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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2026-08-06 compared with 2026-05-07 · 43 added, 48 removed, 19 unchanged (83% of the section changed)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 arises primarily from interest rate risk inherent in lending, investment, and deposit-taking activities.

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 SOFR (basis risk).

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.

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.

Market risk is the risk that changes in market factors, including interest rates, foreign exchange rates, commodity prices, or equity prices, could adversely affect the Company’s earnings or capital.

For the Company, market risk arises primarily from interest rate risk associated with its lending, investment, and deposit-taking activities.

Interest rate risk results from differences in the timing of the repricing and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected cash flows or maturities of assets and liabilities resulting from embedded options, such as borrowers’ ability to prepay loans or depositors’ ability to withdraw certificates of deposit before maturity (option risk), changes in the shape and slope of the yield curve (yield curve risk), and changes in the relationships between different market interest rate indices, such as U.S.

Treasuries and other benchmark rates (basis risk).

Changes in interest rates affect earnings primarily through their impact on net interest income and other interest-sensitive revenues and expenses.

Interest rate changes also affect capital by altering the present value of expected future cash flows.

While assuming interest rate risk is an inherent part of banking and an important source of profitability and shareholder value, excessive exposure can adversely affect earnings, capital, liquidity, and overall financial condition.

The Company’s ALCO is responsible for monitoring the Company’s interest rate risk position, establishing policies and limits to manage exposure, and implementing strategies designed to optimize the balance between asset yields and funding costs within established policy limits.

The Board of Directors’ Investment / Interest Rate Risk Committee provides oversight by reviewing and approving the policies established by ALCO.

Earnings Simulation Modeling

The ALCO uses an asset liability model (“ALM”) to forecast earning simulations that measure the sensitivity of net interest income to changes in interest rates.

The ALM calculates an earnings estimate based on current and projected balances and rates.

This method is subject to the accuracy of the assumptions that support the ALM process.

The ALCO derives the assumptions used in the ALM from historical trends and management’s outlook, including expected loan growth, loan prepayment rates, deposit growth rates, changes to deposit product betas and non-maturity deposit decay rates, and projected yields and rates.

The ALM assumes that all maturities, calls, and prepayments in the securities portfolio are reinvested in like instruments.

These assumptions may not be realized and unanticipated events and circumstances may also occur that cause the assumptions to be inaccurate.

The ALM also does not take into account any future actions management may take to mitigate the impact of unforeseen interest rate changes.

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 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.

Interest rates on unique asset and liability accounts move differently when the short-term market rate changes.

These differences are reflected in the different rate scenarios utilized by the ALM.

For earning simulations, our policy guidelines limit the change in net interest income over a 12-month and 24-month horizon using rate shocks of +/- 100, 200, 300, 400 basis points and for non-parallel yield curve shift scenarios.

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

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

The following table reflects 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.

March 31, 2026 December 31, 2025

The ALCO uses an asset/liability management (“ALM”) model to estimate the sensitivity of net interest income to changes in market interest rates.

The model projects earnings under a variety of interest rate scenarios using current and forecasted balance sheet volumes, contractual repricing characteristics, and key behavioral assumptions.

Significant assumptions include expected loan growth, loan prepayments, deposit growth and pricing, non-maturity deposit betas and decay rates, and projected market interest rates and investment yields.

The ALM model assumes that maturing, called, and prepaid securities are reinvested in similar investment instruments and that projected balance sheet assumptions remain consistent throughout the forecast period.

Because the model relies on numerous assumptions, actual results may differ materially from simulated results.

In addition, the model does not reflect potential management actions that could be taken in response to changing market conditions.

ALCO reviews model assumptions at least quarterly and performs periodic sensitivity analyses of key assumptions, including deposit betas, deposit decay rates, and loan prepayment speeds, to assess their impact on projected results.

The ALM model evaluates the Company’s exposure to interest rate risk using multiple interest rate scenarios, including instantaneous parallel rate shocks of +/- 100, 200, 300, and 400 basis points, as well as selected non-parallel yield curve scenarios.

The primary measure monitored by ALCO is the estimated percentage change in net interest income over a twelve-month forecast horizon.

The following table presents the estimated percentage change in pretax net interest income over the next twelve months under various instantaneous parallel interest rate shocks at June 30, 2026 and December 31, 2025.

June 30, 2026 December 31, 2025

Change in Interest Rate (basis points) % Change in Pretax Net Interest Income % Change in Pretax Net Interest Income

5 unchanged sentences

-200 1.0% 6.2%

The above table indicates that as of March 31, 2026, in a rising interest rate environment, the Company is positioned to have a small increase 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 also have a slight increase in net interest income for less severe parallel rate shocks driven by the same factors discussed above and below.

The slightly asset sensitive position at March 31, 2026 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) the recent shortened maturities of the time deposit portfolio over the past 24 months 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), 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, and 4) the recent balance sheet composition shift related to the Transaction with proceeds being used to retire all outstanding FHLB borrowings and the balance of the proceeds being held as Excess Reserve with the Federal Reserve Bank currently yielding the floating Interest Rate on Reserve Balances (IORB) of 3.65%.

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 DCF analysis.

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

The change in net economic value of equity over different rate environments is an indication of the longer-term earnings capability of the balance sheet.

The Company uses the same assumptions in the economic value of equity simulation model as in the earnings simulation model.

The economic value of equity simulation model uses instantaneous rate shocks to the balance sheet.

For economic value of equity simulation, our policy guidelines limit the change in economic value of equity given changes in rates of +/- 100, 200, 300, 400 basis points and for non-parallel yield curve shift scenarios.

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

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.

-300 2.3% 6.1%

CARTER BANKSHARES, INC.

1 unchanged sentence

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued)

The following table reflects the economic value of equity analyses results at the dates presented.

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

March 31, 2026 December 31, 2025

The June 30, 2026 earnings simulation indicates that the Company remains modestly asset sensitive.

Under rising rate scenarios, projected net interest income increases modestly due primarily to the repricing characteristics of earning assets and funding sources, the current balance sheet composition, and asset and liability maturity structures.

Under moderate declining rate scenarios, projected net interest income also improves modestly, reflecting the Company’s deposit pricing assumptions and balance sheet positioning.

The Company’s interest rate risk profile at June 30, 2026 reflects several factors, including:

• higher than market rate unfunded loan commitments originated during 2024 and early 2025 that are expected to fund over the next twelve months;

• a shorter duration time deposit portfolio resulting from promotional deposit campaigns during the recent inverted yield curve environment;

• deposit pricing assumptions that incorporate more responsive non-maturity deposit betas in declining rate environments based on observed customer behavior during the most recent interest rate cycle;

• changes in the balance sheet following the Company’s recent strategic transactions, including the repayment of all outstanding FHLB borrowings and the investment of remaining excess liquidity in reserve balances at the Federal Reserve, which earn the Interest Rate on Reserve Balances (IORB) rate of 3.65%.

Economic Value of Equity Modeling

Economic value of equity (“EVE”) simulation is used to estimate the sensitivity of the fair value of the Company’s assets and liabilities to changes in interest rates.

The ALM calculates EVE using discounted cash flow (“DCF”) analysis, with economic value defined as the present value of projected asset cash flows less the present value of projected liability cash flows.

Changes in EVE under various interest rate scenarios provide an indication of the longer-term impact of interest rate movements on the Company’s capital position.

The EVE model incorporates the same key assumptions used in the earnings simulation model, including assumptions related to loan prepayments, deposit behavior, and balance sheet growth.

The analysis applies instantaneous parallel interest rate shocks to the current balance sheet and measures the resulting change in EVE.

The Company’s policy guidelines establish limits for changes in EVE under instantaneous parallel interest rate shocks of +/- 100, 200, 300, and 400 basis points, as well as selected non-parallel yield curve scenarios.

Results for the EVE analysis are primarily influenced by the shape of the yield curve, option-adjusted discount spreads applied to projected cash flows, and assumptions regarding the expected lives of interest-earning assets and interest-bearing liabilities.

Because the analysis is based on numerous assumptions, actual results may differ from model outcomes as market conditions, customer behavior, and balance sheet composition change over time.

The following table presents the estimated percentage change in EVE under various instantaneous interest rate shock scenarios at the dates indicated.

At both June 30, 2026 and December 31, 2025, modeled results remained within management’s established policy limits.

June 30, 2026 December 31, 2025

Change in Interest Rate (basis points) % Change in Economic Value of Equity % Change in Economic Value of Equity

5 unchanged sentences

-200 2.9 % 2.6 %

-300 0.9 % (0.4) %

-400 (3.6) % (9.9) %

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-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk