First Internet Bancorp
Annual Report 2016

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2016 ANNUAL REPORT Our Time BA NK I NG BU ILT FOR THE 21 ST CEN TURY. OUR FINER MOMENTS 2012 Announced expanded commercial offering 2013 First Internet Bancorp began trading on the NASDAQ Completed public offering 2015 Surpassed $1 billion in assets Joined the Russell 3000® Index Completed public offerings Added to the NASDAQ Global Select 2016 Our Time It has been 18 years since First Internet Bank opened its virtual doors to the public on February 22, 1999. While 216 months may seem relatively brief measured against the span of American banking history, we have accomplished amazing things in that short period of time. In fact, in 2016 our assets grew 46%, loans increased by 31% and we had record net income and earnings per share. We have succeeded because we are built for today—lean, efficient and engineered specifically for the digital age. Now we are poised for even more growth. And we plan to continue revolutionizing the delivery of financial services in ways thought impossible just a few years ago. This is our time. And we are excited to show you all the reasons why. I N T R O D U C T O N I | 1 FINANCIAL PERFORMANCE Consistent Balance Sheet Growth TOTAL ASSETS TOTAL LOANS (IN MILLIONS) Five-Year Growth Compared to Similarly Sized Banks FIRST INTERNET BANCORP SNL MICRO CAP US BANKS $1,854 $1,270 $1,251 $636 $358 $802 $501 $971 $954 $732 2012 2013 2014 2015 2016 273% 217% 201% 31% 44% 34% TOTAL ASSETS TOTAL LOAN GROWTH TOTAL DEPOSIT GROWTH Loan Portfolio Composition COMMERCIAL LOANS RESIDENTIAL REAL ESTATE LOANS CONSUMER LOANS (IN THOUSANDS) $833,145 $582,888 $351,087 $110,510 $117,494 $126,486 $212,280 $176,324 $107,562 $279,046 $257,838 $97,094 $108,312 $240,590 $173,449 2012 2013 2014 2015 2016 Strong Credit and Asset Quality NONPERFORMING ASSETS TO TOTAL ASSETS NONPERFORMING LOANS TO TOTAL LOANS 1.62% 1.23% .90% .37% .50% .37% .04% .02% .31% .09% 2012 2013 2014 2015 2016 Revenue Growth $11,423 NONINTEREST INCOME NET INTEREST INCOME $15,842 (IN THOUSANDS) $9,517 $17,448 $7,174 $22,287 $14,077 $39,689 $10,141 $30,753 2012 2013 2014 2015 2016 Increased Economies of Scale Noninterest Expense/ Average Assets Comparison of Five-Year Cumulative Total Return* FIRST INTERNET BANCORP NASDAQ COMPOSITE INDEX SNL MICRO CAP US BANK INDEX 2.70% 2.99% 2.60% 2.28% 1.93% 2012 2013 2014 2015 2016 542% 253% 220% *Assumes investment of $100 as of December 31, 2011 2011 2012 2013 2014 2015 2016 $22.24 $23.04 Tangible Book Value Per Share** $20.13 $20.74 $19.38 I I F N A N C A L P E R F O R M A N C E **Reconciliation of Non-GAAP Financial Measures on page 39 of the report 2012 2013 2014 2015 2016 | 3 Dear Fellow Shareholder, Building shareholder value through company growth remained our priority. We added more than $78 million in market capitalization in 2016. In June, First Internet Bancorp joined the Russell 3000® Index. Three months later, our common stock transitioned from the NASDAQ Capital Market to the NASDAQ Global Select Market, which is designed for public companies meeting the highest listing I marvel at the way watchmakers blend the standards in the world. art and science of measuring time—balancing passion for fine craftsmanship and beauty Like the gears of the watch pictured on the with precision and tuning. The final product cover of this report, the many moving parts is something highly functional, but also of our technology, processes and oversight enduring. worked together to contribute to our success There is an art and science to our business at as well. First Internet Bancorp as well. The art is in the Our ever-expanding loan portfolio requires design of our strategy and the way we treat diligence and monitoring, so we added talented our customers and colleagues. The science employees to our team throughout the year. is in the execution of the strategy and the The benefit of our unique business model fine-tuning of our technology, our business allowed us to grow our balance sheet while processes and our oversight. We resourcefully managing expenses. Our noninterest expense fuse the art and science of banking, and I am as a percentage of average assets and efficiency proud of the legacy we have built. ratio continued to trend in the right direction. Our growth strategy continued to be an To maintain the positive trajectory, we important part of our 2016 success story. strengthened our capital base in 2016. During Strong balance sheet growth drove increased the year, I had the opportunity to speak with revenue and earnings. We closed 2016 with many of our new institutional and retail assets up 46% over the previous year. Our investors. These interactions were a touchstone loans increased by 31%, fueling interest for me, and I appreciate your engagement with income growth. And we produced record net our company. (To the shareholders who have income and earnings per share in 2016. joined us in 2016, welcome!) The entire team at First Internet Bank is By executing the strategy we have established, focused on meeting the needs and exceeding we are coming into our own. It’s our time. the expectations of our customers. At a time And by focusing our efforts on maximizing when non-traditional and alternative banking shareholder value, we’re making sure it’s providers continue to enter the market, we’ve your time, too. On behalf of everyone at First successfully balanced our digital capabilities Internet and the Board of Directors, thank you with personal service to build and deepen our for your continued support. Sincerely, DAVID B. BECKER Chairman, President and Chief Executive Officer relationships with our customers. Without question, the digital revolution will continue to reshape the banking experience. But as easy as it can be to rely on technology to provide services for our customers, we haven’t forgotten that there is no substitute for genuine human interaction in certain situations. Nurturing customer relationships will always be an important part of our business, no matter how digital our industry becomes. When our customers succeed, so do we. (We have some terrific customer success stories in the pages that follow.) Moving forward, I believe we are well positioned to capitalize on the market opportunities ahead. Already this year, in early 2017, we further diversified our lines of business with the addition of a public finance lending team. The announcement reflects our entrepreneurial spirit and signals our intention to continue our growth by generating high-quality assets and diversifying our revenue streams. S H A R E H O L D E R L E T T E R | 5 CUSTOMER FOCUSED Our customers are as passionate about their work as we are about ours. This year, we’ve profiled three of them to help illustrate our strong partnerships. They have some fascinating stories to tell— keep reading to learn more. WHENEVER MICHELLE NAIDA NEEDS A NEW HORSE TRAILER, SHE KNOWS SHE CAN COUNT ON FIRST INTERNET BANK FOR ALL HER FINANCING NEEDS. Everyday Horseplay For Michelle Naida, each morning starts before the crack of dawn. “I’m out here at 5 a.m. every day taking care of my horses. They don’t care if it’s Christmas, And since some of these animals weigh more Despite all the traveling, Michelle likes my birthday or a big snowstorm—I never get than 2,000 pounds, she needs a specialized nothing more than hanging out with her four a day off !” trailer—which is exactly why Michelle turned horses (and three dogs) in beautiful Big Flats. to First Internet Bank for financing back in And she wouldn’t trade it for the world. But Michelle doesn’t mind. Spending time with 2004. her four horses—Rip, Patches, Winnie and “At the end of the day, horses take lots of hard Piper—is a labor of love. And it’s something At first, she chose First Internet Bank because work—lots of blood, sweat and tears. People she’s been doing for almost 28 years, 18 of the rates were excellent. But she soon learned either love it or hate it. Guess which group I’m them at the picturesque horse farm she calls that the benefits—and the relationship—went in?” home in Big Flats, New York. much deeper. “This farm is a special place for me. It has “First Internet Bank made everything so more than 100 acres of land for the horses to simple for me, and their customer service enjoy. There are beautiful trails, rolling hills— is top-notch. I financed another trailer in you can’t beat it.” 2013, and I couldn’t believe how seamless the process was. After applying online, I had But Michelle doesn’t spend all her time at the approval in about two hours. I even helped horse farm. One of her passions is showing connect my trailer dealer with First Internet horses at events around the country, which Bank. I’m pretty sure that has been a win-win means lots of traveling. for everybody.” C U S T O M E R F O C U S | 9 Designing Better Lives FOR CALIFORNIA CLOSETS AND FIRST INTERNET BANK, IT’S ALL ABOUT WORKING TOGETHER TO CREATE THE PERFECT CUSTOMER EXPERIENCE. If you don’t think designers are problem- solvers, you’ve never worked with California Closets. “When you’re designing a custom storage space for a client, you’re actually coming up with a solution,” said Charlie Meyer, co-owner of California Closets Indianapolis. “We create designs to help people become the best possible version of themselves. Enhancing your living space with creative solutions can play a huge role in that process.” California Closets designs, builds and installs one-of-a-kind furniture and storage solutions for clients across the region. They’ve been In addition to relying on First Internet Bank growing fast, and a big part of their success for day-to-day business needs, Charlie and is due to their uncompromising design Mark have also looked to the bank for short- philosophy. and long-term lending solutions. And the relationship is poised to grow even more as “Lots of people think you’ve got to choose the two continue to dazzle their clients with between beauty and function. They think it’s exceptional designs. impossible to design something that does everything they want, and looks amazing, too,” “First Internet Bank takes the time to said Charlie. “But the great thing about us is understand our business,” said Mark. “They’re that you never have to choose.” careful listeners, which is something we As the California Closets Indianapolis location business. That’s why we love working with appreciate. Like us, they’re in the solutions has expanded, they’ve needed a strong them.” financial partner to help them achieve their business goals—and for them, that partner has been First Internet Bank. “Our business relies on great relationships,” said co-owner Mark Riggle. “That’s what First Internet Bank brought to the table. The partnership with them has been outstanding.” C U S T O M E R F O C U S | 1 1 Real-Life Monopoly STEVE HENKE IS ONE OF THE BIGGEST PLAYERS IN CENTRAL INDIANA REAL ESTATE DEVELOPMENT— AND FIRST INTERNET BANK IS HIS FINANCIAL PARTNER OF CHOICE. From a young age, Westfield, Indiana-based Not only has it helped him finance critical It’s a partnership that—like Chatham Hills— land developer Steve Henke had a keen infrastructure on his own properties, but it continues to quickly grow. And while Steve’s interest in real estate. And it’s all thanks to a has also been a dependable referral resource present-day property deals might be a little broken leg. for his home-buying clients. more complicated than those you’d find on a Monopoly board, his passion for real estate “Back when I was in fifth grade, I broke my “From the start, First Internet Bank has development is as strong as ever. leg and couldn’t go to school for weeks. Since really impressed me. They’re easy to work I was confined to a bed, I started playing with, efficient and great at what they do. But “Of course there are days when this feels Monopoly—I must have played a thousand what keeps me coming back is how down like work, but most of the time I’m living the games. As funny as it sounds, that’s where to earth they are. We have a great personal dream. I get to work with my family doing a I first started to learn about property and relationship, and it’s always a pleasure to job I love. It really doesn’t get any better than investments.” work with them.” that.” Steve’s come a long way since his Monopoly- playing days. As one of Indiana’s premier real estate developers, the Henke Development Group has had a hand in developing some of Central Indiana’s most stunning properties, including the Bridgewater Club in Carmel and the Westfield Grand Park Sports Campus. Today, Steve is concentrating on Chatham Hills, his newest development in Westfield. With verdant landscapes, gorgeous homes and a world-class golf course designed by the legendary Pete Dye, it might be his most impressive yet. Creating communities like Chatham Hills takes a financial partner with a detailed understanding of the real estate business. That’s why Steve trusts First Internet Bank. Photo provided by SB Childs Photography C U S T O M E R F O C U S | 1 3 TIMELESS SERVICES Consumer and Small Business Banking Commercial Real Estate Lending Commercial Banking Without a costly branch network to weigh We customize financing solutions for We offer customized solutions on business us down, we can offer great rates and low experienced developers and owners of lines of credit, term loans, credit cards fees with all the online and mobile banking investment property located throughout and owner-occupied real estate to middle- tools consumers need to help them make the state of Indiana and nearby Midwestern market companies in Indiana and Arizona. smart financial choices. Our offerings include locations featuring a variety of real estate- Our comprehensive lineup of online treasury checking and savings accounts, CDs, IRAs, oriented loan products. Offerings include management services allows our clients to health savings accounts and credit cards. construction and development debt capital run their businesses more efficiently and for office, retail, industrial and multi-family optimize their cash positions with robust Residential Mortgage and properties. We also finance residential reporting and access capabilities. Home Equity Lending construction and development with active, With an award-winning national online reputable homebuilders and developers Public Finance platform for origination in 50 states, we operating in the central Indiana market. We offer a variety of lending and depository originate conventional, FHA, VA, and jumbo solutions for government and not-for-profit 1-4 family mortgage loans as well as home Single Tenant Lease Financing customers. Options are available for funding equity loans and lines of credit. We sell Acquisition financing is offered nationwide capital projects or refinancing existing the majority of our originated loans to the for savvy real estate owners introduced to debt for hospitals, economic development secondary market. us through our committed, growing network districts, public infrastructure projects and of mortgage bankers, brokers and national police and fire departments. Niche Consumer Lending correspondents. Properties financed are By lending directly to consumers as well generally well-located within their respective as indirectly through an established dealer markets and subject to long-term, net lease network, we attract creditworthy customers arrangements with well-known, financially across the country. We specialize in niche RV qualified tenants. and horse trailer loans. 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, 2016. 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 6.0% Fixed to Floating Subordinated Notes due 2026 Name of exchange on which registered The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC 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, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $122.1 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 10, 2017, the registrant had 6,483,678 shares of common stock issued and outstanding. Documents Incorporated By Reference Portions of our Proxy Statement for our 2017 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 (the “Company,” “we,” “our,” “us”) regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “can,” “expects,” “believes,” “anticipates,” “intends,” “may,” “plan,” “should” 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; potential changes to 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 “FASB”), the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board (the “PCAOB”) 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 Item 16. Form 10-K Summary SIGNATURES PAGE 1 11 20 20 20 20 21 23 25 41 42 42 42 42 43 44 44 44 44 45 46 47 ii Item 1. Business General PART I First Internet Bancorp is a bank holding company that conducts its primary 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. We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through online channels on a nationwide basis and have no traditional branch offices. Our residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending. Our consumer lending products are primarily originated on a nationwide basis over the Internet as well as through relationships with dealerships and financing partners. Our commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking and public finance. Through our CRE team, we offer single tenant lease financing on a nationwide basis in addition to traditional investor commercial real estate and construction loans primarily within Central Indiana and adjacent markets. To meet the needs of commercial borrowers and depositors located primarily in Central Indiana, Phoenix, Arizona and adjacent markets, our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied commercial real estate loans and corporate credit cards as well as treasury management services. Our public finance team, established in early 2017, provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. As of December 31, 2016, we had total assets of $1.9 billion, total liabilities of $1.7 billion, and shareholders’ equity of $153.9 million. We employed 192 full-time equivalent employees at December 31, 2016. Our principal executive offices are located at 11201 USA Parkway, Fishers, Indiana 46037 and our telephone number is (317) 532-7900. Subsidiaries The Bank has two wholly-owned subsidiaries, First Internet Public Finance Corp., which was organized in early 2017 and provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities, and JKH Realty Services, LLC, which manages other real estate owned properties as needed. Performance Balance Sheet Growth. Total assets have increased 191.4% from $636.4 million at December 31, 2012 to $1.9 billion at December 31, 2016. This increase was driven primarily by strong organic growth. During the same time period, loans increased from $358.2 million to $1.3 billion and deposits increased from $530.7 million to $1.5 billion, increases of 249.2% and 175.7%, 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, 2016, commercial loans comprised 66.6% of loans compared to 30.9% at December 31, 2012. 1 Earnings Growth. Net income has increased 115.4% from $5.6 million for the twelve months ended December 31, 2012 to $12.1 million for the twelve months ended December 31, 2016. Diluted earnings per share have increased 17.9% from $1.95 for the twelve months ended December 31, 2012 to $2.30 for the twelve months ended December 31, 2016. Asset Quality. We have maintained a high quality loan portfolio due to our emphasis on a strong credit culture, conservative underwriting standards, disciplined risk management processes, and a diverse national and local customer base. At December 31, 2016, our nonperforming assets to total assets was 0.31%, our nonperforming loans to total loans was 0.09% and our allowance for loan losses to total loans was 0.88%. 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 primarily conduct commercial banking, including CRE and C&I, and related activities on a local basis, except for single tenant lease financing and public finance which are 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 commercial and consumer 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 targeted marketing efforts. Commercial Banking Growth. We have diversified our operations by adding commercial banking and public finance to complement our consumer platform. We offer traditional CRE loans, single tenant lease financing, C&I loans, corporate credit cards, treasury management services and public and municipal finance loans and leases. Our commercial lending teams consist of seasoned commercial bankers, many 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 intend to continue expanding 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 overseen by a dedicated Board of Directors with a wide range of experience from careers in financial services, legal and regulatory services, and industrial services. Increased Efficiency Through Technology. We have built a scalable banking platform based upon technology as opposed to a traditional branch network. We intend to continue leveraging this infrastructure as well as investing in and utilizing net technologies 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 that our business model and digital banking processes are capable of supporting continued growth and producing a greater level of operational efficiency, which should drive increasing profitability. Expand Asset Generation and Revenue Channels. Our geographic and credit product diversity have produced sustained balance sheet and earnings growth. We expect to continue exploring additional asset and revenue generation capabilities that complement our commercial and consumer banking platforms. These efforts may include adding personnel or teams with product, industry or geographic expertise or through strategic acquisitions. 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 C&I loans, CRE loans, municipal loans and leases, lines of credit, letters of credit, and single tenant lease financing. Residential real estate loans are either retained 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 as of December 31, 2016. 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 $5.6 million in brokered time deposits at December 31, 2016 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 our customers, than it would be to build and maintain a proprietary nationwide ATM network. 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. 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 LoanDepot. However, we also compete with money center and superregional 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 KeyBank, 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, First Savings Bank, CapStar Bank, EverBank and StanCorp. For our public finance activities, we compete nationally with superregional and regional banks, such as Huntington National Bank, Key Bank, Capital One, Sterling National Bank and Texas Capital Bank. 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. We anticipate that consolidation will continue in the financial services industry and perhaps accelerate as a result of 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. 3 Regulation and Supervision 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 results of operations and financial condition. 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 the beginning of 2008. 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. 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. Further, the Dodd-Frank Act established the Office of Financial Research, which has the power to require reports from other financial services companies. In October 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. 4 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. 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, 2016 and 2015 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 the beginning of 2015, subject to certain phase-in periods for some requirements. Among other things, the Basel III Capital Rules (i) introduced a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) applied 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) expanded the scope of the deductions/adjustments from capital in comparison to current regulations. Since December 31, 2015, the minimum capital ratios under Basel III Capital Rules have been: 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. 5 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, 2016, 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. 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. 6 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 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. 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. 7 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 deposit. In March 2016, the FDIC issued a final rule to increase the statutory minimum designated reserve ratio (the “DRR”) to 1.35% by September 30, 2020, the deadline imposed by the Dodd- Frank Act. The FDIC’s rules reduced assessment rates on all FDIC-insured financial institutions but imposed a surcharge on banks with assets of $10 billion or more until the DRR reaches 1.35% and provide assessment credits to banks with assets of less than $10 billion for the portion of their assessments that contribute to the increase of the DRR to 1.35%. The rules also changed the methodology used to determine risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk. FDIC insurance expense, including assessments relating to Financing Corporation (FICO) bonds, totaled $1.2 million for 2016. 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. 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, 2016 of $8.9 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, 2016, the Federal Reserve’s regulations required reserves equal to 3% on transaction account balances over $15.2 million and up to $110.2 million, plus 10% on the excess over $110.2 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. 8 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 enforces applicable CFPB rules with respect to the Bank. 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. 9 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 its policies and procedures on the sharing of nonpublic personal information. Cybersecurity. In March 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 we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties. In support of our Internet banking platform, we rely heavily on electronic communications and information systems to conduct our operations and store sensitive data. We employ an in-depth approach that leverages people, processes, and technology to manage and maintain cybersecurity controls. In addition, we employ 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 our 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 we have not experienced any material losses relating to cyber-attacks or other information security breaches, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we 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 us and our customers. Employees At December 31, 2016, we had 192 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 10 • 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. 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 CRE and C&I loan portfolios. At December 31, 2016, CRE loans amounted to $730.7 million, or 58.4% of total loans, and C&I loans amounted to $102.4 million, or 8.2% of total loans. 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 commercial loan growth and the related risks 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. 11 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. 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. A decrease in the corporate federal income tax rate may impair our deferred tax assets (“DTAs”). At December 31, 2016, our DTAs were approximately $3.3 million. While a decline in the corporate tax rate may lower our tax provision expense, it may also significantly impair the value of our DTAs in the year the rate decrease is enacted. Such impairment could have a material adverse effect on our financial condition and results of operations. The market value of some of our investments could decline and adversely affect our financial position. As of December 31, 2016, we had a net unrealized pre-tax holding loss of approximately $14.4 million on the available- for-sale portion of our $456.7 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. 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 deposit gathering activities and a significant portion of its residential mortgage lending 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 could 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 long term 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, financial technology companies, mutual funds, insurance companies and securities 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. 12 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. 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, which would negatively impact capital, and may have a material adverse effect on our business, results of operations, financial condition and prospects. 13 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, 2016, our consumer loans, excluding residential mortgage loans and home equity loans, totaled $173.4 million, representing approximately 13.9% of our total loan portfolio at such date. A substantial portion 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 Central Indiana and adjacent markets, and changes in local economic conditions may impact their performance. We offer our residential mortgage and consumer lending as well as single tenant financing products and services throughout the United States. However, we serve CRE and C&I borrowers primarily in Central Indiana and adjacent markets. 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 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. 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. 14 A sustained decline in the residential mortgage loan market 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 in the secondary market. Revenue from mortgage banking activities was $12.4 million for the twelve months ended December 31, 2016 and $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 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 lending and deposit relationships and accessing equity or credit markets as well as increased regulatory scrutiny of our business. 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 negatively 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 customer, 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. 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 digital 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 customers 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 customers’ 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 customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations. 15 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 DIF 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 DFI 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. 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 a number of factors, including regulatory capital levels, asset growth and asset quality. 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 DIF. In order to maintain a strong funding position and restore the reserve ratios of the DIF, the FDIC may increase deposit insurance assessment rates and may charge 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. 16 The long-term impact of 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 Company and the Bank. 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 Company and the Bank 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 was phased-in 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 Company and the Bank 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. 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 Global Select 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. 17 We face a risk of noncompliance and enforcement action with the BSA and other anti-money laundering statutes and regulations. The BSA, the USA PATRIOT Act 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 OFAC. 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 SECURITIES 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. We have since completed several offerings of our common stock and our securities have been listed on the NASDAQ Global Select Market since September 30, 2016. 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. 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 BHCA, 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. 18 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. If we default on our subordinated debt, we will be prohibited from paying dividends or distributions on our common stock. As of December 31, 2016, we had $38.0 million aggregate principal amount of indebtedness outstanding, consisting of a subordinated debenture in the principal amount of $3.0 million scheduled to mature in 2021 (the “2021 Debenture”), a term loan in the principal amount of $10.0 million scheduled to mature in 2025 (the “2025 Note”) and $25.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinate Notes due 2026 (the “2026 Notes”). The agreements under which our indebtedness is 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. 19 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. We may not be able to generate sufficient cash to service all of our debt. Our ability to make scheduled payments of principal and interest, or to satisfy our obligations in respect of our debt or to refinance our debt, will depend on our future performance of our operating subsidiaries. Prevailing economic conditions (including interest rates), regulatory constraints, including, among other things, limiting distributions to us from the Bank and required capital levels with respect to the Bank and certain of our nonbank subsidiaries, and financial, business and other factors, many of which are beyond our control, will also affect our ability to meet these needs. Our subsidiaries may not be able to generate sufficient cash flows from operations, or we may be unable to obtain future borrowings in an amount sufficient to enable us to pay our debt, or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt when needed on commercially reasonable terms or at all. 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 all of the 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 loan was originally scheduled to mature in March 2014 and had been extended annually in 2014, 2015 and 2016, resulting in a scheduled maturity of March 6, 2017. Effective February 21, 2017, the Company entered into a Fourth Acknowledgment, Confirmation and Amendment that, among other things, reduced the principal amount of the loan to $3.6 million and extended its maturity to March 6, 2020. Amounts borrowed under the loan bear interest 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 is secured by a first priority mortgage and lien on the 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 Neither we nor any of our subsidiaries are 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 trades on the NASDAQ Global Select Market under the symbol “INBK.” 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, 2016: Fourth Quarter Third Quarter Second Quarter First Quarter Year Ended December 31, 2015: Fourth Quarter Third Quarter Second Quarter First Quarter High Low Declared Dividends $ 33.00 $ 22.82 $ 25.38 27.00 28.63 33.00 39.76 25.70 19.00 22.12 22.01 22.41 26.26 24.05 18.01 14.25 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 As of March 10, 2017, the Company had 6,483,678 shares of common stock issued and outstanding, and there were 133 holders of record of common stock. Dividends The Company began paying regular quarterly cash dividends in 2013. Total dividends declared in 2016 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. As of December 31, 2016, the Company had $38.0 million principal amount of subordinated debt. The agreements under which the subordinated debt was 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. Recent Sales of Unregistered Securities None. 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, 2011 in First Internet Bancorp, the NASDAQ Composite Index and the SNL Micro Cap U.S. Bank Index, and assumes that dividends are reinvested. 2011 2012 2013 2014 2015 2016 First Internet Bancorp $ 100.00 $ 227.41 $ 369.18 $ 278.22 $ 481.49 $ NASDAQ Composite Index SNL Micro Cap U.S. Bank Index 100.00 100.00 117.45 126.37 164.57 163.04 188.84 184.90 201.98 205.62 542.17 219.89 252.79 December 31, 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) 2016 2015 2014 2013 2012 At or for the Twelve Months Ended December 31, Balance Sheet Data: Total assets Cash and cash equivalents Loans Loans held-for-sale Total securities 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 $ 1,854,335 $ 1,269,870 $ 970,503 $ 802,342 $ 636,367 39,452 1,250,789 27,101 473,371 1,462,867 149,255 153,942 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 $ 58,899 $ 41,447 $ 31,215 $ 25,536 $ 24,374 19,210 39,689 4,330 35,359 14,077 31,451 17,985 5,911 $ 12,074 $ 10,694 30,753 1,946 28,807 10,141 25,283 13,665 4,736 8,929 $ $ $ $ 2.32 2.30 23.76 23.04 $ $ $ $ 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 1.95 1.95 21.79 20.13 $ $ $ $ $ $ $ $ $ $ 5,211,209 5,239,082 4,528,528 4,554,219 4,497,007 4,507,995 3,041,666 2,869,365 3,050,001 2,869,365 Common shares outstanding at end of period 6,478,050 4,481,347 4,439,575 4,448,326 2,815,094 Dividends declared per share Dividend payout ratio 2 ___________________________________ $ 0.24 $ 0.24 $ 0.24 $ 0.22 $ 10.43% 12.24% 25.00% 14.57% 0.17 8.53% 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 At or for the Twelve Months Ended December 31, 2016 2015 2014 2013 2012 Performance Ratios: Return on average assets Return on average shareholders’ equity Return on average tangible common equity 1 Net interest margin 2 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 Net charge-offs (recoveries) to average loans outstanding during period 0.74% 9.74% 10.12% 2.49% 0.09% 0.31% 0.35% 0.88% 0.81 % 8.89 % 9.33 % 2.85 % 0.02 % 0.37 % 0.46 % 0.88 % 0.50% 4.61% 4.85% 2.65% 0.04% 0.50% 0.62% 0.79% 0.15% (0.07)% 0.00% Allowance for loan losses to nonperforming loans 1,013.9% 5,000.6 % 1,959.5% 0.67% 7.10% 7.65% 2.67% 0.37% 0.90% 1.05% 1.09% 0.91% 9.51% 10.33% 2.67% 1.23% 1.62% 1.84% 1.65% 0.17% 293.0% 0.69% 133.3% Capital Ratios: Tangible common equity to tangible assets 1 Tier 1 leverage ratio 3 Common equity tier 1 capital ratio 3, 4 Tier 1 capital ratio 3 Total risk-based capital ratio 3 Other Data: Full-time equivalent employees Number of banking and loan production offices ___________________________________ 8.07% 8.65% 11.54% 11.54% 15.01% 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% 192 2 152 3 143 4 130 4 97 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 Capital ratios are calculated in accordance with regulatory guidelines specified by our primary federal banking regulatory authority. 4 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 primary 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 wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through online channels on a nationwide basis and have no traditional branch offices. Our residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending. Our consumer lending products are primarily originated on a nationwide basis over the Internet as well as through relationships with dealerships and financing partners. Our commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking and public finance. Through our CRE team, we offer single tenant lease financing on a nationwide basis in addition to traditional investor commercial real estate and construction loans primarily within Central Indiana and adjacent markets. To meet the needs of commercial borrowers and depositors located primarily in Central Indiana, Phoenix, Arizona and adjacent markets, our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied commercial real estate loans and corporate credit cards as well as treasury management services. Our public finance team, established in early 2017, provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. Results of Operations Refer to Item 6 of this report for a summary of the Company's financial performance for the five most recent years. During the twelve months ended December 31, 2016, net income was $12.1 million, or $2.30 per diluted share, compared to net income of $8.9 million, or $1.96 per diluted share, for the twelve months ended December 31, 2015 and net income of $4.3 million, or $0.96 per diluted share, for the twelve months ended December 31, 2014. The increase in net income of $3.1 million for the twelve months ended December 31, 2016 compared to the twelve months ended December 31, 2015 was primarily due to an $8.9 million increase in net interest income and a $3.9 million increase in noninterest income. This was partially offset by a $6.2 million increase in noninterest expense, a $2.4 million increase in provision for loan losses and a $1.2 million increase in income tax expense. 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. During the twelve months ended December 31, 2016, return on average assets was 0.74%, compared to 0.81% for the twelve months ended December 31, 2015 and 0.50% for the twelve months ended December 31, 2014. During the twelve months ended December 31, 2016, return on average shareholders’ equity was 9.74%, compared to 8.89% for the twelve months ended December 31, 2015 and 4.61% for the twelve months ended December 31, 2014. 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. Twelve Months Ended December 31, 2016 December 31, 2015 December 31, 2014 Average Balance Interest/ Dividends Yield/ Cost Average Balance Interest/ Dividends Yield/ Cost Average Balance Interest/ Dividends Yield/ Cost (dollars in thousands) Assets Interest-earning assets Loans, including loans held-for-sale $1,144,687 $ 49,054 4.29% $ 853,996 $ 37,049 4.34% $ 631,743 $ 27,875 Securities - taxable Securities - non-taxable Other earning assets 315,661 64,899 71,140 7,326 1,856 663 2.32% 2.86% 0.93% 171,502 3,728 10,343 42,375 312 358 Total interest-earning assets 1,596,387 58,899 3.69% 1,078,216 41,447 2.17% 3.02% 0.84% 3.84% 151,967 3,036 1,785 56,094 58 246 841,589 31,215 4.41% 2.00% 3.25% 0.44% 3.71% Allowance for loan losses Noninterest earning-assets Total assets Liabilities Interest-bearing liabilities (9,808) 43,221 $1,629,800 (6,906) 35,912 $1,107,222 (5,414) 36,128 $ 872,303 452 158 2,563 12,680 15,853 3,357 19,210 Interest-bearing demand deposits $ 82,533 $ 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 Total liabilities and shareholders' equity 27,174 360,976 817,348 1,288,031 183,410 1,471,441 28,472 5,864 1,505,777 124,023 $1,629,800 418 142 2,136 6,059 8,755 1,939 10,694 0.55% $ 76,145 $ 0.58% 0.71% 1.55% 1.23% 1.83% 1.31% 24,442 299,990 438,776 839,353 139,695 979,048 22,866 4,880 1,006,794 100,428 $1,107,222 0.55% $ 70,362 $ 0.58% 0.71% 1.38% 1.04% 1.39% 1.09% 18,509 269,271 350,129 708,271 45,425 753,696 20,028 4,783 778,507 93,796 $ 872,303 386 109 1,965 5,193 7,653 1,275 8,928 0.55% 0.59% 0.73% 1.48% 1.08% 2.81% 1.18% Net interest income $ 39,689 $ 30,753 $ 22,287 Interest rate spread1 Net interest margin2 2.49% 1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities 2 Net interest income divided by average interest-earning assets 2.38% 2.75% 2.85% 2.53% 2.65% 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, 2016 vs. December 31, 2015 Due to Changes in Twelve Months Ended December 31, 2015 vs. December 31, 2014 Due to Changes in Volume Rate Net Volume Rate Net Loans, including loans held-for-sale $ 12,438 $ (433) $ 12,005 $ 9,624 $ (450) $ 9,174 Securities – taxable Securities – non-taxable Other earning assets Total Interest expense Interest-bearing deposits Other borrowed funds Total 3,325 1,562 264 17,589 5,290 705 5,995 273 (18) 41 (137) 1,808 713 2,521 3,598 1,544 305 17,452 7,098 1,418 8,516 417 258 (71) 10,228 1,390 1,571 2,961 275 (4) 183 4 (288) (907) (1,195) Increase (decrease) in net interest income $ 11,594 $ (2,658) $ 8,936 $ 7,267 $ 1,199 $ 692 254 112 10,232 1,102 664 1,766 8,466 2016 v. 2015 Net interest income for the twelve months ended December 31, 2016 was $39.7 million, an increase of $8.9 million, or 29.1%, compared to $30.8 million for the twelve months ended December 31, 2015. The increase in net interest income was the result of a $17.5 million, or 42.1%, increase in total interest income to $58.9 million for the twelve months ended December 31, 2016 compared to $41.4 million for the twelve months ended December 31, 2015. The increase in total interest income was partially offset by an $8.5 million, or 79.6%, increase in total interest expense to $19.2 million for the twelve months ended December 31, 2016 compared to $10.7 million for the twelve months ended December 31, 2015. The increase in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of $290.7 million, or 34.0%, 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 $198.7 million, or 109.3%, in the average balance of securities for the twelve months ended December 31, 2016 compared to the twelve months ended December 31, 2015. The increase in total interest income was also due to a 19 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 5 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 $448.7 million, or 53.5%, increase in the average balance of interest-bearing deposits for the twelve months ended December 31, 2016 compared to the twelve months ended December 31, 2015, and an increase of 19 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 $43.7 million, or 31.3%, increase in the average balance of other borrowed funds for the twelve months ended December 31, 2016 compared to the twelve months ended December 31, 2015, and an increase of 44 bps in the cost of other borrowed funds. Net interest margin was 2.49% for the twelve months ended December 31, 2016 compared to 2.85% for the twelve months ended December 31, 2015. The decrease in net interest margin was primarily due to a 22 bp increase in the cost of interest-bearing liabilities and a 15 bp decrease in the yield on interest-earning assets. The increase in the cost of interest-bearing liabilities was primarily due to an increase in average certificates of deposits balances and an increase in the related cost of those deposits. Further, the Company issued additional subordinated debt during 2016 which increased the cost of other borrowed funds. The decrease in the yield on interest-earning assets was primarily due to a decrease in the yield earned on loans and an increase in average cash balances compared to the prior year. 27 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. The increase in net interest income was the result of 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 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. 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. 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, 2016 2015 2014 2013 2012 $ 818 $ 12,398 764 $ 9,000 707 $ 5,609 687 $ 8,682 — 177 (63) 747 — — (34) 411 — 538 (78) 398 (49) (63) (146) 406 685 10,647 (252) 48 (93) 388 Total noninterest income $ 14,077 $ 10,141 $ 7,174 $ 9,517 $ 11,423 2016 v. 2015 During the twelve months ended December 31, 2016, noninterest income totaled $14.1 million, representing an increase of $3.9 million, or 38.8% compared to $10.1 million for the twelve months ended December 31, 2015. The increase in noninterest income was primarily driven by an increase of $3.4 million, or 37.8%, in mortgage banking activities, resulting from increases in mortgage originations and sales as well as higher gain on sale margins. 28 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 originations volumes. The increase in mortgage banking activities was partially offset by $0.5 million decline in gains related to sales of securities as no securities were sold during 2015. Noninterest Expense The following table presents noninterest expense for the five most recent years. (amounts in thousands) 2016 2015 2014 2013 2012 Salaries and employee benefits $ 17,387 $ 14,271 $ 12,348 $ 10,250 $ Twelve Months Ended December 31, Marketing, advertising and promotion Consulting and professional services Data processing Loan expenses Premises and equipment Deposit insurance premium Other 1,823 3,143 1,127 891 3,699 1,159 2,222 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 8,529 1,362 1,422 897 1,097 1,711 455 1,140 Total noninterest expense $ 31,451 $ 25,283 $ 22,662 $ 20,482 $ 16,613 2016 v. 2015 Noninterest expense for the twelve months ended December 31, 2016 was $31.5 million, compared to $25.3 million for the twelve months ended December 31, 2015. The increase of $6.2 million, or 24.4%, compared to the twelve months ended December 31, 2015 was primarily due to increases of $3.1 million in salaries and employee benefits, $0.9 million in premises and equipment expenses, $0.8 million in consulting and professional services and $0.5 million in deposit insurance premium expenses. The increase in salaries and employee benefits resulted from personnel growth and higher incentive compensation related to increased mortgage production. The increase in premises and equipment was primarily due to expenses associated with the Company’s new headquarters location. The increase in consulting and professional fees was due to higher legal fees incurred in the normal course of business commensurate with the Company’s growth and certain consulting projects that occurred during 2016. The increase in deposit insurance premium was due to the new methodology implemented by the FDIC as of July 1, 2016, which places a heavier weighting on year-over-year asset growth used to determine the cost of FDIC deposit insurance. 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 increases of $1.9 million in salaries and employee benefits, $0.5 million in consulting and professional services and $0.3 million in marketing, advertising and promotion. The increase in salaries and employee benefits was attributable to increased headcount driven by the Company's continued growth, higher equity compensation expense, and increased short term incentive compensation. The increase in consulting and professional services was due primarily to higher legal fees incurred in the normal course of business commensurate with the Company’s growth. 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. 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 Total securities Loans held-for-sale Noninterest-bearing deposits Interest-bearing deposits Total deposits Total shareholders' equity 2016 2015 2014 2013 2012 December 31, $ 1,854,335 $ 1,269,870 $ 970,503 $ 802,342 $ 1,250,789 473,371 27,101 31,166 1,431,701 1,462,867 153,942 953,859 213,698 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 90,908 636,367 358,161 156,693 63,264 13,187 517,484 530,691 61,350 Total assets increased $584.5 million, or 46.0%, to $1.9 billion as of December 31, 2016 as compared to $1.3 billion as of December 31, 2015. Balance sheet expansion during 2016 was funded by strong deposit growth of $506.8 million, or 53.0%, and supplemented by increases in shareholders’ equity and subordinated debt resulting from capital offerings during the year. This funding was deployed to support total loan growth of $296.9 million, or 31.1%, and to purchase investment securities with total securities balances increasing $259.7 million, or 121.5%. 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 2016 2015 December 31, 2014 2013 2012 Commercial and industrial $ 102,437 8.2% $ 102,000 10.7% $ 77,232 10.5% $ 55,168 11.0% $ 14,271 4.0% 57,668 4.6% 44,462 4.7% 34,295 4.7% 18,165 3.6% 12,644 3.5% 13,181 53,291 606,568 1.0% 4.3% 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 48.5% 66.6% 374,344 582,888 39.2% 61.1% 192,608 351,087 26.3% 47.9% 84,173 212,280 16.8% 42.3% — 110,510 Residential mortgage 205,554 16.4% 214,559 22.5% 220,612 30.1% 138,418 27.6% 110,975 35,036 173,449 414,039 2.8% 13.9% 33.1% 43,279 108,312 366,150 4.5% 11.4% 38.4% 58,434 97,094 376,140 8.0% 13.3% 51.4% 37,906 107,562 283,886 7.6% 21.5% 56.7% 6,519 126,486 243,980 1,247,184 99.7% 949,038 99.5% 727,227 99.3% 496,166 99.0% 354,490 99.0% 3,605 0.3% 4,821 0.5% 5,199 0.7% 4,987 1.0% 3,671 1.0% Total loans 1,250,789 100.0% 953,859 100.0% 732,426 100.0% 501,153 100.0% 358,161 100.0% Allowance for loan losses (10,981) Net loans $1,239,808 (8,351) $ 945,508 (5,800) $ 726,626 (5,426) $ 495,727 (5,833) $ 352,328 The Company continued to experience strong loan growth as total loans rose to $1.3 billion as of December 31, 2016, an increase of $296.9 million, or 31.1%, compared to December 31, 2015. Driving this growth was sustained production in single tenant lease financing with balances increasing $232.2 million, or 62.0%, during 2016 as market conditions for this product remained favorable and the Company expanded its relationships with borrowers and financing partners. Additionally, other consumer loans increased $65.1 million, or 60.1%, during 2016 due to the Company’s recent initiative in financing home improvement loans as well as increased originations in horse trailer and recreational vehicle loans. 30 Owner-occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Total commercial loans 833,145 Consumer loans Home equity Other consumer Total consumer loans Total commercial and consumer loans Net deferred loan origination costs and premiums and discounts on purchased loans 20.2% 3.2% 0.0% 30.9% 31.0% 1.8% 35.3% 68.1% Loan Maturities and Rate Sensitivity The following table shows the contractual maturity distribution intervals of the outstanding loans in our portfolio as of December 31, 2016. (amounts in thousands) Commercial loans Within 1 Year 1-3 Years 4-5 Years Beyond 5 Years Total Commercial and industrial $ 24,596 $ 26,056 $ 32,352 $ 19,433 $ 102,437 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 1,158 2,635 26,121 350 54,860 18,049 — 1,569 19,618 10,621 3,556 23,696 40,689 104,618 1,599 167 6,817 8,583 18,917 209 — 116,945 168,423 840 183 30,053 31,076 26,972 6,781 3,474 448,584 505,244 185,066 34,686 135,010 354,762 57,668 13,181 53,291 606,568 833,145 205,554 35,036 173,449 414,039 Total commercial and consumer loans $ 74,478 $ 113,201 $ 199,499 $ 860,006 $ 1,247,184 The following table shows the rate sensitivity of the outstanding loans in our portfolio by the contractual maturity distribution intervals as of December 31, 2016. (amounts in thousands) Predetermined rates Variable rate Total commercial and consumer loans Within 1 Year 1-3 Years 4-5 Years Beyond 5 Years Total $ $ 26,273 $ 79,551 $ 189,956 $ 676,775 $ 48,205 33,650 9,543 183,231 972,555 274,629 74,478 $ 113,201 $ 199,499 $ 860,006 $ 1,247,184 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 lending experience and product type. 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, 2016 was $26.0 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: 2016 2015 2014 2013 2012 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 — $ — 1,024 59 1,083 1,083 — — — — — $ — 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 Total nonperforming loans 1,083 167 296 1,852 4,377 Other real estate owned Investor commercial real estate Residential mortgage Total other real estate owned Other nonperforming assets 4,488 45 4,533 85 4,488 — 4,488 85 4,488 — 4,488 82 4,013 368 4,381 956 3,401 265 3,666 2,253 Total nonperforming assets $ 5,701 $ 4,740 $ 4,866 $ 7,189 $ 10,296 Total nonperforming loans to total loans Total nonperforming assets to total assets 0.09% 0.31% 0.02% 0.37% 0.04% 0.50% 0.37% 0.90% 1.23% 1.62% 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 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. 32 Troubled Debt Restructurings (amounts in thousands) 2016 2015 2014 2013 2012 Troubled debt restructurings – nonaccrual Troubled debt restructurings – performing Total troubled debt restructurings $ $ — $ 757 757 $ — $ 1,115 1,115 $ 5 1,125 1,130 $ $ 27 1,243 1,270 $ $ 558 1,412 1,970 December 31, The increase in total nonperforming assets was due primarily to an increase in nonaccrual residential mortgage loans. Total nonperforming loans increased $0.9 million, or 548.5%, to $1.1 million as of December 31, 2016 compared to $0.2 million as of December 31, 2015. As a result of the increase in nonperforming loans, the ratio of nonperforming loans to total loans increased to 0.09% as of December 31, 2016 compared to 0.02% as of December 31, 2015. While total nonperforming assets increased year-over-year, the pace of total asset growth was higher and, as a result, the ratio of nonperforming assets to total assets improved to 0.31% as of December 31, 2016 compared to 0.37% as of December 31, 2015. As of December 31, 2016 and December 31, 2015, the Company had one commercial property in other real estate owned with a carrying value of $4.5 million. This balance primarily consists of a property with 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. As of December 31, 2016, the Company also had one residential property in other real estate owned with a carrying value of less than $0.1 million. Allowance for Loan Losses (amounts in thousands) Balance, beginning of period Provision charged to expense Losses charged off Commercial and industrial Owner-occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Residential mortgage Home equity Other consumer Total losses charged off Recoveries Commercial and industrial Owner-occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Residential mortgage Home equity Other consumer Total recoveries 2016 2015 2014 2013 2012 December 31, $ 8,351 $ 5,800 $ 5,426 $ 5,833 $ 4,330 1,946 (1,582) — — — — (134) (33) (440) (2,189) 187 — — — — 30 13 259 489 — — — — — (185) — (451) (636) — — 500 — — 407 1 333 1,241 349 (14) — — — — (247) — (596) (857) — — 460 — — 38 — 384 882 324 — — (238) — — (164) — (810) (1,212) 70 — — — — 98 — 313 481 5,656 2,852 — — (1,464) — — (406) (103) (1,438) (3,411) 75 — — 1 — 43 104 513 736 Balance, end of period $ 10,981 $ 8,351 $ 5,800 $ 5,426 $ 5,833 The determination of the allowance for loan losses and the related provision for loan losses are components of our significant accounting policies as discussed within Note 1 to the consolidated financial statements. The adequacy of the ALLL and the provision are based on the review and evaluation of the loan portfolio and reflect management’s assessment of the risks and potential losses within the portfolio. This evaluation considers historical loss experience as well as qualitative factors such as economic and business conditions, portfolio growth, concentrations of credit in the portfolio, trends in risk grades and delinquencies within the portfolio and changes in our lending policies and practices. 33 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 $11.0 million as of December 31, 2016, compared to $8.4 million as of December 31, 2015. The increase of $2.6 million, or 31.5%, was due primarily to the continued growth in commercial loan balances. During the twelve months ended December 31, 2016, the Company recorded net charge offs of $1.7 million, compared to net recoveries of $0.6 million during the twelve months ended December 31, 2015. During the twelve months ended December 31, 2016, the net charge offs were driven primarily by a $1.6 million charge off of a single commercial and industrial loan. The charge offs were partially offset by recoveries of $0.5 million, primarily related to the commercial and industrial loan that was charged off and other consumer loans. 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. The allowance for loan losses as a percentage of total loans remained stable at 0.88% as of December 31, 2016 compared to December 31, 2015, and decreased as a percentage of nonperforming loans to 1,013.9% as of December 31, 2016, from to 5,000.6% as of December 31, 2015. 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. 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 security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary. As of December 31, 2016, the unrealized losses in the Company’s investment securities portfolio were due primarily 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, 2016, the Company did not have any investment securities of a single issuer that exceeded 10% of shareholders’ equity. The term "issuer" excludes the U.S. Government and its sponsored agencies and corporations. 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 2016 2015 2014 2013 2012 December 31, U.S. Government-sponsored agencies $ 92,599 $ 38,093 $ 13,680 $ 57,569 $ Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Other securities Total securities available-for-sale Securities held-to-maturity Municipal securities Corporate securities Total securities held-to-maturity 97,647 238,354 19,470 20,000 3,000 471,070 10,171 6,500 16,671 21,091 113,948 19,444 20,000 3,000 215,576 — — — — 117,134 4,913 — 2,000 137,727 — — — 46,126 76,371 — — 5,025 185,091 — — — 18,666 39,999 78,478 — — 16,753 153,896 — — — Total securities $ 487,741 $ 215,576 $ 137,727 $ 185,091 $ 153,896 34 Approximate Fair Value Securities available-for-sale 2016 2015 2014 2013 2012 December 31, U.S. Government-sponsored agencies $ 91,896 $ 37,750 $ 13,552 $ 56,277 $ Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Other securities Total securities available-for-sale Securities held-to-maturity Municipal securities Corporate securities Total securities held-to-maturity 91,886 231,641 19,534 18,811 2,932 456,700 9,673 6,524 16,197 21,469 113,052 19,361 19,087 2,979 213,698 — — — — 117,048 4,912 — 2,006 137,518 — — — 46,323 75,173 — — 3,636 181,409 — — — 19,618 42,540 79,942 — — 14,593 156,693 — — — Total securities $ 472,897 $ 213,698 $ 137,518 $ 181,409 $ 156,693 The approximate fair value of investment securities available-for-sale increased $243.0 million, or 113.7%, to $456.7 million as of December 31, 2016 compared to $213.7 million as of December 31, 2015. The increase was due primarily to increases of $118.6 million in mortgage-backed securities, $70.4 million in municipal securities, $54.1 million in U.S. Government-sponsored agencies and $0.2 million in asset-backed securities, partially offset by a decrease of $0.3 million in corporate securities. The increases were primarily a result of investment purchases during the twelve months ended December 31, 2016, as the Company deployed funds generated through deposit growth to further diversify the securities portfolio and enhance net interest income, while supporting liquidity and interest rate risk management. As of December 31, 2016, the Company had securities with an amortized cost basis of $16.7 million designated as held-to-maturity, reflecting additional investment purchases made during 2016. 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, 2016. 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: U.S. Government- sponsored agencies Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Total securities 1 $ $ — — — — — — 0.00% $ 1,067 (0.40)% $ 21,131 2.22% $ 70,401 1.87% $ 92,599 0.00% 0.00% 0.00% 0.00% — 0.00 % 10,071 2.30% 97,747 2.92% 107,818 — 0.00 % — 0.00 % — 0.00 % 1,004 19,470 16,500 2.43% 3.07% 4.34% 237,350 — 10,000 2.33% 0.00% 4.00% 238,354 19,470 26,500 0.00% $ 1,067 (0.40)% $ 68,176 2.99% $ 415,498 2.43% $ 484,741 1.92% 2.86% 2.33% 3.07% 4.21% 2.51% ___________________________________ 1 A $3.0 million investment security has been excluded from this table because the security does not have a maturity date. 35 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) 2016 2015 December 31, 2014 2013 2012 Noninterest-bearing deposits $ 31,166 2.1% $ 23,700 2.5% $ 21,790 2.9% $ 19,386 2.9% $ 13,187 2.5% Interest-bearing demand deposits Regular savings accounts Money market accounts Certificates of deposits Brokered deposits 93,074 27,955 340,240 964,819 5,613 6.4% 1.9% 23.3% 65.9% 0.4% 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 18,311 13.9% 2.2% 38.1% 39.9% 3.4% Total $1,462,867 100.0% $ 956,054 100.0% $ 758,598 100.0% $ 673,095 100.0% $ 530,671 100.0% Total deposits increased $506.8 million, or 53.0%, to $1.5 billion as of December 31, 2016 as compared to $956.1 million as of December 31, 2015. During 2016, the Company determined to enhance both balance sheet liquidity and asset sensitivity through strategies to increase term deposit funding, resulting in growth in certificates of deposit of $494.1 million, or 105.0%. The increase in total deposits was also supplemented by growth in interest-bearing demand deposits, noninterest-bearing deposits and savings accounts. 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, 2016 $ $ 38,165 762,383 164,271 3,084 2,529 970,432 Time Deposit Maturities at December 31, 2016 (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 $ 38,165 $ — $ — $ — $ 346,365 212,378 95 3,084 — — — 2,529 26,385 4,028 — — 177,255 160,148 — — 38,165 762,383 164,271 3,084 2,529 3.9% 78.6% 16.9% 0.3% 0.3% $ 387,709 $ 214,907 $ 30,413 $ 337,403 $ 970,432 100.0% 36 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, 2016 $ $ 95,692 79,632 357,772 313,677 846,773 Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may use short term advances from the FHLB to manage liquidity needs and longer term advances to supplement balance sheet growth and manage interest rate risk. 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 Weighted average interest rate at end of period Weighted average interest rate during period Liquidity and Capital Resources At or for the Twelve Months Ended December 31, 2016 2015 2014 $ 189,981 $ 190,957 $ 164,606 197,980 134,689 190,957 106,897 42,597 106,897 1.21% 1.20% 0.81% 1.09% 1.58% 2.23% 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, 2016, on a consolidated basis, the Company had $496.4 million in cash and cash equivalents, interest-bearing time deposits and investment securities available-for-sale and $27.1 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, 2016, the Bank had the ability to borrow an additional $273.6 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, 2016, the Company, on an unconsolidated basis, had $29.4 million in cash generally available for its cash needs. 37 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, 2016, approved outstanding loan commitments, including unused lines of credit, amounted to $132.5 million. Certificates of deposit scheduled to mature in one year or less at December 31, 2016 totaled $387.7 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. Effective February 21, 2017, the Company entered into a Fourth Acknowledgment, Confirmation and Amendment that, among other things, replaced the principal amount of the loan with $3.6 million and extended the maturity of the loan to March 6, 2020. 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. 38 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 the ratio of 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 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2016 153,942 (4,687) 149,255 1,854,335 (4,687) 1,849,648 6,478,050 23.76 (0.72) 23.04 8.30 % (0.23)% 8.07 % 124,023 (4,687) 119,336 9.74 % 0.38 % 10.12 % 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 % 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. 39 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, 2016 and December 31, 2015, we had commitments to sell residential real estate loans of $61.0 million and $42.7 million, respectively. These contracts mature in less than one year. 40 Contractual Obligations The following table presents significant fixed and determinable contractual obligations and significant commitments as of December 31, 2016. Further discussion of each obligation or commitment is included in the referenced note to the consolidated financial statements. (dollars in thousands) Deposits without stated maturity1 Certificates of deposits and brokered deposits1 FHLB advances1 Subordinated debt1 Operating lease commitments Total contractual obligations 1 Amounts do not include associated interest payments. Payments Due In Note Reference Less than 1 year 1-3 years 3-5 years More than 5 years Total 7 7 8 9 14 $ 492,435 $ — $ — $ 387,709 42,000 — 720 245,320 33,000 — 1,480 337,403 90,000 3,000 1,075 — $ — 25,000 33,578 344 492,435 970,432 190,000 36,578 3,619 $ 922,864 $ 279,800 $ 431,478 $ 58,922 $ 1,693,064 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, 2016, 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 0.68% 2.16% 0.50 % (7.26)% 1.31 % (14.99)% ___________________________________ 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. 41 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. 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, 2016. 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, 2016. 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, 2016, 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, 2016 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, 2016, that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. 42 PART III Certain information required by Part III is incorporated by reference from our definitive Proxy Statement for our 2017 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, 2016. 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 Nicole S. Lorch C. Charles Perfetti Age 63 47 42 72 Position Chairman, President, Chief Executive Officer and Director Executive Vice President and Chief Financial Officer Executive Vice President and Chief Operating Officer Executive Vice President and Secretary David B. Becker has served as our Chairman of the Board since 2006 and as our President and Chief Executive Officer 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 has served as Executive Vice President and Chief Financial Officer of the Company since January 2017. Mr. Lovik joined the Company in August 2014 as Senior Vice President and Chief Financial Officer. 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 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 2008. Nicole S. Lorch has served as Executive Vice President and Chief Operating Officer since January 2017. Ms. Lorch joined the Company as Director of Marketing in 1999 and served as Vice President, Marketing & Technology from 2003 to 2011 and Senior Vice President, Retail Banking from 2011 to January 2017. She previously served as Director of Marketing at Virtual Financial Services, an online banking services provider, from 1996 to 1999. C. Charles Perfetti has served as Executive Vice President since January 2017 and Secretary since May 2014. He previously served as Senior Vice President from 2012 until January 2017. 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. 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. 43 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.” 44 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. Exhibit No. 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 Description Articles of Incorporation of First Internet Bancorp (incorporated by reference to Exhibit 3.1 to registration statement filed 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) Subordinated Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to current report on Form 8-K filed on September 30, 2016) First Supplemental Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to current report on Form 8- K filed on September 30, 2016) Form of Global Note representing 6.0% Subordinated Notes due 2026 (incorporated by reference to Exhibit A included in Exhibit 4.2 to current report on Form 8-K filed on September 30, 2016) 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 10.5 10.6 10.7 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)* 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) Second Amendment to Office Lease dated as of July 1, 2016, by and between First Internet Bancorp and First Internet Bank of Indiana (incorporated by reference to Exhibit 10.2 to quarterly report on Form 10-Q filed August 2, 2016) 10.8 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) 10.9 10.10 Subordinated Debenture dated June 28, 2013 (incorporated by reference to Exhibit 10.2 to current report on Form 8-K filed July 5, 2013) 2016 Senior Executive Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to quarterly report on Form 10-Q filed May 4, 2016)* 45 Exhibit No. 10.11 Description Form of Director Restricted Stock Units under 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to quarterly report on Form 10-Q filed May 4, 2016)* 10.12 10.13 10.14 10.15 21.1 23.1 24.1 31.1 31.2 32.1 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE 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 (incorporated by reference to Exhibit 10.15 to current report on Form 10-K filed March 10, 2016) Fourth Acknowledgment, Confirmation and Amendment between First Internet Bank of Indiana and First Internet Bancorp executed February 21, 2017 Sales Agency Agreement, dated as of May 6, 2016, among First Internet Bancorp, First Internet Bank of Indiana and Sandler O’Neill & Partners, L.P. (incorporated by reference to Exhibit 1.1 to current report on Form 8-K filed May 6, 2016) List of Subsidiaries 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 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. Item 16. Form 10-K Summary. None. 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 14, 2017. 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 14, 2017. /s/ David B. Becker David B. Becker, Chairman, President, Chief Executive Officer and Director (Principal Executive Officer) * John K. Keach, Jr., Director * Ann D. Murtlow, Director * Jerry Williams, Director _____________________________ /s/ Kenneth J. Lovik Kenneth J. Lovik, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) * David R. Lovejoy, 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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, 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, 2016, 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 14, 2017, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. /s/ BKD, LLP Indianapolis, Indiana March 14, 2017 F-1 Reports of Independent Registered Public Accounting Firm 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, 2016, 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, 2016, 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 14, 2017, expressed an unqualified opinion thereon. /s/ BKD, LLP Indianapolis, Indiana March 14, 2017 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 $471,070 in 2016 and $215,576 in 2015) Securities held-to-maturity - at amortized cost (fair value of $16,197 in 2016 and $0 in 2015) Loans held-for-sale (includes $27,101 in 2016 and $24,065 in 2015 at fair value) Loans Allowance for loan losses Net loans 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 $1,422 in 2016 and $276 in 2015 Accrued interest payable Accrued expenses and other liabilities Total liabilities Commitments and Contingencies Shareholders’ equity December 31, 2016 2015 $ 2,282 $ 37,170 39,452 250 456,700 16,671 27,101 1,250,789 (10,981) 1,239,808 6,708 8,910 24,195 10,044 4,687 4,533 15,276 1,063 24,089 25,152 1,000 213,698 — 36,518 953,859 (8,351) 945,508 4,105 8,595 12,727 8,521 4,687 4,488 4,871 $ 1,854,335 $ 1,269,870 $ 31,166 $ 1,431,701 1,462,867 189,981 36,578 112 10,855 23,700 932,354 956,054 190,957 12,724 117 5,688 1,700,393 1,165,540 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; 6,478,050 in 2016 and 4,481,347 in 2015 shares issued and outstanding 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 119,506 72,559 — 43,704 (9,268) 153,942 — 32,980 (1,209) 104,330 $ 1,854,335 $ 1,269,870 See Notes to Consolidated Financial Statements F-3 First Internet Bancorp Consolidated Statements of Income (Amounts in thousands except share and per share data) Year Ended December 31, 2016 2015 2014 $ 49,054 $ 37,049 $ 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 Gain 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 7,326 1,856 663 58,899 15,853 3,357 19,210 39,689 4,330 35,359 818 12,398 177 (63) 747 3,728 312 358 41,447 8,755 1,939 10,694 30,753 1,946 28,807 764 9,000 — (34) 411 14,077 10,141 17,387 14,271 1,823 3,143 1,127 891 3,699 1,159 2,222 31,451 17,985 5,911 12,074 2.32 2.30 $ $ 1,756 2,374 1,016 631 2,768 643 1,824 25,283 13,665 4,736 8,929 1.97 1.96 $ $ 27,875 3,036 58 246 31,215 7,653 1,275 8,928 22,287 349 21,938 707 5,609 538 (78) 398 7,174 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 $ $ $ 5,211,209 5,239,082 4,528,528 4,554,219 4,497,007 4,507,995 0.24 $ 0.24 $ 0.24 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) Net unrealized holding gains (losses) on securities available-for-sale Reclassification adjustment for gains realized Net unrealized holding gains on securities available-for-sale for which an other- than-temporary impairment has been recognized in income Other comprehensive income (loss) before tax Income tax provision (benefit) Other comprehensive income (loss) - net of tax Comprehensive income Year Ended December 31, 2016 2015 2014 $ 12,074 $ 8,929 $ 4,324 (12,315) (177) — (12,492) (4,433) (8,059) (1,669) — — (1,669) (595) (1,074) $ 4,015 $ 7,855 $ 3,260 (538) 751 3,473 1,236 2,237 6,561 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 Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance, January 1, 2014 $ 71,378 $ 21,902 $ (2,372) $ 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 — — — 507 (71) (40) 4,324 — (1,080) — — Balance, December 31, 2014 $ 71,774 $ 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) 8,929 — (1,095) — — — Balance, December 31, 2015 $ 72,559 $ 32,980 $ Net income Other comprehensive loss Dividends declared ($0.24 per share) Net cash proceeds from common stock issuance 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 — — — 46,223 736 30 49 (91) 12,074 — (1,350) — — — — — — 2,237 — — — (135) $ — (1,074) — — — — (1,209) $ — (8,059) — — — — — — Balance, December 31, 2016 $ 119,506 $ 43,704 $ (9,268) $ See Notes to Consolidated Financial Statements 90,908 4,324 2,237 (1,080) 507 (71) (40) 96,785 8,929 (1,074) (1,095) 762 25 36 (38) 104,330 12,074 (8,059) (1,350) 46,223 736 30 49 (91) 153,942 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 Gain 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 purchases Net change in interest-bearing deposits Bank owned life insurance purchased 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 securities held-to-maturity 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 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 increase (decrease) 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 Capital committed to Small Business Investment Company fund, not contributed Year Ended December 31, 2016 2015 2014 $ 12,074 $ 8,929 $ 4,324 3,799 (468) 4,330 736 (177) (598,439) 619,818 (12,462) 500 (436) 3,544 (7,390) 1,041 26,470 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 (247,957) (220,828) (124,696) 750 (11,000) — 42,616 49,430 (349,683) (16,672) (315) (3,173) (50,718) (586,722) 506,813 (1,199) 23,757 46,223 157,000 (158,000) (42) 574,552 14,300 25,152 39,452 19,215 5,894 45 388 4,000 $ $ 1,000 — — 21,759 — 500 — 235 21,254 137,816 (100,335) (112,000) — (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 — $ $ 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 loan losses and income taxes and valuation and impairments of investment securities and goodwill, as well as fair value measurements of derivatives 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. 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, 2016 or 2015. 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 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 (“ALLL”), 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 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 sixteen quarters. 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. 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 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 The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down 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 is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest. 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. 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. 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. 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, 2016 or December 31, 2015. 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. With few exceptions, the Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years before 2013. 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. F-13 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) 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 Share-based Compensation Year Ended December 31, 2016 2015 2014 12,074 5,211,209 2.32 $ $ 8,929 4,528,528 1.97 $ $ 4,324 4,497,007 0.96 12,074 $ 8,929 $ 4,324 5,211,209 4,528,528 4,497,007 11,026 16,847 10,665 15,026 2,895 8,093 5,239,082 4,554,219 4,507,995 2.30 $ 1.96 $ 0.96 — — — $ $ $ $ The Company has a share-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. 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. F-14 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) 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 2015 and 2014 financial statements to conform to the 2016 financial statement presentation. These reclassifications had no effect on net income. Note 2: Cash and Cash Equivalents At December 31, 2016, the Company’s interest-bearing cash accounts at other institutions did not exceed the limits for full FDIC insurance coverage. However, approximately $0.6 million and $36.6 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, 2016 was $0.6 million. Note 3: Securities The following tables summarize securities available-for-sale and securities held-to-maturity as of December 31, 2016 and 2015. There were no securities held-to-maturity as of December 31, 2015. Amortized Cost December 31, 2016 Gross Unrealized Gains Losses Fair Value Securities available-for-sale U.S. Government-sponsored agencies $ 92,599 $ 167 $ (870) $ Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Other securities Total available-for-sale Securities held-to-maturity Municipal securities Corporate securities Total held-to-maturity 97,647 238,354 19,470 20,000 3,000 85 — 65 — — (5,846) (6,713) (1) (1,189) (68) 91,896 91,886 231,641 19,534 18,811 2,932 $ 471,070 $ 317 $ (14,687) $ 456,700 Amortized Cost December 31, 2016 Gross Unrealized Gains Losses Fair Value $ $ 10,171 6,500 16,671 $ $ — $ 24 24 $ (498) $ — (498) 9,673 6,524 16,197 F-15 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Amortized Cost December 31, 2015 Gross Unrealized Gains Losses Fair Value Securities available-for-sale U.S. Government-sponsored agencies $ 38,093 $ Municipals Mortgage-backed securities Asset-backed securities Corporate 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 The carrying value of securities at December 31, 2016 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 Total Five to ten years After ten years Total Available-for-Sale Amortized Cost Fair Value $ — $ 1,067 38,336 170,843 210,246 238,354 19,470 3,000 — 1,035 37,401 164,157 202,593 231,641 19,534 2,932 $ 471,070 $ 456,700 Held-to-Maturity Amortized Cost Fair Value $ $ 9,366 7,305 16,671 $ $ 9,259 6,938 16,197 Gross realized gains of $0.2 million, $0.0 million, and $2.7 million and gross realized losses of $0.0 million, $0.0 million, and $2.2 million resulting from sales of available-for-sale securities were recognized during the twelve months ended December 31, 2016, 2015, and 2014, respectively. As of December 31, 2016, the fair value of available-for-sale investment securities pledged as collateral was $342.3 million. The Company pledged the securities for various types of transactions, including FHLB advances and derivative financial instruments. F-16 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) 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, 2016 and 2015 was $422.9 million and $166.1 million, which is approximately 89% and 78%, respectively, of the Company’s available-for-sale and held-to-maturity 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. 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, 2016. 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, 2016. 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, 2016. 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, 2016 and 2015: December 31, 2016 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 $ 68,625 $ (840) $ 260 $ (30) $ 68,885 $ Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Other securities Total 86,424 231,641 — — 2,932 (5,846) (6,713) — — (68) — — 4,520 18,811 — — — (1) (1,189) — 86,424 231,641 4,520 18,811 2,932 (870) (5,846) (6,713) (1) (1,189) (68) $ 389,622 $ (13,467) $ 23,591 $ (1,220) $ 413,213 $ (14,687) F-17 Securities held-to-maturity Municipal securities Total First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) December 31, 2016 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ $ 9,673 9,673 $ $ (498) $ (498) $ — $ — $ — $ — $ 9,673 9,673 $ $ (498) (498) 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 $ Municipals Mortgage-backed securities Asset-backed securities Corporate securities Other securities Total 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) 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 years ended December 31, 2016 and 2015. Credit losses on debt securities held January 1, 2014 Realized losses related to OTTI Recoveries related to OTTI December 31, 2014 Accumulated Credit Losses $ 1,183 (1,139) (44) — F-18 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Amounts reclassified from accumulated other comprehensive loss and the affected line items in the consolidated statements of income during the years ended December 31, 2016, 2015 and 2014 were as follows: Amounts Reclassified from Accumulated Other Comprehensive Loss for the Year Ended December 31, 2016 2015 2014 Affected Line Item in the Statements of Income 177 177 63 $ — $ 538 Gain on sale of securities — — 538 191 Income before income taxes Income tax provision 114 $ — $ 347 Net Income Details About Accumulated Other Comprehensive Loss Components Unrealized gains and losses on securities available-for-sale Gain realized in earnings Total reclassified amount before tax Tax expense Total reclassifications out of accumulated other comprehensive loss $ $ Note 4: Loans 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 December 31, 2016 2015 $ 102,437 $ 102,000 57,668 13,181 53,291 606,568 833,145 205,554 35,036 173,449 414,039 1,247,184 3,605 1,250,789 (10,981) 44,462 16,184 45,898 374,344 582,888 214,559 43,279 108,312 366,150 949,038 4,821 953,859 (8,351) $ 1,239,808 $ 945,508 Total commercial and consumer loans Net deferred loan origination costs and premiums and discounts on purchased loans Total loans Allowance for loan losses Net loans The risk characteristics of each loan portfolio segment are as follows: Commercial and Industrial: Commercial and industrial loans’ sources of repayment are 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 segment is generally concentrated in the Central Indiana and greater Phoenix, Arizona markets and its loans often times are secured by manufacturing and service facilities, as well as office buildings. F-19 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) 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 segment generally 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 mitigate these additional risks. 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 portfolio segments, 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 segment 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, home improvement 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. F-20 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables present changes in the balance of the allowance for loan losses during the twelve months ended December 31, 2016, 2015, and 2014. Twelve Months Ended December 31, 2016 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 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 $ 1,367 $ 476 $ 212 $ 500 $ 3,931 $ 896 $ 125 $ 844 $ 8,351 1,380 (1,582) 187 106 — — (44) — — 44 — — 2,317 — — (38) (134) 30 (3) (33) 13 568 4,330 (440) 259 (2,189) 489 $ 1,352 $ 582 $ 168 $ 544 $ 6,248 $ 754 $ 102 $ 1,231 $ 10,981 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 $ 920 $ 345 $ 261 $ 330 $ 2,061 $ 985 $ 207 $ 691 $ 5,800 447 — — 131 — — (549) 170 1,870 (311) (83) 271 1,946 — 500 — — — — (185) 407 — 1 (451) 333 (636) 1,241 $ 1,367 $ 476 $ 212 $ 500 $ 3,931 $ 896 $ 125 $ 844 $ 8,351 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 (596) 384 349 (857) 882 $ 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 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, 2016 and 2015. Commercial and industrial Owner- occupied commercial real estate Investor commercial real estate Single tenant lease financing Construction December 31, 2016 Residential mortgage Home equity Other consumer Total Loans: Ending balance: collectively evaluated for impairment Ending balance: individually evaluated for impairment $ 102,437 $ 57,668 $ 13,181 $ 53,291 $ 606,568 $ 203,842 $ 35,036 $ 173,321 $ 1,245,344 — — — — — 1,712 — 128 1,840 Ending balance $ 102,437 $ 57,668 $ 13,181 $ 53,291 $ 606,568 $ 205,554 $ 35,036 $ 173,449 $ 1,247,184 Allowance for loan losses: Ending balance: collectively evaluated for impairment Ending balance: individually evaluated for impairment $ 1,352 $ 582 $ 168 $ 544 $ 6,248 $ 754 $ 102 $ 1,231 $ 10,981 — — — — — — — — — Ending balance $ 1,352 $ 582 $ 168 $ 544 $ 6,248 $ 754 $ 102 $ 1,231 $ 10,981 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 F-22 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. In the third quarter 2016, the Company updated its risk grading matrix to improve precision within the “Pass” risk grades. Commercial loans are now graded on a scale of 1 to 10, whereas commercial loans were previously graded on a scale of 1 to 9. This update to the risk grading matrix did not have an impact on the ALLL. The following table illustrates the risk ratings utilized as of December 31, 2016 and December 31, 2015. Rating Pass Special Mention Substandard Doubtful Loss December 31, 2016 December 31, 2015 Grade 1-6 Grade 7 Grade 8 Grade 9 Grade 10 Grade 1-5 Grade 6 Grade 7 Grade 8 Grade 9 A description of the general characteristics of the ten risk grades is as follows: • • • • • “Pass” - Higher quality loans that do not fit any of the other categories described below. “Special Mention” - Loans that possess some credit deficiency or potential weakness which deserve close attention. “Substandard” - 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” - 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” - 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, 2016 and 2015. Commercial and industrial Owner- occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Total December 31, 2016 Rating: 1-6 Pass 7 Special Mention 8 Substandard Total Performing Nonaccrual Total $ $ $ $ 99,200 $ 57,657 $ 13,181 $ 53,291 $ 605,190 $ 828,519 2,746 491 — 11 — — — — 1,378 — 4,124 502 102,437 $ 57,668 $ 13,181 $ 53,291 $ 606,568 $ 833,145 Residential mortgage Home equity Other consumer Total December 31, 2016 204,530 1,024 205,554 $ $ 35,036 — 35,036 $ $ 173,390 59 173,449 $ $ 412,956 1,083 414,039 F-23 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, 2015 Rating: 1-5 Pass 6 Special Mention 7 Substandard 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 The following tables present the Company’s loan portfolio delinquency analysis as of December 31, 2016 and 2015. December 31, 2016 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 $ 27 $ — $ — $ 27 $ 102,410 $ 102,437 $ — $ Owner-occupied commercial real estate Investor commercial real estate Construction Single tenant lease financing Residential mortgage Home equity Other consumer Total $ — — — — — — 173 200 — — — — 347 — 91 — — — — 991 — 25 — — — — 1,338 — 289 57,668 13,181 53,291 606,568 204,216 35,036 173,160 57,668 13,181 53,291 606,568 205,554 35,036 173,449 — — — — 1,024 — 59 $ 438 $ 1,016 $ 1,654 $ 1,245,530 $ 1,247,184 $ 1,083 $ — — — — — — — — — 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 $ — — — — 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 $ — — — — 45 — — 45 $ F-24 — — — — — — — — — 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, 2016 and 2015. There were no impaired loans with a specific valuation allowance as of December 31, 2016 and 2015. December 31, 2016 December 31, 2015 Recorded Balance Unpaid Principal Balance Specific Allowance Recorded Balance Unpaid Principal Balance Specific Allowance Loans without a specific valuation allowance Residential mortgage Other consumer Total impaired loans $ $ 1,712 128 1,840 $ $ 1,824 184 2,008 $ $ — $ — — $ 1,133 149 1,282 $ $ 1,154 178 1,332 $ $ — — — The table below presents average balances and interest income recognized for impaired loans during the twelve months ended December 31, 2016, 2015, and 2014. Twelve Months Ended December 31, 2016 December 31, 2015 December 31, 2014 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 Commercial and industrial Residential mortgage Other consumer Total Total impaired loans 1,595 149 1,744 1,084 — — 1,084 $ 2,828 $ 8 5 13 — — — — 13 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 78 $ 1,354 $ 27 $ 2,352 $ As of December 31, 2016 and December 31, 2015, the Company had less than $0.1 million and $0.0 million, respectively, in residential mortgage other real estate owned. There were $1.0 million and less than $0.1 million of loans at December 31, 2016 and December 31, 2015, respectively, in the process of foreclosure. Note 5: Premises and Equipment The following table summarizes premises and equipment at December 31, 2016 and 2015. Land Building and improvements Furniture and equipment Less: accumulated depreciation December 31, 2016 2015 $ $ 2,500 $ 5,441 7,079 (4,976) 10,044 $ 2,500 4,636 6,164 (4,779) 8,521 F-25 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 6: Goodwill As of December 31, 2016 and 2015, the carrying amount of goodwill was $4.7 million. There have been no changes in the carrying amount of goodwill for the three years ended December 31, 2016, 2015, and 2014. 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, 2016 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, 2016 and 2015. 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 and brokered deposits in the amount of $250 or more December 31, 2016 2015 $ 31,166 $ 93,074 27,955 340,240 964,819 5,613 1,462,867 301,191 $ $ $ $ 23,700 84,241 22,808 341,732 470,736 12,837 956,054 117,335 The following table presents scheduled certificates of deposits and brokered deposits maturities by year as of December 31, 2016. 2017 2018 2019 2020 2021 Thereafter Note 8: FHLB Advances $ 387,709 214,907 30,413 57,229 280,174 — $ 970,432 The Company had outstanding FHLB advances of $190.0 million and $191.0 million as of December 31, 2016 and 2015, respectively. As of December 31, 2016, the interest rates on the Company’s outstanding FHLB advances ranged from 0.74% to 4.22%, with a weighted average interest rate of 1.21%. 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 $166.4 million and $186.4 million as of December 31, 2016 and 2015, respectively, and the fair value of investment securities pledged to the FHLB was approximately $340.6 million and $148.7 million as of December 31, 2016 and 2015, respectively. F-26 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The Company’s FHLB advances are scheduled to mature according to the following schedule: 2017 2018 2019 2020 2021 Thereafter Deferred prepayment penalties on advance restructure $ Amount 42,000 3,000 30,000 50,000 40,000 25,000 190,000 (19) $ 189,981 As of December 31, 2016 and 2015, the Company had a $50.0 million option-embedded advance that is scheduled to mature on April 17, 2020. The advance converted 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. Subsequent to December 31, 2016, the FHLB elected to exercise the option to put the advance back to the Company. As a result, the Company refinanced the advance with another borrowing with the FHLB. As of December 31, 2016 and 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. As of December 31, 2016 and 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. As of December 31, 2016, the Company had a $10.0 million fixed rate advance that is scheduled to mature on February 19, 2026. The FHLB has a one-time option to put the advance on February 19, 2021. 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 “2021 Debenture”) in the principal amount of $3.0 million. The 2021 Debenture bears a fixed interest rate of 8.00% per year, payable quarterly, and is scheduled to mature on June 28, 2021. The 2021 Debenture may be repaid, without penalty, at any time after June 28, 2016. The 2021 Debenture is intended to qualify as Tier 2 capital under regulatory guidelines. F-27 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) In connection with the 2021 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 2021 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 entered into a term loan in the principal amount of $10.0 million, evidenced by a term note due 2025 (the “2025 Note”). The 2025 Note bears a fixed interest rate of 6.4375% per year, payable quarterly, and is scheduled to mature on October 1, 2025. The 2025 Note is an unsecured subordinated obligation of the Company and may be repaid, without penalty, on any interest payment date on or after October 15, 2020. The 2025 Note is intended to qualify as Tier 2 capital under regulatory guidelines. In September 2016, the Company issued $25.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2026 Notes”) in a public offering. The 2026 Notes initially bear a fixed interest rate of 6.00% per year to, but excluding September 30, 2021, and thereafter a floating rate equal to the then-current three- month LIBOR rate plus 485 basis points. All interest on the 2026 Notes is payable quarterly. The 2026 Notes are scheduled to mature on September 30, 2026. The 2026 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 30, 2021. The 2026 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The following table presents the principal balance and unamortized discount and debt issuance costs for the 2021 Debenture, the 2025 Note and the 2026 Notes as of December 31, 2016 and 2015. December 31, 2016 December 31, 2015 Principal 3,000 10,000 25,000 38,000 $ $ Unamortized Discount and Debt Issuance Costs — (210) (1,212) (1,422) Unamortized Discount and Debt Issuance Costs (42) (234) — (276) Principal 3,000 10,000 — 13,000 2021 Debenture 2025 Note 2026 Notes 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 $0.4 million in the twelve months ended December 31, 2016 and $0.3 million in each of the twelve months ended December 31, 2015, and 2014. F-28 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) 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. The Company recorded $0.7 million, $0.8 million, and $0.5 million of share-based compensation expense for the years ended December 31, 2016, 2015, and 2014, respectively, related to awards made under the 2013 Plan. The following table summarizes the status of the 2013 Plan awards as of December 31, 2016, and activity for the year ended December 31, 2016: 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, 2016 28,302 $ Granted Vested Forfeited 30,949 (9,470) — Nonvested at December 31, 2016 49,781 $ 18.90 25.62 18.92 — 23.07 27,529 $ 10,232 (21,431) — 16,330 $ 18.17 24.44 20.49 — 19.06 — $ 10 (10) — — $ — 24.20 24.20 — — As of December 31, 2016, the total unrecognized compensation cost related to nonvested awards was $0.8 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. F-29 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the year ended December 31, 2016. Outstanding, beginning of year Granted Exercised Outstanding, end of year Deferred Rights 81,693 684 — 82,377 All deferred stock rights granted during the 2016 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights. Note 11: Income Taxes The provision (benefit) for income taxes consists of the following: Current Deferred Total December 31, 2016 2015 2014 $ $ 2,367 3,544 5,911 $ $ 4,293 443 4,736 $ $ 3,655 (1,529) 2,126 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 and loans 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 and accrued payroll Loan origination costs Prepaid assets Other Total deferred tax assets, net F-30 December 31, 2016 2015 2014 $ 6,115 $ 4,646 $ 2,193 (635) 567 (159) 23 (132) 154 (137) 205 (31) 63 (132) 33 $ 5,911 $ 4,736 $ 2,126 December 31, 2016 2015 $ $ 4,269 $ 5,112 (5,994) (525) 1,234 (955) (276) 397 3,262 $ 2,980 670 (925) (573) 959 (704) (247) 204 2,364 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) 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, 2016 and 2015, and deemed the balances immaterial. Deposits from related parties held by the Company at December 31, 2016 and 2015 totaled $21.9 million and $9.8 million, respectively. 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 began on January 1, 2016 at the 0.625% level and will be phased 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-31 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, 2016 and 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, 2016 and 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, 2016: Common equity tier 1 capital to risk- weighted assets Consolidated Bank $ 158,479 11.54% $ 70,366 5.13% $ 96,110 162,617 11.88% 70,145 5.13% 95,807 7.00% 7.00% N/A 88,964 Tier 1 capital to risk-weighted assets Consolidated Bank 158,479 162,617 11.54% 11.88% 90,961 90,675 6.63% 116,705 8.50% N/A 6.63% 116,337 8.50% 109,494 N/A 6.50% N/A 8.00% Total capital to risk-weighted assets Consolidated Bank Leverage ratio Consolidated Bank 206,038 173,598 158,479 162,617 15.01% 118,421 8.63% 144,165 10.50% N/A N/A 12.68% 118,048 8.63% 143,711 10.50% 136,868 10.00% 8.65% 8.89% 73,311 73,186 4.00% 4.00% 73,311 73,186 4.00% 4.00% N/A 91,483 N/A 5.00% 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% F-32 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, 2016 and 2015, the Company had outstanding loan commitments totaling approximately $132.5 million and $131.9 million, respectively. As of December 31, 2016, 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 $0.6 million, $0.5 million, and $0.5 million for the years ended December 31, 2016, 2015, and 2014 respectively. Future minimum cash lease payments are as follows: 2017 2018 2019 2020 2021 Thereafter Total minimum payments required 1 1 Minimum payments have not been reduced by minimum sublease rentals of $2.0 million due in the future under noncancelable subleases. Amount $ 720 733 747 760 315 344 $ 3,619 In addition, the Company is a limited partner in a Small Business Investment Company fund (the “SBIC Fund”). As of December 31, 2016, the Company has committed to contribute up to $4.0 million of capital to the SBIC Fund. The Company did not have any commitments to contribute capital to the SBIC Fund as of December 31, 2015. 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. Available-for-Sale 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. F-33 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage and asset-backed 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 also on the investment securities’ relationship to other benchmark quoted investment securities. 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, 2016 or 2015. 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, 2016 and 2015. December 31, 2016 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 $ 91,896 $ — $ 91,896 $ Municipal securities Mortgage-backed securities Asset-backed securities Corporate securities Other securities 91,886 231,641 19,534 18,811 2,932 — — — — 2,932 91,886 231,641 19,534 18,811 — Total available-for-sale securities $ 456,700 $ 2,932 $ 453,768 $ Loans held-for-sale (mandatory pricing agreements) Forward contracts IRLCs 27,101 438 610 — 438 — 27,101 — — — — — — — — — — — 610 F-34 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) 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 $ Municipals 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 The following table reconciles 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, 2014 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 Total realized gains Included in net income Balance, December 31, 2016 Securities Available-for-Sale $ 1,673 $ (259) 1,333 (2,747) — — — — $ — $ Interest Rate Lock Commitments 79 442 — — 521 61 582 28 610 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. The amount of the impairment may be determined based on the fair value of the underlying collateral, less costs to sell, the estimated present value of future cash flows or the loan’s observable market price. F-35 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) If the impaired loan is identified as collateral dependent, the fair value of the underlying collateral, less costs to sell, is used to measure impairment. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is not collateral dependent, the Company utilizes a discounted cash flow analysis to measure impairment. Impaired loans with a specific valuation allowance based on the value of the underlying collateral or a discounted cash flow analysis are classified as Level 3 assets. There were no impaired loans that were measured at fair value on a nonrecurring basis at December 31, 2016 or 2015. 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, 2016 Valuation Technique Unobservable Inputs Range 610 Discounted cash flow Loan closing rates 43% - 99% Fair Value at December 31, 2015 Valuation Technique Unobservable Inputs Range 582 Discounted cash flow Loan closing rates 43% - 100% $ $ 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. Held-to-Maturity Securities Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, and interest rate spreads on relevant benchmark securities. Loans Held-For-Sale (best efforts pricing agreements) The fair value of these loans approximates carrying value. Loans The fair value of loans 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. F-36 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) 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. 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 publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining 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, 2016 and 2015. F-37 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables summarize the carrying value and estimated fair value of all financial assets and liabilities at December 31, 2016 and 2015: December 31, 2016 Fair Value Measurements Using Carrying Amount Fair Value Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents Interest-bearing time deposits Held-to-maturity securities Loans Accrued interest receivable Federal Home Loan Bank of Indianapolis stock Deposits Advances from Federal Home Loan Bank Subordinated debt Accrued interest payable $ 39,452 $ 39,452 $ 39,452 $ 250 16,671 250 16,197 1,250,789 1,244,918 6,708 8,910 6,708 8,910 1,462,867 1,441,794 189,981 36,578 112 186,258 38,425 112 250 — — 6,708 — 492,435 — 24,900 112 — $ — 16,197 — — 8,910 — 186,258 13,525 — — — — 1,244,918 — — 949,359 — — — December 31, 2015 Fair Value Measurements Using Carrying Amount Fair Value Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents Interest-bearing time deposits Loans held-for-sale (best efforts pricing agreements) Loans Accrued interest receivable Federal Home Loan Bank of Indianapolis stock Deposits Advances from Federal Home Loan Bank Subordinated debt Accrued interest payable $ 25,152 $ 25,152 $ 25,152 $ 1,000 1,000 1,000 — $ — 12,453 953,859 4,105 8,595 956,054 190,957 12,724 117 12,453 967,303 4,105 8,595 950,841 188,126 13,212 117 — — 4,105 — 472,481 — — 117 12,453 — — 8,595 — 188,126 13,212 — — — — 967,303 — — 478,360 — — — 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. F-38 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) During the years ended December 31, 2016, 2015, and 2014, the Company originated mortgage loans held-for-sale of $598.4 million, $502.7 million, and $409.7 million, respectively, and received $619.8 million, $509.4 million, and $409.5 million from the sale of mortgage loans, respectively, into the secondary market. The following table provides the components of income from mortgage banking activities for the years ended December 31, 2016, 2015, and 2014. Gain on loans sold Gain (loss) 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 Year Ended December 31, 2016 2015 2014 $ $ 12,462 $ 8,845 $ 5,048 (500) 436 (341) 496 751 (190) 12,398 $ 9,000 $ 5,609 F-39 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 17: 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 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. 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. The following table presents the notional amount and fair value of IRLCs and forward contracts utilized by the Company at December 31, 2016 and 2015. December 31, 2016 December 31, 2015 Notional Amount Fair Value Notional Amount Fair Value Asset Derivatives Derivatives not designated as hedging instruments IRLCs Forward contracts $ 36,311 $ 61,000 610 438 $ 28,444 $ 42,743 582 30 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. The following table summarizes the periodic changes in the fair value of the derivative financial instruments on the consolidated statements of income for the twelve months ended December 31, 2016, 2015, and 2014. Amount of gain / (loss) recognized in the twelve months ended December 31, 2016 December 31, 2015 December 31, 2014 Asset Derivatives Derivatives not designated as hedging instruments IRLCs Forward contracts Liability Derivatives Derivatives not designated as hedging instruments Forward contracts $ $ 28 $ 408 61 $ 435 442 — — $ — $ (632) F-40 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 18: Shareholders’ Equity In May 2016, the Company and the Bank entered into a Sales Agency Agreement with Sandler O’Neill & Partners, L.P. (“Sandler”) to sell shares (the “ATM Shares”) of the Company’s common stock having an aggregate gross sales price of up to $25.0 million, from time to time, through an “at-the-market” equity offering program (the “ATM Program”). The sales, if any, of the ATM Shares, may be made in sales deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on or through The NASDAQ Stock Market, or another market for the Company’s common stock, sales made to or through a market maker other than on an exchange or otherwise, in negotiated transactions at market prices prevailing at the time of sale or at negotiated prices, or as otherwise agreed with Sandler. Subject to the terms and conditions of the Sales Agency Agreement, upon its acceptance of written instructions from the Company, Sandler will use its commercially reasonable efforts to sell on the Company’s behalf all of the designated ATM Shares. The Sales Agency Agreement provides for the Company to pay Sandler a commission of up to 3.0% of the gross sales price per share sold through it as sales agent under the Sales Agency Agreement. The Company may also sell ATM Shares under the Sales Agency Agreement to Sandler, as principal for its own account, at a price per share agreed upon at the time of sale. Actual sales will depend on a variety of factors to be determined by the Company from time to time. The Company has no obligation to sell any of the ATM Shares under the Sales Agency Agreement, and may at any time suspend solicitation and offers under the Sales Agency Agreement. In addition, the Company has agreed to indemnify Sandler against certain liabilities on customary terms. The Company has sold a total of 139,811 ATM Shares through the ATM Program for gross proceeds of approximately $3.4 million. As of December 31, 2016, approximately $21.6 million remained available for sale under the ATM Program. In May 2016, the Company and the Bank separately entered into an Underwriting Agreement with Sandler, pursuant to which the Company sold an additional 895,955 shares of common stock at $24.00 per share, resulting in gross proceeds to the Company of $21.5 million. In December 2016, the Company and the Bank also entered into an Underwriting Agreement with Keefe, Bruyette & Woods, a Stifel Company, pursuant to which the Company sold 945,000 shares of common stock at $26.50 per share, resulting in gross proceeds to the Company of $25.0 million. The net proceeds to the Company from the above offerings after deducting underwriting discounts and commissions and offering expenses was $46.2 million. F-41 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 $1,422 in 2016 and $276 in 2015 Note payable to the Bank Accrued expenses and other liabilities Total liabilities Shareholders’ equity $ $ $ Year Ended December 31, 2016 2015 29,365 $ 158,080 6,852 1,488 6,860 107,925 5,793 750 195,785 $ 121,328 36,578 $ 4,000 1,265 41,843 12,724 4,000 274 16,998 153,942 104,330 Total liabilities and shareholders’ equity $ 195,785 $ 121,328 F-42 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, 2016 2015 2014 $ — $ — — $ — 1,557 344 871 291 235 643 425 930 200 174 — — 498 298 777 239 206 3,298 2,372 2,018 Loss before income tax and equity in undistributed net income of subsidiaries (3,298) (2,372) (2,018) Income tax benefit (1,224) (813) (756) Loss before equity in undistributed net income of subsidiaries (2,074) (1,559) (1,262) Equity in undistributed net income of subsidiaries 14,148 10,488 5,586 Net income $ 12,074 $ 8,929 $ 4,324 Condensed Statements of Comprehensive Income Net income Other comprehensive income (loss) Net unrealized holding gains (losses) on securities available-for-sale Reclassification adjustment for gains realized Net unrealized holding gains 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 Year Ended December 31, 2016 2015 2014 $ 12,074 $ 8,929 $ 4,324 (12,315) (177) — — (12,492) (4,433) (8,059) (1,669) — — — (1,669) (595) (1,074) $ 4,015 $ 7,855 $ 3,260 (538) 751 — 3,473 1,236 2,237 6,561 F-43 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, 2016 2015 2014 $ 12,074 $ 8,929 $ 4,324 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (14,148) (10,488) (5,586) Depreciation and amortization Share-based compensation expense Net change in other assets Net change in 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 Net proceeds from common stock issuance Other, net Net cash provided by (used in) financing activities 461 128 (696) 870 (1,311) 246 150 958 (275) (480) (43,500) (1,423) (44,923) (10,000) (1,407) (11,407) (1,199) 23,757 46,223 (42) 68,739 (1,093) 9,761 — 23 8,691 226 120 (641) (19) (1,576) (5,000) (160) (5,160) (1,080) — — (111) (1,191) Net increase (decrease) in cash and cash equivalents 22,505 (3,196) (7,927) Cash and cash equivalents at beginning of year 6,860 10,056 17,983 Cash and cash equivalents at end of year $ 29,365 $ 6,860 $ 10,056 F-44 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, 2016 September 30, 2016 June 30, 2016 March 31, 2016 $ 16,764 $ 15,471 $ 13,971 $ 12,693 5,860 10,904 256 10,648 2,891 8,158 5,381 1,671 5,133 10,338 2,204 8,134 4,898 8,413 4,619 1,521 4,665 9,306 924 8,382 3,748 7,875 4,255 1,421 3,710 $ 3,098 $ 2,834 $ 0.65 0.64 $ $ 0.55 0.55 $ $ 0.57 0.57 $ $ $ $ $ 3,552 9,141 946 8,195 2,540 7,005 3,730 1,298 2,432 0.54 0.53 Weighted average common shares outstanding Basic Diluted 5,722,615 5,761,931 5,597,867 5,622,181 4,972,759 4,992,025 4,541,728 4,575,555 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 F-45 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 (“Update”) 2014-09, Revenue from Contracts with Customers (Topic 606) (May 2014) The amendments in this Update clarify the principals for recognizing revenue and develop a common revenue standard among industries. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The entity should apply the amendments using one of two retrospective methods described in the amendment. Accounting Standard Update 2015-14, Revenue from Contracts with Customers (Topic 606) delayed the effective date for public entities to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Several subsequent amendments have been issued that provide clarifying guidance and are effective with the adoption of the original Update. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is in its preliminary stages of evaluating the impact of these amendments and currently cannot reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from the amendments. The Company is expecting to begin developing processes and procedures during 2017 to ensure it is fully compliant with the amendments at adoption date. 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 does not expect to early adopt and is currently in the process of fully evaluating the amendments on the consolidated financial statements and will subsequently implement updated processes and accounting policies as deemed necessary. The overall impact of the new standard on financial condition, results of operations and regulatory capital cannot yet be determined. Accounting Standards Update 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (March 2016) The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments in this Update clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be implemented using a modified retrospective method. Adoption of this Update is not expected to have a significant effect on the Company’s consolidated financial statements. F-46 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Accounting Standards Update 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting (March 2016) The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. For all business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, 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. Accounting Standards Update 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (March 2016) 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. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Below is a summary of simplifications for the current GAAP areas contained in this Update. • Accounting for Income Taxes: All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. • Classification of Excess Tax Benefits on the Statement of Cash Flows: Excess tax benefits should be classified along with other income tax cash flows as an operating activity. • Forfeitures: An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. • Minimum Statutory Tax Withholding Requirements: The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. • Classification of Employee Taxes Paid on the Statement of Cash Flows When an Employer Withholds Shares for Tax-Withholding Purposes: Cash paid by an employer when directly withholding shares for tax- withholding purposes should be classified as a financing activity. F-47 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. Adoption of this Update is not expected to have a significant effect on the Company’s consolidated financial statements. Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (June 2016) The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets that are not accounted for at fair value through net income. The amendments affect loans, debt securities, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this Update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. There is diversity in practice in applying the incurred loss methodology, which means that before transition some entities may be more aligned, under current GAAP, than others to the new measure of expected credit losses. The following describes the main provisions of this Update. • Assets Measured at Amortized Cost: The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. • Available-for-Sale Debt Securities: Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value. F-48 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the effective date of this Update. The Company does not expect to early adopt and is currently evaluating the impact of the amendments on the Company’s consolidated financial statements and cannot determine or reasonably quantify the impact of the adoption of the amendments due to the complexity and extensive changes. The Company is expecting to begin developing processes and procedures during the next two years to ensure it is fully compliant with the amendments at adoption date. Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (August 2016) Stakeholders indicated that there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This Update addresses specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The amendments in this Update provide guidance on the following specific cash flow issues: • Debt Prepayment or Debt Extinguishment Costs: Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows from financing activities. • Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing: At the settlement of zero- coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, the issuer should classify the portion of the cash payment attributable to the accreted interest related to the debt discount as cash outflows from operating activities, and the portion of the cash payment attributable to the principal as cash outflows for financing activities. • Proceeds from the Settlement of Insurance Claims: Cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage (that is, the nature of the loss). For insurance proceeds that are received in a lump sum settlement, an entity should determine the classification on the basis of the nature of each loss included in the settlement. • Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies: Cash proceeds received from the settlement of corporate-owned life insurance policies should be classified as cash inflows from investing activities. The cash payments for premiums on corporate-owned policies may be classified as cash outflows from investing activities, operating activities, or a combination of investing and operating activities. F-49 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) • Separately Identifiable Cash Flows and Application of the Predominance Principle: The classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in GAAP. In the absence of specific guidance, an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. An entity should then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. 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. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact of adopting this Update on the consolidated financial statements, but it is not expected to have a significant effect. Accounting Standards Update 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (October 2016) The FASB decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this Update do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The amendments in this Update align the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting Standards. For public business entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. The amendments in this Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of adopting this Update on the consolidated financial statements, but it is not expected to have a significant effect. Accounting Standards Update 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (January 2017) The amendments in this Update relate to disclosure of the impact of recently issued accounting standards. It is the SEC staff's view that a registrant should evaluate ASC updates that have not yet been adopted to determine the appropriate financial disclosures about the potential material effects of the updates on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact of an update, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. The staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies expected to be applied compared to current account policies. Also, the registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The Company adopted the amendments in this Update and appropriate disclosures have been included in this Note. F-50 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Accounting Standards Update 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (January 2017) The amendments in this Update are required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. An entity should apply the amendments in this Update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this Update. A public business entity that is a U.S. SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. During the current year, the Company performed its impairment assessment and determined that goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, does not anticipate the adoption of this Update to have a significant effect on the consolidated financial statements. F-51 EXHIBIT INDEX Exhibit No. 3.1 3.2 4.1 4.2 4.3 4.4 Description Articles of Incorporation of First Internet Bancorp 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 Subordinated Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee Method of Filing Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference 4.5 4.6 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 First Supplemental Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee Incorporated by Reference Form of Global Note representing 6.0% Subordinated Notes due 2026 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 Lease dated as of March 6, 2013, by and between First Internet Bancorp and First Internet Bank of Indiana First Amendment to Office Lease dated as of July 1, 2015, by and between First Internet Bancorp and First Internet Bank of Indiana Second Amendment to Office Lease dated as of July 1, 2016, by and between First Internet Bancorp and First Internet Bank of Indiana Subordinated Debenture Purchase Agreement with Community BanCapital, L.P., dated June 28, 2013 Subordinated Debenture dated June 28, 2013 2016 Senior Executive Cash Incentive Plan Form of Director Restricted Stock Units under 2013 Equity Incentive Plan Loan Agreement dated as of March 6, 2013, by and between the Company and the Bank 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 Fourth Acknowledgment, Confirmation and Amendment between First Internet Bank of Indiana and First Internet Bancorp executed February 21, 2017 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 Incorporated by Reference Incorporated by Reference Incorporated by Reference Incorporated by Reference Filed Electronically Sales Agency Agreement, dated as of May 6, 2016, among First Internet Bancorp, First Internet Bank of Indiana and Sandler O’Neill & Partners, L.P. Incorporated by Reference 21.1 23.1 24.1 31.1 31.2 32.1 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE List of Subsidiaries 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 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 Filed Electronically 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] Board of Directors of First Internet Bancorp Senior Management of First Internet Bank Shareholder Information DAVID B. BECKER DAVID B. BECKER* COMMON STOCK Chairman, President and Chief Executive Officer President and Chief Executive Officer DAVID R. LOVEJOY Vice Chairman Managing Director, Greycourt & Co. JOHN K. KEACH, JR. Private Investor Former Chairman, President and Chief Executive Officer, Indiana Community Bancorp ANN D. MURTLOW President and Chief Executive Officer United Way of Central Indiana RALPH R. WHITNEY, JR. Principal Hammond, Kennedy, Whitney & Co., Inc. JERRY WILLIAMS Private Investor Formerly of Counsel, Taft Stettinius & Hollister, LLP JEAN L. WOJTOWICZ President Cambridge Capital Management Corp. NICOLE S. LORCH* Executive Vice President and Chief Operating Officer KENNETH J. LOVIK* Executive Vice President and Chief Financial Officer C. CHARLES PERFETTI* First Internet Bancorp is listed on the NASDAQ Global Select Market under the symbol INBK CORPORATE HEADQUARTERS First Internet Bancorp 11201 USA Parkway Fishers, IN 46037 (317) 532-7900 www.firstinternetbancorp.com Executive Vice President and Corporate Secretary INVESTOR RELATIONS CONTACT TIMOTHY C. DUSING Senior Vice President, Public Finance STEPHEN C. FARRELL Senior Vice President, Chief Credit Officer and Credit Administrator MICHAEL E. LEWIS Senior Vice President, Commercial Real Estate Banking KEVIN B. QUINN Senior Vice President, Retail Lending ANNE M. SHARKEY Senior Vice President, Operations CONNIE J. SHEPHERD Senior Vice President, Commercial Banking *Denotes Executive Officer of First Internet Bancorp Paula Deemer (317) 428-4628 investors@firstib.com TRANSFER AGENT Computershare PO Box 30170 College Station, TX 77842 (800) 522-6645 www.computershare.com INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM BKD, LLP 201 North Illinois Street, Suite 700 Indianapolis, IN 46204 (317) 383-4000 LEGAL COUNSEL Faegre Baker Daniels, LLP 600 East 96th Street, Suite 600 Indianapolis, IN 46240 (317) 569-9600 F IR STINTERNET BANCORP.CO M

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