First Internet Bancorp
Annual Report 2015

Plain-text annual report

2 0 1 5 A N N U A L R E P O R T Great Heights Earnings per share up 104%. Total assets surpassed $1 billion, increasing more than 30%. Total shareholder return, over 70%, placed us first among all public companies in Indiana and second among all banks in America. We achieved great heights in 2015. We did it by identifying a need and imagining a solution. We did it by building a bridge between the essential banking services people and businesses need and the conveniences and economies made possible by world-changing technology. We did it by sticking with our vision of what a bank could be—and should be—in the digital age. 2 0 1 5 A N N U A L R E P O R T I F I N A N C I A L P E R F O R M A N C E 1269.9 970.5 953.9 802.3 732.4 585.4 636.4 503.9 501.2 306.4 335.2 358.2 Consistent Balance Sheet Growth Total Assets (in millions) Total Loans (in millions) 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 211% 152% 126% Loan Portfolio Composition Consumer Loans Residential Real Estate Loans Commercial Loans Five-Year Growth Compared to Similarly Sized Banks 26% 30% 28% First Internet Bancorp SNL Micro Cap US Banks Total Assets Total Loan Growth Total Deposit Growth 3.36% 3.17% 2.64% 2.29% 1.62% 1.23% .90% 2010 2011 2012 2013 2014 2015 .37% .50% .04% .37% .02% Strong Credit and Asset Quality Nonperforming Assets to Total Assets Nonperforming Loans to Total Loans I I T R O P E R L A U N N A 5 1 0 2 450 350 250 150 50 Comparison of Five-Year Cumulative Total Return 1 First Internet Bancorp NASDAQ Composite Index SNL Micro Cap US Bank Index 2010 2011 2012 2013 2014 2015 1 Assumes investment of $100 on December 31, 2010 90.4% 80.9% 76.5% 69.4% 63.1% 63.0% 60.8% 60.6% Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 (cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:4)(cid:8) Ratio Improvement 90,908 96,785 104,330 48,897 55,423 61,350 2010 2011 2012 2013 2014 2015 Shareholders' Equity 2 0 1 5 A N N U A L R E P O R T I I I C H A I R M A N ’ S M E S S A G E Dear Fellow Shareholder, What a year it was! Our 2015 earnings per share were up 104% over the prior year. First Internet Bancorp provided more than a 70% total shareholder return—placing our company first among Indiana-based public companies and second among banks across the country. In one year, we added $54 million in market capitalization, a 73% increase. The formula for our success is simple: We are executing our growth strategy. Assets at First Internet Bancorp crossed the billion-dollar threshold in 2015 and were up more than 30% from 2014. Our growth—and sustained growth, at that—significantly outpaces banks of similar size. Over the past five years, we have grown our loan balances by 211%, while comparable banks averaged 30% growth. Through this growth, we have achieved economies of scale that are critical to our continued financial success. Net income for the year was up 106% on revenues that were up 39% over 2014. Our tangible book value is up, and our improving efficiency ratio continues to reflect the impact of this growth. Importantly, though, we have achieved these results without sacrificing service. Concepts like “efficiency” and “economies of scale,” so critical to investors, are often at odds with customer expectations. We recognize that we have been and will continue to be successful because we are passionate about helping our customers succeed. We don’t view the business of banking as a commodity. Our business was born in 1999 after we identified a need. Put simply, we asked consumers what they wanted from a bank. As we have grown, we have kept an open dialogue with our customers and have maintained the discipline of aligning our product and service offerings with customer needs. While many banks layer online services atop a traditional branch network, First Internet Bank was built from the start to serve customers in the digital economy, and we continue to delight them with customer-centric digital banking solutions. Take, for instance, the mobile phone: Millennials look at their phones more than 40 times a day. Even those of us who are slightly (ahem) more advanced in age seldom go long without sneaking a peek at our mobile devices. In 2015, we introduced two forms of biometric authentication—Touch ID and Eyeprint ID—to our mobile app to make it as easy for our customers to access their accounts as it is to touch a button or take a selfie. Today, consumers prefer online and mobile banking two-to-one over branch banking. (This helps to explain why more than 5,000 bank branches have closed across the country over the past five years.) According to Accenture, almost 40% of consumers ages 18-34, the “digital natives,” would consider V I T R O P E R L A U N N A 5 1 0 2 a bank with no branches. Our business model uniquely positions us to build relationships, with a combination of product, service, value, and a story that consumers find compelling. Using technology to modernize the delivery channel of an industry deeply rooted in tradition, we have also given convenience and control back to the businesses we serve. Our loan portfolio, once made up almost entirely of consumer loans, is now more diversified—with 61% of our loan portfolio composed of commercial loans. An evolution of that scale requires dedication and focus. Across our organization, we have talented people on a mission to establish and strengthen customer connections. The leaders of our lending teams and members of their staff are highly seasoned, career bankers who bring deep industry knowledge and relationships from regional, super-regional, or money center banks. To attract the kind of talent we need to execute our strategy, we have made a concerted effort to be an employer of choice. Just as we listen to our customers, we listen to our employees. We have expanded employee opportunities for education, professional enrichment, philanthropy, and fun competition. As a result, First Internet Bank has received two consecutive Top Workplaces honors from The Indianapolis Star and three consecutive Best Banks to Work For titles from American Banker. Anonymous, voluntary employee surveys are the basis for these awards. Employees noted First Internet Bank is a “unique banking organization with [an] experienced management team not afraid to try new things,” and that the company “rewards hard work. The environment is great.” We genuinely like what we do—and it shows: in the relationships we build with our customers, in the capabilities we continue to expand and enhance, and in the returns we have been able to provide on investments in First Internet Bancorp. On behalf of everyone at First Internet and the Board of Directors, thank you for your continued support. Sincerely, D AV I D B . B E C K E R Chairman, President, and Chief Executive Officer 2 0 1 5 A N N U A L R E P O R T V C U S T O M E R F O C U S : D AV I D C O U C H Saving Money is Great. Saving Time is Better. H O W F I R S T I N T E R N E T B A N K H E L P E D D AV I D C O U C H T A K E H I S P E R S O N A L B A N K I N G T O T H E N E X T L E V E L . I V T R O P E R L A U N N A 5 1 0 2 For David Couch, there have never been enough hours in the day. As president and CEO of Artifex Finishing—a professional finishing service for wood, metal, plastic, and other material surfaces based in Dayton, Ohio—he often gets up before dawn and works well past normal business hours. Which doesn’t leave much time to get to the bank. That’s why David turned to First Internet Bank to handle his personal banking needs more than 15 years ago. He may have discovered First Internet Bank “on a whim” while browsing the web back in 2000, but his decision to choose us was anything but whimsical. He did the research—learning more about our security protocols, encryption methods, services, and rates—and decided it was worth a shot. He’s glad he did. We earn our customers’ trust with every transaction and interaction. Now, we don’t just handle his personal banking needs— we handle all the banking needs of Artifex Finishing, too. “I’ve been with lots of different banks over the years—too many to name. Over time I’ve dropped them. All my business goes through First Internet Bank,” said David. “The length of our relationship speaks volumes. I get top-notch customer service, and combined with the value they give me, that goes a long way.” Today, David’s business is booming. And the days still aren’t long enough. “Everyone who knows me knows I’m a busy guy, and that time is my most precious resource. First Internet Bank’s competitive rates and customer service are great—but it’s the extra time they give me that I love most.” 2 0 1 5 A N N U A L R E P O R T V I I C U S T O M E R F O C U S : A R B O R H O M E S Constructing a Lasting Partnership W E ’ R E H E L P I N G A R B O R H O M E S R E A C H N E W H E I G H T S I N T H E H O M E B U I L D I N G B U S I N E S S . I I I V T R O P E R L A U N N A 5 1 0 2 The economic downturn bulldozed the residential construction business, and new home sales were slow to pick up after the general economy recovered. Even Arbor Homes, among the largest and most respected home builders based in Indianapolis, had trouble getting a foot in the door with many commercial real estate lenders. But First Internet Bank saw potential in developing a relationship. “We were one of the few home builders that made it through the crash, and First Internet Bank was one of the few banks that still had interest in working with us,” said Curtis Rector, founder and CEO of Arbor Homes. “They’ve been a perfect match for us because they have lots of experience with our industry and a unique understanding of how our business works.” The relationship between First Internet Bank and Arbor Homes started small. As our relationship grew, we found an opportunity to customize loan structures in order to help streamline Arbor Homes’ loan process, making it faster and more cost effective. “Whereas most banks structure separate loans for each individual community financed, First Internet Bank aggregated our loans so we have just one note and a single structure for most of our developments,” says Curtis. “Innovative ideas like this go a long way toward helping our business succeed, which is just one reason I recommend First Internet Bank to other people all the time.” Planning, perseverance, and a quality product are the foundation for success at Arbor Homes—and we have a banking partnership built to last. 2 0 1 5 A N N U A L R E P O R T I X C U S T O M E R F O C U S : B I C Y C L E G A R A G E I N D Y Putting the Pedal to our Mettle O U R P E O P L E M A K E S U R E T H AT B I C Y C L E G A R A G E I N D Y ’ S P AT H T O G R E AT H E I G H T S I S N E V E R A N U P H I L L R I D E . X T R O P E R L A U N N A 5 1 0 2 Say you’re looking for a bike. You know exactly what you want: a mountain bike with an XT-9 parts set, F20 clipless pedals, and a carbon fiber frame. Randy Clark, founder and president of Bicycle Garage Indy, knows that people make the difference between a good business and a great one. And that’s especially true for a bank. so that funds can be transferred instantly. And because First Internet Bank has no branches, it’s easy to keep Bicycle Garage Indy’s fees low without sacrificing convenience. If you live in the Indianapolis area, you know the people to see. With three Central Indiana locations, Bicycle Garage Indy is Indianapolis’ go-to bike and fitness retailer. They’ve been in business for more than 30 years—and they’ve built their business on the strength of their personable, expert staff and the outstanding service they provide. “Our partnership with First Internet Bank is founded on strong relationships with the people who work there,” said Randy. “They’re responsive, competent, can-do people—and they do a great job of taking care of us.” Easy access to checking and savings accounts are critical to any retail business. We set up Bicycle Garage Indy with an efficient check scanner But in the end, it’s still all about the people. “They use lots of cool technology to help us,” said Randy. “But what you really want out of a bank is fairness, competence, communication. They’ve earned our loyalty. Their people make them the best.” 2 0 1 5 A N N U A L R E P O R T X I O U R P E O P L E Board of Directors of First Internet Bancorp Senior Management of First Internet Bank D AV I D B . B E C K E R Chairman, President, and Chief Executive Officer D AV I D R . L OV E J OY Vice Chairman Managing Director Greycourt & Co. J O H N K . K E A C H , J R . Private Investor Former Chairman, President, and Chief Executive Officer Indiana Community Bancorp A N N D . M U R T L O W President and Chief Executive Officer United Way of Central Indiana R A L P H R . W H I T N E Y, J R . Principal Hammond, Kennedy, Whitney & Co., Inc. J E R RY W I L L I A M S Private Investor Formerly Of Counsel Taft Stettinius & Hollister, LLP D AV I D B . B E C K E R * President and Chief Executive Officer C . C H A R L E S P E R F E T T I * Senior Vice President and Corporate Secretary K E N N E T H J . L OV I K * Senior Vice President and Chief Financial Officer S T E P H E N C . FA R R E L L Senior Vice President Chief Credit Officer and Credit Administrator M I C H A E L E . L E W I S Senior Vice President Commercial Real Estate Banking N I C O L E S . L O R C H * Senior Vice President Retail Banking K E V I N B . Q U I N N Senior Vice President Retail Lending J E A N L . W O J T O W I C Z President Cambridge Capital Management Corp. A N N E M . S H A R K E Y Senior Vice President Operations C O N N I E J . S H E P H E R D Senior Vice President Commercial Banking Shareholder Information C O M M O N S T O C K First Internet Bancorp is listed on the NASDAQ Capital Market under the symbol INBK C O R P O R AT E H E A D Q U A R T E R S First Internet Bancorp 11201 USA Parkway Fishers, IN 46037 (317) 532-7900 www.firstinternetbancorp.com I N V E S T O R R E L AT I O N S C O N TA C T Paula Deemer (317) 428-4628 investors@firstib.com T R A N S F E R A G E N T Computershare PO Box 30170 College Station, TX 77842 (800) 522-6645 www.computershare.com I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M BKD, LLP 201 N. Illinois Street, Suite 700 Indianapolis, IN 46244 (317) 383-4000 L E G A L C O U N S E L Faegre Baker Daniels, LLP 600 E. 96th Street, Suite 600 Indianapolis, IN 46240 (317) 569-9600 * Denotes Executive Officer of First Internet Bancorp I I X T R O P E R L A U N N A 5 1 0 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2015. or 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 001-35750 First Internet Bancorp (Exact Name of Registrant as Specified in its Charter) Indiana (State or other jurisdiction of incorporation or organization) 11201 USA Parkway Fishers, Indiana (Address of principal executive offices) 20-3489991 (I.R.S. Employer Identification No.) 46037 (Zip Code) (317) 532-7900 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of class Common stock, without par value Name of exchange on which registered NASDAQ Capital Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes No Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). Large Accelerated Filer Accelerated Filer Non-accelerated Filer (Do not check if a smaller reporting company) Smaller Reporting Company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $100.6 million, based on the closing sale price for the registrant’s common stock on that date. For purposes of determining this number, all officers and directors of the registrant are considered to be affiliates of the registrant. This number is provided only for the purpose of this report and does not represent an admission by either the registrant or any such person as to the status of such person. As of March 7, 2016, the registrant had 4,486,024 shares of common stock issued and outstanding. Documents Incorporated By Reference Portions of our Proxy Statement for our 2016 Annual Meeting of Shareholders are incorporated by reference in Part III. Cautionary Note Regarding Forward-Looking Statements This annual report on Form 10-K contains “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on the current expectations of First Internet Bancorp and its consolidated subsidiaries (“we,” “our,” “us”) regarding its business strategies, intended results and future performance. Forward- looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends,” “plan” and similar expressions. Such statements are subject to certain risks and uncertainties including: general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products, our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans; failures of or interruptions in the communication and information systems on which we rely to conduct our business that could reduce our revenues, increase our costs or lead to disruptions in our business; our plans to grow our commercial real estate and commercial and industrial loan portfolios which may carry greater risks of non-payment or other unfavorable consequences; our dependence on capital distributions from First Internet Bank of Indiana (the “Bank”); results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets; changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet; our liquidity requirements could be adversely affected by changes in our assets and liabilities; the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals; the growth and profitability of noninterest or fee income being less than expected; the loss of any key members of senior management; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies; and the effect of fiscal and governmental policies of the United States federal government. Additional factors that may affect our results include those discussed in this report under the heading “Risk Factors” and in other reports filed with the SEC. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Except as required by law, we do not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. i First Internet Bancorp Table of Contents PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits, Financial Statement Schedules SIGNATURES PAGE 1 11 20 20 20 20 21 23 25 40 40 40 40 41 42 43 43 43 43 44 47 ii Item 1. Business General PART I First Internet Bancorp is a bank holding company that conducts its business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank. First Internet Bank of Indiana was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. First Internet Bancorp was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank. When we refer to “First Internet Bancorp,” the “Company,” “we,” “us” and “our” in the remainder of this annual report on Form 10-K, we mean First Internet Bancorp and its consolidated subsidiaries, unless the context indicates otherwise. References to “First Internet Bank” or the “Bank” refer to First Internet Bank of Indiana, an Indiana chartered bank and wholly owned subsidiary of the Company. The Bank has one wholly owned subsidiary, JKH Realty Services, LLC, which was established on August 20, 2012 as a single member LLC to manage other real estate owned properties as needed. We offer a full complement of products and services on a nationwide basis. We conduct our deposit operations primarily over the Internet and have no traditional branch offices. We have diversified our operations by adding commercial real estate (“CRE”) lending, including nationwide single tenant lease financing and commercial and industrial (“C&I”) lending, including business banking/treasury management services to meet the needs of high-quality commercial borrowers and depositors. We have no significant customer concentrations within our loan portfolio. As of December 31, 2015, we had total assets of $1.3 billion, total liabilities of $1.2 billion, and shareholders’ equity of $104.3 million. We employed 152 full-time equivalent employees at December 31, 2015. Our principal executive offices are located at 11201 USA Parkway, Fishers, Indiana 46037 and our telephone number is (317) 532-7900. Business Strategies Our business model is significantly different from that of a typical community bank. We do not have a conventional brick and mortar branch system, but instead operate through our scalable Internet banking platform. The market area for our residential real estate lending, consumer lending, and deposit gathering activities is the entire United States. We also offer single tenant lease financing on a nationwide basis. Our other commercial banking activities, including CRE and C&I loans, corporate credit cards, and corporate treasury management services, are offered by our commercial banking team to businesses primarily within Central Indiana, Phoenix, Arizona and adjacent markets. Performance Growth. Total assets have increased 116.9% from $585.4 million at December 31, 2011 to $1.3 billion at December 31, 2015. This increase was driven primarily by strong organic growth. During the same time period, loans receivable increased from $335.2 million to $953.9 million and deposits increased from $486.7 million to $956.1 million, increases of 184.5% and 96.5%, respectively. Our sustained growth profile is the result of our flexible and highly scalable Internet banking platform that allows us to target a broad reach of customers across all 50 states. Additionally, key strategic commercial banking hires have enabled us to further expand our product offerings on both a local and national basis. At December 31, 2015, commercial loans comprised 61.1% of loans receivable compared to 16.1% at December 31, 2011. Earnings Trend. Net income has increased 180.3% from $3.2 million for the twelve months ended December 31, 2011 to $8.9 million for the twelve months ended December 31, 2015. Diluted earnings per share have increased 76.6% from $1.11 for the twelve months ended December 31, 2011 to $1.96 for the twelve months ended December 31, 2015. Asset Quality. We have maintained a high quality loan portfolio due to our emphasis on a strong credit culture, conservative underwriting standards, and a diverse national and local customer base. At December 31, 2015, our nonperforming assets to total assets was 0.37%, our nonperforming loans to total loans receivable was 0.02% and our allowance for loan losses to total loans receivable was 0.88%. 1 Strategic Focus We operate on a national basis through our scalable Internet banking platform to gather deposits and offer residential mortgage and consumer lending products rather than relying on a conventional brick and mortar branch system. We also primarily conduct commercial banking and related activities on a local basis, except for single tenant lease financing which is offered nationwide. Our overriding strategic focus is enhancing franchise and shareholder value while maintaining strong risk management policies and procedures. We believe the continued creation of franchise and shareholder value will be driven by profitable growth in consumer and commercial banking, effective underwriting, strong asset quality and efficient technology-driven operations. National Focus on Deposit and Consumer Banking Growth. Our first product offerings were basic deposit accounts, certificates of deposit, electronic bill pay and credit cards. Within 90 days of opening, we had accounts with consumers in all 50 states. Over the years, we added consumer loans, lines of credit, home equity loans and single-family mortgages. Our footprint for deposit gathering and these consumer lending activities is the entire nation. With the use of our Internet-based technology platform, we do not face geographic boundaries that traditional banks must overcome for customer acquisition. Armed with smart phones, tablets and computers, our customers can access our online banking system, bill pay, and remote deposit capture 24 hours a day, seven days a week, on a real-time basis. In addition, we have dedicated banking specialists who can service customer needs via telephone, email or online chat. We intend to continue to expand our deposit base by leveraging technology and through cross- selling capabilities as well as targeted marketing efforts. Commercial Banking Growth. We have continued to diversify our operations by adding commercial banking to complement our consumer platform. We offer traditional CRE loans, single tenant lease financing, C&I loans, corporate credit cards and treasury management services. Our commercial lending teams consist of seasoned commercial bankers, most of whom have had extensive careers with larger money center, super-regional or regional banks. These lenders leverage deep market knowledge and experience to serve commercial borrowers with a relationship-based approach. We are continuing to develop new products and services for this market which is expected to produce additional revenue. We also intend to grow and expand our commercial banking platform by hiring additional seasoned loan officers and relationship managers with specialized market or product expertise. Experience. Our management team and our Board of Directors are integral to our success. Our management team and Board of Directors are led by David B. Becker, the founder of First Internet Bank of Indiana. Mr. Becker is a seasoned business executive and entrepreneur with over three decades of management experience in the financial services and financial technology space, and has served as Chief Executive Officer since 2005. Mr. Becker has been the recipient of numerous business awards, including Ernst & Young Entrepreneur of the Year in 2001, and was inducted into the Central Indiana Business Hall of Fame in 2008. The senior management team consists of individuals with backgrounds in both regional and community banking and financial technology services. The senior management team is complemented by a dedicated Board of Directors with a wide range of experience from careers in financial services, legal and regulatory services, and industrial services. Profitability. We intend to continue to leverage our technology, our long-term customer relationships and our noninterest income sources to drive profitability. As we continue to grow, we believe that our model will produce a greater level of efficiency than more traditional community banks, with the goal of higher returns on assets and shareholders’ equity. Maintain Asset Quality, Diversified Loan Portfolio and Effective Underwriting. We place an emphasis on our strong credit culture and strict underwriting standards of diverse loan products to maintain our excellent credit quality. As of December 31, 2015, the composition of our loan portfolio was 38.4% consumer loans, 61.1% commercial loans and 0.5% net deferred loan origination costs and premiums and discounts on purchased loans. As of December 31, 2011, the composition of our loan portfolio was 82.9% consumer loans, 16.1% commercial loans and 1.0% net deferred loan origination costs and premiums and discounts on purchased loans. Efficiency Through Technology. To date, we have pursued growth in a prudent and disciplined fashion. We will continue to monitor our efficiency ratio and intend to invest in and utilize technology to compete more effectively as we grow in the future. Through our online account access services, augmented by our team of dedicated banking specialists, we can satisfy the needs of our retail and commercial customers in an efficient manner. Our data processing systems run on a “real-time” basis, unlike many banks that run a “batch system,” so customers benefit from an up-to-the-minute picture of their financial position, particularly our commercial customers who complete numerous transactions in a single day. We believe we have built a scalable banking infrastructure based upon technology, rather than a traditional branch network, and that our Internet banking processes are capable of supporting continued growth while improving operational efficiencies. Expand Market Share Through Disciplined Acquisition Strategy. We may expand through acquisitions on an opportunistic basis, primarily as a means of securing additional asset generation capabilities and product or geographic expertise. 2 Lending Activities We earn interest income on loans as well as fee income from the origination of loans. Lending activities include loans to individuals, which primarily consist of residential real estate loans, home equity loans and lines of credit, and consumer loans, and loans to commercial clients, which include commercial loans, commercial real estate loans, lines of credit, letters of credit, and single tenant lease financing. Residential real estate loans are either kept in our loan portfolio or sold to secondary investors, with gains or losses from the sales being recognized within noninterest income. Refer to Note 4 of the financial statements for further discussion of each loan portfolio segment. Deposit Activities and Other Sources of Funds We obtain deposits through the ACH network (direct deposit as well as customer-directed transfers of funds from outside financial institutions), remote and mobile deposit capture, mailed checks, wire transfers and a deposit-taking ATM network. Additionally, we had approximately $12.8 million in brokered time deposits at December 31, 2015 that were originated in prior years. The Bank does not own or operate any ATMs. Through network participation, the Bank’s customers are able to use nearly any ATM worldwide to withdraw cash. The Bank currently rebates up to $10.00 per customer per month for surcharges our customers incur when using an ATM owned by another institution. Management believes this program is more cost effective for the Bank, and more convenient for customers, than it would be to build and maintain a proprietary nationwide ATM network for our customers. By providing robust online capabilities, quality customer service and competitive pricing for the products and services offered, we have been able to develop relationships with our customers and build brand loyalty. As a result, we are not dependent upon costly account acquisition campaigns to attract new customers on a continual basis. Market Areas The market area for our residential real estate lending, consumer lending and deposit gathering activities is the entire United States. We also offer single tenant lease financing on a nationwide basis. Our other commercial banking activities, including CRE and C&I loans, corporate credit cards, and corporate treasury management services, are offered by our commercial banking team to businesses primarily within Central Indiana, Phoenix, Arizona, and adjacent markets. Competition The markets in which we compete to make loans and attract deposits are highly competitive. For retail banking activities, we compete with other banks that use the Internet as a primary service channel, including Ally Bank, EverBank and Bank of Internet. However, we also compete with other banks, savings banks, credit unions, investment banks, insurance companies, securities brokerages and other financial institutions, as nearly all have some form of Internet delivery for their services. For residential mortgage lending, competitors that use the Internet as a primary service channel include Quicken Loans and Loan Depot. However, we also compete with the major banks in residential mortgage lending, including Bank of America, Chase and Wells Fargo. For our traditional commercial lending activities, we compete with larger financial institutions operating in the Midwest and Central Indiana regions, including Key Bank, PNC Bank, Chase, BMO Harris, Huntington National Bank and First Financial Bank. In the Southwest, competitors include Wells Fargo, Chase, Bank of America, U.S. Bank, Bank of Arizona and CoBiz Bank. For our single tenant lease financing activities, we compete nationally with regional banks, local banks and credit unions, as well as life insurance companies and commercial mortgage-backed securities lenders. Examples of these competitors include Wells Fargo, Everbank and StanCorp. These competitors may have significantly greater financial resources and higher lending limits than we do, and may also offer specialized products and services that we do not. In the United States, banking has experienced widespread consolidation over the last decade leading to the emergence of several large nationwide banking institutions. These competitors have significantly greater financial resources and offer many branch locations as well as a variety of services we do not. We have attempted to offset some of the advantages of the larger competitors by leveraging technology to deliver product solutions and better compete in targeted segments. We have positioned ourselves as an alternative to these institutions for consumers who do not wish to subsidize the cost of large branch networks through high fees and unfavorable rates. 3 We anticipate that consolidation will continue in the financial services industry and perhaps accelerate as a result of ongoing financial stress, intensified competition for the same customer segments and significantly increased regulatory burdens and rules that are expected to increase expenses and put pressure on earnings. Regulation and Supervision General Because the Company is a public company, it is subject to regulation by the Securities and Exchange Commission (the “SEC”). Under these regulations, the Company is considered to be an accelerated filer and, as such, must comply with SEC reporting requirements applicable to accelerated filers. The Company and the Bank are extensively regulated under federal and state law. The Company is a registered bank holding company under the Bank Holding Company Act of 1956 (the “BHCA”) and, as such, is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company is required to file reports with the Federal Reserve on a quarterly basis. The Bank is an Indiana-chartered bank formed pursuant to the Indiana Financial Institutions Act (the “IFIA”). As such, the Bank is regularly examined by and subject to regulations promulgated by the Indiana Department of Financial Institutions (the “DFI”) and the FDIC as its primary federal bank regulator. The Bank is not a member of the Federal Reserve System. The regulatory environment affecting the Company has been and continues to be altered by the enactment of new statutes and the adoption of new regulations as well as by revisions to, and evolving interpretations of, existing regulations. State and federal banking agencies have significant discretion in the conduct of their supervisory and enforcement activities and their examination policies. Any change in such practices and policies could have a material impact on the Company’s operations and shareholders. The following discussion is intended to be a summary of the material statutes, regulations and regulatory directives that are currently applicable to us. It does not purport to be comprehensive or complete and it is expressly subject to and modified by reference to the text of the applicable statutes, regulations and directives. The Dodd-Frank Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) comprehensively reformed the regulation of financial institutions and the products and services they offer. Certain provisions of the Dodd-Frank Act noted in this section are also discussed in other sections. Furthermore, many of the provisions of the Dodd-Frank Act require further study or rulemaking by federal agencies, a process which will take years to implement fully. Among other things, the Dodd-Frank Act provides for new capital standards that eliminate or restrict the treatment of trust preferred securities as Tier 1 capital based on the asset size of an institution. The Company has never issued any trust preferred securities. The Dodd-Frank Act permanently raised deposit insurance levels to $250,000, retroactive to January 1, 2008, and provided unlimited deposit insurance coverage for noninterest-bearing transaction accounts through December 31, 2012. Pursuant to modifications under the Dodd-Frank Act, deposit insurance assessments are now being calculated based on an insured depository institution’s assets rather than its insured deposits, and the minimum reserve ratio of the FDIC’s Deposit Insurance Fund (the “DIF”) has been raised to 1.35%. The payment of interest on business demand deposit accounts is permitted by the Dodd-Frank Act. The Dodd-Frank Act authorized the Federal Reserve to regulate interchange fees for debit card transactions and established new minimum mortgage underwriting standards for residential mortgages. Further, the Dodd-Frank Act barred certain banking organizations from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances. The Dodd-Frank Act empowered the newly established Financial Stability Oversight Council to designate certain activities as posing a risk to the U.S. financial system and to recommend new or heightened standards and safeguards for financial organizations engaging in such activities. 4 The Dodd-Frank Act also established the Consumer Financial Protection Bureau (the “CFPB”) as an independent agency within the Board of Governors of the Federal Reserve System. The CFPB has the exclusive authority to administer, enforce, and otherwise implement federal consumer financial laws, which includes the power to make rules, issue orders, and issue guidance governing the provision of consumer financial products and services. The CFPB has exclusive federal consumer law supervisory authority and primary enforcement authority over insured depository institutions with assets totaling over $10 billion. Authority for institutions with $10 billion or less rests with the prudential regulator, and in the case of the Bank will be enforced by the FDIC. The CFPB was also required to establish four offices: 1) Office of Fair Lending and Equal Opportunity, 2) Office of Financial Education, 3) Office of Service Member Affairs, and 4) Office of Financial Protection for Older Americans. Additionally, the Bureau was required to establish a Consumer Advisory Board to advise and consult with the Bureau in the exercise of its functions. Further, the Dodd-Frank Act established the Office of Financial Research, which has the power to require reports from other financial services companies. On December 10, 2013, five federal agencies published the final “Volcker Rule” pursuant to the Dodd-Frank Act. Among other things, the Volcker Rule imposes significant limitations on certain activities by covered banks and bank holding companies, including restrictions on holding certain types of securities, proprietary trading and private equity investing. Most of the limitations imposed by the Volcker Rule are not likely to impact smaller banks which do not engage in proprietary trading or private equity activities. However, the restrictions on investing in hedge funds and similar entities could impact the ability to invest in collateralized debt obligations and other investments that many smaller banks hold. On January 14, 2014, through publication of an Interim Final Rule, the federal banking agencies clarified that investments by banks in certain trust preferred collateralized debt obligations are not prohibited by the Volcker Rule. The Volcker Rule did not have any material implications on the Bank or our investments or activities. On October 3, 2015, the CFPB’s final rules on integrated mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act became effective. The new disclosures are intended to improve disclosures to consumers and also contain tolerance limitations that may cause lenders to refund fees charged to consumers when certain costs vary between the initial and final disclosure. Holding Company Regulation We are subject to supervision and examination as a bank holding company by the Federal Reserve under the BHCA. In addition, the Federal Reserve has the authority to issue orders to bank holding companies to cease and desist from unsafe or unsound banking practices and from violations of conditions imposed by, or violations of agreements with, the Federal Reserve. The Federal Reserve is also empowered, among other things, to assess civil money penalties against companies or individuals who violate Federal Reserve orders or regulations, to order termination of nonbanking activities of bank holding companies and to order termination of ownership and control of a nonbanking subsidiary by a bank holding company. Federal Reserve approval is also required in connection with bank holding companies’ acquisitions of more than 5% of the voting shares of any class of a depository institution or its holding company and, among other things, in connection with the bank holding company’s engaging in new activities. Under the BHCA, our activities are limited to businesses so closely related to banking, managing or controlling banks as to be a proper incident thereto. The BHCA also requires a bank holding company to obtain approval from the Federal Reserve before (1) acquiring or holding more than a 5% voting interest in any bank or bank holding company, (2) acquiring all or substantially all of the assets of another bank or bank holding company or (3) merging or consolidating with another bank holding company. We have not filed an election with the Federal Reserve to be treated as a “financial holding company,” a type of holding company that can engage in certain insurance and securities-related activities that are not permitted for a bank holding company. Source of Strength. Under the Dodd-Frank Act, we are required to serve as a source of financial and managerial strength for the Bank in the event of the financial distress of the Bank. This provision codifies the longstanding policy of the Federal Reserve. Although the Dodd-Frank Act requires the federal banking agencies to issue regulations to implement the source of strength provisions, no regulations have been promulgated at this time. In addition, any capital loans by a bank holding company to any of its depository subsidiaries are subordinate to the payment of deposits and to certain other indebtedness. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a depository subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment. 5 Regulatory Capital. The Federal Reserve sets risk-based capital ratio and leverage ratio guidelines for bank holding companies. Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The guidelines provide a systematic analytical framework that makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and minimizes disincentives to holding assets considered by regulatory agencies to be liquid and low-risk. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into risk-weighted categories, with higher weighting assigned to categories perceived as representing greater risk. The risk-based ratio represents total capital divided by total risk-weighted assets. The leverage ratio is Tier 1 capital divided by total average assets adjusted as specified in the guidelines. The Bank, supervised by the FDIC and DFI, is subject to substantially similar capital requirements. Our applicable capital ratios as of December 31, 2015 and December 31, 2014 are summarized in Note 13 to the financial statements. In July 2013, the Federal Reserve published final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. bank holding companies. The FDIC adopted substantially identical standards for institutions, like the Bank, subject to its jurisdiction in an interim final rule. The Basel III Capital Rules implement requirements consistent with agreements reached by the Basel Committee on Banking Supervision as well as certain provisions of the Dodd-Frank Act. These rules substantially revised the risk-based capital requirements applicable to depository institutions and their holding companies, including the Company and the Bank. The Basel III Capital Rules were effective for all banks as of January 1, 2015, subject to certain phase-in periods for some requirements. Among other things, the Basel III Capital Rules (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) apply most deductions/adjustments to regulatory capital measures to CET1 and not to the other components of capital, thus potentially requiring higher levels of CET1 in order to meet minimum ratios, and (iv) expand the scope of the deductions/adjustments from capital in comparison to current regulations. As of December 31, 2015, the minimum capital ratios under Basel III Capital Rules were: 4.5% CET1 to risk-weighted assets, 6.0% Tier 1 capital to risk-weighted assets, 8.0% Total capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets and 4.0% leverage ratio. In addition, a capital conservation buffer of 2.5% above each level applicable to the CET1, Tier 1, and Total capital ratios will be required for banking institutions like the Company and the Bank to avoid restrictions on their ability to make capital distributions, including dividends, and pay certain discretionary bonus payments to executive officers. The following are the Basel III regulatory capital levels that the Company and the Bank must satisfy to avoid limitations on capital distributions, including dividends, and discretionary bonus payments during the applicable transition period from January 1, 2015, until January 1, 2019: Basel III Regulatory Capital Levels January 1, 2015 January 1, 2016 January 1, 2017 January 1, 2018 January 1, 2019 Common equity tier 1 capital to risk-weighted assets Tier 1 capital to risk-weighted assets Total capital to risk-weighted assets 4.50% 6.00% 8.00% 5.125% 6.625% 8.625% 5.75% 7.25% 9.25% 6.375% 7.875% 9.875% 7.00% 8.50% 10.50% The Basel III Capital Rules provide for multiple new deductions from and adjustments to CET1. These include, for example, the requirement that deferred tax assets dependent upon future taxable income and significant investments in non- consolidated financial entities be deducted from CET1 to the extent that any one category exceeds 10% of total CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of these adjustments began on January 1, 2015, and will be phased in over the following four years. The Basel III Capital Rules also revise the prompt corrective action framework by (i) introducing a CET1 ratio requirement at each capital level, with a required CET1 ratio to remain well-capitalized at 6.5%, (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being increased to 8% and (iii) transitioning to a leverage ratio of 4% in order to qualify as adequately capitalized and a leverage ratio of 5% to be well- capitalized. The Company believes that, as of December 31, 2015, the Company and the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were then effective. 6 Regulation of Banks Business Activities. The Bank derives its lending and investment powers from the IFIA, the Federal Deposit Insurance Act (the “FDIA”) and related regulations. Loans-to-One Borrower Limitations. Generally, the Bank’s total loans or extensions of credit to a single borrower, including the borrower’s related entities, outstanding at one time, and not fully secured, cannot exceed 15% of the Bank’s unimpaired capital and surplus. If the loans or extensions of credit are fully secured by readily marketable collateral, the Bank may lend up to an additional 10% of its unimpaired capital and surplus. Community Reinvestment Act. Under the Community Reinvestment Act (the “CRA”), as implemented by FDIC regulations, the Bank has a continuing and affirmative obligation, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examinations of the Bank, to assess the Bank’s record of meeting the credit needs of its entire community and to take that record into account in evaluating certain applications for regulatory approvals that we may file with the FDIC. Due to its Internet-driven model and nationwide consumer banking platform, the Bank has opted to operate under a CRA Strategic Plan, which was submitted to and approved by the FDIC and sets forth certain guidelines the Bank must meet. The current Strategic Plan expires December 31, 2017. The Bank received a “Satisfactory” CRA rating in its most recent CRA examination. Failure of an institution to receive at least a “Satisfactory” rating could inhibit such institution or its holding company from engaging in certain activities or pursuing acquisitions of other financial institutions. Transactions with Affiliates. The authority of the Bank, like other FDIC-insured banks, to engage in transactions with its “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation W. An “affiliate” for this purpose is defined generally as any company that owns or controls the Bank or is under common ownership or control with the Bank, but excludes a company controlled by a bank. In general, transactions between the Bank and its affiliates must be on terms that are consistent with safe and sound banking practices and at least as favorable to the Bank as comparable transactions between the Bank and non-affiliates. In addition, covered transactions with affiliates are restricted individually to 10% and in the aggregate to 20% of the Bank’s capital. Collateral ranging from 100% to 130% of the loan amount depending on the quality of the collateral must be provided for an affiliate to secure a loan or other extension of credit from the Bank. The Company is an “affiliate” of the Bank for purposes of Regulation W and Sections 23A and 23B of the Federal Reserve Act. We believe the Bank is in compliance with these provisions. Loans to Insiders. The Bank’s authority to extend credit to its directors, executive officers and principal shareholders, as well as to entities controlled by such persons (“Related Interests”), is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve. Among other things, these provisions require that extensions of credit to insiders: (1) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and (2) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, extensions of credit in excess of certain limits must be approved in advance by the Bank’s Board of Directors. Further, provisions of the Dodd-Frank Act require that after July 21, 2011, any sale or purchase of an asset by the Bank with an insider must be on market terms and if the transaction represents more than 10% of the Bank’s capital stock and surplus it must be approved in advance by a majority of the disinterested directors of the Bank. We believe the Bank is in compliance with these provisions. Enforcement. The DFI and the FDIC share primary regulatory enforcement responsibility over the Bank and its institution- affiliated parties (“IAPs”), including directors, officers and employees. This enforcement authority includes, among other things, the ability to appoint a conservator or receiver for the Bank, to assess civil money penalties, to issue cease and desist orders, to seek judicial enforcement of administrative orders and to remove directors and officers from office and bar them from further participation in banking. In general, these enforcement actions may be initiated in response to violations of laws, regulations and administrative orders, as well as in response to unsafe or unsound banking practices or conditions. 7 Standards for Safety and Soundness. Pursuant to the FDIA, the federal banking agencies have adopted a set of guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings standards, compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. We believe we are in compliance with the safety and soundness guidelines. Dividends. The ability of the Bank to pay dividends is limited by state and federal laws and regulations that require the Bank to obtain the prior approval of the DFI before paying a dividend that, together with other dividends it has paid during a calendar year, would exceed the sum of its net income for the year to date combined with its retained net income for the previous two years. The amount of dividends the Bank may pay may also be limited by the principles of prudent bank management. Capital Distributions. The FDIC may disapprove of a notice or application to make a capital distribution if: • • • the Bank would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statute, regulation or agreement applicable to the Bank. Insurance of Deposit Accounts. The Bank is a member of the DIF, which is administered by the FDIC. All deposit accounts at the Bank are insured by the FDIC up to a maximum of $250,000 per depositor. The FDIA, as amended by the Federal Deposit Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to set a ratio of deposit insurance reserves to estimated insured deposits—the designated reserve ratio (the “DRR”)—of at least 1.35%. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating. On February 27, 2009, the FDIC introduced three possible adjustments to an institution’s initial base assessment rate: (1) a decrease of up to five basis points for long-term unsecured debt, including senior unsecured debt (other than debt guaranteed under the Temporary Liquidity Guarantee Program) and subordinated debt and, for small institutions, a portion of Tier 1 capital; (2) an increase not to exceed 50 percent of an institution’s assessment rate before the increase for secured liabilities in excess of 25 percent of domestic deposits; and (3) for non-Risk Category I institutions, an increase not to exceed 10 basis points for brokered deposits in excess of 10 percent of domestic deposits. On November 9, 2010, the FDIC proposed to change its assessment base from total domestic deposits to average total assets minus average tangible equity as required in the Dodd-Frank Act. The new assessment formula became effective on April 1, 2011, and was used to calculate the June 30, 2011 assessment. The FDIC plans to raise the same expected revenue under the new base as under the current assessment base. Since the new base is larger than the current base, the proposal would lower the assessment rate schedule to maintain revenue neutrality. Assessment rates would be reduced to a range of 2.5 to 9 basis points on the broader assessment base for banks in the lowest risk category (well capitalized and CAMELS I or II) and up to 30 to 45 basis points for banks in the highest risk category. FDIC insurance expense, including assessments relating to Financing Corporation (FICO) bonds, totaled $0.6 million for 2015. Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Liquidity. The Bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. To fund its operations, the Bank historically has relied upon deposits, Federal Home Loan Bank of Indianapolis (“FHLB”) borrowings, fed funds lines with correspondent banks and brokered deposits. The Bank believes it has sufficient liquidity to meet its funding obligations. 8 Federal Home Loan Bank System. The Bank is a member of the FHLB, which is one of the regional Federal Home Loan Banks comprising the Federal Home Loan Bank System. Each Federal Home Loan Bank serves as a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of FHLB capital stock. While the required percentage of stock ownership is subject to change by the FHLB, the Bank is in compliance with this requirement with an investment in FHLB stock at December 31, 2015 of $8.6 million. Any advances from the FHLB must be secured by specified types of collateral, and long term advances may be used for the purpose of providing funds to make residential mortgage or commercial loans and to purchase investments. Long term advances may also be used to help alleviate interest rate risk for asset and liability management purposes. The Bank receives dividends on its FHLB stock. Federal Reserve System. Although the Bank is not a member of the Federal Reserve System, it is subject to provisions of the Federal Reserve Act and the Federal Reserve’s regulations under which depository institutions may be required to maintain reserves against their deposit accounts and certain other liabilities. In 2008, the Federal Reserve Banks began paying interest on reserve balances. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). As of December 31, 2015, the Federal Reserve’s regulations required reserves equal to 3% on transaction account balances over $14.5 million and up to $103.6 million, plus 10% on the excess over $103.6 million. These requirements are subject to adjustment annually by the Federal Reserve. The Bank is in compliance with the foregoing reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements imposed by the FDIC. Anti-Money Laundering and the Bank Secrecy Act. Under the Bank Secrecy Act (the “BSA”), a financial institution is required to have systems in place to detect and report transactions of a certain size and nature. Financial institutions are generally required to report to the U.S. Treasury any cash transactions involving more than $10,000. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), which amended the BSA, is designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system. The USA PATRIOT Act has significant implications for financial institutions and businesses of other types involved in the transfer of money. The USA PATRIOT Act, in conjunction with the implementation of various federal regulatory agency regulations, has caused financial institutions, such as the Bank, to adopt and implement additional policies or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity, currency transaction reporting, customer identity verification and customer risk analysis. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by the Treasury Office of Foreign Assets Control (“OFAC”), take many different forms. Generally, however, they contain one or more of the following elements: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment- related advice or assistance to, a sanctioned country; and (2) blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Consumer Protection Laws. The Bank is subject to a number of federal and state laws designed to protect consumers and prohibit unfair or deceptive business practices. These laws include the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), the Gramm-Leach-Bliley Act (the “GLBA”), the Truth in Lending Act, the CRA, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with customers when taking deposits, making loans, collecting loans and providing other services. Further, the Dodd-Frank Act established the CFPB, which has the responsibility for making and amending rules and regulations under the federal consumer protection laws relating to financial products and services. The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The FDIC will enforce applicable CFPB rules with respect to the Bank. 9 Mortgage Reform. The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan. The Dodd-Frank Act also allows borrowers to assert violations of certain provisions of the Truth-in-Lending Act as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, in each billing statement and for negative amortization loans and hybrid adjustable rate mortgages. Additionally, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans and generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer. Customer Information Security. The federal banking agencies have adopted final guidelines for establishing standards for safeguarding nonpublic personal information about customers. These guidelines implement provisions of the GLBA. Specifically, the Information Security Guidelines established by the GLBA require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information (as defined under the GLBA), to protect against anticipated threats or hazards to the security or integrity of such information and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The federal banking regulators have issued guidance for banks on response programs for unauthorized access to customer information. This guidance, among other things, requires notice to be sent to customers whose “sensitive information” has been compromised if unauthorized use of this information is “reasonably possible.” Identity Theft Red Flags. The federal banking agencies jointly issued final rules and guidelines in 2007 implementing Section 114 of the FACT Act and final rules implementing Section 315 of the FACT Act. The rules implementing Section 114 require each financial institution or creditor to develop and implement a written Identity Theft Prevention Program to detect, prevent and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. In addition, the federal banking agencies issued guidelines to assist financial institutions and creditors in the formulation and maintenance of an Identity Theft Prevention Program that satisfies the requirements of the rules. The rules implementing Section 114 also require credit and debit card issuers to assess the validity of notifications of changes of address under certain circumstances. Additionally, the federal banking agencies issued joint rules, that became effective in 2008, under Section 315 that provide guidance regarding reasonable policies and procedures that a user of consumer reports must employ when a consumer reporting agency sends the user a notice of address discrepancy. Privacy. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires financial institutions to explain to consumers their policies and procedures regarding the disclosure of such nonpublic personal information and, except as otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided in their policies and procedures. The Bank is required to provide notice to its customers on an annual basis disclosing their policies and procedures on the sharing of nonpublic personal information. In December 2009, the federal banking agencies promulgated regulations that incorporate a two-page model form that financial institutions may use to satisfy their privacy disclosure obligations under the GLBA. These regulations became effective in January 2011. Cybersecurity. In March of 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption, and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber- attack. If the Company fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties. 10 In support of its Internet banking platform, the Company relies heavily on electronic communications and information systems to conduct its operations and store sensitive data. The Company employs an in-depth approach that leverages people, processes, and technology to manage and maintain cybersecurity controls. In addition, the Company employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of the Company’s defensive measures, the threat from cyber- attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Although to date the Company has not experienced any material losses relating to cyber-attacks or other information security breaches, its systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet and mobile banking and other technology-based products and services, by the Company and its customers. Employees At December 31, 2015, we had 152 full-time equivalent employees. None of our employees are currently represented by a union or covered by a collective bargaining agreement. Management believes that its employee relations are satisfactory. Available Information Our Internet address is www.firstinternetbancorp.com. We post important information for investors on our website and use this website as a means for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings, public conference calls, presentations and webcasts. Investors can easily find or navigate to pertinent information about us, free of charge, on our website, including: • • • • • • our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC; announcements of investor conferences and events at which our executives talk about our products and competitive strategies. Archives of some of these events are also available; press releases on quarterly earnings, product announcements, legal developments and other material news that we may post from time to time; corporate governance information, including our Corporate Governance Principles, Code of Business Conduct and Ethics, information concerning our Board of Directors and its committees, including the charters of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, and other governance-related policies; shareholder services information, including ways to contact our transfer agent; and opportunities to sign up for email alerts and RSS feeds to have information provided in real time. The information available on our website is not incorporated by reference in, or a part of, this or any other report we file with or furnish to the SEC. Item 1A. Risk Factors Risk factors which could cause actual results to differ from our expectations and which could negatively impact our financial condition and results of operations are discussed below and elsewhere in this report. Additional risks and uncertainties not presently known to us or that are currently not believed to be significant to our business may also affect our actual results and could harm our business, financial condition and results of operations. If any of the risks or uncertainties described below or any additional risks and uncertainties actually occur, our business, results of operations and financial condition could be materially and adversely affected. 11 RISKS RELATED TO OUR BUSINESS A failure of, or interruption in, the communications and information systems on which we rely to conduct our business could adversely affect our revenues and profitability. We rely heavily upon communications and information systems to conduct our business. Although we have built a level of redundancy into our information technology infrastructure and update our business continuity plan annually, any failure or interruption of our information systems, or the third-party information systems on which we rely, as a result of inadequate or failed processes or systems, human errors or external events, could adversely affect our Internet-based operations and slow the processing of applications, loan servicing, and deposit-related transactions. In addition, our communication and information systems may present security risks and could be susceptible to hacking or other unauthorized access. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations. Our commercial loan portfolio exposes us to higher credit risks than residential real estate and consumer loans, including risks relating to the success of the underlying business and conditions in the market or the economy and concentrations in our commercial loan portfolio. We are growing our C&I and CRE loan portfolios. At December 31, 2015, C&I loans amounted to $102.0 million, or 10.7% of total loans receivable, and CRE loans amounted to $480.9 million, or 50.4% of total loans receivable. These loans generally involve higher credit risks than residential real estate and consumer loans and are dependent upon our lenders maintaining close relationships with the borrowers. Payments on these loans are often dependent upon the successful operation and management of the underlying business or assets, and repayment of such loans may be influenced to a great extent by conditions in the market or the economy. Commercial loans typically involve larger loan balances than residential real estate or consumer loans and could lead to concentration risks within our commercial loan portfolio. In addition, our C&I loans have primarily been extended to small to medium sized businesses that generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. Our failure to manage this growth could have a material adverse effect on our business, financial condition and results of operations. In addition, with respect to commercial real estate loans, federal and state banking regulators are examining commercial real estate lending activity with heightened scrutiny and may require banks with higher levels of commercial real estate loans to implement more stringent underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures. Because a significant portion of our loan portfolio is comprised of commercial real estate loans, the banking regulators may require us to maintain higher levels of capital than we would otherwise be expected to maintain, which could limit our ability to leverage our capital and have a material adverse effect on our business, financial condition, results of operations and prospects. Weakness in the economy may materially adversely affect our business and results of operations. Our results of operations are materially affected by conditions in the economy generally, which continue to be uncertain and include sluggish economic growth, accompanied by historically low interest rates. Dramatic declines in the housing market following the 2008 financial crisis, with falling home prices and increasing foreclosures and unemployment, resulted in significant write-downs of asset values by financial institutions. While conditions have improved, a return to a recessionary economy could result in financial stress on our borrowers that would adversely affect consumer confidence, a reduction in general business activity and increased market volatility. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets could adversely affect our business, financial condition, results of operations and stock price. Our ability to properly assess the creditworthiness of our customers and to estimate the losses inherent in our credit exposure would be made more complex by these difficult market and economic conditions. Accordingly, if market conditions worsen, we may experience increases in foreclosures, delinquencies, write-offs and customer bankruptcies, as well as more restricted access to funds. The market value of some of our investments could decline and adversely affect our financial position. As of December 31, 2015, we had a net unrealized holding loss of approximately $1.9 million on the available for sale portion of our $213.7 million investment securities portfolio. In assessing the impairment of investment securities, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuers, whether the market decline was affected by macroeconomic conditions and whether we have the intent to sell the security or will be required to sell the security before its anticipated recovery. We also use economic models to assist in the valuation of some of our investment securities. If our investment securities experience a decline in value, we would need to determine whether the decline represented an other-than-temporary impairment, in which case we would be required to record a write-down of the investment and a corresponding charge to our earnings. 12 Because our business is highly dependent on technology that is subject to rapid change and transformation, we are subject to risks of obsolescence. The Bank conducts its consumer lending and deposit gathering activities through the Internet. The financial services industry is undergoing rapid technological change, and we face constant evolution of customer demand for technology-driven financial and banking products and services. Many of our competitors have substantially greater resources to invest in technological improvement and product development, marketing and implementation. Any failure to successfully keep pace with and fund technological innovation in the markets in which we compete could have a material adverse effect on our business, financial condition and results of operations. We may need additional capital resources in the future and these capital resources may not be available when needed or at all, without which our financial condition, results of operations and prospects could be materially impaired. If we continue to experience significant growth, we may need to raise additional capital. Our ability to raise capital, if needed, will depend upon our financial performance and on conditions in the capital markets, as well as economic conditions generally. Accordingly, such financing may not be available to us on acceptable terms or at all. If we cannot raise additional capital when needed, it would have a material adverse effect on our business, financial condition and results of operations. The competitive nature of the banking and financial services industry could negatively affect our ability to increase our market share and retain profitability. Competition in the banking and financial services industry is strong. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms operating locally and nationwide. Some of our competitors have greater name recognition and market presence than we do and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to increase our market share and remain profitable on a long term basis. Our success will depend on the ability of the Bank to compete successfully on a long term basis within the financial services industry. We rely on our management team and could be adversely affected by the unexpected loss of key officers. Our future success and profitability is substantially dependent upon our management and the abilities of our senior executives. We believe that our future results will also depend in part upon our ability to attract and retain highly skilled and qualified management. Competition for senior personnel is intense, and we may not be successful in attracting and retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations. In particular, the loss of our chief executive officer could have a material adverse effect on our business, financial condition and results of operations. Fluctuations in interest rates could reduce our profitability and affect the value of our assets. Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice-versa. In addition, the individual market interest rates underlying our loan and deposit products may not change to the same degree over a given time period. In any event, if market interest rates should move contrary to our position, earnings may be negatively affected. In addition, loan volume and quality and deposit volume and mix can be affected by market interest rates as can the businesses of our clients. Changes in levels of market interest rates could have a material adverse effect on our net interest spread, asset quality, loan origination volume, deposit gathering efforts and overall profitability. Market interest rates are beyond our control, and they fluctuate in response to economic conditions and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, may negatively affect our ability to originate loans and leases, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately could affect our earnings. 13 An inadequate allowance for loan losses would reduce our earnings and adversely affect our financial condition and results of operations. Our success depends to a significant extent upon the quality of our assets, particularly the credit quality of our loans. In originating loans, there is a substantial likelihood that credit losses will be experienced. We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of probable losses inherent in our loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in such estimates may have a significant impact on our financial statements. The allowance our management has established for loan losses may not be adequate to absorb losses in our loan portfolio. Continuing deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside our control, may require an increase in the allowance for loan losses. Bank regulatory agencies periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. To the extent required charge-offs in future periods exceed the allowance for loan losses, we may need additional provisions to increase the allowance. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our business, results of operations, financial condition and prospects. Consumer loans in our portfolio generally have greater risk of loss or default than residential real estate loans and may make it necessary to increase our provision for loan losses. At December 31, 2015, our consumer loans, excluding residential mortgage loans and home equity loans, totaled $108.3 million, representing approximately 11.4% of our total loan portfolio at such date. The overwhelming majority of our consumer loans are horse trailer and recreational vehicle loans acquired through our indirect dealer network. Consumer loans generally have a greater risk of loss or default than do residential mortgage loans, particularly in the case of loans that are secured by rapidly depreciating assets such as horse trailer and recreational vehicles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. It may become necessary to increase our provision for loan losses in the event that our losses on these loans increase, which would reduce our earnings and could have a material adverse effect on our business, financial condition and results of operations. Portions of our commercial lending activities are geographically concentrated in the Midwest and Central Indiana, and changes in local economic conditions may impact their performance. We offer our retail products and services throughout the United States through our web-based operations. However, both CRE and C&I relationships are highly dependent on strong lender/borrower relationships. We serve CRE borrowers primarily in Indiana and the surrounding Midwest states, and our more recent expansion into C&I lending has historically focused primarily on Central Indiana. Accordingly, the performance of our CRE and C&I lending depends upon demographic and economic conditions in those regions. The profitability of our CRE and C&I loan portfolio may be impacted by changes in those conditions. Additionally, unfavorable local or national economic conditions could reduce or limit the growth rate of our CRE and C&I loan portfolios for a significant period of time, or otherwise decrease the ability of those borrowers to repay their loans, which could have a material adverse effect on our business, financial condition and results of operations. Because of our holding company structure, we depend on capital distributions from the Bank to fund our operations. We are a separate and distinct legal entity from the Bank and have no business activities other than our ownership of the Bank. As a result, we primarily depend on dividends, distributions and other payments from the Bank to fund our obligations. The ability of the Bank to pay dividends to us is limited by state and federal law and depends generally on the Bank’s ability to generate net income. If we are unable to comply with applicable provisions of these statutes and regulations, the Bank may not be able to pay dividends to us, and we would not be able to pay dividends on our outstanding common stock and our ability to service our debt would be materially impaired. 14 Lack of seasoning of our commercial loan portfolios may increase the risk of credit defaults in the future. Due to our increasing emphasis on CRE and C&I lending, a substantial amount of the loans in our commercial loan portfolios and our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” A portfolio of older loans will usually behave more predictably than a newer portfolio. As a result, because a large portion of our commercial loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could have a material adverse effect on our business, financial condition and results of operations. A sustained decline in the mortgage loan markets or the related real estate markets could reduce loan origination activity or increase delinquencies, defaults and foreclosures, which could adversely affect our financial results. Historically, our mortgage loan business has provided a significant portion of our revenue and our ability to maintain or grow that revenue is dependent upon our ability to originate loans and sell them on the secondary market. For the twelve months ended December 31, 2014, income from mortgage banking activities was $5.6 million, and it was $9.0 million for the twelve months ended December 31, 2015. Mortgage loan originations are sensitive to changes in economic conditions, including decreased economic activity, a slowdown in the housing market, and higher market interest rates, and has historically been cyclical, enjoying periods of strong growth and profitability followed by periods of lower volumes and market-wide losses. During periods of rising interest rates, refinancing originations for many mortgage products tend to decrease as the economic incentives for borrowers to refinance their existing mortgage loans are reduced. In addition, the mortgage loan origination business is affected by changes in real property values. A reduction in real property values could also negatively affect our ability to originate mortgage loans because the value of the real properties underlying the loans is a primary source of repayment in the event of foreclosure. The national market for residential mortgage loan refinancing has declined in recent years and future declines could adversely impact our business. Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to originate and sell mortgage loans, and the price received on the sale of such loans, which could have a material adverse effect on our business, financial condition and results of operations. Reputational risk and social factors may negatively affect us. Our ability to attract and retain customers is highly dependent upon consumer and other external perceptions of our business practices and financial condition. Adverse perceptions could damage our reputation to a level that could lead to difficulties in generating and maintaining deposit accounts and accessing credit markets as well as increased regulatory scrutiny of our business. Borrower payment behaviors also affect us. To the extent that borrowers determine to stop paying their loans where the financed properties’ market values are less than the amount of their loans, or for other reasons, our costs and losses may increase. Adverse developments or perceptions regarding the business practices or financial condition of our competitors, or our industry as a whole, may also indirectly adversely affect our reputation. In addition, adverse reputational developments with respect to third parties with whom we have important relationships may adversely affect our reputation. All of the above factors may result in greater regulatory and/or legislative scrutiny, which may lead to laws or regulations that may change or constrain the manner in which we engage with our customers and the products we offer and may also increase our litigation risk. If these risks were to materialize, they could negatively affect our business, financial condition and results of operations. A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. We depend upon our ability to process, record and monitor our client transactions on a continuous basis. As client, public and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business, financial, accounting and data processing systems, or other operating systems and facilities, may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunications outages; natural disasters such as earthquakes, tornadoes and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and, as described below, cyber-attacks. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our business and clients. 15 Information security risks for financial institutions such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists and other external parties. As noted above, our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. Our business relies on our digital technologies, computer and email systems, software and networks to conduct its operations. In addition, to access our products and services, our clients may use personal smartphones, tablets, personal computers and other mobile devices that are beyond our control systems. Although we have information security procedures and controls in place, our technologies, systems, networks and our clients’ devices may become the target of cyber- attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other information, or otherwise disrupt our or our clients’ or other third parties’ business operations. Third parties with whom we do business or that facilitate our business activities, including financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of the evolving nature of these threats. As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our business and clients, or cyber- attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, claims or litigation, reimbursement or other compensation costs and/or additional compliance costs, any of which could materially and adversely affect our business, financial condition and results of operations. RISKS RELATING TO THE REGULATION OF OUR INDUSTRY We operate in a highly regulated environment, which could restrain our growth and profitability. We are subject to extensive laws and regulations that govern almost all aspects of our operations. These laws and regulations, and the supervisory framework that oversees the administration of these laws and regulations, are primarily intended to protect depositors, the Deposit Insurance Fund and the banking system as a whole, and not shareholders. These laws and regulations, among other matters, affect our lending practices, capital structure, investment practices, dividend policy, operations and growth. Compliance with the myriad laws and regulations applicable to our organization can be difficult and costly. In addition, these laws, regulations and policies are subject to continual review by governmental authorities, and changes to these laws, regulations and policies, including changes in interpretation or implementation of these laws, regulations and policies, could affect us in substantial and unpredictable ways and often impose additional compliance costs. Further, any new laws, rules and regulations could make compliance more difficult or expensive. All of these laws and regulations, and the supervisory framework applicable to our industry, could have a material adverse effect on our business, financial condition and results of operations. Federal and state regulators periodically examine our business and we may be required to remediate adverse examination findings. The Federal Reserve, the FDIC and the Indiana Department of Financial Institutions periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a federal or state banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business, financial condition and results of operations. 16 Our FDIC deposit insurance premiums and assessments may increase which would reduce our profitability. The deposits of the Bank are insured by the FDIC up to legal limits and, accordingly, subject to the payment of FDIC deposit insurance assessments. The Bank’s regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. High levels of bank failures during and following the financial crisis and increases in the statutory deposit insurance limits have increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund. In order to maintain a strong funding position and restore the reserve ratios of the Deposit Insurance Fund, the FDIC increased deposit insurance assessment rates and charged a special assessment to all FDIC-insured financial institutions. Further increases in assessment rates or special assessments may occur in the future, especially if there are significant additional financial institution failures. Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have a material adverse effect on our business, financial condition and results of operations. The short term and long term impact of recently adopted regulatory capital rules is uncertain and a significant increase in our capital requirements could have an adverse effect on our business and profitability. In July 2013, the FDIC and the Federal Reserve approved a new rule that substantially amends the regulatory risk-based capital rules applicable to the Bank and the Company. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rule includes new minimum risk-based capital and leverage ratios, which became effective for the Bank and the Company on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a “capital conservation buffer” of 2.5%, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be used for such actions. The application of more stringent capital requirements for both the Bank and the Company could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements, any of which could have a material adverse effect on our business and profitability. We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions. The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations. 17 We are subject to evolving and expensive regulations and requirements. Our failure to adhere to these requirements or the failure or circumvention of our controls and procedures could seriously harm our business. We are subject to extensive regulation as a financial institution and are also required to follow the corporate governance and financial reporting practices and policies required of a company whose stock is registered under the Exchange Act and listed on the NASDAQ Capital Market. Compliance with these requirements means we incur significant legal, accounting and other expenses that we did not incur before 2013 and are not reflected in our historical financial statements prior to that time. Compliance also requires a significant diversion of management time and attention, particularly with regard to disclosure controls and procedures and internal control over financial reporting. Although we have reviewed, and will continue to review, our disclosure controls and procedures in order to determine whether they are effective, our controls and procedures may not be able to prevent errors or frauds in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it difficult for us to ensure that the objectives of the control system will be met. A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and results of operations. We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations. The Bank Secrecy Act, the USA PATRIOT Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition and results of operations. RISKS RELATED TO OUR COMMON STOCK There is a limited trading market for our common stock and you may not be able to resell your shares. Our common stock began trading on the NASDAQ Capital Market on February 22, 2013 and we issued common stock through a follow-on public offering in late 2013; however, trading remains relatively limited. Although we expect that a more liquid market for our common stock will develop, we cannot guarantee that you would be able to resell shares of our common stock at an attractive price or at all. The market price of our common stock can be volatile and may decline. Securities that are not heavily traded can be more volatile than stock trading in an active market. Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly and may decline in response to a variety of factors including: • Actual or anticipated variations in quarterly results of operations; • Developments in our business or the financial sector generally; • Recommendations by securities analysts; • Operating and stock price performance of other companies that investors deem comparable to us; • News reports relating to trends, concerns and other issues in the financial services industry; • • New technology used or services offered by competitors; • Perceptions in the marketplace regarding us or our competitors; Significant acquisitions or business combinations, strategic partnerships, joint venture or capital commitments by or involving us or our competitors; Failure to integrate acquisitions or realize anticipated benefits from acquisitions; • • Regulatory changes affecting our industry generally or our business or operations; or • Geopolitical conditions such as acts or threats of terrorism or military conflicts. 18 General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results. Federal banking laws limit the acquisition and ownership of our common stock. Because we are a bank holding company, any purchaser of certain specified amounts of our common stock may be required to file a notice with or obtain the approval of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the Change in Bank Control Act of 1978, as amended. Specifically, under regulations adopted by the Federal Reserve, (1) any other bank holding company may be required to obtain the approval of the Federal Reserve before acquiring 5% or more of our common stock and (2) any person may be required to file a notice with and not be disapproved by the Federal Reserve to acquire 10% or more of our common stock and will be required to file a notice with and not be disapproved by the Federal Reserve to acquire 25% or more of our common stock. Anti-takeover provisions could negatively impact our shareholders. Provisions of Indiana law and provisions of our articles of incorporation could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. We are subject to certain anti-takeover provisions under the Indiana Business Corporation Law. Additionally, our articles of incorporation authorize our Board of Directors to issue one or more classes or series of preferred stock without shareholder approval and such preferred stock could be issued as a defensive measure in response to a takeover proposal. Although these provisions do not preclude a takeover, they may have the effect of discouraging, delaying or deferring a tender offer or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price of our common stock. Such provisions will also render the removal of the board of directors and of management more difficult and, therefore, may serve to perpetuate current management. These provisions could potentially adversely affect the market price of our common stock. Our shares of common stock are not an insured deposit and as such are subject to loss of entire investment. The shares of our common stock are not a bank deposit and are not insured or guaranteed by the FDIC or any other government agency. An investment in our common stock is subject to investment risk and an investor must be capable of affording the loss of the entire investment. If we were to issue preferred stock, the rights of holders of our common stock and the value of such common stock could be adversely affected. Our Board of Directors is authorized to issue classes or series of preferred stock, without any action on the part of our shareholders. The Board of Directors also has the power, without shareholder approval, to set the terms of any such classes or series of preferred stock, including voting rights, dividend rights and preferences over our common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business and other terms. If we issue preferred stock in the future that has a preference over our common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the value of our common stock would be adversely affected. We may issue additional shares of common or preferred stock in the future, which could dilute existing shareholders. Our articles of incorporation authorize our Board of Directors, generally without shareholder approval, to, among other things, issue additional shares of common stock up to a total of forty-five million shares or up to five million shares of preferred stock. The issuance of any additional shares of common or preferred stock could be dilutive to a shareholder’s ownership of our common stock. To the extent that currently outstanding options or warrants to purchase our common stock are exercised, or to the extent that we issue additional options or warrants to purchase our common stock in the future and the options or warrants are exercised, our shareholders may experience further dilution. In addition, we may issue preferred stock that is convertible into shares of our common stock, and upon conversion would result in our common shareholders’ ownership interest being diluted. Holders of shares of our common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, shareholders may not be permitted to invest in future issuances of common or preferred stock. We and the Bank are required by federal and state regulatory authorities, as applicable, to maintain adequate levels of capital to support our operations. Accordingly, regulatory requirements and/or deterioration in our asset quality may require us to sell common stock to raise capital under circumstances and at prices which result in substantial dilution. 19 If we default on our subordinated debt, we will be prohibited from paying dividends or distributions on our common stock. During 2013, we issued a $3.0 million subordinated debenture to a third party, and during 2015, we issued $10.0 million in subordinated notes to a third party. The agreements under which the subordinated debenture and subordinated notes were issued prohibit us from paying any dividends on our common stock or making any other distributions to our shareholders at any time when there shall have occurred and be continuing an event of default under the applicable agreement. Events of default generally consist of, among other things, our failure to pay any principal or interest on the subordinated debenture or subordinated notes, as applicable, when due, our failure to comply with certain agreements, terms and covenants under the agreement (without curing such default following notice), and certain events of bankruptcy, insolvency or liquidation relating to us. If an event of default were to occur and we did not cure it, we would be prohibited from paying any dividends or making any other distributions to our shareholders or from redeeming or repurchasing any of our common stock, which would likely have a material adverse effect on the market value of our common stock. Moreover, without notice to or consent from the holders of our common stock, we may enter into additional financing arrangements that may limit our ability to purchase or to pay dividends or distributions on our common stock. Item 1B. Unresolved Staff Comments None. Item 2. Properties The Company owns an office building at 11201 USA Parkway, Fishers, Indiana 46037 with approximately 52,000 square feet of office space and related real estate located in Fishers, Indiana. This building houses our principal executive offices and we intend to use the property for the current and future operations of the Company and the Bank. The Bank is currently leasing approximately 34,618 square feet of office space at the Fishers property. The lease has an initial term of five years and provides for monthly rent in the amount of $18.50 per square foot. In March 2013, the Company borrowed $4.0 million from the Bank for the purchase of the Company’s principal executive offices. The original scheduled maturity date of the loan was March 6, 2014. Effective March 6, 2014, the Company entered into an Acknowledgment, Confirmation and Amendment that, among other things, extended the maturity of the loan to March 6, 2015. Effective March 6, 2015, the Company entered into a Second Acknowledgment, Confirmation and Amendment that extended the maturity of the loan to March 6, 2016. Effective February 26, 2016, the Company entered into a Third Acknowledgment, Confirmation and Amendment that extended the maturity of the loan to March 6, 2017. The loan bears interest during the term at a variable rate equal to the then applicable prime rate (as determined by the Bank with reference to the “Prime Rate” published in The Wall Street Journal) plus 1.00% per annum. The loan agreement contains customary warranties and representations, affirmative covenants and events of default. The loan agreement provides that the loan is to be secured by a first priority mortgage and lien on the acquired property and requires that the Company, at all times, maintain collateral securing the loan with an “as is” market value of not less than 1.3 times the principal balance of the loan. Item 3. Legal Proceedings We are not a party to any material legal proceedings. From time to time, the Bank is a party to legal actions arising from its normal business activities. Item 4. Mine Safety Disclosures None. 20 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information The Company’s common stock began trading on the NASDAQ Capital Market under the symbol “INBK” effective February 22, 2013. Previously, shares of the Company’s common stock were quoted on the over-the-counter market under the symbol “FIBP.” The following table sets forth the range of high and low stock prices and dividends declared per share for each quarter within the two most recent fiscal years. Period Year Ended December 31, 2015: Fourth Quarter Third Quarter Second Quarter First Quarter Year Ended December 31, 2014: Fourth Quarter Third Quarter Second Quarter First Quarter High (US$) Low (US$) Declared Dividends $ 33.00 $ 26.26 $ 39.76 25.70 19.00 19.00 22.00 24.00 26.10 24.05 18.01 14.25 15.10 15.54 19.38 19.66 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 As of March 7, 2016, the Company had 4,486,024 shares of common stock issued and outstanding, and there were 147 holders of record of common stock. 21 Stock Performance Graph The following graph compares the five-year cumulative total return to shareholders of First Internet Bancorp common stock with that of the NASDAQ Composite Index and the SNL Micro Cap U.S. Bank Index. The SNL Micro Cap U.S. Bank Index is comprised of publicly-traded banking institutions with market capitalizations of less than $250 million. First Internet Bancorp is included in the SNL Micro Cap U.S. Bank Index. The following table assumes $100 invested on December 31, 2010 in First Internet Bancorp, the NASDAQ Composite Index and the SNL Micro Cap U.S. Bank Index, and assumes that dividends are reinvested. 2010 2011 2012 2013 2014 2015 First Internet Bancorp $ 100.00 $ 85.00 $ 193.30 $ 313.80 $ 236.49 $ NASDAQ Composite Index SNL Micro Cap U.S. Bank Index 100.00 100.00 99.17 95.11 116.48 120.19 163.21 155.07 187.27 175.86 409.27 200.31 195.56 December 31, Dividends The Company began paying regular quarterly cash dividends in 2013. Total dividends declared in 2015 were $0.24 per share. The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including its results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors. During 2013, the Company issued a $3.0 million subordinated debenture to a third party, and during 2015, the Company issued $10.0 million in subordinated notes to a third party. The agreements under which the subordinated debenture and subordinated notes were issued prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred and be continuing an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock. On June 21, 2013 the Company effected a three-for-two (3:2) stock split of outstanding common stock through the payment of a stock dividend of one-half of one share for each then-outstanding share of common stock. Recent Sales of Unregistered Securities None. 22 Item 6. Selected Financial Data Five Year Selected Financial and Other Data The following selected consolidated financial and other data is qualified in its entirety by, and should be read in conjunction with, Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the notes thereto contained in this annual report on Form 10-K. Certain reclassifications have been made to prior period financial information as discussed in Note 1 to the consolidated financial statements. (dollars in thousands, except per share data) 2015 2014 2013 2012 2011 At or for the Twelve Months Ended December 31, Balance Sheet Data: Total assets Cash and cash equivalents Loans receivable Loans held-for-sale Securities available-for-sale Deposits Tangible common equity 1 Total shareholders’ equity Income Statement Data: Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Noninterest expense Income before income taxes Income tax provision Net income Per Share Data: Net income Basic Diluted Book value per common share Tangible book value per common share 1 Weighted average common shares outstanding Basic Diluted $ 1,269,870 $ 970,503 $ 802,342 $ 636,367 $ 585,440 25,152 953,859 36,518 213,698 956,054 99,643 104,330 28,289 732,426 34,671 137,518 758,598 92,098 96,785 53,690 501,153 28,610 181,409 673,095 86,221 90,908 32,513 358,161 63,264 156,693 530,691 56,663 61,350 34,778 335,226 45,091 149,270 486,665 50,736 55,423 $ 41,447 $ 31,215 $ 25,536 $ 24,374 $ 23,944 10,694 30,753 1,946 28,807 10,141 25,283 13,665 4,736 8,929 1.97 1.96 23.28 22.24 $ $ $ $ $ 8,928 22,287 349 21,938 7,174 22,662 6,450 2,126 4,324 0.96 0.96 21.80 20.74 $ $ $ $ $ 8,088 17,448 324 17,124 9,517 20,482 6,159 1,566 4,593 1.51 1.51 20.44 19.38 $ $ $ $ $ $ $ $ $ $ 8,532 15,842 2,852 12,990 11,423 16,613 7,800 2,194 5,606 9,621 14,323 2,440 11,883 3,559 11,483 3,959 773 $ 3,186 1.95 1.95 21.79 20.13 $ $ $ $ 1.11 1.11 19.74 18.07 4,528,528 4,497,007 3,041,666 2,869,365 2,859,434 4,554,219 4,507,995 3,050,001 2,869,365 2,859,434 Common shares outstanding at end of period 4,481,347 4,439,575 4,448,326 2,815,094 2,807,385 Dividends declared per share Dividend payout ratio 2 ___________________________________ $ 0.24 $ 0.24 $ 0.22 $ 0.17 $ 12.24% 25.00% 14.57% 8.53% — 0.00% 1 Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations. 2 Dividends per share divided by diluted earnings per share. 23 Performance Ratios: Return on average assets Return on average shareholders’ equity Return on average tangible common equity 1 Net interest margin 2 Noninterest income to average assets Noninterest expense to average assets Efficiency ratio 3 Asset Quality Ratios: Nonperforming loans to total loans Nonperforming assets to total assets Nonperforming assets (including troubled debt restructurings) to total assets Allowance for loan losses to total loans receivable Net (recoveries) charge-offs to average loans outstanding during period Allowance for loan losses to nonperforming loans Capital Ratios: Tangible common equity to tangible assets 1 Tier 1 leverage ratio 4 Common equity tier 1 capital ratio 4, 5 Tier 1 capital ratio 4 Total risk-based capital ratio 4 Other Data: Full-time equivalent employees Number of banking and loan production offices ___________________________________ At or for the Twelve Months Ended December 31, 2015 2014 2013 2012 2011 0.81 % 8.89 % 9.33 % 2.85 % 0.92 % 2.28 % 0.50% 4.61% 4.85% 2.65% 0.82% 2.60% 0.67% 7.10% 7.65% 2.67% 1.39% 2.99% 0.91% 9.51% 10.33% 2.67% 1.86% 2.70% 0.59% 6.09% 6.69% 2.75% 0.66% 2.12% 61.83 % 78.35% 75.78% 61.04% 64.52% 0.02 % 0.37 % 0.46 % 0.88 % 0.04% 0.50% 0.62% 0.79% 0.37% 0.90% 1.05% 1.09% 1.23% 1.62% 1.84% 1.65% (0.07)% 0.00% 5,000.6 % 1,959.5% 0.17% 293.0% 0.69% 133.3% 7.88 % 8.28 % 10.11 % 10.11 % 12.25 % 9.54% 9.87% N/A 12.55% 13.75% 10.81% 11.66% N/A 15.61% 17.09% 8.97% 8.89% N/A 12.20% 13.46% 2.64% 2.29% 2.47% 1.70% 1.05% 64.6% 8.74% 8.74% N/A 11.15% 12.40% 152 3 143 4 130 4 97 1 74 1 1 Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations. 2 Net interest margin is net interest income divided by average earning assets. 3 Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income, excluding gains and losses from the sale of securities. 4 Capital ratios are calculated in accordance with regulatory guidelines specified by our primary federal banking regulatory authority. 5 Introduced as part of the final implementation of the “Basel III” regulatory capital reforms as of January 1, 2015. Not applicable to periods prior to 2015. 24 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report. Overview First Internet Bancorp is a bank holding company that conducts its business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank. First Internet Bank of Indiana was the first state-chartered, FDIC insured Internet bank and commenced banking operations in 1999. First Internet Bancorp was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank. We offer a full complement of products and services on a nationwide basis. We conduct our deposit operations primarily over the Internet and have no traditional branch offices. We have diversified our operations by adding CRE lending, including nationwide single tenant lease financing, and C&I lending, including business banking/treasury management services to meet the needs of high-quality commercial borrowers and depositors. Our business model differs from that of a typical community bank. We do not have a conventional brick and mortar branch system, but instead operate through our scalable Internet banking platform. The market area for our residential real estate lending, consumer lending, and deposit gathering activities is the entire United States. We also offer single tenant lease financing on a nationwide basis. Our other commercial banking activities, including CRE and C&I loans, corporate credit cards, and corporate treasury management services, are offered by our commercial banking team to businesses primarily within Central Indiana, Phoenix, Arizona and adjacent markets. We have no significant customer concentrations within our loan portfolio. Results of Operations Refer to Item 6 for a summary of the Company's financial performance for the five most recent years. During the twelve months ended December 31, 2015, net income was $8.9 million, or $1.96 per diluted share, compared to net income of $4.3 million, or $0.96 per diluted share, for the twelve months ended December 31, 2014 and net income of $4.6 million, or $1.51 per diluted share, for the twelve months ended December 31, 2013. The increase in net income of $4.6 million for the twelve months ended December 31, 2015 compared to the twelve months ended December 31, 2014 was primarily due to an $8.5 million increase in net interest income and a $3.0 million increase in noninterest income. This was partially offset by a $2.6 million increase in income tax expense, a $2.6 million increase in noninterest expense and a $1.6 million increase in provision for loan losses. The decrease in net income of $0.3 million for the twelve months ended December 31, 2014 compared to the twelve months ended December 31, 2013 was primarily due to a $2.3 million decrease in noninterest income, a $2.2 million increase in noninterest expense and a $0.6 million increase in income tax expense, partially offset by a $4.8 million increase in net interest income. During the twelve months ended December 31, 2015, return on average assets and return on average shareholders’ equity were 0.81% and 8.89%, respectively, compared to 0.50% and 4.61%, respectively, for the twelve months ended December 31, 2014, and 0.67% and 7.10%, respectively, for the twelve months ended December 31, 2013. 25 Consolidated Average Balance Sheets and Net Interest Income Analyses For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances. (dollars in thousands) Assets Interest-earning assets Twelve Months Ended December 31, 2015 December 31, 2014 December 31, 2013 Average Balance Yield/Cost Average Balance Yield/Cost Average Balance Yield/Cost Loans, including loans held-for-sale $ 853,996 4.34% $ 631,743 4.41% $ 435,799 Securities - taxable Securities - non-taxable Other earning assets Total interest-earning assets Allowance for loan losses Noninterest earning-assets Total assets Liabilities Interest-bearing liabilities 171,502 10,343 42,375 1,078,216 (6,906) 35,912 2.17% 3.02% 0.84% 3.84% 151,967 1,785 56,094 841,589 (5,414) 36,128 2.00% 3.25% 0.44% 3.71% 137,230 43,620 37,785 654,434 (5,573) 35,719 $ 1,107,222 $ 872,303 $ 684,580 Interest-bearing demand deposits $ Regular savings accounts Money market accounts Certificates and brokered deposits Total interest-bearing deposits Other borrowed funds Total interest-bearing liabilities Noninterest-bearing deposits Other noninterest-bearing liabilities Total liabilities Shareholders' equity 76,145 24,442 299,990 438,776 839,353 139,695 979,048 22,866 4,880 1,006,794 100,428 Total liabilities and shareholders' equity $ 1,107,222 0.55% $ 0.58% 0.71% 1.38% 1.04% 1.39% 1.09% 70,362 18,509 269,271 350,129 708,271 45,425 753,696 20,028 4,783 778,507 0.55% $ 0.59% 0.73% 1.48% 1.08% 2.81% 1.18% 68,366 13,806 224,383 260,549 567,104 31,471 598,575 13,605 7,696 619,876 93,796 $ 872,303 64,704 $ 684,580 4.78% 2.11% 3.69% 0.51% 3.90% 0.55% 0.59% 0.74% 1.82% 1.21% 3.90% 1.35% Interest rate spread1 Net interest margin2 2.75% 2.85% 2.53% 2.65% 2.55% 2.67% 1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities 2 Net interest income divided by average interest-earning assets 26 Rate/Volume Analysis The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. (amounts in thousands) Interest income Rate/Volume Analysis of Net Interest Income Twelve Months Ended December 31, 2015 vs. December 31, 2014 Due to Changes in Twelve Months Ended December 31, 2014 vs. December 31, 2013 Due to Changes in Volume Rate Net Volume Rate Net Loans, including loans held-for-sale $ 9,624 $ (450) $ 9,174 $ 8,750 $ (1,718) $ Securities – taxable Securities – non-taxable Other earning assets Total Interest expense Interest-bearing deposits Other borrowed funds Total 417 258 (71) 10,228 1,390 1,571 2,961 275 (4) 183 4 (288) (907) (1,195) 692 254 112 10,232 1,102 664 1,766 301 (1,381) 84 7,754 1,803 450 2,253 (156) (172) (29) (2,075) (1,011) (402) (1,413) Increase in net interest income $ 7,267 $ 1,199 $ 8,466 $ 5,501 $ (662) $ 7,032 145 (1,553) 55 5,679 792 48 840 4,839 2015 v. 2014 Net interest income for the twelve months ended December 31, 2015 was $30.8 million, an increase of $8.5 million, or 38.0%, compared to $22.3 million for the twelve months ended December 31, 2014. Net interest margin was 2.85% for the twelve months ended December 31, 2015 compared to 2.65% for the twelve months ended December 31, 2014. The increases in net interest income and net interest margin were primarily driven by an increase in average interest-earning assets of $236.6 million, or 28.1%, for the twelve months ended December 31, 2015 compared to the twelve months ended December 31, 2014, as well as changes in the composition of the Company’s balance sheet, which resulted in an increase in the yield earned on interest-earning assets and a decrease in the cost of funds related to interest-bearing liabilities. The increase in net interest income for the twelve months ended December 31, 2015, compared to the twelve months ended December 31, 2014, was also due to a $10.2 million, or 32.8%, increase in total interest income to $41.4 million for the twelve months ended December 31, 2015 compared to $31.2 million for the twelve months ended December 31, 2014. The increase in total interest income was partially offset by a $1.8 million, or 19.8%, increase in total interest expense to $10.7 million for the twelve months ended December 31, 2015 compared to $8.9 million for the twelve months ended December 31, 2014. The increase in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of $222.3 million, or 35.2%, in the average balance of loans, including loans held-for-sale, as well as an increase in interest earned on securities resulting from an increase of $28.1 million, or 18.3%, in the average balance of securities for the twelve months ended December 31, 2015 compared to the twelve months ended December 31, 2014. The increase in total interest income was also due to a 21 basis point (“bp”) increase in the yield earned on the securities portfolio, partially offset by a decline in the yield earned on loans, including loans held-for-sale, of 7 bps. The increase in total interest expense was driven primarily by an increase in interest expense related to interest-bearing deposits as a result of a $131.1 million, or 18.5%, increase in the average balance of interest-bearing deposits for the twelve months ended December 31, 2015 compared to the twelve months ended December 31, 2014, partially offset by a decline of 4 bps in the cost of funds related to these deposits. Interest expense related to other borrowed funds also contributed to the increase in total interest expense, due to a $94.3 million, or 207.5%, increase in the average balance of other borrowed funds for the twelve months ended December 31, 2015 compared to the twelve months ended December 31, 2014, partially offset by a decline of 142 bps in the cost of other borrowed funds. 27 2014 v. 2013 Net interest income for the twelve months ended December 31, 2014 was $22.3 million, an increase of $4.8 million, or 27.7%, compared to $17.4 million for the twelve months ended December 31, 2013. Net interest margin was 2.65% for the twelve months ended December 31, 2014 compared to 2.67% for the twelve months ended December 31, 2013. The increase in net interest income was primarily driven by an increase in average interest-earning assets of $187.2 million, or 28.6%, for the twelve months ended December 31, 2014 compared to the twelve months ended December 31, 2013. The modest decline in net interest margin for the twelve months ended December 31, 2014 compared to the twelve months ended December 31, 2013 was driven primarily by the decline in market interest rates during 2014 as the yield on interest-earnings assets decreased 19 bps and the cost of interest- bearing liabilities decreased 17 bps. The increase in net interest income for the twelve months ended December 31, 2014, as compared to the twelve months ended December 31, 2013, was also due to a $5.7 million, or 22.2%, increase in total interest income to $31.2 million for the twelve months ended December 31, 2014 compared to $25.5 million for the twelve months ended December 31, 2013. The increase in total interest income was partially offset by a $0.8 million, or 10.4%, increase in total interest expense to $8.9 million for the twelve months ended December 31, 2014 compared to $8.1 million for the twelve months ended December 31, 2013. The increase in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of $195.9 million, or 45.0%, in the average balance of loans, including loans held-for-sale, which was offset by a decrease in interest earned on securities resulting from a decrease of $27.1 million, or 15.0%, in the average balance of securities for the twelve months ended December 31, 2014 compared to the twelve months ended December 31, 2013. The increase in total interest income was also partially offset by a 48 bp decline in the yield earned on the securities portfolio and a 37 bp decline in the yield earned on loans, including loans held-for-sale. The increase in total interest expense was driven primarily by an increase in interest expense related to interest-bearing deposits as a result of a $141.2 million, or 24.9%, increase in the average balance of interest-bearing deposits for the twelve months ended December 31, 2014 compared to the twelve months ended December 31, 2013, partially offset by a decline of 13 bps in the cost of funds related to these deposits. Interest expense related to other borrowed funds also contributed to the increase in total interest expense, due to a $14.0 million, or 44.3%, increase in the average balance of other borrowed funds for the twelve months ended December 31, 2014 compared to the twelve months ended December 31, 2013, partially offset by a decline of 109 bps in the cost of other borrowed funds. Noninterest Income The following table presents noninterest income for the five most recent years. (amounts in thousands) Service charges and fees Mortgage banking activities Other-than-temporary impairment loss recognized in net income Gain (loss) on sale of securities Loss on asset disposals Other Twelve Months Ended December 31, 2015 2014 2013 2012 2011 $ 764 $ 9,000 707 $ 5,609 687 $ 8,682 685 $ 10,647 — — (34) 411 — 538 (78) 398 (49) (63) (146) 406 (252) 48 (93) 388 Total noninterest income $ 10,141 $ 7,174 $ 9,517 $ 11,423 $ 1,157 3,690 (626) 84 (1,052) 306 3,559 2015 v. 2014 During the twelve months ended December 31, 2015, noninterest income totaled $10.1 million, representing an increase of $3.0 million, or 41.4% compared to $7.2 million for the twelve months ended December 31, 2014. The increase in noninterest income was primarily driven by an increase of $3.4 million, or 60.5%, in mortgage banking activities resulting primarily from higher origination volumes. The increase in mortgage banking activities was partially offset by a $0.5 million decline in gains related to sales of securities. 28 2014 v. 2013 During the twelve months ended December 31, 2014, noninterest income totaled $7.2 million, representing a decrease of $2.3 million, or 24.6%, compared to $9.5 million for the twelve months ended December 31, 2013. The decrease in noninterest income was primarily driven by a decrease of $3.1 million, or 35.4%, in mortgage banking activities, due primarily to a decrease in the volume of loans sold, which was slightly offset by an increase in the gain on sale margin. The decrease in income from mortgage banking activities was partially offset by an increase of $0.6 million related to gains on sales of securities and a decrease of $0.1 million from losses on asset disposals. Noninterest Expense The following table presents noninterest expense for the five most recent years. (amounts in thousands) 2015 2014 2013 2012 2011 Salaries and employee benefits $ 14,271 $ 12,348 $ 10,250 $ 8,529 $ 5,311 Twelve Months Ended December 31, Marketing, advertising and promotion Consulting and professional services Data processing Loan expenses Premises and equipment Deposit insurance premium Other 1,756 2,374 1,016 631 2,768 643 1,824 1,455 1,902 995 626 2,937 591 1,808 1,858 2,152 911 799 2,196 451 1,865 1,362 1,422 897 1,097 1,711 455 1,140 Total noninterest expense $ 25,283 $ 22,662 $ 20,482 $ 16,613 $ 936 777 915 526 1,481 727 810 11,483 2015 v. 2014 Noninterest expense for the twelve months ended December 31, 2015 was $25.3 million, compared to $22.7 million for the twelve months ended December 31, 2014. The increase of $2.6 million, or 11.6%, compared to the twelve months ended December 31, 2014 was primarily due to an increase of $1.9 million in salaries and employee benefits, an increase of $0.5 million in consulting and professional services, an increase of $0.3 million in marketing, advertising and promotion, and an increase $0.1 million in deposit insurance premium expenses, slightly offset by a decrease of $0.2 million in premises and equipment expenses. The increase in salaries and employee benefits was attributable to increased headcount driven by the Company's continued growth, increased equity compensation expense, and increased bonus expense. The increase in bonus expense was primarily attributable to improved profitability in 2015, which resulted in senior management earning annual cash bonuses under the 2015 Senior Management Bonus Plan. In 2014, there were no cash bonuses earned under the 2014 Senior Management Bonus Plan because the threshold criterion for payment was not met. The increase in consulting and professional services was due primarily to an increase in legal and other professional fees consistent with the Company's balance sheet and operational growth as well as increased regulatory compliance matters. The increase in marketing, advertising and promotion was due to higher sponsorships and online channel origination costs related to the increase in mortgage origination activity. 2014 v. 2013 Noninterest expense for the twelve months ended December 31, 2014 was $22.7 million, compared to $20.5 million for the twelve months ended December 31, 2013. The increase of $2.2 million, or 10.6%, compared to the twelve months ended December 31, 2013 was due to an increase of $2.1 million in salaries and employee benefits, an increase of $0.7 million in premises and equipment, and an increase of $0.1 million in deposit insurance premium expenses, partially offset by decreases of $0.4 million in marketing, advertising and promotion, $0.3 million in consulting and professional services, and $0.2 million in loan expenses. The increase in salaries and employee benefits was attributable to increased headcount driven by the Company's continued growth. 29 Financial Condition The following table presents summary balance sheet data as of the end of the last five years. (amounts in thousands) Balance Sheet Data: Total assets Loans receivable Securities available-for-sale Loans held-for-sale Noninterest-bearing deposits Interest-bearing deposits Total deposits Total shareholders' equity 2015 2014 2013 2012 2011 December 31, $ 1,269,870 $ 970,503 $ 802,342 $ 636,367 $ 953,859 213,698 36,518 23,700 932,354 956,054 104,330 732,426 137,518 34,671 21,790 736,808 758,598 96,785 501,153 181,409 28,610 19,386 653,709 673,095 90,908 358,161 156,693 63,264 13,187 517,504 530,691 61,350 585,440 335,226 149,270 45,091 15,870 470,795 486,665 55,423 Total assets were $1.3 billion at December 31, 2015, compared to $970.5 million at December 31, 2014, representing an increase of $299.4 million, or 30.8%. The increase in total assets was due primarily to increases of $221.4 million, or 30.2%, in loans receivable, and $76.2 million, or 55.4%, in securities available-for-sale. Loan Portfolio Analysis The following table provides information regarding the Company’s loan portfolio as of the end of the last five years. (dollars in thousands) Commercial loans 2015 2014 December 31, 2013 2012 2011 Commercial and industrial $ 102,000 10.7% $ 77,232 10.5% $ 55,168 11.0% $ 14,271 4.0% $ 2,063 0.7% 44,462 4.7% 34,295 4.7% 18,165 3.6% 12,644 3.5% — —% 16,184 45,898 1.7% 4.8% 22,069 24,883 3.0% 3.4% 26,574 28,200 5.3% 5.6% 72,274 11,321 20.2% 43,507 3.2% 8,223 374,344 39.2% 192,608 26.3% 84,173 16.8% — —% — Total commercial loans 582,888 61.1% 351,087 47.9% 212,280 42.3% 110,510 30.9% 53,793 214,559 43,279 108,312 366,150 22.5% 220,612 30.1% 138,418 27.6% 110,975 31.0% 130,519 4.5% 11.4% 58,434 97,094 8.0% 37,906 7.6% 6,519 1.8% 4,710 13.3% 107,562 21.5% 126,486 35.3% 142,783 38.4% 376,140 51.4% 283,886 56.7% 243,980 68.1% 278,012 949,038 99.5% 727,227 99.3% 496,166 99.0% 354,490 99.0% 331,805 99.0% 4,821 0.5% 5,199 0.7% 4,987 1.0% 3,671 1.0% 3,421 1.0% Total loans receivable 953,859 100.0% 732,426 100.0% 501,153 100.0% 358,161 100.0% 335,226 100.0% Allowance for loan losses (8,351) Net loans receivable $ 945,508 (5,800) $ 726,626 (5,426) $ 495,727 (5,833) $ 352,328 (5,656) $ 329,570 Total loans receivable as of December 31, 2015 were $953.9 million, an increase $221.4 million, or 30.2%, compared to $732.4 million as of December 31, 2014. Total commercial loans increased $231.8 million, or 66.0%, as of December 31, 2015 compared to December 31, 2014, due to increases of $181.7 million, or 94.4%, in single tenant lease financing, $24.8 million, or 32.1%, in commercial and industrial, $21.0 million, or 84.5%, in construction, and $10.2 million, or 29.6%, in owner-occupied commercial real estate. These increases were partially offset by a decline of $5.9 million, or 26.7%, in investor commercial real estate. Total consumer loans decreased $10.0 million, or 2.7%, as of December 31, 2015, compared to December 31, 2014, due primarily to decreases of $15.2 million, or 25.9%, in home equity and $6.1 million, or 2.7%, in residential mortgages. These decreases were partially offset by an increase of $11.2 million, or 11.6%, in other consumer loans. 30 Owner-occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Consumer loans Residential mortgage Home equity Other consumer Total consumer loans Total commercial and consumer loans Deferred loan origination costs and premiums and discounts on purchased loans 13.0% 2.5% —% 16.1% 38.9% 1.4% 42.6% 82.9% Loan Maturities The following table shows the contractual maturity distribution intervals of the outstanding loans in our portfolio as of December 31, 2015. (amounts in thousands) Commercial loans Within 1 Year 1-3 Years 4-5 Years Beyond 5 Years Total Commercial and industrial $ 20,808 $ 19,912 $ 38,087 $ 23,193 $ 102,000 Owner-occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Total commercial loans Consumer loans Residential mortgage Home equity Other consumer Total consumer loans — 8,328 28,218 756 58,110 592 — 574 1,166 4,488 4,113 17,580 11,174 57,267 777 71 6,333 7,181 24,056 3,271 — 66,974 132,388 1,150 54 16,449 17,653 15,918 472 100 295,440 335,123 212,040 43,154 84,956 340,150 Total commercial and consumer loans $ 59,276 $ 64,448 $ 150,041 $ 675,273 $ 44,462 16,184 45,898 374,344 582,888 214,559 43,279 108,312 366,150 949,038 Loan Approval Procedures and Authority Our lending activities follow written, non-discriminatory policies with loan approval limits approved by the board of directors of the Bank. Loan officers have underwriting and approval authorization of varying amounts based on their years of experience in the lending field. Additionally, based on the amount of the loan, multiple approvals may be required. Based on the Company’s legal lending limit, the maximum the Bank could lend to any one borrower at December 31, 2015 was $16.9 million. Our goal is to have a well-diversified and balanced loan portfolio. In order to manage our loan portfolio risk, we establish concentration limits by borrower, product type, industry and geography. To supplement our internal loan review resources, we have engaged an independent third-party loan review group, which is a key component of our overall risk management process related to credit administration. 31 Asset Quality (dollars in thousands) Nonaccrual loans Commercial loans: 2015 2014 2013 2012 2011 December 31, Investor commercial real estate $ — $ Total commercial loans Consumer loans: Residential mortgage Other consumer Total consumer loans Total nonaccrual loans Past Due 90 days and accruing loans Consumer loans: Residential mortgage Other consumer Total consumer loans Total past due 90 days and accruing loans — 103 64 167 167 — — — — $ 87 87 25 123 148 235 57 4 61 61 $ 1,054 1,054 630 150 780 1,834 — 18 18 18 $ 2,362 2,362 1,389 155 1,544 3,906 450 21 471 471 7,523 7,523 876 224 1,100 8,623 75 56 131 131 Total nonperforming loans 167 296 1,852 4,377 8,754 Other real estate owned Investor commercial real estate Residential mortgage Total other real estate owned Other nonperforming assets 4,488 — 4,488 85 4,488 — 4,488 82 4,013 368 4,381 956 3,401 265 3,666 2,253 1,064 448 1,512 3,113 Total nonperforming assets $ 4,740 $ 4,866 $ 7,189 $ 10,296 $ 13,379 Total nonperforming loans to total loans receivable Total nonperforming assets to total assets 0.02% 0.37% 0.04% 0.50% 0.37% 0.90% 1.23% 1.62% 2.64% 2.29% A loan is designated as impaired, in accordance with the impairment accounting guidance when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings (“TDRs”) where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Nonperforming loans are comprised of total nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets. Nonperforming assets also included investments that were classified as other-than-temporarily impaired as of December 31, 2012 and 2011. 32 Troubled Debt Restructurings (amounts in thousands) 2015 2014 2013 2012 2011 Troubled debt restructurings – nonaccrual Troubled debt restructurings – performing Total troubled debt restructurings $ $ — $ 1,115 1,115 $ 5 1,125 1,130 $ $ 27 1,243 1,270 $ $ 558 1,412 1,970 $ $ 884 1,086 1,970 December 31, The decrease in total nonperforming assets was due primarily to declines in loans 90 days past due and accruing and in nonaccrual loans. Total nonperforming loans decreased $0.1 million, or 43.6%, to $0.2 million as of December 31, 2015 compared to $0.3 million as of December 31, 2014. Other nonperforming assets increased by less than $0.1 million, or 3.7%, as of December 31, 2015 compared to December 31, 2014. As a result, the ratio of nonperforming loans to total loans receivable improved to 0.02% as of December 31, 2015 compared to 0.04% as of December 31, 2014, and the ratio of nonperforming assets to total assets improved to 0.37% as of December 31, 2015 compared to 0.50% as of December 31, 2014. As of December 31, 2015 and December 31, 2014, the Company had one commercial property in other real estate owned with a carrying value of $4.5 million. This property consists of two buildings which are residential units adjacent to a university campus. Improvements to the property have been made in collaboration with the university and the property continues to be occupied. Allowance for Loan Losses (amounts in thousands) Balance, beginning of period Provision charged to expense Losses charged off Recoveries Balance, end of period December 31, 2015 2014 2013 2012 2011 $ $ 5,800 $ 5,426 $ 5,833 $ 5,656 $ 1,946 (636) 1,241 349 (857) 882 324 (1,212) 481 2,852 (3,411) 736 8,351 $ 5,800 $ 5,426 $ 5,833 $ 6,845 2,440 (4,417) 788 5,656 The determination of the allowance for loan losses and the related provision is one of our critical accounting policies that is subject to significant estimates, as discussed within the Critical Accounting Policies and Estimates section below. The current level of the allowance for loan losses is a result of management’s assessment of the risks within the portfolio based on the information obtained through the credit evaluation process. The Company utilizes a risk-rating system on non-homogenous commercial loans that includes regular credit reviews to identify and quantify the risk in the commercial portfolio. Management conducts quarterly reviews of the entire loan portfolio and evaluates the need to establish allowances on the basis of these reviews. Management actively monitors asset quality and, when appropriate, charges off loans against the allowance for loan losses. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used to determine the size of the allowance for loan losses. The allowance for loan losses was $8.4 million as of December 31, 2015, compared to $5.8 million as of December 31, 2014. The increase of $2.6 million, or 44.0%, was due primarily to the continued growth in commercial loan balances. During the twelve months ended December 31, 2015, the Company recorded net recoveries of $0.6 million, compared to net recoveries of less than $0.1 million during the twelve months ended December 31, 2014. During the twelve months ended December 31, 2015, the net recoveries were driven primarily by a $0.5 million recovery of an investor commercial real estate loan that had been previously charged-off and a $0.4 million recovery of a residential mortgage loan, of which $0.3 million related to the recapture of principal previously charged-off. The recoveries were partially offset by charge-offs of $0.6 million in residential mortgage and other consumer loans. During the twelve months ended December 31, 2014, the net recoveries were driven primarily by a $0.5 million recovery of an investor commercial real estate loan. The recoveries were mostly offset by charge offs of $0.9 million, primarily related to residential mortgage and other consumer loans. 33  The allowance for loan losses as a percentage of total loans receivable increased to 0.88% as of December 31, 2015, compared to 0.79% as of December 31, 2014, and as a percentage of nonperforming loans increased to 5,000.6% as of December 31, 2015, compared to 1,959.5% as of December 31, 2014. The increase in the allowance for loan losses as a percentage of total loans receivable was primarily driven by a $2.6 million increase in the allowance related to total commercial loans at December 31, 2015 compared to December 31, 2014. Under the Company’s allowance for loan losses methodology, commercial loans are assigned higher reserve factors than consumer loans. Since December 31, 2014, commercial loan growth has outpaced consumer loan growth, and as of December 31, 2015, total commercial loans represented 61.1% of total loans receivable compared to 47.9% as of December 31, 2014. The combination of higher growth and higher reserve factors related to commercial loans resulted in the increased percentage of allowance for loan losses to total loans receivable. The increase in the allowance for loan losses as a percentage of nonperforming loans as of December 31, 2015 compared to December 31, 2014 was also due to the increase in the allowance for loan losses and the decline in nonperforming loans. Investment Securities In managing the Company’s investment securities portfolio, management focuses on providing an adequate level of liquidity and establishing an interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. Investment securities that are acquired and held principally for the purpose of selling them in the near term with the objective of generating economic profits on short-term differences in market characteristics are classified as securities held for trading. Securities that we intend to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as available-for-sale. As of December 31, 2015 and 2014, all of the Company’s investment securities were classified as available-for-sale. The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income (loss). The Company periodically evaluates each available-for-sale security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. As of December 31, 2015, the unrealized losses in the Company’s investment securities portfolio were due solely to interest rate changes. The Company has the ability and intent to hold all investment securities with identified impairments resulting from interest rate changes to the earlier of the forecasted recovery or the maturity of the underlying investment security. As of December 31, 2015, the Company did not have any investment securities of a single issuer, which were not governmental or government-sponsored, that exceeded 10% of shareholders’ equity. The following tables present the amortized cost and approximate fair value of the Company’s investment securities portfolio by security type as of the end of the last five years. (amounts in thousands) Amortized Cost Securities available-for-sale 2015 2014 2013 2012 2011 December 31, U.S. Government-sponsored agencies $ 38,093 $ 13,680 $ 57,569 $ 18,666 $ Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Other securities 21,091 113,948 19,444 20,000 3,000 — 117,134 4,913 — 2,000 46,126 76,371 — — 5,025 39,999 78,478 — — 16,753 Total securities available-for-sale $ 215,576 $ 137,727 $ 185,091 $ 153,896 $ 24,685 40,849 73,204 — — 8,648 147,386 Approximate Fair Value Securities available-for-sale 2015 2014 2013 2012 2011 December 31, U.S. Government-sponsored agencies $ 37,750 $ 13,552 $ 56,277 $ 19,618 $ Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Other securities 21,469 113,052 19,361 19,087 2,979 — 117,048 4,912 — 2,006 46,323 75,173 — — 3,636 42,540 79,942 — — 14,593 Total securities available-for-sale $ 213,698 $ 137,518 $ 181,409 $ 156,693 $ 25,502 42,761 75,235 — — 5,772 149,270 34 The approximate fair value of investment securities available-for-sale increased $76.2 million, or 55.4%, to $213.7 million as of December 31, 2015 compared to $137.5 million as of December 31, 2014. The increase was due primarily to increases of $24.2 million in U.S. Government-sponsored agencies, $21.5 million in municipal securities, $14.4 million in asset-backed securities and $19.1 million in corporate securities, partially offset by a decrease of $4.0 million in mortgage-backed securities. During the twelve months ended December 31, 2015, the Company deployed funds generated through deposit growth to purchase additional securities to further diversify the securities portfolio and enhance net interest income, while supporting liquidity and interest rate risk management. Investment Maturities The following table summarizes the contractual maturity schedule of the Company’s investment securities at their amortized cost and their weighted average yields at December 31, 2015. 1 year or less More than 1 year to 5 years More than 5 years to 10 years More than 10 years Total Amortized Cost Wtd. Avg. Yield Amortized Cost Wtd. Avg. Yield Amortized Cost Wtd. Avg. Yield Amortized Cost Wtd. Avg. Yield Amortized Cost Wtd. Avg. Yield (dollars in thousands) Securities available for sale: U.S. Government- sponsored agencies Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Total securities available for sale 1 $ $ — — — — — — —% $ —% —% —% —% 487 — — — — 3.75% $ 14,198 2.18% $ 23,408 2.34% $ 38,093 —% —% —% —% 1,160 2.50% 19,931 3.10% 21,091 44,433 5,083 10,000 1.60% 2.27% 3.50% 69,515 14,361 10,000 2.14% 2.60% 4.00% 113,948 19,444 20,000 2.30% 3.07% 1.93% 2.51% 3.75% —% $ 487 3.75% $ 74,874 2.02% $ 137,215 2.50% $ 212,576 2.33% ___________________________________ 1 A $3.0 million investment security has been excluded from this table because the security does not have a maturity date. Deposits The following table presents the composition of the Company's deposit base as of the end of the last five years. (dollars in thousands) 2015 2014 December 31, 2013 2012 2011 Noninterest-bearing deposits $ 23,700 2.5% $ 21,790 2.9% $ 19,386 2.9% $ 13,187 2.5% $ 15,870 3.2% Interest-bearing demand deposits Regular savings accounts Money market accounts Certificates of deposits Brokered deposits 84,241 22,808 341,732 470,736 12,837 8.8% 2.4% 35.7% 49.2% 1.4% 74,238 20,776 267,046 361,202 13,546 9.8% 2.7% 35.2% 47.6% 1.8% 73,748 14,330 255,169 292,685 17,777 11.0% 2.1% 37.9% 43.5% 2.6% 73,660 11,583 202,388 211,542 18,331 13.9% 2.2% 38.1% 39.9% 3.4% 64,006 13.2% 7,773 165,561 209,762 23,693 1.6% 34.0% 43.1% 4.9% Total $ 956,054 100.0% $ 758,598 100.0% $ 673,095 100.0% $ 530,691 100.0% $ 486,665 100.0% Total deposits increased $197.5 million, or 26.0%, to $956.1 million as of December 31, 2015 as compared to $758.6 million as of December 31, 2014. This increase was due primarily to increases of $109.5 million, or 30.3%, in certificates of deposit, $74.7 million, or 28.0%, in money market accounts, $10.0 million, or 13.5%, in interest-bearing demand deposits, $2.0 million, or 9.8%, in regular savings accounts, and $1.9 million, or 8.8%, in noninterest-bearing deposits. 35 The following tables present contractual interest rates paid on time deposits, their scheduled maturities, and the scheduled maturities for time deposits $100,000 or greater. Time Deposits (dollars in thousands) Interest Rate: <1.00% 1.00% – 1.99% 2.00% – 2.99% 3.00% – 3.99% 4.00% – 4.99% Total December 31, 2015 $ $ 190,958 188,491 93,514 8,085 2,525 483,573 Time Deposit Maturities at December 31, 2015 (dollars in thousands) Interest Rate: <1.00% 1.00% – 1.99% 2.00% – 2.99% 3.00% – 3.99% 4.00% – 4.99% Total Period to Maturity Less than 1 year > 1 year to 2 years > 2 years to 3 years More than 3 years Total Percentage of Total Certificate Accounts $ 189,551 $ 1,407 $ — $ — $ 46,197 46,967 5,009 — 82,722 92 3,076 — 45,936 — — 2,525 13,636 46,455 — — 190,958 188,491 93,514 8,085 2,525 39.5% 39.0% 19.3% 1.7% 0.5% $ 287,724 $ 87,297 $ 48,461 $ 60,091 $ 483,573 100.0% Time Deposit Maturities of $100,000 or Greater (dollars in thousands) Maturity Period: 3 months or less Over 3 through 6 months Over 6 through 12 months Over 12 months Total Federal Home Loan Bank Advances December 31, 2015 $ $ 54,391 59,228 206,219 91,386 411,224 Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may obtain advances from the FHLB as an alternative to retail and commercial deposits. The following table is a summary of FHLB borrowings for the periods indicated. (dollars in thousands) Balance outstanding at end of period Average amount outstanding during period Maximum outstanding at any month end during period At or for the Twelve Months Ended December 31, 2015 2014 2013 $ 190,957 $ 106,897 $ 134,689 190,957 42,597 106,897 31,793 30,054 31,793 Weighted average interest rate at end of period Weighted average interest rate during period 0.81% 1.09% 1.58% 2.23% 2.63% 3.53% 36 Liquidity and Capital Resources While the Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for at least the next twelve months, including any cash dividends it may pay, the Company intends to continue pursuing its growth strategy, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to execute its growth strategy could be adversely affected. Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings, which are generally advances from the FHLB. The Company maintains cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments. At December 31, 2015, on a consolidated basis, the Company had $239.9 million in cash and cash equivalents, interest-bearing time deposits and investment securities available-for-sale and $36.5 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At December 31, 2015, the Bank had the ability to borrow an additional $99.0 million in advances from the FHLB and correspondent bank Fed Funds lines of credit. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At December 31, 2015, the Company, on an unconsolidated basis, had $6.9 million in cash generally available for its cash needs. The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At December 31, 2015, approved outstanding loan commitments, including unused lines of credit, amounted to $131.9 million. Certificates of deposit scheduled to mature in one year or less at December 31, 2015 totaled $287.7 million. Generally, the Company believes that a majority of maturing deposits will remain with the Bank. In March 2013, the Company borrowed $4.0 million from the Bank for the purchase of the Company’s principal executive offices. The original scheduled maturity date of the loan was March 6, 2014. Effective March 6, 2014, the Company entered into an Acknowledgment, Confirmation and Amendment that, among other things, extended the maturity of the loan to March 6, 2015. Effective March 6, 2015, the Company entered into a Second Acknowledgment, Confirmation and Amendment that extended the maturity of the loan to March 6, 2016. Effective February 26, 2016, the Company entered into a Third Acknowledgment, Confirmation and Amendment that extended the maturity of the loan to March 6, 2017. The loan bears interest during the term at a variable rate equal to the then applicable prime rate (as determined by the Bank with reference to the “Prime Rate” published in The Wall Street Journal) plus 1.00% per annum. The loan agreement contains customary warranties and representations, affirmative covenants and events of default. The loan agreement provides that the loan is to be secured by a first priority mortgage and lien on the acquired property and requires that the Company, at all times, maintain collateral securing the loan with an “as is” market value of not less than 1.3 times the principal balance of the loan. 37 Reconciliation of Non-GAAP Financial Measures This annual report on Form 10-K contains financial information determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial measures, specifically tangible common equity, tangible assets, average tangible common equity, tangible book value per common share, return on average tangible common equity and tangible common equity to tangible assets are used by management to measure the strength of its capital and its ability to generate earnings on tangible capital invested by its shareholders. Although the Company believes these non-GAAP measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table. (dollars in thousands, except share and per share data) Total equity - GAAP Adjustments: Goodwill Tangible common equity Total assets - GAAP Adjustments: Goodwill Tangible assets Total common shares outstanding Book value per common share Effect of goodwill Tangible book value per common share Total shareholders’ equity to assets ratio Effect of goodwill Tangible common equity to tangible assets ratio Total average equity - GAAP Adjustments: Average goodwill Average tangible common equity Return on average shareholders' equity Effect of goodwill Return on average tangible common equity $ $ $ $ $ $ $ $ At or for the Twelve Months Ended December 31, $ $ $ $ $ $ $ $ 2015 104,330 (4,687) 99,643 1,269,870 (4,687) 1,265,183 4,481,347 23.28 (1.04) 22.24 8.22 % (0.34)% 7.88 % 100,428 (4,687) 95,741 8.89 % 0.44 % 9.33 % $ $ $ $ $ $ $ $ 2014 96,785 (4,687) 92,098 970,503 (4,687) 965,816 4,439,575 21.80 (1.06) 20.74 9.97 % (0.43)% 9.54 % 93,796 (4,687) 89,109 4.61 % 0.24 % 4.85 % $ $ $ $ $ $ $ $ 2013 90,908 (4,687) 86,221 802,342 (4,687) 797,655 4,448,326 20.44 (1.06) 19.38 11.33 % (0.52)% 10.81 % 64,704 (4,687) 60,017 7.10 % 0.55 % 7.65 % $ $ $ $ $ $ $ $ 2012 61,350 (4,687) 56,663 636,367 (4,687) 631,680 2,815,094 21.79 (1.66) 20.13 9.64 % (0.67)% 8.97 % 58,934 (4,687) 54,247 9.51 % 0.82 % 10.33 % 2011 55,423 (4,687) 50,736 585,440 (4,687) 580,753 2,807,385 19.74 (1.67) 18.07 9.47 % (0.73)% 8.74 % 52,313 (4,687) 47,626 6.09 % 0.60 % 6.69 % Critical Accounting Policies and Estimates Allowance for Loan Losses. We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of our consolidated financial statements. An estimate of potential losses inherent in the loan portfolio is determined and an allowance for those losses is established by considering factors including historical loss rates, expected cash flows, and estimated collateral values. The allowance for loan losses represents management’s best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. Management evaluates the allowance for loan losses quarterly. If the underlying assumptions later prove to be inaccurate based on subsequent loss evaluations, the allowance for loan losses is adjusted. 38 Management estimates the appropriate level of allowance for loan losses by separately evaluating impaired and non- impaired loans. A specific allowance is assigned to an impaired loan when expected cash flows or collateral do not justify the carrying amount of the loan. The methodology used to assign an allowance to a non-impaired loan is more subjective. Generally, the allowance assigned to non-impaired loans is determined by applying historical loss rates to existing loans with similar risk characteristics, adjusted for qualitative factors including changes in economic conditions, changes in underwriting standards, and changes in concentrations of credit risk, and changes in industry conditions. Because the economic and business climate in any given industry or market, and its impact on any given borrower, can change rapidly, the risk profile of the loan portfolio is periodically assessed and adjusted when appropriate. Notwithstanding these procedures, there still exists the possibility that the assessment could prove to be significantly incorrect and that an immediate adjustment to the allowance for loan losses would be required. Investments in Debt and Equity Securities. We classify investments in debt and equity securities as available-for-sale in accordance with Accounting Standards Codification, or ASC, Topic 320, “Accounting for Certain Investments in Debt and Equity Securities.” Securities classified as held-to-maturity would be recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair value calculations are based on quoted market prices, when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of pricing sources, including Reuters/EJV, Interactive Data and Standard & Poors. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, management evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and management determines that the impairment is other-than-temporary, a further determination is made as to the portion of impairment that is related to credit loss. The impairment of the investment that is related to the credit loss is expensed in the period in which the event or change occurred. The remainder of the impairment is recorded in other comprehensive income (loss). Other Real Estate Owned (“OREO”). OREO acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the OREO or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation adjustment is recorded through noninterest expense. Net operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of OREO and foreclosed assets are netted and posted through noninterest income. Impairment of Goodwill. As a result of the Company’s previous acquisition of Landmark Financial Corporation, goodwill, an intangible asset with an indefinite life, is reflected on the balance sheet. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently. Deferred Income Tax Assets/Liabilities. Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if they are realizable based on the historical level of taxable income, estimates of future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on future profitability. If we were to experience net operating losses for tax purposes in a future period, the realization of deferred tax assets would be evaluated for a potential valuation reserve. Recent Accounting Pronouncements Refer to Note 21 to the Company’s consolidated financial statements. Off-Balance Sheet Arrangements In the ordinary course of business, the Company enters into financial transactions to extend credit and forms of commitments that may be considered off-balance sheet arrangements. We enter into forward contracts relating to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale. At December 31, 2015 and December 31, 2014, we had commitments to sell residential real estate loans of $42.7 million and $55.1 million, respectively. These contracts mature in less than one year. 39 Item 7A. 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. Interest rate risk is the risk to earnings and the value of the Company’s equity resulting from changes in market interest rates and 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. The Company seeks to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. The Company monitors its 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. The Company uses 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. The Company continually reviews and refines the assumptions used in its interest rate risk modeling. Presented below is the estimated impact on the Company's NII and EVE position as of December 31, 2015, assuming parallel shifts in interest rates: % Change from Base Case for Parallel Changes in Rates -100 Basis Points 1 +100 Basis Points +200 Basis Points NII - next twelve months EVE (1.06)% 1.60 % 0.11 % (5.16)% 0.21 % (9.52)% ___________________________________ 1 Because certain current interest rates are at or below 1.00%, the 100 basis point downward shock assumes that certain corresponding interest rates approach an implied floor that, in effect, reflects a decrease of less than the full 100 basis point downward shock. The Company’s objective is to manage the balance sheet with a bias toward asset sensitivity while simultaneously balancing the potential earnings impact of this strategy. A “risk-neutral” position refers to the absence of a strong bias toward either asset or liability sensitivity. An “asset sensitive” position refers to when the characteristics of the balance sheet are expected to generate higher net interest income when interest rates, primarily short-term rates, increase as rates earned on interest-earning assets would reprice upward more quickly or in greater quantities than rates paid on interest-bearing liabilities would reprice. A “liability sensitive” position refers to when the characteristics of the balance sheet are expected to generate lower net interest income when short-term interest rates increase as rates paid on interest-bearing liabilities would reprice upward more quickly or in greater quantities than rates earned on interest-earning assets. Item 8. Financial Statements and Supplementary Data The consolidated financial statements and notes thereto required pursuant to this Item begin on page F-1 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information the Company is required to disclose in reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including our principal executive and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, the Company has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating its controls and procedures. 40 The Company performed an evaluation under the supervision and with the participation of management, including the Company’s principal executive officer and principal financial officer, to assess the effectiveness of the design and operation of our disclosure controls and procedures under the Exchange Act. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of December 31, 2015. Report of Management's Assessment of Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, including accounting and other internal control systems that, in the opinion of management, provide reasonable assurance that (1) transactions are properly authorized, (2) the assets are properly safeguarded, and (3) transactions are properly recorded and reported to permit the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2015, the Company’s internal control over financial reporting is effective based on those criteria. The Company’s internal control over financial reporting as of December 31, 2015 has been audited by BKD, LLP, an independent registered public accounting firm, as stated in its report appearing on page F-2. Changes in Internal Control Over Financial Reporting There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2015, that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. 41 PART III Certain information required by Part III is incorporated by reference from our definitive Proxy Statement for our 2016 Annual Meeting of Shareholders (the “Proxy Statement”), which we intend to file with the SEC pursuant to Regulation 14A within 120 days after December 31, 2015. Except for those portions specifically incorporated by reference from our Proxy Statement, no other portions of the Proxy Statement are deemed to be filed as part of this report. Item 10. Directors, Executive Officers and Corporate Governance Directors Incorporated into this item by reference is the information set forth under the caption “Proposal No. 1 – Election of Directors” in the Proxy Statement. Executive Officers Our executive officers are as follows: Name David B. Becker Kenneth J. Lovik C. Charles Perfetti Nicole S. Lorch Age 62 46 71 41 Position Chairman, President, Chief Executive Officer and Director Senior Vice President and Chief Financial Officer Senior Vice President and Secretary Senior Vice President, Retail Banking David B. Becker has served as our Chairman of the Board since 2006 and as our President since 2007. Mr. Becker is the founder of the Bank, and has served as an officer and director of the Bank since 1998. Kenneth J. Lovik joined First Internet Bancorp and was appointed to the positions of Senior Vice President and Chief Financial Officer in August 2014. Previously, he served as Senior Vice President, Investor Relations and Corporate Development, at First Financial Bancorp, a publicly traded bank holding company headquartered in Cincinnati, Ohio, from February 2013 to May 2014. Prior to that, he served as its Vice President, Investor Relations and Corporate Development, from March 2010 to February 2013. Before First Financial Bancorp, he served as Vice President – Investment Banking at Milestone Advisors, LLC from October 2008 to September 2009 and in the same position at Howe Barnes Hoefer & Arnett, Inc. from 2004 to July 2008. C. Charles Perfetti was appointed to the positions of Senior Vice President in January 2012 and Secretary in May 2014. Mr. Perfetti joined First Internet Bancorp in 2007 upon our acquisition of Landmark Financial Corporation, where he had served as President from 1989 to 2007. He previously conducted independent real estate and government consulting and served as the Chief Investment Manager of the State of Indiana from 1979 to 1986. Nicole S. Lorch has served as Senior Vice President, Retail Banking since May 2011. Ms. Lorch joined the Company as Director of Marketing in 1999 and served as Vice President, Marketing & Technology from May 2003 to May 2011. She previously served as Director of Marketing at Virtual Financial Services, an online banking services provider, from 1996 to 1999. Executive officers are elected annually by our Board of Directors and serve a one-year period or until their successors are elected. None of the above-identified executive officers are related to each other or to any of our directors. Code of Business Conduct and Ethics We have adopted a code of business conduct and ethics that applies to all of our directors and officers and other employees, including our principal executive officer and principal financial officer. This code is publicly available through the Corporate Governance section of our website at www.firstinternetbancorp.com. To the extent permissible under applicable law, the rules of the SEC or NASDAQ listing standards, we intend to post on our website any amendment to the code of business conduct and ethics, or any grant of a waiver from a provision of the code of business conduct and ethics, that requires disclosure under applicable law, the rules of the SEC or NASDAQ listing standards. 42 Audit Committee Incorporated into this item by reference is the information relating to our audit committee set forth in the Proxy Statement under the caption “Corporate Governance.” Section 16(a) Beneficial Ownership Reporting Compliance Incorporated into this item by reference is the information relating to reports filed under Section 16(a) of the Exchange Act set forth in the Proxy Statement under the caption “Corporate Governance.” Corporate Governance Incorporated into this item by reference is the information relating to the procedures by which shareholders may recommend nominees to the board of directors set forth in the Proxy Statement under the caption “Corporate Governance.” Item 11. Executive Compensation Incorporated into this item by reference is the information in the Proxy Statement regarding the compensation of our named executive officers appearing under the heading “Executive Compensation,” the information regarding compensation committee interlocks and insider participation under the heading “Corporate Governance” and the information regarding compensation of non-employee directors under the heading “Director Compensation.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated into this item by reference is the information in the Proxy Statement appearing under the headings “Security Ownership of Certain Beneficial Owners” and “Equity Compensation Plan Information.” Item 13. Certain Relationships and Related Transactions, and Director Independence Incorporated into this item by reference is the information in the Proxy Statement regarding director independence and related person transactions under the heading “Corporate Governance.” Item 14. Principal Accounting Fees and Services Incorporated into this item by reference is the information in the Proxy Statement under the heading “Audit-Related Matters.” 43 PART IV Item 15. Exhibits, Financial Statement Schedules (a) Documents Filed as Part of this annual report on Form 10-K: 1. See our financial statements beginning on page F-1. (b) Exhibits: Unless otherwise indicated, all documents incorporated into this annual report on Form 10-K by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 1-35750. 44 Exhibit No. 3.1 3.2 4.1 4.2 4.3 Description Articles of Incorporation of First Internet Bancorp (incorporated by reference to Exhibit 3.1 to registration statement on Form 10 filed November 30, 2012) Amended and Restated Bylaws of First Internet Bancorp as amended March 18, 2013 (incorporated by reference to Exhibit 3.2 to annual report on Form 10-K for the year ended December 31, 2012) Warrant to purchase common stock dated June 28, 2013 (incorporated by reference to Exhibit 4.1 to current report on Form 8-K filed July 5, 2013) Form of Senior Indenture (incorporated by reference to Exhibit 4.6 to registration statement on Form S-3 (Registration No. 333-208748) filed December 23, 2015) Form of Subordinated Indenture (incorporated by reference to Exhibit 4.7 to registration statement on Form S-3 (Registration No. 333-208748) filed December 23, 2015) 10.1 First Internet Bancorp 2013 Equity Incentive Plan (incorporated by reference to Appendix A to the definitive proxy statement on Schedule 14A filed April 9, 2013)* 10.2 Form of Restricted Stock Agreement under 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed July 26, 2013)* 10.3 First Internet Bancorp 2011 Directors’ Deferred Stock Plan (incorporated by reference to Exhibit 10.2 to registration statement on Form 10 filed November 30, 2012)* 10.4 Amended and Restated Employment Agreement among First Internet Bank of Indiana, First Internet Bancorp and David B. Becker dated March 28, 2013 (incorporated by reference to Exhibit 10.4 to annual report on Form 10-K for the year ended December 31, 2012)* 10.6 10.7 10.8 10.9 Contract for Purchase of Property between First Internet Bancorp and LHRET Ascension SV, LLC dated January 30, 2013 (incorporated by reference to Exhibit 10.10 to annual report on Form 10-K for the year ended December 31, 2012) Offer and Contract for Purchase of Real Estate between First Internet Bancorp and St. Vincent Hospital and Health Care Center, Inc., accepted February 5, 2013 (incorporated by reference to Exhibit 10.11 to annual report on Form 10-K for the year ended December 31, 2012) Lease dated as of March 6, 2013, by and between First Internet Bancorp and First Internet Bank of Indiana (incorporated by reference to Exhibit 10.2 to current report on Form 8-K filed March 11, 2013) First Amendment to Office Lease dated as of July 1, 2015, by and between First Internet Bancorp and First Internet Bank of Indiana (incorporated by reference to Exhibit 10.1 to quarterly report on Form 10-Q filed August 5, 2015) 10.10 Subordinated Debenture Purchase Agreement with Community BanCapital, L.P., dated June 28, 2013 (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed July 5, 2013) 10.11 10.12 10.13 10.14 10.15 Subordinated Debenture dated June 28, 2013 (incorporated by reference to Exhibit 10.2 to current report on Form 8-K filed July 5, 2013) 2015 Senior Executive Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to quarterly report on Form 10-Q filed May 7, 2015)* Form of Management Incentive Award Agreement - Restricted Stock Units under First Internet Bancorp 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to quarterly report on Form 10-Q filed May 7, 2015)* Loan Agreement dated as of March 6, 2013, by and between the Company and the Bank (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed March 11, 2013) First, Second and Third Acknowledgment, Confirmation and Amendment between First Internet Bank of Indiana and First Internet Bancorp executed March 6, 2014, March 6, 2015, and February 26, 2016, respectively 21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1 to registration statement on Form 10 filed November 30, 2012) Consent of Independent Registered Public Accounting Firm Powers of Attorney Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer Section 1350 Certifications 23.1 24.1 31.1 31.2 32.1 45 Exhibit No. 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE Description XBRL Instance Document XBRL Taxonomy Extension Schema XBRL Taxonomy Extension Calculation Linkbase XBRL Taxonomy Extension Definition Linkbase XBRL Taxonomy Extension Label Linkbase XBRL Taxonomy Extension Presentation Linkbase __________________________________ *Management contract, compensatory plan or arrangement required to be filed as an exhibit. 46 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 2016. SIGNATURES FIRST INTERNET BANCORP By: /s/ David B. Becker David B. Becker, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 10, 2016. /s/ David B. Becker David B. Becker, Chairman, President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Kenneth J. Lovik Kenneth J. Lovik, Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) * * John K. Keach, Jr., Director David R. Lovejoy, Director * Ann D. Murtlow, Director * Jerry Williams, Director _____________________________ * Ralph R. Whitney, Jr., Director * Jean L. Wojtowicz, Director * David B. Becker, by signing his name hereto, does hereby sign this document on behalf of each of the above-named directors of the Registrant pursuant to powers of attorney duly executed by such persons. By: /s/ David B. Becker David B. Becker, Attorney-in-Fact 47 Reports of Independent Registered Public Accounting Firm Audit Committee, Board of Directors and Shareholders First Internet Bancorp Fishers, Indiana We have audited the accompanying consolidated balance sheets of First Internet Bancorp (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2015. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Internet Bancorp as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), First Internet Bancorp's internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 10, 2016, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. /s/ BKD, LLP Indianapolis, Indiana March 10, 2016 F-1 Audit Committee, Board of Directors and Shareholders First Internet Bancorp Fishers, Indiana We have audited First Internet Bancorp’s (the “Company”) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, First Internet Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of First Internet Bancorp and our report dated March 10, 2016, expressed an unqualified opinion thereon. /s/ BKD, LLP Indianapolis, Indiana March 10, 2016 F-2 First Internet Bancorp Consolidated Balance Sheets (Amounts in thousands except share data) Assets Cash and due from banks Interest-bearing demand deposits Total cash and cash equivalents Interest-bearing time deposits Securities available-for-sale - at fair value (amortized cost of $215,576 in 2015 and $137,727 in 2014) Loans held-for-sale (includes $24,065 and $32,618 at fair value in 2015 and 2014, respectively) Loans receivable Allowance for loan losses Net loans receivable Accrued interest receivable Federal Home Loan Bank of Indianapolis stock Cash surrender value of bank-owned life insurance Premises and equipment, net Goodwill Other real estate owned Accrued income and other assets Total assets Liabilities and Shareholders’ Equity Liabilities Noninterest-bearing deposits Interest-bearing deposits Total deposits Advances from Federal Home Loan Bank Subordinated debt, net of unamortized discounts and debt issuance costs of $276 and $127 in 2015 and 2014, respectively Accrued interest payable Accrued expenses and other liabilities Total liabilities Commitments and Contingencies Shareholders’ Equity December 31, 2015 2014 $ 1,063 $ 24,089 25,152 1,000 1,940 26,349 28,289 2,000 213,698 137,518 36,518 953,859 (8,351) 945,508 4,105 8,595 12,727 8,521 4,687 4,488 4,871 34,671 732,426 (5,800) 726,626 2,833 5,350 12,325 7,061 4,687 4,488 4,655 $ 1,269,870 $ 970,503 $ 23,700 $ 932,354 956,054 190,957 12,724 117 5,688 21,790 736,808 758,598 106,897 2,873 97 5,253 1,165,540 873,718 Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none — — Voting common stock, no par value; 45,000,000 shares authorized; 4,481,347 and 4,439,575 shares issued and outstanding, respectively Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity 72,559 71,774 — 32,980 (1,209) 104,330 $ 1,269,870 $ — 25,146 (135) 96,785 970,503 See Notes to Consolidated Financial Statements F-3 First Internet Bancorp Consolidated Statements of Income (Amounts in thousands except share and per share data) Interest Income Loans Securities – taxable Securities – non-taxable Other earning assets Total interest income Interest Expense Deposits Other borrowed funds Total interest expense Net Interest Income Provision for Loan Losses Net Interest Income After Provision for Loan Losses Noninterest Income Service charges and fees Mortgage banking activities Other-than-temporary impairment Total loss related to other than temporarily impaired securities Portion of loss recognized in other comprehensive income (loss) Other-than-temporary impairment loss recognized in net income Gain (loss) on sale of securities Loss on asset disposals Other Total noninterest income Noninterest Expense Salaries and employee benefits Marketing, advertising, and promotion Consulting and professional fees Data processing Loan expenses Premises and equipment Deposit insurance premium Other Total noninterest expense Income Before Income Taxes Income Tax Provision Net Income Income Per Share of Common Stock Basic Diluted Weighted-Average Number of Common Shares Outstanding Basic Diluted Dividends Declared Per Share Year Ended December 31, 2015 2014 2013 $ 37,049 $ 27,875 $ 20,843 3,728 312 358 41,447 8,755 1,939 10,694 30,753 1,946 28,807 764 9,000 — — — — (34) 411 3,036 58 246 31,215 7,653 1,275 8,928 22,287 349 21,938 707 5,609 — — — 538 (78) 398 10,141 7,174 14,271 1,756 2,374 1,016 631 2,768 643 1,824 25,283 13,665 4,736 8,929 1.97 1.96 $ $ 12,348 1,455 1,902 995 626 2,937 591 1,808 22,662 6,450 2,126 4,324 0.96 0.96 $ $ 2,891 1,611 191 25,536 6,861 1,227 8,088 17,448 324 17,124 687 8,682 (129) 80 (49) (63) (146) 406 9,517 10,250 1,858 2,152 911 799 2,196 451 1,865 20,482 6,159 1,566 4,593 1.51 1.51 4,528,528 4,554,219 4,497,007 4,507,995 3,041,666 3,050,001 0.24 $ 0.24 $ 0.22 $ $ $ See Notes to Consolidated Financial Statements F-4 First Internet Bancorp Consolidated Statements of Comprehensive Income (Amounts in thousands) Net income Other comprehensive income (loss) Year Ended December 31, 2015 2014 2013 $ 8,929 $ 4,324 $ 4,593 Net unrealized holding gains (losses) on securities available for sale (1,669) Reclassification adjustment for (gains) losses realized Net unrealized holding gains (losses) on securities available for sale for which an other-than-temporary impairment has been recognized in income Reclassification adjustment for other-than-temporary impairment loss recognized in income Other comprehensive income (loss) before tax Income tax provision (benefit) Other comprehensive income (loss) - net of tax Comprehensive income — — — (1,669) (595) (1,074) $ 7,855 $ 6,561 $ 3,260 (538) 751 — 3,473 1,236 2,237 (6,462) 63 (129) 49 (6,479) (2,289) (4,190) 403 See Notes to Consolidated Financial Statements F-5 First Internet Bancorp Consolidated Statements of Shareholders’ Equity (Amounts in thousands except per share data) Voting and Nonvoting Common Stock Accumulated Other Comprehensive Loss Retained Earnings Total Shareholders’ Equity Balance, January 1, 2013 Net income Other comprehensive loss Dividends declared ($0.22 per share) Recognition of the fair value of share-based compensation Issuance of common stock warrants Net cash proceeds from common stock issuance Balance, December 31, 2013 Net income Other comprehensive income Dividends declared ($0.24 per share) Recognition of the fair value of share-based compensation Common stock redeemed for the net settlement of share-based awards Other $ 41,508 $ 1,818 $ 18,024 $ — — — 514 255 29,101 71,378 — — — 507 (71) (40) — (4,190) — — — — (2,372) — 2,237 — — — — 4,593 — (715) — — — 21,902 4,324 — (1,080) — — — Balance, December 31, 2014 $ 71,774 $ (135) $ 25,146 $ Net income Other comprehensive loss Dividends declared ($0.24 per share) Recognition of the fair value of share-based compensation Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units Excess tax benefit on share-based compensation Common stock redeemed for the net settlement of share-based awards — — — 762 25 36 (38) — (1,074) — — — — — 8,929 — (1,095) — — — — 61,350 4,593 (4,190) (715) 514 255 29,101 90,908 4,324 2,237 (1,080) 507 (71) (40) 96,785 8,929 (1,074) (1,095) 762 25 36 (38) Balance, December 31, 2015 $ 72,559 $ (1,209) $ 32,980 $ 104,330 See Notes to Consolidated Financial Statements F-6 First Internet Bancorp Consolidated Statements of Cash Flows (Amounts in thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Increase in cash surrender value of bank-owned life insurance Provision for loan losses Share-based compensation expense Loss on other-than-temporary impairment of securities (Gain) loss from sale of available-for-sale securities Loans originated for sale Proceeds from sale of loans Gain on loans sold Decrease (increase) in fair value of loans held-for-sale (Gain) loss on derivatives Deferred income tax Net change in other assets Net change in other liabilities Net cash provided by operating activities Investing Activities Net loan activity, excluding sales and purchases Net change in interest-bearing deposits Proceeds from liquidation of other real estate owned Maturities of securities available-for-sale Proceeds from sale of securities available-for-sale Purchase of securities available-for-sale Purchase of Federal Home Loan Bank of Indianapolis stock Purchase of premises and equipment Loans purchased Net cash used in investing activities Financing Activities Net increase in deposits Cash dividends paid Net proceeds from issuance of subordinated debt and related warrants Net proceeds from common stock issuance Proceeds from advances from Federal Home Loan Bank Repayment of advances from Federal Home Loan Bank Other, net Net cash provided by financing activities Net (Decrease) Increase in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year Supplemental Disclosures of Cash Flows Information Cash paid during the year for interest Cash paid during the year for taxes Loans transferred to other real estate owned Cash dividends declared, not paid Year Ended December 31, 2015 2014 2013 $ 8,929 $ 4,324 $ 4,593 1,942 (402) 1,946 762 — — (502,716) 509,373 (8,845) 341 (496) 443 (1,227) 858 10,908 1,904 (390) 349 507 — (538) (409,715) 409,453 (5,048) (751) 190 (1,529) 2,035 1,189 1,980 (220,828) (124,696) 1,000 — 21,759 — 500 235 21,254 137,816 2,257 (396) 324 514 49 63 (741,078) 784,077 (8,379) 4 (307) 2,259 (2,404) (36) 41,540 (61,039) (2,500) 1,268 29,757 72,019 (100,335) (112,000) (134,471) (3,245) (2,543) — (304,192) 197,456 (1,093) 9,761 — 300,000 (216,000) 23 290,147 (3,137) 28,289 25,152 10,674 3,793 — 267 $ $ (2,407) (915) (106,480) (186,693) 85,503 (1,080) — — 170,000 (95,000) (111) 159,312 (25,401) 53,690 28,289 8,933 2,346 — 265 $ $ — (7,187) (83,265) (185,418) 142,404 (450) 3,000 29,101 13,000 (22,000) — 165,055 21,177 32,513 53,690 8,106 770 581 265 $ $ See Notes to Consolidated Financial Statements F-7 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 1: Basis of Presentation and Summary of Significant Accounting Policies The accounting policies of First Internet Bancorp and its subsidiaries (the “Company”) conform to accounting principles generally accepted in the United States of America (“GAAP”). A summary of the Company’s significant accounting policies follows: Description of Business The Company was incorporated on September 15, 2005, and consummated a plan of exchange on March 21, 2006, by which the Company became a bank holding company and 100% owner of First Internet Bank of Indiana (the “Bank”). The Bank provides commercial and retail banking services, with operations conducted on the Internet at www.firstib.com and primarily through its corporate office located in Fishers, Indiana as well as a loan production office in Tempe, Arizona. The majority of the Bank’s income is derived from commercial lending, retail lending, and mortgage banking activities. The Bank is subject to competition from other financial institutions. The Bank is regulated by certain state and federal agencies and undergoes periodic examinations by those regulatory authorities. JKH Realty Services, LLC was established August 20, 2012 as a single member LLC wholly owned by the Bank to manage other real estate owned properties as needed. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company’s business activities are currently limited to one reporting unit and reportable segment, which is commercial banking. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company utilizes processes that involve the use of significant estimates and the judgment of management in determining the amount of the Company’s allowance for credit losses and income taxes, as well as fair value measurements of investment securities, derivatives, goodwill, and loans held-for-sale. Actual results could differ from those estimates. Securities The Company classifies its securities in one of three categories and accounts for the investments as follows: • • • Securities that the Company has the positive intent and ability to hold to maturity are classified as “held to maturity” and reported at amortized cost. The Company had no securities classified as “held to maturity” at December 31, 2015 or 2014. Securities that are acquired and held principally for the purpose of selling them in the near term with the objective of generating economic profits on short-term differences in market characteristics are classified as “trading securities” and reported at fair value, with unrealized gains and losses included in earnings. The Company had no securities classified as “trading securities” at December 31, 2015 or 2014. Securities not classified as either “held to maturity” or “trading securities” are classified as “securities available for sale” and reported at fair value, with unrealized gains and losses, after applicable taxes, excluded from earnings and reported in a separate component of shareholders’ equity. Declines in the value of debt securities and marketable equity securities that are considered to be other-than-temporary are recorded as an other-than- temporary impairment of securities available for sale with other-than-temporary impairment losses recorded in the consolidated statements of income. F-8 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Interest and dividend income, adjusted by amortization of premium or discount, is included in earnings using the effective interest rate method. Purchases and sales of securities are recorded in the consolidated balance sheets on the trade date. Gains and losses from security sales or disposals are recognized as of the trade date in the consolidated statements of income for the period in which securities are sold or otherwise disposed of. Gains and losses on sales of securities are determined using the specific-identification method. Loans Held-for-Sale Loans originated and intended for sale in the secondary market under best-efforts pricing agreements are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Loans originated and intended for sale in the secondary market under mandatory pricing agreements are carried at fair value to facilitate hedging of the loans. Gains and losses resulting from changes in fair value are included in noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan. Revenue Recognition Interest income on loans is accrued as earned using the interest method based on unpaid principal balances except for interest on loans in nonaccrual status. Interest on loans in nonaccrual status is recorded as a reduction of loan principal when received. Premiums and discounts are amortized using the effective interest rate method. Loan fees, net of certain direct origination costs, primarily salaries and wages, are deferred and amortized to interest income as a yield adjustment over the life of the loan. Loans Receivable Loans that management intends to hold until maturity are reported at their outstanding principal balance adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans. For loans recorded at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan. Allowance for Loan Losses Methodology Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). Primary responsibility for ensuring that the Company has processes in place to consistently assess the adequacy of the ALLL rests with the Board of Directors (the “Board”). The Board has charged management with responsibility for establishing the methodology to be used and to assess the adequacy of the ALLL. The Board reviews recommendations from management on a quarterly basis to adjust the allowance as appropriate. The methodology employed by management for each portfolio segment, at a minimum, contains the following: 1. Loans are segmented by type of loan. F-9 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) 2. The required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on historical losses averaged over the past twelve months. In those instances where the Company’s historical experience is not available, management develops factors based on industry experience and best practices. 3. All criticized, classified and impaired loans are tested for impairment by applying one of three methodologies: a. Present value of future cash flows; b. Fair value of collateral less costs to sell; or c. The loan’s observable market price 4. All troubled debt restructurings (“TDR”) are considered impaired loans. 5. Loans tested for impairment are removed from other pools to prevent layering (double-counting). 6. The required ALLL for each group of loans are added together to determine the total required ALLL for the Company. The required ALLL is compared to the existing ALLL to determine the provision required to increase the ALLL or credit to decrease the ALLL. The historical loss experience is determined by portfolio segment and considers two weighted average net charge-off trends: 1) the Company’s average loss history over the previous sixteen quarters; and 2) average loss history over the previous sixteen quarters for a peer group. Management believes the historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The Company also factors in the following qualitative considerations: 1. Changes in policies and procedures; 2. Changes in national, regional, and local economic and business conditions; 3. Changes in the composition and size of the portfolio and in the terms of loans; 4. Changes in the experience, ability, and depth of lending management and other relevant staff; 5. Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; 6. Changes in the quality of the Company’s loan review system; 7. Changes in the value of underlying collateral for collateral-dependent loans; 8. The existence and effect of any concentration of credit and changes in the level of such concentrations; and 9. The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. During 2015, management elected to further segment the presentation of the Company’s loan portfolio. The revised segmentation groups loans with similar characteristics, allows for greater insight of qualitative considerations and is consistent with how the Company manages its loan portfolio. This revision did not have a material impact on the overall balance of the allowance. December 31, 2014 loan balances have been reclassified to conform to the 2015 presentation. Refer to Note 4 for further discussion of each loan portfolio segment’s risk characteristics. F-10 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Provision for Loan Losses A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations. Nonaccrual Loans Any loan which becomes 90 days delinquent or for which the full collection of principal and interest may be in doubt will be considered for nonaccrual status. At the time a loan is placed on nonaccrual status, all accrued but unpaid interest will be reversed from interest income. Placing the loan on nonaccrual status does not relieve the borrower of the obligation to repay interest. A loan placed on nonaccrual status may be restored to accrual status when all delinquent principal and interest has been brought current, and the Company expects full payment of the remaining contractual principal and interest. Impaired Loans A loan is designated as impaired, in accordance with the impairment accounting guidance when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. Impaired loans include nonperforming commercial loans but also include loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Accounting Standards Codification (“ASC”) Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral, less costs to sell, and allows existing methods for recognizing interest income. Troubled Debt Restructurings (“TDR”) The loan portfolio includes certain loans that have been modified in a TDR, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six months. When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on either the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific ALLL or charge-off to the ALLL. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the ALLL. F-11 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Policy for Charging Off Loans A loan should be generally charged off at any point in time when it no longer can be considered a bankable asset, meaning collected within the parameters of policy. A secured loan generally should be charged off to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally should be charged off no later than when it is 180 days past due as to principal or interest. All charge-offs are approved by the Chief Credit Officer. Federal Home Loan Bank (“FHLB”) of Indianapolis Stock Federal law requires a member institution of the FHLB system to hold common stock of its district FHLB according to a predetermined formula. This investment is stated at cost, which represents redemption value, and may be pledged as collateral for FHLB advances. Other Real Estate Owned Other real estate owned represents real estate acquired through foreclosure or deed in lieu of foreclosure and is recorded at its fair value less estimated costs to sell. When property is acquired, it is recorded at its fair value at the date of acquisition with any resulting write-down charged against the ALLL. Any subsequent deterioration of the property is charged directly to operating expense. Costs relating to the development and improvement of other real estate owned are capitalized, whereas costs relating to holding and maintaining the property are charged to expense as incurred. Premises and Equipment Premises and equipment is stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives, which range from three to five years for software and equipment, ten years for land improvements, and 39 years for buildings. Derivative Financial Instruments The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into forward contracts for the future delivery of mortgage loans to third party investors and enters into interest rate lock commitments with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. Each of these items are considered derivatives, but are not designated as accounting hedges, and are recorded at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets. Fair Value Measurements The Company records or discloses certain assets and liabilities at fair value. ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified within one of three levels in a valuation hierarchy. ASC Topic 820 describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities F-12 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities There were no transfers that occurred and, therefore, recognized, between any of the fair value hierarchy levels at December 31, 2015 or December 31, 2014. Income Taxes Deferred income tax assets and liabilities reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations. Deferred income tax expense or benefit is based upon the change in deferred tax assets and liabilities from period to period, subject to an ongoing assessment of realization of deferred tax assets. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company files income tax returns in the U.S. federal, Indiana, and other state jurisdictions. ASC Topic 740-10, Accounting for Uncertainty in Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company did not identify any uncertain tax positions that it believes should be recognized in the consolidated financial statements. Earnings Per Share Earnings per share of common stock is based on the weighted-average number of basic shares and dilutive shares outstanding during the year. The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations. Basic earnings per share Net income available to common shareholders Weighted-average common shares Basic earnings per common share Diluted earnings per share Net income available to common shareholders Weighted-average common shares Dilutive effect of warrants Dilutive effect of equity compensation Weighted-average common and incremental shares Diluted earnings per common share Number of warrants excluded from the calculation of diluted earnings per share as the exercise prices were greater than the average market price of the Company’s common stock during the year F-13 Year Ended December 31, 2015 2014 2013 8,929 4,528,528 1.97 $ $ 4,324 4,497,007 0.96 $ $ 4,593 3,041,666 1.51 8,929 $ 4,324 $ 4,593 4,528,528 4,497,007 3,041,666 10,665 15,026 2,895 8,093 5,933 2,402 4,554,219 4,507,995 3,050,001 1.96 $ 0.96 $ 1.51 — — — $ $ $ $ First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Stock Compensation The Company has a stock-based compensation plan using the fair value recognition provisions of ASC Topic 718, Compensation - Stock Compensation. The plan is described more fully in Note 10. Comprehensive Income Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, which are also recognized as separate components of equity. Reclassification adjustments have been determined for all components of other comprehensive income or loss reported in the consolidated statements of changes in shareholders’ equity. Statements of Cash Flows Cash and cash equivalents are defined to include cash on-hand, noninterest and interest-bearing amounts due from other banks and federal funds sold. Generally, federal funds are sold for one-day periods. The Company reports net cash flows for customer loan transactions and deposit transactions. Bank-Owned Life Insurance Bank-owned life insurance policies are carried at their cash surrender value. The Company recognizes tax-free income from the periodic increases in the cash surrender value of these policies and from death benefits. Goodwill Goodwill is tested at least annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements. Reclassifications Certain reclassifications have been made to the 2014 and 2013 financial statements to conform to the 2015 financial statement presentation. These reclassifications had no effect on net income. Note 2: Cash and Cash Equivalents At December 31, 2015, the Company’s interest-bearing cash accounts at other institutions did not exceed the limits for full FDIC insurance coverage. However, approximately $1.9 million and $22.2 million of cash was held by the FHLB of Indianapolis and Federal Reserve Bank of Chicago, respectively, which are not federally insured. The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2015 was $0.3 million. F-14 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 3: Securities Securities at December 31, 2015 and 2014 are as follows: Amortized Cost December 31, 2015 Gross Unrealized Gains Losses Fair Value Securities available-for-sale U.S. Government-sponsored agencies $ 38,093 $ Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Other securities Total available for sale Securities available-for-sale U.S. Government-sponsored agencies Mortgage-backed securities Asset-backed securities Other securities Total available for sale 21,091 113,948 19,444 20,000 3,000 139 385 110 — — — $ (482) $ (7) (1,006) (83) (913) (21) 37,750 21,469 113,052 19,361 19,087 2,979 $ 215,576 $ 634 $ (2,512) $ 213,698 Amortized Cost December 31, 2014 Gross Unrealized Gains Losses Fair Value $ $ 13,680 $ 117,134 4,913 2,000 $ 129 282 — 6 (257) $ (368) (1) — 13,552 117,048 4,912 2,006 137,727 $ 417 $ (626) $ 137,518 The carrying value of securities at December 31, 2015 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Within one year One to five years Five to ten years After ten years Mortgage-backed securities Asset-backed securities Other securities Totals Available for Sale Amortized Cost Fair Value $ — $ 487 25,358 53,339 79,184 113,948 19,444 3,000 — 451 24,935 52,920 78,306 113,052 19,361 2,979 $ 215,576 $ 213,698 Gross realized gains of $0, $2.7 million, and $0.5 million and gross realized losses of $0, $2.2 million, and $0.5 million resulting from sales of available-for-sale securities were recognized during the twelve months ended December 31, 2015, 2014, and 2013, respectively. F-15 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) As of December 31, 2015, the fair value of available-for-sale investment securities pledged as collateral was $150.8 million. The Company pledged the securities for various types of transactions, including FHLB advances and derivative financial instruments. Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2015 and 2014 was $166.1 million and $86.9 million, which is approximately 78% and 63%, respectively, of the Company’s available-for-sale securities portfolio. These declines primarily resulted from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced with the resulting loss recognized in net income in the period the other-than-temporary impairment (“OTTI”) is identified. The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2015 and 2014: December 31, 2015 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities available-for-sale U.S. Government-sponsored agencies $ 18,289 $ (237) $ 8,537 $ (245) $ 26,826 $ Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Other securities 1,026 74,198 19,361 19,087 2,979 (7) (562) (83) (913) (21) — 22,655 — — — — (444) — — — 1,026 96,853 19,361 19,087 2,979 (482) (7) (1,006) (83) (913) (21) $ 134,940 $ (1,823) $ 31,192 $ (689) $ 166,132 $ (2,512) Securities available-for-sale U.S. Government-sponsored agencies Mortgage-backed securities Asset-backed securities December 31, 2014 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ $ 801 $ (10) $ 8,719 $ (247) $ 9,520 $ 51,204 4,912 (57) (1) 21,237 — (311) — 72,441 4,912 56,917 $ (68) $ 29,956 $ (558) $ 86,873 $ (257) (368) (1) (626) U.S. Government-Sponsored Agencies, Municipal Securities, and Corporate Securities The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments, and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2015. F-16 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Mortgage-Backed and Asset-Backed Securities The unrealized losses on the Company’s investments in mortgage-backed and asset-backed securities were caused by interest rate changes. The Company expects to recover the amortized cost bases over the term of the securities. Because the Company does not intend to sell the investments, and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2015. Other Securities The unrealized losses on the Company’s investments in other securities were caused by the investment in the Community Reinvestment Act Qualified Fund. Because the Company does not intend to sell the investment and it is not likely that the Company will be required to sell the investment before recovery of its amortized cost basis, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2015. Credit Losses Recognized on Investments Certain debt securities have experienced fair value deterioration due to credit losses and other market factors, but are not considered other-than-temporarily impaired. The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in accumulated other comprehensive loss. The Company did not own any securities categorized as OTTI securities during the year ended December 31, 2015. Accumulated Credit Losses Credit losses on debt securities held January 1, 2013 Realized losses related to OTTI Additions related to OTTI losses not previously recognized Additions related to increases in previously recognized OTTI losses December 31, 2013 Realized losses related to OTTI Recoveries related to OTTI December 31, 2014 $ $ 1,737 (603) 31 18 1,183 (1,139) (44) — There were no amounts reclassified from accumulated other comprehensive loss in the year ended December 31, 2015. Amounts reclassified from accumulated other comprehensive loss and the affected line items in the consolidated statements of income during the years ended December 31, 2014 and 2013 were as follows: Details About Accumulated Other Comprehensive Loss Components Unrealized gains and losses on securities available for sale Gain (loss) realized in earnings OTTI losses recognized in earnings Total reclassified amount before tax Tax expense (benefit) Total reclassifications out of accumulated other comprehensive loss $ $ Amounts Reclassified from Accumulated Other Comprehensive Loss for the Year Ended December 31, 2014 2013 Affected Line Item in the Statements of Income 538 $ (63) Gain (loss) on sale of securities — 538 191 Other-than-temporary impairment loss recognized in net income (49) (112) Income Before Income Taxes (38) Income Tax Provision 347 $ (74) Net Income F-17 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 4: Loans Receivable Categories of loans include: Commercial loans Commercial and industrial Owner-occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Total commercial loans Consumer loans Residential mortgage Home equity Other consumer Total consumer loans Total commercial and consumer loans Deferred loan origination costs and premiums and discounts on purchased loans Total loans receivable Allowance for loan losses Net loans receivable The risk characteristics of each loan portfolio segment are as follows: December 31, 2015 2014 $ 102,000 $ 44,462 16,184 45,898 374,344 582,888 214,559 43,279 108,312 366,150 949,038 4,821 953,859 77,232 34,295 22,069 24,883 192,608 351,087 220,612 58,434 97,094 376,140 727,227 5,199 732,426 (8,351) (5,800) $ 945,508 $ 726,626 Commercial and Industrial: Commercial and industrial loans’ source of repayment is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. Owner-Occupied Commercial Real Estate: The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio is generally concentrated in the Central Indiana and greater Phoenix, Arizona markets and often times is secured by manufacturing and service facilities, as well as office buildings. Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee. This portfolio typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by conditions in the real estate markets, changing industry dynamics, or the overall health of the general economy. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are typically located in the state of Indiana and markets adjacent to Indiana. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, and other risk grade criteria. As a general rule, the Company avoids financing special use projects or properties outside of its designated market areas unless other underwriting factors are present to help mitigate risk. F-18 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Construction: Construction loans are secured by real estate and improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, multi-family) properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. Single Tenant Lease Financing: These loans are made to property owners of real estate subject to long term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolios, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria. Residential Mortgage: With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-4 family residences. The properties securing the Company's home equity portfolio are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of home equity loans and lines of credit may be impacted by changes in property values on residential properties and unemployment levels, among other economic conditions and financial circumstances in the market. Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. The following tables present changes in the balance of the allowance for loan losses during the twelve months ended December 31, 2015, 2014, and 2013. Twelve Months Ended December 31, 2015 Commercial and industrial Owner- occupied commercial real estate Investor commercial real estate Single tenant lease financing Construction Residential mortgage Home equity Other consumer Total Allowance for loan losses: Balance, beginning of period Provision (credit) charged to expense Losses charged off Recoveries Balance, end of period $ 920 $ 345 $ 261 $ 330 $ 2,061 $ 985 $ 207 $ 691 $ 5,800 447 — — 131 — — (549) 170 1,870 — 500 — — — — (311) (185) 407 (83) 271 1,946 — 1 (451) 333 (636) 1,241 $ 1,367 $ 476 $ 212 $ 500 $ 3,931 $ 896 $ 125 $ 844 $ 8,351 F-19 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Twelve Months Ended December 31, 2014 Commercial and industrial Owner- occupied commercial real estate Investor commercial real estate Single tenant lease financing Construction Residential mortgage Home equity Other consumer Total $ 819 $ 290 $ 219 $ 277 $ 1,731 $ 1,008 $ 211 $ 871 $ 5,426 115 (14) — 55 — — (418) — 460 53 — — 330 — — 186 (247) 38 (4) — — 32 349 (596) 384 (857) 882 $ 920 $ 345 $ 261 $ 330 $ 2,061 $ 985 $ 207 $ 691 $ 5,800 Twelve Months Ended December 31, 2013 Commercial and industrial Owner- occupied commercial real estate Investor commercial real estate Single tenant lease financing Construction Residential mortgage Home equity Other consumer Total $ 371 $ 352 $ 266 $ 336 $ 2,153 $ 946 $ 203 $ 1,206 $ 5,833 378 — 70 (62) — — 191 (238) — (59) (422) — — — — 128 (164) 98 8 — — 162 324 (810) 313 (1,212) 481 $ 819 $ 290 $ 219 $ 277 $ 1,731 $ 1,008 $ 211 $ 871 $ 5,426 Allowance for loan losses: Balance, beginning of period Provision (credit) charged to expense Losses charged off Recoveries Balance, end of period Allowance for loan losses: Balance, beginning of period Provision (credit) charged to expense Losses charged off Recoveries Balance, end of period F-20 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2015 and 2014. Commercial and industrial Owner- occupied commercial real estate Investor commercial real estate Single tenant lease financing Construction December 31, 2015 Residential mortgage Home equity Other consumer Total Loans: Ending balance: collectively evaluated for impairment Ending balance: individually evaluated for impairment $ 102,000 $ 44,462 $ 16,184 $ 45,898 $ 374,344 $ 213,426 $ 43,279 $ 108,163 $ 947,756 — — — — — 1,133 — 149 1,282 Ending balance $ 102,000 $ 44,462 $ 16,184 $ 45,898 $ 374,344 $ 214,559 $ 43,279 $ 108,312 $ 949,038 Allowance for loan losses: Ending balance: collectively evaluated for impairment Ending balance: individually evaluated for impairment $ 1,367 $ 476 $ 212 $ 500 $ 3,931 $ 896 $ 125 $ 844 $ 8,351 — — — — — — — — — Ending balance $ 1,367 $ 476 $ 212 $ 500 $ 3,931 $ 896 $ 125 $ 844 $ 8,351 Commercial and industrial Owner- occupied commercial real estate Investor commercial real estate Single tenant lease financing Construction December 31, 2014 Residential mortgage Home equity Other consumer Total Loans: Ending balance: collectively evaluated for impairment Ending balance: individually evaluated for impairment $ 77,232 $ 34,295 $ 21,982 $ 24,883 $ 192,608 $ 219,473 $ 58,434 $ 96,789 $ 725,696 — — 87 — — 1,139 — 305 1,531 Ending balance $ 77,232 $ 34,295 $ 22,069 $ 24,883 $ 192,608 $ 220,612 $ 58,434 $ 97,094 $ 727,227 Allowance for loan losses: Ending balance: collectively evaluated for impairment Ending balance: individually evaluated for impairment $ 920 $ 345 $ 261 $ 330 $ 2,061 $ 985 $ 207 $ 676 $ 5,785 — — — — — — — 15 15 Ending balance $ 920 $ 345 $ 261 $ 330 $ 2,061 $ 985 $ 207 $ 691 $ 5,800 F-21 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the nine risk grades is as follows: • • • • • “Pass” (Grades 1-5) - Higher quality loans that do not fit any of the other categories described below. “Special Mention” (Grade 6) - Loans that possess some credit deficiency or potential weakness which deserve close attention. “Substandard” (Grade 7) - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Doubtful” (Grade 8) - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable. “Loss” (Grade 9) - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted. The following tables present the credit risk profile of the Company’s commercial loan portfolio based on rating category and payment activity as of December 31, 2015 and 2014. Commercial and industrial Owner- occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Total December 31, 2015 Rating: 1-5 Pass 6 Special Mention 7 Substandard 8 Doubtful Total Performing Nonaccrual Total $ $ $ $ 95,589 $ 43,913 $ 14,746 $ 45,599 $ 374,344 $ 574,191 2,006 4,405 — 535 14 — — 1,438 — 299 — — — — — 2,840 5,857 — 102,000 $ 44,462 $ 16,184 $ 45,898 $ 374,344 $ 582,888 Residential mortgage Home equity Other consumer Total December 31, 2015 214,456 103 214,559 $ $ 43,279 — 43,279 $ $ 108,248 64 108,312 $ $ 365,983 167 366,150 F-22 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Commercial and industrial Owner- occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Total December 31, 2014 Rating: 1-5 Pass 6 Special Mention 7 Substandard 8 Doubtful Total Performing Nonaccrual Total $ $ $ $ 77,232 $ 34,278 $ 20,478 $ 24,504 $ 192,608 $ 349,100 — — — — 17 — — 1,591 — 379 — — — — — 379 1,608 — 77,232 $ 34,295 $ 22,069 $ 24,883 $ 192,608 $ 351,087 Residential mortgage Home equity Other consumer Total December 31, 2014 220,587 25 220,612 $ $ 58,434 — 58,434 $ $ 96,971 123 97,094 $ $ 375,992 148 376,140 The following tables present the Company’s loan portfolio delinquencies analysis as of December 31, 2015 and 2014. December 31, 2015 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total commercial and consumer loans Nonaccrual Loans Total Loans 90 Days or More Past Due and Accruing Commercial and industrial $ 29 $ — $ — $ 29 $ 101,971 $ 102,000 $ — $ Owner-occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Residential mortgage Home equity Other consumer Total $ — — — — 300 20 116 465 $ — — — — 23 — 12 35 $ — — — — 45 — — 45 $ — — — — 368 20 128 545 44,462 16,184 45,898 374,344 214,191 43,259 108,184 44,462 16,184 45,898 374,344 214,559 43,279 108,312 — — — — 103 — 64 $ 948,493 $ 949,038 $ 167 $ — — — — — — — — — December 31, 2014 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total commercial and consumer loans Nonaccrual Loans Total Loans 90 Days or More Past Due and Accruing Commercial and industrial $ — $ — $ — $ — $ 77,232 $ 77,232 $ — $ Owner-occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Residential mortgage Home equity Other consumer Total $ — — — — 161 — 249 410 $ — — — — — — 56 56 — — — — 57 — 53 $ 110 $ F-23 — — — — 218 — 358 576 34,295 22,069 24,883 192,608 220,394 58,434 96,736 34,295 22,069 24,883 192,608 220,612 58,434 97,094 $ 726,651 $ 727,227 $ — 87 — — 25 — 123 235 $ — — — — — 57 — 4 61 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables present the Company’s impaired loans as of December 31, 2015 and 2014. December 31, 2015 December 31, 2014 Recorded Balance Unpaid Principal Balance Specific Allowance Recorded Balance Unpaid Principal Balance Specific Allowance Loans without a specific valuation allowance Investor commercial real estate $ — $ — $ — $ 87 $ 87 $ Residential mortgage Other consumer Total Loans with a specific valuation allowance Residential mortgage Other consumer Total Total impaired loans 1,133 149 1,282 — — — 1,154 178 1,332 — — — — — — — — — 1,139 268 1,494 — 37 37 1,146 338 1,571 — 51 51 $ 1,282 $ 1,332 $ — $ 1,531 $ 1,622 $ — — — — — 15 15 15 The table below presents average balances and interest income recognized for impaired loans during the twelve months ended December 31, 2015, 2014, and 2013. Twelve Months Ended December 31, 2015 December 31, 2014 December 31, 2013 Average Balance Interest Income Average Balance Interest Income Average Balance Interest Income Loans without a specific valuation allowance Investor commercial real estate $ 21 $ Residential mortgage Other consumer Total Loans with a specific valuation allowance Investor commercial real estate Residential mortgage Other consumer Total Total impaired loans 1,112 193 1,326 — 15 13 28 2 8 16 26 — — 1 1 $ 666 $ 1,266 380 2,312 — — 40 40 5 32 37 74 — — 4 4 $ 239 $ 1,894 315 2,448 1,617 66 78 1,761 $ 1,354 $ 27 $ 2,352 $ 78 $ 4,209 $ — 29 28 57 5 3 2 10 67 There were no residential mortgage loans in other real estate owned at December 31, 2015 or December 31, 2014. There were less than $0.1 million of loans at December 31, 2015, and no loans at December 31, 2014 in the process of foreclosure. Note 5: Premises and Equipment The following table summarizes premises and equipment at December 31, 2015 and 2014. Land Building and improvements Furniture and equipment Less: accumulated depreciation F-24 December 31, 2015 2014 $ $ 2,500 $ 4,636 6,164 (4,779) 8,521 $ 2,500 3,018 5,277 (3,734) 7,061 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 6: Goodwill The following table shows the change in the carrying amount of goodwill for the three years ended December 31, 2015, 2014, and 2013. Balance as of January 1, 2013 Changes in goodwill during the year Balance as of December 31, 2013 Changes in goodwill during the year Balance as of December 31, 2014 Changes in goodwill during the year Balance as of December 31, 2015 $ $ 4,687 — 4,687 — 4,687 — 4,687 Goodwill is tested for impairment on an annual basis as of August 31, or whenever events or changes in circumstances indicate the carrying amount of goodwill exceeds its implied fair value. No events or changes in circumstances have occurred since the August 31, 2015 annual impairment test that would suggest it was more likely than not goodwill impairment existed. Note 7: Deposits The following table presents the composition of the Company’s deposit base as of December 31, 2015 and 2014. Noninterest-bearing demand deposit accounts Interest-bearing demand deposit accounts Regular savings accounts Money market accounts Certificates of deposits Brokered deposits Total deposits Certificates of deposit in the amount of $250 or more December 31, 2015 2014 $ 23,700 $ 84,241 22,808 341,732 470,736 12,837 956,054 117,335 $ $ $ $ 21,790 74,238 20,776 267,046 361,202 13,546 758,598 66,226 The following table presents scheduled certificate of deposits maturities by year as of December 31, 2015. 2016 2017 2018 2019 2020 Thereafter $ 287,724 87,297 48,461 11,933 48,158 — $ 483,573 F-25 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 8: FHLB Advances The Company had outstanding FHLB advances of $191.0 million and $106.9 million as of December 31, 2015 and 2014, respectively. As of December 31, 2015, the interest rates on the Company’s outstanding FHLB advances ranged from 0.00% to 4.22%, with a weighted average interest rate of 0.81%. All advances are collateralized by mortgage loans pledged and held by the Company and investment securities pledged by the Company and held in safekeeping with the FHLB. Mortgage loans pledged were approximately $186.4 million and $212.6 million as of December 31, 2015 and 2014, respectively, and the fair value of investment securities pledged to the FHLB was approximately $148.7 million and $128.2 million as of December 31, 2015 and 2014, respectively. The Company’s FHLB advances are scheduled to mature according to the following schedule: 2016 2017 2018 2019 2020 Thereafter Deferred prepayment penalties on advance restructure Amount $ 83,000 — 3,000 — 50,000 55,000 191,000 (43) $ 190,957 As of December 31, 2015, the Company had a $50.0 million option-embedded advance that is scheduled to mature on April 17, 2020. The advance will convert from a variable rate of 3-month LIBOR minus 0.75% to a fixed rate equal to 1.0525% on April 18, 2016. The FHLB has the option to put the advance prior to its scheduled maturity date. If the advance is put by the FHLB, the Company has the option to request to convert the advance to an adjustable rate advance of predetermined index for the remaining term to maturity, at the FHLB’s discretion. As of December 31, 2015 the Company had a $40.0 million symmetrical fixed rate bullet advance that is scheduled to mature on January 19, 2021. The terms of the advance allow the Company to terminate the advance prior to its scheduled maturity date. If the Company elects to terminate the advance prior to its scheduled maturity date and the interest rate for the advance is above market rates relative to an advance with a similar remaining term, the Company will be required to pay a prepayment fee based on the mark-to-market adjustment of the advance. If the Company elects to terminate the advance prior to its scheduled maturity date and the interest rate for the advance is below market rates relative to an advance with a similar remaining term, the Company would be eligible for a prepayment credit and could realize a gain, which is limited to 10% of the advance principal balance, when the advance is prepaid. As of December 31, 2015, the Company had a $15.0 million fixed rate advance that is scheduled to mature on September 2, 2025. The FHLB has a one-time option to put the advance on September 2, 2020. If the FHLB exercises its option to put the advance, the advance will be prepayable without a fee at the Company’s option on the exercise date. If the Company requests to convert the advance to an adjustable rate after the FHLB has put the advance, the Company may prepay the advance without a fee on any subsequent quarterly reset date. Note 9: Subordinated Debt In June 2013, the Company issued a subordinated debenture (the “debenture”) in the principal amount of $3.0 million. The debenture bears a fixed interest rate of 8.00% per year, payable quarterly, and is scheduled to mature on June 28, 2021. The debenture may be repaid, without penalty, at any time after June 28, 2016. The debenture is intended to qualify for treatment as Tier 2 capital under regulatory guidelines. F-26 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) In connection with the debenture, the Company also issued a warrant to purchase up to 48,750 shares of common stock at an initial per share exercise price equal to $19.33. The warrant became exercisable on June 28, 2014 and, unless previously exercised, will expire on June 28, 2021. The Company has the right to force an exercise of the warrant after the debenture has been repaid in full if the 20-day volume-weighted average price of a share of its common stock exceeds $30.00. The Company used the Black-Scholes option pricing model to assign a fair value of $0.3 million to the warrant as of June 28, 2013. The following assumptions were used to value the warrant: a risk-free interest rate of 0.66% per the U.S. Treasury yield curve in effect at the date of issuance; an expected dividend yield of 1.19% calculated using the dividend rate and stock price at the date of the issuance; and an expected volatility of 34% based on the estimated volatility of the Company’s stock over the expected term of the warrant, which is estimated to be three years. In October 2015, the Company issued subordinated notes (the “Notes”) in the principal amount of $10.0 million. The Notes bear a fixed interest rate of 6.4375% per year, payable quarterly, and are scheduled to mature on October 1, 2025. The Notes may be repaid, without penalty, on any interest payment date on or after October 15, 2020. The Notes are intended to qualify as Tier 2 capital under regulatory guidelines. December 31, 2015 December 31, 2014 Principal 3,000 10,000 13,000 $ $ Unamortized Discount and Debt Issuance Costs (42) (234) (276) Unamortized Discount and Debt Issuance Costs (127) — (127) Principal 3,000 — 3,000 8.00% subordinated debenture, due 2021 6.4375% subordinated notes, due 2025 Total Note 10: Benefit Plans 401(k) Plan The Company has a 401(k) plan established for substantially all full-time employees, as defined in the plan. Employee contributions are limited to the maximum established by the Internal Revenue Service on an annual basis. The Company has elected to match contributions equal to 100% of the first 1% of employee deferrals and then 50% on deferrals over 1% up to a maximum of 6% of an individual’s total eligible salary, as defined in the plan. Employer-matching contributions begin vesting after one year at a rate of 50% per year of employment and are fully vested after the completion of two years of employment. Contributions totaled approximately $0.3 million in each of the twelve months ended December 31, 2015, 2014, and 2013. Employment Agreement The Company has entered into an employment agreement with its Chief Executive Officer that provides for the continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the agreement, these payments could occur in the event of a change in control of the Company, as defined in the agreement, along with other specific conditions. 2013 Equity Incentive Plan The 2013 Equity Incentive Plan (“2013 Plan”) authorizes the issuance of up to 750,000 shares of the Company’s common stock in the form of equity-based awards to employees, directors, and other eligible persons. Under the terms of the 2013 Plan, the pool of shares available for issuance may be used for available types of equity awards under the 2013 Plan, which includes stock options, stock appreciation rights, restricted stock awards, stock unit awards, and other share-based awards. All employees, consultants, and advisors of the Company or any subsidiary, as well as all non-employee directors of the Company, are eligible to receive awards under the 2013 Plan. F-27 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The Company recorded $0.8 million, $0.5 million, and $0.4 million of share-based compensation expense for the years ended December 31, 2015, 2014, and 2013, respectively, related to awards made under the 2013 Plan. The following table summarizes the status of the Company’s restricted stock unit, restricted stock, and deferred stock unit awards as of December 31, 2015, and activity for the year ended December 31, 2015: Weighted- Average Grant Date Fair Value Per Share Restricted Stock Units Weighted- Average Grant Date Fair Value Per Share Deferred Stock Units Weighted- Average Grant Date Fair Value Per Unit Restricted Stock Awards Nonvested at January 1, 2015 — $ Granted Vested Forfeited 31,089 — (2,787) Nonvested at December 31, 2015 28,302 $ — 18.90 — 18.89 18.90 20,777 $ 46,988 (37,070) (3,166) 27,529 $ 25.09 16.69 20.18 18.02 18.17 — $ 10 (10) — — $ — 19.72 19.72 — — As of December 31, 2015, the total unrecognized compensation cost related to nonvested awards was $0.6 million, with a weighted-average expense recognition period of 1.8 years. Directors Deferred Stock Plan Until January 1, 2014, the Company had a stock compensation plan for non-employee members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The plan provided directors the option to elect to receive up to 100% of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right. For the year ended December 31, 2013, the Company recorded $0.2 million of expense related to awards made from the Directors Deferred Stock Plan. The Company recognized compensation expense ratably over the vesting period based upon the fair value of the stock on the grant date. The Directors Deferred Stock Plan ended on December 31, 2013. The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the year ended December 31, 2015: Outstanding, beginning of year Granted Exercised Outstanding, end of year Deferred Rights 80,528 1,165 — 81,693 All deferred stock rights granted during 2015 were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights. F-28 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 11: Income Taxes The provision (benefit) for income taxes consists of the following: Current Deferred Total December 31, 2015 2014 2013 $ $ 4,293 443 4,736 $ $ 3,655 (1,529) 2,126 $ $ (693) 2,259 1,566 Income tax provision (benefit) is reconciled to the 34% statutory rate applied to pre-tax income as follows: Statutory rate times pre-tax income Add (subtract) the tax effect of: Income from tax-exempt securities State income tax, net of federal tax effect Bank-owned life insurance Other differences Total income taxes The net deferred tax asset at December 31 consists of the following: Deferred tax assets (liabilities) Allowance for loan losses Unrealized loss on available for sale securities Fair value adjustments Depreciation Deferred compensation Loan origination costs Prepaid assets Accrued payroll Other December 31, 2015 2014 2013 $ 4,646 $ 2,193 $ 2,094 (132) 154 (137) 205 (31) 63 (132) 33 (514) 33 (135) 88 $ 4,736 $ 2,126 $ 1,566 December 31, 2015 2014 2013 $ 2,980 $ 2,073 $ 670 (925) (573) 262 (704) (247) 697 204 75 (117) (590) 262 (288) (207) 458 546 1,930 1,310 (1,840) (270) 510 (209) (205) 155 536 Total deferred tax assets, net $ 2,364 $ 2,212 $ 1,917 Note 12: Related Party Transactions In the normal course of business, the Company may enter into transactions with various related parties. In management’s opinion, such loans, other extensions of credit, and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features. Management evaluated related party loans and extensions of credit at December 31, 2015 and 2014, and deemed the balances immaterial. Deposits from related parties held by the Company at December 31, 2015 and 2014 totaled $9.8 million and $13.7 million, respectively. F-29 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 13: Regulatory Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”). When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0% upon full implementation); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5% upon full implementation); and 4) a minimum Leverage Ratio of 4.0%. The implementation of the capital conservation buffer will began on January 1, 2016 at the 0.625% level and will phase in over a four-year period increasing by increments of that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees. F-30 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following table presents actual and required capital ratios as of December 31, 2015 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2015 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. Actual Minimum Capital Required - Basel III Phase-In Schedule Minimum Capital Required - Basel III Fully Phased-In Minimum Required to be Considered Well Capitalized Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of December 31, 2015: Common equity tier 1 capital to risk- weighted assets Consolidated Bank $ 100,839 10.11% $ 44,881 4.50% $ 69,815 104,434 10.50% 44,768 4.50% 69,639 7.00% 7.00% N/A 64,664 Tier 1 capital to risk-weighted assets Consolidated Bank 100,839 104,434 10.11% 10.50% 59,842 59,690 6.00% 6.00% 84,776 84,561 8.50% 8.50% N/A 79,587 N/A 6.50% N/A 8.00% Total capital to risk-weighted assets Consolidated Bank Leverage ratio Consolidated Bank 122,190 112,785 12.25% 11.34% 79,789 79,587 8.00% 104,723 8.00% 104,458 10.50% 10.50% N/A N/A 99,484 10.00% 100,839 104,434 8.28% 8.59% 48,713 48,636 4.00% 4.00% 48,713 48,636 4.00% 4.00% N/A 60,796 N/A 5.00% The following table presents actual and required capital ratios as of December 31, 2014 for the Company and the Bank under the regulatory capital rules then in effect. As of December 31, 2014: Tier 1 capital to risk-weighted assets Consolidated Bank Total capital to risk-weighted assets Consolidated Bank Leverage ratio Consolidated Bank Actual Minimum Capital Requirement Minimum to be Well Capitalized Under Prompt Corrective Actions Amount Ratio Amount Ratio Amount Ratio $ 92,233 12.55% $ 29,388 83,377 11.38% 29,300 101,033 89,177 13.75% 12.17% 92,233 83,377 9.87% 8.94% 58,777 58,600 37,381 37,303 4.00% 4.00% 8.00% 8.00% 4.00% 4.00% N/A 43,950 N/A 73,250 N/A 46,629 N/A 6.00% N/A 10.00% N/A 5.00% F-31 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 14: Commitments and Credit Risk In the normal course of business, the Company makes various commitments to extend credit which are not reflected in the accompanying consolidated financial statements. At December 31, 2015 and 2014, the Company had outstanding loan commitments totaling approximately $131.9 million and $110.4 million, respectively. As of December 31, 2015, the Company leased office facilities under various operating leases. The leases may be subject to additional payments based on building operating costs and property taxes in excess of specified amounts. The Company recorded rental expense for all operating leases of $0.5 million, $0.5 million, and $0.5 million for the years ended December 31, 2015, 2014, and 2013 respectively. Future minimum cash lease payments are as follows: 2016 2017 2018 2019 2020 Thereafter Amount $ 557 517 526 534 542 92 $ 2,768 Note 15: Fair Value of Financial Instruments ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASU Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government-sponsored agencies, mortgage and asset-backed securities, state and municipal securities, and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. F-32 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of December 31, 2015 or 2014. Loans Held-for-Sale (mandatory pricing agreements) The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). Forward Contracts The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets, or benchmarked thereto (Level 1). Interest Rate Lock Commitments The fair value of interest rate lock commitments (“IRLCs”) are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3). The following tables present the fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2015 and 2014: December 31, 2015 Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value U.S. Government-sponsored agencies $ 37,750 $ — $ 37,750 $ Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Other securities 21,469 113,052 19,361 19,087 2,979 — — — — 2,979 21,469 113,052 19,361 19,087 — Total available for sale securities $ 213,698 $ 2,979 $ 210,719 $ Loans held-for-sale (mandatory pricing agreements) Forward contracts IRLCs 24,065 30 582 — 30 — 24,065 — — — — — — — — — — — 582 F-33 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) December 31, 2014 Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value $ $ 13,552 $ — $ 13,552 $ 117,048 4,912 2,006 — — 2,006 117,048 4,912 — 137,518 $ 2,006 $ 135,512 $ 32,618 (405) 521 — (405) — 32,618 — — — — — — — — — 521 U.S. Government-sponsored agencies Mortgage-backed securities Asset-backed securities Other securities Total available for sale securities Loans held-for-sale (mandatory pricing agreements) Forward contracts IRLCs The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs: Balance as of January 1, 2013 Total realized gains Included in net income Included in other comprehensive income (loss) Balance, December 31, 2013 Total realized gains (losses) Included in net income Included in other comprehensive income Sales Balance, December 31, 2014 Total realized gains Included in net income Balance, December 31, 2015 Securities Available-for-Sale $ 840 $ — 833 1,673 (259) 1,333 (2,747) — — $ — $ Interest Rate Lock Commitments — 79 — 79 442 — — 521 61 582 The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy. Impaired Loans (Collateral Dependent) Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral, less costs to sell, for collateral dependent loans. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. F-34 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. There were no impaired loans that were measured at fair value on a nonrecurring basis at December 31, 2015 or 2014. Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill. IRLCs IRLCs Fair Value at December 31, 2015 Valuation Technique Unobservable Inputs Range 582 Discounted cash flow Loan closing rates 43% - 100% Fair Value at December 31, 2014 Valuation Technique Unobservable Inputs Range 521 Discounted cash flow Loan closing rates 40% - 95% $ $ The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value: Cash and Cash Equivalents For these instruments, the carrying amount is a reasonable estimate of fair value. Interest-Bearing Time Deposits The fair value of these financial instruments approximates carrying value. Loans Held-For-Sale (best efforts pricing agreements) The fair value of these loans approximates carrying value. Loans Receivable The fair value of loans receivable is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. Accrued Interest Receivable The fair value of these financial instruments approximates carrying value. Federal Home Loan Bank of Indianapolis Stock The fair value approximates carrying value. Deposits The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities. F-35 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Advances from Federal Home Loan Bank The fair value of fixed rate advances is estimated using rates currently offered for similar remaining maturities. The carrying value of variable rate advances approximates fair value. Subordinated Debt The fair value of the Company’s subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments. Accrued Interest Payable The fair value of these financial instruments approximates carrying value. Commitments The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at December 31, 2015 and 2014. The following schedule includes the carrying value and estimated fair value of all financial assets and liabilities at December 31, 2015 and 2014: December 31, 2015 Fair Value Measurements Using Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Carrying Amount $ 25,152 $ 25,152 $ 1,000 12,453 953,859 4,105 8,595 956,054 190,957 12,724 117 1,000 — — 4,105 — 472,481 — — 117 — $ — 12,453 — — 8,595 — 188,126 13,212 — — — — 967,303 — — 478,360 — — — Cash and cash equivalents Interest-bearing time deposits Loans held-for-sale (best efforts pricing agreements) Loans receivable Accrued interest receivable Federal Home Loan Bank of Indianapolis stock Deposits Advances from Federal Home Loan Bank Subordinated debt Accrued interest payable F-36 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) December 31, 2014 Fair Value Measurements Using Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Carrying Amount $ 28,289 $ 28,289 $ — $ 2,000 2,053 732,426 2,833 5,350 758,598 106,897 2,873 97 2,000 — — 2,833 — 383,847 — — 97 — 2,053 — — 5,350 — 107,743 3,094 — — — — 733,538 — — 377,067 — — — Cash and cash equivalents Interest-bearing time deposits Loans held-for-sale (best efforts pricing agreements) Loans receivable Accrued interest receivable Federal Home Loan Bank of Indianapolis stock Deposits Advances from Federal Home Loan Bank Subordinated debt Accrued interest payable Note 16: Mortgage Banking Activities The Company’s residential real estate lending business originates mortgage loans for customers and sells a majority of the originated loans into the secondary market. The Company hedges its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third party investors and entering into interest rate lock commitments with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. To facilitate the hedging of the loans, the Company has elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, interest rate lock commitments and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 17 for further information on derivative financial instruments. During the years ended December 31, 2015, 2014, and 2013, the Company originated mortgage loans held-for-sale of $502.7 million, $409.7 million, and $741.1 million, respectively, and sold $509.4 million, $409.5 million, and $784.1 million of mortgage loans, respectively, into the secondary market. The components of income from mortgage banking activities consist of the following: Gain on loans sold (Loss) gain resulting from the change in fair value of loans held-for-sale Gain (loss) resulting from the change in fair value of derivatives Net revenue from mortgage banking activities Note 17: Derivative Financial Instruments Year Ended December 31, 2015 2014 2013 $ $ 8,845 $ 5,048 $ 8,379 (341) 496 751 (190) 9,000 $ 5,609 $ (4) 307 8,682 The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into forward contracts for the future delivery of mortgage loans to third party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. F-37 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) These items are considered derivatives, but are not designated as accounting hedges, and are recorded at fair value with changes in fair value reflected in noninterest income on the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets. The notional amount and fair value of IRLCs and forward contracts utilized by the Company were as follows: December 31, 2015 December 31, 2014 Notional Amount Fair Value Notional Amount Fair Value Asset Derivatives Derivatives not designated as hedging instruments IRLCs Forward contracts $ 28,444 $ 582 $ 29,967 $ 42,743 30 — 521 — Liability Derivatives Derivatives not designated as hedging instruments Forward contracts $ — $ — $ 55,102 $ (405) Fair values of derivative financial instruments were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date. Periodic changes in the fair value of the derivative financial instruments on the consolidated statements of income for the twelve months ended December 31, 2015, 2014, and 2013 were as follows: Amount of gain / (loss) recognized in the twelve months ended December 31, 2015 December 31, 2014 December 31, 2013 Asset Derivatives Derivatives not designated as hedging instruments IRLCs Forward contracts Liability Derivatives Derivatives not designated as hedging instruments Forward contracts Note 18: Shareholders’ Equity $ $ 61 $ 435 442 $ — 79 227 — $ (632) $ — In 2013, the Company completed a public offering of 1.587 million shares of its common stock and received net proceeds of approximately $29.1 million. F-38 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 19: Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations, and cash flows of the Company on a non-consolidated basis: Condensed Balance Sheets Assets Cash and cash equivalents Investment in common stock of subsidiaries Premises and equipment, net Accrued income and other assets Total assets Liabilities and Shareholders’ Equity Subordinated debt, net of unamortized discounts and debt issuance costs of $276 and $127 in 2015 and 2014, respectively Note payable to the Bank Accrued expenses and other liabilities Total liabilities Shareholders’ equity $ $ $ Year Ended December 31, 2015 2014 6,860 $ 107,925 5,793 750 10,056 87,929 4,542 1,678 121,328 $ 104,205 12,724 $ 4,000 274 16,998 2,873 4,000 547 7,420 104,330 96,785 Total liabilities and shareholders’ equity $ 121,328 $ 104,205 F-39 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Condensed Statements of Income Income Dividends from subsidiaries Total income Expenses Interest on borrowings Salaries and employee benefits Consulting and professional fees Premises and equipment Other Total expenses Year Ended December 31, 2015 2014 2013 $ — $ — — $ — 643 425 930 200 174 498 298 777 239 206 500 500 307 320 859 87 231 2,372 2,018 1,804 Loss Before Income Tax and Equity in Undistributed Net Income of Subsidiaries (2,372) (2,018) (1,304) Income Tax Benefit (813) (756) Loss Before Equity in Undistributed Net Income of Subsidiaries (1,559) (1,262) (596) (708) Equity in Undistributed Net Income of Subsidiaries 10,488 5,586 5,301 Net Income $ 8,929 $ 4,324 $ 4,593 Condensed Statements of Comprehensive Income Year Ended December 31, 2015 2014 2013 $ 8,929 $ 4,324 $ 4,593 Net income Other comprehensive income (loss) Net unrealized holding gains (losses) on securities available for sale (1,669) — — — (1,669) (595) (1,074) 3,260 (538) 751 — 3,473 1,236 2,237 $ 7,855 $ 6,561 $ (6,462) 63 (129) 49 (6,479) (2,289) (4,190) 403 Reclassification adjustment for (gains) losses realized Net unrealized holding gains (losses) on securities available for sale for which an other-than-temporary impairment has been recognized in income Reclassification adjustment for other-than-temporary impairment loss recognized in income Other comprehensive income (loss) before tax Income tax provision (benefit) Other comprehensive income (loss) - net of tax Comprehensive income F-40 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Condensed Statements of Cash Flows Operating Activities Net income Year Ended December 31, 2015 2014 2013 $ 8,929 $ 4,324 $ 4,593 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (10,488) (5,586) (5,301) Depreciation and amortization Share-based compensation expense Net change in: Accrued income and other assets Accrued expenses and other liabilities Net cash used in operating activities Investing Activities Capital contribution to the Bank Purchase of premises and equipment Net cash used in investing activities Financing Activities Cash dividends paid Net proceeds from issuance of subordinated debt and related warrants Proceeds from loan from the Bank Net proceeds from common stock issuance Other, net Net cash provided by (used in) financing activities 246 150 958 (275) (480) (10,000) (1,407) (11,407) (1,093) 9,761 — — 23 8,691 226 120 (641) (19) (1,576) (5,000) (160) (5,160) (1,080) — — — (111) (1,191) 161 127 (433) 44 (809) (13,000) (4,641) (17,641) (450) 3,000 4,000 29,101 — 35,651 Net (Decrease) Increase in Cash and Cash Equivalents (3,196) (7,927) 17,201 Cash and Cash Equivalents at Beginning of Year 10,056 17,983 782 Cash and Cash Equivalents at End of Year $ 6,860 $ 10,056 $ 17,983 F-41 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 20: Quarterly Financial Data (unaudited) Income Statement Data: Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Noninterest expense Income before income taxes Income tax provision Net income Per Share Data: Net income Basic Diluted Three Months Ended December 31, 2015 September 30, 2015 June 30, 2015 March 31, 2015 $ 11,594 $ 10,536 $ 10,130 $ 3,026 8,568 746 7,822 2,143 6,492 3,473 1,195 2,697 7,839 454 7,385 2,374 6,207 3,552 1,229 2,558 7,572 304 7,268 2,476 6,327 3,417 1,152 2,278 $ 2,323 $ 2,265 $ 0.50 0.50 $ $ 0.51 0.51 $ $ 0.50 0.50 $ $ $ $ $ 9,187 2,413 6,774 442 6,332 3,148 6,257 3,223 1,160 2,063 0.46 0.46 Weighted average common shares outstanding Basic Diluted 4,534,910 4,580,353 4,532,360 4,574,455 4,529,823 4,550,034 4,516,776 4,523,246 Income Statement Data: Interest income Interest expense Net interest income Provision (credit) for loan losses Net interest income after provision (credit) for loan losses Noninterest income Noninterest expense Income before income taxes Income tax provision Net income Per Share Data: Net income Basic Diluted Three Months Ended December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014 $ 8,623 $ 7,947 $ 7,612 $ 2,248 6,375 387 5,988 2,098 5,879 2,207 742 2,274 5,673 (112) 5,785 1,943 5,785 1,943 661 1,465 $ 1,282 $ 2,239 5,373 (73) 5,446 1,622 5,560 1,508 531 977 0.33 0.32 $ $ 0.29 0.28 $ $ 0.22 0.22 $ $ $ $ $ $ 7,033 2,167 4,866 147 4,719 1,511 5,438 792 192 600 0.13 0.13 Weighted average common shares outstanding Basic Diluted 4,499,316 4,514,505 4,497,762 4,511,291 4,496,219 4,504,302 4,494,670 4,501,705 F-42 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 21: Recent Accounting Pronouncements Accounting Standards Update (“ASU” or “Update”) 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (April 2015) This Update is part of an initiative to reduce complexity in accounting standards (the “Simplification Initiative”) implemented by the Financial Accounting Standards Board. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. This Update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. This Update will be applied retrospectively to all periods presented, beginning after December 15, 2015. Early adoption was permitted. The Company adopted this Update during the twelve months ended December 31, 2015 and has included the required disclosures in this annual report on Form 10-K. Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date (August 2015) The amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. Update 2014-09 provides a five-step model for revenue recognition that all industries will apply to recognize revenue when a customer obtains control of a good or service. Public business entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Adoption of this Update is not expected to have a significant effect on the Company’s consolidated financial statements. Accounting Standards Update 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement - Period Adjustments (September 2015) This Update is part of the Simplification Initiative. The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and should be implemented using the prospective method. Adoption of this Update is not expected to have a significant effect on the Company’s consolidated financial statements. F-43 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Accounting Standards Update 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (January 2016) The amendments in this Update affect all entities that hold financial assets or owe financial liabilities. The amendments in this Update supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. An entity’s equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this Update. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. The amendments in this Update also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. That impairment assessment is similar to the qualitative assessment for long-lived assets, goodwill, and indefinite-lived intangible assets. Upon determining that impairment exists, an entity should calculate the fair value of that investment and recognize as an impairment in net income any amount by which the carrying value exceeds the fair value of the investment. The amendments in this Update require public business entities that are required to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion consistent with Topic 820, Fair Value Measurement. This change to GAAP eliminates the entry price method previously used by some entities for disclosure purposes for some financial assets. Previously, GAAP permitted entities an option to measure fair value in two different ways. The amendments in this Update require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. That presentation addresses financial statement users’ feedback that presenting the total change in fair value of a liability in net income reduced the decision usefulness of an entity’s net income when it had a deterioration in its credit worthiness. This amendment excludes from net income gains or losses that the entity may not realize because those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this Update require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. The amendments in this Update reduce diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The feedback received by the Financial Accounting Standards Board indicated that there is diversity in practice in that some entities evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities separately from their other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be implemented using the prospective method. Adoption of this Update is not expected to have a significant effect on the Company’s consolidated financial statements. F-44 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Accounting Standards Update 2016-02, Leases (Topic 842) (February 2016) In February 2016, the Financial Accounting Standards Board amended its standards with respect to the accounting for leases. The amended standard serves to replace all current GAAP guidance on this topic and requires that an operating lease be recognized by the lessee on the balance sheet as a “right-of-use” asset along with a corresponding liability representing the rent obligation. Key aspects of current lessor accounting remain unchanged from existing guidance. This standard is expected to result in an increase to assets and liabilities recognized and, therefore, increase risk-weighted assets for regulatory capital purposes. The amended standard requires the use of the modified retrospective transition approach for existing leases that have not expired before the date of initial application and will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Earlier application of the amended standard is permitted. The Company is currently evaluating the impact of the amended guidance on the Company’s consolidated financial statements. F-45 3.2 4.1 4.2 4.3 10.1 10.2 10.3 10.4 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 21.1 23.1 24.1 31.1 31.2 32.1 EXHIBIT INDEX Exhibit No. 3.1 Articles of Incorporation of First Internet Bancorp Description Amended and Restated Bylaws of First Internet Bancorp as amended March 18, 2013 Warrant to purchase common stock dated June 28, 2013 Form of Senior Indenture Form of Subordinated Indenture First Internet Bancorp 2013 Equity Incentive Plan Form of Restricted Stock Agreement under 2013 Equity Incentive Plan First Internet Bancorp 2011 Directors’ Deferred Stock Plan Amended and Restated Employment Agreement among First Internet Bank of Indiana, First Internet Bancorp and David B. Becker dated March 28, 2013 Contract for Purchase of Property between First Internet Bancorp and LHRET Ascension SV, LLC dated January 30, 2013 Method of Filing Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Offer and Contract for Purchase of Real Estate between First Internet Bancorp and St. Vincent Hospital and Health Care Center, Inc., accepted February 5, 2013 Incorporated by Reference Lease dated as of March 6, 2013, by and between First Internet Bancorp and First Internet Bank of Indiana Incorporated by Reference First Amendment to Office Lease dated as of July 1, 2015, by and between First Internet Bancorp and First Internet Bank of Indiana Incorporated by Reference Subordinated Debenture Purchase Agreement with Community BanCapital, L.P., dated June 28, 2013 Incorporated by Reference Subordinated Debenture dated June 28, 2013 2015 Senior Executive Cash Incentive Plan Form of Management Incentive Award Agreement - Restricted Stock Units under First Internet Bancorp 2013 Equity Incentive Plan Incorporated by Reference Incorporated by Reference Incorporated by Reference Loan Agreement dated as of March 6, 2013, by and between the Company and the Bank Incorporated by Reference First, Second and Third Acknowledgment, Confirmation and Amendment between First Internet Bank of Indiana and First Internet Bancorp executed March 6, 2014, March 6, 2015, and February 26, 2016, respectively Filed Electronically List of Subsidiaries Incorporated by Reference Consent of Independent Registered Public Accounting Firm Powers of Attorney Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer Section 1350 Certifications 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.DEF XBRL Taxonomy Extension Definition Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase Filed Electronically Filed Electronically Filed Electronically Filed Electronically Filed Electronically Filed Electronically Filed Electronically Filed Electronically Filed Electronically Filed Electronically Filed Electronically This page intentionally left blank Great service. Great services. R E S I D E N T I A L M O R T G A G E A N D H O M E E Q U I T Y L E N D I N G With an award-winning national online platform for origination in 50 states, we originate conventional, FHA, VA, and jumbo 1-4 family mortgage loans as well as home equity loans and lines of credit. We sell the majority of our originated loans to the secondary market. N I C H E C O N S U M E R L E N D I N G Lending directly to consumers as well as indirectly through an established dealer network, we attract creditworthy customers across the country. We specialize in niche RV and horse trailer loans. C O N S U M E R A N D S M A L L B U S I N E S S B A N K I N G Without a costly branch network to weigh us down, we can offer great rates and low fees with all of the online and mobile tools savvy consumers need to help them make smart financial choices. Our offerings include checking and savings accounts, CDs, IRAs, health savings accounts, and credit cards. C O M M E R C I A L R E A L E S TAT E L E N D I N G We customize financing solutions throughout the Midwest for our customers’ commercial investment property mortgage needs across a variety of real estate-oriented loan products. Offerings include construction and development debt capital for office, retail, industrial, and multi-family properties. We also finance residential construction and development with reasonable yet conservative leverage parameters for well-known, reputable owners/ developers in our market. We hold and service all originated commercial real estate loans in portfolio. S I N G L E T E N A N T L E A S E F I N A N C I N G Acquisition financing is offered nationwide for savvy real estate investors introduced to us through our committed, growing network of mortgage bankers and national correspondents. Properties financed are generally well located within their respective markets and subject to long-term, net lease arrangements with well-known, financially strong tenants. C O M M E R C I A L B A N K I N G We offer customized solutions on business lines of credit, term loans, credit cards, and owner-occupied real estate to middle-market companies in Indiana and Arizona. Our comprehensive lineup of online treasury management services allows our clients to run their businesses more efficiently and optimize their cash positions with robust reporting and access capabilities. Account access is available online or through a mobile app. F I R S T I N T E R N E T B A N C O R P . C O M 

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