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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2026-03-05 compared with 2025-03-07 · 50 added, 38 removed, 248 unchanged (26% of the section changed)

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Interest rate risk can arise from timing differences in the repricing and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time, depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve, where interest rates increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S.

Treasuries and Secured Overnight Financing Rate (“SOFR”) (basis risk).

Treasuries and SOFR (basis risk).

Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels.

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However, excessive interest rate risk can threaten a financial institution’s earnings, capital, liquidity, and solvency.

The Company’s ALCO is responsible for the reviewing the interest rate sensitivity position of the institution, establishing policies to monitor and limit exposure to this type of risk, and employing strategies to ensure our asset-liability structure produces the maximum yield-cost spread available based on current market conditions.

The Company’s ALCO is responsible for reviewing the interest rate sensitivity position of the institution, establishing policies to monitor and limit exposure to this type of risk, and employing strategies to ensure our asset-liability structure produces the maximum yield-cost spread available based on current market conditions.

The Company’s Investment / Interest Rate Risk Committee, a committee of the Board of Directors, reviews and approves the policies established by ALCO.

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A sensitivity analysis for deposit betas, deposit decay rates and loan prepayment speeds is performed at least annually within the ALM to help ALCO better understand the impact of these critical assumptions on the ALM results.

The ALCO reviews the assumptions of the ALM at least quarterly and periodically adjusts them when deemed appropriate.

The ALCO reviews the assumptions of the ALM at least quarterly and periodically adjusts the ALM assumptions when deemed appropriate.

The ALCO also uses different interest rate scenarios and shifts in yield curve shapes to measure the sensitivity of earnings to various interest rate environments.

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We have temporarily suspended the + 300 and + 400 basis point rate shock analyses.

Due to the FOMC’s recent action taken at their last three scheduled meetings of 2024 to reduce the Fed Funds Target Rate range by an aggregate of 100 bps from 5.25% - 5.50% to 4.25% - 4.50% coupled with current rate forecasts that imply that the FOMC is unlikely to increase the Fed Funds Target Rate during 2025, we believe the impact to net interest income when evaluating the + 300 and +400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position nor does it project a probable interest rate environment for the foreseeable future.

Due to the FOMC’s recent actions to reduce the Fed Funds Target Rate by 25 bps during each of its September 2025, October 2025 and December 2025 meetings and the current rate forecast that implies the FOMC may continue to reduce the Fed Funds Target Rate during 2026, we believe the impact to net interest income when evaluating the + 300 and +400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position or project a probable interest rate environment for the foreseeable future.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued)

The following tables reflect the earnings simulation results for the periods presented utilizing a forecasted static balance sheet over the next twelve months.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following tables reflect the earnings simulation results at the dates presented utilizing a forecasted static balance sheet over the next twelve months.

All percentage changes presented are within prescribed ranges set by ALCO.

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-400 4.8 % 6.6 %

The results from the earnings simulation imply that the Company’s balance sheet is slightly liability sensitive balance sheet at December 31, 2024 and December 31, 2023.

The above table indicates that, in a rising interest rate environment, the Company is positioned to have a small increase in net interest income for the same asset and liability mix due to the balance sheet composition, related maturity structures, and repricing correlations to market interest rates for assets and liabilities.

However, in a declining interest rate environment, the Company is positioned to have a slightly more advantageous increase in net interest income for the same reasons discussed above.

The liability sensitive position at December 31, 2024 is due to a variety of factors which include 1) higher than market rate unfunded loan commitments that were originated during 2024 with fixed rates that are assumed to draw down, or convert to funded loan balances during the next twelve months, 2) shortening maturities of the time deposit portfolio due to shorter term time deposit promotional campaigns in response to the recent inverted yield curve, and 3) more aggressive non maturing deposit betas utilized in a rates down environment versus a rates up environment based on bank specific non maturing deposit rate beta assumptions observed during the most recent rate cycle.

The results from the earnings simulation imply that the Company’s balance sheet is liability sensitive at December 31, 2025 and December 31, 2024.

The above table indicates that as of December 31, 2025, in a rising interest rate environment, the Company is positioned to have a small decrease in net interest income due to the balance sheet composition, related maturity structures, and repricing correlations to market interest rates for assets and liabilities.

In a declining interest rate environment, the Company is positioned to have an increase in net interest income driven by the same factors discussed above and below.

The liability sensitive position at December 31, 2025 is due to a variety of factors which include 1) higher than market rate unfunded loan commitments that were originated during 2024 and early 2025 with fixed rates that are assumed to draw down, or convert to funded loan balances, during the next twelve months, 2) shortened maturities of the time deposit portfolio due to shorter term time deposit promotional campaigns in response to the inversion in the shorter end of the yield curve where financial institutions typically offer time deposit products (overnight out to five years) that began early in the first quarter of 2023 and continues today, and 3) more aggressive non maturing deposit betas utilized in a rates down environment versus a rates up environment based on bank specific non-maturing deposit rate beta assumptions observed during the most recent rate cycle.

Economic Value of Equity Modeling

Economic value of equity simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments.

The ALM calculates the economic value of equity based on discounted cash flow analysis.

The ALM calculates the economic value of equity based on DCF analysis.

The net economic value of equity is the economic value of all assets minus the economic value of all liabilities.

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We have temporarily suspended the + 300 and + 400 basis point rate shock analyses.

Due to the FOMC’s recent action taken at their last three scheduled meetings of 2024 to reduce the Fed Funds Target Rate range by 100 bps from 5.25% - 5.50% to 4.25% - 4.50% coupled with current rate forecasts that imply that the FOMC is unlikely to increase the Fed Funds Target Rate during 2025, we believe the impact to net interest income when evaluating the + 300 and +400 basis point rate shock scenarios do not provide meaningful insight into our interest rate risk position nor does it project a probable interest rate environment for the foreseeable future.

Results for the economic value of equity modeling are driven primarily by the shape of the underlying yield curves and option-adjusted spreads used to discount the projected cash flows of assets and liabilities, and the assumed life span of the assets and liabilities being discounted.

The following tables reflect the economic value of equity analyses results for the periods presented.

CARTER BANKSHARES, INC.

AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued)

The following tables reflect the economic value of equity analyses results at the dates presented.

All percentage changes presented are within prescribed ranges set by management.

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CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands Except per Share Data) December 31,

(Dollars in Thousands Except Share Data) December 31,

2025 December 31,

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Equity Securities 10,291 10,041

Loans Held-for-Sale 339 —

Portfolio Loans 3,879,560 3,624,826

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Bank Premises and Equipment, net 72,497 74,329

Goodwill 1,193 —

Core Deposit Intangible 940 —

Other Real Estate Owned, net 142 659

Federal Home Loan Bank Stock, at Cost 6,487 21,626

Other Restricted Stock, at Cost 16,830 6,487

Bank Owned Life Insurance 44,811 59,588

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Debit Card Expense 4,192 3,423 2,875

Tax Credit Amortization — — 621

Other 11,082 8,777 10,846

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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (continued)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31,

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Net Income $ 31,362 $ 24,523 $ 23,384

Other Comprehensive Income (Loss):

Net Unrealized Gains (Losses) on Securities Available-for-Sale:

Net Unrealized Gains (Losses) Arising during the Period 9,270 16,370 ( 111,542 )

Other Comprehensive Income:

Net Unrealized Gains on Securities Available-for-Sale:

Net Unrealized Gains Arising during the Period 28,633 9,270 16,370

Reclassification Adjustment for (Gains) Losses included in Net Income ( 46 ) ( 68 ) 1,521

Tax Effect ( 6,226 ) ( 2,284 ) ( 3,714 )

Net Unrealized Gains (Losses) Recognized in Other Comprehensive Income (Loss) 6,918 14,177 ( 87,318 )

Other Comprehensive Income (Loss):

Net Unrealized Gains Recognized in Other Comprehensive Income 22,361 6,918 14,177

Other Comprehensive Income:

22,361 6,918 14,177

Comprehensive Income (Loss) $ 31,441 $ 37,561 $ ( 37,200 )

Comprehensive Income $ 53,723 $ 31,441 $ 37,561

See accompanying notes to audited Consolidated Financial Statements.

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(Loss) Total Shareholder's

Balance January 1, 2022 $ 26,431 $ 143,988 $ 235,475 $ 1,702 $ 407,596

Balance December 31, 2022 $ 23,957 $ 104,693 $ 285,593 $ ( 85,616 ) $ 328,627

Cumulative Effect of the Adoption of ASU 2023-02 — — 106 — 106

Balance at January 1, 2023 $ 23,957 $ 104,693 $ 285,699 $ ( 85,616 ) $ 328,733

Net Income — — 23,384 — 23,384

Other Comprehensive Loss, Net of Tax — — — ( 87,318 ) ( 87,318 )

Other Comprehensive Income, Net of Tax — — — 14,177 14,177

1% Excise Tax on Stock Buybacks — ( 153 ) — — ( 153 )

Repurchase of Common Stock ( 1,132,232 shares)

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Balance December 31, 2023 $ 22,957 $ 90,642 $ 309,083 $ ( 71,439 ) $ 351,243

Cumulative Effect of the Adoption of ASU 2023-02 — — 106 — 106

Balance at January 1, 2023 23,957 104,693 285,699 ( 85,616 ) 328,733

Net Income — — 24,523 — 24,523

Other Comprehensive Income, Net of Tax — — — 6,918 6,918

1% Excise Tax on Stock Buybacks — ( 153 ) — — ( 153 )

Repurchase of Common Stock ( 1,132,232 shares)

( 1,132 ) ( 15,284 ) — — ( 16,416 )

Forfeiture of Restricted Stock ( 15,244 shares)

3 unchanged sentences

Recognition of Restricted Stock Compensation Expense

— 1,752 — — 1,752

Balance December 31, 2024 $ 23,069 $ 92,159 $ 333,606 $ ( 64,521 ) $ 384,313

1 unchanged sentence

Other Comprehensive Income, Net of Tax — — — 22,361 22,361

1% Excise Tax on Stock Buybacks — ( 181 ) — — ( 181 )

Repurchase of Common Stock ( 1,124,690 shares)

( 1,125 ) ( 18,875 ) — — ( 20,000 )

Forfeiture of Restricted Stock ( 23,670 shares)

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Recognition of Restricted Stock Compensation Expense

— 2,071 — — 2,071

Balance December 31, 2025 $ 22,083 $ 74,806 $ 364,968 $ ( 42,160 ) $ 419,697

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Unrealized Gain on Equity Securities ( 250 ) ( 41 ) —

Commercial Loan Swap Derivative Loss (Income) 12 219 ( 605 )

Commercial Loan Swap Derivative Loss 107 12 219

Increase in the Value of Life Insurance Contracts ( 1,511 ) ( 1,473 ) ( 1,381 )

Gain on Bank Owned Life Insurance Death Benefit ( 1,882 ) — —

1035 Exchange Fee on Bank Owned Life Insurance 660 — —

Balance Sheet Hedge Fair Value Adjustment 140 125 —

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Decrease (Increase) in Other Assets 1,859 1,614 ( 3,849 )

Increase in Other Liabilities 1,687 3,803 3,549

(Decrease) Increase in Other Liabilities ( 2,329 ) 1,687 3,803

Net Cash Provided By Operating Activities 39,862 36,938 46,730

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Proceeds from Sales 19,010 17,953 43,323

Proceeds from Maturities, Redemptions, and Pay-downs 63,454 48,901 84,693

Proceeds from Maturities, Redemptions, and Paydowns 96,923 63,454 48,901

Purchases ( 63,684 ) ( 15,126 ) ( 24,938 )

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Purchase of Bank Premises and Equipment, Net ( 8,055 ) ( 8,133 ) ( 9,798 )

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

Redemption (Purchase) of Federal Home Loan Bank Stock, net 15,139 ( 11,886 ) ( 7,388 )

Net Cash Acquired from Branch Purchase 53,573 — —

(Purchase) Redemption of Other Restricted Stock, net ( 10,343 ) 15,139 ( 11,886 )

Loan Originations, net ( 255,303 ) ( 135,888 ) ( 359,407 )

Proceeds from Death Benefit on Bank Owned Life Insurance 3,077 — —

Proceeds from Surrender of BOLI Policies 7,273 — —

Proceeds from Sales and Payments of Other Real Estate Owned 1,618 4,199 6,794

2 unchanged sentences

Net Change in Demand, Money Markets and Savings Accounts 29,811 93,787 ( 235,748 )

Increase (Decrease) in Certificates of Deposits 337,719 325,125 ( 82,792 )

(Decrease) Increase in Certificates of Deposits ( 28,270 ) 337,719 325,125

Proceeds from Federal Home Loan Bank Borrowings 610,000 1,870,000 3,441,685

Repayments on Federal Home Loan Bank Borrowings ( 501,500 ) ( 2,193,400 ) ( 3,228,835 )

(Repayments) Proceeds from Federal Funds Purchased, net — ( 17,870 ) 17,870

Repayments from Federal Funds Purchased, net — — ( 17,870 )

Repurchase of Common Stock ( 20,000 ) — ( 16,416 )

Net Cash Provided By Financing Activities 90,041 108,106 267,941

Net Increase (Decrease) in Cash and Cash Equivalents 76,642 7,660 ( 230,930 )

Net (Decrease) Increase in Cash and Cash Equivalents ( 26,008 ) 76,642 7,660

Cash and Cash Equivalents at Beginning of Period 131,171 54,529 46,869

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk