		100,163
Commercial Mortgage-Backed Securities	35,844		35,402
Other Commercial Mortgage-Backed Securities	24,839		21,583
Collateralized Mortgage Obligations	183,193		169,077
Asset Backed Securities	152,683		138,722
Total Debt Securities	$	926,198	$	821,370

At June 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S. Government and its Agencies, in an amount greater than 10% of shareholders’ equity. The carrying value of securities pledged for various regulatory and legal requirements was $218.7 million at June 30, 2023 and $224.5 million at December 31, 2022.

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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, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:


	June 30, 2023
	Less Than 12 Months					12 Months or More					Total
(Dollars in Thousands)	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
U.S. Treasury Securities	—	$	—	$	—	4	$	13,174	$	(1,197)	4	$	13,174	$	(1,197)
U.S. Government Agency Securities	8	6,683		(74)		12	16,891		(729)		20	23,574		(803)
Residential Mortgage-Backed Securities	1	83		—		42	100,080		(13,055)		43	100,163		(13,055)
Commercial Mortgage-Backed Securities	5	1,998		(9)		49	19,471		(859)		54	21,469		(868)
Other Commercial Mortgage-Backed Securities	1	1,939		(582)		8	19,644		(2,674)		9	21,583		(3,256)
Asset Backed Securities	1	1,885		(115)		52	136,141		(13,849)		53	138,026		(13,964)
Collateralized Mortgage Obligations	—	—		—		85	169,077		(14,116)		85	169,077		(14,116)
States and Political Subdivisions	3	2,922		(130)		158	230,309		(45,936)		161	233,231		(46,066)
Corporate Notes	1	2,037		(213)		20	56,273		(12,227)		21	58,310		(12,440)
Total Debt Securities	20	$	17,547	$	(1,123)	430	$	761,060	$	(104,642)	450	$	778,607	$	(105,765)


	December 31, 2022
	Less Than 12 Months					12 Months or More					Total
(Dollars in Thousands)	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
U.S. Treasury Securities	3	$	14,080	$	(789)	2	$	3,786	$	(663)	5	$	17,866	$	(1,452)
U.S. Government Agency Securities	6	5,337		(26)		9	15,576		(762)		15	20,913		(788)
Residential Mortgage-Backed Securities	6	7,601		(372)		37	96,084		(11,637)		43	103,685		(12,009)
Commercial Mortgage-Backed Securities	7	7,843		(307)		49	15,675		(629)		56	23,518		(936)
Other Commercial Mortgage-Backed Securities	2	5,302		(617)		6	14,560		(1,980)		8	19,862		(2,597)
Asset Backed Securities	13	42,173		(2,984)		41	97,210		(12,185)		54	139,383		(15,169)
Collateralized Mortgage Obligations	35	66,362		(4,500)		50	110,260		(9,659)		85	176,622		(14,159)
States and Political Subdivisions	73	112,564		(19,706)		91	115,382		(33,901)		164	227,946		(53,607)
Corporate Notes	8	23,285		(2,965)		13	38,448		(6,052)		21	61,733		(9,017)
Total Debt Securities	153	$	284,547	$	(32,266)	298	$	506,981	$	(77,468)	451	$	791,528	$	(109,734)

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses, (“ACL”), on its investment securities during the quarter ended June 30, 2023 or the year ended December 31, 2022. The Company did not have any credit related net investment impairment losses. There were no securities classified as held-to-maturity at June 30, 2023 and December 31, 2022. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary, based on the composition of the portfolio at period end.

As of June 30, 2023, management does not intend to sell any security in an unrealized loss position and it is not more than likely that it will be required to sell any such security before the recovery of its amortized cost basis. The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage-related securities, general financial market uncertainty and market volatility. These conditions should not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date.

Table of Contents

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – INVESTMENT SECURITIES (continued)

As of June 30, 2023, management believes the unrealized losses detailed in the table above are not related to credit; therefore, no ACL has been recognized on the Company’s securities. Should the impairment of any of these securities become credit related, the impairment will be recognized by establishing an ACL through provision for credit losses in the period the credit related impairment is identified, while any non-credit loss will be recognized in accumulated other comprehensive loss, net of applicable taxes. During the three and six months ended June 30, 2023 and 2022, the Company had no credit related net investment impairment losses.

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, 2023		December 31, 2022
Commercial
Commercial Real Estate	$	1,642,597	$	1,470,562
Commercial and Industrial	279,156		309,792
Total Commercial Loans	1,921,753		1,780,354
Consumer
Residential Mortgages	707,893		657,948
Other Consumer	38,736		44,562
Total Consumer Loans	746,629