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.
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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
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**Reconciliation of Non-GAAP Financial
Measures on page 39 of the report
2012
2013
2014
2015
2016
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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.
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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.”
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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.”
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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
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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.
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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
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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:
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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;
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shareholder services information, including ways to contact our transfer agent; and
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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.
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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.
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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.
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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.
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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.
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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.
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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