Carter Bankshares, Inc. 10-Q

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk 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 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 400 4.1% (3.9)% 300 3.6% (2.2)% 200 2.8% (1.0)% 100 1.7% (0.3)% -100 0.3% 3.1% -200 1.0% 6.2% -300 2.3% 6.1% -400 —% 4.8% 72 Table of Contents CARTER BANKSHARES, INC. AND SUBSIDIARIES ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (continued) 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; and • 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 400 (18.6) % (21.3) % 300 (12.4) % (14.1) % 200 (7.0) % (7.9) % 100 (2.7) % (3.1) % -100 1.8 % 2.0 % -200 2.9 % 2.6 % -300 0.9 % (0.4) % -400 (3.6) % (9.9) %