First Internet Bancorp 10-Q

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, foreign exchange rates and equity prices. The primary source of market risk for the Company is interest rate risk, which can be defined as the risk to earnings and the value of our equity resulting from changes in market interest rates. Interest rate risk arises in the normal course of business to the extent that there are timing and volume differences between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid, withdrawn, re-priced or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. We monitor the Company’s interest rate risk position using income simulation models and economic value of equity (“EVE”) sensitivity analysis that capture both short-term and long-term interest rate risk exposure. Income simulation involves forecasting net interest income (“NII”) under a variety of interest rate scenarios. We use EVE sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest-rate scenarios. Modeling the sensitivity of NII and EVE to changes in market interest rates is highly dependent on the assumptions incorporated into the modeling process, especially those pertaining to non-maturity deposit accounts. These assumptions are reviewed and refined on an ongoing basis by the Company. We continually model our NII and EVE positions with various interest rate scenarios and assumptions of future balance sheet composition. We utilize implied forward rates as its base case scenario which reflects market expectations for rate increases over the next 24 months. Presented below is the estimated impact on our NII and EVE position as of June 30, 2024, assuming a static balance sheet and instantaneous parallel shifts in interest rates: % Change from Base Case for Instantaneous Parallel Changes in Rates Implied Forward Curve -200 Basis Points Implied Forward Curve -100 Basis Points Base Implied Forward Curve Implied Forward Curve +50 Basis Points Implied Forward Curve +100 Basis Points NII - Year 1 16.60 % 9.25 % N/A (3.66 %) (7.32 %) NII - Year 2 44.46 % 41.04 % 32.79 % 28.82 % 24.67 % EVE 21.68 % 13.96 % N/A (6.65 %) (13.44 %) To supplement the instantaneous rate shocks required by regulatory guidance, we also calculate our interest rate risk position assuming a gradual change in market interest rates. This gradual change is commonly referred to as a “rate ramp” and evenly allocates a change in interest rates over a specified time period. Presented below is the estimated impact on the Company’s NII and EVE position as of June 30, 2024, assuming a static balance sheet and gradual parallel shifts in interest rates: % Change from Base Case for Gradual Changes in Rates Implied Forward Curve -200 Basis Points Implied Forward Curve -100 Basis Points Base Implied Forward Curve Implied Forward Curve +50 Basis Points Implied Forward Curve +100 Basis Points NII - Year 1 7.21 % 3.78 % N/A (2.23 %) (4.60 %) NII - Year 2 46.28 % 41.67 % 32.79 % 27.28 % 21.52 % EVE 19.91 % 12.95 % N/A (7.48 %) (15.10 %) 71 The NII and EVE figures presented in the tables above are reflective of a static balance sheet, and do not incorporate either balance sheet growth or contraction, or strategies to increase net interest income while managing volatility arising from shifts in market interest rates. As such, it is likely that actual results will differ from what is presented in the tables above. Balance sheet strategies to achieve such objectives may include: • Increasing the proportion of low-duration or variable-rate loans to total loans, including organic growth in small business, construction or C&I lending, and declines in longer-term loan portfolios • Selling longer-term fixed rate loans • Increasing the proportion of lower cost non-maturity deposits to total deposits • Extending the duration of wholesale funding • Executing derivative strategies to synthetically extend liabilities or shorten asset duration • Repositioning the investment portfolio to manage its duration