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WHAT HAPPENS
WHEN YOU LET
YOURSELF DREAM?
11201 USA Parkway Fishers, IN 46037 | (317) 532-7900 | www.firstinternetbancorp.com
You can find First Internet Bank on these social media feeds:
2019 ANNUAL REPORT
2019 AT A GLANCE
EXECUTIVE/SHAREHOLDER INFORMATION
$3.2B
TOTAL DEPOSITS
$3.0B
TOTAL LOANS
12
2019 FULL YEAR
REVENUE GROWTH
30
FIVE YEAR NET
INCOME CAGR
NET INCOME
($ in thousands)
$12,074
$8,929
$21,900
$15,226
2015
2016
2017
2018
$25,239
$25,000
$20,000
$15,000
$10,000
$5,000
$0
2019
BOARD OF DIRECTORS OF
SENIOR MANAGEMENT OF
SHAREHOLDER INFORMATION
FIRST INTERNET BANCORP
FIRST INTERNET BANK
DAVID B. BECKER
DAVID B. BECKER*
Chairman, President and
President and Chief
Chief Executive Officer
Executive Officer
COMMON STOCK
First Internet Bancorp is listed
on the Nasdaq Global Select
Market under the symbol INBK
DAVID R. LOVEJOY
Vice Chairman,
Managing Director,
Greycourt & Co.
NICOLE S. LORCH*
CORPORATE HEADQUARTERS
Executive Vice President and
First Internet Bancorp
Chief Operating Officer
KENNETH J. LOVIK*
11201 USA Parkway
Fishers, IN 46037
(317) 532-7900
JOHN K. KEACH, JR.
Executive Vice President and
www.firstinternetbancorp.com
Private Investor,
Chief Financial Officer
Former Chairman, President
and Chief Executive Officer,
C. CHARLES PERFETTI*
Indiana Community Bancorp
Executive Vice President and
RALPH R. WHITNEY, JR.
Chairman Emeritus,
Hammond, Kennedy,
Whitney & Co., Inc.
Partner, Monument Microcap
Partners
JERRY WILLIAMS
Private Investor,
Formerly of Counsel, Taft
Corporate Secretary
TIMOTHY C. DUSING
Senior Vice President,
Public Finance
STEPHEN C. FARRELL
Senior Vice President, Chief
Credit Officer and Credit
Administrator
Stettinius & Hollister, LLP
KEVIN B. QUINN
Senior Vice President,
President,
Cambridge Capital
Management Corp.
ANNE M. SHARKEY
Senior Vice President,
Operations
NEIL BARNA
Regional Vice President,
Commercial Banking (AZ)
THOMAS SMITH
Regional Vice President,
Commercial Banking (IN)
* Denotes Executive Officer of First Internet Bancorp
INVESTOR RELATIONS
CONTACT
Paula Deemer
(317) 428-4628
investors@firstib.com
TRANSFER AGENT
Computershare
PO Box 505000
Louisville, KY 40233-5000
(800) 368-5948
www.computershare.com
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
BKD, LLP
Suite 700
Indianapolis, IN 46204
(317) 383-4000
LEGAL COUNSEL
Faegre Drinker Biddle & Reath LLP
600 East 96th Street, Suite 600
Indianapolis, IN 46240
(317) 569-9600
JEAN L. WOJTOWICZ
Retail Lending
201 North Illinois Street,
WHAT HAPPENS
WHEN YOU LET
YOURSELF DREAM?
We create new ideas. We explore new paths.
We conceive new ways. Ultimately, we get better.
This entrepreneurial concept is foundational to
First Internet Bank – it’s how we approach our
business and our customer relationships. By
reimagining the traditional banking model, we are
able to deliver a more flexible and robust banking
experience that provides the time, space and financing
necessary for our customers to fulfill their dreams.
“When you let yourself
dream, you begin to see
beyond accepted norms
and start exploring what
is possible.”
DAVID B. BECKER
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
BALANCE SHEET GROWTH
($ in millions)
REVENUE GROWTH ($ in thousands)
Total Assets
Total Loans
$4,100
$3,542
$2,768
$2,716
$2,964
$1,854
$2,091
$1,270
$954
$1,251
Total Annual Revenue
Noninterest Income
Net Interest Income
$53,766
$14,077
$39,689
$40,894
$10,141
$30,753
$71,027
$8,760
$62,267
$79,756
$16,789
$62,967
$64,523
$10,541
$53,982
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2
FIRST INTERNET BANCORP
DEAR FELLOW
SHAREHOLDER,
I was a budding eight-year-old entrepreneur when I lined up
my first newspaper delivery route. On foot, day after day in all
kinds of weather, I had plenty of time to dream. I envisioned a
day when I would have saved enough to buy a bicycle, because
I knew, with wheels, I could cover more ground more quickly,
expanding my route and thus my fortune.
When you let yourself dream, you begin to see beyond
accepted norms and start exploring what is possible. It was
this simple notion of exploring what is possible in banking –
reaching more customers and delivering better service, free
from the cost and the limitations of a branch network – that led
me to launch First Internet Bank in 1999. It’s gratifying to see
this dream not just realized, but enhanced over time. Just as
adding a bicycle kicked my newspaper route into a higher gear,
we are able to produce elevated results thanks to the unique
channels we have built. In our twenty-first year of operations,
we delivered twelve percent annual revenue growth and fifteen
percent annual net income growth. Record net income of $25.2
million equates to $2.51 in earnings per share on a diluted
basis. These results are reflective of strong production in both
commercial and consumer loans, particularly in a number
of our specialty lending areas, including single tenant lease
financing, healthcare finance and horse trailer and recreational
vehicle lending. Additionally, we capitalized on the lower
interest rate environment to drive strong origination growth
in our direct-to-consumer mortgage segment. These are all
businesses we have built to serve customers on a nationwide
basis from our headquarters in Central Indiana.
In 2019, we made significant progress with our expansion
into small business banking by capitalizing on attractive
opportunities on both sides of our balance sheet. We
completed the acquisition of a small business lending division
which will help ignite our growth on this front. This transaction,
combined with the experienced professionals we brought on
board during the year, positions us to accelerate our efforts in
building a nationwide platform to provide a full suite of services
to small business entrepreneurs. Through the customer-centric
approach and entrepreneurial spirit championed at First
Internet Bank, we afford our small business customers the
opportunity to dream. I encourage you to explore the shining
examples we’ve highlighted in this report – illustrating the
aspirations we’ve helped our customers realize by providing the
financial freedom they deserve, while turning the traditional,
slow-moving banking model on its head.
At First Internet Bank, we foster a culture that guides
our innovative bank approach and, in turn, facilitates the
entrepreneurial spirit our customers appreciate. The ability to
attract and retain the talent required to preserve our strategic
edge is critical to our success, and the recognition we continue
to receive for creating a positive workplace environment
enhances our outlook. Moving forward, we remain committed
to increasing shareholder value by capitalizing on the ever-
growing trend of retail and business banking toward our online
platform. And, by leveraging our over 20 years of branchless
banking experience, we will continue to selectively target tech-
centric markets and the demographic profiles most inclined to
adopt our fresh way of banking.
Once again, the entire First Internet Bank team delivered
another outstanding year. Not only did we achieve record
financial performance for our shareholders, we also better
served our customers and improved the communities in which
we work. We believe in doing right by our employees, and that
they will, in turn, take care of our customers. And when we take
care of our customers, every shareholder wins. On behalf of
the team at First Internet Bank, I thank you for your support.
Sincerely,
DAVID B. BECKER
Chairman, President and
Chief Executive Officer
BOOK VALUE PER SHARE
Book Value Per Share
Tangible Book Value Per Share
$31.30
$30.82
$28.39
$27.93
$26.65
$26.09
$23.28
$22.24
$23.76
$23.04
NONPERFORMING ASSETS TO
TOTAL ASSETS
0.37%
0.31%
0.21%
0.22%
0.10%
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
3
2019 ANNUAL REPORT SOLUTIONS THAT KEEP YOU DREAMING
Can a high-tech bank still deliver personalized service?
From the founding of First Internet Bank in 1999, we’ve been
passionate about delivering convenience and unparalleled
support to our customers.
NATIONWIDE DEPOSITS
Without a costly branch network to weigh us down, we can offer
competitive rates and low fees with all the online and mobile
banking tools our customers need to help them make smart
financial choices. Our offerings include deposit accounts for
consumers, small and mid-size businesses and municipalities.
RESIDENTIAL MORTGAGE
AND HOME EQUITY LENDING
With an award-winning national online platform for origination in all 50
states, we offer conventional, FHA, VA and jumbo 1-4 family mortgage
loans. We also originate home equity loans and lines of credit.
CONSUMER LENDING
By lending directly to consumers as well as indirectly through an
established dealer network, we attract creditworthy customers
across the country. We offer loans for a variety of consumer needs
with a specialization in recreational vehicle and horse trailer loans.
SMALL BUSINESS LENDING
Our Small Business Administration (SBA) lending team has the
experience needed to create custom financial solutions that preserve
capital, lower monthly payments and deliver future flexibility and
payment certainty. Our SBA Preferred Lender status allows us to
deliver a faster, streamlined loan process. Spending less time on the
loan process, means more time for customers to focus on what
matters most – growing their business.
4
COMMERCIAL REAL ESTATE LENDING
We customize financing solutions for experienced developers and owners
of investment property located throughout Indiana and nearby Midwestern
locations featuring a variety of real estate oriented loan products.
Offerings include construction and development debt capital for office,
retail, industrial and multi-family properties. We also finance residential
construction and development with active, reputable homebuilders and
developers operating in the Central Indiana market.
SINGLE TENANT LEASE FINANCING
Acquisition financing is offered nationwide for savvy real estate owners
introduced to us through our committed, growing network of mortgage
bankers, brokers and national correspondents. Properties financed are
generally well-located within their respective markets and subject to long-
term, net lease arrangements with well-known, financially qualified tenants.
COMMERCIAL BANKING
We offer customized solutions on business lines of credit, term loans,
credit cards and owner-occupied real estate to middle-market companies
in Indiana and Arizona. Our comprehensive lineup of online treasury
management services allows our clients to run their businesses more
efficiently and optimize their cash positions with robust reporting and
access capabilities.
PUBLIC FINANCE
We offer a variety of lending and depository solutions for government
entities and municipal utilities. Options are available for funding
capital projects or refinancing existing debt for schools, hospitals,
police and fire departments, development districts and public
infrastructure projects.
HEALTHCARE FINANCE
Through a partnership with Lendeavor, a San Francisco-based technology-
enabled lender, we offer business loans for dental, veterinary and other
healthcare practices. Funding is available for buying or growing a practice,
refinancing practice debt, owner-occupied real estate or buying equipment.
5
2019 ANNUAL REPORT THEY’VE GOT
EFFICIENCY DOWN COLD
When the top seller on your menu is shaved ice, you’d better be quick
on the draw when preparing your orders – particularly if your stores are
located in the heart, and heat, of Arizona. To say that Lance Packer and his
partner, Al Schmeiser, co-owners of four Bahama Buck’s franchises, know
a thing or two about efficiency would be an understatement. “We don’t
have the luxury of pre-flavoring our product because it is the equivalent of
freshly shaven snow,” said Lance. “Our employees have to be fast, or it has
melted by the time it reaches the customers’ hands.”
Bahama Buck’s, the nation’s premier tropical theme dessert shop, has
a corporate training program to improve speed, but Lance and Al hold
their teams to an even higher standard. To be successful, they recognize
employees have to be appropriately incentivized to meet the demanding
speed-to-customer metrics expected of them. “The more rapidly we’re able
to serve a customer, the better the store performs, and our employees
are rewarded accordingly,” said Lance. “This gives us every reason to want
them to earn more.” In addition, many of the young folks who operate their
stores are often friends and family.
As a pioneer in the online banking space, First Internet Bank also knows a
thing or two about efficiency, and that’s part of what the Bahama Buck’s
franchisees appreciate most about their partnership with the bank. When
Lance and Al decided to build a new store in 2018 from the ground up, they
turned to First Internet Bank for financing and support navigating what can
be a daunting process. “They were always on top of things, allowing me
to concentrate on making my businesses run better rather than what was
next for the loan. They never gave up on us or our dream,” said Lance.
Each year, the partners’ four stores are top performers according to Bahama
Buck’s Franchise Corporation, with all consistently ranking in the top ten for
operations. First Internet Bank strives to facilitate the entrepreneurial spirt
in cool customers like Lance and Al, and providing the support they need to
not melt under pressure makes it even more rewarding.
LET YOURSELF DREAM.
6
FIRST INTERNET BANCORP OUR RELATIONSHIP WITH A BAHAMA BUCK’S FRANCHISEE
Lance Packer
Franchise owner, Bahama Buck’s
LET YOURSELF DREAM.
7
2019 ANNUAL REPORT Mark Becker and Joseph White
Co-owners, Becker Boards
DREAMING OF
THE OUTDOORS
OUR RELATIONSHIP WITH BECKER BOARDS
With a veritable who’s who of world renowned brands, there’s
little question that Becker Boards has quickly made a name for
itself in the outdoor advertising space, a market traditionally
dominated by just a handful of long-established players.
Co-owners Mark Becker (no relation to First Internet Bank
President and CEO David Becker) and Joseph White started the
operation in 2009 with just one billboard in Phoenix, Arizona,
and have since grown to over 300 static and digital boards,
wallscapes and supergraphic faces in major markets such as
Miami, Orlando, Los Angeles and San Francisco.
“We’re pretty confident in our abilities, but even we wouldn’t
have dreamed this type of success was possible ten years
ago given the high barrier-to-entry in this space,” said Mark.
“Between the challenging zoning laws and the hardball
played by our large corporate competitors, this business
is not for the faint of heart.” Making matters worse is the
low number of banks with an understanding of billboard
financing, often keeping upstarts like Mark and Joseph on
the sidelines for larger permit transactions. Though as fate
would have it, when seven billboard permits opened up
in Miami, Mark and Joseph - two folks who don’t like being
relegated to the sidelines – decided they weren’t going to be
pushed around by their larger competitors.
The partners connected with First Internet Bank to discuss
the potential of the permits in such a prime market and
the hesitancy of other prospective financial partners due
to the lack of physical assets associated with them. First
Internet Bank, appreciating industry disrupters like Mark
and Joseph, quickly recognized the value of the permits
and of partnering with an entrepreneurial company like
Becker Boards. Within five business days the financing
was approved. With the backing of First Internet Bank, the
partners closed on the permits and have continued to keep
advertisers happy with the high visibility and attractive
demographics Miami affords.
“First Internet Bank took a chance on us that some others
wouldn’t, but to their credit, they could see that the numbers
added up,” said Mark. Sometimes the signs align to create a
perfect partnership between market disrupters like Becker
Boards and First Internet Bank.
LET YOURSELF DREAM.
DOGGED ENTREPRENEURS
Jordan, Rick and Krista Coffey
Co-owners, Barkefellers
Herb and Alexi Coffey
Barkefellers franchisees
at the Columbus, Indiana,
construction site
10
FIRST INTERNET BANCORP OUR RELATIONSHIP WITH BARKEFELLERS
When Rick and Christi Coffey decided to open an upscale pet hotel
called Barkefellers, their schnauzers - Max and Emma - proudly
served as “bouncers”. If your pet didn’t get along with these top
dogs, it was time to find another place to stay.
When your dream involves making sure that 20 dogs play well
together, even in Barkefellers’ large play areas, a high level of
behavioral standards must be met. “We’ve created these amazing
spaces where dog lovers can comfortably drop off their pets and
feel good about doing so,” said Rick. “Max and Emma were the
inspiration for our business, and although they have since passed
away, they set the bar for the high quality of care we provide our
guests today.”
With three locations in Indianapolis, Indiana, Barkefellers is truly a
family affair. The enterprise includes two of the Coffey’s children,
Jordan and Krista, as well as Rick’s brother, Herb, who is currently
building Barkefellers’ first franchise location in Columbus, Indiana.
Herb, whose daughter Alexi will manage the new location, decided
to join the Barkefellers family when Rick opted to grow the business
through franchising to minimize his need for travel. As Herb set
about securing a partner to finance his building, he felt he was
barking up the wrong tree…until he met with First Internet Bank.
“Right out of the gate, I could tell they were different,” said Herb.
“They seemed to understand our vision and need for flexibility
where others simply could not.”
The new Columbus location is on track to open in the summer of
2020, and Herb can’t wait. “A dog owner’s biggest concern is care for
their best friend when they aren’t around,” said Herb. “To be able to
give them peace of mind and ensure that their companion is cared
for in a fun and safe environment is a dream come true. To share
that with my daughter is even more rewarding.” First Internet Bank
takes pride in supporting entrepreneurial ventures, especially when
they bring a touch of happiness to peoples’ lives. As Barkefellers
continues to grow, our goal is to help more of the Coffeys’ dreams
become paws-sible.
LET YOURSELF DREAM.
11
2019 ANNUAL REPORT A PASSION TO
CHEER ABOUT
Taryn DeVeau Lautzenheiser
Co-owner, DeVeau’s
OUR RELATIONSHIP WITH DEVEAU’S SCHOOL OF GYMNASTICS
As a young child, Taryn DeVeau Lautzenheiser spent most
days honing her skills as a cheerleader and a gymnast
at DeVeau’s School of Gymnastics, a newly established
gymnasium founded by her mother, Joan DeVeau. After
competing in both sports at the high school level, Taryn
realized one of her childhood dreams by making the 24-time
national championship cheerleading team at the University
of Kentucky, where she graduated with a BBA in Business
Marketing and a Juris Doctor.
After a few years toiling behind the desk as an attorney,
Taryn quickly recognized how much she missed the gym
and all the excitement that surrounded it. So she and
her husband, Luke Lautzenheiser, decided to jump back
into the family business at DeVeau’s in 2015. “I believe in
following one’s heart, and I’ve always dreamed of working
in cheerleading and with kids,” said Taryn. “Now I’m lucky
enough to enjoy a career that involves both, while helping to
extend the legacy my mother began almost 40 years ago.”
With growth on their minds, the family created plans for
an ambitious expansion that would double the size of the
facility. They found the reception from banks to be less than
enthusiastic when it came time to secure financing…until
they discovered First Internet Bank. “Given the rates and
terms most banks were offering, it was almost as if they were
daring us to fail,” said Luke. “Luckily, First Internet Bank saw
things differently. They immediately understood our vision
– not to mention our solid financial track record – and found
creative ways to accommodate our needs.”
Today, DeVeau’s stands at 57,000 square feet and coaches
over 1,500 students annually, many of whom have continued
on to become collegiate athletes, and even one Olympian.
Taryn and Luke now co-own DeVeau’s after buying Joan’s
shares, and First Internet Bank has continued to be one of
their biggest cheerleaders. Helping people like Taryn and
Luke secure the financing they need in order to make a
career doing what they love is cause for us to do backflips.
LET YOURSELF DREAM.
OUR RELATIONSHIP WITH EMPLOYEES
When Melissa Marin graduated from college, she had already
experienced six months as an intern at First Internet Bank and knew
where she wanted to start her career. There were other options to
weigh, but she had grown so fond of the workplace culture and people
at First Internet Bank that her decision was an easy one. As a self-
starter, Melissa appreciated the ability to explore new areas within the
bank. After her internship in internal audit, she accepted a full-time
position in finance and decided to further her horizons by accepting
a position that had opened in the compliance department one year
later. “I’ve always liked new challenges and to grow as a person, and
First Internet Bank has given me the chance to do just that,” said
Melissa. “One of the things I love most about this company is that I’m
not told exactly how to solve a problem, but instead, I’m given the
tools that I need to figure the solution out on my own. And that is
so empowering!”
If asked to create her ideal job, Ali Grader would say she’s already
found it, thank you very much. Her love for people is unmistakable,
so it should come as little surprise that her days are filled dreaming
up ways to further develop the culture at First Internet Bank in the
human resources department. “I started out as an intern in HR and
fell in love with the company immediately,” said Ali. “So when I was
offered a full-time position, I jumped at the chance.” Ali relishes the
collaborative environment at the bank that allows her to interact with
other like-minded people as she helps plan and implement employee
engagement opportunities. She also appreciates the transparency in
which First Internet Bank operates. “We have regular companywide
meetings in which we openly discuss strategic initiatives, new clients
and fresh ideas,” said Ali. “And our open-door policy helps encourage
everyone to feel welcome to ask questions of others, regardless of
their positions.”
While First Internet Bank helps facilitate the entrepreneurial spirit of
our customers, we work just as diligently to encourage that mindset
in our employees. Melissa and Ali are but two of the hundreds of
amazing people collaborating every day at our bank. Hiring and
developing extraordinary talent keeps our business humming, as
innovative ideas and out-of-the-box thinking provide the sparks that
energize our unconventional approach to banking. By giving our
employees space to dream, we ensure an evolving, solutions-rich
environment that will help us maintain our leadership position in the
market. And that keeps our customers coming back.
14
FIRST INTERNET BANCORP A WORKPLACE DESIGNED
TO DREAM
Melissa Marin, Regulatory Compliance Specialist
Ali Grader, Employee Success Partner
LET YOURSELF DREAM.
15
2019 ANNUAL REPORT OUR WORKPLACE
We believe we’ve created a workplace
designed to dream, where banking
solutions are conceived and personal
growth is fostered - but don’t just take
our word for it.
Best Banks to Work For
First Internet Bank was recognized as one of the top ten Best Banks to
Work For in 2019, in a nationwide ranking by American Banker and
Best Companies Group. We’ve earned the distinction of being one of the
best every year since the program began in 2013.
Top Workplaces in Indianapolis
First Internet Bank made the list of top Indianapolis Workplaces in 2019,
the 6th consecutive year the Bank has earned the honor from
The Indianapolis Star.
Best Places to Work in Indiana
First Internet Bank was one of 30 medium-sized organizations named
as a Best Place to Work in Indiana for 2019, the 5th time we’ve received
this recognition.
16
FIRST INTERNET BANCORP
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019.
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Transition Period From ________ to ________.
or
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 each class
Common stock, without par value
6.0% Fixed to Floating Subordinated Notes due 2026
6.0% Fixed to Floating Subordinated Notes due 2029
Trading Symbols
INBK
INBKL
INBKZ
Name of exchange on which registered
The Nasdaq Stock Market LLC
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that
the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer,"
"smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Non-accelerated filer ¨
Emerging growth company ¨
Accelerated filer þ
Smaller reporting company þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of common stock held by non-affiliates of the registrant as of June 28, 2019, the last business day of
the registrant’s most recently completed second fiscal quarter, was approximately $204.6 million, based on the closing sale price
for the registrant’s common stock on that date. For purposes of determining this number, all officers and directors of the registrant
are considered to be affiliates of the registrant. This number is provided only for the purpose of this report and does not represent
an admission by either the registrant or any such person as to the status of such person.
As of March 6, 2020, the registrant had 9,754,964 shares of common stock issued and outstanding.
Documents Incorporated By Reference
Portions of our Proxy Statement for our 2020 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, but rather statements based on the current expectations of First Internet Bancorp
and its consolidated subsidiaries (the “Company,” “we,” “our,” or “us”) regarding its business strategies, intended results and
future performance. Forward-looking statements are generally preceded by terms such as “anticipate,” “believe,” “can,” “continue,”
“could,” “estimate,” “expect,” “intend,” “likely,” “may,” “pending,” “plan,” “position,” “preliminary,” “remain,” “should,” “will,”
“would,” or other 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 or breaches 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, commercial and industrial, public
finance, U.S. Small Business Administration (“SBA”) and healthcare finance loan portfolios, which may carry greater risks of
non-payment or other unfavorable consequences; our dependence on capital distributions from First Internet Bank of Indiana (the
“Bank”); results of examinations of us by our regulators, including the possibility that our regulators may, among other things,
require us to increase our allowance for loan losses or to write-down assets; changing bank regulatory conditions, policies or
programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally,
or the Bank in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums;
regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;
changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments
and the interest rate sensitivity of our balance sheet; our liquidity requirements being 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; execution of future
acquisition, reorganization or disposition transactions, including without limitation, the related time and costs of implementing
such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue
growth and/or expense savings and other anticipated benefits from such transactions; changes in applicable tax laws; 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 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 disclaim any obligation, to publicly release the result
of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
i
First Internet Bancorp
Table of Contents
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
SIGNATURES
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ii
Item 1.
Business
General
PART I
First Internet Bancorp is a bank holding company that conducts its primary business activities through its wholly-owned
subsidiary, First Internet Bank of Indiana, an Indiana chartered bank. First Internet Bank of Indiana was the first state-chartered,
Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. First Internet
Bancorp was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated
a plan of exchange by which we acquired all of the outstanding shares of the Bank.
When we refer to “First Internet Bancorp,” the “Company,” “we,” “us” and “our” in the remainder of this annual report
on Form 10-K, we mean First Internet Bancorp and its consolidated subsidiaries, unless the context indicates otherwise. References
to “First Internet Bank” or the “Bank” refer to First Internet Bank of Indiana, an Indiana chartered bank and wholly-owned
subsidiary of the Company.
We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct
our consumer and small business deposit operations primarily through online channels on a nationwide basis and have no traditional
branch offices. Our residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform
and are supplemented with Central Indiana-based mortgage and construction lending. Our consumer lending products are primarily
originated on a nationwide basis over the Internet as well as through relationships with dealerships and financing partners.
Our commercial banking products and services are delivered through a relationship banking model and include commercial
real estate (“CRE”) banking, commercial and industrial (“C&I”) banking, public finance, healthcare finance, small business lending
and commercial deposits and treasury management. Through our CRE team, we offer single tenant lease financing on a nationwide
basis in addition to traditional investor CRE 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 CRE loans and
corporate credit cards. Our public finance team provides a range of public and municipal lending and leasing products to government
entities on a nationwide basis. Our healthcare finance team was established in conjunction with our strategic partnership with
Lendeavor, Inc., a San Francisco-based technology-enabled lender to healthcare practices, and provides lending for healthcare
practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases. This portfolio segment
is generally concentrated in the Western and Southwestern regions of the United States with plans to continue expanding nationwide.
Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and
treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit
opportunities in business segments where we have no credit relationships.
In 2018, we identified small business as an area for potential growth in loans, revenue and deposits. We believe that we
can differentiate ourselves from larger financial institutions through providing a full suite of services to emerging small businesses
and entrepreneurs. We have begun adding experienced personnel to build out our capabilities in small business lending and U.S.
government guaranteed lending programs, including loans originated under the Small Business Administration (“SBA”) guidelines.
To accelerate our efforts in this area, on November 1, 2019, we acquired a loan portfolio, a servicing portfolio and a team of
experienced small business lending servicing professionals from First Colorado National Bank. As of December 31, 2019, the
principal balance of loans acquired was approximately $32.6 million and was comprised primarily of SBA 7(a) loans while the
principal balance of the servicing portfolio acquired was approximately $94.8 million and consisted of guaranteed SBA 7(a) loans
sold in the secondary market. We expect to continue adding personnel to build out a nationwide small business platform.
As of December 31, 2019, we had total assets of $4.1 billion, total liabilities of $3.8 billion, and shareholders’ equity of
$304.9 million.
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 three wholly-owned subsidiaries: First Internet Public Finance Corp., which provides a range of public
and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities
1
issued by state and local governments and other municipalities; JKH Realty Services, LLC, which manages other real estate owned
properties as needed; and SPF15 Inc., which was established to acquire and hold real estate.
Performance
Balance Sheet Growth. Total assets have increased 222.9% from $1.3 billion at December 31, 2015 to $4.1 billion at
December 31, 2019. This increase was driven primarily by strong organic growth. During the same time period, loans increased
from $1.0 billion to $3.0 billion and deposits increased from $1.0 billion to $3.2 billion, increases of 210.7% and 229.9%,
respectively. Our sustained growth profile has been 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, 2019, commercial loans
comprised 77.2% of loans compared to 61.1% at December 31, 2015.
Earnings Growth. Net income has increased 182.7% from $8.9 million for the twelve months ended December 31, 2015
to $25.2 million for the twelve months ended December 31, 2019. Diluted earnings per share have increased 28.1% from $1.96
for the twelve months ended December 31, 2015 to $2.51 for the twelve months ended December 31, 2019.
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,
2019, our nonperforming assets to total assets was 0.22%, our nonperforming loans to total loans was 0.23% and our allowance
for loan losses to total loans was 0.74%.
Strategic Focus
We operate on a national basis through our scalable Internet banking platform to gather deposits and offer residential
mortgage and consumer lending products rather than relying on a conventional brick and mortar branch system. We also offer
commercial banking services, including CRE and C&I, single tenant lease financing, public finance, healthcare finance and small
business lending. 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, public finance,
healthcare finance and small business lending to complement our consumer platform. We offer traditional CRE loans, single tenant
lease financing, C&I loans, healthcare finance loans, small business lending 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.
2
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 new
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.
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 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.
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 customers, which include C&I loans, CRE loans, municipal loans and leases, lines of credit, letters of
credit, single tenant lease financing, loans to healthcare providers and small business lending loans. 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 to the Company's consolidated financial statements for further discussion of each loan portfolio
segment as of December 31, 2019.
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 $538.4 million in brokered deposits at December 31, 2019, which includes deposits originated
through broker/dealer relationships, as well as certain public fund deposits originated through a relationship with an asset manager
that manages the short-term liquidity needs of municipalities and other governmental bodies.
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, Discover Bank, TIAA Bank, Synchrony Bank, Goldman Sachs Bank USA and Axos Bank. 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. 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 Bank, Huntington National Bank and First
Financial Bank. In the Southwest, competitors include Wells Fargo, Chase, Bank of America, U.S. Bank, Mid First Bank and
BOK Financial. 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, TIAA Bank and StanCorp. For our public finance activities, we compete
nationally with superregional and regional banks, such as Huntington National Bank, KeyBank, Capital One, Sterling National
Bank, JP Morgan and Chase Co. and Bank of America. For our healthcare finance activities, we compete nationally with
superregional and regional banks, such as TD Bank, PNC Bank, Wintrust Financial Corporation and Columbia Bank. These
3
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. For our small business lending activities, we compete on a national footprint with other
participating SBA-approved lenders. Those lenders could be smaller or larger than us and could include non-bank entities.
Examples of these competitors include Wells Fargo, Byline Bank, Live Oak Bank, Huntington, and Newtek, as well as a large
number of regional or community banks. These competitors have resources and/or lending limits that differ greatly from one
another.
In the United States, banking has continued to experience consolidation leading to the emergence of several large
nationwide banking institutions. These competitors have significantly greater financial resources as well as offer a wider range of
services than we do. 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 interest 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 as well as significantly increased regulatory burdens and rules that are
expected to increase expenses and put pressure on earnings.
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.
The Dodd-Frank Act permanently raised deposit insurance levels to $250,000. Deposit insurance assessments are
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”) is 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 minimum mortgage underwriting standards for residential mortgages. Further, the Dodd-Frank Act bars 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 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 lies with the FDIC.
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. 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, 2019 and 2018 are summarized in Note 14 to the
financial statements.
In 2013, the Federal Reserve published final rules (the “Basel III Capital Rules”) establishing a 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.
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 prior regulations.
Under Basel III Capital Rules, the minimum capital ratios are: 4.5% CET1 to risk-weighted assets, 6.0% Tier 1 capital
to risk-weighted assets, 8.0% Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets and 4.0% Leverage Ratio.
In addition, a capital conservation buffer of 2.5% above each level applicable to the CET1, Tier 1, and Total Capital ratios is
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 capital conservation buffer was
phased in with annual increases through January 1, 2019. The following are the Basel III regulatory capital levels, inclusive of
the capital conservation buffer, that the Company and the Bank must satisfy to avoid limitations on capital distributions, including
dividends, and discretionary bonus payments during the applicable phase-in period from January 1, 2015, until January 1, 2019:
5
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 revised the prompt corrective action framework by (i) introducing a CET1 ratio requirement
at each capital level, with a required CET1 ratio of 6.5% to remain well-capitalized, (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.
As of December 31, 2019, the Company and the Bank met all capital adequacy requirements under the Basel III Capital
Rules.
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, 2020. The Bank received a “Satisfactory” CRA rating in its most recent CRA examination.
Failure of an institution to receive at least a “Satisfactory” rating could inhibit such institution or its holding company from engaging
in certain activities or pursuing acquisitions of other financial institutions.
Transactions with Affiliates. The authority of the Bank, like other FDIC-insured banks, to engage in transactions with its
“affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation W. An “affiliate”
for this purpose is defined generally as any company that owns or controls the Bank or is under common ownership or control
with the Bank, but excludes a company controlled by a bank. In general, transactions between the Bank and its affiliates must be
on terms that are consistent with safe and sound banking practices and at least as favorable to the Bank as comparable transactions
between the Bank and non-affiliates. In addition, covered transactions with affiliates are restricted individually to 10% and in the
aggregate to 20% of the Bank’s capital. Collateral ranging from 100% to 130% of the loan amount depending on the quality of
the collateral must be provided for an affiliate to secure a loan or other extension of credit from the Bank. The Company is an
“affiliate” of the Bank for purposes of Regulation W and Sections 23A and 23B of the Federal Reserve Act. We believe the Bank
complied with these provisions during 2019.
6
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, 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 could pay may also be affected or limited by other factors, such as the requirements
to maintain adequate capital.
Capital Distributions. The FDIC may disapprove of a notice or application to make a capital distribution if:
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the Bank would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement applicable
to the Bank.
Insurance of Deposit Accounts. The Bank is a member of the DIF, which is administered by the FDIC. All deposit accounts
at the Bank are insured by the FDIC up to a maximum of $250,000 per depositor.
The FDIA, as amended by the Federal Deposit Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to set
a ratio of deposit insurance reserves to estimated insured deposits. 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 $1.9 million
for 2019, which included a $0.6 million small bank assessment credit.
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.
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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 for at least the next twelve months.
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, 2019 of $25.7 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. As of January 16, 2020, the Federal Reserve’s
regulations required reserves equal to 3% on transaction account balances over $16.9 million and up to and including $127.5
million, plus 10% on the excess over $127.5 million. These requirements are subject to adjustment annually by the Federal Reserve.
The Bank is in compliance with the foregoing reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements imposed by the FDIC.
Anti-Money Laundering and the Bank Secrecy Act. Under the Bank Secrecy Act (the “BSA”), a financial institution is
required to have systems in place to detect and report transactions of a certain size and nature. Financial institutions are generally
required to report to the U.S. Treasury any cash transactions involving more than $10,000. In addition, financial institutions are
required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows,
suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(the “USA PATRIOT Act”), which amended the BSA, is designed to deny terrorists and others the ability to obtain anonymous
access to the U.S. financial system. The USA PATRIOT Act has significant implications for financial institutions and businesses
of other types involved in the transfer of money. The USA PATRIOT Act, in conjunction with the implementation of various federal
regulatory agency regulations, has caused financial institutions, such as the Bank, to adopt and implement additional policies or
amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity,
currency transaction reporting, customer identity verification and customer risk analysis.
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals
and others. These sanctions, which are administered by the Treasury Office of Foreign Assets Control (“OFAC”), take many
different forms. Generally, however, they contain one or more of the following elements: (1) restrictions on trade with or investment
in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and
prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-
related advice or assistance to, a sanctioned country; and (2) blocking of assets in which the government or specially designated
nationals of the sanctioned country have an interest by prohibiting transfers of property subject to U.S. jurisdiction (including
property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid
out, withdrawn, set off or transferred in any manner without a license from OFAC.
Consumer Protection Laws. The Bank is subject to a number of federal and state laws designed to protect consumers and
prohibit unfair or deceptive business practices. These laws include the Equal Credit Opportunity Act, Fair Housing Act, Home
Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the
“FACT Act”), the Gramm-Leach-Bliley Act (the “GLBA”), the Truth in Lending Act, the CRA, the Home Mortgage Disclosure
Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various state law counterparts. These laws
and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with
customers when taking deposits, making loans, collecting loans and providing other services. Further, the Dodd-Frank Act
established the CFPB, which has the responsibility for making and amending rules and regulations under the federal consumer
protection laws relating to financial products and services. The CFPB also has a broad mandate to prohibit unfair or deceptive
acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms.
Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines
and other penalties. The FDIC enforces applicable CFPB rules with respect to the Bank.
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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. Rules implementing Section 114 of the FACT Act 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. 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 under
Section 315 of the FACT Act that provide guidance regarding reasonable policies and procedures that a user of consumer reports
must employ when a consumer reporting agency sends the user a notice of address discrepancy.
Privacy. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of
nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires financial institutions
to explain to consumers their policies and procedures regarding the disclosure of such nonpublic personal information and, except
as otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided
in their policies and procedures. The Bank is required to provide notice to its customers on an annual basis disclosing its policies
and procedures on the sharing of nonpublic personal information. From time to time, Congress and state legislatures consider
additional legislation relating to privacy and other aspects of consumer information. We cannot predict whether such legislation
will be enacted, or what impact, if any, such legislation may have on our business, financial condition or results of operations.
The California Consumer Privacy Act of 2018 (the “CCPA”) grants all California residents the right to know what
information a business has collected from them and the sourcing and sharing of that information, as well as a right to have a
business delete their personal information (with some exceptions). Its definition of “personal information” is more expansive than
those found in other privacy laws applicable to us in the United States. Failure to comply with the CCPA risks regulatory fines
and the law grants a private right of action for any unauthorized disclosure of personal information as a result of failure to maintain
reasonable security procedures. The CCPA became effective on January 1, 2020, but California's Attorney General cannot bring
an enforcement action under the CCPA until July 1, 2020.
Cybersecurity. In 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.
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State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations.
For example, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs
and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have
also recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of
increased activity and changes at the state level to continue.
In 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity
risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure
requirements under state and federal banking law and regulations.
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.
We continually strive to enhance our cyber and information security in order to be resilient against emerging threats and
improve our ability to detect and respond to attempts to gain unauthorized access to our data and systems. We regularly conduct
cybersecurity risk assessments, regularly engage with the Board or appropriate committees on cybersecurity matters, routinely
update our incident response plans based on emerging threats, periodically practice implementation of incident response plans
across applicable departments and train officers and employees to detect and report suspicious activity. 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 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 consumers.
Employees
At December 31, 2019, we had 231 total employees, of which 227 were full-time employees.
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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;
shareholder services information, including ways to contact our transfer agent; and
opportunities to sign up for email alerts and RSS feeds to have information provided in real time.
The information available on our website is not incorporated by reference in, or a part of, this or any other report we file
with or furnish to the SEC.
Item 1A.
Risk Factors
Risk factors which could cause actual results to differ from our expectations and which could negatively impact our
financial condition and results of operations are discussed below and elsewhere in this report. Additional risks and uncertainties
not presently known to us or that are currently not believed to be significant to our business may also affect our actual results and
could harm our business, financial condition and results of operations. If any of the risks or uncertainties described below or any
additional risks and uncertainties actually occur, our business, results of operations and financial condition could be materially
and adversely affected.
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 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 have grown our CRE, healthcare finance and C&I loan portfolios. At December 31, 2019, CRE loans amounted to
$1.1 billion, or 38.5% of total loans, healthcare finance loans amounted to $300.6 million, or 10.1% of total loans and C&I loans
amounted to $96.4 million, or 3.3% of total loans. These loans generally involve higher credit risks than residential real estate
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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 loans and could lead to concentration risks within our commercial loan portfolio. In addition, our C&I,
healthcare finance and small business 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 CRE, federal and state banking regulators are examining CRE lending activity with heightened
scrutiny and may require banks with higher levels of CRE 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 CRE lending growth and exposures. Because a significant portion of our loan portfolio is comprised of CRE loans, our
banking regulators may require us to maintain higher levels of capital than we would otherwise be expected to maintain, which
could limit our ability to leverage our capital and have a material adverse effect on our business, financial condition, results of
operations and prospects.
Weakness in the economy may materially adversely affect our business and results of operations.
Our results of operations are materially affected by conditions in the economy. 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, another economic downturn 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.
Significant external events could adversely affect our business and results of operations.
Severe weather, natural disasters, acts of war or terrorism, widespread public health issues and other significant external
events or continued circumstances could impair the ability of our customers to repay outstanding loans; impair the value of
collateral, if any, securing outstanding loans; negatively impact our deposit base, loan originations or general demand for our
services; cause significant property damage; result in loss of revenue or cause us to incur additional expenses or losses. For
example, the emergence of a widespread health emergency or pandemic, such as the potential spread of the coronavirus
(“COVID-19”) and actions intended to mitigate the same, could lead to regional quarantines, business shutdowns, labor shortages,
disruptions to supply chains, and overall economic instability. We could also be adversely affected if key personnel or a significant
number of employees were to become unavailable due to an outbreak in the places they live. Although we have business continuity
plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective in mitigating the adverse
impacts of any significant external event. The occurrence or continuation of any such event could materially adversely impact
our business, our ability to provide our services, demand for our services, asset quality, 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, 2019, we had a net unrealized pre-tax holding loss of approximately $5.8 million on our $540.9
million available-for-sale 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.
Uncertainty about the future of London Inter-bank Offered Rate (“LIBOR”) may adversely affect our business.
In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (the “Authority”), which regulates
LIBOR, announced that the Authority intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR
to the administrator of LIBOR after 2021. In response to concerns regarding the future of LIBOR, the Board of Governors of the
Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee
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(“ARRC”) to identify alternatives to LIBOR. The ARRC has recommended a benchmark replacement waterfall to assist issuers
in continued capital market entry while safeguarding against LIBOR's discontinuation. The initial steps in the ARRC's
recommended provision reference variations of the Secured Overnight Financing Rate (“SOFR”). At this time, it is not possible
to predict whether SOFR will attain market traction as a LIBOR replacement. Additionally, it is uncertain if LIBOR will cease
to exist after calendar year 2021, or whether additional reforms to LIBOR may be enacted, or whether alternative reference rates
will gain market acceptance as a replacement for LIBOR. Further, other central banks have convened working groups to determine
replacements or reforms of other interest rate benchmarks, such as Euro Interbank Offered Rate, and it is expected, although not
known, that a transition away from the use of certain of these other interest rate benchmarks will occur over the course of the next
few years and alternative reference rates will be established. At this time, it is not possible to predict the effect of the Authority’s
announcement or other regulatory changes or announcements, any establishment of alternative reference rates, or any other reforms
to LIBOR that may be enacted in the United Kingdom, the United States, or elsewhere. The uncertainty regarding the future of
LIBOR as well as the transition from LIBOR to another benchmark rate or rates could have adverse impacts on floating-rate
obligations, loans, deposits, derivatives, and other financial instruments that currently use LIBOR as a benchmark rate and,
ultimately, adversely affect the Company’s financial condition and results of operations.
The implementation of CECL, including the design and maintenance of related internal controls over financial reporting, will
require a significant amount of time and resources which may have a material impact on our results of operations.
A new accounting standard adopted by FASB, referred to as Current Expected Credit Loss, or (“CECL”), will require
financial institutions, like the Bank, to determine periodic estimates of lifetime expected credit losses on loans, and recognize the
expected credit loses as allowances for loan and lease losses beginning with our fiscal year ending December 31, 2023. Current
GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has
been incurred. CECL will represent a significant change in methodology and may greatly increase the types of data we will need
to collect and review to determine the appropriate level of the allowance for loan and lease losses. We are in the process of
evaluating the impact of the adoption of this guidance on our financial statements. However, the allowance for loan and lease
losses may increase upon the adoption of CECL and any such increased allowance level would decrease shareholders' equity and
the Company's and Bank's regulatory capital ratios.
A significant amount of time and resources may be needed to implement CECL effectively, including the design and
implementation of adequate internal controls, which may adversely affect our results of operations. If we are unable to maintain
effective internal control over financial reporting relating to CECL, or otherwise, our ability to report our financial condition and
results of operations accurately and on a timely basis could also be adversely affected.
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 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 or maintain
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
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to increase our market share and remain profitable on a long-term basis. Our success will depend on the ability of the Bank to
compete successfully on a long-term basis within the financial services industry.
We rely on our management team and could be adversely affected by the unexpected loss of key officers.
Our future success and profitability are 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, 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, 2019, our consumer loans, excluding residential mortgage loans and home equity loans, totaled $295.3
million, representing approximately 10.0% 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 depreciating
assets such as horse trailers 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 public finance, healthcare finance, small business
lending and 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, 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, public finance, healthcare finance and small business 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.
15
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 noninterest income 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 $11.5 million for the twelve months ended December 31, 2019 and $5.7 million for the
twelve months ended December 31, 2018. 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 increased in 2019; however, any 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 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.
16
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.
17
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 2013, the FDIC and the Federal Reserve substantially amended the regulatory risk-based capital rules applicable to
the Company and the Bank by implementing the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank
Act. The final rule included new minimum risk-based capital and leverage ratios, which became effective for the Company and
the Bank in 2015, and refined the definition of what constitutes “capital” for purposes of calculating these ratios. The current
minimum capital requirements are: (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 capital conservation buffer requirement began being phased-in in January 2016
at 0.625% of risk-weighted assets and increased by an additional 0.625% each year until fully implemented at 2.5% 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 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 CRA and fair lending laws, and failure to comply
with these laws could lead to a wide variety of sanctions.
The CRA, 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
CRA 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. Compliance also requires a significant diversion of management time and attention, particularly with regard to disclosure
controls and procedures and internal control over financial reporting. Although we have reviewed, and will continue to review,
our disclosure controls and procedures in order to determine whether they are effective, our controls and procedures may not be
able to prevent errors or frauds in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere
to established controls and procedures may make it difficult for us to ensure that the objectives of the control system will be met.
A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and
results of operations.
We face a risk of noncompliance with and enforcement action under 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 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.
18
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;
perceptions in the marketplace regarding us or our competitors;
new technology used or services offered by 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, political and social conditions and events, such as
economic slowdowns or recessions, interest rate changes, credit loss trends, natural disasters or disease pandemics 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 acquired 25% or more of our
common stock.
Anti-takeover provisions could negatively impact our shareholders.
Provisions of Indiana law and provisions of our articles of incorporation could make it more difficult for a third party to
acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. We are subject to
certain anti-takeover provisions under the Indiana Business Corporation Law. Additionally, our articles of incorporation authorize
our Board of Directors to issue one or more classes or series of preferred stock without shareholder approval and such preferred
stock could be issued as a defensive measure in response to a takeover proposal.
Although these provisions do not preclude a takeover, they may have the effect of discouraging, delaying or deferring a
tender offer or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might
result in a premium over the market price of our common stock. Such provisions will also render the removal of the Board of
Directors and of management more difficult and, therefore, may serve to perpetuate current management. These provisions could
potentially adversely affect the market price of our common stock.
19
Our securities are not insured or guaranteed by the FDIC and as such are subject to loss of entire investment.
Neither shares of our common stock nor indebtedness of our Company are savings accounts, deposits or other obligations
of the Bank or any of our nonbank subsidiaries and neither is insured or guaranteed by the FDIC or any other government agency
or public or private insurer. An investment in our securities 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 or debt securities or undertake other debt financing, 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 and senior or subordinated debt securities
or other debt financing, 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. Debt securities or other debt financing may be unsecured or secured by any or all of our assets. If we issue
preferred or debt securities, or incur other indebtedness, 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 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.
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 the 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 the principal executive offices of the
Company and the Bank.
The Bank is currently leasing all of the office space at the Fishers property. The lease is currently scheduled to expire
on March 31, 2022 and provides for monthly rent in the amount of $18.50 per square foot.
20
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 through March 2020. In
February 2020, the Company entered into an amendment that, among other things, extended its maturity to April 1, 2022. The
principal balance of the loan is $3.0 million as of December 31, 2019 and its payment terms are interest only through April 1,
2022. The 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.
21
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.”
As of March 6, 2020, the Company had 9,754,964 shares of common stock issued and outstanding, and there were 113
holders of record of common stock.
Dividends
The Company began paying regular quarterly cash dividends in 2013. Total dividends declared in 2019 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
our 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.
Because the Company is a holding company and does not engage directly in business activities of a material nature, its
ability to pay dividends to shareholders depends, in large part, upon the receipt of distributions from the Bank, which is also subject
to numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies. The present
and future ability of the Bank to distribute funds to the Company are subject to the discretion of the Board of the Directors of the
Bank and the Bank is not obligated to pay any distributions to the Company.
Issuer Purchases of Equity Securities
On December 18, 2018 the Company's Board of Directors approved a stock repurchase program authorizing the repurchase
of up to $10.0 million of the Company's outstanding common stock from time to time on the open market or in privately negotiated
transactions. The stock repurchase program was scheduled to expire on December 31, 2019. Under this program, the Company
repurchased 482,970 shares of common stock through September 30, 2019, at an average price of $20.70, for a total repurchase
amount of $10.0 million, thus repurchasing the maximum amount of stock authorized by the Company's Board of Directors under
this program.
22
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 Small Cap U.S. Bank Index. The SNL Small Cap U.S. Bank Index
is comprised of publicly traded banking institutions with market capitalizations between $250 million and $1 billion and total
assets in a range comparable to the Company.
The following table assumes $100 was invested on December 31, 2014 in First Internet Bancorp, the Nasdaq Composite
Index and the SNL Small Cap U.S. Bank Index, and assumes that dividends are reinvested.
Comparison of Five-Year Cumulative Total Return
250
150
50
2014
2015
2016
2017
2018
2019
First Internet Bancorp
Nasdaq Composite Index
SNL Small Cap U.S. Bank Index
2014
2015
2016
2017
2018
2019
First Internet Bancorp
$
100.00
$
173.06
$
194.87
$
234.08
$
126.47
$
Nasdaq Composite Index
SNL Small Cap U.S. Bank Index
100.00
100.00
106.96
109.52
116.45
155.27
150.96
162.85
146.67
145.94
148.38
200.49
176.97
December 31,
23
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)
2019
2018
2017
2016
2015
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
$ 4,100,083
$ 3,541,692
$ 2,767,687
$ 1,854,335
$ 1,269,870
327,361
188,712
47,981
39,452
2,963,547
2,716,228
2,091,193
1,250,789
56,097
602,730
18,328
504,095
51,407
492,484
27,101
473,371
3,153,963
2,671,351
2,084,941
1,462,867
300,226
304,913
284,048
288,735
219,440
224,127
149,255
153,942
25,152
953,859
36,518
213,698
956,054
99,643
104,330
$ 147,414
$ 115,467
$
84,697
$
58,899
$
41,447
84,447
62,967
5,966
57,001
16,789
46,634
27,156
1,917
53,200
62,267
3,892
58,375
8,760
43,183
23,952
2,052
30,715
53,982
4,872
49,110
10,541
36,723
22,928
7,702
19,210
39,689
4,330
35,359
14,077
31,451
17,985
5,911
$
25,239
$
21,900
$
15,226
$
12,074
$
10,694
30,753
1,946
28,807
10,141
25,283
13,665
4,736
8,929
$
$
$
$
2.51
2.51
31.30
30.82
$
$
$
$
2.31
2.30
28.39
27.93
$
$
$
$
2.14
2.13
26.65
26.09
$
$
$
$
2.32
2.30
23.76
23.04
$
$
$
$
1.97
1.96
23.28
22.24
10,041,581
9,490,506
7,118,628
5,211,209
4,528,528
10,044,483
9,508,653
7,149,302
5,239,082
4,554,219
Common shares outstanding at end of period
9,741,800
10,170,778
8,411,077
6,478,050
4,481,347
Dividends declared per share
Dividend payout ratio 2
___________________________________
$
0.24
$
0.24
$
0.24
$
0.24
$
0.24
9.56%
10.43%
11.27%
10.43%
12.24%
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.
24
Performance Ratios:
Return on average assets
Return on average shareholders’ equity
Return on average tangible common equity 1
Net interest margin 2
Net interest margin FTE 1, 3
Noninterest expense to average assets
Asset Quality Ratios:
Nonperforming loans to total loans
Nonperforming assets to total assets
Nonperforming assets (including performing troubled debt
restructurings) to total assets
Allowance for loan losses to total loans
Net charge-offs (recoveries) to average loans
At Or For The Twelve Months Ended December 31,
2019
2018
2017
2016
2015
0.65%
8.52%
8.65%
1.65%
1.82%
1.20%
0.23%
0.22%
0.23%
0.74%
0.07%
0.72%
8.44%
8.60%
2.09%
2.25%
1.41%
0.03%
0.10%
0.11%
0.66%
0.04%
0.66%
8.54%
8.77%
2.39%
2.57%
1.59%
0.04%
0.21%
0.23%
0.72%
0.05%
0.74%
9.74%
10.12%
2.49%
2.53%
1.93%
0.09%
0.31%
0.35%
0.88%
0.15%
0.81 %
8.89 %
9.33 %
2.85 %
2.87 %
2.28 %
0.02 %
0.37 %
0.46 %
0.88 %
(0.07)%
Allowance for loan losses to nonperforming loans
324.4%
2,013.1%
1,784.3%
1,013.9%
5,000.6 %
Capital Ratios:
Total shareholders' equity to assets
Tangible common equity to tangible assets 1
Tier 1 leverage ratio 4
Common equity tier 1 capital ratio 4, 5
Tier 1 capital ratio 4
Total risk-based capital ratio 4
Other Data:
Full-time equivalent employees
Number of banking and loan production offices
___________________________________
7.44%
7.33%
7.64%
10.84%
10.84%
13.99%
8.15%
8.03%
9.00%
12.39%
12.39%
14.53%
8.10%
7.94%
8.45%
11.43%
11.43%
14.07%
8.30%
8.07%
8.65%
11.54%
11.54%
15.01%
8.22 %
7.88 %
8.28 %
10.11 %
10.11 %
12.25 %
229
2
201
2
206
2
192
2
152
3
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 On an FTE basis assuming a 21% tax rate in 2019 and 2018 and a 35% tax rate in 2017, 2016 and 2015. Net interest income
is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This
is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company
believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-
taxable equivalent basis as these measures provide useful information to make peer comparisons.
4 Capital ratios are calculated in accordance with regulatory guidelines specified by our primary federal banking regulatory
authority.
5 Introduced as part of the final implementation of the “Basel III” regulatory capital reforms as of January 1, 2015.
25
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
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, public finance, healthcare finance, small business lending
and commercial deposits and treasury management. Through our CRE team, we offer single tenant lease financing on a nationwide
basis in addition to traditional investor CRE 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 CRE loans and
corporate credit cards. Our public finance team provides a range of public and municipal lending and leasing products to government
entities on a nationwide basis. Our healthcare finance team was established in conjunction with our strategic partnership with
Lendeavor, Inc., a San Francisco-based technology-enabled lender to healthcare practices, and provides lending for healthcare
practice finance or acquisition, acquisition or refinancing owner-occupied CRE and equipment purchases. This portfolio segment
is generally concentrated in the Western and Southwestern regions of the United States with plans to continue expanding nationwide.
Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and
treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit
opportunities in business segments where we have no credit relationships.
In 2018, we identified small business as an area for potential growth in loans, revenue and deposits. We believe that we
can differentiate ourselves from larger financial institutions through providing a full suite of services to emerging small businesses
and entrepreneurs. We have begun adding experienced personnel to build out our capabilities in small business lending and U.S.
government guaranteed lending programs, including loans originated under the Small Business Administration (“SBA”) guidelines.
To accelerate our efforts in this area, on November 1, 2019, we acquired a loan portfolio, a servicing portfolio and a team of
experienced small business lending servicing professionals from First Colorado National Bank. As of December 31, 2019, the
principal balance of loans acquired was approximately $32.9 million and was comprised primarily of SBA 7(a) loans while the
principal balance of the servicing portfolio acquired was approximately $104.0 million and consisted of guaranteed SBA 7(a)
loans sold in the secondary market. We expect to continue adding personnel to build out a nationwide small business platform.
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, 2019, net income was $25.2 million, or $2.51 per diluted share, compared
to net income of $21.9 million, or $2.30 per diluted share, for the twelve months ended December 31, 2018 and net income of
$15.2 million, or $2.13 per diluted share, for the twelve months ended December 31, 2017.
The $3.3 million increase in net income for the twelve months ended December 31, 2019 compared to the twelve months
ended December 31, 2018 was due primarily to an $8.0 million increase in noninterest income, a $0.7 million increase in net
interest income and a $0.1 million decrease in income tax expense, but was partially offset by a $3.5 million increase in noninterest
expense and a $2.1 million increase in provision for loan losses.
26
The increase in net income of $6.7 million for the twelve months ended December 31, 2018 compared to the twelve
months ended December 31, 2017 was due primarily to an $8.3 million increase in net interest income, a $5.7 million decrease
in income tax expense and a $1.0 million decrease in provision for loan losses, but was partially offset by a $6.5 million increase
in noninterest expense and a $1.8 million decrease in noninterest income.
During the twelve months ended December 31, 2019, return on average assets was 0.65%, compared to 0.72% for the
twelve months ended December 31, 2018 and 0.66% for the twelve months ended December 31, 2017. During the twelve months
ended December 31, 2019, return on average shareholders’ equity was 8.52%, compared to 8.44% for the twelve months ended
December 31, 2018 and 8.54% for the twelve months ended December 31, 2017.
In 2018, the Company recorded a $2.4 million write-down of a commercial other real estate owned property that consists
of two buildings. The revaluation of the other real estate owned was driven by deteriorating conditions in the market where the
property is located and the commencement of a marketing strategy to move the property off the Company's balance sheet. As a
result, this write-down decreased 2018 net income by $1.9 million and diluted earnings per share by $0.20. Adjusted for the write-
down, 2018 net income was $23.8 million and diluted earnings per share was $2.50. The write-down also decreased return on
average assets by 6 basis points (“bps”) and return on average shareholders' equity by 74 bps. Adjusted for the write-down, 2018
return on average assets was 0.78% and return on average shareholders' equity was 9.18%. 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.
In 2017, as a result of the Tax Cuts and Jobs Act (“Tax Act”), the Company’s net deferred tax asset (“net DTA”) was
revalued as of December 31, 2017. The value of the net DTA was reduced by $1.8 million with the amount of the reduction
recognized as additional income tax expense in 2017. Consequently, this revaluation decreased 2017 diluted earnings per share
by $0.26. Adjusted for the net DTA revaluation, 2017 net income was $17.1 million and diluted earnings per share were $2.39.
The revaluation also decreased return on average assets by 8 bps and return on average shareholders' equity by 104 bps. Adjusted
for the net DTA revaluation, 2017 return on average assets was 0.74% and return on average shareholders' equity was 9.58%.
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.
27
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, 2019
December 31, 2018
December 31, 2017
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
$2,894,174
$ 122,228
4.22% $2,382,504
$ 99,082
4.16% $1,682,249
$ 70,465
Securities - taxable
Securities - non-taxable
Other earning assets
462,704
97,613
355,412
13,807
2,595
8,784
2.98%
2.66%
2.47%
391,958
94,072
116,074
10,630
2,810
2,945
2.71%
2.99%
2.54%
400,449
10,036
95,694
79,461
2,786
1,410
Total interest-earning assets
3,809,903
147,414
3.87% 2,984,608
115,467
3.87% 2,257,853
84,697
4.19%
2.51%
2.91%
1.77%
3.75%
Allowance for loan losses
Noninterest earning-assets
Total assets
Liabilities
Interest-bearing liabilities
(19,891)
100,696
$3,890,708
(16,097)
86,713
$3,055,224
(12,964)
68,580
$2,313,469
Interest-bearing demand deposits
$ 118,874
$
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
35,751
637,360
2,146,637
2,938,622
564,757
3,503,379
44,682
46,265
3,594,326
296,382
$3,890,708
882
398
12,661
55,372
69,313
15,134
84,447
0.74% $
90,229
$
1.11%
1.99%
51,333
544,802
2.58% 1,585,673
2.36% 2,272,037
2.68%
468,411
2.41% 2,740,448
583
585
8,803
32,513
42,484
10,716
53,200
0.65% $
89,081
$
1.14%
1.62%
39,393
415,910
2.05% 1,169,219
1.87% 1,713,603
2.29%
376,470
1.94% 2,090,073
488
342
4,227
18,918
23,975
6,740
30,715
0.55%
0.87%
1.02%
1.62%
1.40%
1.79%
1.47%
45,562
9,798
2,795,808
259,416
$3,055,224
35,043
10,141
2,135,257
178,212
$2,313,469
Net interest income
$ 62,967
$ 62,267
$ 53,982
Interest rate spread1
Net interest margin2
Net interest margin - FTE3
1.46%
1.65%
1.82%
1.93%
2.09%
2.25%
2.28%
2.39%
2.57%
1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities
2 Net interest income divided by average interest-earning assets
3 On a fully-taxable equivalent ("FTE") basis assuming a 21% tax rate in 2019 and 2018 and a 35% tax rate in 2017. 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
28
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, 2019 vs.
December 31, 2018 Due to Changes in
Twelve Months Ended December 31, 2018 vs.
December 31, 2017 Due to Changes in
Volume
Rate
Net
Volume
Rate
Net
Loans, including loans held-for-sale
$
21,689
$
1,457
$
23,146
$
29,126
$
(509) $
28,617
Securities – taxable
Securities – non-taxable
Other earning assets
Total
Interest expense
Interest-bearing deposits
Other borrowed funds
Total
2,047
103
5,922
29,761
14,172
2,417
16,589
1,130
(318)
(83)
2,186
12,657
2,001
14,658
3,177
(215)
5,839
31,947
26,829
4,418
31,247
(212)
(49)
789
29,654
9,117
1,855
10,972
806
73
746
1,116
9,392
2,121
11,513
Increase (decrease) in net interest income
$
13,172
$
(12,472) $
700
$
18,682
$
(10,397) $
594
24
1,535
30,770
18,509
3,976
22,485
8,285
2019 v. 2018
Net interest income for the twelve months ended December 31, 2019 was $63.0 million, an increase of $0.7 million, or
1.1%, compared to $62.3 million for the twelve months ended December 31, 2018. The increase in net interest income was the
result of a $31.9 million, or 27.7%, increase in total interest income to $147.4 million for the twelve months ended December 31,
2019 compared to $115.5 million for the twelve months ended December 31, 2018. The increase in total interest income was
partially offset by a $31.2 million, or 58.7%, increase in total interest expense to $84.4 million for the twelve months ended
December 31, 2019 compared to $53.2 million for the twelve months ended December 31, 2018.
The increase in total interest income was due primarily to an increase in interest earned on loans resulting from an increase
of $511.7 million, or 21.5%, in the average balance of loans, including loans held-for-sale, and a 6 bp increase in the yield earned
on loans for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018. The increase
in the average balance of loans was driven largely by higher average balances in the public finance, healthcare finance and single
tenant lease financing portfolios. Further, the average balance of other earning assets increased $239.3 million during 2019
compared to 2018, primarily due to the Company carrying higher cash balances, which resulted in increased income from other
earning assets. Finally, the average balance of the securities portfolio increased $74.3 million, or 15.3%, and the yield earned on
the securities portfolio increased 16 bps, both of which contributed to increased interest income on the portfolio during 2019
compared to 2018.
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 $666.6 million, or 29.3%, increase in the average balance of interest-bearing deposits for the twelve months
ended December 31, 2019 compared to the twelve months ended December 31, 2018, and an increase of 49 bps in the cost of
funds related to these deposits. The increase in the average balance of interest-bearing deposits was due primarily to higher average
balances in brokered deposits, certificates of deposit and money market accounts. Interest expense related to other borrowed funds
also contributed to the increase in total interest expense, due to a $96.3 million, or 20.6%, increase in the average balance of other
borrowed funds for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018 and
an increase of 39 bps in the cost of other borrowed funds.
Net interest margin was 1.65% for the twelve months ended December 31, 2019 compared to 2.09% for the twelve months
ended December 31, 2018. The decrease in net interest margin was due primarily to a 47 bp increase in the cost of interest-bearing
liabilities. An increase in market interest rates and an increase in deposit competition during the second half of 2018 drove deposit
rates higher and contributed to increased costs associated with certificates of deposits and money market account in 2019 compared
to 2018. Further, during mid-to-late 2018, the Company initiated a liability hedging strategy using pay fixed/receive variable
interest rate swaps intended to extend the duration of brokered variable rate money market deposits to increase asset sensitivity,
29
reduce long-term interest rate risk and reduce volatility in total shareholders’ equity due to the impact of changes in interest rates
on other comprehensive income (loss). This long-term funding strategy also contributed to the increase in cost of deposit funding
during 2019. The cost of funds related to other borrowed funds increased as we used longer-term Federal Home Loan Bank
advances in 2019 and 2018 to extend the duration of liabilities and reduce long-term interest rate risk. Additionally, the cost of
other borrowed funds was impacted by the issuance of $37.0 million of 6.0% fixed-to-floating rate subordinated notes in June
2019.
2018 v. 2017
Net interest income for the twelve months ended December 31, 2018 was $62.3 million, an increase of $8.3 million, or
15.3%, compared to $54.0 million for the twelve months ended December 31, 2017. The increase in net interest income was the
result of a $30.8 million, or 36.3%, increase in total interest income to $115.5 million for the twelve months ended December 31,
2018 compared to $84.7 million for the twelve months ended December 31, 2017. The increase in total interest income was
partially offset by an $22.5 million, or 73.2%, increase in total interest expense to $53.2 million for the twelve months ended
December 31, 2018 compared to $30.7 million for the twelve months ended December 31, 2017.
The increase in total interest income was due primarily to an increase in interest earned on loans resulting from an increase
of $700.3 million, or 41.6%, in the average balance of loans, including loans held-for-sale, as well as an increase in interest earned
on securities resulting from a decrease of $10.1 million, or 2.0%, in the average balance of securities for the twelve months ended
December 31, 2018 compared to the twelve months ended December 31, 2017. The increase in total interest income was also due
to a 19 bp increase in the yield earned on the securities portfolio, partially offset by a decline of 3 bps in the yield earned on loans,
including loans held-for-sale.
The increase in total interest expense was driven primarily by an increase in interest expense related to interest-bearing
deposits as a result of a $558.4 million, or 32.6%, increase in the average balance of interest-bearing deposits for the twelve months
ended December 31, 2018 compared to the twelve months ended December 31, 2017, and an increase of 47 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 $91.9 million, or 24.4%, increase in the average balance of other borrowed funds for the twelve months ended
December 31, 2018 compared to the twelve months ended December 31, 2017, partially offset by an increase of 50 bps in the cost
of other borrowed funds.
Net interest margin was 2.09% for the twelve months ended December 31, 2018 compared to 2.39% for the twelve months
ended December 31, 2017. The decrease in net interest margin was primarily due to a 47 bp increase in the cost of interest-bearing
liabilities, partially offset by a 12 bp increase in the yield on total interest-earning assets. The increase in the cost of total interest-
bearing liabilities was due primarily to an increase in average certificates of deposits, money market balances and an increase in
the related costs of those deposits. The increase in the cost of these deposits was due primarily to the rise of short-term interest
rates throughout 2018. The increase in the yield on interest-earning assets was due primarily to increases in the yields earned on
securities and other earning assets, partially offset by a decrease in the yield earned on loans. The decrease in the yield earned on
loans was due primarily to continued strong growth in the public finance portfolio which typically has lower tax-exempt interest
rates, partially offset by higher yields in other commercial loan categories and residential mortgage loans resulting from higher
market interest rates.
Noninterest Income
The following table presents noninterest income for the five most recent years.
(amounts in thousands)
Service charges and fees
Loan servicing revenue
Mortgage banking activities
Gain on sale of loans
Loss on sale of securities
Other
2019
2018
2017
2016
2015
Twelve Months Ended December 31,
$
$
885
166
11,541
2,074
(458)
2,581
934
$
888
$
818
$
—
5,718
503
—
1,605
—
7,836
395
(8)
1,430
—
12,398
—
—
861
764
—
9,000
—
—
377
Total noninterest income
$
16,789
$
8,760
$
10,541
$
14,077
$
10,141
30
2019 v. 2018
During the twelve months ended December 31, 2019, noninterest income totaled $16.8 million, representing an increase
of $8.0 million, or 91.7%, compared to $8.8 million for the twelve months ended December 31, 2018. The increase in noninterest
income was driven primarily by an increase of $5.8 million, or 101.8%, in revenue from mortgage banking activities, as well as
a $1.6 million increase in gain on sale of loans, a $1.0 million increase in other noninterest income and a $0.2 million increase in
loan servicing revenue, partially offset by a $0.5 million loss on sale of securities. The increase in mortgage banking revenue was
due mainly to an increase in refinancing activity, as mortgage interest rates declined significantly during the year. The increase
in gain on sale of loans was due to a higher volume of sales of single tenant lease financing loans and public finance loans, as well
as our first sales of SBA 7(a) guaranteed loans. The increase in other noninterest income was mainly the result of the $0.5 million
gain on the sale of the Company's Visa Class B shares and $0.4 million of income associated with the Company's temporary
ownership of the land described in Note 5 - Premises and Equipment. The $0.5 million loss on sale of securities during the twelve
months ended December 31, 2019 resulted from the Company selling lower-yielding agency mortgage-backed and U.S.
Government Agency securities with a book value of $30.6 million. The Company did not sell any securities during the twelve
months ended December 31, 2018. The Company also began earning loan servicing revenue from the acquired small business
lending portfolio, recognizing $0.2 million in the fourth quarter 2019.
2018 v. 2017
During the twelve months ended December 31, 2018, noninterest income totaled $8.8 million, representing a decrease
of $1.8 million, or 16.9%, compared to $10.5 million for the twelve months ended December 31, 2017. The decrease in noninterest
income was primarily driven by a decrease of $2.1 million, or 27.0%, in mortgage banking activities, partially offset by gains on
sale of loans and other noninterest income. The decrease in revenue from mortgage banking activities was due primarily to
decreases in mortgage held-for-sale origination and sales volumes, due to a decline in mortgage refinance activity, and a decrease
in gain on sale margins.
Noninterest Expense
The following table presents noninterest expense for the five most recent years.
(amounts in thousands)
2019
2018
2017
2016
2015
Salaries and employee benefits
$
27,014
$
23,174
$
21,164
$
17,387
$
14,271
Twelve Months Ended December 31,
Marketing, advertising and promotion
Consulting and professional services
Data processing
Loan expenses
Premises and equipment
Deposit insurance premium
Write-down of other real estate owned
Other
1,800
3,669
1,338
1,142
6,059
1,903
—
3,709
2,468
3,055
1,233
942
4,996
1,956
2,423
2,936
2,393
3,091
971
1,027
4,183
1,410
—
2,484
1,823
3,143
1,127
891
3,699
1,159
—
2,222
Total noninterest expense
$
46,634
$
43,183
$
36,723
$
31,451
$
1,756
2,374
1,016
631
2,768
643
—
1,824
25,283
2019 v. 2018
Noninterest expense for the twelve months ended December 31, 2019 was $46.6 million, compared to $43.2 million for
the twelve months ended December 31, 2018. The increase of $3.5 million, or 8.0%, compared to the twelve months ended
December 31, 2018 was due primarily to a $3.8 million increase in salaries and employee benefits, a $1.1 million increase in
premises and equipment expenses, a $0.8 million increase in other expenses and a $0.6 million increase in consulting and
professional services, partially offset by decreases of $2.4 million in write-down of other real estate owned ("OREO") and $0.7
million in marketing, advertising and promotion expense. The increase in salaries and employee benefits was primarily the result
of an increase in incentive compensation associated with increased mortgage production and personnel growth. Recent hires in
the Company's commercial lending verticals and support areas were generally in higher skilled positions, which contributed to
the increase in salaries and benefits expense. Additionally, we had an increase in personnel due to our expansion in the small
business lending area. The increase in premises and equipment was due primarily to higher software expenses. The increase in
other expense was due primarily to higher OREO operating expense. The increase in consulting and professional services was
due primarily to higher recruiting fees and third party loan review fees. The write-down of OREO in 2018 was due to the revaluation
31
of one commercial property, as discussed earlier in the Results of Operations. The decrease in marketing, advertising and promotion
expenses was driven by digital marketing initiatives and higher mortgage lead generation costs that occurred in 2018.
2018 v. 2017
Noninterest expense for the twelve months ended December 31, 2018 was $43.2 million, compared to $36.7 million for
the twelve months ended December 31, 2017. The increase of $6.5 million, or 17.6%, compared to the twelve months ended
December 31, 2017 was primarily due to a $2.4 million write-down of other real estate owned, as well as increases of $2.0 million
in salaries and employee benefits, $0.8 million in premises and equipment expenses and $0.5 million in deposit insurance premium
expenses. The write-down of other real estate owned was due to the revaluation of one commercial property, consisting of two
buildings, driven by deteriorating conditions in the market where the properties are located and the commencement of a marketing
strategy to move the property off the Company's balance sheet. The increase in salaries and employee benefits was due primarily
to changes in employee mix. Although the number of full-time employees decreased from 2017, recent hires in the Company's
commercial lending verticals and support areas were generally in higher skill positions and led to an increase in employee salary
and equity compensation expense. Additionally, the Company experienced an increase in benefits expense, primarily related to
higher medical, prescription drug and dental insurance claims. These increases were partially offset by a decrease in bonus expense
primarily related to a reduction in senior management incentive compensation due to 2018 financial performance being below the
targets established under the Company's Annual Bonus Plan for 2018. The increase in premises and equipment was primarily due
to technology-related expenses and the increase in deposit insurance premium was due primarily to the Company's year-over-year
asset growth, which impacts the formula used by the FDIC to calculate deposit insurance.
Income Taxes
The following table reconciles reported income tax expense to that computed at the statutory federal tax rate for the
five most recent years.
(amounts in thousands)
2019
2018
2017
2016
2015
Statutory rate times pre-tax income
$
5,703
$
5,030
$
8,025
$
6,115
$
4,646
Twelve Months Ended December 31,
(Subtract) add the tax effect of:
Income from tax-exempt securities and loans
State income taxes, net of federal tax effect
Bank-owned life insurance
Net deferred tax asset revaluation
Tax credits
Other differences
Income tax expense
(4,881)
1,285
(198)
—
(181)
189
(3,833)
1,164
(200)
—
(180)
71
(2,512)
693
(318)
1,846
—
(32)
(635)
567
(159)
—
—
23
$
1,917
$
2,052
$
7,702
$
5,911
$
(132)
154
(137)
—
—
205
4,736
32
2019 v. 2018
The Company recognized income tax expense of $1.9 million in 2019, resulting in an effective tax rate of 7.1%, compared
to $2.1 million and an effective tax rate of 8.6% in 2018. The Company's federal statutory tax rate was 21% in 2019 and 2018.
In both 2019 and 2018, the variance from the federal statutory rate was due primarily to tax-exempt income, partially offset by
state income taxes. Interest income on certain loans or securities issued by governmental, municipal and not-for-profit entities,
and earnings from bank-owned life insurance were the primary components of tax-exempt income.
2018 v. 2017
The Company recognized income tax expense of $2.1 million in 2018, resulting in an effective tax rate of 8.6%, compared
to $7.7 million and an effective tax rate of 33.6% in 2017. The Company's federal statutory tax rate was 21% in 2018 and 35%
in 2017. In 2018, the variance from the federal statutory rate was due primarily to tax-exempt income, partially offset by state
income taxes. Interest income on certain loans or securities issued by governmental, municipal and not-for-profit entities, and
earnings from bank-owned life insurance were the primary components of tax-exempt income. In 2017, the variance from the
federal statutory rate was due primarily to tax-exempt income, partially offset by state income taxes and the net deferred tax asset
revaluation as a result of the Tax Act as discussed further in the paragraph below. Excluding the impact of the net deferred tax
asset revaluation, income tax expense in 2017 was $5.9 million and the effective tax rate was 25.5%. 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.
On December 22, 2017, the Tax Act was signed into law, significantly reforming the Internal Revenue Code. The Tax
Act, among other things, reduced the federal corporate tax rate from 35% to 21%. The reduction of the corporate tax rate resulted
in a $1.8 million reduction to our net deferred tax asset in 2017.
33
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
Advances from Federal Home Loan Bank
Total shareholders' equity
2019
2018
2017
2016
2015
$
4,100,083
$
3,541,692
$
2,767,687
$
1,854,335
$
1,269,870
December 31,
2,963,547
602,730
56,097
57,115
3,096,848
3,153,963
514,910
304,913
2,716,228
504,095
18,328
43,301
2,628,050
2,671,351
525,153
288,735
2,091,193
492,484
51,407
44,686
2,040,255
2,084,941
410,176
224,127
1,250,789
473,371
27,101
31,166
1,431,701
1,462,867
189,981
153,942
953,859
213,698
36,518
23,700
932,354
956,054
190,957
104,330
Total assets increased $558.4 million, or 15.8%, to $4.1 billion as of December 31, 2019 as compared to $3.5 billion as
of December 31, 2018. Balance sheet expansion during 2019 was funded by deposit growth of $482.6 million, or 18.1%. The
deposit growth was deployed to fund total loan growth of $247.3 million, or 9.1%, and total securities growth of $98.6 million,
or 19.6%. Additionally, cash balances increased $138.6 million, or 73.5%, as we carried a higher level of liquidity during 2019.
We used loan sales and other balance sheet management strategies throughout 2019 to manage overall balance sheet and
loan portfolio growth and capital utilization, as well as to help improve profitability and net interest margin. As part of these
activities, we sold $291.2 million of portfolio residential mortgage, single tenant lease financing and public finance loans during
2019.
34
Home equity
Other consumer
Total consumer loans
Total commercial
and consumer loans
Net deferred loan origination
costs and premiums and
discounts on purchased loans
and other (1)
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
2019
2018
December 31,
2017
2016
2015
Commercial and industrial
$
96,420
3.3% $ 107,405
4.0% $ 121,966
5.8% $ 101,326
8.1% $ 100,299
10.5%
Owner-occupied
commercial real estate
Investor commercial real
estate
Construction
Single tenant lease
financing
Public finance
Healthcare finance
Small business lending
73,392
2.5%
77,569
2.9%
71,872
3.4%
55,637
4.4%
44,462
4.7%
12,567
60,274
995,879
687,094
300,612
60,279
0.4%
2.0%
33.6%
23.2%
10.1%
2.1%
5,391
39,916
919,440
706,342
117,007
17,370
0.2%
1.5%
33.8%
26.0%
4.4%
0.5%
7,273
49,213
803,299
438,341
31,573
4,870
0.4%
2.4%
38.5%
21.0%
1.5%
0.2%
13,181
53,291
1.0%
4.3%
16,184
45,898
1.7%
4.8%
606,568
48.5%
374,344
39.2%
—
—
3,142
0.0%
0.0%
0.3%
—
—
1,701
0.0%
0.0%
0.2%
Total commercial loans
2,286,517
77.2% 1,990,440
73.3% 1,528,407
73.2%
833,145
66.6%
582,888
61.1%
Consumer loans
Residential mortgage
313,849
10.6%
399,898
14.7%
299,935
14.3%
205,554
16.4%
214,559
24,306
295,309
633,464
0.8%
10.0%
21.4%
28,735
279,771
708,404
1.1%
10.3%
26.1%
30,554
227,533
558,022
1.5%
10.8%
26.6%
35,036
173,449
414,039
2.8%
13.9%
33.1%
43,279
108,312
366,150
22.5%
4.5%
11.4%
38.4%
2,919,981
98.6% 2,698,844
99.4% 2,086,429
99.8% 1,247,184
99.7%
949,038
99.5%
43,566
1.4%
17,384
0.6%
4,764
0.2%
3,605
0.3%
4,821
0.5%
Total loans
2,963,547
100.0% 2,716,228
100.0% 2,091,193
100.0% 1,250,789
100.0%
953,859
100.0%
Allowance for loan losses
(21,840)
Net loans
$2,941,707
(17,896)
$2,698,332
(14,970)
$2,076,223
(10,981)
$1,239,808
(8,351)
$ 945,508
1 Includes carrying value adjustments of $21.4 million, $5.0 million, $0.3 million, $0.0 million, $0.0 million and million as of December 31,
2019, 2018, 2017, 2016 and 2015, respectively, related to interest rate swaps associated with public finance loans.
The Company continued to experience strong loan growth as total loans rose to $3.0 billion as of December 31, 2019,
an increase of $247.3 million, or 9.1%, compared to December 31, 2018. Growth in commercial loan balances of $296.1 million
was partially offset by a decline of $74.9 million in consumer loan balances. The growth in commercial loan balances was driven
primarily by growth of $183.6 million in healthcare finance, $76.4 million in single tenant lease financing and $42.9 million in
small business lending balances. Continued loan growth in healthcare finance driven by our strategic partnership with Lendeavor,
Inc., a San Francisco-based technology-enabled lender, drove the increase in this category. Strong single tenant lease financing
originations resulted in an increase in 2019, but the increase was partially offset by sales throughout the year. The increase in
small business lending balances is due mostly to the acquisition of a loan portfolio from First Colorado National Bank, which
consisted primarily of SBA 7(a) loans and had a principal balance of $32.9 million at December 31, 2019. The decrease in consumer
loan balances was due primarily to an $86.0 million decrease in residential mortgage loan balances, driven by the sale of $100.5
million of portfolio mortgage loans in 2019, partially offset by originations in other consumer loans, including loans to finance
purchases of recreational vehicles and trailers.
The Company completed sales of single tenant lease financing loans, public finance loans and portfolio residential
mortgage loans, totaling $291.2 million in the aggregate in 2019, resulting in a gain of $2.1 million in 2019. The Company
completed sales of single tenant lease financing loans, totaling $41.1 million in the aggregate in 2018, resulting in a gain of $0.5
million.
35
Loan Maturities and Rate Sensitivity
The following table shows the contractual maturity distribution intervals (without regard to repayment schedules) of the
outstanding loans in our portfolio as of December 31, 2019.
(amounts in thousands)
Commercial loans
Within 1 Year
1-3 Years
4-5 Years
Beyond 5 Years
Total
Commercial and industrial
$
30,002
$
23,149
$
7,784
$
35,485
$
Owner-occupied commercial real estate
Investor commercial real estate
Construction
Single tenant lease financing
Public finance
Healthcare finance
Small business lending
7,053
1,477
17,815
35,735
12,515
494
615
16,267
2,483
28,855
132,729
10,457
30
1,307
Total commercial loans
105,706
215,277
Consumer loans
Residential mortgage
Home equity
Other consumer
Total consumer loans
7,740
86
1,640
9,466
46,565
2,446
9,231
58,242
15,710
5,969
5,723
127,282
251
324
3,106
166,149
114,111
4,342
14,767
133,220
34,362
2,638
7,881
700,133
663,871
299,764
55,251
96,420
73,392
12,567
60,274
995,879
687,094
300,612
60,279
1,799,385
2,286,517
145,433
17,432
269,671
432,536
313,849
24,306
295,309
633,464
Total commercial and consumer loans
$
115,172
$
273,519
$
299,369
$
2,231,921
$
2,919,981
The following table shows the rate sensitivity of the outstanding loans in our portfolio by the contractual maturity
distribution intervals as of December 31, 2019. Beginning in 2017, the Company began hedging certain long-term fixed rate loans
with interest rate swaps. Refer to Note 18 to the Company's consolidated financial statements for further information on derivative
financial instruments. The following table does not include the effect of interest rate swaps on fixed-rate loans that have been
hedged.
(amounts in thousands)
Within 1 Year
1-3 Years
4-5 Years
Beyond 5 Years
Total
Predetermined rates
Adjustable rate
Total commercial and consumer loans
$
$
61,110
$
213,662
$
221,088
$
2,016,268
$
2,512,128
54,062
59,857
78,281
215,653
407,853
115,172
$
273,519
$
299,369
$
2,231,921
$
2,919,981
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
Bank’s legal lending limit, the maximum it could lend to any one borrower at December 31, 2019 was $54.5 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 independent third-party loan review groups, which are a key component of our overall risk management process
related to credit administration.
36
Asset Quality
(dollars in thousands)
Nonaccrual loans
Commercial loans:
Commercial and industrial
Owner-occupied commercial real estate
Single tenant lease financing
Total commercial loans
Consumer loans:
Residential mortgage
Home equity
Other consumer
Total consumer loans
Total nonaccrual loans
Past Due 90 days and accruing loans
Consumer loans:
Residential mortgage
Total consumer loans
Total past due 90 days and accruing loans
Total nonperforming loans
Other real estate owned
Investor commercial real estate
Residential mortgage
Total other real estate owned
Other nonperforming assets
2019
2018
2017
2016
2015
December 31,
226
464
4,680
5,370
761
—
33
794
6,164
416
416
416
6,580
2,065
—
2,065
75
195
325
—
520
175
55
42
272
792
97
97
97
889
2,066
553
2,619
—
—
—
—
—
724
83
32
839
839
—
—
—
839
4,488
553
5,041
12
—
—
—
—
1,024
—
59
1,083
1,083
—
—
—
1,083
4,488
45
4,533
85
—
—
—
—
103
—
64
167
167
—
—
—
167
4,488
—
4,488
85
Total nonperforming assets
$
8,720
$
3,508
$
5,892
$
5,701
$
4,740
Total nonperforming loans to total loans
Total nonperforming assets to total assets
0.23%
0.22%
0.03%
0.10%
0.04%
0.21%
0.09%
0.31%
0.02%
0.37%
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 can also include investments that were classified as other-than-temporarily impaired; however, we did not
own any investments classified as such during the five-year period ended December 31, 2019.
37
Troubled Debt Restructurings
(amounts in thousands)
2019
2018
2017
2016
2015
Troubled debt restructurings – nonaccrual
Troubled debt restructurings – performing
Total troubled debt restructurings
$
$
94
427
521
$
$
— $
410
410
$
— $
473
473
$
— $
757
757
$
—
1,115
1,115
December 31,
Total nonperforming assets increased $5.4 million, or 152.9%, from December 31, 2018. The increase in total
nonperforming assets was due primarily to a $4.7 million single tenant lease financing loan relationship being placed on nonaccrual
during 2019 and an increase of $0.6 million in nonaccrual residential mortgage loans. Total nonperforming loans increased $5.8
million compared to December 31, 2018 due primarily to the loans mentioned above, as well as an increase of $0.3 million in
accruing loans that are more than 90 days past due. The ratio of nonperforming loans to total loans increased to 0.23% as of
December 31, 2019 compared to 0.03% as of December 31, 2018, as the rate of growth in nonperforming loans outpaced the
growth in total loan balances. The ratio of nonperforming assets to total assets increased to 0.22% as of December 31, 2019
compared to 0.10% as of December 31, 2018, as the rate of growth in nonperforming assets outpaced the growth in total assets.
As of December 31, 2019 and December 31, 2018, the Company had one commercial property in OREO with a carrying
value of $2.1 million. This balance consists of a property with two buildings which are residential units adjacent to a university
campus. At December 31, 2018, the Company had one residential property in other real estate owned with a carrying value of
$0.6 million. This property was sold in 2019.
Allowance for Loan Losses
(amounts in thousands)
Balance, beginning of period
Provision charged to expense
Losses charged off
Commercial and industrial
Residential mortgage
Home equity
Other consumer
Total losses charged off
Recoveries
Commercial and industrial
Investor commercial real estate
Small business lending
Residential mortgage
Home equity
Other consumer
Total recoveries
2019
2018
2017
2016
2015
December 31,
$
17,896
$
14,970
$
10,981
$
5,966
3,892
4,872
(921)
(76)
(68)
(1,292)
(2,357)
29
—
5
4
10
287
335
(92)
(9)
—
(1,176)
(1,277)
3
—
—
5
16
287
311
(271)
(116)
—
(895)
(1,282)
69
—
—
4
23
303
399
8,351
$
4,330
(1,582)
(134)
(33)
(440)
(2,189)
187
—
—
30
13
259
489
Balance, end of period
$
21,840
$
17,896
$
14,970
$
10,981
$
5,800
1,946
—
(185)
—
(451)
(636)
—
500
—
407
1
333
1,241
8,351
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 allowance
for loan losses 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.
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.
38
The allowance for loan losses was $21.8 million as of December 31, 2019, compared to $17.9 million as of December 31,
2018. The increase of $3.9 million, or 22.0%, was due primarily to the continued growth in loan balances, as well as $1.8 million
in specific reserves, mainly associated with the $4.7 million single tenant lease financing relationship that was placed on nonaccrual
during 2019.
The allowance for loan losses as a percentage of total loans was 0.74% as of December 31, 2019 compared to 0.66% as
of December 31, 2018, and decreased as a percentage of nonperforming loans to 324.4% as of December 31, 2019, from to
2,013.1% as of December 31, 2018. The increase in the allowance for loan losses as a percentage of total loans was due primarily
to the specific reserve related to the single tenant lease financing relationship, as well as changes in the composition of the loan
portfolio, as loan categories with lower reserve factors declined as a percentage of the overall loan portfolio. The decline in the
allowance for loan losses as a percentage of nonperforming loans was driven mainly by the impact of the single tenant lease
financing relationship discussed above.
Investment Securities
In managing the Company’s investment securities portfolio, management focuses on providing an adequate level of
liquidity and managing long-term interest rate risk, 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 “trading securities.” 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, 2019, 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, 2019, 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.
39
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
2019
2018
2017
2016
2015
December 31,
U.S. Government-sponsored agencies
$
77,715
$
109,631
$
133,424
$
92,599
$
Municipal securities
Agency mortgage-backed securities
Private-label mortgage-backed securities
Asset-backed securities
Corporate securities
Other securities
97,447
264,142
63,704
5,000
38,632
—
97,090
242,293
9,199
5,002
36,678
—
97,370
215,452
—
5,000
27,111
3,000
97,647
238,354
—
19,470
20,000
3,000
38,093
21,091
113,948
—
19,444
20,000
3,000
Total securities available-for-sale
546,640
499,893
481,357
471,070
215,576
Securities held-to-maturity
Municipal securities
Corporate securities
Total securities held-to-maturity
10,142
51,736
61,878
10,157
12,593
22,750
10,164
9,045
19,209
10,171
6,500
16,671
—
—
—
Total securities
$
608,518
$
522,643
$
500,566
$
487,741
$
215,576
Approximate Fair Value
Securities available-for-sale
2019
2018
2017
2016
2015
December 31,
U.S. Government-sponsored agencies
$
75,872
$
107,585
$
133,190
$
91,896
$
Municipal securities
Agency mortgage-backed securities
Private-label mortgage-backed securities
Asset-backed securities
Corporate securities
Other securities
97,652
261,440
63,613
4,955
37,320
—
92,506
233,734
9,178
4,859
33,483
—
96,377
209,720
—
5,009
26,047
2,932
91,886
231,641
—
19,534
18,811
2,932
37,750
21,469
113,052
—
19,361
19,087
2,979
Total securities available-for-sale
540,852
481,345
473,275
456,700
213,698
Securities held-to-maturity
Municipal securities
Corporate securities
Total securities held-to-maturity
10,368
52,192
62,560
9,801
12,617
22,418
9,847
9,236
19,083
9,673
6,524
16,197
—
—
—
Total securities
$
603,412
$
503,763
$
492,358
$
472,897
$
213,698
The approximate fair value of investment securities available-for-sale increased $59.5 million, or 12.4%, to $540.9 million
as of December 31, 2019 compared to $481.3 million as of December 31, 2018. The increase was due primarily to increases of
$54.4 million in private-label mortgage-backed securities, $27.7 million in agency mortgage-backed securities, $5.1 million in
municipal securities and $3.8 million in corporate securities. The increase in private-label and agency mortgage-backed securities
was driven by purchases as excess liquidity was deployed, partially offset by prepayment activity and principal amortization. The
increase in the approximate fair value of municipal securities was primarily caused by interest rate changes. Additional liquidity
was also used to purchase corporate securities during 2019. These increases were offset by a decrease of $31.7 million in U.S.
Government-sponsored agencies securities. The decrease in U.S. Government-sponsored agencies was due primarily to principal
amortization and prepayments, as well as the sale of $8.5 million of lower-yielding securities. As of December 31, 2019, the
Company had securities with an amortized cost basis of $61.9 million designated as held-to-maturity compared to $22.8 million
as of December 31, 2018, an increase of $39.1 million, due mainly to the purchase of corporate securities described above.
40
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, 2019.
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
Agency mortgage-backed
securities
Private-label mortgage-
backed securities
Asset-backed securities
Corporate securities
Total securities
$
30
—
—
—
—
—
30
7.31% $
0.00%
2,368
7,334
3.03% $
52,583
1.82% $
22,734
2.37% $
77,715
2.17%
20,759
2.64%
79,496
2.71%
107,589
2.02%
2.66%
0.00%
1,305
2.80%
14,666
2.24%
248,171
2.65%
264,142
2.63%
0.00%
0.00%
0.00%
—
—
18,514
0.00%
0.00%
2.05%
—
5,000
66,854
—%
3.76%
4.20%
63,704
—
5,000
3.11%
0.00%
3.03%
63,704
5,000
90,368
7.31% $
29,521
1.95% $ 159,862
3.02% $ 419,105
2.72% $ 608,518
3.11%
3.70%
3.76%
2.78%
Other Assets
Other assets were $67.1 million at December 31, 2019 compared to $37.7 million at December 31, 2018. The increase
of $29.4 million, or 77.8%, was due primarily to cash collateral pledged for interest rate swaps. The Company pledged $42.3
million and $7.0 million of cash collateral to counterparties as security for its obligations related to these interest rate swap
transactions at December 31, 2019 and December 31, 2018, respectively. Collateral posted and received is dependent on the
market valuation of the underlying hedges.
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)
2019
2018
December 31,
2017
2016
2015
Noninterest-bearing deposits
$
57,115
1.8% $
43,301
1.6% $
44,686
2.1% $
31,166
2.1% $
23,700
2.5%
Interest-bearing demand
deposits
Savings accounts
129,020
29,616
4.1%
0.9%
121,055
38,489
4.5%
1.4%
94,674
49,939
Money market accounts
786,390
24.9%
528,533
19.9%
499,501
Certificates of deposits
1,613,453
51.2% 1,292,883
48.4% 1,319,488
Brokered deposits
538,369
17.1%
647,090
24.2%
76,653
4.5%
2.4%
24.0%
63.3%
3.7%
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%
Total
$3,153,963
100.0% $2,671,351
100.0% $2,084,941
100.0% $1,462,867
100.0% $ 956,054
100.0%
Total deposits increased $482.6 million, or 18.1%, to $3.2 billion as of December 31, 2019 as compared to $2.7 billion
as of December 31, 2018. During 2019, certificates of deposits increased $320.6 million, or 24.8%, money market accounts
increased $257.9 million, or 48.8%, noninterest-bearing deposits increased $13.8 million, or 31.9%, and interest-bearing demand
deposits increased $8.0 million, or 6.6%. These increases were partially offset by declines of $108.7 million, or 16.8%, in brokered
deposits and $8.9 million, or 23.1%, in savings accounts. In 2019, we placed greater emphasis on increasing small business money
market account balances. The results of these efforts successfully contributed $180.7 million to the total growth in money market
balances.
41
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 Deposit Maturities at December 31, 2019
(dollars in thousands)
Interest Rate:
<1.00%
1.00% – 1.99%
2.00% – 2.99%
3.00% – 3.99%
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
$
$
$
$
$
4,780
302,482
636,416
—
— $
— $
— $
4,780
334,829
$
41,945
$
9,216
$
688,472
193,839
89
82,594
5
133,478
8,084
1,046,327
8,178
943,678
$
528,757
$
124,544
$
150,778
$
1,747,757
0.3%
39.4%
59.8%
0.5%
100.0%
Time Deposit Maturities of $100,000 or Greater
(dollars in thousands)
Maturity Period:
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total
Federal Home Loan Bank Advances
December 31, 2019
$
$
195,761
203,178
267,287
641,021
1,307,247
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 Federal Home Loan Bank of Indianapolis (the "FHLB") to manage liquidity
needs and longer-term advances to supplement balance sheet growth and manage interest rate risk. During 2018, the Company
converted $110.0 million of short-term FHLB advances to longer term fixed-rate structures using interest rate swaps to reduce
long-term interest rate risk. Refer to Note 18 to the Company's consolidated financial statements for additional information about
derivative financial instruments. 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 1
Weighted average interest rate during period 1
1 Excludes the impact of interest rate swaps.
Other Liabilities
At Or For The Twelve Months Ended December 31,
2019
2018
2017
$
514,910
$
525,153
$
511,093
525,000
433,211
525,153
410,176
339,823
435,183
1.98%
2.25%
2.15%
1.92%
1.50%
1.24%
Other liabilities were $53.0 million at December 31, 2019 compared to $21.5 million at December 31, 2018. The increase
of $31.5 million, or 146.9%, was due primarily to a $27.1 million decrease in the fair value of interest rate swaps.
Liquidity and Capital Resources
While the Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure
requirements for at least the next twelve months, including any cash dividends it may pay, the Company intends to continue
pursuing its growth strategy, which may require additional capital. If the Company is unable to secure such capital at favorable
terms, its ability to execute its growth strategy could be adversely affected.
42
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, investment securities and other short-duration assets 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 organic deposit
growth and enhances interest rate risk management through brokered deposits and borrowings.
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, 2019, on a consolidated basis, the Company
had $868.2 million in cash and cash equivalents and investment securities available-for-sale, and $56.1 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, 2019, the Bank had the ability to borrow an additional $530.1 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, 2019, the Company, on an unconsolidated
basis, had $38.3 million in cash generally available for its cash needs.
The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by
depositors, credit commitments to borrowers, operating expenses and capital expenditures. At December 31, 2019, approved
outstanding loan commitments, including unused lines of credit, amounted to $254.4 million. Certificates of deposit scheduled
to mature in one year or less at December 31, 2019 totaled $0.9 billion.
On December 18, 2018 the Company's Board of Directors approved a stock repurchase program authorizing the repurchase
of up to $10.0 million of the Company's outstanding common stock from time to time on the open market or in privately negotiated
transactions. The stock repurchase program was scheduled to expire on December 31, 2019. Under this program, the Company
repurchased 482,970 shares of common stock through September 30, 2019, at an average price of $20.70, for a total repurchase
amount of $10.0 million, thus repurchasing the maximum amount of stock authorized by the Company's Board of Directors under
this program.
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 through March 2020. In
February 2020, the Company entered into an amendment that, among other things, extended its maturity to April 1, 2022. The
principal balance of the loan was $3.0 million as of December 31, 2019 and its payment terms are interest only through April 1,
2022. The 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.
43
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, tangible book value per common share, the ratio of tangible common equity to tangible assets, average tangible
common equity, return on average tangible common equity, net interest income - FTE, net interest margin - FTE, adjusted income
before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on
average assets, adjusted return on average shareholders' equity, adjusted return on average tangible common equity and adjusted
effective income tax rate are used by management to measure the strength of the Company's capital and analyze profitability,
including its ability to generate earnings on tangible capital invested by its shareholders. Management also believes that it is a
standard practice in the banking industry to present net interest margin and net income on a fully-taxable equivalent basis as those
measures provide useful information for peer comparisons. 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.
44
At Or For The Twelve Months Ended December 31,
$
$
$
$
$
$
$
$
$
$
2017
224,127
(4,687)
219,440
2,767,687
(4,687)
2,763,000
8,411,077
26.65
(0.56)
26.09
8.10 %
(0.16)%
7.94 %
178,212
(4,687)
173,525
8.54 %
0.23 %
8.77 %
53,982
4,053
58,035
2.39 %
0.18 %
2.57 %
$
$
$
$
$
$
$
$
$
$
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 %
39,689
1,090
40,779
2.49 %
0.06 %
2.55 %
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 %
30,753
224
30,977
2.85 %
0.02 %
2.87 %
(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
Net interest income
Adjustments:
Fully-taxable equivalent adjustments1
Net interest income - FTE
$
$
$
$
$
$
$
$
$
$
2019
304,913
(4,687)
300,226
4,100,083
(4,687)
4,095,396
9,741,800
31.30
(0.48)
30.82
7.44 %
(0.11)%
7.33 %
296,382
(4,687)
291,695
8.52 %
0.13 %
8.65 %
62,967
6,334
69,301
$
$
$
$
$
$
$
$
$
$
2018
288,735
(4,687)
284,048
3,541,692
(4,687)
3,537,005
10,170,778
28.39
(0.46)
27.93
8.15 %
(0.12)%
8.03 %
259,416
(4,687)
254,729
8.44 %
0.16 %
8.60 %
62,267
5,010
67,277
$
$
$
$
$
$
$
$
$
$
Net interest margin
1.65 %
2.09 %
Effect of fully-taxable equivalent
adjustments1
Net interest margin - FTE
1Assuming a 21% tax rate in 2019 and 2018 and a 35% tax rate in 2017, 2016 and 2015
0.17 %
1.82 %
0.16 %
2.25 %
45
$
$
$
$
$
$
$
$
(dollars in thousands, except share and per share
data)
Income before income taxes - GAAP
Adjustments:
Write-down of other real estate owned
Adjusted income before income taxes
Income tax provision - GAAP
Adjustments:
Write-down of other real estate owned
Net deferred tax asset revaluation
Adjusted income tax provision
Net income - GAAP
Adjustments:
Write-down of other real estate owned
Net deferred tax asset revaluation
Adjusted net income
Diluted average common shares outstanding
Diluted earnings per share - GAAP
Adjustments:
Effect of write-down of other real estate owned
Effect of net deferred tax asset revaluation
Adjusted diluted earnings per share
Return on average assets
Effect of write-down of other real estate owned
Effect of net deferred tax asset revaluation
Adjusted return on average assets
Return on average shareholders' equity
Effect of write-down of other real estate owned
Effect of net deferred tax asset revaluation
Adjusted return on average shareholders' equity
Return on average tangible common equity
Effect of write-down of other real estate owned
Effect of net deferred tax asset revaluation
Adjusted return on average tangible common equity
Effective income tax rate
Effect of write-down of other real estate owned
Effect of net deferred tax asset revaluation
Adjusted effective income tax rate
Critical Accounting Policies and Estimates
At Or For The Twelve Months Ended December 31,
2019
2018
2017
2016
2015
27,156
$
23,952
$
22,928
$
$
$
$
—
27,156
1,917
—
1,917
25,239
—
—
$
$
$
$
2,423
26,375
2,052
509
2,561
21,900
1,914
—
—
22,928
7,702
—
(1,846)
5,856
15,226
—
1,846
$
$
$
$
$
17,985
$
13,665
$
$
$
$
—
17,985
5,911
—
—
5,911
12,074
—
—
—
13,665
4,736
—
—
4,736
8,929
—
—
25,239
$
23,814
$
17,072
$
12,074
$
8,929
10,044,483
9,508,653
7,149,302
5,239,082
4,554,219
2.51
$
2.30
$
2.13
$
2.30
$
—
—
0.20
—
2.51
$
2.50
$
0.65%
0.00%
0.00%
0.65%
8.52%
0.00%
0.00%
8.52%
8.65%
0.00%
0.00%
8.65%
7.1%
0.0%
0.0%
7.1%
0.72%
0.06%
0.00%
0.78%
8.44%
0.74%
0.00%
9.18%
8.60%
0.75%
0.00%
9.35%
8.6%
1.1%
0.0%
9.7%
—
0.26
2.39
0.66 %
0.00 %
0.08 %
0.74 %
8.54 %
0.00 %
1.04 %
9.58 %
8.77 %
0.00 %
1.07 %
9.84 %
33.6 %
0.0 %
(8.1)%
25.5 %
—
—
$
2.30
$
0.74%
0.00%
0.00%
0.74%
9.74%
0.00%
0.00%
9.74%
10.12%
0.00%
0.00%
10.12%
32.9%
0.0%
0.0%
32.9%
1.96
—
—
1.96
0.81%
0.00%
0.00%
0.81%
8.89%
0.00%
0.00%
8.89%
9.33%
0.00%
0.00%
9.33%
34.7%
0.0%
0.0%
34.7%
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
46
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.
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 23 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, interest rate swaps
and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive
hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert
certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate
47
liabilities. At December 31, 2019 and December 31, 2018, the Company had interest rate swaps with notional amounts of $725.6
million and $734.1 million, respectively. Additionally, 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, 2019 and December 31, 2018, we had commitments to sell residential real estate
loans of $115.0 million and $32.5 million, respectively. These contracts mature in less than one year. Refer to Note 18 to the
Company's consolidated financial statements for additional information about derivative financial instruments.
Contractual Obligations
The following table presents significant fixed and determinable contractual obligations and significant commitments as
of December 31, 2019. Further discussion of each obligation or commitment is included in the referenced note to the consolidated
financial statements.
Payments Due In
(dollars in thousands)
Deposits and brokered deposits without stated maturity1
Certificates of deposits and brokered certificates of
deposits1
FHLB advances1,2
Subordinated debt1
Operating lease commitments
Total contractual obligations
Note
Reference
8
Less than
1 year
$1,171,054
1-3 years
$
— $
3-5 years
More
than 5
years
Total
— $
— $1,171,054
8
9
10
6
980,288
110,000
—
867
$2,262,209
734,343
—
—
661
$ 735,004
268,028
180,000
—
116
$ 448,144
250
225,000
72,000
—
$ 297,250
1,982,909
515,000
72,000
1,644
$3,742,607
1 Amounts do not include associated interest payments.
2 Amounts do not include the effect of interest rate swaps used to convert short-term advances into long-term funding.
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, 2019, assuming
parallel shifts in interest rates:
NII - next twelve months
NII - Year 2
EVE
% Change from Base Case for Parallel Changes in Rates
-100 Basis Points
-50 Basis Points
-25 Basis Points
+100 Basis Points
(7.49)%
5.41 %
(2.58)%
(3.14)%
7.85 %
0.54 %
(1.35)%
8.57 %
0.69 %
3.42 %
4.74 %
(10.36)%
The Company’s objective is to manage the balance sheet with a “risk-neutral” position. 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
48
are expected to generate lower net interest income when short-term interest rates increase as rates paid on interest-bearing liabilities
would reprice upward more quickly or in greater quantities than rates earned on interest-earning assets.
Item 8.
Financial Statements and Supplementary Data
The consolidated financial statements and notes thereto required pursuant to this Item begin on page F-1 of this report.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information the Company
is required to disclose in reports that the Company files or submits under the 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, 2019.
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, 2019. 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, 2019, the Company’s internal control over financial reporting
was effective based on those criteria. The Company’s internal control over financial reporting as of December 31, 2019 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,
2019, that has materially affected or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B.
Other Information
None.
49
PART III
Certain information required by Part III is incorporated by reference from our definitive Proxy Statement for our 2020
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, 2019. 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
Information about our Executive Officers
Our executive officers are as follows:
Name
David B. Becker
Kenneth J. Lovik
Nicole S. Lorch
C. Charles Perfetti
Age
66
50
45
75
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.
The disclosure in the Proxy Statement under the headings “Proposal No. 1 - Election of Directors,” “Corporate
Governance,” “Shareholder proposals for 2021 Annual Meeting,” and, if applicable “Delinquent Section 16(a) Reports” is
incorporated into this Item by reference.
Item 11.
Executive Compensation
50
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 Management” 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 Accountant Fees and Services
Incorporated into this Item by reference is the information in the Proxy Statement under the heading “Audit-Related
Matters.”
51
PART IV
Item 15.
Exhibits and 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:
Exhibit No.
Description
3.1
3.2
4.1
4.4
4.5
4.6
4.7
4.8
4.9
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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)
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934
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)
Second Supplemental Indenture, dated as of June 12, 2019, 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 June 12, 2019
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)
Form of Senior Indenture (incorporated by reference to Exhibit 4.5 to registration statement on Form S-3
(Registration No. 333-219841) filed August 9, 2017)
Form of Subordinated Indenture (incorporated by reference to Exhibit 4.6 to registration statement on Form
S-3 (Registration No. 333-219841) filed August 9, 2017)
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)*
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)*
Form of Management Incentive Award Agreement - Restricted Stock Units under 2013 Equity Incentive
Plan for awards on or before January 21, 2019 (incorporated by reference to Exhibit 10.2 to quarterly
report on form 10-Q for the fiscal quarter ended March 31, 2017)*
Form of Management Incentive Award Agreement - Restricted Stock Units under 2013 Equity Incentive
Plan for awards after January 21, 2019 (incorporated by reference to Exhibit 10.1 to quarterly report on
Form 10-Q for the fiscal quarter ended March 31, 2019)*
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)*
Amended and Restated Employment Agreement among First Internet Bank of Indiana, First Internet
Bancorp and David B. Becker dated March 28, 2013 (incorporated by reference to Exhibit 10.4 to annual
report on Form 10-K for the year ended December 31, 2012)*
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)
10.10
Third Amendment to Office Lease dated as of May 1, 2018, by and between First Internet Bancorp and
First Internet Bank of Indiana
52
Exhibit No.
10.11
Description
Fourth Amendment to Office Lease dated as of February 1, 2020, by and between First Internet Bancorp
and First Internet Bank of Indiana
10.12
10.13
10.14
10.15
10.16
21.1
23.1
24.1
31.1
31.2
32.1
101
Form of Non-Employee Director Restricted Stock Award Agreement under 2013 Equity Incentive Plan
(incorporated by reference to Exhibit 10.2 to quarterly report on Form 10-Q filed May 4, 2016)*
Loan Agreement dated as of March 6, 2013, by and between First Internet Bancorp and First Internet Bank
of Indiana (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 annual report on Form 10-K for the fiscal year
ended December 31, 2015)
Fourth Acknowledgment, Confirmation and Amendment between First Internet Bank of Indiana and First
Internet Bancorp executed February 21, 2017 (incorporated by reference to Exhibit 10.14 to annual report
on Form 10-K for the fiscal year ended December 31, 2016)
First Internet Bancorp Annual Bonus Plan (incorporated by reference to Exhibit 10.1 to quarterly report on
Form 10-Q for the fiscal quarter ended March 31, 2017)*
List of Subsidiaries (incorporated by reference to Exhibit 21.1 to annual report on Form 10-K for the fiscal
year ended December 31, 2018)
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
Financial statements from the Annual Report on Form 10-K of First Internet Bancorp for the period ended
December 31, 2019, filed with the SEC on March 12, 2020, formatted in Extensible Business Reporting
Language (XBRL): (i) the Consolidated Balance Sheets at December 31, 2019 and 2018, (ii) the
Consolidated Statements of Income for the fiscal years ended December 31, 2019, 2018, and 2017, (iii) the
Consolidated Statements of Comprehensive Income for the fiscal years ended December, 2019, 2018, and
2017, (iv) the Consolidated Statements of Shareholders’ Equity for the fiscal years ended December 31,
2019, 2018, and 2017, (v) Consolidated Statements of Cash Flows for the fiscal years ended December
2019, 2018, and 2017, and (iv) Notes to Consolidated Financial Statements.
__________________________________
*Management contract, compensatory plan or arrangement required to be filed as an exhibit.
Item 16.
Form 10-K Summary.
None.
53
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 12, 2020.
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 12, 2020.
/s/ David B. Becker
David B. Becker,
Chairman, President,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Kenneth J. Lovik
Kenneth J. Lovik,
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
*
*
John K. Keach, Jr., Director
David R. Lovejoy, Director
*
Ann D. Murtlow, Director
*
Jerry Williams, Director
_____________________________
*
Ralph R. Whitney, Jr., Director
*
Jean L. Wojtowicz, Director
* David B. Becker, by signing his name hereto, does hereby sign this document on behalf of each of the above-named
directors of the Registrant pursuant to powers of attorney duly executed by such persons.
By:
/s/ David B. Becker
David B. Becker,
Attorney-in-Fact
54
Reports of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
First Internet Bancorp
Fishers, Indiana
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Internet Bancorp (Company) as of December 31, 2019
and 2018, 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, 2019, and the related notes (collectively referred to as the "financial
statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2019, 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)
("PCAOB"), the Company's internal control over financial reporting as of December 31, 2019, 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 11, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BKD, LLP
We have served as the Company's auditor since 2004.
Indianapolis, Indiana
March 12, 2020
F-1
Reports of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
First Internet Bancorp
Fishers, Indiana
Opinion on the Internal Control over Financial Reporting
We have audited First Internet Bancorp's (the "Company") internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2019, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
("PCAOB"), the consolidated financial statements of the Company and our report dated March 11, 2020, expressed an unqualified
opinion thereon.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definitions and Limitations of Internal Control over Financial Reporting
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.
F-2
/s/ BKD, LLP
Indianapolis, Indiana
March 12, 2020
F-3
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
Securities available-for-sale - at fair value (amortized cost of $546,640 in 2019 and $499,893
in 2018)
Securities held-to-maturity - at amortized cost (fair value of $62,560 in 2019 and $22,418 in
2018)
Loans held-for-sale (includes $56,097 in 2019 and $18,328 in 2018 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
Servicing asset
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 $2,472 in 2019 and
$1,125 in 2018
Accrued interest payable
Accrued expenses and other liabilities
Total liabilities
Commitments and Contingencies
Shareholders’ equity
December 31,
2019
2018
$
5,061
$
322,300
327,361
7,080
181,632
188,712
540,852
481,345
61,878
56,097
2,963,547
(21,840)
2,941,707
18,607
25,650
37,002
14,630
4,687
2,481
2,065
67,066
22,750
18,328
2,716,228
(17,896)
2,698,332
16,822
23,625
36,059
10,697
4,687
—
2,619
37,716
$
4,100,083
$
3,541,692
$
57,115
$
43,301
3,096,848
3,153,963
514,910
69,528
3,767
53,002
2,628,050
2,671,351
525,153
33,875
1,108
21,470
3,795,170
3,252,957
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; 9,741,800 and 10,170,778
shares issued and outstanding in 2019 and 2018, respectively
219,423
227,587
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
—
99,681
(14,191)
304,913
—
77,689
(16,541)
288,735
$
4,100,083
$
3,541,692
See Notes to Consolidated Financial Statements
F-4
First Internet Bancorp
Consolidated Statements of Income
(Amounts in thousands except share and per share data)
Interest income
Loans
Securities – taxable
Securities – non-taxable
Other earning assets
Total interest income
Interest expense
Deposits
Other borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges and fees
Loan servicing revenue
Mortgage banking activities
Gain on sale of loans
Loss on sale of securities
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
Write-down of other real estate owned
Other
Total noninterest expense
Income before income taxes
Income tax provision
Net income
Income per share of common stock
Basic
Diluted
Weighted-average number of common shares outstanding
Basic
Diluted
Dividends declared per share
Year Ended December 31,
2019
2018
2017
$
122,228
$
99,082
$
13,807
2,595
8,784
10,630
2,810
2,945
147,414
115,467
69,313
15,134
84,447
62,967
5,966
57,001
885
166
11,541
2,074
(458)
2,581
16,789
42,484
10,716
53,200
62,267
3,892
58,375
934
—
5,718
503
—
1,605
8,760
70,465
10,036
2,786
1,410
84,697
23,975
6,740
30,715
53,982
4,872
49,110
888
—
7,836
395
(8)
1,430
10,541
27,014
23,174
21,164
1,800
3,669
1,338
1,142
6,059
1,903
—
3,709
46,634
27,156
1,917
25,239
2.51
2.51
$
$
2,468
3,055
1,233
942
4,996
1,956
2,423
2,936
43,183
23,952
2,052
21,900
2.31
2.30
$
$
2,393
3,091
971
1,027
4,183
1,410
—
2,484
36,723
22,928
7,702
15,226
2.14
2.13
10,041,581
10,044,483
9,490,506
9,508,653
7,118,628
7,149,302
0.24
$
0.24
$
0.24
$
$
$
See Notes to Consolidated Financial Statements
F-5
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 recorded
within other comprehensive income before income tax
Reclassification adjustment for losses realized
Net unrealized holding losses on cash flow hedging derivatives recorded within
other comprehensive income before income tax
Other comprehensive income (loss) before tax
Income tax provision (benefit)
Other comprehensive income (loss) - net of tax
Comprehensive income
Year Ended December 31,
2019
2018
2017
$
25,239
$
21,900
$
15,226
12,072
458
(9,071)
3,459
1,109
2,350
(10,466)
—
(4,358)
(14,824)
(4,365)
(10,459)
6,280
8
—
6,288
2,039
4,249
$
27,589
$
11,441
$
19,475
See Notes to Consolidated Financial Statements
F-6
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, 2017
Net income
Other comprehensive income
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
Common stock redeemed for the net settlement of
share-based awards
Balance, December 31, 2017
Impact of adoption of new accounting standards (1)
Net income
Other comprehensive loss
Dividends declared ($0.24 per share)
Net cash proceeds from common stock issuance
Repurchase of common stock
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
Common stock redeemed for the net settlement of
share-based awards
Balance, December 31, 2018
Impact of adoption of new accounting standards (2)
Net income
Other comprehensive income
Dividends declared ($0.24 per share)
Repurchase of common stock
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
Common stock redeemed for the net settlement of
share-based awards
Balance, December 31, 2019
$
$
$
$
$
$
$
119,506
—
—
—
51,636
1,038
36
(173)
172,043
—
—
—
—
54,334
(216)
1,596
40
(210)
227,587
—
—
—
—
(9,784)
1,680
34
$
$
$
43,704
15,226
—
(1,827)
—
—
—
—
57,103
1,063
21,900
—
(2,377)
—
—
—
—
—
77,689
(821)
25,239
—
(2,426)
—
—
—
(9,268) $
—
4,249
—
—
—
—
(5,019) $
(1,063)
—
(10,459)
—
—
—
—
—
—
(16,541) $
—
—
2,350
—
—
—
—
(94)
219,423
$
—
99,681
$
—
(14,191) $
153,942
15,226
4,249
(1,827)
51,636
1,038
36
(173)
224,127
—
21,900
(10,459)
(2,377)
54,334
(216)
1,596
40
(210)
288,735
(821)
25,239
2,350
(2,426)
(9,784)
1,680
34
(94)
304,913
(1) Represents the impact of adopting Accounting Standards Update ("ASU") 2018-02 and ASU 2016-01. ASU 2018-02 increased retained
earnings and accumulated other comprehensive loss by $1.1 million. ASU 2016-01 decreased retained earnings and accumulated other
comprehensive loss by $0.1 million.
(2) Represents the impact of adopting ASU 2017-08.
See Notes to Consolidated Financial Statements
F-7
First Internet Bancorp
Consolidated Statements of Cash Flows
(Amounts in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Year Ended December 31,
2018
2017
2019
$
25,239
$
21,900
$
15,226
Amortization of operating lease right-of-use assets
Depreciation and amortization
Write-down of other real estate owned
Increase in cash surrender value of bank-owned life insurance
Provision for loan losses
Share-based compensation expense
Loss from sale of available-for-sale securities
Loans originated for sale
Proceeds from sale of loans originated for sale
Gain on sale of loans
Increase in fair value of loans held-for-sale
(Gain) loss on derivatives
Net change in servicing assets
Deferred income tax
Net change in other assets
Net change in other liabilities
Net cash (used in) provided by operating activities
Investing activities
Net loan activity, excluding sales and purchases
Net change in interest-bearing deposits
Purchase of bank owned life insurance
Proceeds from sales of other real estate owned
Net proceeds from sales of portfolio loans
Maturities of securities available-for-sale
Proceeds from sales 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
Other investing activities
Net cash used in investing activities
Financing activities
Net increase in deposits
Cash dividends paid
Net proceeds from issuance of subordinated debt
Repayment of subordinated debt
Net proceeds from common stock issuance
Repurchase of common stock
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 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
Initial recognition of right-of-use asset
Initial recognition of operating lease liabilities
Cash paid during the year for interest
Cash paid during the year for taxes
Loans transferred to other real estate owned
Loans transferred to held-for-sale from portfolio
Cash dividends declared, not paid
Transfer of mutual fund securities to other assets
729
6,926
—
(943)
5,966
1,680
458
(627,597)
601,215
(12,349)
(538)
(671)
(2,481)
(4,402)
(42,079)
5,270
(43,577)
(191,070)
—
—
554
293,708
92,610
30,137
(171,997)
(39,208)
(2,025)
(4,105)
(332,945)
11,068
(313,273)
482,612
(2,418)
35,418
—
—
(9,784)
595,000
(605,000)
(329)
495,499
138,649
188,712
327,361
2,096
2,096
81,788
4,561
—
291,152
585
—
$
$
—
5,667
2,423
(954)
3,892
1,596
—
(364,630)
376,535
(6,605)
(57)
501
—
978
(11,807)
(83)
29,356
(463,528)
—
—
332
41,916
62,507
—
(87,993)
(3,554)
(4,050)
(2,219)
(171,958)
(10,166)
(638,713)
586,410
(2,230)
—
(3,000)
54,334
(216)
375,000
(260,000)
(210)
750,088
140,731
47,981
188,712
$
— $
—
52,403
485
227
16,065
611
2,932
—
5,299
—
(910)
4,872
1,038
8
(412,925)
425,262
(8,170)
(638)
577
—
(3,296)
(2,273)
554
24,624
(870,181)
250
(10,000)
30
67,696
68,342
9,192
(91,463)
(2,550)
(10,665)
(1,517)
(67,285)
—
(908,151)
622,074
(1,675)
—
—
51,636
—
542,000
(321,806)
(173)
892,056
8,529
39,452
47,981
—
—
30,516
6,568
648
95,531
504
—
$
$
See Notes to Consolidated Financial Statements
F-8
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 on August 20, 2012 as a single member limited liability company wholly
owned by the Bank to manage other real estate owned properties as needed. First Internet Public Finance Corp., a wholly-
owned subsidiary of the Bank, was incorporated on March 6, 2017 and was established to provide municipal finance
lending and leasing products to government entities and to purchase, manage, service, and safekeep municipal securities.
SPF15, Inc., a wholly-owned subsidiary of the Bank, was incorporated on August 31, 2018 and was established to acquire
and hold real estate.
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, income taxes, valuation and impairments of investment securities and goodwill,
as well as fair value measurements of derivatives, loans held-for-sale and other real estate owned. 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, 2019 or 2018.
F-9
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
•
Securities not classified as either “held-to-maturity” or “trading securities” are classified as “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.
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 recognized 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
The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services
are provided and collectability is reasonably assured. The Company's principal source of revenue is interest income from
loans and leases and investment securities.
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.
The Company also earns noninterest income through a variety of financial and transaction services provided to corporate
and consumer clients such as deposit account, debit card, mortgage banking, portfolio loan sales and sales of the
government-guaranteed portion of U.S. Small Business Administration loans. Revenue is recorded for noninterest income
based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is
reported net of associated expenses.
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, unamortized premiums or discounts on purchased loans and carrying value adjustments related to interest
rate swaps associated with loans.
F-10
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
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.
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) the 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;
F-11
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
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.
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
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
F-12
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
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.
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
interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position.
Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors
and enters into interest rate lock commitments ("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.
Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses, less any
ineffectiveness, in the income statement within the same period that the hedged item affects earnings. The Company
includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest
rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related
to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate
F-13
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
swaps with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets while
interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the consolidated
balance sheets.
The IRLCs and forward contracts are not designated as accounting hedges, and are recorded at fair value with changes
in fair value reflected in noninterest income in 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
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, 2019 or 2018.
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 2016.
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 material uncertain tax positions that it believes should be
recognized in the consolidated financial statements.
F-14
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 (1)
Year Ended December 31,
2019
2018
2017
25,239
10,041,581
2.51
$
$
21,900
9,490,506
2.31
$
$
15,226
7,118,628
2.14
25,239
$
21,900
$
15,226
10,041,581
9,490,506
7,118,628
—
2,902
—
18,147
6,120
24,554
10,044,483
9,508,653
7,149,302
2.51
$
2.30
$
2.13
$
$
$
$
(1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from
the computation of diluted EPS were weighted-average antidilutive shares totaling 15,758 and 8,523 for the years ended December 31, 2019 and 2018,
respectively.
Share-based Compensation
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 11.
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 and unrealized gains and losses on cash flow
hedges.
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-15
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.
Servicing Asset
Servicing assets are related to small business lending loans sold and are recognized at the time of sale when servicing is
retained with the income statement effect recorded in loan servicing revenue. Servicing assets are recorded at fair value
in accordance with ASC 860. Fair value is based on a third-party valuation model that calculates the present value of
estimated future loan servicing revenue.
Reclassifications
Certain reclassifications have been made to the 2018 and 2017 financial statements to conform to the 2019 financial
statement presentation. These reclassifications had no effect on net income.
Note 2:
Cash and Cash Equivalents
At December 31, 2019, the Company’s interest-bearing and noninterest-bearing cash accounts at other institutions
exceeded the limits for full FDIC insurance coverage by $275.9 million. In addition, approximately $1.9 million and
$44.6 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, 2019 was $1.7 million.
Note 3:
Securities
The following tables summarize securities available-for-sale and securities held-to-maturity as of December 31, 2019
and 2018.
Amortized
Cost
December 31, 2019
Gross Unrealized
Gains
Losses
Fair
Value
Securities available-for-sale
U.S. Government-sponsored agencies
$
77,715
$
99
$
(1,942) $
Municipal securities
Agency mortgage-backed securities
Private label mortgage-backed securities
Asset-backed securities
Corporate securities
Total available-for-sale
97,447
264,142
63,704
5,000
38,632
1,706
1,304
97
—
220
(1,501)
(4,006)
(188)
(45)
(1,532)
75,872
97,652
261,440
63,613
4,955
37,320
$
546,640
$
3,426
$
(9,214) $
540,852
F-16
Securities held-to-maturity
Municipal securities
Corporate securities
Total held-to-maturity
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
Amortized
Cost
December 31, 2019
Gross Unrealized
Gains
Losses
Fair
Value
$
$
10,142
51,736
61,878
$
$
226
588
814
$
$
— $
(132)
(132) $
10,368
52,192
62,560
Amortized
Cost
December 31, 2018
Gross Unrealized
Gains
Losses
Fair
Value
Securities available-for-sale
U.S. Government-sponsored agencies
$
109,631
$
Municipal securities
Agency mortgage-backed securities
Private label mortgage-backed securities
Asset-backed securities
Corporate securities
Total available-for-sale
Securities held-to-maturity
Municipal securities
Corporate securities
Total held-to-maturity
97,090
242,293
9,199
5,002
36,678
20
90
162
—
—
—
$
(2,066) $
(4,674)
(8,721)
(21)
(143)
(3,195)
107,585
92,506
233,734
9,178
4,859
33,483
481,345
$
499,893
$
272
$
(18,820) $
Amortized
Cost
December 31, 2018
Gross Unrealized
Gains
Losses
Fair
Value
$
$
10,157
12,593
22,750
$
$
— $
80
80
$
(356) $
(56)
(412) $
9,801
12,617
22,418
The carrying value of securities at December 31, 2019 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
Agency mortgage-backed securities
Private label mortgage-backed securities
Asset-backed securities
Total
F-17
Available-for-Sale
Amortized
Cost
Fair
Value
$
30
$
9,200
81,237
123,327
213,794
264,142
63,704
5,000
31
7,789
80,175
122,849
210,844
261,440
63,613
4,955
$
546,640
$
540,852
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
One to five years
Five to ten years
After ten years
Total
Held-to-Maturity
Amortized
Cost
Fair
Value
$
$
998
$
50,848
10,032
61,878
$
1,005
51,493
10,062
62,560
There were no gross realized gains resulting from sales of available-for-sale securities recognized during the twelve
months ended December 31, 2019, 2018, and 2017. There were gross realized losses of $0.5 million, $0.0 million, and
$0.0 million resulting from sales of available-for-sale securities recognized during the twelve months ended December 31,
2019, 2018, and 2017, respectively.
As of December 31, 2019, the fair value of available-for-sale investment securities pledged as collateral was $469.0
million. The Company pledged the securities for various types of transactions, including FHLB advances, derivative
financial instruments and to collateralize municipal deposits.
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, 2019 and 2018 was $317.5 million and $469.8
million, which is approximately 53% and 93%, 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 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, 2019.
Agency Mortgage-Backed, Private-Label Mortgage-Backed and Asset-Backed Securities
The unrealized losses on the Company’s investments in agency mortgage-backed, private-label 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, 2019.
F-18
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
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,
2019 and 2018:
December 31, 2019
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
$
4,820
$
(61) $
62,182
$
(1,881) $
67,002
$
Municipal securities
Agency mortgage-backed securities
Private label mortgage-backed securities
Asset-backed securities
Corporate securities
Total
1,279
91,159
30,077
—
—
(1,501)
(829)
(180)
—
—
—
83,212
2,884
4,955
22,985
—
1,279
(3,177)
174,371
(8)
(45)
(1,532)
32,961
4,955
22,985
$
127,335
$
(2,571) $
176,218
$
(6,643) $
303,553
$
(1,942)
(1,501)
(4,006)
(188)
(45)
(1,532)
(9,214)
Securities held-to-maturity
Corporate securities
Total
December 31, 2019
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
13,977
(132)
$
13,977
$
(132) $
—
— $
—
13,977
— $
13,977
$
(132)
(132)
December 31, 2018
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
$
69,798
$
(893) $
33,511
$
(1,173) $
103,309
$
Municipals
Agency mortgage-backed securities
Private label mortgage-backed securities
Asset-backed securities
Corporate securities
Total
Securities held-to-maturity
Municipal securities
Corporate securities
Total
23,747
47,000
9,177
4,859
14,092
(710)
(509)
(20)
(143)
(586)
59,938
172,442
—
—
(3,964)
(8,212)
(1)
—
19,391
(2,609)
83,685
219,442
9,177
4,859
33,483
(2,066)
(4,674)
(8,721)
(21)
(143)
(3,195)
$
168,673
$
(2,861) $
285,282
$
(15,959) $
453,955
$
(18,820)
December 31, 2018
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
$
9,801
6,037
15,838
$
$
(356) $
(56)
(412) $
— $
—
— $
— $
—
9,801
6,037
— $
15,838
$
$
(356)
(56)
(412)
F-19
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, 2019, 2018 and 2017 were as follows:
Amounts Reclassified from
Accumulated Other Comprehensive Loss
for the Year Ended December 31,
2019
2018
2017
Affected Line Item in the
Statements of Income
(458) $
— $
(8) Loss on sale of securities
(458)
(124)
—
—
(8)
(3)
Income before income taxes
Income tax provision
(334) $
— $
(5) Net Income
Details About Accumulated Other
Comprehensive Loss Components
Unrealized gains and losses on securities
available-for-sale
Loss realized in earnings
Total reclassified amount before tax
Tax benefit
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
Public finance
Healthcare finance
Small business lending
Total commercial loans
Consumer loans
Residential mortgage
Home equity
Other consumer
Total consumer loans
December 31,
2019
2018
$
96,420
$
107,405
73,392
12,567
60,274
995,879
687,094
300,612
60,279
77,569
5,391
39,916
919,440
706,342
117,007
17,370
2,286,517
1,990,440
313,849
24,306
295,309
633,464
2,919,981
43,566
2,963,547
399,898
28,735
279,771
708,404
2,698,844
17,384
2,716,228
(21,840)
(17,896)
$
2,941,707
$
2,698,332
Total commercial and consumer loans
Net deferred loan origination costs and premiums and discounts on purchased loans and other(1)
Total loans
Allowance for loan losses
Net loans
(1) Includes carrying value adjustments of $21.4 million and $5.0 million as of December 31, 2019 and 2018, respectively, related to interest
rate swaps associated with public finance loans.
F-20
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
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. This portfolio segment is generally concentrated in
Central Indiana and adjacent markets and the greater Phoenix, Arizona market.
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 Central Indiana and adjacent markets and the greater Phoenix, Arizona market and
its loans are often secured by manufacturing and service facilities, as well as office buildings.
Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be
generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate
a personal guarantee from the primary sponsor or sponsors. This portfolio segment generally involves larger loan amounts
with repayment primarily dependent on the successful leasing and 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 changing economic conditions in the real estate markets, industry dynamics or the overall health of the local
economy where the property is located. The properties securing the Company’s investor commercial real estate portfolio
tend to be diverse in terms of property type and are generally located in the state of Indiana or markets immediately
adjacent to Indiana. Management monitors and evaluates commercial real estate loans based on property financial
performance, collateral value, guarantor strength, economic and industry conditions together with 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 land and related 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, architectural services, 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. This portfolio segment is generally
concentrated in Central Indiana.
Single Tenant Lease Financing: These loans are made on a nationwide basis 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.
Public Finance: These loans are made to governmental and not-for-profit entities to provide both tax-exempt and taxable
loans for a variety of purposes including: short-term cash-flow needs; debt refinancing; economic development; quality
of life projects; infrastructure improvements; and equipment financing. The primary sources of repayment for public
finance loans include pledged revenue sources including but not limited to: general obligations; property taxes; income
taxes; tax increment revenue; utility revenue; gaming revenues; sales tax; and pledged general revenue. Certain loans
may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment. Public
finance loans have been completed primarily in the Midwest, with plans to continue expanding nationwide.
Healthcare Finance: These loans are made to healthcare providers, primarily dentists, for practice acquisition refinancing
that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment
are primarily based on the identified cash flows from operations of the borrower and related entities if the real estate is
held in a separate entity and secondarily on the underlying collateral provided by the borrower. This portfolio segment
F-21
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
was initially concentrated in the Western United States but has been growing rapidly throughout the rest of the country
with the addition of a growing sales force located in Eastern and Midwestern markets.
Small Business Lending: These loans are to small businesses and generally carry a partial guaranty from the U.S. Small
Business Administration ("SBA"). We generally sell the government guaranteed portion of SBA loans into the secondary
market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending
portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily
on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. An
SBA guaranty provides a tertiary source or repayment to the Bank in event of borrower default. Cash flows of borrowers;
however, may not be as expected, and collateral securing these loans may fluctuate in value. Loans are made for a broad
array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating
equipment purchases. This portfolio segment has an emerging geography, with a nationwide focus.
Residential Mortgage: With respect to residential loans that are secured by 1 to 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 to 4 family
residences. The properties securing the home equity portfolio segment are generally geographically diverse as the
Company offers these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent
on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property
values on residential properties, among other economic conditions 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-22
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 ALLL during the twelve months ended December 31, 2019,
2018, and 2017.
Twelve Months Ended December 31, 2019
Balance,
beginning of
period
Provision (credit)
charged to
expense
Losses charged
off
Recoveries
Balance, end of
period
Allowance for loan losses:
Commercial and industrial
Owner-occupied commercial real estate
Investor commercial real estate
Construction
Single tenant lease financing
Public finance
Healthcare finance
Small business lending
Residential mortgage
Home equity
Other consumer
Total
$
1,384
$
1,029
$
(921) $
783
61
251
8,827
1,670
1,264
203
1,079
53
2,321
(222)
48
129
2,348
(90)
1,983
(154)
(350)
51
1,194
$
17,896
$
5,966
$
—
—
—
—
—
—
—
(76)
(68)
(1,292)
(2,357) $
$
1,521
29
—
—
—
—
—
—
5
4
10
287
335
$
561
109
380
11,175
1,580
3,247
54
657
46
2,510
21,840
Allowance for loan losses:
Commercial and industrial
Owner-occupied commercial real estate
Investor commercial real estate
Construction
Single tenant lease financing
Public finance
Healthcare finance
Small business lending
Residential mortgage
Home equity
Other consumer
Total
Twelve Months Ended December 31, 2018
Balance,
beginning of
period
Provision (credit)
charged to
expense
Losses charged
off
Recoveries
Balance, end of
period
$
1,724
$
(251) $
(92) $
3
$
1,384
762
85
423
7,872
959
313
55
956
70
1,751
21
(24)
(172)
955
711
951
148
127
(33)
1,459
$
14,970
$
3,892
$
—
—
—
—
—
—
—
(9)
—
—
—
—
—
—
—
—
5
16
(1,176)
(1,277) $
287
311
$
783
61
251
8,827
1,670
1,264
203
1,079
53
2,321
17,896
F-23
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
Twelve Months Ended December 31, 2017
Balance,
beginning of
period
Provision (credit)
charged to
expense
Losses charged
off
Recoveries
Balance, end of
period
$
1,724
69
—
—
—
—
—
—
—
4
23
303
399
$
762
85
423
7,872
959
313
55
956
70
1,751
14,970
Allowance for loan losses:
Commercial and industrial
Owner-occupied commercial real estate
Investor commercial real estate
Construction
Single tenant lease financing
Public finance
Healthcare finance
Small business lending
Residential mortgage
Home equity
Other consumer
Total
$
1,352
$
582
168
544
6,248
—
—
—
754
102
1,231
$
574
180
(83)
(121)
1,624
959
313
55
314
(55)
1,112
(271) $
—
—
—
—
—
—
—
(116)
—
(895)
$
10,981
$
4,872
$
(1,282) $
F-24
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, 2019 and 2018.
Ending
Balance:
Collectively
Evaluated
for
Impairment
Loans
Ending
Balance:
Individually
Evaluated
for
Impairment
Ending
Balance
Allowance for Loan Losses
Ending
Balance:
Collectively
Evaluated
for
Impairment
Ending
Balance:
Individually
Evaluated
for
Impairment
Ending
Balance
$
93,520
$
2,900
$
96,420
$
1,412
$
109
$
1,521
71,067
12,567
60,274
991,199
687,094
300,612
56,941
312,714
24,306
295,266
2,325
—
—
4,680
—
—
3,338
1,135
—
43
73,392
12,567
60,274
995,879
687,094
300,612
60,279
313,849
24,306
295,309
561
109
380
9,515
1,580
3,247
54
657
46
2,510
—
—
—
561
109
380
1,660
11,175
—
—
—
—
—
—
1,580
3,247
54
657
46
2,510
$
2,905,560
$
14,421
$2,919,981
$
20,071
$
1,769
$
21,840
December 31, 2019
Commercial and industrial
Owner-occupied commercial real
estate
Investor commercial real estate
Construction
Single tenant lease financing
Public finance
Healthcare finance
Small business lending
Residential mortgage
Home equity
Other consumer
Total
Ending
Balance:
Collectively
Evaluated
for
Impairment
Loans
Ending
Balance:
Individually
Evaluated
for
Impairment
Ending
Balance
Allowance for Loan Losses
Ending
Balance:
Collectively
Evaluated
for
Impairment
Ending
Balance:
Individually
Evaluated
for
Impairment
Ending
Balance
$
101,765
$
5,640
$ 107,405
$
1,384
$
— $
1,384
76,216
5,391
39,916
919,440
706,342
117,007
16,414
399,328
28,680
279,714
1,353
—
—
—
—
—
956
570
55
57
77,569
5,391
39,916
919,440
706,342
117,007
17,370
399,898
28,735
279,771
783
61
251
8,827
1,670
1,264
203
1,079
53
2,321
—
—
—
—
—
—
—
—
—
—
783
61
251
8,827
1,670
1,264
203
1,079
53
2,321
$
2,690,213
$
8,631
$2,698,844
$
17,896
$
— $
17,896
December 31, 2018
Commercial and industrial
Owner-occupied commercial real
estate
Investor commercial real estate
Construction
Single tenant lease financing
Public finance
Healthcare finance
Small business lending
Residential mortgage
Home equity
Other consumer
Total
F-25
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. A description of the
general characteristics of the 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 and consumer loan portfolios based on
rating category and payment activity as of December 31, 2019 and 2018.
Commercial and industrial
Owner-occupied commercial real
estate
Investor commercial real estate
Construction
Single tenant lease financing
Public finance
Healthcare finance
Small business lending
December 31, 2019
Pass
Special Mention
Substandard
Total
$
89,818
$
3,973
$
2,629
$
71,068
12,567
60,274
983,448
687,094
300,612
55,206
1,727
—
—
7,751
—
—
1,735
597
—
—
4,680
—
—
3,338
96,420
73,392
12,567
60,274
995,879
687,094
300,612
60,279
Total commercial loans
$
2,260,087
$
15,186
$
11,244
$
2,286,517
Performing
December 31, 2019
Nonaccrual
Total
Residential mortgage
Home equity
Other consumer
Total
$
$
313,088
$
24,306
295,276
632,670
$
761
$
—
33
794
$
313,849
24,306
295,309
633,464
F-26
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
December 31, 2018
Pass
Special Mention
Substandard
Total
$
100,689
$
1,076
$
5,640
$
73,593
5,391
39,916
913,984
706,342
117,007
14,648
2,623
—
—
5,456
—
—
1,766
1,353
—
—
—
—
—
956
107,405
77,569
5,391
39,916
919,440
706,342
117,007
17,370
Commercial and industrial
Owner-occupied commercial real
estate
Investor commercial real estate
Construction
Single tenant lease financing
Public finance
Healthcare finance
Small business lending
Total commercial loans
$
1,971,570
$
10,921
$
7,949
$
1,990,440
Performing
December 31, 2018
Nonaccrual
Total
Residential mortgage
Home equity
Other consumer
Total
$
$
399,723
$
28,680
279,729
708,132
$
175
$
55
42
272
$
399,898
28,735
279,771
708,404
The following tables present the Company’s loan portfolio delinquency analysis as of December 31, 2019 and 2018.
December 31, 2019
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
Total
Past Due
Current
Total loans
Nonaccrual
Loans
Total Loans
90 Days or
More Past
Due
and Accruing
Commercial and industrial
$
15
$
96
$
122
$
233
$
96,187
$
96,420
$
226
$
Owner-occupied commercial
real estate
Investor commercial real
estate
Construction
Single tenant lease financing
Public finance
Healthcare finance
Small business lending
Residential mortgage
Home equity
Other consumer
Total
—
—
—
—
—
—
54
—
—
240
309
$
—
—
—
4,680
—
—
—
—
—
107
464
464
72,928
73,392
—
—
—
—
—
—
—
—
4,680
—
—
54
12,567
60,274
991,199
687,094
300,612
60,225
1,177
1,177
312,672
—
—
—
347
24,306
294,962
12,567
60,274
995,879
687,094
300,612
60,279
313,849
24,306
295,309
464
—
—
4,680
—
—
—
761
—
33
$
4,883
$
1,763
$
6,955
$2,913,026
$ 2,919,981
$
6,164
$
—
—
—
—
—
—
—
—
416
—
—
416
F-27
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
December 31, 2018
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
Total
Past Due
Current
Total loans
Nonaccrual
Loans
Total Loans
90 Days or
More Past
Due
and Accruing
Commercial and industrial
$
9
$
— $
— $
9
$
107,396
$
107,405
$
195
$
Owner-occupied commercial
real estate
Investor commercial real estate
Construction
Single tenant lease financing
Public finance
Healthcare finance
Small business lending
Residential mortgage
Home equity
Other consumer
Total
$
92
—
—
—
—
—
—
—
—
235
336
234
—
—
—
—
—
—
3,118
—
170
—
—
—
—
—
—
—
98
55
4
326
—
—
—
—
—
—
3,216
55
409
77,243
5,391
39,916
919,440
706,342
117,007
17,370
396,682
28,680
279,362
77,569
5,391
39,916
919,440
706,342
117,007
17,370
399,898
28,735
279,771
325
—
—
—
—
—
—
175
55
42
$
3,522
$
157
$
4,015
$ 2,694,829
$ 2,698,844
$
792
$
—
—
—
—
—
—
—
—
97
—
—
97
The following tables present the Company’s impaired loans as of December 31, 2019 and 2018.
December 31, 2019
December 31, 2018
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
Loans without a specific valuation allowance
Commercial and industrial
$
2,693
$
2,694
$
— $
5,640
$
5,652
$
Owner-occupied commercial real estate
Small business lending
Residential mortgage
Home equity
Other consumer
Total
Loans with a specific valuation allowance
Commercial and industrial
Single tenant lease financing
Total
Total impaired loans
2,325
3,338
1,135
—
43
9,534
2,327
3,338
1,209
—
107
9,675
—
—
—
—
—
—
1,353
1,353
956
570
55
57
956
570
55
124
8,631
8,710
$
$
207
$
244
$
109
$
— $
— $
4,680
4,887
4,680
4,924
1,660
1,769
—
—
—
—
14,421
$
14,599
$
1,769
$
8,631
$
8,710
$
—
—
—
—
—
—
—
—
—
—
F-28
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
The following table presents average balances and interest income recognized for impaired loans during the twelve months
ended December 31, 2019, 2018, and 2017.
Twelve Months Ended
December 31, 2019
December 31, 2018
December 31, 2017
Average
Balance
Interest
Income
Average
Balance
Interest
Income
Average
Balance
Interest
Income
Loans without a specific valuation allowance
Commercial and industrial
$
3,293
$
$
5,961
$
426
$
2,942
$
146
Owner-occupied commercial real estate
Small business lending
Residential mortgage
Home equity
Other consumer
Total
Loans with a specific valuation allowance
Commercial and industrial
Single tenant lease financing
Total
Total impaired loans
3,292
331
2,265
10
68
9,259
1,077
1,464
2,541
289
170
94
—
—
1
554
—
—
—
833
60
720
61
108
7,743
—
—
—
44
15
—
—
—
485
—
—
—
3
—
1,546
5
105
4,601
35
—
35
$
11,800
$
554
$
7,743
$
485
$
4,636
$
—
—
6
—
4
156
—
—
—
156
The Company had $0.0 million and $0.6 million in residential mortgage other real estate owned as of December 31, 2019
and December 31, 2018, respectively. There were no loans in the process of foreclosure at December 31, 2019 and
December 31, 2018, respectively.
Troubled Debt Restructurings
The loan portfolio includes TDRs, which are loans that have been modified to grant economic concessions 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
consecutive months.
When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the
present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or
using 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
allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have
payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance.
In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain
loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability
of the loan. Any loan modification is reviewed by the Company to identify whether a TDR has occurred when the Company
grants a concession to the borrower that it would not otherwise consider based on economic or legal reasons related to a
borrower’s financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current
financial status or the loan may be restructured to secure additional collateral and/or guarantees to support the debt, or a
combination of the two.
There were four commercial and industrial loans classified as new TDRs during the twelve months ended December 31,
2019 with a pre-modification and post-modification outstanding recorded investment of $2.0 million. The Company did
not allocate a specific allowance for those loans as of December 31, 2019 and the modifications consisted of interest-
only payments for a period of time. There were no loans classified as new TDRs during the twelve months ended December
F-29
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
31, 2018. There were two commercial and industrial loans classified as new TDRs during the twelve months ended
December 31, 2017 with a pre-modification and post-modification outstanding recorded investment of $1.8 million.
These loans were paid-in-full in the fourth quarter of 2017. The 2017 modifications consisted of maturity date amendments
and certain other term modifications.
There were no performing TDRs which had payment defaults within the twelve months following modification during
the years ended December 31, 2019, 2018 and 2017.
Note 5:
Premises and Equipment
The following table summarizes premises and equipment at December 31, 2019 and 2018.
Land
Right of use leased asset
Building and improvements
Furniture and equipment
Less: accumulated depreciation
December 31,
2019
2018
$
2,500
$
1,602
10,004
9,689
(9,165)
$
14,630
$
2,500
—
6,752
9,076
(7,631)
10,697
During 2018, the Bank's subsidiary, SPF15, Inc., (“SPF15”) acquired several parcels of land consisting of approximately
3.3 acres located in Fishers, Indiana for approximately $10.2 million, inclusive of acquisition costs. Pursuant to a Land
Acquisition Agreement with the City of Fishers, Indiana (the “City”), and its Redevelopment Commission, among others,
the City agreed to reimburse SPF15 for the purchase price and other specified land acquisition costs. The Land Acquisition
Agreement was replaced by a Project Agreement in December 2018, which extended the reimbursement deadline to
October 31, 2019 and made additional financial incentives available to the Company for constructing an office building
and associated parking garage on the property. As contemplated under the Project Agreement, the City transferred to
SPF15 two additional parcels of land consisting of approximately 0.75 acres and SPF15 transferred to the Fishers Town
Hall Building Corporation and third parties a certain parcel of land consisting of approximately 1.65 acres in connection
with the development of the property. On October 25, 2019, the City satisfied its reimbursement obligation, resulting in
the payment of SPF15 of an aggregate of $11.1 million for purchase prices and other specified land acquisition costs.
Site demolition has been completed and construction of a multi-use development, to include the Company's future
headquarters, began on October 7, 2019. Development of the site is estimated to be substantially completed by September
30, 2021.
Note 6:
Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property or
equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU 2016-02
- Leases (Topic 842) and elected the optional transition method, which allows the Company to not separate non-lease
components from the associated lease component if certain conditions are met. In addition, the Company elected not to
adjust prior comparative periods. Refer to Note 22 for further information regarding transition guidance related to the
new standard.
The Company has three operating leases that are used for general office operations with remaining lease terms of two to
four years. With the adoption of ASU 2016-02, operating lease agreements are required to be recognized on the consolidated
balance sheets as a right-of-use asset and a corresponding lease liability.
F-30
The following table shows the components of lease expense.
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
(in thousands)
Operating lease cost
December 31,
2019
Twelve Months Ended
December 31,
2018
December 31,
2017
$
758
$
724
$
711
The following table shows supplemental cash flow information related to leases.
(in thousands)
Twelve Months Ended
December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
814
The following table shows the operating leases’ impact on the consolidated balance sheets. The Company elected not
to include short-term leases (leases with original terms of 12 months or less) or equipment leases, as those amounts are
insignificant. The Company’s leases do not provide an implicit rate. The discount rate utilized to determine the present
value of lease payments is the Company’s incremental borrowing rate based on the information available at the lease
inception date. The incremental borrowing rate is the rate of interest the Company would have to pay to borrow on a
collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.
(dollars in thousands)
Operating lease right-of-use assets
Operating lease liabilities
Weighted-average remaining lease term (years)
Operating leases
Weighted-average discount rate
Operating leases
$
December 31, 2019
1,602
1,602
2.4
2.0%
The following table shows the future minimum payments of operating leases with initial or remaining terms of one year
or more as of December 31, 2019.
(in thousands)
Twelve months ended December 31, 2019
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less imputed interest
Total
F-31
$
$
867
423
238
116
—
—
1,644
(49)
1,595
Note 7:
Goodwill
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
As of December 31, 2019 and 2018, 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, 2019, 2018, and 2017. 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. The annual test indicated no impairment existed as of August 31, 2019
and no events or changes in circumstances have occurred since the August 31, 2019 annual impairment test that would
suggest it was more likely than not goodwill impairment existed.
Note 8:
Deposits
The following table presents the composition of the Company’s deposit base as of December 31, 2019 and 2018.
December 31,
2019
2018
Noninterest-bearing demand deposit accounts
Interest-bearing demand deposit accounts
Regular savings accounts
Money market accounts
Certificates of deposits
Brokered deposits
Total deposits
Time deposits (in the amount of $250 or more)
The following table presents time deposit maturities by year as of December 31, 2019.
2020
2021
2022
2023
2024
Thereafter
Note 9:
FHLB Advances
$
57,115
$
129,020
29,616
786,390
1,613,453
538,369
3,153,963
536,028
$
$
$
$
$
43,301
121,055
38,489
528,533
1,292,883
647,090
2,671,351
494,403
943,678
528,757
124,544
81,447
69,081
250
$
1,747,757
The Company had outstanding FHLB advances of $514.9 million and $525.2 million as of December 31, 2019 and 2018,
respectively. As of December 31, 2019, the stated interest rates on the Company’s outstanding FHLB advances ranged
from 1.06% to 3.26%, with a weighted average interest rate of 1.98%. All advances are collateralized by residential
mortgage loans and commercial real estate loans pledged and held by the Company and investment securities pledged
by the Company and held in safekeeping with the FHLB. Residential mortgage loans pledged were approximately $166.6
million and $238.6 million as of December 31, 2019 and 2018, respectively, and commercial real estate loans pledged
were approximately $956.3 million and $881.7 million as of December 31, 2019 and 2018, respectively. The fair value
of investment securities pledged to the FHLB was approximately $356.8 million and $339.1 million as of December 31,
2019 and 2018, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible
to borrow up to an additional $496.1 million at year-end 2019. As of December 31, 2019, the Company had $305.0
million of putable advances with the FHLB.
F-32
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:
2020
2021
2022
2023
2024
Thereafter
Net deferred prepayment gain on advance restructure
Note 10:
Subordinated Debt
Amount
$
110,000
—
—
35,000
145,000
225,000
515,000
(90)
$
514,910
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
London Interbank Offered Rate (“LIBOR”) plus 485 basis points. LIBOR will be phased-out after 2021 and the transition
to another benchmark rate could have an adverse effect on the 2026 Notes. Refer to Part I Item 1A. Risk Factors for more
information on the LIBOR phase out. 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.
In June 2019, the Company issued $37.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated
Notes due 2029 (the “2029 Notes”) in a public offering. The 2029 Notes initially bear a fixed interest rate of 6.0% per year
to, but excluding, June 30, 2024, and thereafter a floating rate equal to the then-current benchmark rate (initially three-
month LIBOR rate) plus 411 basis points. All interest on the 2029 Notes is payable quarterly. The 2029 Notes are scheduled
to mature on June 30, 2029. The 2029 Notes are unsecured subordinated obligations of the Company and may be repaid,
without penalty, on any interest payment date on or after June 30, 2024. The 2029 Notes are intended to qualify as Tier 2
capital under regulatory guidelines.
F-33
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
The following table presents the principal balance and unamortized discount and debt issuance costs for the 2025 Note, the
2026 Notes and the 2029 Notes as of December 31, 2019 and 2018.
December 31, 2019
December 31, 2018
Principal
10,000
25,000
37,000
72,000
$
$
Unamortized
Discount and
Debt Issuance
Costs
(138)
(839)
(1,495)
(2,472)
Unamortized
Discount and
Debt Issuance
Costs
(162)
(963)
—
(1,125)
Principal
10,000
25,000
—
35,000
2025 Note
2026 Notes
2029 Notes
Total
Note 11:
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, which vests immediately.
Discretionary 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 $0.6 million, $0.5
million and $0.5 million in the twelve months ended December 31, 2019, 2018 and 2017, respectively.
Employment Agreement
The Company has entered into an employment agreement with its Chief Executive Officer that provides for an annual
base salary and an annual bonus, if any, as determined from time to time by the Compensation Committee. The annual
bonus is to be determined with reference to the achievement of annual performance objectives established by the
Compensation Committee for the Chief Executive Officer and other senior officers. The agreement also provides that
the Chief Executive Officer may be awarded additional compensation, benefits or consideration as the Compensation
Committee may determine.
The agreement provides for the continuation of salary and certain other benefits for a specified period of time upon
termination of his employment under certain circumstances, including his resignation for "good reason" or termination
by the Company without "cause" at any time or any termination of his employment for any reason within twelve months
following a "change in control," 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 $1.7 million, $1.6 million, and $1.0 million of share-based compensation expense for the years
ended December 31, 2019, 2018, and 2017, respectively, related to awards made under the 2013 Plan.
F-34
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
The following table summarizes the status of the 2013 Plan awards as of December 31, 2019, and activity for the year
ended December 31, 2019:
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
Unvested at January 1, 2019
75,554
$
Granted
Vested
Forfeited
74,698
(36,218)
(6,790)
Unvested at December 31, 2019
107,244
$
35.34
24.61
33.08
29.10
29.03
1,666
$
11,742
(13,408)
—
— $
24.44
24.62
24.60
—
—
— $
11
(11)
—
— $
—
21.88
21.88
—
—
As of December 31, 2019, the total unrecognized compensation cost related to unvested awards was $2.0 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.
The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the
year ended December 31, 2019.
Outstanding, beginning of year
Granted
Exercised
Outstanding, end of year
Deferred Rights
83,521
984
—
84,505
All deferred stock rights granted during 2019 were additional rights issued in lieu of cash dividends payable on outstanding
deferred stock rights.
Note 12:
Income Taxes
The provision for income taxes consists of the following:
Current
Deferred
Net deferred tax asset revaluation
Total
December 31,
2019
2018
2017
$
$
6,319
$
1,074
$
(4,402)
—
978
—
1,917
$
2,052
$
10,998
(5,142)
1,846
7,702
The Tax Cuts and Jobs Act of 2017 ("Tax Act") was enacted on December 22, 2017. Among other changes, the Tax
Act reduced the federal corporate tax rate from 35% to 21%. Deferred tax assets and liabilities, as of December 31,
2017, were revalued based on the rate expected to reverse in the future, which was 21%.
F-35
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
Income tax provision is reconciled to the statutory rate applied to pre-tax income. The statutory rate was 21%, 21% and
35% at December 31, 2019, 2018 and 2017, respectively.
Statutory rate times pre-tax income
(Subtract) add the tax effect of:
Income from tax-exempt securities and loans
State income tax, net of federal tax effect
Bank-owned life insurance
Net deferred tax asset revaluation
Tax credits
Other differences
Total income taxes
December 31,
2019
2018
2017
$
5,703
$
5,030
$
8,025
(4,881)
1,285
(198)
—
(181)
189
(3,833)
1,164
(200)
—
(180)
71
(2,512)
693
(318)
1,846
—
(32)
$
1,917
$
2,052
$
7,702
The net deferred tax asset at December 31, 2019 and 2018 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
Net operating loss
Tax credits
Other
December 31,
2019
2018
$
5,897
$
5,021
(1,011)
(257)
1,358
(1,181)
(449)
—
—
513
Total deferred tax assets, net
$
9,891
$
4,832
6,137
(5,016)
(398)
1,043
(1,081)
(406)
455
231
808
6,605
Note 13:
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 the normal risk
of collectability or present other unfavorable features.
Management evaluated related party loans and extensions of credit at December 31, 2019 and 2018, and deemed the
balances immaterial. Deposits from related parties held by the Company at December 31, 2019 and 2018 totaled $28.3
million and $24.0 million, respectively.
F-36
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
Note 14:
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”).
The Basel III Capital Rules were fully phased in on January 1, 2019 and 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%); 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%); 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%); 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 was phased in
over a four-year period, increasing by increments of that amount on each subsequent January 1 until it reached 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 capital 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-37
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
The following tables present actual and required capital ratios as of December 31, 2019 and 2018 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, 2019 and 2018 based on the Basel III Capital Rules. 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
Minimum Required to be
Considered Well
Capitalized
Capital
Amount
Ratio
Capital
Amount
Ratio
Capital
Amount
Ratio
As of December 31, 2019:
Common equity tier 1 capital to risk-weighted
assets
Consolidated
Bank
Tier 1 capital to risk-weighted assets
Consolidated
Bank
Total capital to risk-weighted assets
Consolidated
Bank
Leverage ratio
Consolidated
Bank
313,803
341,242
405,171
363,082
313,803
341,242
$
313,803
10.84% $
202,661
341,242
11.80%
202,480
10.84%
11.80%
246,088
245,869
7.00%
7.00%
8.50%
8.50%
N/A
188,017
N/A
231,406
13.99%
12.55%
303,991
303,720
10.50%
10.50%
N/A
289,257
7.64%
8.32%
164,219
164,121
4.00%
4.00%
N/A
205,151
Actual
Minimum Capital
Required - Basel III
Phase-In Schedule
Minimum Capital
Required - Basel III
Minimum Required
to be Considered
Well Capitalized
Capital
Amount
Ratio
Capital
Amount
Ratio
Capital
Amount
Ratio
Capital
Amount
Ratio
As of December 31, 2018:
Common equity tier 1 capital to risk-
weighted assets
Consolidated
Bank
$ 300,589
12.39% $ 154,613
6.38% $ 169,771
7.00%
N/A
286,012
11.81% 154,407
6.38% 169,545
7.00% 157,435
N/A
6.50%
N/A
8.00%
N/A
10.00%
N/A
5.00%
N/A
6.50%
N/A
8.00%
Tier 1 capital to risk-weighted assets
Consolidated
Bank
Total capital to risk-weighted assets
Consolidated
Bank
Leverage ratio
Consolidated
Bank
300,589
286,012
352,360
300,908
300,589
286,012
12.39% 190,992
7.88% 206,150
8.50%
N/A
11.81% 190,738
7.88% 205,876
8.50% 193,766
14.53% 239,498
9.88% 254,656
10.50%
N/A
N/A
12.55% 239,180
9.88% 254,318
10.50% 242,207
10.00%
9.00% 133,602
4.00% 133,602
4.00%
N/A
8.57% 133,474
4.00% 133,474
4.00% 166,843
N/A
5.00%
F-38
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
Note 15:
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, 2019 and 2018, the Company had outstanding
loan commitments totaling approximately $254.4 million and $223.5 million, respectively.
In addition, the Company is a limited partner in a Small Business Investment Company fund (the “SBIC Fund”). As of
December 31, 2019, the Company has committed to contribute up to $2.3 million of capital to the SBIC Fund.
Capital Commitments
Capital expenditures contracted for at the balance sheet date but not yet recognized in the financial statements are associated
with the construction of premises intended to house our future corporate headquarters. The Company has entered into
construction-related contracts in the amount of $65.1 million. As of December 31, 2019, $61.3 million of such contract
commitments had not yet been incurred. These commitments are due within 2 years.
Note 16:
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.
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, 2019 or 2018.
F-39
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
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).
Servicing Asset
Fair value is based on a loan-by-loan basis taking into consideration the original to maturity of the loans, the current age
of the loans and the remaining term to maturity. The valuation methodology utilized for the servicing assets begins with
generating estimated future cash flows for each servicing asset, based on their unique characteristics and market-based
assumptions for prepayment speeds and costs to service. The present value of the future cash flows is then calculated
utilizing market-based discount rate assumptions (Level 3).
Interest Rate Swap Agreements
The fair values of interest rate swap agreements are estimated using current market interest rates as of the balance sheet
date and calculated using discounted cash flows that are observable or that can be corroborated by observable market
data (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 values of 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).
F-40
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
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, 2019 and 2018.
December 31, 2019
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
$
75,872
$
— $
75,872
$
Municipal securities
Agency mortgage-backed securities
Private-label mortgage-backed securities
Asset-backed securities
Corporate securities
Total available-for-sale securities
Servicing asset
Interest rate swaps liabilities
Loans held-for-sale (mandatory pricing agreements)
Forward contracts
IRLCs
97,652
261,440
63,613
4,955
37,320
—
—
—
—
—
97,652
261,440
63,613
4,955
37,320
$
540,852
$
— $
540,852
$
2,481
(37,786)
56,097
(153)
910
—
—
—
(153)
—
—
(37,786)
56,097
—
—
—
—
—
—
—
—
—
2,481
—
—
—
910
December 31, 2018
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
$
107,585
$
— $
107,585
$
Municipal securities
Agency mortgage-backed securities
Private-label mortgage-backed securities
Asset-backed securities
Corporate securities
Total available-for-sale securities
Interest rate swaps assets
Interest rate swaps liabilities
Loans held-for-sale (mandatory pricing agreements)
Forward contracts
IRLCs
92,506
233,734
9,178
4,859
33,483
—
—
—
—
92,506
233,734
9,178
4,859
33,483
$
481,345
$
— $
481,345
$
1,579
(10,727)
18,328
(360)
389
—
—
—
(360)
—
(271)
(10,727)
18,328
—
—
—
—
—
—
—
—
—
—
—
—
389
F-41
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
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, 2017
Total realized gains (losses)
Included in net income
Balance, December 31, 2017
Total realized gains
Included in net income
Balance, December 31, 2018
Total realized gains
Included in net income
Balance, December 31, 2019
Interest Rate
Lock
Commitments
610
(59)
551
(162)
389
521
910
$
$
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.
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.
2019
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
Impaired loans
3,019
—
—
3,019
Other Real Estate Owned
Other real estate owned is a level 3 asset that is adjusted to fair value less estimated selling costs, upon transfer to other
real estate owned. When a current appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value as a result of known changes in the market or the collateral and
F-42
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
there is no observable market price, such valuation inputs result in a fair value measurement. To the extent a negotiated
sales price or reduced listing price represents a significant discount to an observable market price, such valuation input
would result in a fair value measurement that is also considered a Level 3 measurement.
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 nonrecurring basis and the level within the fair value hierarchy
in which the fair value measurements fall at December 31, 2019 and 2018.
2018
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
Other real estate owned
2,065
—
—
2,065
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.
Impaired loans
IRLCs
Servicing asset
Other real estate owned
IRLCs
$
$
$
$
$
Fair Value at
December 31, 2019
Valuation
Technique
3,019
Fair value of collateral
Unobservable
Inputs
Discount for type of
property and current
market conditions
Range
10%
910
Discounted cash flow
Loan closing rates
50% - 100%
2,481
Discounted cash flow
Prepayment speeds
0% - 25%
Fair Value at
December 31, 2018
Valuation
Technique
Unobservable
Inputs
2,065
Fair value of collateral
Discount to reflect
current market conditions
Range
10%
389
Discounted cash flow
Loan closing rates
34% - 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.
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.
F-43
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
Loans
The fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability
factors.
Accrued Interest Receivable
The fair value of these financial instruments approximates carrying value.
Federal Home Loan Bank of Indianapolis Stock
The fair value approximates carrying value.
Deposits
The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts
approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated
using rates currently offered for deposits of similar remaining maturities.
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, 2019 and 2018.
F-44
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,
2019 and 2018:
Cash and cash equivalents
Securities held-to-maturity
Net loans
Accrued interest receivable
Federal Home Loan Bank of Indianapolis stock
Deposits
Advances from Federal Home Loan Bank
Subordinated debt
Accrued interest payable
December 31, 2019
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)
$
327,361
$
327,361
$
327,361
$
— $
61,878
62,560
2,941,707
2,876,688
18,607
25,650
3,153,963
514,910
69,528
3,767
18,607
25,650
3,232,065
520,950
75,206
3,767
—
—
18,607
—
1,002,141
—
64,996
3,767
62,560
—
—
25,650
—
520,950
10,210
—
—
—
2,876,688
—
—
2,229,924
—
—
—
December 31, 2018
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
Securities held-to-maturity
Net loans
Accrued interest receivable
Federal Home Loan Bank of Indianapolis stock
Deposits
Advances from Federal Home Loan Bank
Subordinated debt
Accrued interest payable
$
188,712
$
188,712
$
188,712
$
— $
22,750
22,418
2,698,332
2,646,060
16,822
23,625
2,671,351
525,153
33,875
1,108
16,822
23,625
2,687,666
520,120
34,490
1,108
—
—
16,822
—
731,378
—
24,250
1,108
22,418
—
—
23,625
—
520,120
10,240
—
—
—
2,646,060
—
—
1,956,288
—
—
—
Note 17:
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 IRLCs 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, IRLCs and forward contracts are
recorded in the mortgage banking activities line item within noninterest income. Refer to Note 18 for further information
on derivative financial instruments.
F-45
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
During the years ended December 31, 2019, 2018, and 2017, the Company originated mortgage loans held-for-sale of
$627.6 million, $364.6 million, and $412.9 million, respectively, and received $601.2 million, $376.5 million, and $425.3
million from the sale of mortgage loans, respectively, into the secondary market. During 2019, the Company sold $100.5
million of residential mortgage loans that were originally held for investment. There were no comparable sales in 2018.
During 2017, the Company sold $42.3 million of residential mortgage loans that were originally held for investment.
The following table provides the components of income from mortgage banking activities for the years ended
December 31, 2019, 2018, and 2017.
Gain on loans sold
Gain resulting from the change in fair value of loans held-for-sale
Gain (loss) resulting from the change in fair value of derivatives
Net revenue from mortgage banking activities
Year Ended December 31,
2019
2018
2017
10,275
$
6,102
$
7,775
538
728
57
(441)
638
(577)
11,541
$
5,718
$
7,836
$
$
F-46
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
Note 18:
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
interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position.
Additionally, 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.
The Company entered into various interest rate swap agreements designated and qualifying as accounting hedges during
the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains
and losses, less any ineffectiveness, in the income statement within the same period that the hedged item affects earnings.
The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the
related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or
losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value
of interest rate swaps with a positive fair value are reported in accrued income and other assets in the consolidated balance
sheets while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the
consolidated balance sheets.
The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in
fair value reflected in noninterest income in 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 amounts that were recorded in the consolidated balance sheets related to cumulative basis
adjustments for interest rate swap derivatives designated as fair value accounting hedges as of December 31, 2019 and
2018.
Line item in the consolidated balance
sheet in which the hedged item is
included
Loans
Securities available-for-sale1
Carrying amount of the hedged assets
December 31, 2019
December 31, 2018
Cumulative amount of fair value hedging
adjustment included in the carrying
amount of the hedged assets
December 31, 2019 December 31, 2018
$
474,957
$
151,538
474,233
$
159,188
21,440
$
2,802
4,961
(229)
1 These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is
the last layer expected to be remaining at the end of the hedging relationship. The amounts of the designated hedged items were $88.2
million and $88.2 million, at December 31, 2019 and 2018, respectively.
F-47
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of
fixed-rate receivables used in the Company's asset/liability management activities at December 31, 2019 and December
31, 2018, identified by the underlying interest rate-sensitive instruments.
December 31, 2019
Instruments Associated With
Loans
Securities available-for-sale
Total swap portfolio at December 31, 2019
December 31, 2018
Instruments Associated With
Loans
Securities available-for-sale
Total swap portfolio at December 31, 2018
Notional
Value
427,446
88,200
515,646
Notional
Value
435,926
88,200
524,126
$
$
$
$
Weighted
Average
Remaining
Maturity
(years)
Weighted-Average Rate
Fair Value
Receive
5.5
4.1
5.3
$
$
(21,551)
3 month LIBOR
(2,806)
3 month LIBOR
(24,357)
3 month LIBOR
Pay
2.86%
2.54%
2.80%
Weighted
Average
Remaining
Maturity
(years)
Weighted-Average Rate
Fair Value
Receive
6.5
5.1
6.3
$
$
(5,025)
3 month LIBOR
235
3 month LIBOR
(4,790)
3 month LIBOR
Pay
2.86%
2.54%
2.80%
The following tables present a summary of interest rate swap derivatives designated as cash flow accounting hedges of
variable-rate liabilities used in the Company's asset/liability management activities at December 31, 2019 and December
31, 2018.
December 31, 2019
Cash Flow Hedges
Interest rate swaps
Interest rate swaps
December 31, 2018
Cash Flow Hedges
Interest rate swaps
Interest rate swaps
Weighted
Average
Remaining
Maturity
(years)
7.1
4.0
Weighted
Average
Remaining
Maturity
(years)
8.1
5.0
Notional
Value
110,000
100,000
Notional
Value
110,000
100,000
$
$
Weighted-Average Rate
Fair Value
Receive
$
(8,390)
3 month LIBOR
(5,040)
1 month LIBOR
Pay
2.88%
2.88%
Weighted-Average Rate
Fair Value
Receive
$
(2,293)
3 month LIBOR
(2,065)
1 month LIBOR
Pay
2.88%
2.88%
These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets
and liabilities. The Company pledged $42.3 million and $7.0 million of cash collateral to counterparties as security for
its obligations related to these interest rate swap transactions at December 31, 2019 and 2018, respectively. Collateral
posted and received is dependent on the market valuation of the underlying hedges.
F-48
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts
utilized by the Company at December 31, 2019 and 2018.
December 31, 2019
December 31, 2018
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Asset Derivatives
Derivatives designated as hedging instruments
Interest rate swaps associated with loans
Interest rate swaps associated with securities
available-for-sale
Derivatives not designated as hedging instruments
IRLCs
Total contracts
Liability Derivatives
Derivatives designated as hedging instruments
Interest rate swaps associated with loans
Interest rate swaps associated with securities
available-for-sale
Interest rate swaps associated with liabilities
Derivatives not designated as hedging instruments
$
$
$
— $
—
56,256
56,256
$
— $
91,135
$
—
910
910
50,000
15,136
$
156,271
$
427,446
$
(21,551) $
344,791
$
88,200
210,000
(2,806)
(13,429)
38,200
210,000
Forward contracts
Total contracts
115,000
(153)
32,500
$
840,646
$
(37,939) $
625,491
$
986
593
389
1,968
(6,011)
(358)
(4,358)
(360)
(11,087)
The fair values of interest rate swaps were estimated using a discounted cash flow method that incorporates current market
interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts 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 presents the effects of the Company's cash flow hedge relationships on the consolidated statements
of comprehensive income during the twelve months ended December 31, 2019, 2018, and 2017.
Amount of Loss Recognized in Other Comprehensive Income in the
Twelve Months Ended
December 31, 2019
December 31, 2018
December 31, 2017
Interest rate swap agreements
$
(9,071) $
(4,358) $
—
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, 2019, 2018, and 2017.
Asset Derivatives
Derivatives not designated as hedging instruments
IRLCs
Forward contracts
Amount of (loss) / gain recognized in the twelve months ended
December 31, 2019
December 31, 2018
December 31, 2017
521
207
(162)
(279)
(59)
(519)
F-49
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
The following table presents the effects of the Company's interest rate swap agreements on the consolidated statements
of income during the twelve months ended December 31, 2019, 2018, and 2017.
Line item in the consolidated statements of income
December 31, 2019
December 31, 2018
December 31, 2017
Twelve Months Ended
Interest income
Loans
Securities - taxable
Securities - non-taxable
Total interest income
Interest expense
Deposits
Other borrowed funds
Total interest expense
Net interest income
Note 19:
Shareholders’ Equity
$
(1,533) $
(100) $
(127)
36
(1,624)
618
473
1,091
(153)
23
(230)
151
177
328
$
(2,715) $
(558) $
—
—
—
—
—
—
—
—
In June 2018, the Company completed an underwritten public offering of 1,730,750 shares of its common stock at a price
of $33.25 per share. The Company received net proceeds of approximately $54.3 million after deducting underwriting
discounts and commissions and offering expenses.
In September 2017, the Company completed an underwritten public offering of 1,895,750 shares of its common stock at
a price of $29.00 per share. The Company received net proceeds of approximately $51.6 million after deducting
underwriting discounts and commissions and offering expenses.
F-50
Note 20:
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, included in stockholders' equity, are presented in the table
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
below.
Available-For-
Sale Securities
Cash Flow
Hedges
Total
Balance, January 1, 2017
Net change in unrealized gain
Reclassification of net loss realized and included in earnings
Accumulated other comprehensive loss before income tax
Income tax provision
Balance, December 31, 2017
Net change in unrealized loss
Reclassification of certain tax effects 1
Accumulated other comprehensive loss before income tax
Income tax benefit
Balance, December 31, 2018
Net change in unrealized gain (loss)
Reclassification of net loss realized and included in earnings
Accumulated other comprehensive loss before income tax
Income tax provision (benefit)
$
$
$
(9,268) $
6,280
8
(2,980)
2,039
(5,019) $
(10,466)
(1,063)
(16,548)
(3,188)
(13,360) $
12,072
458
(830)
3,558
(4,388) $
— $
—
—
—
—
— $
(4,358)
—
(4,358)
(1,177)
(3,181) $
(9,071)
—
(12,252)
(2,449)
(9,803) $
(9,268)
6,280
8
(2,980)
2,039
(5,019)
(14,824)
(1,063)
(20,906)
(4,365)
(16,541)
3,001
458
(13,082)
1,109
(14,191)
Balance, December 31, 2019
1 Represents the reclassification of stranded income tax effects to Retained Earnings upon adoption of ASU 2018-02 and ASU 2016-01.
Note 21:
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 $2,472 in 2019 and
$1,125 in 2018
Note payable to the Bank
Accrued expenses and other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
Year Ended December 31,
2019
2018
38,303
$
332,352
6,515
2,156
45,281
274,158
6,158
1,554
379,326
$
327,151
69,528
$
3,000
1,885
74,413
33,875
3,300
1,241
38,416
304,913
$
379,326
$
288,735
327,151
F-51
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
Condensed Statements of Income
Expenses
Interest on borrowings
Salaries and employee benefits
Consulting and professional fees
Premises and equipment
Other
Total expenses
Year Ended December 31,
2019
2018
2017
$
3,804
$
2,616
$
2,724
804
1,610
285
408
6,911
564
958
285
315
354
664
302
258
4,738
4,302
Loss before income tax and equity in undistributed net income of subsidiaries
(6,911)
(4,738)
(4,302)
Income tax benefit
(1,783)
(1,172)
(1,539)
Loss before equity in undistributed net income of subsidiaries
(5,128)
(3,566)
(2,763)
Equity in undistributed net income of subsidiaries
30,367
25,466
17,989
Net income
$
25,239
$
21,900
$
15,226
Condensed Statements of Comprehensive Income
Net income
Other comprehensive income (loss)
Net unrealized holding gains (losses) on securities available-for-sale recorded
within other comprehensive income before income tax
Reclassification adjustment for losses realized
Net unrealized holding losses on cash flow hedging derivatives recorded within
other comprehensive income before income tax
Other comprehensive income (loss) before tax
Income tax provision (benefit)
Other comprehensive income (loss) - net of tax
Comprehensive income
Year Ended December 31,
2019
2018
2017
$
25,239
$
21,900
$
15,226
12,072
458
(9,071)
3,459
1,109
2,350
(10,466)
—
(4,358)
(14,824)
(4,365)
(10,459)
6,280
8
—
6,288
2,039
4,249
$
27,589
$
11,441
$
19,475
F-52
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,
2019
2018
2017
$
25,239
$
21,900
$
15,226
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiaries
(30,367)
(25,466)
(17,989)
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
Repayment of subordinated debt
Principal payment on loan from the Bank
Net proceeds from common stock issuance
Repurchase of common stock
Other, net
Net cash provided by financing activities
647
288
(508)
(87)
(4,788)
568
243
1,769
79
(907)
572
175
(1,453)
(326)
(3,795)
(25,000)
(35,000)
(13)
—
(25,013)
(35,000)
(42,000)
(148)
(42,148)
(2,418)
35,418
—
(300)
—
(9,784)
(93)
22,823
(2,230)
—
(3,000)
(300)
54,334
(216)
(210)
48,378
(1,675)
—
—
(400)
51,636
—
(173)
49,388
Net (decrease) increase in cash and cash equivalents
(6,978)
12,471
3,445
Cash and cash equivalents at beginning of year
45,281
32,810
29,365
Cash and cash equivalents at end of year
$
38,303
$
45,281
$
32,810
F-53
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
Note 22:
Quarterly Financial Data (unaudited)
Three Months Ended
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
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
Weighted average common shares outstanding
Basic
Diluted
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 (benefit) provision
Net income
Per Share Data:
Net income
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
$
$
$
$
$
$
34,999
18,755
16,244
1,285
14,959
2,372
11,109
6,222
526
5,696
25,979
10,564
15,415
850
14,565
2,542
10,217
6,890
862
6,028
$
37,877
$
37,694
$
36,844
$
22,503
15,374
468
14,906
5,405
12,613
7,698
602
22,450
15,244
2,824
12,420
5,558
11,203
6,775
449
20,739
16,105
1,389
14,716
3,454
11,709
6,461
340
7,096
$
6,326
$
6,121
$
0.72
0.72
$
$
0.63
0.63
$
$
0.60
0.60
$
$
0.56
0.56
9,825,784
9,843,829
9,979,603
9,980,612
10,148,285
10,148,285
10,217,637
10,230,531
Three Months Ended
December 31,
2018
September 30,
2018
June 30,
2018
March 31,
2018
$
31,849
$
30,223
$
27,416
$
16,428
15,421
1,487
13,934
2,047
12,739
3,242
(334)
3,576
$
14,253
15,970
888
15,082
1,994
10,045
7,031
743
11,955
15,461
667
14,794
2,177
10,182
6,789
781
6,288
$
6,008
$
0.35
0.35
$
$
0.61
0.61
$
$
0.67
0.67
$
$
0.71
0.71
10,263,086
10,275,040
10,261,967
10,273,766
8,909,913
8,919,460
8,499,196
8,542,363
F-54
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
Note 23:
Recent Accounting Pronouncements
ASU 2016-02 - Leases (Topic 842) (February 2016)
In February 2016, the Financial Accounting Standards Board (“FASB”) amended its standards with respect to the
accounting for leases. This ASU replaces 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.
The amended standard has resulted in an increase to assets and liabilities recognized and, therefore, increased risk-
weighted assets for regulatory capital purposes.
In July 2018, the FASB issued ASU 2018-10 - Codification Improvements to Topic 842, Leases and ASU 2018-11,
Leases (Topic 842): Targeted Improvements. ASU 2018-11 allows entities adopting ASU 2016-02 to choose an
additional (and optional) transition method, under which an entity initially applies the new leases standard at the
adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The Company elected the optional transition method permitted by ASU 2018-11, which allowed
the Company to recognize and measure leases that exist at the application date. Under this method, an entity must
recognize and measure leases that exist at the application date and prior comparative periods are not adjusted.
The new ASU provides a number of optional practical expedients in transition. The Company has elected the
practical expedients that allowed the Company to retain the classifications of existing leases, rather than re-assessing
if existing leases have initial direct costs, and to use hindsight when determining the lease term and assessment of
impairment. The Company also elected a practical expedient to not assess whether existing or expired land easements
that were not previously accounted for as leases under ASC Topic 840 contain a lease.
The Company adopted the guidance on January 1, 2019 using the optional transition method and the adoption of
the guidance did not have a material impact on the consolidated financial statements. As a result, the Company
recognized a $2.1 million increase in assets and liabilities on the consolidated balance sheets. Refer to Note 6 for
additional information.
In March 2019, the FASB issued ASU 2019-01 - Leases (Topic 842): Codification Improvements. This ASU (1)
states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any
volume or trade discounts, as long as there is not a significant amount of time between acquisition of the asset and
lease commencement; (2) clarifies that lessors in the scope of ASC Topic 942, such as the Company, must classify
principal payments received from sales-type and direct financing leases in investing activities in the statements of
cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of
adoption. To coincide with the adoption of ASU 2016-02, the Company elected to early adopt ASU 2019-01 on
January 1, 2019. The adoption of the guidance did not have a material impact on the consolidated financial statements.
ASU 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.
F-55
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
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 statements of income reflect the measurement of credit losses for newly recognized
financial assets, as well as the expected increase or decrease of 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.
In May 2019, the FASB issued ASU 2019-05 - Financial Instruments - Credit Losses (Topic 326) -
•
Targeted Transition Relief. This ASU allows an option for preparers to irrevocably elect the fair value
option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis
upon adoption of the credit losses standard. This increases the comparability of financial statement
information provided by institutions that otherwise would have reported similar financial instruments using
different measurement methodologies, potentially decreasing costs for financial statement preparers while
providing more useful information to investors and other users.
For public business entities that are SEC 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 early adopt the
amendments in this update as of the fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. In November 2019, the FASB issued ASU 2019-10 - Financial Instruments - Credit Losses
(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) - Effective Dates. This ASU delayed
the effective date for smaller reporting companies to fiscal years beginning after December 15, 2022. 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 OTTI 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. The Company currently cannot determine or reasonably quantify the
impact of the adoption of the amendments due to the complexity and extensive changes. The Company intends to
develop processes and procedures prior to the effective date to ensure it is fully compliant with the amendments at
the adoption date. The Company has formed an implementation committee and has engaged a third-party consultant
to assist in developing current expected credit losses (“CECL”) models using appropriate methodologies.
F-56
First Internet Bancorp
Notes to Consolidated Financial Statements
(Tabular dollar amounts in thousands except per share data)
ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement (August 2018)
The amendments in this update modify the disclosure requirements on fair value measurements in ASC Topic 820.
This ASU eliminates the requirements to disclose the amount of and reasons for transfers between Level 1 and Level
2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level
3 fair value measurements. In addition, this ASU requires entities that calculate net asset value to disclose the timing
of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee
has communicated the timing to the entity or announced the timing publicly. This ASU also adds new requirements,
which include the disclosure of the changes in unrealized gains and losses for the period included in other
comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and
the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The amendments in this ASU were effective for public companies for fiscal years, and interim fiscal periods within
those fiscal years, beginning after December 15, 2019. The adoption of this guidance did not have a material impact
on the consolidated financial statements.
ASU 2018-16 - Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”)
Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (October 2018)
The amendments in this ASU allow all entities that elect to apply hedge accounting to benchmark interest rate hedges
under ASC Topic 815, Derivatives and Hedging, to use the OIS rate based on SOFR as a benchmark interest rate,
in addition to the four eligible benchmark interest rates. The Company adopted this ASU effective December 31,
2018 and it did not have a material impact on the consolidated financial statements.
ASU 2019-04 - Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives
and Hedging, and Topic 825, Financial Instruments (April 2019)
The amendments in this ASU clarify or correct the guidance in ASC Topic 326, Topic 815 and Topic 825. With
respect to Topic 326, ASU 2019-04 addresses a number of issues as it relates to the CECL standard including
consideration of accrued interest, recoveries, variable-rate financial instruments, prepayments, extension and
renewal options, among other things, in the measurement of expected credit losses. The amendments to Topic 326
have the same effective dates as ASU 2016-13 and the Company is currently evaluating the potential impact of these
amendments on the consolidated financial statements. With respect to Topic 815, ASU 2019-04 clarifies issues
related to partial-term hedges, hedged debt securities, and transitioning from a quantitative method of assessing
hedge effectiveness to a more simplified method. The amendments to Topic 815 are effective for interim and annual
reporting periods beginning after December 15, 2019 and are not expected to have a material impact on the
consolidated financial statements. With respect to Topic 825, ASU 2019-04 addresses the scope of the guidance,
the requirement for remeasurement under ASC Topic 820 when using the measurement alternative, certain disclosure
requirements, and which equity securities must be remeasured at historical exchanges rates. The amendments to
Topic 825 were effective for interim and annual reporting periods beginning after December 15, 2019 and the
adoption of this guidance did not have a material impact on the consolidated financial statements.
F-57
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2019 AT A GLANCE
EXECUTIVE/SHAREHOLDER INFORMATION
BOARD OF DIRECTORS OF
FIRST INTERNET BANCORP
SENIOR MANAGEMENT OF
FIRST INTERNET BANK
DAVID B. BECKER
Chairman, President and
Chief Executive Officer
DAVID B. BECKER*
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
RALPH R. WHITNEY, JR.
Chairman Emeritus,
Hammond, Kennedy,
Whitney & Co., Inc.
Partner, Monument Microcap
Partners
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*
Executive Vice President and
Corporate Secretary
TIMOTHY C. DUSING
Senior Vice President,
Public Finance
STEPHEN C. FARRELL
Senior Vice President, Chief
Credit Officer and Credit
Administrator
KEVIN B. QUINN
Senior Vice President,
Retail Lending
ANNE M. SHARKEY
Senior Vice President,
Operations
NEIL BARNA
Regional Vice President,
Commercial Banking (AZ)
THOMAS SMITH
Regional Vice President,
Commercial Banking (IN)
SHAREHOLDER INFORMATION
COMMON STOCK
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
INVESTOR RELATIONS
CONTACT
Paula Deemer
(317) 428-4628
investors@firstib.com
TRANSFER AGENT
Computershare
PO Box 505000
Louisville, KY 40233-5000
(800) 368-5948
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 Drinker Biddle & Reath LLP
600 East 96th Street, Suite 600
Indianapolis, IN 46240
(317) 569-9600
2015
2016
2017
2018
* Denotes Executive Officer of First Internet Bancorp
$3.2B
TOTAL DEPOSITS
$3.0B
TOTAL LOANS
12
2019 FULL YEAR
REVENUE GROWTH
30
FIVE YEAR NET
INCOME CAGR
NET INCOME
($ in thousands)
$25,239
$21,900
$15,226
$12,074
$8,929
$25,000
$20,000
$15,000
$10,000
$5,000
$0
2019
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WHAT HAPPENS
WHEN YOU LET
YOURSELF DREAM?
11201 USA Parkway Fishers, IN 46037 | (317) 532-7900 | www.firstinternetbancorp.com
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2019 ANNUAL REPORT