First Internet Bancorp 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed to ensure that information the Company is required to disclose in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including our principal executive and principal 47 financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, the Company has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating its controls and procedures. The Company performed an evaluation under the supervision and with the participation of management, including the Company’s principal executive officer and principal financial officer, to assess the effectiveness of the design and operation of our disclosure controls and procedures under the Exchange Act. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of December 31, 2022. Report of Management's Assessment of Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, including accounting and other internal control systems that, in the opinion of management, provide reasonable assurance that (1) transactions are properly authorized, (2) the assets are properly safeguarded, and (3) transactions are properly recorded and reported to permit the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was effective based on those criteria. The Company’s internal control over financial reporting as of December 31, 2022 has been audited by FORVIS, LLP, an independent registered public accounting firm, as stated in its report appearing on page F-2. Changes in Internal Control Over Financial Reporting There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2022, that has materially affected or is reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not Applicable. 48 PART III Certain information required by Part III is incorporated by reference from our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders (the “Proxy Statement”), which we intend to file with the SEC pursuant to Regulation 14A within 120 days after December 31, 2022. Except for those portions specifically incorporated by reference from our Proxy Statement, no other portions of the Proxy Statement are deemed to be filed as part of this report. Item 10. Directors, Executive Officers and Corporate Governance Information about our Executive Officers Our executive officers are as follows: Name Age Position David B. Becker 69 Chairman, Chief Executive Officer and Director Nicole S. Lorch 48 President, Chief Operating Officer and Secretary Kenneth J. Lovik 53 Executive Vice President and Chief Financial Officer David B. Becker has served as our Chairman of the Board since 2006, as our Chief Executive Officer since 2007, and as our President from 2007 to June 2021. Mr. Becker is the founder of the Bank and has served as an officer and director of the Bank since 1998. Nicole S. Lorch has served as Secretary since June of 2022 and as President and Chief Operating Officer since June 2021. Previously, she served as Executive Vice President and Chief Operating Officer since January 2017. Ms. Lorch joined the Company as Director of Marketing in 1999 and served as Vice President, Marketing & Technology from 2003 to 2011 and Senior Vice President, Retail Banking from 2011 to January 2017. She previously served as Director of Marketing at Virtual Financial Services, an online banking services provider, from 1996 to 1999. Kenneth J. Lovik has served as Executive Vice President and Chief Financial Officer of the Company since January 2017. Mr. Lovik joined the Company in August 2014 as Senior Vice President and Chief Financial Officer. Previously, he served as Senior Vice President, Investor Relations and Corporate Development, at First Financial Bancorp, a publicly traded bank holding company headquartered in Cincinnati, Ohio, from February 2013 to May 2014. Prior to that, he served as its Vice President, Investor Relations and Corporate Development, from 2010 to February 2013. Before First Financial Bancorp, he was an investment banker at Milestone Advisors LLC, Howe Barnes Hoefer & Arnett, Inc. and A.G. Edwards & Sons, Inc. Executive officers are elected annually by our Board of Directors and serve a one-year period or until their successors are elected. None of the above-identified executive officers are related to each other or to any of our directors. Code of Business Conduct and Ethics We have adopted a code of business conduct and ethics that applies to all of our directors and officers and other employees, including our principal executive officer and principal financial officer. This code is publicly available through the Corporate Governance section of our website at www.firstinternetbancorp.com. To the extent permissible under applicable law, the rules of the SEC or Nasdaq listing standards, we intend to post on our website any amendment to the code of business conduct and ethics, or any grant of a waiver from a provision of the code of business conduct and ethics, that requires disclosure under applicable law, the rules of the SEC or Nasdaq listing standards. The disclosures in the Proxy Statement under the headings “Proposal 1 - Election of Directors,” “Corporate Governance,” “Shareholder Proposals for 2024 Annual Meeting,” and, if applicable “Delinquent Section 16(a) Reports” are incorporated into this Item by reference. Item 11. Executive Compensation Incorporated into this Item by reference is the information in the Proxy Statement regarding the compensation of our named executive officers appearing under the heading “Executive Compensation” (excluding information under the caption “Pay versus Performance”), the information regarding compensation committee interlocks and insider participation under the 49 heading “Corporate Governance” and the information regarding compensation of non-employee directors under the heading “Director Compensation.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated into this Item by reference is the information in the Proxy Statement appearing under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.” Item 13. Certain Relationships and Related Transactions, and Director Independence Incorporated into this Item by reference is the information in the Proxy Statement regarding director independence and related person transactions under the heading “Corporate Governance.” Item 14. Principal Accountant Fees and Services Incorporated into this Item by reference is the information in the Proxy Statement under the heading “Audit Matters.” The independent registered public accounting firm is FORVIS, LLP (Public Company Accounting Oversight Board Firm ID No. 686 ) located in Indianapolis, Indiana. 50 PART IV Item 15. Exhibits and Financial Statement Schedules (a) Documents Filed as Part of this Annual Report on Form 10-K: 1. See our financial statements beginning on page F-1. (b) Exhibits: Exhibit No. Description 3.1 Amended and Restated Articles of Incorporation of First Internet Bancorp (incorporated by reference to Exhibit 3.1 to current report on Form 8-K filed May 21, 2020) 3.2 Amended and Restated Bylaws of First Internet Bancorp (incorporated by reference to Exhibit 3.2 to current report on Form 8-K filed May 21, 2020) 4.1 Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 4.2 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) 4.3 Third Supplemental Indenture, dated as of October 26, 2020, between First Internet Bancorp and U.S. Bank National Association, as trustee (including form of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030) (incorporated by reference to Exhibit 4.2 to current report on Form 8-K filed October 26, 2020) 4.4 Fourth Supplemental Indenture, dated as of August 16, 2021, 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 August 16, 2021) 4.5 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) 4.6 Form of 3.75% Fixed-to-Floating Rate Subordinated Note due September 1, 2031 (incorporated by reference to Exhibit A-1 and Exhibit A-2 included in Exhibit 4.2 to current report on Form 8-K filed on August 16, 2021) 10.1 First Internet Bancorp 2013 Equity Incentive Plan (incorporated by reference to Appendix A to the definitive proxy statement on Schedule 14A filed April 9, 2013)* 10.2 First Internet Bancorp 2011 Directors’ Deferred Stock Plan (incorporated by reference to Exhibit 10.2 to registration statement on Form 10 filed November 30, 2012)* 10.3 Amended and Restated Employment Agreement among First Internet Bank of Indiana, First Internet Bancorp and David B. Becker dated March 28, 2013 (incorporated by reference to Exhibit 10.4 to Annual Report on Form 10-K for the year ended December 31, 2012)* 51 Exhibit No. Description 10.4 Amendment to Amended and Restated Employment Agreement among First Internet Bank of Indiana, First Internet Bancorp and David B. Becker dated April 20, 2022 (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed April 25, 2022) 10.5 Employment Agreement among First Internet Bank of Indiana, First Internet Bancorp and Nicole S. Lorch dated April 20, 2022 (incorporated by reference to Exhibit 10.2 to current report on Form 8-K filed April 25, 2022) 10.6 Employment Agreement among First Internet Bank of Indiana, First Internet Bancorp and Kenneth J. Lovik dated April 20, 2022 (incorporated by reference to Exhibit 10.3 to current report on Form 8-K filed April 25, 2022) 10.7 Form of Non-Employee Director Restricted Stock Award Agreement under 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2022)* 10.8 First Internet Bancorp Annual Bonus Plan (incorporated by reference to Exhibit 10.1 to quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2017)* 10.9 Form of Subordinated Note Purchase Agreement, dated as of October 26, 2020, between First Internet Bancorp and the purchaser thereunder (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed October 26, 2020) 10.10 Form of Management Incentive Award Agreement - Restricted Stock Units under 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2022)* 10.11 Form of Management Incentive Award Agreement - Restricted Stock units (performance based) under 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2021)* 10.12 Form of Subordinated Note Purchase Agreement, dated August 16,2021, by and among First Internet Bancorp and the Purchasers* (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed August 15, 2021) 10.13 First Internet Bancorp 2022 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed May 17, 2022)* 21.1 List of Subsidiaries 23.1 Consent of Independent Registered Public Accounting Firm 24.1 Powers of Attorney 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 Financial statements from the Annual Report on Form 10-K of First Internet Bancorp for the period ended December 31, 2022, filed with the SEC on March 14, 2023, formatted in inline extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets at December 31, 2022 and 2021, (ii) the Consolidated Statements of Income for the fiscal years ended December 31, 2022, 2021, and 2020, (iii) the Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2022, 2021, and 2020, (iv) the Consolidated Statements of Shareholders’ Equity for the fiscal years ended December 31, 2022, 2021, and 2020, (v) Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2022, 2021, and 2020, and (vi) Notes to Consolidated Financial Statements. 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) __________________________________ *Management contract, compensatory plan or arrangement required to be filed as an exhibit. Item 16. Form 10-K Summary. None. 52 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, on March 14, 2023. FIRST INTERNET BANCORP By: /s/ David B. Becker David B. Becker, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 14, 2023. /s/ David B. Becker /s/ Kenneth J. Lovik David B. Becker, Chairman and Chief Executive Officer (Principal Executive Officer) Kenneth J. Lovik, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) * * Aasif M. Bade, Director David R. Lovejoy, Director * * Justin P. Christian, Director Jean L. Wojtowicz, Director * * Ann Colussi Dee, Director John K. Keach, Jr., Director * David B. Becker, by signing his name hereto, does hereby sign this document on behalf of each of the above-named directors of the Registrant pursuant to powers of attorney duly executed by such persons. By: /s/ David B. Becker David B. Becker, Attorney-in-Fact 53 Reports of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors and Audit Committee First Internet Bancorp Fishers, Indiana Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of First Internet Bancorp (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows9F for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2023 expressed an unqualified opinion thereon . Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowances for Loan Losses Description of the Matter As described in Note 4 to the financial statements, the Company’s consolidated allowance for loan losses (ALLL) was $31.74 million at December 31, 2022. The Company also describes in Note 1 of the financial statements the “Allowance for Loan Losses Methodology” accounting policy around this estimate. The ALLL is an estimate of losses inherent in the loan portfolio. The determination of the reserve requires significant judgment reflecting the Company’s best estimate of probable loan losses. F-1 The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management determines that an outstanding loan will not be collected. Subsequent recoveries, if any, are credited to the allowance. The ALLL is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experiences, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available. The ALLL consists of specific and general components. The specific component relates to loans that are classified as impaired and an allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. The historical charge-off experience is determined by portfolio segment and is based on an analysis of historical loss activity over a time period that represents the economic life cycle of the loan segment. Other adjustments for each segment, such as qualitative or environmental considerations may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. The primary reason for our determination that the ALLL is a critical audit matter is that it involved significant judgment and complex review. There is a high degree of subjectivity in evaluating management’s estimate, such as evaluating management’s assessment of economic conditions and other environmental factors, evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades. How We Addressed the Matter in Our Audit Our audit procedures related to the estimated allowance for loan losses included: a. Testing the design and operating effectiveness of internal controls, including those related to technology, over the ALLL. b. Testing clerical and computational accuracy of the Company’s ALLL calculation. c. Testing the completeness and accuracy of underlying data utilized in the ALLL, including reports used in management review controls over the ALLL. d. Evaluating the qualitative and environmental adjustments to the historical loss rates, including assessing the basis for the adjustments and the reasonableness and directional consistency of those adjustments, including the reliability and relevance of the significant assumptions and underlying data. e. Evaluating the appropriateness of loan grades and assessing the reasonableness of specific impairments on loans. /s/ FORVIS, LLP (Formerly, BKD, LLP) We have served as the Company's auditor since 2004. Indianapolis, Indiana March 14, 2023 F-2 Reports of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors and Audit Committee First Internet Bancorp Fishers, Indiana Opinion on the Internal Control over Financial Reporting We have audited First Internet Bancorp’s (the “Company”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2022 and 2021, and for each of the three years in the period ended December 31, 2022 and our report dated March 14, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definitions and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. F-3 /s/ FORVIS, LLP (Formerly BKD, LLP) Indianapolis, Indiana March 14, 2023 F-4 First Internet Bancorp Consolidated Balance Sheets (Amounts in thousands except share data) December 31, 2022 2021 Assets Cash and due from banks $ 17,426 $ 7,492 Interest-bearing demand deposits 239,126 435,468 Total cash and cash equivalents 256,552 442,960 Securities available-for-sale - at fair value (amortized cost of $436,183 in 2022 and $606,507 in 2021) 390,384 603,044 Securities held-to-maturity - at amortized cost (fair value of $168,483 in 2022 and $61,468 in 2021) 189,168 59,565 Loans held-for-sale (includes $9,110 in 2022 and $23,233 in 2021 at fair value) 21,511 47,745 Loans 3,499,401 2,887,662 Allowance for loan losses ( 31,737 ) ( 27,841 ) Net loans 3,467,664 2,859,821 Accrued interest receivable 21,069 16,037 Federal Home Loan Bank of Indianapolis stock 28,350 25,650 Cash surrender value of bank-owned life insurance 39,859 38,900 Premises and equipment, net 72,711 59,842 Goodwill 4,687 4,687 Servicing asset, at fair value 6,255 4,702 Other real estate owned — 1,188 Accrued income and other assets 44,894 46,853 Total assets $ 4,543,104 $ 4,210,994 Liabilities and shareholders’ equity Liabilities Noninterest-bearing deposits $ 175,315 $ 117,531 Interest-bearing deposits 3,265,930 3,061,428 Total deposits 3,441,245 3,178,959 Advances from Federal Home Loan Bank 614,928 514,922 Subordinated debt, net of unamortized discounts and debt issuance costs of $2,468 in 2022 and $2,769 in 2021 104,532 104,231 Accrued interest payable 2,913 2,018 Accrued expenses and other liabilities 14,512 30,526 Total liabilities 4,178,130 3,830,656 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; 9,065,883 and 9,754,455 shares issued and outstanding in 2022 and 2021, respectively 192,935 218,946 Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none — — Retained earnings 205,675 172,431 Accumulated other comprehensive loss ( 33,636 ) ( 11,039 ) Total shareholders’ equity 364,974 380,338 Total liabilities and shareholders’ equity $ 4,543,104 $ 4,210,994 See Notes to Consolidated Financial Statements F-5 First Internet Bancorp Consolidated Statements of Income (Amounts in thousands except share and per share data) Year Ended December 31, 2022 2021 2020 Interest income Loans $ 140,600 $ 123,467 $ 120,628 Securities – taxable 10,711 7,970 11,123 Securities – non-taxable 1,767 1,017 1,728 Other earning assets 3,830 1,429 3,380 Total interest income 156,908 133,883 136,859 Interest expense Deposits 41,832 29,822 55,976 Other borrowed funds 17,983 17,505 16,342 Total interest expense 59,815 47,327 72,318 Net interest income 97,093 86,556 64,541 Provision for loan losses 4,977 1,030 9,325 Net interest income after provision for loan losses 92,116 85,526 55,216 Noninterest income Service charges and fees 1,071 1,114 824 Loan servicing revenue 2,573 1,934 1,159 Loan servicing asset revaluation ( 1,639 ) ( 1,069 ) ( 432 ) Mortgage banking activities 5,464 15,050 24,693 Gain on sale of loans 11,372 11,598 8,298 Gain on sale of securities — — 139 Gain on sale of premises and equipment — 2,523 — Other 2,416 1,694 1,655 Total noninterest income 21,257 32,844 36,336 Noninterest expense Salaries and employee benefits 41,553 38,223 34,231 Marketing, advertising and promotion 3,554 3,261 1,654 Consulting and professional fees 4,826 4,054 3,511 Data processing 1,989 1,649 1,528 Loan expenses 4,435 2,112 2,036 Premises and equipment 10,688 7,063 6,396 Deposit insurance premium 1,152 1,213 1,810 Write-down of other real estate owned — — 2,065 Other 5,076 4,223 4,423 Total noninterest expense 73,273 61,798 57,654 Income before income taxes 40,100 56,572 33,898 Income tax provision 4,559 8,458 4,445 Net income $ 35,541 $ 48,114 $ 29,453 Income per share of common stock Basic $ 3.73 $ 4.85 $ 2.99 Diluted 3.70 4.82 2.99 Weighted-average number of common shares outstanding Basic 9,530,921 9,918,083 9,840,205 Diluted 9,595,115 9,976,261 9,842,425 Dividends declared per share $ 0.24 $ 0.24 $ 0.24 See Notes to Consolidated Financial Statements F-6 First Internet Bancorp Consolidated Statements of Comprehensive Income (Amounts in thousands) Year Ended December 31, 2022 2021 2020 Net income $ 35,541 $ 48,114 $ 29,453 Other comprehensive (loss) income Securities available-for-sale Net unrealized holding (losses) gains on securities available-for-sale recorded within other comprehensive income before income tax ( 42,336 ) ( 4,087 ) 6,551 Reclassification adjustment for gains realized — — ( 139 ) Income tax (benefit) provision ( 9,060 ) ( 1,064 ) 1,556 Net effect on other comprehensive (loss) income ( 33,276 ) ( 3,023 ) 4,856 Securities held-to-maturity Reclassification of securities from available-for-sale to held-to-maturity ( 5,402 ) — — Amortization of net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity 844 — — Income tax benefit ( 1,039 ) — — Net effect on other comprehensive loss ( 3,519 ) — — Cash flow hedges Net unrealized holding gains (losses) on cash flow hedging derivatives recorded within other comprehensive income before income tax 19,091 11,138 ( 10,248 ) Income tax provision (benefit) 4,893 1,958 ( 2,387 ) Net effect on other comprehensive income (loss) 14,198 9,180 ( 7,861 ) Total other comprehensive (loss) income ( 22,597 ) 6,157 ( 3,005 ) Comprehensive income $ 12,944 $ 54,271 $ 26,448 See Notes to Consolidated Financial Statements F-7 First Internet Bancorp Consolidated Statements of Shareholders’ Equity (Amounts in thousands except per share data) Voting and Nonvoting Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance, January 1, 2020 $ 219,423 $ 99,681 $ ( 14,191 ) $ 304,913 Net income — 29,453 — 29,453 Other comprehensive loss — — ( 3,005 ) ( 3,005 ) Dividends declared ($0.24 per share) — ( 2,402 ) — ( 2,402 ) Recognition of the fair value of share-based compensation 2,110 — — 2,110 Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 27 — — 27 Common stock redeemed for the net settlement of share-based awards ( 152 ) — — ( 152 ) Balance, December 31, 2020 $ 221,408 $ 126,732 $ ( 17,196 ) $ 330,944 Net income — 48,114 — 48,114 Other comprehensive income — — 6,157 6,157 Dividends declared ($0.24 per share) — ( 2,415 ) — ( 2,415 ) Repurchased shares of common stock (100,000) ( 4,436 ) — — ( 4,436 ) Recognition of the fair value of share-based compensation 2,393 — — 2,393 Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 21 — — 21 Common stock redeemed for the net settlement of share-based awards ( 440 ) — — ( 440 ) Balance, December 31, 2021 $ 218,946 $ 172,431 $ ( 11,039 ) $ 380,338 Net income — 35,541 — 35,541 Other comprehensive loss — — ( 22,597 ) ( 22,597 ) Dividends declared ($0.24 per share) — ( 2,297 ) — ( 2,297 ) Repurchased shares of common stock (779,956) ( 27,780 ) — — ( 27,780 ) Recognition of the fair value of share-based compensation 2,035 — — 2,035 Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 21 — — 21 Common stock redeemed for the net settlement of share-based awards ( 287 ) — — ( 287 ) Balance, December 31, 2022 $ 192,935 $ 205,675 $ ( 33,636 ) $ 364,974 See Notes to Consolidated Financial Statements F-8 First Internet Bancorp Consolidated Statements of Cash Flows (Amounts in thousands) Year Ended December 31, 2022 2021 2020 Operating activities Net income $ 35,541 $ 48,114 $ 29,453 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 8,729 8,775 7,831 Write-down of other real estate owned — — 2,065 Increase in cash surrender value of bank-owned life insurance ( 959 ) ( 948 ) ( 950 ) Provision for loan losses 4,977 1,030 9,325 Share-based compensation expense 2,035 2,393 2,110 Gain from sale of available-for-sale securities — — ( 139 ) Loans originated for sale ( 518,870 ) ( 814,671 ) ( 1,009,266 ) Proceeds from sale of loans originated for sale 558,817 832,089 1,054,873 Gain on sale of loans ( 17,473 ) ( 29,401 ) ( 31,124 ) Decrease in fair value of loans held-for-sale 184 718 94 (Gain) loss on derivatives ( 2,569 ) 1,513 ( 2,069 ) Settlement of derivatives — ( 1,859 ) ( 46,109 ) Gain on sale of premises and equipment — ( 2,523 ) — Net change in servicing asset 1,639 1,069 ( 1,088 ) Net deferred income tax 4,632 2,434 ( 4,118 ) Net change in other assets 9,815 7,028 7,163 Net change in other liabilities ( 3,775 ) ( 921 ) ( 4,983 ) Net cash provided by operating activities 82,723 54,840 13,068 Investing activities Net loan activity, excluding sales and purchases ( 214,761 ) 316,002 46,787 Proceeds from sales of other real estate owned 1,188 — — Net proceeds from sales of portfolio loans 14,466 21,093 207,475 Maturities of securities available-for-sale 80,223 166,260 179,724 Proceeds from sales of securities available-for-sale — — 16,986 Purchase of securities available-for-sale ( 12,969 ) ( 282,226 ) ( 144,091 ) Maturities and calls of securities held-to-maturity 7,902 8,525 — Purchase of securities held-to-maturity ( 41,246 ) — ( 2,000 ) Redemption of Federal Home Loan Bank of Indianapolis stock 431 — — Purchase of Federal Home Loan Bank of Indianapolis stock ( 3,131 ) — — Net proceeds from sale of premises and equipment — 8,116 — Purchase of premises and equipment ( 17,517 ) ( 29,892 ) ( 25,559 ) Loans purchased ( 412,109 ) ( 168,438 ) ( 324,131 ) Other investing activities ( 3,510 ) 4,434 — Net cash (used in) provided by investing activities ( 601,033 ) 43,874 ( 44,809 ) Financing activities Net change in deposits 262,286 ( 91,926 ) 116,922 Cash dividends paid ( 2,317 ) ( 2,415 ) ( 2,349 ) Net proceeds from issuance of subordinated debt — 58,658 9,765 Repayment of subordinated debt — ( 35,000 ) — Repurchase of common stock ( 27,780 ) ( 4,436 ) — Proceeds from advances from Federal Home Loan Bank 615,000 440,000 440,000 Repayment of advances from Federal Home Loan Bank ( 515,000 ) ( 440,000 ) ( 440,000 ) Other, net ( 287 ) ( 441 ) ( 152 ) Net cash provided by (used in) financing activities 331,902 ( 75,560 ) 124,186 Net (decrease) increase in cash and cash equivalents ( 186,408 ) 23,154 92,445 Cash and cash equivalents, beginning of year 442,960 419,806 327,361 Cash and cash equivalents, end of year $ 256,552 $ 442,960 $ 419,806 Supplemental disclosures of cash flows information Cash paid during the year for interest 58,920 46,748 74,646 Cash paid during the year for taxes 2,005 7,045 5,912 Loans transferred to other real estate owned — 1,188 — Loans transferred to held-for-sale from portfolio 14,049 20,145 204,647 Cash dividends declared, not paid 544 585 588 Securities purchases settled in subsequent period 2,997 — 5,547 Transfer of available-for-sale mortgage-backed securities to held-to-maturity mortgage-backed securities at fair value 96,220 — — Transfer of available-for-sale municipal securities to held-to-maturity municipal securities — — 4,479 See Notes to Consolidated Financial Statements F-9 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 1: Basis of Presentation and Summary of Significant Accounting Policies The accounting policies of First Internet Bancorp and its subsidiaries (the “Company”) conform to accounting principles generally accepted in the United States of America (“GAAP”). A summary of the Company’s significant accounting policies follows: Description of Business The Company was incorporated on September 15, 2005 , and consummated a plan of exchange on March 21, 2006, by which the Company became a bank holding company and 100 % owner of First Internet Bank of Indiana (the “Bank”). The Company elected to and became a financial holding company, effective as of September 1, 2022. The Bank offers a wide range of commercial, small business, consumer and municipal banking products and services. The Bank conducts its consumer and small business deposit operations primarily through digital channels on a nationwide basis and has no traditional branch offices. Consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners. The Bank is subject to competition from other financial institutions. The Bank is regulated by certain state and federal agencies and undergoes periodic examinations by those regulatory authorities. The Bank has three wholly owned subsidiaries. JKH Realty Services, LLC was established on August 20, 2012 as a single member limited liability company wholly owned by the Bank to manage other real estate owned properties as needed. First Internet Public Finance Corp., a wholly-owned subsidiary of the Bank, was incorporated on March 6, 2017 and was established to provide municipal finance lending and leasing products to government entities and to purchase, manage, service, and safekeep municipal securities. SPF15, Inc., a wholly-owned subsidiary of the Bank, was incorporated on August 31, 2018 and was established to acquire and hold real estate. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company’s business activities are currently limited to one reporting unit and reportable segment, which is commercial banking. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company utilizes processes that involve the use of significant estimates and the judgment of management in determining the amount of the Company’s allowance for loan losses, income taxes, valuation and impairments of investment securities and goodwill, as well as fair value measurements of derivatives, loans held-for-sale and other real estate owned. Actual results could differ from those estimates. Securities The Company classifies its securities in one of three categories and accounts for the investments as follows: • Securities that the Company has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and reported at amortized cost. • Securities that are acquired and held principally for the purpose of selling them in the near term with the objective of generating economic profits on short-term differences in market characteristics are classified as “trading securities” and reported at fair value, with unrealized gains and losses included in earnings. The Company had no securities classified as “trading securities” at December 31, 2022 or 2021. F-10 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) • Securities not classified as either “held-to-maturity” or “trading securities” are classified as “available-for-sale” and reported at fair value, with unrealized gains and losses, after applicable taxes, excluded from earnings and reported in a separate component of shareholders’ equity. Declines in the value of debt securities and marketable equity securities that are considered to be other-than-temporary are recorded as an other-than-temporary impairment of securities available-for-sale with other-than-temporary impairment losses recorded in the consolidated statements of income. Interest and dividend income, adjusted by amortization of premium or discount, is included in earnings using the effective interest rate method. Purchases and sales of securities are recorded in the consolidated balance sheets on the trade date. Gains and losses from the sale or disposal of securities are recognized as of the trade date in the consolidated statements of income for the period in which securities are sold or otherwise disposed of. Gains and losses on sales of securities are determined using the specific-identification method. Loans Held-for-Sale Loans originated and intended for sale in the secondary market under best-efforts pricing agreements are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Loans originated and intended for sale in the secondary market under mandatory pricing agreements are carried at fair value to facilitate hedging of the loans. Gains and losses resulting from changes in fair value are recognized in noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan. Revenue Recognition The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company's principal source of revenue is interest income from loans and leases and investment securities. Interest income on loans is accrued as earned using the interest method based on unpaid principal balances except for interest on loans in nonaccrual status. Interest on loans in nonaccrual status is recorded as a reduction of loan principal when received. Premiums and discounts are amortized using the effective interest rate method. Loan fees, net of certain direct origination costs, primarily salaries and wages, are deferred and amortized to interest income as a yield adjustment over the life of the loan. The Company also earns noninterest income through a variety of financial and transaction services provided to corporate and consumer clients such as deposit account, debit card, mortgage banking, portfolio loan sales and sales of the government-guaranteed portion of U.S. Small Business Administration loans. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses. Loans Loans that management intends to hold until maturity are reported at their outstanding principal balance adjusted for unearned income, charge-offs, the allowance for loan losses (“ALLL”), any unamortized deferred fees or costs on originated loans, unamortized premiums or discounts on purchased loans and any carrying value adjustments related to terminated interest rate swaps associated with loans. F-11 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) For loans recorded at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are recorded in accordance with our revenue recognition policy. Allowance for Loan Losses Methodology Company policy is designed to maintain an adequate ALLL. Primary responsibility for ensuring that the Company has processes in place to consistently assess the adequacy of the ALLL rests with the Board of Directors (the “Board”). The Board has charged management with responsibility for establishing the methodology to be used and to assess the adequacy of the ALLL. The Board reviews recommendations from management on a quarterly basis to adjust the allowance as appropriate. The methodology employed by management for each portfolio segment, at a minimum, contains the following: 1. Loans are segmented by type of loan. 2. The required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on historical losses averaged over the past sixteen quarters. In those instances where the Company’s historical experience is not available, management develops factors based on industry experience and best practices. 3. All criticized, classified and impaired loans are tested for impairment by applying one of three methodologies: a. Present value of future cash flows; b. Fair value of collateral less costs to sell; or c. The loan’s observable market price. 4. All troubled debt restructurings (“TDR”) are considered impaired loans. 5. Loans tested for impairment are removed from other pools to prevent layering (double-counting). 6. The required ALLL for each group of loans are added together to determine the total required ALLL for the Company. The required ALLL is compared to the existing ALLL to determine the provision required to increase the ALLL or credit to decrease the ALLL. The historical loss experience is determined by portfolio segment and considers two weighted average net charge-off trends: 1) the Company’s average loss history over the previous sixteen quarters; and 2) the average loss history over the previous sixteen quarters for a peer group. Management believes the historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The Company also factors in the following qualitative considerations: 1. Changes in national, regional, and local economic and business conditions; 2. Changes in national, regional, and local unemployment rates; 3. The existence and effect of any concentrations of credit, and changes in the levels of such concentrations; 4. Changes in the nature and volume of the portfolio, and in the terms of loans; 5. Changes in the risk grades assigned to loans; 6. The levels of and trends in charge-offs and recoveries; F-12 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) 7. The levels of and trends in delinquencies, nonaccrual loans, and impaired loans; and 8. Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices. Provision for Loan Losses A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations. Nonaccrual Loans Any loan which becomes 90 days delinquent or for which the full collection of principal and interest may be in doubt will be considered for nonaccrual status. At the time a loan is placed on nonaccrual status, all accrued but unpaid interest will be reversed from interest income. Placing the loan on nonaccrual status does not relieve the borrower of the obligation to repay interest. A loan placed on nonaccrual status may be restored to accrual status when all delinquent principal and interest has been brought current, and the Company expects full payment of the remaining contractual principal and interest. Impaired Loans A loan is designated as impaired, in accordance with the impairment accounting guidance when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays not exceeding 90 days outstanding generally are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. Impaired loans include nonperforming loans but also include loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Accounting Standards Codification (“ASC”) Topic 310, Receivables , requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral, less costs to sell, and allows existing methods for recognizing interest income. Troubled Debt Restructurings The loan portfolio includes certain loans that have been modified in a TDR, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six months. When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on either the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or the current fair value of the collateral, less selling costs for collateral-dependent loans. If it is F-13 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) determined that the value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific ALLL or charge-off to the ALLL. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the ALLL. Policy for Charging Off Loans The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest. Federal Home Loan Bank (“FHLB”) of Indianapolis Stock Federal law requires a member institution of the FHLB system to hold common stock of its district FHLB according to a predetermined formula. This investment is stated at cost, which represents redemption value, and may be pledged as collateral for FHLB advances. Premises and Equipment Premises and equipment is stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives, which range from three to five years for software and equipment, ten years for land improvements, and 39 years for buildings. Other Real Estate Owned Other real estate owned represents real estate acquired through foreclosure or deed in lieu of foreclosure and is recorded at its fair value less estimated costs to sell. When property is acquired, it is recorded at its fair value at the date of acquisition with any resulting write-down charged against the ALLL. Any subsequent deterioration of the property is charged directly to operating expense. Costs relating to the development and improvement of other real estate owned are capitalized, whereas costs relating to holding and maintaining the property are charged to expense as incurred. Derivative Financial Instruments The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into interest rate lock commitments (“IRLCs”) with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses, in the income statement within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets. The IRLCs and forward contracts are not designated as accounting hedges, and are recorded at fair value with changes in fair value reflected in noninterest income in the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance F-14 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets. Fair Value Measurements The Company records or discloses certain assets and liabilities at fair value. ASC Topic 820, Fair Value Measurements , defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified within one of three levels in a valuation hierarchy. ASC Topic 820 describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities There were no transfers that occurred and, therefore, recognized, between any of the fair value hierarchy levels at December 31, 2022 or 2021. Income Taxes Deferred income tax assets and liabilities reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations. Deferred income tax expense or benefit is based upon the change in deferred tax assets and liabilities from period to period, subject to an ongoing assessment of realization of deferred tax assets. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company files income tax returns in the U.S. federal, Indiana, and other state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years before 2019. ASC Topic 740-10, Accounting for Uncertainty in Income Taxes , prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company did not identify any material uncertain tax positions that it believes should be recognized in the consolidated financial statements. F-15 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Earnings Per Share Earnings per share of common stock is based on the weighted average number of basic shares and dilutive shares outstanding during the year. The following is a reconciliation of the weighted average common shares for the basic and diluted earnings per share computations. Year Ended December 31, 2022 2021 2020 Basic earnings per share Net income available to common shareholders $ 35,541 $ 48,114 $ 29,453 Weighted average common shares 9,530,921 9,918,083 9,840,205 Basic earnings per common share $ 3.73 $ 4.85 $ 2.99 Diluted earnings per share Net income available to common shareholders $ 35,541 $ 48,114 $ 29,453 Weighted average common shares 9,530,921 9,918,083 9,840,205 Dilutive effect of equity compensation 64,194 58,178 2,220 Weighted average common and incremental shares 9,595,115 9,976,261 9,842,425 Diluted earnings per common share 1 $ 3.70 $ 4.82 $ 2.99 1 Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted average antidilutive shares totaling 2,646 , 28 and 18,524 for the years ended December 31, 2022, 2021 and 2020, respectively. Share-based Compensation The Company has a share-based compensation plan using the fair value recognition provisions of ASC Topic 718, Compensation - Stock Compensation . The plan is described more fully in Note 11. Comprehensive Income Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale, unrealized gains and losses on the transfer of securities available-for-sale to securities held-to-maturity, and unrealized gains and losses on cash flow hedges. Reclassification adjustments have been determined for all components of other comprehensive income or loss reported in the consolidated statements of changes in shareholders’ equity. Statements of Cash Flows Cash and cash equivalents are defined to include cash on-hand, noninterest and interest-bearing amounts due from other banks and federal funds sold. Generally, federal funds are sold for one-day periods. The Company reports net cash flows for customer loan transactions and deposit transactions. Bank-Owned Life Insurance Bank-owned life insurance policies are carried at their cash surrender value. The Company recognizes tax-free income from the periodic increases in the cash surrender value of these policies and from death benefits. Goodwill Goodwill is tested at least annually for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements. F-16 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Servicing Asset The servicing asset is related to small business lending loans sold. The servicing asset is recognized at the time of sale when servicing is retained and the income statement effect is recorded in loan servicing revenue. Servicing assets are recorded at fair value in accordance with ASC 860. Fair value is based on a third-party valuation model that calculates the present value of net servicing revenue. Reclassifications Certain reclassifications have been made to the 2021 and 2020 financial statements to conform to the 2022 financial statement presentation. These reclassifications had no effect on net income. Note 2: Cash and Cash Equivalents At December 31, 2022, the Company’s interest-bearing and noninterest-bearing cash accounts at other institutions exceeded the limits for full FDIC insurance coverage by $ 20.9 million. In addition, approximately $ 227.9 million and $ 0.8 million of cash was held by the Federal Reserve Bank of Chicago and the FHLB of Indianapolis, respectively, which are not federally insured. The Federal Reserve Act authorizes the Federal Reserve Board to establish reserve requirements within specified ranges for the purpose of implementing monetary policy on certain types of deposits and other liabilities of depository institutions. On March 15, 2020, the Federal Reserve Board reduced requirement ratios to zero percent effective March 26, 2020. As such, the Company is not currently required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. Note 3: Securities The following tables summarize securities available-for-sale and securities held-to-maturity as of December 31, 2022 and 2021. December 31, 2022 Amortized Gross Unrealized Fair Cost Gains Losses Value Securities available-for-sale U.S. Government-sponsored agencies $ 35,606 $ — $ ( 1,797 ) $ 33,809 Municipal securities 68,958 458 ( 2,140 ) 67,276 Agency mortgage-backed securities - residential 1 252,066 — ( 36,974 ) 215,092 Agency mortgage-backed securities - commercial 17,142 — ( 1,302 ) 15,840 Private label mortgage-backed securities - residential 11,777 — ( 1,322 ) 10,455 Asset-backed securities 5,000 — ( 40 ) 4,960 Corporate securities 45,634 35 ( 2,717 ) 42,952 Total available-for-sale $ 436,183 $ 493 $ ( 46,292 ) $ 390,384 F-17 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) December 31, 2022 Amortized Gross Unrealized Fair Cost Gains Losses Value Securities held-to-maturity Municipal securities $ 13,946 $ — $ ( 1,114 ) $ 12,832 Agency mortgage-backed securities - residential 121,853 — ( 15,112 ) 106,741 Agency mortgage-backed securities - commercial 5,818 — ( 1,266 ) 4,552 Corporate securities 47,551 — ( 3,193 ) 44,358 Total held-to-maturity $ 189,168 $ — $ ( 20,685 ) $ 168,483 1 Includes $ 0.5 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of December 31, 2022. December 31, 2021 Amortized Gross Unrealized Fair Cost Gains Losses Value Securities available-for-sale U.S. Government-sponsored agencies $ 50,013 $ 164 $ ( 1,137 ) $ 49,040 Municipal securities 75,158 1,940 ( 65 ) 77,033 Agency mortgage-backed securities - residential 1 377,928 960 ( 5,652 ) 373,236 Agency mortgage-backed securities - commercial 36,024 441 ( 139 ) 36,326 Private label mortgage-backed securities - residential 15,902 122 ( 3 ) 16,021 Asset-backed securities 5,000 4 — 5,004 Corporate securities 46,482 597 ( 695 ) 46,384 Total available-for-sale $ 606,507 $ 4,228 $ ( 7,691 ) $ 603,044 December 31, 2021 Amortized Gross Unrealized Fair Cost Gains Losses Value Securities held-to-maturity Municipal securities $ 13,992 $ 717 $ — $ 14,709 Corporate securities 45,573 1,186 — 46,759 Total held-to-maturity $ 59,565 $ 1,903 $ — $ 61,468 1 Includes $ 0.8 million of additional premium related to terminated interest rate swaps associated with agency mortgage-backed securities - residential as of December 31, 2021. F-18 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The carrying value of securities at December 31, 2022 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 34,169 35,307 Five to ten years 47,739 45,422 After ten years 68,290 63,308 150,198 144,037 Agency mortgage-backed securities - residential 252,066 215,092 Agency mortgage-backed securities - commercial 17,142 15,840 Private label mortgage-backed securities - residential 11,777 10,455 Asset-backed securities 5,000 4,960 Total $ 436,183 $ 390,384 Held-to-Maturity Amortized Cost Fair Value One to five years $ 11,805 $ 11,547 Five to ten years 44,213 40,861 After ten years 5,479 4,782 61,497 57,190 Agency mortgage-backed securities - residential 121,853 106,741 Agency mortgage-backed securities - commercial 5,818 4,552 Total $ 189,168 $ 168,483 There were no gross realized gains or losses resulting from the sale of available-for-sale securities recognized during the twelve months ended December 31, 2022 and December 31, 2021. There were gross realized losses of $ 0.1 million resulting from sales of available-for-sale securities recognized during the twelve months ended December 31, 2020. As of December 31, 2022, the fair value of available-for-sale investment securities pledged as collateral was $ 328.7 million. The Company pledged the securities for various types of transactions, including FHLB advances, deposits and derivative financial instruments. Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. As of December 31, 2022 and 2021, the Company had 434 and 179 securities, respectively, with market values below their cost basis. The total fair value of these investments at December 31, 2022 and 2021 was $ 527.4 million and $ 403.2 million, which is approximately 94 % and 61 %, respectively, of the Company’s available-for-sale and held-to-maturity securities portfolio. These declines resulted primarily from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced with the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. U.S. Government-Sponsored Agencies, Municipal Securities, and Corporate Securities The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be F-19 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) required to sell the investments before recovery of their amortized cost bases, which may not be until maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2022. Agency Mortgage-Backed and Private Label Mortgage-Backed Securities The unrealized losses on the Company’s investments in agency mortgage-backed and private label mortgage-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 not be until maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2022. The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2022 and 2021: December 31, 2022 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 $ 29,668 $ ( 1,008 ) $ 4,141 $ ( 789 ) $ 33,809 $ ( 1,797 ) Municipal securities 39,557 ( 1,766 ) 4,778 ( 374 ) 44,335 ( 2,140 ) Agency mortgage-backed securities - residential 170,026 ( 29,690 ) 45,066 ( 7,284 ) 215,092 ( 36,974 ) Agency mortgage-backed securities - commercial 10,560 ( 926 ) 5,280 ( 376 ) 15,840 ( 1,302 ) Private label mortgage-backed securities - residential 2,445 ( 330 ) 8,010 ( 992 ) 10,455 ( 1,322 ) Asset-backed securities 4,960 ( 40 ) — — 4,960 ( 40 ) Corporate securities 21,568 ( 1,452 ) 13,239 ( 1,265 ) 34,807 ( 2,717 ) Total $ 278,784 $ ( 35,212 ) $ 80,514 $ ( 11,080 ) $ 359,298 $ ( 46,292 ) December 31, 2022 Less Than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Securities held-to-maturity Municipals $ 8,160 $ ( 661 ) $ 4,258 $ ( 453 ) $ 12,418 $ ( 1,114 ) Mortgage-backed securities - residential 68,408 ( 8,848 ) 38,332 ( 6,264 ) 106,740 ( 15,112 ) Mortgage-backed securities - commercial 4,552 ( 1,266 ) — — 4,552 ( 1,266 ) Corporate securities 36,866 ( 2,685 ) 7,492 ( 508 ) 44,358 ( 3,193 ) Total $ 117,986 $ ( 13,460 ) $ 50,082 $ ( 7,225 ) $ 168,068 $ ( 20,685 ) F-20 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) December 31, 2021 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 $ 2,921 $ ( 79 ) $ 40,305 $ ( 1,058 ) $ 43,226 $ ( 1,137 ) Municipals 5,721 ( 65 ) — — 5,721 ( 65 ) Agency mortgage-backed securities - residential 287,820 ( 3,694 ) 40,840 ( 1,958 ) 328,660 ( 5,652 ) Agency mortgage-backed securities - commercial 3,944 ( 139 ) — — 3,944 ( 139 ) Private label mortgage-backed securities - residential 374 ( 3 ) — — 374 ( 3 ) Corporate securities 11,813 ( 187 ) 9,491 ( 508 ) 21,304 ( 695 ) Total $ 312,593 $ ( 4,167 ) $ 90,636 $ ( 3,524 ) $ 403,229 $ ( 7,691 ) Amounts reclassified from accumulated other comprehensive loss and the affected line items in the consolidated statements of income during the years ended December 31, 2022, 2021 and 2020 were as follows: Details About Accumulated Other Comprehensive Loss Components Amounts Reclassified from Accumulated Other Comprehensive Loss for the Year Ended December 31, Affected Line Item in the Statements of Income 2022 2021 2020 Unrealized gains on securities available-for-sale Gain realized in earnings $ — $ — $ 139 Gain on sale of securities Total reclassified amount before tax — — 139 Income before income taxes Tax expense — — 38 Income tax provision Total reclassifications out of accumulated other comprehensive loss $ — $ — $ 101 Net Income Equity Investments Equity investments, largely comprised of non-marketable equity investments, are generally accounted for under equity security accounting. The following tables provide additional information related to investments accounted for under this method. The carrying amount of each equity investment with a readily determinable fair value at December 31, 2022 and 2021 is reflected in the following table: (dollars in thousands) 2022 2021 GenOpp Financial Fund LP $ 2,134 $ 2,075 Total $ 2,134 $ 2,075 F-21 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The carrying amount of the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings on a cumulative basis as of December 31, 2022 and for the years ended December 31, 2022 and 2021 is reflected in the following table: (dollars in thousands ) 2022 2021 Carrying value 1 $ 8,067 $ 4,636 Carrying value adjustments — — Impairment — — Upward changes for observable prices — — Downward changes for observable prices — — Net change $ 8,067 $ 4,636 1 Exclusive of $ 13.0 million and $ 12.0 million in unfunded commitments as of December 31, 2022, and 2021, respectively. F-22 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 4: Loans Categories of loans include: December 31, 2022 2021 Commercial loans Commercial and industrial $ 126,108 $ 96,008 Owner-occupied commercial real estate 61,836 66,732 Investor commercial real estate 93,121 28,019 Construction 181,966 136,619 Single tenant lease financing 939,240 865,854 Public finance 621,032 592,665 Healthcare finance 272,461 387,852 Small business lending 123,750 108,666 Franchise finance 299,835 81,448 Total commercial loans 2,719,349 2,363,863 Consumer loans Residential mortgage 383,948 186,770 Home equity 24,712 17,665 Other consumer 324,598 265,478 Total consumer loans 733,258 469,913 Total commercial and consumer loans 3,452,607 2,833,776 Net deferred loan origination costs, premiums and discounts on purchased loans, and other 1 46,794 53,886 Total loans 3,499,401 2,887,662 Allowance for loan losses ( 31,737 ) ( 27,841 ) Net loans $ 3,467,664 $ 2,859,821 1 Includes carrying value adjustment of $ 32.5 million and $ 37.5 million related to terminated interest rate swaps associated with public finance loans as of December 31, 2022 and December 31, 2021, respectively. The general risk characteristics specific to each loan portfolio segment are as follows: Commercial and Industrial: Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States. 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 Midwest and Southwest regions of the United States and its loans are often secured by manufacturing and service facilities, as well as office buildings. F-23 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee from the primary sponsor or sponsors. This portfolio segment generally involves larger loan amounts with repayment primarily dependent on the successful leasing and operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by changing economic conditions in the real estate markets, industry dynamics or the overall health of the local economy where the property is located. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are generally located in the Midwest and Southwest regions of the United States. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, economic and industry conditions together with other risk grade criteria. As a general rule, the Company avoids financing special use projects unless other underwriting factors are present to mitigate these additional risks. Construction: Construction loans are secured by land and related improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, and multi-family) properties, land development for residential properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, architectural services, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. This portfolio segment is generally concentrated in the Midwest and Southwest regions of the United States. Single Tenant Lease Financing: These loans are made on a nationwide basis to property owners of real estate subject to long-term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria. Public Finance: These loans are made on a nationwide basis to governmental and not-for-profit entities to provide both tax-exempt and taxable loans for a variety of purposes including: short-term cash-flow needs; debt refinancing; economic development; quality of life projects; infrastructure improvements; renewable energy projects; and equipment financing. The primary sources of repayment for public finance loans include pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenues; sales tax; and pledged general revenue. Certain loans may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment. Healthcare Finance: These loans are made on a nationwide basis to healthcare providers, primarily dentists, for practice acquisition financing or refinancing that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment are primarily based on the identified cash flows from operations of the borrower and related entities and secondarily on the underlying collateral provided by the borrower. F-24 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Small Business Lending: These loans are made on a nationwide basis to small businesses and generally carry a partial guaranty from the U.S. Small Business Administration (“SBA”) under its 7(a) loan program. We generally sell the government guaranteed portion of SBA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. For SBA loans where the guaranteed portion is retained, the SBA guaranty provides a tertiary source of repayment to the Bank in event of borrower default. Cash flows of borrowers, however, may not be as expected and collateral securing these loans may fluctuate in value. Loans are made for a broad array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating equipment purchases. Franchise Finance: These loans are made on a nationwide basis through our partnership with ApplePie Capital, which through their deep relationships with franchise brands provides franchisees with financing options for new franchise units, recapitalization, expansion, equipment and working capital. The sources of repayment are either based on identified cash flows from existing operations of the borrower or pro forma cash flow for new franchise locations. Residential Mortgage: With respect to residential loans that are secured by 1-to-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-to-4 family residences. The properties securing the home equity portfolio segment are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property values on residential properties, among other economic conditions in the market. Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. F-25 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables present changes in the balance of the ALLL during the twelve months ended December 31, 2022, 2021, and 2020 Twelve Months Ended December 31, 2022 Balance, Beginning of Period Provision (Credit) Charged to Expense Losses Charged Off Recoveries Balance, End of Period Allowance for loan losses: Commercial and industrial $ 1,891 $ ( 185 ) $ — $ 5 $ 1,711 Owner-occupied commercial real estate 742 ( 91 ) — — 651 Investor commercial real estate 328 771 — — 1,099 Construction 1,612 462 — — 2,074 Single tenant lease financing 10,385 ( 1,097 ) — 1,231 10,519 Public finance 1,776 ( 23 ) — — 1,753 Healthcare finance 5,940 ( 2,943 ) — — 2,997 Small business lending 1,387 1,154 ( 402 ) 29 2,168 Franchise finance 1,083 2,905 — — 3,988 Residential mortgage 643 912 — 4 1,559 Home equity 64 ( 134 ) — 139 69 Other consumer 1,990 3,246 ( 2,358 ) 271 3,149 Total $ 27,841 $ 4,977 $ ( 2,760 ) $ 1,679 $ 31,737 Twelve Months Ended December 31, 2021 Balance, Beginning of Period Provision (Credit) Charged to Expense Losses Charged Off Recoveries Balance, End of Period Allowance for loan losses: Commercial and industrial $ 1,146 $ 684 $ ( 28 ) $ 89 $ 1,891 Owner-occupied commercial real estate 1,082 ( 340 ) — — 742 Investor commercial real estate 155 173 — — 328 Construction 1,192 420 — — 1,612 Single tenant lease financing 12,990 ( 214 ) ( 2,391 ) — 10,385 Public finance 1,732 44 — — 1,776 Healthcare finance 7,485 ( 1,545 ) — — 5,940 Small business lending 628 901 ( 222 ) 80 1,387 Franchise finance — 1,083 — — 1,083 Residential mortgage 519 67 ( 6 ) 63 643 Home equity 48 60 ( 51 ) 7 64 Other consumer 2,507 ( 303 ) ( 529 ) 315 1,990 Total $ 29,484 $ 1,030 $ ( 3,227 ) $ 554 $ 27,841 F-26 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Twelve Months Ended December 31, 2020 Balance, Beginning of Period Provision (Credit) Charged to Expense Losses Charged Off Recoveries Balance, End of Period Allowance for loan losses: Commercial and industrial $ 1,521 $ 80 $ ( 461 ) $ 6 $ 1,146 Owner-occupied commercial real estate 561 545 ( 24 ) — 1,082 Investor commercial real estate 109 46 — — 155 Construction 380 812 — — 1,192 Single tenant lease financing 11,175 1,815 — — 12,990 Public finance 1,580 152 — — 1,732 Healthcare finance 3,247 4,894 ( 743 ) 87 7,485 Small business lending 54 665 ( 110 ) 19 628 Residential mortgage 657 ( 122 ) ( 20 ) 4 519 Home equity 46 ( 9 ) — 11 48 Other consumer 2,510 447 ( 804 ) 354 2,507 Total $ 21,840 $ 9,325 $ ( 2,162 ) $ 481 $ 29,484 The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2022 and 2021. Loans Allowance for Loan Losses December 31, 2022 Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Commercial and industrial $ 116,307 $ 9,801 $ 126,108 $ 1,660 $ 51 $ 1,711 Owner-occupied commercial real estate 60,266 1,570 61,836 651 — 651 Investor commercial real estate 93,121 — 93,121 1,099 — 1,099 Construction 181,966 — 181,966 2,074 — 2,074 Single tenant lease financing 939,240 — 939,240 10,519 — 10,519 Public finance 621,032 — 621,032 1,753 — 1,753 Healthcare finance 272,461 — 272,461 2,997 — 2,997 Small business lending 1 113,699 10,051 123,750 1,465 703 2,168 Franchise finance 299,835 — 299,835 3,988 — 3,988 Residential mortgage 380,272 3,676 383,948 1,559 — 1,559 Home equity 24,683 29 24,712 69 — 69 Other consumer 324,581 17 324,598 3,149 — 3,149 Total $ 3,427,463 $ 25,144 $ 3,452,607 $ 30,983 $ 754 $ 31,737 1 Balance is partially guaranteed by the U.S. government. F-27 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Loans Allowance for Loan Losses December 31, 2021 Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Commercial and industrial $ 95,364 $ 644 $ 96,008 $ 1,441 $ 450 $ 1,891 Owner-occupied commercial real estate 63,387 3,345 66,732 742 — 742 Investor commercial real estate 28,019 — 28,019 328 — 328 Construction 136,619 — 136,619 1,612 — 1,612 Single tenant lease financing 864,754 1,100 865,854 10,290 95 10,385 Public finance 592,665 — 592,665 1,776 — 1,776 Healthcare finance 386,926 926 387,852 5,417 523 5,940 Small business lending 1 106,682 1,984 108,666 994 393 1,387 Franchise finance 81,448 — 81,448 1,083 — 1,083 Residential mortgage 183,852 2,918 186,770 643 — 643 Home equity 17,651 14 17,665 64 — 64 Other consumer 265,469 9 265,478 1,990 — 1,990 Total $ 2,822,836 $ 10,940 $ 2,833,776 $ 26,380 $ 1,461 $ 27,841 1 Balance is partially guaranteed by the U.S. government. The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. A description of the general characteristics of the risk grades is as follows: • “Pass” - Higher quality loans that do not fit any of the other categories described below. • “Special Mention” - Loans that possess some credit deficiency or potential weakness which deserve close attention. • “Substandard” - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. • “Doubtful” - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable. • “Loss” - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted. F-28 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of December 31, 2022 and 2021. December 31, 2022 Pass Special Mention Substandard Total Commercial and industrial $ 114,934 $ 1,373 $ 9,801 $ 126,108 Owner-occupied commercial real estate 50,721 9,546 1,569 61,836 Investor commercial real estate 93,121 — — 93,121 Construction 180,768 1,198 — 181,966 Single tenant lease financing 936,207 3,033 — 939,240 Public finance 618,752 2,280 — 621,032 Healthcare finance 271,085 1,376 — 272,461 Small business lending 1 107,885 5,814 10,051 123,750 Franchise finance 299,241 594 — 299,835 Total commercial loans $ 2,672,714 $ 25,214 $ 21,421 $ 2,719,349 1 Balance is partially guaranteed by the U.S. government. December 31, 2022 Performing Nonaccrual Total Residential mortgage $ 382,900 $ 1,048 $ 383,948 Home equity 24,712 — 24,712 Other consumer 324,581 17 324,598 Total $ 732,193 $ 1,065 $ 733,258 December 31, 2021 Pass Special Mention Substandard Total Commercial and industrial $ 82,412 $ 12,952 $ 644 $ 96,008 Owner-occupied commercial real estate 59,369 4,018 3,345 66,732 Investor commercial real estate 28,019 — — 28,019 Construction 124,578 12,041 — 136,619 Single tenant lease financing 859,612 5,142 1,100 865,854 Public finance 591,630 1,035 — 592,665 Healthcare finance 386,337 589 926 387,852 Small business lending 1 99,250 7,433 1,983 108,666 Franchise finance 81,448 — — 81,448 Total commercial loans $ 2,312,655 $ 43,210 $ 7,998 $ 2,363,863 1 Balance is partially guaranteed by the U.S. government. December 31, 2021 Performing Nonaccrual Total Residential mortgage $ 185,544 $ 1,226 $ 186,770 Home equity 17,651 14 17,665 Other consumer 265,469 9 265,478 Total $ 468,664 $ 1,249 $ 469,913 F-29 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables present the Company’s loan portfolio delinquency analysis as of December 31, 2022 and 2021. December 31, 2022 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total loans Nonaccrual Loans Total Loans 90 Days or More Past Due and Accruing Commercial and industrial $ 81 $ — $ 51 $ 132 $ 125,976 $ 126,108 $ 51 $ — Owner-occupied commercial real estate — — — — 61,836 61,836 1,570 — Investor commercial real estate — — — — 93,121 93,121 — — Construction — 1,198 — 1,198 180,768 181,966 — — Single tenant lease financing — — — — 939,240 939,240 — — Public finance — — — — 621,032 621,032 — — Healthcare finance — — — — 272,461 272,461 — — Small business lending 1 57 — 3,485 3,542 120,208 123,750 4,764 — Franchise Finance 313 — — 313 299,522 299,835 — — Residential mortgage — 283 185 468 383,480 383,948 1,048 79 Home equity — — — — 24,712 24,712 — — Other consumer 91 10 — 101 324,497 324,598 17 — Total $ 542 $ 1,491 $ 3,721 $ 5,754 $ 3,446,853 $ 3,452,607 $ 7,450 $ 79 1 Balance is partially guaranteed by the U.S. government. December 31, 2021 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total loans Nonaccrual Loans Total Loans 90 Days or More Past Due and Accruing Commercial and industrial $ — $ — $ — $ — $ 96,008 $ 96,008 $ 674 $ — Owner-occupied commercial real estate — — — — 66,732 66,732 — — Investor commercial real estate — — — — 28,019 28,019 3,419 — Construction — — — — 136,619 136,619 — — Single tenant lease financing — — — — 865,854 865,854 1,100 — Public finance — — — — 592,665 592,665 — — Healthcare finance — — — — 387,852 387,852 — — Small business lending 1 — — 657 657 108,009 108,666 959 — Franchise Finance — — — — 81,448 81,448 — — Residential mortgage 51 226 106 383 186,387 186,770 1,226 — Home equity — — — — 17,665 17,665 14 — Other consumer 68 18 — 86 265,392 265,478 9 — Total $ 119 $ 244 $ 763 $ 1,126 $ 2,832,650 $ 2,833,776 $ 7,401 $ — 1 Balance is partially guaranteed by the U.S. government. F-30 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables present the Company’s impaired loans as of December 31, 2022 and 2021. December 31, 2022 December 31, 2021 Recorded Balance Unpaid Principal Balance Specific Allowance Recorded Balance Unpaid Principal Balance Specific Allowance Loans without a specific valuation allowance Commercial and industrial $ 9,750 $ 9,750 $ — $ — $ — $ — Owner-occupied commercial real estate 1,570 1,779 — 3,345 3,466 — Small business lending 1 8,184 8,705 — 959 1,193 — Residential mortgage 3,676 3,835 — 2,918 3,063 — Home equity 29 29 — 14 15 — Other consumer 17 36 — 9 44 — Total 23,226 24,134 — 7,245 7,781 — Loans with a specific valuation allowance Commercial and industrial $ 51 $ 51 $ 51 $ 644 $ 677 $ 450 Single tenant lease financing — — — 1,100 1,123 95 Healthcare finance — — — 926 926 523 Small business lending 1 1,867 1,867 703 1,025 1,025 393 Total 1,918 1,918 754 3,695 3,751 1,461 Total impaired loans $ 25,144 $ 26,052 $ 754 $ 10,940 $ 11,532 $ 1,461 1 Balance is partially guaranteed by the U.S. government. The following table presents average balances and interest income recognized for impaired loans during the twelve months ended December 31, 2022, 2021, and 2020. Twelve Months Ended December 31, 2022 December 31, 2021 December 31, 2020 Average Balance Interest Income Average Balance Interest Income Average Balance Interest Income Loans without a specific valuation allowance Commercial and industrial $ 3,676 $ 872 $ 194 $ 9 $ 1,037 $ 57 Owner-occupied commercial real estate 2,253 — 3,324 — 3,790 60 Single tenant lease financing — — 75 5 — — Healthcare finance — — 252 — 386 16 Small business lending 1 2,678 — 1,215 — — — Residential mortgage 3,529 25 2,264 67 1,333 — Home equity 16 — 13 — — — Other consumer 8 — 29 — 57 — Total 12,160 897 7,366 81 6,603 133 Loans with a specific valuation allowance Commercial and industrial $ 411 $ — $ 675 $ — $ 169 $ 3 Owner-occupied commercial real estate — — 355 — — — Single tenant lease financing 410 — 3,931 — 5,671 4 Healthcare finance 620 45 841 131 — — Small business lending 1 1,662 — 644 — — — Other consumer 50 — — — — — Total 3,153 45 6,446 131 5,840 7 Total impaired loans $ 15,313 $ 942 $ 13,812 $ 212 $ 12,443 $ 140 1 Balance is partially guaranteed by the U.S. government. F-31 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The Company did not have any other real estate owned (“OREO”) as of December 31, 2022. The Company had $ 1.2 million in OREO as of December 31, 2021, which consisted of one commercial property. There was one loan for $ 0.1 million and one loan for $ 0.1 million in the process of foreclosure at December 31, 2022 and December 31, 2021, respectively. Troubled Debt Restructurings In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability of the loan. Any loan modification is reviewed by the Company to identify whether a TDR has occurred when the Company grants a concession to the borrower that it would not otherwise consider based on economic or legal reasons related to a borrower’s financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status or the loan may be restructured to secure additional collateral and/or guarantees to support the debt, or a combination of the two. There were two portfolio residential mortgage loans classified as new TDRs during the twelve months ended December 31, 2022 with a pre-modification and post-modification outstanding recorded investment of $ 1 million. The Company did not allocate a specific ALLL for these loans as of December 31, 2022 and the modifications consisted of interest only payments for a period of time. There was one SBA loan classified as a new TDR during the twelve months ended December 31, 2022 with a pre-modification and post-modification outstanding recorded investment of $ 0.6 million and the modification consisted of a forbearance agreement. The company allocated a specific ALLL of $ 0.3 million for this loan. There were two portfolio residential mortgage loans classified as new TDRs during the twelve months ended December 31, 2021 with a pre-modification and post-modification outstanding recorded investment of $ 1.6 million. The Company did not allocate a specific ALLL for these loans as of December 31, 2021. The modifications consisted of interest-only payments for a period of time. There were three commercial and industrial loans classified as new TDRs during the twelve months ended December 31, 2020 with a pre-modification and post-modification outstanding recorded investment of $ 2.6 million. The Company did not allocate a specific ALLL for these loans as of December 31, 2020 and the modifications consisted of interest only payments for a period of time and an extension of the maturity dates. There were no performing TDRs which had payment defaults within the twelve months following modification during the years ended December 31, 2022, 2021 and 2020. Non-TDR Loan Modifications due to COVID-19 The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encouraged financial institutions to work prudently with borrowers who were or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief were in effect from the period beginning March 1, 2020 until January 1, 2022. As of December 31, 2022, the Company had no loans classified as non-TDR loan modifications due to COVID-19. Note 5: Premises and Equipment The following table summarizes premises and equipment at December 31, 2022 and 2021. F-32 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) December 31, 2022 2021 Land $ 5,598 $ — Construction in process 714 57,469 Right of use leased asset 206 208 Building and improvements 57,505 1,090 Furniture and equipment 19,585 7,800 Less: accumulated depreciation ( 10,897 ) ( 6,725 ) $ 72,711 $ 59,842 On February 16, 2021, the Company entered into an agreement to sell its then headquarters (the “Prior Headquarters”) and certain equipment located in the Prior Headquarters to a third party. The sale was completed on April 16, 2021, and the Company recorded a gain on sale of $ 2.5 million. As a part of the sale agreement, the buyer agreed to lease the Prior Headquarters back to the Company through December 31, 2021. The Company vacated the Prior Headquarters at the end of the lease, on or prior to December 31, 2021. Note 6: Goodwill As of December 31, 2022 and 2021, the carrying amount of goodwill was $ 4.7 million. There have been no changes in the carrying amount of goodwill for the three years ended December 31, 2022, 2021, and 2020. Goodwill is tested for impairment on an annual basis as of August 31, or whenever events or changes in circumstances indicate the carrying amount of goodwill exceeds its implied fair value. The annual test indicated no impairment existed as of August 31, 2022 and no events or changes in circumstances have occurred since the August 31, 2022 annual impairment test that would suggest it was more likely than not goodwill impairment existed. F-33 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 7: Servicing Asset Activity for the servicing asset and the related changes in fair value for the twelve months ended December 31, 2022, 2021 and 2020 are shown in the table below. Twelve Months Ended December 31, 2022 December 31, 2021 December 31, 2020 Beginning balance $ 4,702 $ 3,569 $ 2,481 Additions: Originated and purchased servicing 3,192 2,202 1,520 Subtractions: Paydowns ( 1,075 ) ( 820 ) ( 524 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model ( 564 ) ( 249 ) 92 Loan servicing asset revaluation ( 1,639 ) ( 1,069 ) ( 432 ) Ending balance $ 6,255 $ 4,702 $ 3,569 Loans serviced for others are not included in the consolidated balance sheets. The unpaid principal balances of these loans serviced for others as of December 31, 2022, 2021, and 2020 are shown in the table below. December 31, 2022 December 31, 2021 December 31, 2020 Loan portfolios serviced for: SBA guaranteed loans $ 318,194 $ 230,514 $ 165,961 Total $ 318,194 $ 230,514 $ 165,961 Loan servicing revenue totaled $ 2.6 million, $ 1.9 million, and $ 1.2 million during the twelve months ended December 31, 2022, 2021, and 2020, respectively. Loan servicing asset revaluation, which represents paydowns and the change in fair value of the servicing asset, resulted in a $ 1.6 million, $ 1.1 million, and $ 0.4 million downward valuation for twelve months ended December 31, 2022 , 2021 and 2020, respectively. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Though fluctuations in prepayment speeds and changes in secondary market premiums generally have the most substantial impact on the fair value of servicing rights, other influencing factors include changing economic conditions, changes to the discount rate assumption and the weighted average life of the servicing portfolio. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time; however, those assumptions may change over time. Refer to Note 16 - Fair Value of Financial Instruments for further details. F-34 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 8: Deposits The following table presents the composition of the Company’s deposit base as of December 31, 2022 and 2021. December 31, 2022 2021 Noninterest-bearing demand deposit accounts $ 175,315 $ 117,531 Interest-bearing demand deposit accounts 335,611 247,967 Savings accounts 44,819 59,998 Money market accounts 1,418,599 1,483,936 Banking-as-a-Service (“BaaS”) - brokered deposits 13,607 — Certificates of deposits 874,490 970,107 Brokered deposits 578,804 299,420 Total deposits $ 3,441,245 $ 3,178,959 Time deposits greater than $250 $ 484,700 $ 327,490 The following table presents time deposit maturities by year as of December 31, 2022. Certificates of Deposits Brokered Certificates of Deposits 2023 $ 590,208 $ 48,795 2024 146,747 51,164 2025 38,736 85,106 2026 31,764 35,208 2027 67,035 35,000 $ 874,490 $ 255,273 Note 9: FHLB Advances The Company had outstanding FHLB advances of $ 614.9 million and $ 514.9 million as of December 31, 2022 and 2021, respectively. As of December 31, 2022, the stated interest rates on the Company’s outstanding FHLB advances ranged from 1.06 % to 4.64 %, with a weighted average interest rate of 2.82 %. All advances are collateralized by residential mortgage loans and commercial real estate loans pledged and held by the Company and investment securities pledged by the Company and held in safekeeping with the FHLB. Residential mortgage loans pledged were approximately $ 258.0 million and $ 128.8 million as of December 31, 2022 and 2021, respectively, and commercial real estate loans pledged were approximately $ 895.3 million and $ 920.9 million as of December 31, 2022 and 2021, respectively. The fair value of investment securities pledged to the FHLB was approximately $ 448.4 million and $ 474.5 million as of December 31, 2022 and 2021, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to an additional $ 455.9 million at year-end 2022. As of December 31, 2022, the Company had $ 125.0 million of putable advances with the FHLB. The Company’s FHLB advances are scheduled to mature according to the following schedule: Amount 2023 $ 145,000 2024 145,009 2025 90,000 2026 10,000 2027 100,000 Thereafter 124,919 $ 614,928 F-35 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 10: Subordinated Debt 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 had a fixed interest rate of 6.0 % per year to, but excluding, September 30, 2021, and thereafter a floating rate equal to the then-current three-month London Interbank Offered Rate (“LIBOR”) plus 4.85 %. All interest on the 2026 Notes was payable quarterly. The 2026 Notes were scheduled to mature on September 30, 2026. The 2026 Notes were unsecured subordinated obligations of the Company eligible to be repaid, without penalty, on any interest payment date on or after September 30, 2021. The 2026 Notes were intended to qualify as Tier 2 capital under regulatory guidelines. The Company redeemed the 2026 Notes in full on September 30, 2021. In June 2019, the Company issued $ 37.0 million aggregate principal amount of 6.0 % Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering. The 2029 Notes initially bear a fixed interest rate of 6.0 % per year to, but excluding, June 30, 2024, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month LIBOR rate) plus 4.11 %. All interest on the 2029 Notes is payable quarterly. The 2029 Notes are scheduled to mature on June 30, 2029. The 2029 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after June 30, 2024. The 2029 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. In October 2020, the Company entered into a term loan in the principal amount of $ 10.0 million, evidenced by a term note due 2030 (the “2030 Note”). The 2030 Note initially bears a fixed interest rate of 6.0 % per year to, but excluding, November 1, 2025 and thereafter at a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 5.795 %). The 2030 Note is scheduled to mature on November 1, 2030. The 2030 Note is an unsecured subordinated obligation of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Note is intended to qualify as Tier 2 capital under regulatory guidelines. The Company used the net proceeds from the issuance of the 2030 Note to redeem a subordinated term note that had been entered into in October 2015. In August 2021, the Company issued $ 60.0 million aggregate principal amount of 3.75 % Fixed-to-Floating Rate Subordinated Notes due 2031 (the “2031 Notes”) in a private placement. The 2031 Notes initially bear a fixed interest rate of 3.75 % per year to, but excluding, September 1, 2026, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 3.11 %). The 2031 Notes are scheduled to mature on September 1, 2031. The 2031 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 1, 2026. The 2031 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The Company used a portion of the net proceeds from the issuance of the 2031 Notes to redeem the 2026 Notes. Pursuant to the terms of a Registration Rights Agreement between the Company and the initial purchasers of the 2031 Notes, the Company offered to exchange the 2031 Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, and have substantially the same terms as the 2031 Notes. On December 30, 2021, we completed an exchange of $ 59.3 million principal amount of the unregistered 2031 Notes for registered 2031 Notes in satisfaction of our obligations under the registration rights agreement. Holders of $ 0.7 million of unregistered 2031 Notes did not participate in the exchange. The following table presents the principal balance and unamortized discount and debt issuance costs for the 2029 Notes, the 2030 Note and the 2031 Notes as of December 31, 2022 and 2021. December 31, 2022 December 31, 2021 Principal Unamortized Discount and Debt Issuance Costs Principal Unamortized Discount and Debt Issuance Costs 2029 Notes $ 37,000 $ ( 1,020 ) $ 37,000 $ ( 1,178 ) 2030 Note 10,000 ( 184 ) 10,000 ( 208 ) 2031 Notes 60,000 ( 1,264 ) 60,000 ( 1,383 ) Total $ 107,000 $ ( 2,468 ) $ 107,000 $ ( 2,769 ) F-36 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 11: Benefit Plans 401(k) Plan The Company has a 401(k) plan established for substantially all full-time and part-time employees, as defined in the plan. Employee contributions are limited to the maximum established by the Internal Revenue Service on an annual basis. The Company has elected to match contributions equal to 100 % up to the first 1 % of employee deferrals and then 50 % on deferrals over 1 % up to a maximum of 6 % of an individual’s total eligible salary, as defined in the plan, which vests immediately. Discretionary employer-matching contributions begin vesting immediately at a rate of 50 % per year of employment and are fully vested after the completion of two years of employment. Contributions totaled approximately $ 0.9 million, $ 0.9 million and $ 0.8 million in the twelve months ended December 31, 2022, 2021 and 2020, respectively. Employment Agreements The Company is party to certain employment agreements with each of its Chief Executive Officer, President and Chief Operating Officer and Executive Vice President and Chief Financial Officer. The employment agreements each provide for annual base salaries and annual bonuses, if any, as determined from time to time by the Compensation Committee of our Board of Directors. The annual bonuses are to be determined with reference to the achievement of annual performance objectives established by the Compensation Committee. The agreements also provide that each of the Chief Executive Officer, President and Chief Operating Officer and Executive Vice President and Chief Financial Officer, may be awarded additional compensation, benefits, or consideration as the Compensation Committee may determine. The agreements also provide for the continuation of salary and certain other benefits for a specified period of time upon termination of employment under certain circumstances, including resignation for “good reason,” termination by the Company without “cause” at any time or any termination of employment within twelve months following a “change in control,” along with other specific conditions. 2022 Equity Incentive Plan The First Internet Bancorp 2022 Equity Incentive Plan (the “2022 Plan”) was approved by our Board of Directors and ratified by our shareholders on May 16, 2022. The plan permits awards of incentive and non-statutory stock options, stock appreciation rights, restricted stock awards, stock unit awards, performance awards and other stock-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 2022 Plan. The 2022 Plan initially authorized the issuance of 400,000 new shares of the Company’s common stock plus all shares of common stock that remained available for future grants under the First Internet Bancorp 2013 Equity Incentive Plan (the “2013 Plan”). Award Activity Under 2022 Plan The Company recorded less than $ 0.1 million of share-based compensation expense for the year ended December 31, 2022, related to stock-based awards under the 2022 Plan. The following table summarizes the stock-based award activity under the 2022 Plan for the year ended December 31, 2022. 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 Unit Unvested at January 1, 2022 — $ — — $ — — $ — Granted — — 4,151 36.84 — — Forfeited — — ( 593 ) 36.84 — Unvested at December 31, 2022 — $ — 3,558 $ 36.84 — $ — F-37 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) At December 31, 2022, the total unrecognized compensation cost related to unvested stock-based awards was 0.1 million with a weighted-average expense recognition period of 0.4 years. 2013 Equity Incentive Plan The 2013 Plan authorized the issuance of 750,000 shares of the Company’s common stock in the form of stock-based awards to employees, directors, and other eligible persons. Although outstanding stock-based awards under the 2013 Plan remain in place according to their terms, our authority to grant new awards under the 2013 Plan terminated upon shareholder approval of the 2022 Plan. Award Activity Under 2013 Plan The Company recorded $ 2.0 million, $ 2.4 million, and $ 2.1 million of share-based compensation expense for the years ended December 31, 2022, 2021, and 2020, respectively, related to stock-based awards under the 2013 Plan. The following table summarizes the stock-based award activity under the 2013 Plan for the year ended December 31, 2022: 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 Unit Unvested at January 1, 2022 112,822 $ 28.18 — $ — — $ — Granted 41,662 46.67 9,954 52.64 6 38.31 Vested ( 47,309 ) 26.82 ( 9,310 ) 52.64 ( 6 ) ( 38.31 ) Forfeited ( 5,441 ) 36.80 ( 644 ) 52.64 — — Unvested at December 31, 2022 101,734 $ 35.93 — $ — — $ — As of December 31, 2022, the total unrecognized compensation cost related to unvested awards was $ 1.6 million, with a weighted-average expense recognition period of 1.7 years. Directors Deferred Stock Plan Until January 1, 2014, the Company had a stock compensation plan for non-employee members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The plan provided directors the option to elect to receive up to 100 % of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right. The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the year ended December 31, 2022. Deferred Rights Outstanding, beginning of year 84,536 Granted 432 Released ( 44,554 ) Outstanding, end of year 40,414 All deferred stock rights granted during 2022 were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights. F-38 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 12: Income Taxes The provision for income taxes consists of the following: December 31, 2022 2021 2020 Current $ ( 73 ) $ 6,024 $ 8,563 Deferred 4,632 2,434 ( 4,118 ) Total $ 4,559 $ 8,458 $ 4,445 Income tax provision is reconciled to the statutory 21% rate applied to pre-tax income. December 31, 2022 2021 2020 Statutory rate times pre-tax income $ 8,421 $ 11,880 $ 7,119 (Subtract) add the tax effect of: Income from tax-exempt securities and loans ( 4,190 ) ( 4,217 ) ( 4,464 ) State income tax, net of federal tax effect 592 865 1,765 Bank-owned life insurance ( 201 ) ( 199 ) ( 200 ) Tax credits ( 143 ) ( 175 ) ( 178 ) Other differences 80 304 403 Total income taxes $ 4,559 $ 8,458 $ 4,445 The net deferred tax asset at December 31, 2022 and 2021 consists of the following: December 31, 2022 2021 Deferred tax assets (liabilities) Allowance for loan losses $ 8,569 $ 7,517 Net unrealized losses on available-for-sale securities and hedged items 10,047 4,835 Fair value adjustments ( 12,097 ) ( 618 ) Depreciation ( 2,612 ) ( 100 ) Deferred compensation and accrued payroll 1,574 1,577 Loan origination costs ( 1,816 ) ( 1,311 ) Prepaid assets ( 813 ) ( 641 ) Net operating loss 8,928 — Other 312 149 Total deferred tax assets, net $ 12,092 $ 11,408 During 2022, the Company generated a federal and state net operating loss of $ 40.5 million and $ 9.1 million, respectively. For federal income tax purposes, the NOL has no expiration period; however, for state income tax purposes, the NOL may have varying expiration periods. The Company expects to generate sufficient taxable income in the future to utilize the loss generated. Note 13: Related Party Transactions In the normal course of business, the Company may enter into transactions with various related parties. In management’s opinion, such loans, other extensions of credit, and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than the normal risk of collectability or present other unfavorable features. F-39 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Related party loans and extensions of credit at December 31, 2022 and 2021 totaled $ 21.9 million and $ 11.4 million, respectively. The following table presents the change in related party loans as of December 31, 2022 and 2021. Twelve Months Ended December 31, 2022 December 31, 2021 Balance at the beginning of period $ 11,364 $ 2,089 Effect of change in composition of directors and executive officers — — New Term Loans 21,810 11,352 Repayment of term loans ( 11,324 ) ( 2,072 ) Changes in balances of revolving lines of credit 10 ( 5 ) Balance at end of period $ 21,860 $ 11,364 Deposits from related parties held by the Company at December 31, 2022 and 2021 totaled $ 33.7 million and $ 28.8 million, respectively. Note 14: Regulatory Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”). The Basel III Capital Rules were fully phased in on January 1, 2019 and require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5 %, plus a 2.5 % “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0 %); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 %, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5 %); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0 %, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5 %); and 4) a minimum Leverage Ratio of 4.0 %. The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees. F-40 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables present actual and required capital ratios as of December 31, 2022 and 2021 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2022 and 2021 based on the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of December 31, 2022: Common equity tier 1 capital to risk-weighted assets Consolidated $ 390,150 10.93 % $ 249,795 7.00 % N/A N/A Bank 466,257 13.10 % 249,191 7.00 % $ 231,392 6.50 % Tier 1 capital to risk-weighted assets Consolidated 390,150 10.93 % 303,323 8.50 % N/A N/A Bank 466,257 13.10 % 302,590 8.50 % 284,790 8.00 % Total capital to risk-weighted assets Consolidated 526,419 14.75 % 374,693 10.50 % N/A N/A Bank 497,994 13.99 % 373,787 10.50 % 355,988 10.00 % Leverage ratio Consolidated 390,150 9.06 % 172,330 4.00 % N/A N/A Bank 466,257 10.84 % 172,093 4.00 % 215,116 5.00 % Actual Minimum Capital Required - Basel III Minimum Required to be Considered Well Capitalized Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio As of December 31, 2021: Common equity tier 1 capital to risk-weighted assets Consolidated $ 384,499 12.93 % $ 208,202 7.00 % N/A N/A Bank 432,181 14.55 % 207,913 7.00 % $ 193,062 6.50 % Tier 1 capital to risk-weighted assets Consolidated 384,499 12.93 % 252,817 8.50 % N/A N/A Bank 432,181 14.55 % 252,466 8.50 % 237,615 8.00 % Total capital to risk-weighted assets Consolidated 516,571 17.37 % 312,303 10.50 % N/A N/A Bank 460,022 15.49 % 311,870 10.50 % 297,019 10.00 % Leverage ratio Consolidated 384,499 9.22 % 166,824 4.00 % N/A N/A Bank 432,181 10.37 % 166,693 4.00 % 208,366 5.00 % Note 15: Commitments and Credit Risk In the normal course of business, the Company makes various commitments to extend credit which are not reflected in the accompanying consolidated financial statements. At December 31, 2022 and 2021, the Company had outstanding loan commitments totaling approximately $ 485.4 million and $ 324.3 million, respectively. F-41 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Capital Commitments Capital expenditures contracted for at the balance sheet date but not yet recognized in the financial statements are associated with the construction of the building where our corporate headquarters is located, along with the attached parking garage. The Company has entered into construction-related contracts in the amount of $ 68.9 million. As of December 31, 2022, $ 2.4 million of such contract commitments had not yet been incurred. These commitments are due within one year . Note 16: Fair Value of Financial Instruments ASC Topic 820, Fair Value Measurements , defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASU Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. Available-for-Sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage and asset-backed securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of December 31, 2022 or 2021. 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). F-42 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Servicing Asset Fair value is based on a loan-by-loan basis taking into consideration the origination to maturity dates of the loans, the current age of the loans and the remaining term to maturity. The valuation methodology utilized for the servicing asset begins with generating estimated future cash flows for each servicing asset based on their unique characteristics and market-based assumptions for prepayment speeds and costs to service. The present value of the future cash flows is then calculated utilizing market-based discount rate assumptions (Level 3). Interest Rate Swap Agreements The fair values of interest rate swap agreements are estimated using current market interest rates as of the balance sheet date and calculated using discounted cash flows that are observable or that can be corroborated by observable market data (Level 2). Forward Contracts The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets, or benchmarked thereto (Level 1). Interest Rate Lock Commitments The fair values of IRLCs are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3). F-43 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables present the fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2022 and 2021. December 31, 2022 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 $ 33,809 $ — $ 33,809 $ — Municipal securities 67,276 — 67,276 — Agency mortgage-backed securities - residential 215,092 — 215,092 — Agency mortgage-backed securities - commercial 15,840 — 15,840 Private label mortgage-backed securities - residential 10,455 — 10,455 — Asset-backed securities 4,960 — 4,960 — Corporate securities 42,952 — 42,952 — Total available-for-sale securities $ 390,384 $ — $ 390,384 $ — Servicing asset 6,255 — — 6,255 Interest rate swaps assets 8,645 — 8,645 — Loans held-for-sale (mandatory pricing agreements) 9,110 — 9,110 — Forward contracts 97 97 — — IRLCs 133 — — 133 December 31, 2021 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 $ 49,040 $ — $ 49,040 $ — Municipal securities 77,033 — 77,033 — Agency mortgage-backed securities - residential 373,236 — 373,236 — Agency mortgage-backed securities - commercial 36,326 — 36,326 — Private label mortgage-backed securities - residential 16,021 — 16,021 — Asset-backed securities 5,004 — 5,004 — Corporate securities 46,384 — 46,384 — Total available-for-sale securities $ 603,044 $ — $ 603,044 $ — Servicing asset 4,702 — — 4,702 Interest rate swaps liabilities ( 14,271 ) — ( 14,271 ) — Loans held-for-sale (mandatory pricing agreements) 23,233 — 23,233 — Forward contracts ( 30 ) ( 30 ) — — IRLCs 718 — — 718 F-44 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following table reconciles the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs. Servicing Asset Interest Rate Lock Commitments Balance as of January 1, 2020 $ 2,481 $ 910 Total realized gains Additions 1,520 — Paydowns ( 524 ) Change in fair value 92 2,451 Balance, December 31, 2020 3,569 3,361 Total realized gains Additions 2,202 — Paydowns ( 820 ) — Change in fair value ( 249 ) ( 2,643 ) Balance, December 31, 2021 4,702 718 Total realized gains Additions 3,192 — Paydowns ( 1,135 ) — Change in fair value ( 504 ) ( 585 ) Balance, December 31, 2022 $ 6,255 $ 133 The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy. Impaired Loans (Collateral Dependent) Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The amount of the impairment may be determined based on the fair value of the underlying collateral, less costs to sell, the estimated present value of future cash flows or the loan’s observable market price. If the impaired loan is identified as collateral dependent, the fair value of the underlying collateral, less costs to sell, is used to measure impairment. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is not collateral dependent, the Company utilizes a discounted cash flow analysis to measure impairment. Impaired loans with a specific valuation allowance based on the value of the underlying collateral or a discounted cash flow analysis are classified as Level 3 assets. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurement falls at December 31, 2022 and December 31, 2021. December 31, 2022 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) Impaired loans 1,164 — — 1,164 F-45 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) December 31, 2021 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) Impaired loans 1,228 — — 1,228 Unobservable (Level 3) Inputs The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill. (dollars in thousands) Fair Value at December 31, 2022 Valuation Technique Significant Unobservable Inputs Range Weighted-Average Range Impaired loans $ 1,164 Fair value of collateral Discount for type of property and current market conditions 0 % - 25 % 20 % IRLCs 133 Discounted cash flow Loan closing rates 31 % - 100 % 89 % Servicing asset 6,255 Discounted cash flow Prepayment speeds Discount rate 0 % - 25 % 14 % 14.6 % 14 % (dollars in thousands) Fair Value at December 31, 2021 Valuation Technique Unobservable Inputs Range Weighted - Average Range Impaired loans $ 1,228 Fair value of collateral Discount for type of property and current market conditions 0 % - 35 % 10.1 % IRLCs 718 Discounted cash flow Loan closing rates 42 % - 100 % 89 % Servicing asset 4,702 Discounted cash flow Prepayment speeds Discount rate 0 % - 25 % 10 % 12.5 % 10 % The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value: Cash and Cash Equivalents For these instruments, the carrying amount is a reasonable estimate of fair value. Securities Held-to-Maturity 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 agency mortgage-backed securities - residential, municipal securities and corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value 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 F-46 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of December 31, 2022 or December 31, 2021. Loans The fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. Accrued Interest Receivable The fair value of these financial instruments approximates carrying value. Federal Home Loan Bank of Indianapolis Stock The fair value of this financial instrument approximates carrying value. Deposits The fair value of noninterest-bearing and interest-bearing demand deposits, savings accounts and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities. Advances from Federal Home Loan Bank The fair value of fixed rate advances is estimated using rates currently offered for similar remaining maturities. The carrying value of variable rate advances approximates fair value. Subordinated Debt The fair value of the Company’s publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining subordinated debt is estimated using discounted cash flow analysis based on current borrowing rates for similar types of debt instruments. Accrued Interest Payable The fair value of these financial instruments approximates carrying value. Commitments The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at December 31, 2022 and 2021. F-47 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following tables provide the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2022 and 2021: December 31, 2022 Fair Value Measurements Using Carrying Amount Fair Value Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 256,552 $ 256,552 $ 256,552 $ — $ — Securities held-to-maturity 189,168 168,483 — 168,483 — Loans held-for-sale (best efforts pricing agreements) 12,401 12,401 — 12,401 Net loans 3,467,664 3,225,845 — — 3,225,845 Accrued interest receivable 21,069 21,069 21,069 — — Federal Home Loan Bank of Indianapolis stock 28,350 28,350 — 28,350 — Deposits 3,441,245 3,415,390 1,974,344 — 1,441,046 Advances from Federal Home Loan Bank 614,928 596,455 — 596,455 — Subordinated debt 104,532 102,669 32,560 70,109 — Accrued interest payable 2,913 2,913 2,913 — — December 31, 2021 Fair Value Measurements Using Carrying Amount Fair Value Quoted Prices In Active Market for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents $ 442,960 $ 442,960 $ 442,960 $ — $ — Securities held-to-maturity 59,565 61,468 — 61,468 — Loans held-for-sale (best efforts pricing agreements) 24,512 24,512 — 24,512 — Net loans 2,859,821 2,880,024 — — 2,880,024 Accrued interest receivable 16,037 16,037 16,037 — — Federal Home Loan Bank of Indianapolis stock 25,650 25,650 — 25,650 — Deposits 3,178,959 3,190,000 1,909,432 — 1,280,568 Advances from Federal Home Loan Bank 514,922 526,143 — 526,143 — Subordinated debt 104,231 108,788 38,643 70,145 — Accrued interest payable 2,018 2,018 2,018 — — Note 17: Mortgage Banking Activities The Company’s residential real estate lending business originated mortgage loans for customers and sold a majority of the originated loans into the secondary market. The Company hedged its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third-party investors and entering into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. To facilitate the hedging of the loans, the Company has elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, IRLCs and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 18 for further information on derivative financial instruments. F-48 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) During the years ended December 31, 2022, 2021, and 2020, the Company originated mortgage loans held-for-sale of $ 388.0 million, $ 721.3 million, and $ 878.2 million, respectively, and received $ 411.5 million, $ 714.9 million, and $ 923.8 million from the sale of mortgage loans, respectively, into the secondary market. The following table provides the components of income from mortgage banking activities for the years ended December 31, 2022, 2021, and 2020. Year Ended December 31, 2022 2021 2020 Gain on loans sold $ 6,101 $ 17,803 $ 22,826 Loss resulting from the change in fair value of loans held-for-sale ( 184 ) ( 718 ) ( 94 ) (Loss) gain resulting from the change in fair value of derivatives ( 453 ) ( 2,035 ) 1,961 Net revenue from mortgage banking activities $ 5,464 $ 15,050 $ 24,693 F-49 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 18: Derivative Financial Instruments The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company entered into forward contracts for the future delivery of mortgage loans to third-party investors and entered into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans. The Company entered into various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses, in the income statement within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income in the consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the consolidated balance sheets. The following table presents amounts that were recorded in the consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of December 31, 2022 and 2021. Carrying amount of the hedged assets Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets Line item in the consolidated balance sheet in which the hedged item is included December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Securities available-for-sale 1 $ 68,963 $ 75,156 $ ( 2,088 ) $ 1,729 1 These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The amounts of the designated hedged items were $ 50.0 million at December 31, 2022 and 2021. The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company's asset/liability management activities at December 31, 2022 and December 31, 2021, identified by the underlying interest rate-sensitive instruments. December 31, 2022 Weighted Average Remaining Maturity (years) Weighted-Average Rate Instruments Associated With Notional Value Fair Value Receive Pay Securities available-for-sale $ 50,000 1.8 $ 2,093 3 month LIBOR 2.33 % Total swap portfolio at December 31, 2022 $ 50,000 1.8 $ 2,093 3 month LIBOR 2.33 % F-50 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) December 31, 2021 Weighted Average Remaining Maturity (years) Weighted-Average Rate Instruments Associated With Notional Value Fair Value Receive Pay Securities available-for-sale $ 50,000 2.8 $ ( 1,731 ) 3 month LIBOR 2.33 % Total swap portfolio at December 31, 2021 $ 50,000 2.8 $ ( 1,731 ) 3 month LIBOR 2.33 % In March 2021, the Company terminated the last layer of interest rate swaps associated with available-for-sale agency mortgage-backed securities - residential, which resulted in swap termination payments to counterparties totaling $ 1.9 million. The corresponding fair value hedging adjustment was allocated pro-rata to the underlying hedged securities and is being amortized over the remaining lives of the designated securities. During the year ended December 31, 2022, amortization expense totaling $ 0.3 million was recognized as a reduction to interest income on securities. In June 2020, the Company terminated all fair value hedging relationships associated with loans, which resulted in swap termination payments to counterparties totaling $ 46.1 million. The corresponding loan fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated loans, which have a weighted average term to maturity of 11.3 years as of December 31, 2022. During the years ended December 31, 2022 and 2021, amortization expense totaling $ 4.9 million and $ 5.2 million, respectively, related to these previously terminated fair value hedges was recognized as a reduction to interest income on loans. The following tables present a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable-rate liabilities used in the Company's asset/liability management activities at December 31, 2022 and December 31, 2021. December 31, 2022 Weighted Average Remaining Maturity (years) Weighted-Average Rate Cash Flow Hedges Notional Value Fair Value Receive Pay Interest rate swaps $ 110,000 4.1 $ 4,787 3 month LIBOR 2.88 % Interest rate swaps 60,000 0.6 735 1 month LIBOR 2.88 % Interest rate swaps 40,000 1.4 1,030 Fed Funds Effective 2.78 % December 31, 2021 Weighted Average Remaining Maturity (years) Weighted-Average Rate Cash Flow Hedges Notional Value Fair Value Receive Pay Interest rate swaps $ 110,000 5.1 $ ( 8,560 ) 3 month LIBOR 2.88 % Interest rate swaps 100,000 2.0 ( 3,980 ) 1 month LIBOR 2.88 % These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. As of December 31, 2022, the Company received $ 7.7 million of cash collateral from counterparties as security for their obligations related to these swap transactions. As of December 31, 2021, the Company pledged cash collateral of $ 15.7 million to counterparties as security for its obligations related to these interest rate swap transactions. Cash collateral is pledged to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the market valuation of the underlying hedges. F-51 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at December 31, 2022 and 2021. December 31, 2022 December 31, 2021 Notional Amount Fair Value Notional Amount Fair Value Asset Derivatives Derivatives designated as hedging instruments Interest rate swaps associated with securities available-for-sale $ 50,000 $ 2,093 $ — $ — Interest rate swaps associated with liabilities 210,000 6,552 — — Derivatives not designated as hedging instruments IRLCs 14,862 133 62,789 718 Forward contracts 17,000 97 — — Total contracts $ 291,862 $ 8,875 $ 62,789 $ 718 Liability Derivatives Derivatives designated as hedging instruments Interest rate swaps associated with securities available-for-sale $ — $ — $ 50,000 $ ( 1,731 ) Interest rate swaps associated with liabilities — — 210,000 ( 12,540 ) Derivatives not designated as hedging instruments Forward contracts — — 72,750 ( 30 ) Total contracts $ — $ — $ 332,750 $ ( 14,301 ) The fair values of interest rate swaps were estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates and other factors from the date the Company entered into the IRLC and the balance sheet date. Refer to “Note 16 - Fair Value of Financial Instruments” for additional information. The following table presents the effects of the Company's cash flow hedge relationships on the consolidated statements of comprehensive income during the twelve months ended December 31, 2022, 2021, and 2020. Amount of Gain (loss) Recognized in Other Comprehensive Income in the Twelve Months Ended December 31, 2022 December 31, 2021 December 31, 2020 Interest rate swap agreements $ 19,091 $ 11,138 $ ( 10,248 ) The following table summarizes the periodic changes in the fair value of the derivative financial instruments on the consolidated statements of income for the twelve months ended December 31, 2022, 2021, and 2020. F-52 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Amount of (Loss) / Gain Recognized in the Twelve Months Ended December 31, 2022 December 31, 2021 December 31, 2020 Asset Derivatives Derivatives not designated as hedging instruments IRLCs $ — $ — $ 2,451 Forward contracts 127 610 — Liability Derivatives Derivatives not designated as hedging instruments IRLCs $ ( 585 ) $ ( 2,643 ) $ — Forward contracts — — ( 487 ) The following table presents the effects of the Company's interest rate swap agreements on the consolidated statements of income during the twelve months ended December 31, 2022, 2021, and 2020. Line item in the consolidated statements of income December 31, 2022 December 31, 2021 December 31, 2020 Interest income Loans $ — $ — $ ( 2,445 ) Securities - taxable — ( 253 ) ( 722 ) Securities - non-taxable ( 244 ) ( 1,099 ) ( 741 ) Total interest income ( 244 ) ( 1,352 ) ( 3,908 ) Interest expense Deposits 1,125 2,775 2,273 Other borrowed funds 1,110 3,028 2,374 Total interest expense 2,235 5,803 4,647 Net interest income $ ( 2,479 ) $ ( 7,155 ) $ ( 8,555 ) Note 19: Shareholders’ Equity On October 20, 2021, the Company's Board of Directors approved a stock repurchase program authorizing the repurchase of up to $ 30.0 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions. In October 2022, the Company’s Board of Directors increased the authorization to $ 35.0 million. The Company repurchased a total of 855,956 shares at an average price of $ 36.31 per share under the program through December 19, 2022. On December 19, 2022, the Company's Board of Directors approved a new stock repurchase program authorizing the repurchase of up to $ 25.0 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions. The stock repurchase authorization replaced the Company’s previously announced stock repurchase program and is scheduled to expire on December 31, 2023. Under this program, the Company repurchased 46,497 shares of common stock during the fourth quarter 2022 at an average price of $ 24.42 per share. As of December 31, 2022, the Company had $ 23.9 million of remaining authority under the program. F-53 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 20: Accumulated Other Comprehensive Income (Loss) The components of accumulated other comprehensive loss, included in stockholders' equity, are presented in the table below. Available-For-Sale Securities Unrealized Losses on Debt Securities Transferred from Available-for-Sale to Held-to-Maturity Cash Flow Hedges Total Balance, January 1, 2020 $ ( 4,388 ) $ — $ ( 9,803 ) $ ( 14,191 ) Net unrealized holding gains (losses) recorded within other comprehensive income before income tax 6,551 — ( 10,248 ) ( 3,697 ) Reclassification adjustment for gains realized ( 139 ) — — ( 139 ) Other comprehensive income (loss) before tax 6,412 — ( 10,248 ) ( 3,836 ) Income tax provision (benefit) 1,556 — ( 2,387 ) ( 831 ) Other comprehensive income (loss) - net of tax 4,856 — ( 7,861 ) ( 3,005 ) Balance, December 31, 2020 $ 468 $ — $ ( 17,664 ) $ ( 17,196 ) Net unrealized holding (losses) gains recorded within other comprehensive income before income tax ( 4,087 ) — 11,138 7,051 Other comprehensive (loss) income before tax ( 4,087 ) — 11,138 7,051 Income tax (benefit) provision ( 1,064 ) — 1,958 894 Other comprehensive (loss) income- net of tax ( 3,023 ) — 9,180 6,157 Balance, December 31, 2021 $ ( 2,555 ) $ — $ ( 8,484 ) $ ( 11,039 ) Net unrealized holding (losses) gains recorded within other comprehensive income before income tax ( 42,336 ) — 19,091 ( 23,245 ) Reclassification of securities available-for-sale to held-to-maturity — ( 5,402 ) — ( 5,402 ) Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity — 844 — 844 Other comprehensive (loss) income before tax ( 42,336 ) ( 4,558 ) 19,091 ( 27,803 ) Income tax (benefit) provision ( 9,060 ) ( 1,039 ) 4,893 ( 5,206 ) Other comprehensive (loss) income - net of tax ( 33,276 ) ( 3,519 ) 14,198 ( 22,597 ) Balance, December 31, 2022 $ ( 35,831 ) $ ( 3,519 ) $ 5,714 $ ( 33,636 ) Note 21: Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations, and cash flows of the Company on a non-consolidated basis: F-54 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Condensed Balance Sheets Year Ended December 31, 2022 2021 Assets Cash and cash equivalents $ 22,259 $ 52,857 Investment in common stock of subsidiaries 440,645 428,021 Premises and equipment, net 58 176 Accrued income and other assets 8,567 5,868 Total assets $ 471,529 $ 486,922 Liabilities and shareholders’ equity Subordinated debt, net of unamortized discounts and debt issuance costs of $2,468 in 2022 and $2,769 in 2021 $ 104,532 $ 104,231 Accrued expenses and other liabilities 2,023 2,353 Total liabilities 106,555 106,584 Shareholders’ equity 364,974 380,338 Total liabilities and shareholders’ equity $ 471,529 $ 486,922 Condensed Statements of Income Year Ended December 31, 2022 2021 2020 Income Gain on sale of premises and equipment $ — $ 2,523 $ — Other 285 75 — Total income 285 2,598 — Expenses Interest on borrowings $ 5,371 $ 5,892 $ 4,924 Salaries and employee benefits 1,147 1,037 904 Consulting and professional fees 1,814 2,178 1,678 Premises and equipment 201 548 295 Other 134 363 361 Total expenses 8,667 10,018 8,162 Loss before income tax and equity in undistributed net income of subsidiaries ( 8,382 ) ( 7,420 ) ( 8,162 ) Income tax benefit ( 1,874 ) ( 1,687 ) ( 2,089 ) Loss before equity in undistributed net income of subsidiaries ( 6,508 ) ( 5,733 ) ( 6,073 ) Equity in undistributed net income of subsidiaries 42,049 53,847 35,526 Net income $ 35,541 $ 48,114 $ 29,453 F-55 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Condensed Statements of Comprehensive Income Year Ended December 31, 2022 2021 2020 Net income $ 35,541 $ 48,114 $ 29,453 Other comprehensive (loss) income Securities available-for-sale Net unrealized holding (losses) gains on securities available-for-sale recorded within other comprehensive income before income tax ( 42,336 ) ( 4,087 ) 6,551 Reclassification adjustment for gains realized — — ( 139 ) Income tax (benefit) provision ( 9,060 ) ( 1,064 ) 1,556 Net effect on other comprehensive loss ( 33,276 ) ( 3,023 ) 4,856 Securities held-to-maturity Reclassification of securities from available-for-sale to held-to-maturity ( 5,402 ) — — Amortization of net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity 844 — — Income tax benefit ( 1,039 ) — — Net effect on other comprehensive loss ( 3,519 ) — — Cash flow hedges Net unrealized holding gains (losses) on cash flow hedging derivatives recorded within other comprehensive income before income tax 19,091 11,138 ( 10,248 ) Income tax provision (benefit) 4,893 1,958 ( 2,387 ) Net effect on other comprehensive income (loss) 14,198 9,180 ( 7,861 ) Total other comprehensive (loss) income ( 22,597 ) 6,157 ( 3,005 ) Comprehensive income $ 12,944 $ 54,271 $ 26,448 F-56 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Condensed Statements of Cash Flows Year Ended December 31, 2022 2021 2020 Operating activities Net income $ 35,541 $ 48,114 $ 29,453 Adjustments to reconcile net income to net cash provided by operating activities: Dividend received from Bank 8,000 — — Equity in undistributed net income of subsidiaries ( 42,049 ) ( 53,847 ) ( 35,526 ) Depreciation and amortization 329 1,081 711 Share-based compensation expense 795 835 518 Gain on sale of premises and equipment — ( 2,523 ) — Net change in other assets 350 ( 31 ) ( 502 ) Net change in other liabilities ( 490 ) 775 311 Net cash provided by (used in) operating activities 2,476 ( 5,596 ) ( 5,035 ) Investing activities Net proceeds from sale of premises and equipment — 8,116 — Other investing activities ( 2,727 ) ( 3,561 ) — Net cash (used in) provided by investing activities ( 2,727 ) 4,555 — Financing activities Cash dividends paid ( 2,317 ) ( 2,415 ) ( 2,349 ) Net proceeds from issuance of subordinated debt — 58,658 9,765 Repayment of subordinated debt — ( 35,000 ) — Repayment of Bank loan — ( 3,000 ) — Repurchase of common stock ( 27,780 ) ( 4,436 ) — Other, net ( 250 ) ( 441 ) ( 152 ) Net cash provided by financing activities ( 30,347 ) 13,366 7,264 Net (decrease) increase in cash and cash equivalents ( 30,598 ) 12,325 2,229 Cash and cash equivalents at beginning of year 52,857 40,532 38,303 Cash and cash equivalents at end of year $ 22,259 $ 52,857 $ 40,532 F-57 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 22: Recent Accounting Pronouncements ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (June 2016) The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets that are not accounted for at fair value through net income. The amendments affect loans, debt securities, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. There is diversity in practice in applying the incurred loss methodology, which means that before transition some entities may be more aligned under current GAAP than others to the new measure of expected credit losses. The following describes the main provisions of this update. • Assets Measured at Amortized Cost: The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The statements of income reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increase or decrease of credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. • Available-for-Sale Debt Securities: Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value if cash collection would result in the realization of an amount less than fair value. • In May 2019, the FASB issued ASU 2019-05 - Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief . This ASU allows an option for preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. This increases the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially decreasing costs for financial statement preparers while providing more useful information to investors and other users. F-58 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) The ASU was effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. FASB subsequently approved a delay in adoption for Smaller Reporting Companies, which postponed adoption until periods beginning after December 15, 2022. The Company has a current expected credit losses (“CECL”) working group that has been meeting to discuss implementation matters related to the completeness and accuracy of historical data, model development and corporate governance documentation. The new allowance model estimates credit losses over the expected life of the portfolio and includes a qualitative framework to account for drivers of losses that the quantitative model does not capture. The CECL working group discussed results from parallel model runs for each portfolio segment, assumptions related to unfunded commitments and economic forecast factors. Model validation was completed by an independent third party in the fourth quarter 2022. The ASU allows for several different methods of calculating the Allowance for Credit Losses (“ACL”) and based on its analysis of observable data, the Company determined the discounted cash flow method to be the most appropriate for all its loan segments, with the exception of its home improvement loan segment. The most appropriate method for this portfolio is the weighted-average remaining life method. The Company expects to record a one-time cumulative effect adjustment to the ACL in retained earnings on the consolidated balance sheet as of the beginning of 2023, as is required in the guidance. The Company believes there will be an increase to the ACL between $ 2.5 million and $ 3.0 million. In addition, the Company expects the allowance for unfunded commitments to be in the range of $ 2.5 million and $ 3.0 million. The qualitative impact of the new accounting standard will still be directed by many of the same factors that impacted the previous methodology for calculating the ACL, including but not limited to, quality and experience of staff, changes in the value of collateral, concentrations of credit in loan types or industries and changes to lending policies. In addition, the Company will also use reasonable and supportable forecasts. Examples of this are regression analyses of data from the Federal Open Market Committee quarterly economic projections for change in real GDP, housing price index and national unemployment. The actual impact from adopting this guidance may be subject to change based upon refinement and finalization of the model and associated assumptions, the implementation and testing of certain internal controls ensuring model effectiveness and management’s judgment. The Company does not expect a material ACL on HTM securities or AFS debt securities. ASU 2019-04 - Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (April 2019) The amendments in this ASU clarify or correct the guidance in ASC Topic 326, Topic 815 and Topic 825. With respect to Topic 326, ASU 2019-04 addresses a number of issues as it relates to the CECL standard including consideration of accrued interest, recoveries, variable-rate financial instruments, prepayments, extension and renewal options, among other things, in the measurement of expected credit losses. The amendments to Topic 326 have the same effective dates as ASU 2016-13 and the Company is currently evaluating the potential impact of these amendments on the consolidated financial statements. With respect to Topic 815, ASU 2019-04 clarifies issues related to partial-term hedges, hedged debt securities, and transitioning from a quantitative method of assessing hedge effectiveness to a more simplified method. The amendments to Topic 815 are effective for interim and annual reporting periods beginning after December 15, 2019 and are not expected to have a material impact on the consolidated financial statements. With respect to Topic 825, ASU 2019-04 addresses the scope of the guidance, the requirement for remeasurement under ASC Topic 820 when using the measurement alternative, certain disclosure requirements, and which equity securities must be remeasured at historical exchanges rates. The amendments to Topic 825 were effective for interim and annual reporting periods beginning after December 15, 2019 and the adoption of this guidance did not have a material impact on the consolidated financial statements. F-59 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) In March 2020 in connection with the implementation of the CARES Act and related provisions, the Company adopted the temporary relief issued under the CARES Act, thereby suspending the guidance in ASC 310-40 on accounting for TDRs to loan modifications related to COVID-19. Section 4013 of the CARES Act specifies that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief were in effect from the period beginning March 1, 2020 until the earlier of December 31, 2020 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. See the “Non-TDR Loan Modifications due to COVID-19” section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information. ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (March 2020) In March 2020, FASB issued ASU 2020-04 to ease the potential burden in accounting for the transition away from LIBOR on financial reporting. The ASU provides optional expedients and exceptions for applying GAAP to contract modification and hedge accounting relationships. In December 2022, FASB extended the effective date for this ASU from December 31, 2022 to December 31, 2024. The Company is still evaluating the impact of reference rate reform and does not believe the adoption of this guidance will have a material impact on the consolidated financial statements. ASU 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (March 2022) In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the separate recognition and measurement guidance for Troubled Debt Restructurings ("TDRs") by creditors. The elimination of the TDR guidance may be adopted prospectively for loan modifications after adoption or on a modified retrospective basis, which would also apply to loans previously modified, resulting in a cumulative effect adjustment to retained earnings in the period of adoption for changes in the allowance for credit losses. The ASU requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20. The Company adopted this guidance on January 1, 2023 and it did not have a material impact on the condensed consolidated financial statements. F-60 First Internet Bancorp Notes to Consolidated Financial Statements (Tabular dollar amounts in thousands except per share data) Note 23: Subsequent Event Due to the steep decline in consumer mortgage volumes and the negative outlook for consumer mortgage lending over the next several years, the Company decided to exit its consumer mortgage business during the first quarter of 2023. This includes its nationwide digital direct-to-consumer mortgage platform that originates residential loans for sale in the secondary market as well as its local traditional consumer mortgage and construction-to-permanent business. The Company’s commercial construction and land development business will not be affected by this decision and will remain an important part of the Company’s lending strategy. This action is expected to reduce total annual noninterest expense by approximately $ 6.8 million and increase annualized pre-tax income by approximately $ 2.7 million, with 80 % of the benefit realized in 2023 and 100 % thereafter. The Company estimates that it will incur total pre-tax expense of approximately $ 3.3 million in the first and second quarters of 2023 associated with exiting this line of business. F-61