INBK 10-Q Quarterly Report Sept. 30, 2016

FIRST INTERNET BANCORP

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10-Q 1 inbk-20160930x10q.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to ________.

Commission File Number 001-35750

First Internet Bancorp

(Exact Name of Registrant as Specified in Its Charter)



Indiana		20-3489991
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

11201 USA Parkway Fishers, IN		46037
(Address of Principal Executive Offices)		(Zip Code)



	(317) 532-7900
	(Registrant’s Telephone Number, Including Area Code)

	(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).



Large Accelerated Filer ¨	Accelerated Filer þ
Non-accelerated Filer ¨ (Do not check if a smaller reporting company)	Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of November 3, 2016 , the registrant had 5,533,050 shares of common stock issued and outstanding.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 (“we,” “our,” “us” or the “Company”) regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends,” “plan,” and similar expressions. Such statements are subject to certain risks and uncertainties including: general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products; our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans; failures of or interruptions in the communication and information systems on which we rely to conduct our business that could reduce our revenues, increase our costs or lead to disruptions in our business; our plans to grow our commercial real estate and commercial and industrial loan portfolios which may carry greater risks of non-payment or other unfavorable consequences; our dependence on capital distributions from First Internet Bank of Indiana (the “Bank”); results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets; changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Bank in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums; regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet; our liquidity requirements 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; the growth and profitability of noninterest or fee income being less than expected; the loss of any key members of senior management; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies; and the effect of fiscal and governmental policies of the United States federal government. Additional factors that may affect our results include those discussed in our most recent Annual Report on Form 10-K 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 )

PART I


ITEM 1.	FINANCIAL STATEMENTS

First Internet Bancorp

Condensed Consolidated Balance Sheets

(Amounts in thousands except share data)



	September 30, 2016			December 31, 2015
	(Unaudited)
Assets
Cash and due from banks	$	2,314		$	1,063
Interest-bearing demand deposits	65,511			24,089
Total cash and cash equivalents	67,825			25,152
Interest-bearing time deposits	250			1,000
Securities available-for-sale, at fair value (amortized cost of $469,539 and $215,576 in 2016 and 2015, respectively)	470,978			213,698
Securities held-to-maturity, at amortized cost (fair value of $5,578 and $0 in 2016 and 2015, respectively)	5,500			—
Loans held-for-sale (includes $31,196 and $24,065 at fair value in 2016 and 2015, respectively)	32,471			36,518
Loans	1,198,932			953,859
Allowance for loan losses	(10,561		)	(8,351		)
Net loans	1,188,371			945,508
Accrued interest receivable	5,848			4,105
Federal Home Loan Bank of Indianapolis stock	8,595			8,595
Cash surrender value of bank-owned life insurance	18,044			12,727
Premises and equipment, net	10,116			8,521
Goodwill	4,687			4,687
Other real estate owned	4,533			4,488
Accrued income and other assets	6,978			4,871
Total assets	$	1,824,196		$	1,269,870
Liabilities and Shareholders’ Equity
Liabilities
Noninterest-bearing deposits	$	32,938		$	23,700
Interest-bearing deposits	1,460,663			932,354
Total deposits	1,493,601			956,054
Advances from Federal Home Loan Bank	147,978			190,957
Subordinated debt, net of unamortized discounts and debt issuance costs of $1,459 and $276 in 2016 and 2015, respectively	36,541			12,724
Accrued interest payable	125			117
Accrued expenses and other liabilities	8,797			5,688
Total liabilities	1,687,042			1,165,540
Commitments and Contingencies
Shareholders’ Equity
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; 5,533,050 and 4,481,347 shares issued and outstanding in 2016 and 2015, respectively	95,839			72,559
Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none	—			—
Retained earnings	40,389			32,980
Accumulated other comprehensive income (loss)	926			(1,209		)
Total shareholders’ equity	137,154			104,330
Total liabilities and shareholders’ equity	$	1,824,196		$	1,269,870

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Income – Unaudited

(Amounts in thousands except share and per share data)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016			2015
Interest Income
Loans	$	12,544	$	9,326		$	35,394		$	26,759
Securities – taxable	2,148		994			5,064			2,661
Securities – non-taxable	637		116			1,170			175
Other earning assets	142		100			507			258
Total interest income	15,471		10,536			42,135			29,853
Interest Expense
Deposits	4,368		2,260			11,186			6,350
Other borrowed funds	765		437			2,164			1,318
Total interest expense	5,133		2,697			13,350			7,668
Net Interest Income	10,338		7,839			28,785			22,185
Provision for Loan Losses	2,204		454			4,074			1,200
Net Interest Income After Provision for Loan Losses	8,134		7,385			24,711			20,985
Noninterest Income
Service charges and fees	207		202			622			571
Mortgage banking activities	4,442		2,095			9,991			7,195
Gain on sale of securities	—		—			177			—
Gain (loss) on asset disposals	5		(27		)	(59		)	(74		)
Other	244		104			455			306
Total noninterest income	4,898		2,374			11,186			7,998
Noninterest Expense
Salaries and employee benefits	4,550		3,446			12,777			10,811
Marketing, advertising, and promotion	454		544			1,352			1,330
Consulting and professional services	901		544			2,434			1,700
Data processing	286		248			835			729
Loan expenses	240		97			624			459
Premises and equipment	983		676			2,744			2,009
Deposit insurance premium	420		163			815			473
Other	579		489			1,712			1,280
Total noninterest expense	8,413		6,207			23,293			18,791
Income Before Income Taxes	4,619		3,552			12,604			10,192
Income Tax Provision	1,521		1,229			4,240			3,541
Net Income	$	3,098	$	2,323		$	8,364		$	6,651
Income Per Share of Common Stock
Basic	$	0.55	$	0.51		$	1.66		$	1.47
Diluted	$	0.55	$	0.51		$	1.65		$	1.46
Weighted-Average Number of Common Shares Outstanding
Basic	5,597,867		4,532,360			5,039,497			4,526,377
Diluted	5,622,181		4,574,455			5,063,299			4,549,447
Dividends Declared Per Share	$	0.06	$	0.06		$	0.18		$	0.18

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Comprehensive Income – Unaudited

(Amounts in thousands)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016			2015
Net income	$	3,098		$	2,323	$	8,364		$	6,651
Other comprehensive income (loss)
Net unrealized holding gains (losses) on securities available-for-sale recorded within other comprehensive income (loss) before income tax	(2,297		)	1,193		3,494			(528		)
Reclassification adjustment for gains realized	—			—		(177		)	—
Other comprehensive income (loss) before income tax	(2,297		)	1,193		3,317			(528		)
Income tax provision (benefit)	(816		)	429		1,182			(189		)
Other comprehensive income (loss)	(1,481		)	764		2,135			(339		)
Comprehensive income	$	1,617		$	3,087	$	10,499		$	6,312

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statement of Shareholders’ Equity - Unaudited

Nine Months Ended September 30, 2016

(Amounts in thousands except per share data)



	Voting and Nonvoting Common Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Shareholders’ Equity
Balance, January 1, 2016	$	72,559		$	(1,209	)	$	32,980		$	104,330
Net income	—			—			8,364			8,364
Other comprehensive income	—			2,135			—			2,135
Dividends declared ($0.18 per share)	—			—			(955		)	(955		)
Net cash proceeds from common stock issuance	22,754			—			—			22,754
Recognition of the fair value of share-based compensation	547			—			—			547
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	22			—			—			22
Excess tax benefit on share-based compensation	48			—			—			48
Common stock redeemed for the net settlement of share-based awards	(91		)	—			—			(91		)
Balance, September 30, 2016	$	95,839		$	926		$	40,389		$	137,154

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Cash Flows – Unaudited

(Amounts in thousands)



	Nine Months Ended September 30,
	2016			2015
Operating Activities
Net income	$	8,364		$	6,651
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,567			1,388
Increase in cash surrender value of bank-owned life insurance	(317		)	(300		)
Provision for loan losses	4,074			1,200
Share-based compensation expense	547			631
Gain from sale of available-for-sale securities	(177		)	—
Loans originated for sale	(439,159		)	(386,353		)
Proceeds from sale of loans	452,242			400,003
Gain on loans sold	(8,476		)	(6,895		)
(Increase) decrease in fair value of loans held-for-sale	(560		)	143
Gain on derivatives	(955		)	(443		)
Net change in accrued income and other assets	(3,318		)	304
Net change in accrued expenses and other liabilities	350			407
Net cash provided by operating activities	15,182			16,736
Investing Activities
Net loan activity, excluding purchases	(210,844		)	(143,481		)
Net change in interest-bearing time deposits	750			750
Maturities of securities available-for-sale	29,015			16,322
Proceeds from sale of securities available-for-sale	49,430			—
Purchase of securities available-for-sale	(331,501		)	(78,481		)
Purchase of securities held-to-maturity	(5,500		)	—
Purchase of Federal Home Loan Bank of Indianapolis stock	—			(1,596		)
Purchase of bank-owned life insurance	(5,000		)	—
Purchase of premises and equipment	(2,867		)	(2,233		)
Loans purchased	(36,138		)	—
Net cash used in investing activities	(512,655		)	(208,719		)
Financing Activities
Net increase in deposits	537,547			141,152
Cash dividends paid	(869		)	(800		)
Net proceeds from issuance of subordinated debt	23,757			—
Proceeds from advances from Federal Home Loan Bank	65,000			220,000
Repayment of advances from Federal Home Loan Bank	(108,000		)	(176,000		)
Net proceeds from common stock issuance	22,754			—
Other, net	(43		)	(13		)
Net cash provided by financing activities	540,146			184,339
Net Increase (Decrease) in Cash and Cash Equivalents	42,673			(7,644		)
Cash and Cash Equivalents, Beginning of Period	25,152			28,289
Cash and Cash Equivalents, End of Period	$	67,825		$	20,645
Supplemental Disclosures
Cash paid during the period for interest	$	13,342		$	7,653
Cash paid during the period for taxes	5,886			2,503
Loans transferred to other real estate owned	45			—
Cash dividends declared, paid in subsequent period	331			267
Securities purchased during the period, settled in subsequent period	2,238			3,922

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Notes to Condensed Consolidated Financial Statements – Unaudited

(Table amounts in thousands except share and per share data)

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the year ending December 31, 2016 or any other period. The September 30, 2016 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended December 31, 2015 .

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for loan losses, valuations and impairments of investment securities, and the accounting for income tax expense are highly dependent upon management’s estimates, judgments, and assumptions where changes in any of these could have a significant impact on the financial statements.

The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly-owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s wholly-owned subsidiary, JKH Realty Services, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company.

Certain reclassifications have been made to the 2015 financial statements to conform to the presentation of the 2016 financial statements. These reclassifications had no effect on net income.

Note 2: Earnings Per Share

Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period.

The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three and nine months ended September 30, 2016 and 2015 .



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Basic earnings per share
Net income	$	3,098	$	2,323	$	8,364	$	6,651
Weighted-average common shares	5,597,867		4,532,360		5,039,497		4,526,377
Basic earnings per common share	$	0.55	$	0.51	$	1.66	$	1.47
Diluted earnings per share
Net income	$	3,098	$	2,323	$	8,364	$	6,651
Weighted-average common shares	5,597,867		4,532,360		5,039,497		4,526,377
Dilutive effect of warrants	8,877		17,264		9,967		8,153
Dilutive effect of equity compensation	15,437		24,831		13,835		14,917
Weighted-average common and incremental shares	5,622,181		4,574,455		5,063,299		4,549,447
Diluted earnings per common share	$	0.55	$	0.51	$	1.65	$	1.46
Number of warrants excluded from the calculation of diluted earnings per share as the exercise prices were greater than the average market price of the Company’s common stock during the period	—		—		—		—

Note 3: Securities

The following tables summarize securities available-for-sale and securities held-to-maturity as of September 30, 2016 and December 31, 2015 . There were no securities held-to-maturity as of December 31, 2015 .



	September 30, 2016
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Securities available-for-sale
U.S. Government-sponsored agencies	$	85,630	$	652	$	(292	)	$	85,990
Municipal securities	96,665		1,345		(509		)	97,501
Mortgage-backed securities	244,780		1,715		(410		)	246,085
Asset-backed securities	19,464		59		(27		)	19,496
Corporate securities	20,000		—		(1,120		)	18,880
Other securities	3,000		26		—			3,026
Total available-for-sale	$	469,539	$	3,797	$	(2,358	)	$	470,978



	September 30, 2016
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Securities held-to-maturity
Corporate securities	$	5,500	$	78	$	—	$	5,578
Total held-to-maturity	$	5,500	$	78	$	—	$	5,578



	December 31, 2015
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Securities available-for-sale
U.S. Government-sponsored agencies	$	38,093	$	139	$	(482	)	$	37,750
Municipal securities	21,091		385		(7		)	21,469
Mortgage-backed securities	113,948		110		(1,006		)	113,052
Asset-backed securities	19,444		—		(83		)	19,361
Corporate securities	20,000		—		(913		)	19,087
Other securities	3,000		—		(21		)	2,979
Total available-for-sale	$	215,576	$	634	$	(2,512	)	$	213,698

The carrying value of securities at September 30, 2016 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Available-for-Sale
	Amortized Cost		Fair Value
Within one year	$	—	$	—
One to five years	298		263
Five to ten years	36,851		36,536
After ten years	165,146		165,572
	202,295		202,371
Mortgage-backed securities	244,780		246,085
Asset-backed securities	19,464		19,496
Other securities	3,000		3,026
Total	$	469,539	$	470,978



	Held-to-Maturity
	Amortized Cost		Fair Value
Five to ten years	$	5,500	$	5,578
Total	$	5,500	$	5,578

There were no sales of available-for-sale securities during the three months ended September 30, 2016 . Gross gains of $0.2 million and gross losses of $0.0 million resulted from sales of available-for-sale securities during the nine months ended September 30, 2016 . There were no sales of available-for-sale securities during the three and nine months ended September 30, 2015 .

Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at September 30, 2016 and December 31, 2015 was $166.9 million and $ 166.1 million, which was approximately 35% and 78% , respectively, of the Company’s available-for-sale securities portfolio. These declines resulted primarily from fluctuations in market interest rates after purchase.

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 September 30, 2016 .

Mortgage-Backed and Asset-Backed Securities

The unrealized losses on the Company’s investments in mortgage-backed and asset-backed securities were caused by interest rate changes. The Company expects to recover the amortized cost bases over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2016 .

Should any future impairment of these securities become other-than-temporary, the cost basis of the security will be reduced, with the resulting loss recognized in net income in the period in which the other-than-temporary impairment (“OTTI”) is identified.

The following tables show the available-for-sale 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 September 30, 2016 and December 31, 2015 .



	September 30, 2016
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Securities available-for-sale
U.S. Government-sponsored agencies	$	29,919	$	(257	)	$	263	$	(35	)	$	30,182	$	(292	)
Municipal securities	38,854		(509		)	—		—			38,854		(509		)
Mortgage-backed securities	64,526		(410		)	—		—			64,526		(410		)
Asset-backed securities	4,913		(9		)	9,589		(18		)	14,502		(27		)
Corporate securities	4,861		(139		)	14,019		(981		)	18,880		(1,120		)
Total	$	143,073	$	(1,324	)	$	23,871	$	(1,034	)	$	166,944	$	(2,358	)



	December 31, 2015
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Securities available-for-sale
U.S. Government-sponsored agencies	$	18,289	$	(237	)	$	8,537	$	(245	)	$	26,826	$	(482	)
Municipal securities	1,026		(7		)	—		—			1,026		(7		)
Mortgage-backed securities	74,198		(562		)	22,655		(444		)	96,853		(1,006		)
Asset-backed securities	19,361		(83		)	—		—			19,361		(83		)
Corporate securities	19,087		(913		)	—		—			19,087		(913		)
Other securities	2,979		(21		)	—		—			2,979		(21		)
Total	$	134,940	$	(1,823	)	$	31,192	$	(689	)	$	166,132	$	(2,512	)

There were no held-to-maturity securities in an unrealized loss position at September 30, 2016 , and there were no held-to-maturity securities at December 31, 2015 .

There were no amounts reclassified from accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2015 . Amounts reclassified from accumulated other comprehensive income (loss) and the affected line items in the consolidated statements of income during the three and nine months ended September 30, 2016 were as follows:



Details About Accumulated Other Comprehensive Income (Loss) Components	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) for the				Affected Line Item in the Statements of Income
	Three Months Ended September 30, 2016		Nine Months Ended September 30, 2016		Affected Line Item in the Statements of Income
Unrealized gains and losses on securities available-for-sale
Gain realized in earnings	$	—	$	177	Gain on sale of securities
Total reclassified amount before tax	—		177		Income Before Income Taxes
Tax expense	—		60		Income Tax Provision
Total reclassifications out of accumulated other comprehensive income (loss)	$	—	$	117	Net Income

Note 4: 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, any unamortized deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans.

For loans recorded at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

Categories of loans include:



	September 30, 2016			December 31, 2015
Commercial loans
Commercial and industrial	$	107,250		$	102,000
Owner-occupied commercial real estate	45,540			44,462
Investor commercial real estate	12,752			16,184
Construction	56,391			45,898
Single tenant lease financing	571,972			374,344
Total commercial loans	793,905			582,888
Consumer loans
Residential mortgage	200,889			214,559
Home equity	37,849			43,279
Other consumer	163,158			108,312
Total consumer loans	401,896			366,150
Total commercial and consumer loans	1,195,801			949,038
Deferred loan origination costs and premiums and discounts on purchased loans	3,131			4,821
Total loans	1,198,932			953,859
Allowance for loan losses	(10,561		)	(8,351		)
Net loans	$	1,188,371		$	945,508

The risk characteristics of each loan portfolio segment are as follows:

Commercial and Industrial: Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee.

Owner-Occupied Commercial Real Estate: The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio segment is generally concentrated in the Central Indiana and greater Phoenix, Arizona markets and its loans often times are secured by manufacturing and service facilities, as well as office buildings.

Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee. This portfolio segment typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by conditions in the real estate markets, changing industry dynamics, or the overall health of the general economy. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are typically located in the state of Indiana and markets adjacent to Indiana. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, and other risk grade criteria. As a general rule, the Company avoids financing special use projects or properties outside of its designated market areas unless other underwriting factors are present to help mitigate risk.

Construction: Construction loans are secured by real estate and improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, multi-family) properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes.

Single Tenant Lease Financing: These loans are made to property owners of real estate subject to long term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria.

Residential Mortgage: With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.

Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-4 family residences. The properties securing the Company's home equity portfolio segment are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of home equity loans and lines of credit may be impacted by changes in property values on residential properties and unemployment levels, among other economic conditions and financial circumstances in the market.

Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.

Allowance for Loan Losses Methodology

Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). The portfolio is segmented by loan type, and the required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on average historical losses, adjusted for current economic factors and portfolio trends. 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. Management adds qualitative factors for observable trends, changes in internal practices, changes in delinquencies and impairments, and external factors. Observable factors include changes in the composition and size of portfolios, as well as loan terms or concentration levels. The Company evaluates the impact of internal changes such as management and staff experience levels or modification to loan underwriting processes. Delinquency trends are scrutinized for both volume and severity of past due, nonaccrual, or classified loans as well as any changes in the value of underlying collateral. Finally, the Company considers the effect of other external factors such as national, regional, and local economic and business conditions, as well as competitive, legal, and regulatory requirements. Loans that are considered to be impaired are evaluated to determine the need for a specific allowance by applying at least one of three methodologies: present value of future cash flows; fair value of collateral less costs to sell; or the loan’s observable market price. All troubled debt restructurings (“TDR”) are considered impaired loans. Loans evaluated for impairment are removed from other pools to prevent double-counting. 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.

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.

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.

The following tables present changes in the balance of the ALLL during the three and nine month periods ended September 30, 2016 and 2015 .



	Three Months Ended September 30, 2016
	Commercial and industrial			Owner-occupied commercial real estate			Investor commercial real estate			Construction		Single tenant lease financing		Residential mortgage			Home equity			Other consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	1,834		$	461		$	171		$	555	$	5,059	$	781		$	121		$	1,034		$	10,016
Provision (credit) charged to expense	1,174			(5		)	(7		)	37		832		(67		)	(15		)	255			2,204
Losses charged off	(1,582		)	—			—			—		—		—			—			(155		)	(1,737		)
Recoveries	—			—			—			—		—		2			4			72			78
Balance, end of period	$	1,426		$	456		$	164		$	592	$	5,891	$	716		$	110		$	1,206		$	10,561



	Nine Months Ended September 30, 2016
	Commercial and industrial			Owner-occupied commercial real estate			Investor commercial real estate			Construction		Single tenant lease financing		Residential mortgage			Home equity			Other consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	1,367		$	476		$	212		$	500	$	3,931	$	896		$	125		$	844		$	8,351
Provision (credit) charged to expense	1,641			(20		)	(48		)	92		1,960		(75		)	8			516			4,074
Losses charged off	(1,582		)	—			—			—		—		(134		)	(33		)	(369		)	(2,118		)
Recoveries	—			—			—			—		—		29			10			215			254
Balance, end of period	$	1,426		$	456		$	164		$	592	$	5,891	$	716		$	110		$	1,206		$	10,561



	Three Months Ended September 30, 2015
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate			Construction		Single tenant lease financing		Residential mortgage			Home equity			Other consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	1,201	$	439	$	261		$	227	$	3,093	$	933		$	157		$	762		$	7,073
Provision (credit) charged to expense	29		16		(31		)	129		429		(132		)	(1		)	15			454
Losses charged off	—		—		—			—		—		(14		)	—			(62		)	(76		)
Recoveries	—		—		—			—		—		130			—			90			220
Balance, end of period	$	1,230	$	455	$	230		$	356	$	3,522	$	917		$	156		$	805		$	7,671



	Nine Months Ended September 30, 2015
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate			Construction		Single tenant lease financing		Residential mortgage			Home equity			Other consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	920	$	345	$	261		$	330	$	2,061	$	985		$	207		$	691		$	5,800
Provision (credit) charged to expense	310		110		(531		)	26		1,461		(284		)	(51		)	159			1,200
Losses charged off	—		—		—			—		—		(185		)	—			(351		)	(536		)
Recoveries	—		—		500			—		—		401			—			306			1,207
Balance, end of period	$	1,230	$	455	$	230		$	356	$	3,522	$	917		$	156		$	805		$	7,671

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2016 , and December 31, 2015 .



	September 30, 2016
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate		Construction		Single tenant lease financing		Residential mortgage		Home equity		Other consumer		Total
Loans:
Ending balance: collectively evaluated for impairment	$	107,250	$	45,540	$	12,752	$	56,391	$	571,972	$	198,871	$	37,849	$	162,976	$	1,193,601
Ending balance: individually evaluated for impairment	—		—		—		—		—		2,018		—		182		2,200
Ending balance	$	107,250	$	45,540	$	12,752	$	56,391	$	571,972	$	200,889	$	37,849	$	163,158	$	1,195,801
Allowance for loan losses:
Ending balance: collectively evaluated for impairment	$	1,426	$	456	$	164	$	592	$	5,891	$	716	$	110	$	1,206	$	10,561
Ending balance: individually evaluated for impairment	—		—		—		—		—		—		—		—		—
Ending balance	$	1,426	$	456	$	164	$	592	$	5,891	$	716	$	110	$	1,206	$	10,561



	December 31, 2015
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate		Construction		Single tenant lease financing		Residential mortgage		Home equity		Other consumer		Total
Loans:
Ending balance: collectively evaluated for impairment	$	102,000	$	44,462	$	16,184	$	45,898	$	374,344	$	213,426	$	43,279	$	108,163	$	947,756
Ending balance: individually evaluated for impairment	—		—		—		—		—		1,133		—		149		1,282
Ending balance	$	102,000	$	44,462	$	16,184	$	45,898	$	374,344	$	214,559	$	43,279	$	108,312	$	949,038
Allowance for loan losses:
Ending balance: collectively evaluated for impairment	$	1,367	$	476	$	212	$	500	$	3,931	$	896	$	125	$	844	$	8,351
Ending balance: individually evaluated for impairment	—		—		—		—		—		—		—		—		—
Ending balance	$	1,367	$	476	$	212	$	500	$	3,931	$	896	$	125	$	844	$	8,351

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. In the third quarter 2016, the Company updated its risk grading matrix to improve precision within the “Pass” risk grades. Commercial loans are now graded on a scale of 1 to 10, whereas commercial loans were previously graded on a scale of 1 to 9. This update to the risk grading matrix did not have an impact on the ALLL. The following table illustrates the risk ratings utilized as of September 30, 2016 and December 31, 2015 .



Rating	September 30, 2016	December 31, 2015
Pass	Grade 1-6	Grade 1-5
Special Mention	Grade 7	Grade 6
Substandard	Grade 8	Grade 7
Doubtful	Grade 9	Grade 8
Loss	Grade 10	Grade 9

A description of the general characteristics of the ten risk grades is as follows:


•	“Pass” (Grades 1-6) - Higher quality loans that do not fit any of the other categories described below.


•	“Special Mention” (Grade 7) - Loans that possess some credit deficiency or potential weakness which deserve close attention.


•	“Substandard” (Grade 8) - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

•

“Doubtful” (Grade 9) - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.


•	“Loss” (Grade 10) - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.

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.

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 September 30, 2016 and December 31, 2015 .



	September 30, 2016
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate		Construction		Single tenant lease financing		Total
Rating:
1-6 Pass	$	106,482	$	45,529	$	12,752	$	56,391	$	571,972	$	793,126
7 Special Mention	243		—		—		—		—		243
8 Substandard	525		11		—		—		—		536
9 Doubtful	—		—		—		—		—		—
Total	$	107,250	$	45,540	$	12,752	$	56,391	$	571,972	$	793,905



	September 30, 2016
	Residential mortgage		Home equity		Other consumer		Total
Performing	$	199,864	$	37,849	$	163,050	$	400,763
Nonaccrual	1,025		—		108		1,133
Total	$	200,889	$	37,849	$	163,158	$	401,896



	December 31, 2015
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate		Construction		Single tenant lease financing		Total
Rating:
1-5 Pass	$	95,589	$	43,913	$	14,746	$	45,599	$	374,344	$	574,191
6 Special Mention	2,006		535		—		299		—		2,840
7 Substandard	4,405		14		1,438		—		—		5,857
8 Doubtful	—		—		—		—		—		—
Total	$	102,000	$	44,462	$	16,184	$	45,898	$	374,344	$	582,888



	December 31, 2015
	Residential mortgage		Home equity		Other consumer		Total
Performing	$	214,456	$	43,279	$	108,248	$	365,983
Nonaccrual	103		—		64		167
Total	$	214,559	$	43,279	$	108,312	$	366,150

The following tables present the Company’s loan portfolio delinquency analysis as of September 30, 2016 and December 31, 2015 .



	September 30, 2016
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Commercial and Consumer Loans		Non- accrual Loans		Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial	$	257	$	—	$	—	$	257	$	106,993	$	107,250	$	—	$	—
Owner-occupied commercial real estate	—		—		—		—		45,540		45,540		—		—
Investor commercial real estate	—		—		—		—		12,752		12,752		—		—
Construction	—		—		—		—		56,391		56,391		—		—
Single tenant lease financing	—		—		—		—		571,972		571,972		—		—
Residential mortgage	—		—		991		991		199,898		200,889		1,025		—
Home equity	—		—		—		—		37,849		37,849		—		—
Other consumer	232		35		—		267		162,891		163,158		108		—
Total	$	489	$	35	$	991	$	1,515	$	1,194,286	$	1,195,801	$	1,133	$	—



	December 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Commercial and C onsumer Loans		Non- accrual Loans		Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial	$	29	$	—	$	—	$	29	$	101,971	$	102,000	$	—	$	—
Owner-occupied commercial real estate	—		—		—		—		44,462		44,462		—		—
Investor commercial real estate	—		—		—		—		16,184		16,184		—		—
Construction	—		—		—		—		45,898		45,898		—		—
Single tenant lease financing	—		—		—		—		374,344		374,344		—		—
Residential mortgage	300		23		45		368		214,191		214,559		103		—
Home equity	20		—		—		20		43,259		43,279		—		—
Other consumer	116		12		—		128		108,184		108,312		64		—
Total	$	465	$	35	$	45	$	545	$	948,493	$	949,038	$	167	$	—

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 as well as 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.

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.

The following table presents the Company’s impaired loans as of September 30, 2016 and December 31, 2015 . The Company had no impaired loans with a specific valuation allowance as of September 30, 2016 or December 31, 2015 .



	September 30, 2016						December 31, 2015
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance
Residential mortgage	$	2,018	$	2,130	$	—	$	1,133	$	1,154	$	—
Other consumer	182		237		—		149		178		—
Total	2,200		2,367		—		1,282		1,332		—
Total impaired loans	$	2,200	$	2,367	$	—	$	1,282	$	1,332	$	—

The table below presents average balances and interest income recognized for impaired loans during the three and nine month periods ended September 30, 2016 and September 30, 2015 .



	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30, 2016								September 30, 2015
	Average Balance		Interest Income		Average Balance		Interest Income		Average Balance		Interest Income		Average Balance		Interest Income
Loans without a specific valuation allowance
Investor commercial real estate	$	—	$	—	$	—	$	—	$	—	$	—	$	28	$	2
Residential mortgage	1,876		2		1,478		6		1,146		3		1,105		7
Other consumer	167		1		153		5		254		3		197		9
Total	2,043		3		1,631		11		1,400		6		1,330		18
Loans with a specific valuation allowance
Commercial and industrial	$	3,524	$	—	$	1,568	$	—	$	—	$	—	$	—	$	—
Residential mortgage	—		—		—		—		—		—		20		—
Other consumer	—		—		—		—		—		—		18		1
Total	3,524		—		1,568		—		—		—		38		1
Total impaired loans	$	5,567	$	3	$	3,199	$	11	$	1,400	$	6	$	1,368	$	19

As of September 30, 2016 and December 31, 2015 , the Company had less than $0.1 million and $0.0 million , respectively, in residential mortgage other real estate owned. There were $0.8 million and less than $0.1 million of loans at September 30, 2016 and December 31, 2015 , respectively, in the process of foreclosure.

Note 5: Premises and Equipment

The following table summarizes premises and equipment at September 30, 2016 and December 31, 2015 .



	September 30, 2016			December 31, 2015
Land	$	2,500		$	2,500
Building and improvements	5,330			4,636
Furniture and equipment	6,884			6,164
Less: accumulated depreciation	(4,598		)	(4,779		)
Total	$	10,116		$	8,521

Note 6: Goodwill

The following table shows the changes in the carrying amount of goodwill for the periods ended September 30, 2016 and December 31, 2015 .



Balance as of January 1, 2015	$	4,687
Changes in goodwill during the year	—
Balance as of December 31, 2015	4,687
Changes in goodwill during the period	—
Balance as of September 30, 2016	$	4,687

Goodwill is tested for impairment on an annual basis as of August 31, or whenever events or changes in circumstances indicate the carrying amount of goodwill exceeds its implied fair value. No events or changes in circumstances have occurred since the August 31, 2016 annual impairment test that would suggest it was more likely than not goodwill impairment existed.

Note 7: Subordinated Debt

In June 2013 , the Company issued a subordinated debenture (the “2021 Debenture”) in the principal amount of $ 3.0 million. The 2021 Debenture bears a fixed interest rate of 8.00% per year, payable quarterly, and is scheduled to mature on June 28, 2021 . The 2021 Debenture may be repaid, without penalty, at any time after June 28, 2016 . The 2021 Debenture is intended to qualify as Tier 2 capital under regulatory guidelines.

In connection with the 2021 Debenture, the Company also issued a warrant to purchase up to 48,750 shares of common stock at an initial per share exercise price equal to $19.33 . The warrant became exercisable on June 28, 2014 and, unless previously exercised, will expire on June 28, 2021 . The Company has the right to force an exercise of the warrant after the 2021 Debenture has been repaid in full if the 20 -day volume-weighted average price of a share of its common stock exceeds $30.00 .

The Company used the Black-Scholes option pricing model to assign a fair value of $0.3 million to the warrant as of June 28, 2013. The following assumptions were used to value the warrant: a risk-free interest rate of 0.66% per the U.S. Treasury yield curve in effect at the date of issuance, an expected dividend yield of 1.19% calculated using the dividend rate and stock price at the date of the issuance, and an expected volatility of 34% based on the estimated volatility of the Company’s stock over the expected term of the warrant, which is estimated to be three years .

In October 2015, the Company entered into a term loan in the principal amount of $10.0 million , evidenced by a term note due 2025 (the “2025 Note”). The 2025 Note bears a fixed interest rate of 6.4375% per year, payable quarterly, and is scheduled to mature on October 1, 2025. The 2025 Note is an unsecured subordinated obligation of the Company and may be repaid, without penalty, on any interest payment date on or after October 15, 2020. The 2025 Note is intended to qualify as Tier 2 capital under regulatory guidelines.

In September 2016, the Company issued $25.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2026 Notes”) in a public offering. The 2026 Notes initially bear a fixed interest rate of 6.00% per year to, but excluding September 30, 2021, and thereafter a floating rate equal to the then-current three-month LIBOR rate plus 485 basis points. All interest on the 2026 Notes is payable quarterly. The 2026 Notes are scheduled to mature on September 30, 2026. The 2026 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 30, 2021. The 2026 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.

The following table presents the principal balance and unamortized discount and debt issuance costs for the 2021 Debenture, the 2025 Note and the 2026 Notes as of September 30, 2016 and December 31, 2015 .



	September 30, 2016					December 31, 2015
	Principal		Unamortized Discount and Debt Issuance Costs			Principal		Unamortized Discount and Debt Issuance Costs
2021 Debenture	$	3,000	$	—		$	3,000	$	(42	)
2025 Note	10,000		(216		)	10,000		(234		)
2026 Notes	25,000		(1,243		)	—		—
Total	$	38,000	$	(1,459	)	$	13,000	$	(276	)

Note 8: Benefit Plans

Employment Agreement

The Company has entered into an employment agreement with its Chief Executive Officer that provides for the continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the agreement, these payments could occur in the event of a change in control of the Company, as defined in the agreement, along with other specific conditions.

2013 Equity Incentive Plan

The 2013 Equity Incentive Plan (the “2013 Plan”) authorizes the issuance of 750,000 shares of the Company’s common stock in the form of equity-based awards to employees, directors, and other eligible persons. Under the terms of the 2013 Plan, the pool of shares available for issuance may be used for available types of equity awards under the 2013 Plan, which includes stock options, stock appreciation rights, restricted stock awards, stock unit awards, and other share-based awards. All employees, consultants, and advisors of the Company or any subsidiary, as well as all non-employee directors of the Company, are eligible to receive awards under the 2013 Plan.

The Company recorded $0.2 million and $0.5 million of share-based compensation expense for the three and nine month periods ended September 30, 2016 , respectively, related to awards made under th e 2013 Plan. The Company recorded $0.2 million and $0.6 million of share-based compensation expense for the three and nine month periods ended September 30, 2015 , respectively, related to awards made under th e 2013 Plan.

The following table summarizes the status of the 2013 Plan awards as of September 30, 2016 , and activity for the nine months ended September 30, 2016 .



	Restricted Stock Units		Weighted-Average Grant Date Fair Value Per Share		Restricted Stock Awards		Weighted-Average Grant Date Fair Value Per Share		Deferred Stock Units		Weighted-Average Grant Date Fair Value Per Share
Nonvested at December 31, 2015	28,302		$	18.90	27,529		$	18.17	—		$	—
Granted	30,824		25.63		10,232		24.44		7		24.28
Vested	(9,470	)	18.92		(20,123	)	20.23		(7	)	24.28
Nonvested at September 30, 2016	49,656		$	23.07	17,638		$	19.46	—		$	—

At September 30, 2016 , the total unrecognized compensation cost related to nonvested awards was $ 1.0 million with a weighted-average expense recognition period of 2.0 years .

Directors Deferred Stock Plan

Until January 1, 2014, the Company had a stock compensation plan for 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 nine months ended September 30, 2016 .



		Deferred Stock Rights
Outstanding, beginning of period		81,693
Granted		512
Exercised		—
Outstanding, end of period		82,205

All deferred stock rights granted during the 2016 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights.

Note 9: Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurement , 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. ASC 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 condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

Level 2 securities include U.S. Government-sponsored agencies, 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 September 30, 2016 or December 31, 2015 .

Loans Held-for-Sale (mandatory pricing agreements)

The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

Forward Contracts

The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets, or benchmarked thereto (Level 1).

Interest Rate Lock Commitments

The fair values of interest rate lock commitments (“IRLCs”) are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed 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 September 30, 2016 and December 31, 2015 .



				September 30, 2016 Fair Value Measurements Using
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government-sponsored agencies	$	85,990		$	—		$	85,990	$	—
Municipal securities	97,501			—			97,501		—
Mortgage-backed securities	246,085			—			246,085		—
Asset-backed securities	19,496			—			19,496		—
Corporate securities	18,880			—			18,880		—
Other securities	3,026			3,026			—		—
Total available-for-sale securities	470,978			3,026			467,952		—
Loans held-for-sale (mandatory pricing agreements)	31,196			—			31,196		—
Forward contracts	(465		)	(465		)	—		—
IRLCs	2,032			—			—		2,032



			December 31, 2015 Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government-sponsored agencies	$	37,750	$	—	$	37,750	$	—
Municipal securities	21,469		—		21,469		—
Mortgage-backed securities	113,052		—		113,052		—
Asset-backed securities	19,361		—		19,361		—
Corporate securities	19,087		—		19,087		—
Other securities	2,979		2,979		—		—
Total available-for-sale securities	213,698		2,979		210,719		—
Loans held-for-sale (mandatory pricing agreements)	24,065		—		24,065		—
Forward contracts	30		30		—		—
IRLCs	582		—		—		582

The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three and nine month periods ended September 30, 2016 and September 30, 2015 .



	Three Months Ended
	Interest Rate Lock Commitments
Balance, July 1, 2016	$	1,724
Total realized gains
Included in net income	308
Balance, September 30, 2016	$	2,032

Balance, July 1, 2015	$	623
Total realized gains
Included in net income	284
Balance, September 30, 2015	$	907



	Nine Months Ended
	Interest Rate Lock Commitments
Balance, January 1, 2016	$	582
Total realized gains
Included in net income	1,450
Balance, September 30, 2016	$	2,032

Balance, January 1, 2015	$	521
Total realized gains
Included in net income	386
Balance, September 30, 2015	$	907

The following describes 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

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.

There were no impaired loans that were measured at fair value on a nonrecurring basis at September 30, 2016 or December 31, 2015 .

Significant Unobservable (Level 3) Inputs

The following tables present quantitative information about significant unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.



	Fair Value at September 30, 2016	Valuation Technique	Significant Unobservable Inputs	Range
IRLCs	2,032	Discounted cash flow	Loan closing rates	41% - 99%



	Fair Value at December 31, 2015		Valuation Technique	Significant Unobservable Inputs	Range
IRLCs	$	582	Discounted cash flow	Loan closing rates	43% - 100%

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.

Cash and Cash Equivalents

For these instruments, the carrying amount is a reasonable estimate of fair value.

Interest-Bearing Time Deposits

The fair value of these financial instruments approximates carrying value.

Loans Held-for-Sale (best efforts pricing agreements)

The fair value of these loans approximates carrying value.

Loans

The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities.

Accrued Interest Receivable

The fair value of these financial instruments approximates carrying value.

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 available for advances with 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 each of September 30, 2016 and December 31, 2015 .

The following tables summarize the carrying value and estimated fair value of all financial assets and liabilities at September 30, 2016 and December 31, 2015 .



			September 30, 2016 Fair Value Measurements Using
	Carrying Amount		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	$	67,825	$	67,825	$	—	$	—
Interest-bearing time deposits	250		250		—		—
Securities held-to-maturity	5,500		—		5,578		—
Loans held-for-sale (best efforts pricing agreements)	1,275		—		1,275
Loans	1,198,932		—		—		1,209,791
Accrued interest receivable	5,848		5,848		—		—
Federal Home Loan Bank of Indianapolis stock	8,595		—		8,595		—
Deposits	1,493,601		510,055		—		971,679
Advances from Federal Home Loan Bank	147,978		—		146,334		—
Subordinated debt	36,541		25,000		13,542		—
Accrued interest payable	125		125		—		—



			December 31, 2015 Fair Value Measurements Using
	Carrying Amount		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	$	25,152	$	25,152	$	—	$	—
Interest-bearing time deposits	1,000		1,000		—		—
Loans held-for-sale (best efforts pricing agreements)	12,453		—		12,453		—
Loans	953,859		—		—		967,303
Accrued interest receivable	4,105		4,105		—		—
Federal Home Loan Bank of Indianapolis stock	8,595		—		8,595		—
Deposits	956,054		472,481		—		478,360
Advances from Federal Home Loan Bank	190,957		—		188,126		—
Subordinated debt	12,724		—		13,212		—
Accrued interest payable	117		117		—		—

Note 10: Mortgage Banking Activities

The Company’s residential real estate lending business originates mortgage loans for customers and sells a majority of the originated loans into the secondary market. The Company hedges its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third party investors and entering into interest rate lock commitments with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. To facilitate the hedging of the loans, the Company has elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, interest rate lock commitments and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 11 for further information on derivative financial instruments.

During the three months ended September 30, 2016 and 2015 , the Company originated mortgage loans held-for-sale of $180.1 million and $108.4 million , respectively, and sold $195.7 million and $112.9 million of mortgage loans, respectively, into the secondary market. During the nine months ended September 30, 2016 and 2015 , the Company originated mortgage loans held-for-sale of $439.2 million and $386.4 million , respectively, and sold $452.2 million and $400.0 million of mortgage loans, respectively, into the secondary market.

The following table provides the components of income from mortgage banking activities for the three and nine months ended September 30, 2016 and 2015 .



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016		2015
Gain on loans sold	$	3,980		$	2,050		$	8,476	$	6,895
Gain (loss) resulting from the change in fair value of loans held-for-sale	(426		)	349			560		(143		)
Gain (loss) resulting from the change in fair value of derivatives	888			(304		)	955		443
Net revenue from mortgage banking activities	$	4,442		$	2,095		$	9,991	$	7,195

Note 11: Derivative Financial Instruments

The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into forward contracts for the future delivery of mortgage loans to third party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.

Each of these items are considered derivatives, but are not designated as accounting hedges, and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed 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 condensed consolidated balance sheets while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.

The following table presents the notional amount and fair value of IRLCs and forward contracts utilized by the Company at September 30, 2016 and December 31, 2015 .



	September 30, 2016					December 31, 2015
	Notional Amount		Fair Value			Notional Amount		Fair Value
Asset Derivatives
Derivatives not designated as hedging instruments
IRLCs	$	79,376	$	2,032		$	28,444	$	582
Forward contracts	—		—			42,743		30

Liability Derivatives
Derivatives not designated as hedging instruments
Forward contracts	115,695		(465		)	—		—

Fair values of derivative financial instruments were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date. The following table summarizes the periodic changes in the fair value of the derivative financial instruments on the condensed consolidated statements of income for the three and nine month periods ended September 30, 2016 and 2015 .



	Amount of gain / (loss) recognized in the three months ended					Amount of gain / (loss) recognized in the nine months ended
	September 30, 2016		September 30, 2015			September 30, 2016			September 30, 2015
Asset Derivatives
Derivatives not designated as hedging instruments
IRLCs	$	308	$	284		$	1,450		$	386

Liability Derivatives
Derivatives not designated as hedging instruments
Forward contracts	580		(588		)	(495		)	57

Note 12: Recent Accounting Pronouncements

Accounting Standards Update (“Update”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (August 2016)

Stakeholders indicated that there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This Update addresses specific cash flow issues with the objective of reducing the existing diversity in practice.

The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The amendments in this Update provide guidance on the following specific cash flow issues:

• Debt Prepayment or Debt Extinguishment Costs: Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows from financing activities.

• Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing: At the settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, the issuer should classify the portion of the cash payment attributable to the accreted interest related to the debt discount as cash outflows from operating activities, and the portion of the cash payment attributable to the principal as cash outflows for financing activities.

• Proceeds from the Settlement of Insurance Claims: Cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage (that is, the nature of the loss). For insurance proceeds that are received in a lump sum settlement, an entity should determine the classification on the basis of the nature of each loss included in the settlement.

• Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies: Cash proceeds received from the settlement of corporate-owned life insurance policies should be classified as cash inflows from investing activities. The cash payments for premiums on corporate-owned policies may be classified as cash outflows from investing activities, operating activities, or a combination of investing and operating activities.

• Separately Identifiable Cash Flows and Application of the Predominance Principle: The classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in GAAP. In the absence of specific guidance, an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. An entity should then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item.

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact of adopting this Update on the consolidated financial statements, but it is not expected to have a significant effect.


ITEM 2.	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 condensed 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 our Annual Report on Form 10-K for the year ended December 31, 2015 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 also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.

Overview

First Internet Bancorp (“we,” “our,” “us,” or the “Company”) is a bank holding company that conducts its business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank (the “Bank”). The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. The Company was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank.

We offer a full complement of products and services on a nationwide basis. We conduct our deposit operations primarily over the Internet and have no traditional branch offices. We have diversified our operations by adding commercial real estate (“CRE”) lending, including nationwide single tenant lease financing, and commercial and industrial (“C&I”) lending, including business banking/treasury management services to meet the needs of high-quality commercial borrowers and depositors.

Our business model differs from that of a typical community bank. We do not have a conventional brick and mortar branch system; but instead operate through our scalable Internet banking platform. The market area for our residential real estate lending, consumer lending, and deposit gathering activities is the entire United States. We also offer single tenant lease financing on a nationwide basis. Our other commercial banking activities, including CRE and C&I loans, corporate credit cards, and corporate treasury management services, are offered by our commercial banking team to businesses primarily within Central Indiana, Phoenix, Arizona, and adjacent markets. We have no significant customer concentrations within our loan portfolio.

Results of Operations

The following table provides a summary of the Company’s financial performance for the five most recent quarters and nine months ended September 30, 2016 and 2015 .



(dollars in thousands except for share and per share data)	Three Months Ended															Nine Months Ended
(dollars in thousands except for share and per share data)	September 30, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			September 30, 2016			September 30, 2015
Income Statement Summary:
Net interest income	$	10,338		$	9,306		$	9,141		$	8,568		$	7,839		$	28,785		$	22,185
Provision for loan losses	2,204			924			946			746			454			4,074			1,200
Noninterest income	4,898			3,748			2,540			2,143			2,374			11,186			7,998
Noninterest expense	8,413			7,875			7,005			6,492			6,207			23,293			18,791
Income tax provision	1,521			1,421			1,298			1,195			1,229			4,240			3,541
Net income	$	3,098		$	2,834		$	2,432		$	2,278		$	2,323		$	8,364		$	6,651
Per Share Data:
Earnings per share - basic	$	0.55		$	0.57		$	0.54		$	0.50		$	0.51		$	1.66		$	1.47
Earnings per share - diluted	$	0.55		$	0.57		$	0.53		$	0.50		$	0.51		$	1.65		$	1.46
Dividends declared per share	$	0.06		$	0.06		$	0.06		$	0.06		$	0.06		$	0.18		$	0.18
Book value per common share	$	24.79		$	24.52		$	23.98		$	23.28		$	22.95		$	24.79		$	22.95
Tangible book value per common share ¹	$	23.94		$	23.67		$	22.93		$	22.24		$	21.90		$	23.94		$	21.90
Common shares outstanding	5,533,050			5,533,050			4,497,284			4,481,347			4,484,513			5,533,050			4,484,513
Average common shares outstanding:
Basic	5,597,867			4,972,759			4,541,728			4,534,910			4,532,360			5,039,497			4,526,377
Diluted	5,622,181			4,992,025			4,575,555			4,580,353			4,574,455			5,063,299			4,549,447
Performance Ratios:
Return on average assets	0.71		%	0.71		%	0.72		%	0.74		%	0.82		%	0.72		%	0.83		%
Return on average shareholders’ equity	9.08		%	9.67		%	9.20		%	8.73		%	9.14		%	9.31		%	8.95		%
Return on average tangible common equity ¹	9.41		%	10.07		%	9.63		%	9.14		%	9.58		%	9.69		%	9.39		%
Net interest margin	2.42		%	2.39		%	2.78		%	2.85		%	2.84		%	2.51		%	2.85		%
Capital Ratios:
Tangible common equity to tangible assets ratio ¹	7.28		%	7.72		%	6.77		%	7.88		%	8.46		%	7.28		%	8.46		%
Tier 1 leverage ratio	7.62		%	8.08		%	7.65		%	8.28		%	8.81		%	7.62		%	8.81		%
Common equity tier 1 capital ratio	10.07		%	10.66		%	9.38		%	10.11		%	10.74		%	10.07		%	10.74		%
Tier 1 capital ratio	10.07		%	10.66		%	9.38		%	10.11		%	10.74		%	10.07		%	10.74		%
Total risk-based capital ratio	13.67		%	12.54		%	11.38		%	12.25		%	11.90		%	13.67		%	11.90		%

¹ This information represents a non-GAAP financial measure. See the “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of these measures to their most directly comparable GAAP measures.

During the third quarter 2016 , net income was $3.1 million , or $0.55 per diluted share, compared to third quarter 2015 net income of $2.3 million , or $0.51 per diluted share, representing an increase in net income of $0.8 million , or 33.4% . During the nine months ended September 30, 2016 , net income was $8.4 million , or $1.65 per diluted share, compared to the nine months ended September 30, 2015 net income of $6.7 million , or $1.46 per diluted share, representing an increase in net income of $1.7 million , or 25.8% .

The increase in net income in the third quarter 2016 compared to the third quarter 2015 was primarily due to a $2.5 million , or 31.9% , increase in net interest income and a $2.5 million , or 106.3% , increase in noninterest income , partially offset by a $2.2 million , or 35.5% , increase in noninterest expense , a $1.8 million , or 385.5% , increase in provision for loan losses and a $0.3 million , or 23.8% , increase in income tax expense .

The increase in net income in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 was primarily due to a $6.6 million , or 29.7% , increase in net interest income and a $3.2 million , or 39.9% , increase in noninterest income , partially offset by a $4.5 million , or 24.0% , increase in noninterest expense , a $2.9 million , or 239.5% , increase in provision for loan losses and a $0.7 million , or 19.7% , increase in income tax expense .

During the third quarter 2016 , return on average assets and return on average shareholders’ equity were 0.71% and 9.08% , respectively, compared to 0.82% and 9.14% , respectively, for the third quarter 2015 . During the nine months ended September 30, 2016 , return on average assets and return on average shareholders’ equity were 0.72% and 9.31% , respectively, compared to 0.83% and 8.95% , respectively, for the nine months ended September 30, 2015 .

Consolidated Average Balance Sheets and Net Interest Income Analyses

For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances.



(dollars in thousands)	Three Months Ended
	September 30, 2016					June 30, 2016					September 30, 2015
	Average Balance			Yield/Cost		Average Balance			Yield/Cost		Average Balance			Yield/Cost
Assets
Interest-earning assets
Loans, including loans held-for-sale	$	1,192,816		4.18	%	$	1,110,282		4.22	%	$	865,350		4.28	%
Securities - taxable	366,810			2.33	%	307,336			2.29	%	176,722			2.23	%
Securities - non-taxable	90,597			2.80	%	51,162			2.89	%	14,912			3.09	%
Other earning assets	51,779			1.09	%	97,774			0.80	%	37,638			1.05	%
Total interest-earning assets	1,702,002			3.62	%	1,566,554			3.59	%	1,094,622			3.82	%

Allowance for loan losses	(10,378		)			(9,472		)			(7,223		)
Noninterest-earning assets	43,319					39,422					36,342
Total assets	$	1,734,943				$	1,596,504				$	1,123,741

Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits	$	81,151		0.55	%	$	83,712		0.55	%	$	75,965		0.55	%
Regular savings accounts	27,479			0.58	%	28,023			0.57	%	25,500			0.59	%
Money market accounts	369,082			0.71	%	363,767			0.71	%	297,545			0.71	%
Certificates and brokered deposits	907,775			1.56	%	809,450			1.56	%	455,879			1.38	%
Total interest-bearing deposits	1,385,487			1.25	%	1,284,952			1.23	%	854,889			1.05	%
Other borrowed funds	173,568			1.75	%	161,127			1.83	%	139,731			1.24	%
Total interest-bearing liabilities	1,559,055			1.31	%	1,446,079			1.30	%	994,620			1.08	%
Noninterest-bearing deposits	32,897					27,687					23,267
Other noninterest-bearing liabilities	7,325					4,825					4,969
Total liabilities	1,599,277					1,478,591					1,022,856

Shareholders’ equity	135,666					117,913					100,885
Total liabilities and shareholders’ equity	$	1,734,943				$	1,596,504				$	1,123,741

Interest rate spread ¹				2.31	%				2.29	%				2.74	%
Net interest margin ²				2.42	%				2.39	%				2.84	%

¹ Yield on total interest-earning assets minus cost of total interest-bearing liabilities

² Net interest income divided by total average interest-earning assets (annualized)



(dollars in thousands)	Nine Months Ended
	September 30, 2016					September 30, 2015
	Average Balance			Yield/Cost		Average Balance			Yield/Cost
Assets
Interest-earning assets
Loans, including loans held-for-sale	$	1,108,066		4.27	%	$	824,069		4.34	%
Securities - taxable	292,620			2.31	%	165,456			2.15	%
Securities - non-taxable	54,777			2.85	%	7,627			3.07	%
Other earning assets	75,860			0.89	%	42,746			0.81	%
Total interest-earning assets	1,531,323			3.68	%	1,039,898			3.84	%

Allowance for loan losses	(9,505		)			(6,555		)
Noninterest-earning assets	40,241					35,362
Total assets	$	1,562,059				$	1,068,705

Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits	$	82,063		0.55	%	$	75,824		0.55	%
Regular savings accounts	26,844			0.58	%	23,836			0.58	%
Money market accounts	361,248			0.71	%	284,709			0.72	%
Certificates and brokered deposits	764,923			1.54	%	429,152			1.37	%
Total interest-bearing deposits	1,235,078			1.21	%	813,521			1.04	%
Other borrowed funds	173,438			1.67	%	129,089			1.37	%
Total interest-bearing liabilities	1,408,516			1.27	%	942,610			1.09	%
Noninterest-bearing deposits	27,846					22,080
Other noninterest-bearing liabilities	5,687					4,650
Total liabilities	1,442,049					969,340

Shareholders’ equity	120,010					99,365
Total liabilities and shareholders’ equity	$	1,562,059				$	1,068,705

Interest rate spread ¹				2.41	%				2.75	%
Net interest margin ²				2.51	%				2.85	%

¹ Yield on total interest-earning assets minus cost of total interest-bearing liabilities

² Net interest income divided by total average interest-earning assets (annualized)

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.



	Rate/Volume Analysis of Net Interest Income
(dollars in thousands)	Three Months Ended September 30, 2016 vs. June 30, 2016 Due to Changes in									Three Months Ended September 30, 2016 vs. September 30, 2015 Due to Changes in							Nine Months Ended September 30, 2016 vs. September 30, 2015 Due to Changes in
	Volume			Rate			Net			Volume		Rate			Net		Volume		Rate			Net
Interest income
Loans, including loans held-for-sale	$	1,571		$	(688	)	$	883		$	4,660	$	(1,442	)	$	3,218	$	9,351	$	(716	)	$	8,635
Securities – taxable	368			33			401			1,108		46			1,154		2,191		212			2,403
Securities – non-taxable	347			(78		)	269			596		(75		)	521		1,017		(22		)	995
Other earning assets	(351		)	298			(53		)	38		4			42		221		28			249
Total	1,935			(435		)	1,500			6,402		(1,467		)	4,935		12,780		(498		)	12,282

Interest expense
Interest-bearing deposits	363			75			438			1,613		495			2,108		3,676		1,160			4,836
Other borrowed funds	184			(154		)	30			122		206			328		517		329			846
Total	547			(79		)	468			1,735		701			2,436		4,193		1,489			5,682

Increase (decrease) in net interest income	$	1,388		$	(356	)	$	1,032		$	4,667	$	(2,168	)	$	2,499	$	8,587	$	(1,987	)	$	6,600

Net interest income for the third quarter 2016 was $10.3 million , an increase of $2.5 million , or 31.9% , compared to $7.8 million for the third quarter 2015 . The increase in net interest income was the result of a $4.9 million , or 46.8% , increase in total interest income to $15.5 million for the third quarter 2016 from $10.5 million for the third quarter 2015 . The increase in total interest income was partially offset by a $2.4 million , or 90.3% , increase in total interest expense to $5.1 million for the third quarter 2016 from $2.7 million for the third quarter 2015 .

The increase in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of $327.5 million , or 37.8% , in the average balance of loans, including loans held-for-sale, as well as an increase in interest earned on securities resulting from an increase of $265.8 million , or 138.7% , in the average balance of securities for the third quarter 2016 compared to the third quarter 2015 . The increase in total interest income was also due to a 12 basis point (“bp”) increase in the yield earned on the securities portfolio, partially offset by a 10 bp decline in the yield earned on loans, including loans held-for-sale.

The increase in total interest expense was driven primarily by an increase in interest expense related to interest-bearing deposits as a result of a $530.6 million , or 62.1% , increase in the average balance of interest-bearing deposits for the third quarter 2016 compared to the third quarter 2015 , as well as a 20 bp increase in the cost of funds related to interest-bearing deposits. The increase in the cost of interest-bearing deposits was primarily due to an 18 bp increase in the cost of certificates and brokered deposits as new certificates of deposits production in 2016 was predominately in longer duration products with higher costs of funds. Interest expense related to other borrowed funds also contributed to the increase in total interest expense due to a $33.8 million , or 24.2% , increase in the average balance of other borrowed funds for the third quarter 2016 compared to the third quarter 2015 as well as an increase of 51 bps in the cost of other borrowed funds. The increase in the average balance of other borrowed funds was primarily due to the Company’s issuance of subordinated debt in the fourth quarter 2015 as well as an increase in the cost and average balance of Federal Home Loan Bank advances compared to the third quarter 2015 .

Net interest margin (“NIM”) was 2.42% for the third quarter 2016 compared to 2.84% for the third quarter 2015 . The decline in NIM for the third quarter 2016 compared to the third quarter 2015 was driven primarily by an increase of 23 bps in the cost of interest-bearing liabilities as well as the decline of 20 bps in the yield earned on interest-earning assets.

Net interest income for the nine months ended September 30, 2016 was $28.8 million , increasing $6.6 million , or 29.7% , compared to $22.2 million for the nine months ended September 30, 2015 . The increase in net interest income was the result of a $12.3 million , or 41.1% , increase in total interest income to $42.1 million for the nine months ended September 30, 2016 from $29.9 million for the nine months ended September 30, 2015 . The increase in total interest income was partially offset by a $5.7 million , or 74.1% , increase in total interest expense to $13.4 million for the nine months ended September 30, 2016 from $7.7 million for the nine months ended September 30, 2015 .

The increase in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of $284.0 million , or 34.5% , in the average balance of loans, including loans held-for-sale, as well as an increase in interest earned on securities resulting from an increase of $174.3 million , or 100.7% , in the average balance of securities for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 . The increase in total interest income was also due to a 21 bps increase in the yield earned on the securities portfolio, partially offset by a 7 bps decline in the yield earned on loans, including loans held-for-sale.

The increase in total interest expense was driven primarily by an increase in interest expense related to interest-bearing deposits as a result of a $421.6 million , or 51.8% , increase in the average balance of interest-bearing deposits for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 , as well as an increase in the cost of funds relating to interest-bearing deposits of 17 bps. The increase in the cost of interest-bearing deposits was primarily due to a 17 bps increase in the cost of certificates and brokered deposits as new certificates of deposits production in the nine months ended September 30, 2016 was predominately in longer duration products with higher costs of funds. Interest expense related to other borrowed funds also contributed to the increase in total interest expense due to a $44.3 million , or 34.4% , increase in the average balance of other borrowed funds for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 , as well as an increase of 30 bps in the cost of other borrowed funds. The increase in the average balance of other borrowed funds was primarily due to the Company’s issuance of subordinated debt in the fourth quarter 2015 as well as the increase in the average balance of Federal Home Loan Bank advances compared to the nine months ended September 30, 2015 .

NIM was 2.51% for the nine months ended September 30, 2016 compared to 2.85% for the nine months ended September 30, 2015 . The decline in NIM for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 was driven primarily by an increase of 18 bps in the cost of interest-bearing liabilities as well as a decline of 7 bps in the yield earned on loans, including loans held-for-sale, partially offset by an increase of 21 bps in the yield earned on the securities portfolio.

Noninterest Income

The following table presents noninterest income for the five most recent quarters and the nine months ended September 30, 2016 and 2015 .



(dollars in thousands)	Three Months Ended													Nine Months Ended
	September 30, 2016		June 30, 2016			March 31, 2016			December 31, 2015		September 30, 2015			September 30, 2016			September 30, 2015
Service charges and fees	$	207	$	215		$	200		$	193	$	202		$	622		$	571
Mortgage banking activities	4,442		3,295			2,254			1,805		2,095			9,991			7,195
Gain on sale of securities	—		177			—			—		—			177			—
Gain (loss) on asset disposals	5		(48		)	(16		)	40		(27		)	(59		)	(74		)
Other	244		109			102			105		104			455			306
Total noninterest income	$	4,898	$	3,748		$	2,540		$	2,143	$	2,374		$	11,186		$	7,998

During the third quarter 2016 , noninterest income was $4.9 million , representing an increase of $2.5 million , or 106.3% , compared to $2.4 million for the third quarter 2015 . The increase in noninterest income was primarily driven by an increase of $2.3 million , or 112.0% , in mortgage banking activities resulting primarily from increases in mortgage originations and sales as well as higher gain on sale margins.

During the nine months ended September 30, 2016 , noninterest income was $11.2 million , representing an increase of $3.2 million , or 39.9% , compared to $8.0 million for the nine months ended September 30, 2015 . The increase in noninterest income was primarily driven by an increase of $2.8 million , or 38.9% , in mortgage banking activities resulting primarily from higher origination volumes and an improvement in gain on sale margin, as well as a $0.2 million increase from the gain on sale of securities.

Noninterest Expense

The following table presents noninterest expense for the five most recent quarters and the nine months ended September 30, 2016 and 2015 .



(dollars in thousands)	Three Months Ended										Nine Months Ended
	September 30, 2016		June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015		September 30, 2016		September 30, 2015
Salaries and employee benefits	$	4,550	$	4,329	$	3,898	$	3,460	$	3,446	$	12,777	$	10,811
Marketing, advertising, and promotion	454		434		464		426		544		1,352		1,330
Consulting and professional services	901		895		638		674		544		2,434		1,700
Data processing	286		275		274		287		248		835		729
Loan expenses	240		200		184		172		97		624		459
Premises and equipment	983		963		798		759		676		2,744		2,009
Deposit insurance premium	420		215		180		170		163		815		473
Other	579		564		569		544		489		1,712		1,280
Total noninterest expense	$	8,413	$	7,875	$	7,005	$	6,492	$	6,207	$	23,293	$	18,791

Noninterest expense for the third quarter 2016 was $8.4 million , compared to $6.2 million for the third quarter 2015 . The increase of $2.2 million , or 35.5% , compared to the third quarter 2015 was primarily due to an increase of $1.1 million in salaries and employee benefits , an increase of $0.4 million in consulting and professional services , an increase of $0.3 million in premises and equipment and an increase of $0.3 million in deposit insurance premium . The increase in salaries and employee benefits resulted from personnel growth and higher incentive compensation related to increased mortgage production. The increase in consulting and professional fees was due to higher legal fees incurred in the normal course of business commensurate with the Company’s growth and certain consulting projects that occurred during the third quarter 2016. The increase in premises and equipment was due to expenses associated with the Company’s new headquarters location. The increase in deposit insurance premium was due to the new methodology implemented by the FDIC as of July 1, 2016, which places a heavier weighting on year-over-year asset growth used to determine the cost of FDIC deposit insurance.

Noninterest expense for the nine months ended September 30, 2016 was $23.3 million , compared to $18.8 million for the nine months ended September 30, 2015 . The increase of $4.5 million , or 24.0% , compared to the nine months ended September 30, 2015 was primarily due to an increase of $2.0 million in salaries and employee benefits , an increase of $0.7 million in premises and equipment , an increase of $0.7 million in consulting and professional services , an increase of $0.4 million in other expenses and an increase of $0.3 million in deposit insurance premium . The increase in salaries and employee benefits resulted primarily from personnel growth and higher incentive compensation related to increased mortgage production. The increase in premises and equipment was partially due to certain expenses associated with the Company exiting its former headquarters location, as well as the Company’s build out of its corporate headquarters facility and further investments in technology. The increase in consulting and professional fees was due to higher legal fees incurred in the normal course of business commensurate with the Company’s growth and certain consulting projects that occurred during the 2016 period. The increase in other expenses were comprised of varying expenses, none of which were individually significant. The increase in deposit insurance premium was due to the new methodology implemented by the FDIC as of July 1, 2016, which places a heavier weighting on year-over-year asset growth used to determine the cost of FDIC deposit insurance.

Financial Condition

The following table presents summary balance sheet data for the last five quarters.



(dollars in thousands)
Balance Sheet Data:	September 30, 2016		June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015
Total assets	$	1,824,196	$	1,702,468	$	1,527,719	$	1,269,870	$	1,166,170
Loans	1,198,932		1,111,622		1,040,683		953,859		876,578
Securities available-for-sale	470,978		433,806		315,311		213,698		202,565
Securities held-to-maturity	5,500		—		—		—		—
Loans held-for-sale	32,471		44,503		29,491		36,518		27,773
Noninterest-bearing deposits	32,938		28,066		28,945		23,700		22,338
Interest-bearing deposits	1,460,663		1,360,867		1,214,233		932,354		877,412
Total deposits	1,493,601		1,388,933		1,243,178		956,054		899,750
Total shareholders’ equity	137,154		135,679		107,830		104,330		102,912

Total assets were $1.8 billion at September 30, 2016 , compared to $1.3 billion at December 31, 2015 , representing an increase of $554.3 million , or 43.7% . The increase in total assets was due primarily to increases of $257.3 million , or 120.4% , in securities available-for-sale, $245.1 million , or 25.7% , in loans and $42.7 million , or 169.7% , in cash and cash equivalents.

Loan Portfolio Analysis

The following table provides a detailed listing of the Company’s loan portfolio for the last five quarters.



(dollars in thousands)	September 30, 2016					June 30, 2016					March 31, 2016					December 31, 2015					September 30, 2015
Commercial loans
Commercial and industrial	$	107,250		8.9	%	$	111,130		10.0	%	$	106,431		10.2	%	$	102,000		10.7	%	$	89,762		10.2	%
Owner-occupied commercial real estate	45,540			3.8	%	46,543			4.2	%	47,010			4.5	%	44,462			4.7	%	42,117			4.8	%
Investor commercial real estate	12,752			1.1	%	12,976			1.2	%	14,756			1.4	%	16,184			1.7	%	17,483			2.0	%
Construction	56,391			4.7	%	53,368			4.8	%	52,591			5.1	%	45,898			4.8	%	30,196			3.4	%
Single tenant lease financing	571,972			47.7	%	500,937			45.1	%	445,534			42.8	%	374,344			39.2	%	329,149			37.6	%
Total commercial loans	793,905			66.2	%	724,954			65.3	%	666,322			64.0	%	582,888			61.1	%	508,707			58.0	%
Consumer loans
Residential mortgage	200,889			16.7	%	202,107			18.2	%	208,636			20.1	%	214,559			22.5	%	209,507			23.9	%
Home equity	37,849			3.2	%	38,981			3.5	%	40,000			3.8	%	43,279			4.5	%	47,319			5.4	%
Other consumer	163,158			13.6	%	141,756			12.7	%	121,323			11.7	%	108,312			11.4	%	106,187			12.1	%
Total consumer loans	401,896			33.5	%	382,844			34.4	%	369,959			35.6	%	366,150			38.4	%	363,013			41.4	%
Deferred loan origination costs and premiums and discounts on purchased loans	3,131			0.3	%	3,824			0.3	%	4,402			0.4	%	4,821			0.5	%	4,858			0.6	%
Total loans	1,198,932			100.0	%	1,111,622			100.0	%	1,040,683			100.0	%	953,859			100.0	%	876,578			100.0	%
Allowance for loan losses	(10,561		)			(10,016		)			(9,220		)			(8,351		)			(7,671		)
Net loans	$	1,188,371				$	1,101,606				$	1,031,463				$	945,508				$	868,907

Total loans as of September 30, 2016 were $1.2 billion , increasing $245.1 million , or 25.7% , compared to $953.9 million as of December 31, 2015 .

Total commercial loans increased $211.0 million , or 36.2% , as of September 30, 2016 , compared to December 31, 2015 , due to increases of $197.6 million , or 52.8% , in single tenant lease financing, $10.5 million , or 22.9% , in construction, $5.3 million , or 5.1% , in commercial and industrial and $1.1 million , or 2.4% , in owner-occupied commercial real estate. These increases were partially offset by a decline of $3.4 million , or 21.2% , in investor commercial real estate.

Total consumer loans increased $35.7 million , or 9.8% , as of September 30, 2016 , compared to December 31, 2015 , due primarily to an increase of $54.8 million , or 50.6% , in other consumer loans. This increase was partially offset by decreases of $13.7 million , or 6.4% , in residential mortgages and $5.4 million , or 12.5% , in home equity loans.

Asset Quality

Nonperforming loans are comprised of 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. The following table provides a detailed listing of the Company’s nonperforming assets for the last five quarters.



(dollars in thousands)	September 30, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015
Nonaccrual loans
Commercial loans:
Commercial and industrial	$	—		$	4,716		$	—		$	—		$	—
Total commercial loans	—			4,716			—			—			—
Consumer loans:
Residential mortgage	1,025			844			103			103			104
Other consumer	108			74			69			64			92
Total consumer loans	1,133			918			172			167			196
Total nonaccrual loans	1,133			5,634			172			167			196

Past Due 90 days and accruing loans
Commercial loans:
Commercial and industrial	—			—			—			—			10
Total commercial loans	—			—			—			—			10
Consumer loans:
Residential mortgage	—			—			195			—			—
Other consumer	—			5			—			—			—
Total consumer loans	—			5			195			—			—
Total past due 90 days and accruing loans	—			5			195			—			10

Total nonperforming loans	1,133			5,639			367			167			206

Other real estate owned
Investor commercial real estate	4,488			4,488			4,488			4,488			4,488
Residential mortgage	45			—			—			—			—
Total other real estate owned	4,533			4,488			4,488			4,488			4,488

Other nonperforming assets	69			46			75			85			30

Total nonperforming assets	$	5,735		$	10,173		$	4,930		$	4,740		$	4,724

Total nonperforming loans to total loans	0.09		%	0.51		%	0.04		%	0.02		%	0.02		%
Total nonperforming assets to total assets	0.31		%	0.60		%	0.32		%	0.37		%	0.41		%

Troubled Debt Restructurings

The following table provides a summary of troubled debt restructurings for the last five quarters.



(dollars in thousands)	September 30, 2016		June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015
Troubled debt restructurings – nonaccrual	$	1	$	—	$	—	$	—	$	—
Troubled debt restructurings – performing	$	1,067	$	1,082	$	1,100	$	1,115	$	1,134
Total troubled debt restructurings	$	1,068	$	1,082	$	1,100	$	1,115	$	1,134

The increase of $1.0 million , or 21.0% , in total nonperforming assets as of September 30, 2016 compared to December 31, 2015 was due primarily to an increase in nonaccrual loans. Total nonperforming loans increased $1.0 million , or 578.4% , to $1.1 million as of September 30, 2016 compared to $0.2 million as of December 31, 2015 . This increase was primarily driven by two residential mortgage loans totaling $1.0 million that were placed on nonaccrual status during 2016. As a result, the ratio of nonperforming loans to total loans increased to 0.09% as of September 30, 2016 compared to 0.02% as of December 31, 2015 . The ratio of nonperforming assets to total assets decreased to 0.31% as of September 30, 2016 compared to 0.37% as of December 31, 2015 due to the increase in total assets outpacing the increase in total nonperforming assets.

As of September 30, 2016 and December 31, 2015 , the Company had one commercial property in other real estate owned with a carrying value of $4.5 million. This property consists of two buildings which are residential units adjacent to a university campus. Improvements to the property have been made in collaboration with the university and the property continues to be occupied. As of September 30, 2016 and December 31, 2015 , the Company also had residential mortgage other real estate owned of less than $0.1 million and $0, respectively.

Allowance for Loan Losses

The following table provides a rollforward of the allowance for loan losses for the last five quarters and the nine months ended September 30, 2016 and 2015 .



(dollars in thousands)	Three Months Ended															Nine Months Ended
	September 30, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			September 30, 2016			September 30, 2015
Balance, beginning of period	$	10,016		$	9,220		$	8,351		$	7,671		$	7,073		$	8,351		$	5,800
Provision charged to expense	2,204			924			946			746			454			4,074			1,200
Losses charged off	(1,737		)	(232		)	(149		)	(100		)	(76		)	(2,118		)	(536		)
Recoveries	78			104			72			34			220			254			1,207
Balance, end of period	$	10,561		$	10,016		$	9,220		$	8,351		$	7,671		$	10,561		$	7,671

Net charge-offs (recoveries) to average loans	0.57		%	0.05		%	0.03		%	0.03		%	(0.07		)%	0.23		%	(0.11		)%

The allowance for loan losses was $10.6 million as of September 30, 2016 , compared to $8.4 million as of December 31, 2015 . The increase of $2.2 million , or 26.5% , was due primarily to the growth in commercial and other consumer loan balances. During the third quarter 2016 , the Company recorded net charge-offs of $1.7 million , compared to net recoveries of $0.1 million during the third quarter 2015 . During the nine months ended September 30, 2016 , the Company recorded net charge-offs of $1.9 million , compared to net recoveries of $0.7 million during nine months ended September 30, 2015 . The increase in net charge-offs for both the third quarter 2016 and nine months ended September 30, 2016 was due to the Company charging off the full balance of a commercial and industrial loan it placed on nonaccrual status during the second quarter 2016.

The allowance for loan losses as a percentage of total loans remained stable at 0.88% as of September 30, 2016 , compared to 0.88% as of December 31, 2015 . Due primarily to the increase in nonaccrual loans, the allowance for loan losses as a percentage of nonperforming loans decreased to 932.1% as of September 30, 2016 , compared to 5,000.6% as of December 31, 2015 .

Investment Securities

The following tables present the amortized cost and approximate fair value of our investment portfolio by security type for the last five quarters.



(dollars in thousands)
Amortized Cost	September 30, 2016		June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015
Securities available-for-sale
U.S. Government-sponsored agencies	$	85,630	$	75,133	$	60,511	$	38,093	$	36,006
Municipal securities	96,665		78,594		35,016		21,091		15,213
Mortgage-backed securities	244,780		233,886		177,337		113,948		109,645
Asset-backed securities	19,464		19,457		19,451		19,444		19,438
Corporate securities	20,000		20,000		20,000		20,000		20,000
Other securities	3,000		3,000		3,000		3,000		3,000
Total available-for-sale	$	469,539	$	430,070	$	315,315	$	215,576	$	203,302

Securities held-to-maturity
Corporate securities	$	5,500	$	—	$	—	$	—	$	—
Total held-to-maturity	$	5,500	$	—	$	—	$	—	$	—



(dollars in thousands)
Approximate Fair Value	September 30, 2016		June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015
Securities available-for-sale
U.S. Government-sponsored agencies	$	85,990	$	75,678	$	60,792	$	37,750	$	35,624
Municipal securities	97,501		80,798		35,639		21,469		15,224
Mortgage-backed securities	246,085		235,911		177,989		113,052		110,052
Asset-backed securities	19,496		19,332		18,892		19,361		19,423
Corporate securities	18,880		19,074		18,978		19,087		19,229
Other securities	3,026		3,013		3,021		2,979		3,013
Total available-for-sale	$	470,978	$	433,806	$	315,311	$	213,698	$	202,565

Securities held-to-maturity
Corporate securities	$	5,578	$	—	$	—	$	—	$	—
Total held-to-maturity	$	5,578	$	—	$	—	$	—	$	—

The approximate fair value of investment securities available-for-sale increased $257.3 million , or 120.4% , to $471.0 million as of September 30, 2016 compared to $213.7 million as of December 31, 2015 . During the nine month period ended September 30, 2016 , the Company deployed funds generated through deposit growth to purchase additional securities to further diversify the securities portfolio and enhance net interest income while supporting liquidity and interest rate risk management. The increase was due primarily to increases of $133.0 million in mortgage-backed securities, $76.0 million in municipal securities and $48.2 million in U.S. Government-sponsored agencies. During the third quarter 2016, the Company purchased $5.5 million in corporate securities with the intention to hold these securities to maturity. At September 30, 2016 , the Company had purchased $2.2 million of securities available-for-sale that had not settled. This obligation is recorded within accrued expenses and other liabilities on the condensed consolidated balance sheet.

Deposits

The following table presents the composition of the Company’s deposit base for the last five quarters.



(dollars in thousands)	September 30, 2016				June 30, 2016				March 31, 2016				December 31, 2015				September 30, 2015
Noninterest-bearing deposits	$	32,938	2.2	%	$	28,066	2.0	%	$	28,945	2.3	%	$	23,700	2.5	%	$	22,338	2.5	%
Interest-bearing demand deposits	84,939		5.7	%	83,031		6.0	%	89,180		7.2	%	84,241		8.8	%	79,031		8.8	%
Regular savings accounts	27,661		1.8	%	28,900		2.1	%	27,279		2.2	%	22,808		2.4	%	26,316		2.9	%
Money market accounts	364,517		24.4	%	373,932		26.9	%	366,195		29.5	%	341,732		35.7	%	314,105		34.9	%
Certificates of deposits	970,684		65.0	%	862,150		62.1	%	718,733		57.8	%	470,736		49.2	%	444,396		49.4	%
Brokered deposits	12,862		0.9	%	12,854		0.9	%	12,846		1.0	%	12,837		1.4	%	13,564		1.5	%
Total deposits	$	1,493,601	100.0	%	$	1,388,933	100.0	%	$	1,243,178	100.0	%	$	956,054	100.0	%	$	899,750	100.0	%

Total deposits increased $537.5 million , or 56.2% , to $1.5 billion as of September 30, 2016 as compared to $956.1 million as of December 31, 2015 . This increase was due primarily to increases of $499.9 million , or 106.2% , in certificates of deposits, $22.8 million , or 6.7% , in money market accounts, $9.2 million , or 39.0% , in noninterest-bearing deposits, $4.9 million , or 21.3% , in regular savings accounts and $0.7 million , or 0.8% , in interest-bearing demand deposits. The increase in the balance of certificates of deposits during the first nine months of 2016 was primarily due to the Company’s concentrated efforts to capitalize on customer demand for longer duration deposit products and to enhance liquidity and asset/liability management.

Recent Common Stock Offerings

In May 2016, the Company and the Bank entered into a Sales Agency Agreement with Sandler O’Neill & Partners, L.P. (the “Agent”) to sell shares (the “ATM Shares”) of the Company’s common stock having an aggregate gross sales price of up to $25.0 million, from time to time, through an “at-the-market” equity offering program (the “ATM Program”). The sales, if any, of the ATM Shares, may be made in sales deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on or through The NASDAQ Stock Market, or another market for the Company’s common stock, sales made to or through a market maker other than on an exchange or otherwise, in negotiated transactions at market prices prevailing at the time of sale or at negotiated prices, or as otherwise agreed with the Agent. Subject to the terms and conditions of the Sales Agency Agreement, upon its acceptance of written instructions from the Company, the Agent will use its commercially reasonable efforts to sell on the Company’s behalf all of the designated ATM Shares. The Sales Agency Agreement provides for the Company to pay the Agent a commission of up to 3.0% of the gross sales price per share sold through it as sales agent under the Sales Agency Agreement. The Company may also sell ATM Shares under the Sales Agency Agreement to the Agent, as principal for its own account, at a price per share agreed upon at the time of sale. Actual sales will depend on a variety of factors to be determined by the Company from time to time. The Company has no obligation to sell any of the ATM Shares under the Sales Agency Agreement, and may at any time suspend solicitation and offers under the Sales Agency Agreement. In addition, the Company has agreed to indemnify the Agent against certain liabilities on customary terms. The Company did not sell any shares through the ATM Program during the three months ended September 30, 2016. The Company has sold a total of 139,811 ATM Shares through the ATM Program for gross proceeds of approximately $3.4 million.

As of September 30, 2016 , approximately $21.6 million remained available for sale under the ATM Program.

In May 2016, the Company separately entered into an Underwriting Agreement with the Agent, pursuant to which the Company sold an additional 895,955 shares of common stock at $24.00 per share, resulting in gross proceeds to the Company of $21.5 million.

The net proceeds to the Company from the above offerings after deducting underwriting discounts and commissions and offering expenses was $22.8 million.

Debt Offerings

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 represents 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 at a floating rate equal to the then-current three-month LIBOR rate plus 485 basis points. All interest on the 2026 Notes is payable quarterly. The 2026 Notes are scheduled to mature on September 30, 2026. The 2026 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 30, 2021. The 2026 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. Subsequent to the end of the quarter, the 2026 Notes commenced trading on The NASDAQ Global Select Market under the symbol “INBKL.”

Capital

The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”).

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0% upon full implementation); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5% upon full implementation); and 4) a minimum Leverage Ratio of 4.0%.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period increasing by increments of that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 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.

The following tables present actual and required capital ratios as of September 30, 2016 and December 31, 2015 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2016 and December 31, 2015 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.



	Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phased-In				Minimum Required to be Considered Well Capitalized
(dollars in thousands)	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
As of September 30, 2016:
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	131,541	10.07	%	$	66,963	5.13	%	$	91,462	7.00	%	N/A		N/A
Bank	148,086		11.36	%	66,798		5.13	%	91,236		7.00	%	$	84,719	6.50	%
Tier 1 capital to risk-weighted assets
Consolidated	131,541		10.07	%	86,563		6.63	%	111,061		8.50	%	N/A		N/A
Bank	148,086		11.36	%	86,348		6.63	%	110,787		8.50	%	104,270		8.00	%
Total capital to risk-weighted assets
Consolidated	178,655		13.67	%	112,695		8.63	%	137,193		10.50	%	N/A		N/A
Bank	158,659		12.17	%	112,416		8.63	%	136,854		10.50	%	130,337		10.00	%
Leverage ratio
Consolidated	131,541		7.62	%	69,093		4.00	%	69,093		4.00	%	N/A		N/A
Bank	148,086		8.59	%	68,974		4.00	%	68,974		4.00	%	86,218		5.00	%



	Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phased-In				Minimum Required to be Considered Well Capitalized
(dollars in thousands)	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
As of December 31, 2015:
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	100,839	10.11	%	$	44,881	4.50	%	$	69,815	7.00	%	N/A		N/A
Bank	104,434		10.50	%	44,768		4.50	%	69,639		7.00	%	$	64,664	6.50	%
Tier 1 capital to risk-weighted assets
Consolidated	100,839		10.11	%	59,842		6.00	%	84,776		8.50	%	N/A		N/A
Bank	104,434		10.50	%	59,690		6.00	%	84,561		8.50	%	79,587		8.00	%
Total capital to risk-weighted assets
Consolidated	122,190		12.25	%	79,789		8.00	%	104,723		10.50	%	N/A		N/A
Bank	112,785		11.34	%	79,587		8.00	%	104,458		10.50	%	99,484		10.00	%
Leverage ratio
Consolidated	100,839		8.28	%	48,713		4.00	%	48,713		4.00	%	N/A		N/A
Bank	104,434		8.59	%	48,636		4.00	%	48,636		4.00	%	60,796		5.00	%

Shareholders’ Dividends

The Company’s Board of Directors declared a cash dividend for the third quarter 2016 of $0.06 per share of common stock payable October 17, 2016 to shareholders of record as of September 30, 2016 . The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including its results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors.

As of September 30, 2016, the Company had $38.0 million principal amount of subordinated debt outstanding pursuant to the 2021 Debenture, the 2025 Note, and the 2026 Notes. The agreements under which subordinated debt was issued prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred and be continuing an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock.

Capital Resources

While the Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for at least the next twelve months, including any cash dividends it may pay, the Company intends to continue pursuing its growth strategy, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to execute its growth strategy could be adversely affected.

Liquidity

Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings, which are generally advances from the Federal Home Loan Bank.

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 September 30, 2016 , on a consolidated basis, the Company had $539.1 million in cash and cash equivalents, interest-bearing time deposits and investment securities available-for-sale and $32.5 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At September 30, 2016 , the Bank had the ability to borrow an additional $324.5 million in advances from the Federal Home Loan Bank, the Federal Reserve 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 stockholders 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 September 30, 2016 , the Company, on an unconsolidated basis, had $17.3 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

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 September 30, 2016 , approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $129.6 million . Certificates of deposits scheduled to mature in one year or less at September 30, 2016 totaled $401.3 million . Generally, the Company believes that a majority of maturing deposits will remain with the Bank.

Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company’s or the Bank’s liquidity.

Reconciliation of Non-GAAP Financial Measures

This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial measures, specifically tangible common equity, tangible assets, average tangible common equity, tangible book value per common share, return on average tangible common equity and tangible common equity to tangible assets ratio are used by the Company’s management to measure the strength of its capital and its ability to generate earnings on tangible capital invested by its shareholders. Although the Company believes these non-GAAP measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the past five quarters and nine months ended September 30, 2016 and 2015 .



(dollars in thousands, except share and per share data)	Three Months Ended															Nine Months Ended
(dollars in thousands, except share and per share data)	September 30, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			September 30, 2016			September 30, 2015
Total equity - GAAP	$	137,154		$	135,679		$	107,830		$	104,330		$	102,912		$	137,154		$	102,912
Adjustments:
Goodwill	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)
Tangible common equity	$	132,467		$	130,992		$	103,143		$	99,643		$	98,225		$	132,467		$	98,225

Total assets - GAAP	$	1,824,196		$	1,702,468		$	1,527,719		$	1,269,870		$	1,166,170		$	1,824,196		$	1,166,170
Adjustments:
Goodwill	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)
Tangible assets	$	1,819,509		$	1,697,781		$	1,523,032		$	1,265,183		$	1,161,483		$	1,819,509		$	1,161,483

Total common shares outstanding	5,533,050			5,533,050			4,497,284			4,481,347			4,484,513			5,533,050			4,484,513

Book value per common share	$	24.79		$	24.52		$	23.98		$	23.28		$	22.95		$	24.79		$	22.95
Effect of goodwill	(0.85		)	(0.85		)	(1.05		)	(1.04		)	(1.05		)	(0.85		)	(1.05		)
Tangible book value per common share	$	23.94		$	23.67		$	22.93		$	22.24		$	21.90		$	23.94		$	21.90

Total shareholders’ equity to assets ratio	7.52		%	7.97		%	7.06		%	8.22		%	8.82		%	7.52		%	8.82		%
Effect of goodwill	(0.24		)%	(0.25		)%	(0.29		)%	(0.34		)%	(0.36		)%	(0.24		)%	(0.36		)%
Tangible common equity to tangible assets ratio	7.28		%	7.72		%	6.77		%	7.88		%	8.46		%	7.28		%	8.46		%

Total average equity - GAAP	$	135,666		$	117,913		$	106,278		$	103,583		$	100,885		$	120,010		$	99,365
Adjustments:
Average goodwill	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)
Average tangible common equity	$	130,979		$	113,226		$	101,591		$	98,896		$	96,198		$	115,323		$	94,678

Return on average shareholders’ equity	9.08		%	9.67		%	9.20		%	8.73		%	9.14		%	9.31		%	8.95		%
Effect of goodwill	0.33		%	0.40		%	0.43		%	0.41		%	0.44		%	0.38		%	0.44		%
Return on average tangible common equity	9.41		%	10.07		%	9.63		%	9.14		%	9.58		%	9.69		%	9.39		%

Critical Accounting Policies and Estimates

There have been no material changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2015 .

Recent Accounting Pronouncements

Refer to Note 12 of the condensed consolidated financial statements.

Off-Balance Sheet Arrangements

In the ordinary course of business, the Company enters into financial transactions to extend credit and forms of commitments that may be considered off-balance sheet arrangements. The Company enters into forward contracts related to its mortgage banking business to hedge the exposures from commitments to extend new residential mortgage loans to customers and from its mortgage loans held-for-sale. At September 30, 2016 and December 31, 2015 , the Company had commitments to sell residential real estate loans of $115.7 million and $42.7 million , respectively. These contracts mature in less than one year. The Company does not believe that off-balance sheet arrangements have had or are reasonably likely to have a material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, foreign exchange rates and equity prices. The primary source of market risk for the Company is interest rate risk. 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 September 30, 2016 , assuming parallel shifts in interest rates:



	% Change from Base Case for Parallel Changes in Rates
	-100 Basis Points ¹		+100 Basis Points		+200 Basis Points
NII - next twelve months	(3.05	)%	6.22	%	10.63	%
EVE	(2.87	)%	(6.77	)%	(14.50	)%

¹ Because certain current interest rates are at or below 1.00%, the 100 basis point downward shock assumes that certain corresponding interest rates approach an implied floor that, in effect, reflects a decrease of less than the full 100 basis point downward shock.

The Company’s objective is to manage the balance sheet with a bias toward asset sensitivity while simultaneously balancing the potential earnings impact of this strategy. A “risk-neutral” position refers to the absence of a strong bias toward either asset or liability sensitivity. An “asset sensitive” position refers to when the characteristics of the balance sheet are expected to generate higher net interest income when interest rates, primarily short-term rates, increase as rates earned on interest-earning assets would reprice upward more quickly or in greater quantities than rates paid on interest-bearing liabilities would reprice. A “liability sensitive” position refers to when the characteristics of the balance sheet are expected to generate lower net interest income when short-term interest rates increase as rates paid on interest-bearing liabilities would reprice upward more quickly or in greater quantities than rates earned on interest-earning assets.


ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information it is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time period specified in SEC rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive and principal financial officers, 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 principal executive and principal financial officers, to assess the effectiveness of the design and operation of its disclosure controls and procedures under the Exchange Act. Based on that evaluation, the principal executive and principal financial officers concluded that the disclosure controls and procedures were effective as of September 30, 2016 .

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the three months ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

PART II


ITEM 1.	LEGAL PROCEEDINGS

The Company is not 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 1A.	RISK FACTORS

Other than set forth below, there have been no material changes to the risk factors previously disclosed in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 .

We may not be able to generate sufficient cash to service all of our debt.

Our ability to make scheduled payments of principal and interest, or to satisfy our obligations in respect of our debt or to refinance our debt, will depend on our future performance of our operating subsidiaries. Prevailing economic conditions (including interest rates), regulatory constraints, including, among other things, limiting distributions to us from the Bank and required capital levels with respect to the Bank and certain of our nonbank subsidiaries, and financial, business and other factors, many of which are beyond our control, will also affect our ability to meet these needs. Our subsidiaries may not be able to generate sufficient cash flows from operations, or we may be unable to obtain future borrowings in an amount sufficient to enable us to pay our debt, or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt when needed on commercially reasonable terms or at all.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

Not Applicable.


ITEM 5.	OTHER INFORMATION

None.


ITEM 6.	EXHIBITS

Unless otherwise indicated, all documents incorporated into this quarterly report on Form 10-Q by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 1-35750.



Exhibit No.		Description
3.1		Articles of Incorporation of First Internet Bancorp (incorporated by reference to Exhibit 3.1 to registration statement on Form 10 filed November 30, 2012)
3.2		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)
4.1		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)
4.2		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)
4.3		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)
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1		Section 1350 Certifications
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

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.



		FIRST INTERNET BANCORP

Date: November 7, 2016	By	/s/ David B. Becker
		David B. Becker, Chairman, President and Chief Executive Officer (on behalf of Registrant)

Date: November 7, 2016	By	/s/ Kenneth J. Lovik
		Kenneth J. Lovik, Senior Vice President and Chief Financial Officer (principal financial officer)

EXHIBIT INDEX



Exhibit No.	Description	Method of Filing
3.1	Articles of Incorporation of First Internet Bancorp	Incorporated by Reference
3.2	Amended and Restated Bylaws of First Internet Bancorp, as amended March 18, 2013	Incorporated by Reference
4.1	Subordinated Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee	Incorporated by Reference
4.2	First Supplemental Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee	Incorporated by Reference
4.3	Form of Global Note representing 6.0% Subordinated Notes due 2026	Incorporated by Reference
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	Filed Electronically
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	Filed Electronically
32.1	Section 1350 Certifications	Filed Electronically
101.INS	XBRL Instance Document	Filed Electronically
101.SCH	XBRL Taxonomy Extension Schema	Filed Electronically
101.CAL	XBRL Taxonomy Extension Calculation Linkbase	Filed Electronically
101.DEF	XBRL Taxonomy Extension Definition Linkbase	Filed Electronically
101.LAB	XBRL Taxonomy Extension Label Linkbase	Filed Electronically
101.PRE	XBRL Taxonomy Extension Presentation Linkbase	Filed Electronically

TABLE OF CONTENTS

INBK 10-Q Quarter ended Sept. 30, 2016