When we refer to “First Internet Bancorp,” the “Company,” “we,” “us” and “our” in the remainder of this annual reportAnnual Report on Form 10-K, we mean First Internet Bancorp and its consolidated subsidiaries, unless the context indicates otherwise. References to “First Internet Bank” or the “Bank” refer to First Internet Bank of Indiana, an Indiana chartered bank and wholly-owned subsidiary of the Company.

The Company has two wholly-owned subsidiaries: the Bank and FC Subsidiary, Inc., a Georgia corporation, formed in connection with our pending acquisition of First Century Bancorp. (“First Century”). The Bank has three wholly-owned subsidiaries: First Internet Public Finance Corp., an Indiana corporation whichthat provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities; JKH Realty Services, LLC, a Delaware limited liability company whichthat manages other real estate owned properties as needed; and SPF15, Inc., an Indiana corporation which was established to acquire and holdthat owns real estate used primarily for the Bank’s principal office.

We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through digital channels on a nationwide basis and have no traditional branch offices. Our residential mortgage products are offered nationwide primarily through a digital direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending. Our consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners.

As of December 31, 2021,2023, we had 286 total employees,employed 290 people, 287 of which 282 were full-time employees. Throughout our history,full-time. Our team members have been, and continue to be, our most valuable assets, helping to create a strong workplace culture that recognizes the unique contributions and perspectives each individual brings to the organization.

At First Internet Bank, weWe encourage our employees to “Imagine More.” We seek the game-changers, innovators and dreamers – those who are driven to find a better way of doing things for customers and each other. We encourage community involvement and opportunities that support team members, both inside and outside the office. We may be a digital bank, but we strongly believe in the power of personal connection and collaboration.

The markets in which we compete to make loans, attract deposits and provide fee based financial services are highly competitive. For retailconsumer banking activities, we compete with other digital banks and fintech companies, in addition to traditional banks, savings banks, credit unions, investment banks, insurance companies, securities brokerages and other financial institutions, as nearly all have some form of digital delivery for their retailconsumer banking services. For residential mortgage lending, we compete with other digital lenders as well as money center and superregional banks, community banks and credit unions.

For our construction, investor CRE, and C&I lending activities, we compete with larger financial institutionssuper-regional, regional and community banks operating in the Midwest and Southwest.Southwest regions of the United States. For our single tenant lease financing activities, we compete nationally with regional banks, localcommunity banks and credit unions, as well as life insurance companies and commercial mortgage-backed securities lenders. For our public finance, healthcare finance and franchise finance activities, we compete nationally with superregional and regional banks. These competitors may have significantly greater financial resources and higher lending limits than we do and may also offer specialized products and services that we do not. For our small business lending activities, we compete on a national footprint with other participating SBA-approved lenders, including a large number of regional orand community banks. These competitors have resources and/or lending limits that differ greatly from one another.

The U.S. banking industry is highly regulated under federal and state law and this regulatory environment has a material effect on the operations and financial condition of the Company and its subsidiaries. As a result, the Company’s growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Indiana Department of Financial Institutions (the “DFI”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the FDIC and the Consumer Financial Protection Bureau (“CFPB”). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (“FASB”(the “FASB”), securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the U.S. Department of the Treasury (“U.S. Treasury”) also have an impact on the Company’s business. This regulatory framework is intended for the protection of depositors, borrowers and other customers, as well as the FDIC deposit insurance funds and the U.S. banking system, rather than the Company’s shareholders or creditors.

Banking statutes and regulations are subject to ongoing review and revision by federal and state legislatures and regulatory agencies. Notably, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in 2010 in response to the global financial crisis, imposed a number of new and expanded regulatory requirements on the banking industry, which in some cases have been subsequently modified. Future changes in laws, regulations or regulatory policies, including changes in the ways laws and regulations are interpreted or enforced, could affect us in significant and unpredictable ways that may have a material impact on our business.

Federal and state banking laws and regulations affect, among other things, the scope of the Company’s business; the kinds and amounts of investments the Company and Bank may make; the fees and charges that may be imposed for bank products and services; required capital levels relative to assets; the nature and amount of collateral for loans; the ability to merge, consolidate, and acquire; dealings with the Company’s and Bank’s insiders and affiliates; and the Company’s payment of dividends. The cost of compliance with these legal and regulatory requirements has increased over time and could increase further in the future in response to changing laws and regulations or regulatory expectations, or as the Company grows and passes certain asset size thresholds at which additional requirements begin to apply. The Dodd-Frank Act, for example, gives rise to a number of additional requirements as financial institutions pass $10 billion in assets.

The supervisory framework for U.S. banking organizations subjects banks and banktheir holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are in most cases not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. Regulatory agencies may impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law, or are otherwise inconsistent with laws and regulations. These regulatory agencies have broad enforcement power over regulated entities, including the ability to impose substantial fines and other adverse consequences for violations of law and regulations.

The Basel III Rule requires minimum capital ratios for bank holding companies as follows:

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5%2.50% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted above to 7.0%7.00% for Common Equity Tier 1 Capital, 8.5%8.50% for Tier 1 Capital and 10.5%10.50% for Total Capital. Federal bank regulators released a joint statement in response to the COVID-19 pandemic reminding the industry that capital and liquidity buffers were meant to give banks the means to support the economy in adverse situations, and that the agencies would support banks that use the buffers for that purpose if undertaken in a safe and sound manner.

Under the capital regulations of the FDIC and Federal Reserve, in order to be well capitalized, a banking organization must maintain:

It is possible under the Basel III Rule to be well capitalized while remaining out of compliance with the capital conservation buffer discussed above.

Bank mergers and acquisitions generally will require the approval of the regulatory authorities of each banking organization. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, public benefits expected to be generated by the acquisition, post-acquisition capital levels, and CRA performance.performance under the Community Reinvestment Act of 1977, as amended (the “CRA”). The federal banking regulators are also required to take into accountconsider the effectiveness of the Bank Secrecy Act/anti-money laundering activities of the applicant. Federal regulatory policy relating to the

The Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the Company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve possesses enforcement powers to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes or regulations. Among those powers is the ability to restrict the payment of dividends. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5%2.50% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “Regulatory Capital”“Regulatory” section above.

Due to its online-driven model and nationwide banking platform, the Bank has opted to operate under a CRA Strategic Plan, which sets forth certain guidelines the Bank must meet. The Bank's currentBank is awaiting FDIC approval for its proposed CRA Strategic Plan coversto cover the time period of January 1, 2024 through December 31, 2027. The Bank’s previous CRA Strategic Plan covered the time period of January 1, 2021 through December 31, 2023. The Bank received a “Satisfactory” CRA rating under that plan in its most recent CRA examination. Failure of an institution to receive at least a “Satisfactory” rating could inhibit such institution or its holding company from engaging in certain activities or pursuing acquisitions of other financial institutions.

In January 2021, the Anti-Money Laundering Act of 2020 (the “AMLA”), which amends the BSA, was enacted. The AMLA iswas intended to comprehensively reform and modernize U.S. anti-money laundering laws. Among other things, the AMLA codifiesattempted to codify a risk-based approach to anti-money laundering compliance for financial institutions; requiresrequired the development of standards by the U.S. Treasury for evaluating technology and internal processes for BSA compliance; and expandsexpanded enforcement- and investigation-related authority, including a significant expansion in the available sanctions for certain BSA violations and enhanced whistleblower provisions permitting monetary awards to persons who provide information that leads to successful enforcement of certain violations. Many of the statutory provisions in the AMLA will require additional rulemaking, reports and other measures, and the impact of the AMLA will depend on, among other things, rulemaking and implementation guidance.

The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by the U.S. Treasury Office of Foreign Assets Control (“OFAC”), take many different forms. Generally, however, they contain one or more of the following elements: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions can give rise to serious legal and reputational consequences.

In November 2021, the federal banking agencies published a final rule establishing computer-security incident notification requirements that require a banking organization to notify its primary federal regulator of any “computer security incident” that rises to the level of a “notification incident” as soon as possible and no later than 36 hours after determining that such an incident has occurred. The rule also requires a bank service provider to notify each affected banking organization customer as soon as possible when the service provider determines it has experienced a computer security incident that has caused, or is reasonably likely to cause, a material service disruption or degradation for four or more hours.

State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. For example, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of increased activity and changes at the state level to continue.

In 2018,Recently, the SEC published interpretive guidance to assisthas enacted laws requiring public companies in preparing disclosures aboutto disclose material cybersecurity risks and incidents.incidents along with cybersecurity protections and governance processes. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations. See Part I, Item 1C.

In support of our digital banking platform, we rely heavily on electronic communications and information systems to conduct our operations and store sensitive data. We employ an in-depth approach that leverages people, processes, and technology to manage and maintain cybersecurity controls. In addition, we employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures.

We continually strive to enhance our cyber and information security in order to be resilient against emerging threats and improve our ability to detect and respond to attempts to gain unauthorized access to our data and systems. We regularly conduct cybersecurity risk assessments, regularly engage with the Board or appropriate committees on cybersecurity matters, routinely update our incident response plans based on emerging threats, periodically practice implementation of incident response plans across applicable departments, and train officers and employees to detect and report suspicious activity. Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, our systems and those of our customers and third-party service providers are under constant threat, and it is possible that we could experience a significant event in the future due to the rapidly evolving nature and sophistication of these threats.

We rely heavily upon communications and information systems to conduct our business. Although we have built a level of redundancy into our information technology infrastructure and update our business continuity plan annually, any failure or interruption of our information systems, or the third-party information systems on which we rely, as a result of inadequate or failed processes or systems, human errors or external events, could adversely affect our digital-based operations and slow or temporarily halt the processing of applications, loan servicing, deposit-related transactions, and our general banking operations. In addition, our communication and information systems may present security risks and could be susceptible to hacking or other unauthorized access. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

AnyOur success depends, to a certain extent, upon favorable economic and political conditions, local and national, as well as governmental monetary policies. Conditions such as recession, unemployment, changes in interest rates, inflation, money supply, and other factors beyond the Company’s control may adversely affect deposit levels, costs, loan demand and/or asset quality and, therefore, our earnings. Further, any economic downturn could result in financial stress on our borrowers that would adversely affect consumer confidence, a reduction in general business activity and increased market volatility. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets could adversely affect our business, financial condition, results of operations and stock price. Our ability to properly assess the creditworthiness of our customers and to estimate the losses inherent in our credit exposure would be made more complex by difficult or rapidly changing market and economic conditions. Accordingly, if market conditions worsen, we may experience increases in foreclosures, delinquencies, write-offsnet charge-offs and customer bankruptcies, as well as more restricted access to funds.

Competition in the banking and financial services industry is strong. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, fintechs, mutual funds, insurance companies and securities brokerage and investment banking firms operating locally and nationwide.nationwide, and may soon compete with entities granted “special purpose national bank” (“SPNB”) charters by the Office of the Comptroller of the Currency. Some of our competitors have greater name financial resources, recognition and market presence than we do and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to increase our market share and remain profitable on a long-term basis.

We also anticipate increased regulatory scrutiny – in the course of routine examinations and otherwise – and new regulations directed towards banks of similar size to the Bank designed to respond to recent negative developments in the banking industry and/or changing regulatory focus, all of which may increase our costs of doing business and reduce our profitability. Among other things, there may be increased focus by both regulators and investors on deposit composition, the level of uninsured deposits, brokered deposits, unrealized losses in securities portfolios, liquidity, CRE composition and concentration, capital, third party risk management and general oversight and control of the Comptrollerforegoing. The Bank could face increased scrutiny or be viewed as higher risk by regulators and/or the investor community due to changing regulatory focus and/or the failures of the Currency announced that it would begin to accept and evaluate charters for entities that wanted to conduct certain components of a banking business pursuant to a federal charter, known as a “special purpose national bank” (“SPNB”) charter. Intended to promote economic opportunity and spurother financial innovation, SPNBs may engage in any of the following activities: paying checks, lending money, or taking deposits. If any such applications are granted, recipients of an SPNB charter may enter the U.S. payments market in which the Bank operates,institutions, which could have a material adverse effect on the Banknegatively affect our future results of operations and certain of its business lines.financial condition.

In addition, adverse reputational developments with respect to third parties with whom we have important relationships may negatively affect our reputation. All of the above factors may result in greater regulatory and/or legislative scrutiny, which may lead to laws or regulations that may change or constrain the manner in which we engage with our customers and the products we offer and may also increase our litigation risk. If these risks were to materialize, they could negatively affect our business, financial condition and results of operations.

The Bank has introduced, and in the future, may introduce new products and services to differing markets either alone or in conjunction with third parties, including programs and products introduced as part of our fintech partnership initiatives. New lines of business, products or services could have a significant impact on the effectiveness of our system of internal controls or the controls of third parties and could reduce our revenues and potentially generate losses. There are material inherent risks and uncertainties associated with offering new products and services, especially when new markets are not fully developed or when the laws and regulations regarding a new product are not mature. New products and services, or entrance into new markets, are carefully scrutinized by regulatory agencies and may require substantial time, resources and capital, and profitability targets may not be achieved. Factors outside of our control, such as developing laws and regulations, regulatory orders, competitive product offerings and changes in commercial and consumer demand for products or services may also materially impact the successful launch and implementation of new products or services. Failure to manage these risks, or failure of any product or service offerings to be successful and profitable, could have a material adverse effect on our financial condition and results of operations.

Provisions of Indiana law and provisions of our articles of incorporation could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. We are subject to certain anti-takeover provisions under the Indiana Business Corporation Law. Additionally, our articles of incorporation authorize our Board of Directors to issue one or more classes or series of preferred stock without shareholder approval and such preferred stock could be issued as a defensive measure in response to a takeover proposal.

Although these provisions do not preclude a takeover, they may have the effect of discouraging, delaying or deferring a tender offer or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price of our common stock. Such provisions will also render the removal of the Board of Directors and of management more difficult and, therefore, may serve to perpetuate current management. These provisions could potentially adversely affect the market price of our common stock.

In addition, with respect to CRE, federal and state banking regulators are examining CRE lending activity with heightened scrutiny and may require banks with higher levels of CRE loans to implement more stringent underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for credit losses and

We offer our residential mortgage and consumer lending as well as public finance, healthcare finance, franchise finance, small business lending and single tenant financing products and services throughout the United States. However, we serve CRE and C&I borrowers primarily in Central Indiana and adjacent markets. Accordingly, the performance of our CRE and C&I lending depends upon demographic and economic conditions in those regions. The profitability of our CRE and C&I loan portfolio may be impacted by changes in those conditions. Additionally, unfavorable local economic conditions could reduce or limit the growth rate of our CRE and C&I loan portfolios for a significant period of time, or otherwise decrease the ability of those borrowers to repay their loans, which could have a material adverse effect on our business, financial condition and results of operations.

At December 31, 2021,2023, approximately 44.9%45.6% of our loans held for investment portfolio was comprised of commercial, residential mortgage and home equity loans with real estate as the primary component of collateral. Our real estate lending activities, and our exposure to fluctuations in real estate collateral values, are significant and may increase as our assets increase. The market value of real estate can fluctuate significantly in a relatively short period of time as a result of market conditions in the geographic area in which the real estate is located,located; in response to factors such as economic downturns and changes in the economic health of industries heavily concentrated in a particular areaarea; and in response to changes in market interest rates, which influence capitalization rates used to value revenue-generating commercial real estate. If the value of real estate serving as collateral for our loans declines materially, a significant part of our loan portfolio could become under-collateralized and losses incurred upon borrower defaults would increase. Conditions in certain segments of the real estate industry, including homebuilding, lot development and mortgage lending, may have an effect on values of real estate pledged as collateral for our loans. The inability of purchasers of real estate, including residential real estate, to obtain financing may weaken the financial condition of our borrowers who are dependent on the sale or refinancing of property to repay their loans. Changes in the economic health of certain industries can have a significant impact on other sectors or industries which are directly or indirectly associated with those industries, and may impact the value of real estate in areas where such industries are concentrated.

In assessing the impairment of investment securities, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuers, whether the market decline was affected by macroeconomic conditions and whether we have the intent to sell the security or will be required to sell the security before its anticipated recovery. We also use economic models to assist in the valuation of some of our investment securities. If our investment securities experience a decline in value, we would need to determine whether the decline represented an other-than-temporary impairment, in which case we would be required to record a write-down of the investment and a corresponding charge to our earnings.

Additionally, theThe floating rate features of our outstanding 6.0% Fixed-to-Floating Rate Subordinated2029 Notes due 2029 (the “2029 Notes”) arewere based on LIBOR, while the floating rate features of our 3.75% Fixed-to-Floating Rate Subordinatedother subordinated notes due 2031 (the “2031 Notes”) are based on SOFR. In anticipation of LIBOR’s phase out, and the uncertainty of SOFR as a LIBOR replacement, the terms of our 2029 Notes and 2031 Notes provide for a benchmark replacement rate for LIBOR or SOFR, as applicable, with such benchmark replacement rate to be determined by the Company or an independent financial advisor appointed by the Company, as applicable, in each case in accordance with terms of the 2029 Notes and 2031 Notes, respectively. There can be no assurance that any replacement benchmark rate for our 2029 Notes or 2031 Notes will be determined or agreed upon, as applicable, before experiencing adverse effects due to changes in interest rates, if at all. We will continue to monitor the situation and address the potential reference rate changes in future debt obligations that we may incur. Accordingly, the potential effect of the phase-out of LIBOR or the unavailability of any other interest rate benchmarks such as SOFR or EURIBOR, on our cost of capital cannot yet be determined. Further,and the use of an alternative base rate or a benchmark replacement rate as a basis for calculating interest with respect to any outstanding variable rate indebtedness could lead to an increase in the interest we pay and a corresponding increase in our costs of capital or otherwise have a material adverse impact on our business, financial condition or results of operations.

The ability of the Bank to pay dividends to us is limited by state and federal law and depends generally on the Bank’s ability to generate net income. If we are unable to comply with applicable provisions of these statutes and regulations, the Bank may not be able to pay dividends to us, we may not be able to pay dividends on our outstanding common stock and our ability to service our debt may be materially impaired.

In recent years,As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include brokered deposits and FHLB advances. Further, in the past, we have raised additional capital in the public debt and equity markets to support balance sheet growth, refinance existing debt obligations, or explore strategic alternatives which may include additional asset, deposit or revenue generation channels. Our ability to source deposits and raise future capital, if needed, will depend upon our financial performance and conditions in the capital markets, as well as economic conditions generally. Accordingly, such financing may not be available to us on acceptable terms or at all. If we cannot raise additional capital when needed, it could have a material adverse effect on our business, financial condition and results of operations.

The Bank conducts its deposit gathering activities and a significant portion of its residential mortgage lending activities through digital channels. The financial services industry is undergoing rapid technological change, and we face constant evolution of customer demand for

Our future success and profitability are substantially dependent upon our management and the abilities of our senior executives. We believe that our future results will also depend in part upon our ability to attract and retain highly skilled and qualified management. Competition for senior personnel is intense, and we may not be successful in attracting and retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations. In particular, the loss of our chief executive officer could have a material adverse effect on our business, financial condition and results of operations.

We depend upon our ability to process, record and monitor our client transactions on a continuous basis. As customer, public and regulatory expectations regarding data privacy and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business, financial, accounting and data processing systems, or other operating systems and facilities, may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunications outages; natural disasters such as earthquakes, tornadoes and hurricanes; disease pandemics; events arising from local or larger-scale political or social matters, including terrorist acts; and, as described below, cyber-attacks. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our business.

Information security risks for financial institutions such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of digital technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists and other external parties. As noted above, our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. Our business relies on our digital technologies, computer and email systems, software and networks to conduct its operations. In addition, to access our products and services, our customers may use smartphones, tablets, personal computers and other mobile devices that are beyond our control systems. Although we have information security procedures and controls in place, our technologies, systems, networks and our customers’ devices may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations.

Third parties with whom we do business or that facilitate our business activities, including financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, like other companies, we and our vendors face a wide range of ongoing cyber threats that include phishing emails and social engineering schemes, ransomware threats, and criminal re-use of credentials sold on the dark web. Therefore, thereThere can be no assurance that we will not suffer such material losses in the future. Our risk and exposure to these matters remains heightened because of the evolving nature of these threats. As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, company data, networks, and customer information from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities.

Disruptions or failures in the physical infrastructure or operating systems that support our business and clients, or cyber-attacks or security breaches of the networks, systems or devices that our clients use to access our products and services, could result in client attrition, regulatory fines, penalties or intervention, breach investigation and notification expenses,

We are subject to extensive laws and regulations that govern almost all aspects of our operations. These laws and regulations, and the supervisory framework that oversees the administration of these laws and regulations, are primarily intended to protect depositors, the DIF, the government and the banking system as a whole, and not shareholders. These laws and regulations, among other matters, affect our lending practices, capital structure, investment practices, dividend policy, operations and growth. Compliance with the myriad laws and regulations applicable to our organization can be difficult and costly. In addition, these laws, regulations and policies are subject to continual review by governmental authorities, and changes to these laws, regulations and policies, including changes in interpretation, implementation, or implementationpriorities in enforcement of these laws, regulations and policies, could affect us in substantial and unpredictable ways and often impose additional compliance costs. Further, any new laws, rules and

The Federal Reserve, the FDIC and the DFI periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a federal or state banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require action to correct any conditions resulting from any violation or practice, to commence a formal or informal enforcement action or issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business, financial condition and results of operations.

The deposits of the Bank are insured by the FDIC up to legal limits and, accordingly, subject to the payment of FDIC deposit insurance assessments. The Bank’s regular assessments are determined by its risk classification, which is based on a number of factors, including regulatory capital levels, asset growth and asset quality. High levels of bank failures during and following the financial crisis and increases in the statutory deposit insurance limits have increased resolution costs to the FDIC and put significant pressure on the DIF. In order to maintain a strong funding position and restore the reserve ratios of the DIF, the FDIC may increase deposit insurance assessment rates and may charge a special assessment to all FDIC-insured financial institutions. Further increases in assessment rates or special assessments may occur in the future, especially if there are significant additional financial institution failures. Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have a material adverse effect on our business, financial condition and results of operations.

In order to remain “well-capitalized”, the Basel III Capital Rules require the Company and the Bank to maintain: (i) 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%); (ii) 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%); (iii) 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 (iv) a minimum Leverage Ratio of 4.0%.

The application of more stringent capital requirements for both the Company and the Bank could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.

We are subject to extensive regulation as a financial institution and are also required to follow the corporate governance and financial reporting practices and policies required of a company whose stock is registered under the Exchange Act and listed on the Nasdaq Global Select Market. Compliance with these requirements means we incur significant legal, accounting and other expenses. Compliance also requires a significant diversion of management time and attention, particularly with regard to disclosure controls and procedures and internal control over financial reporting. Although we have reviewed, and will continue to review, our disclosure controls and procedures in order to determine whether they are effective, our controls and procedures may not be able to prevent errors or frauds in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it difficult for us to ensure that the objectives of the control system will be met. A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and results of operations.

The BSA, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the OFAC. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition and results of operations.

In addition, financial institutions, including ourselves, bear fund transfer risks of different types which result from large transaction volumes and large dollar amounts of incoming and outgoing money transfers. Loss exposure may result if money is transferred from the Bank before it is received, or legal rights to reclaim monies transferred are asserted. Such exposure results from payments which are made to merchants for payment clearing, while customers have statutory periods to reverse their payments. It also results from funds transfers made prior to receipt of offsetting funds, as accommodations to customers. Transfers could also be made in error. Additionally, as with other financial institutions, we may incur legal liability or reputational risk, if we unknowingly process payments for companies in violation of money laundering laws or regulations or immoral activities.

The merger and ourOur introduction of new products and programs in partnership with fintechs is expected to increasehas increased account and transaction volume at the Bank and thereby increaseincreased the foregoing risks, the results of which could have a material adverse effect on our business, financial condition and results of operations.

Our regulators or auditors may requirehave required us to increase the level and manner of our oversight of the third parties which provide marketing and other services through which we offer products and services, whether in connection with the merger, our introduction of new programs and products, or otherwise. Although we have significant compliance staff and have used outside consultants, our internal and external compliance examiners continually evaluate our practices and must be satisfied with the results of our third-party oversight activities. We cannot assure you that we will satisfy all related requirements. Not maintaining a compliance management system which is deemed adequate could result in sanctions or other action against the Bank. Our ongoing review and analysis of our compliance management system and implementation of any changes resulting from that review and analysis will likely result in increased non-interest expense.

Because we are a bank holding company, any purchaser of certain specified amounts of our common stock may be required to file a notice with or obtain the approval of the Federal Reserve under the BHCA, as amended, and the Change in

 

Neither we nor any of our subsidiaries are party to any material legal proceedings. From time to time, the Bank is a party to legal actions arising from its normal business activities. 

None.

The year 2021 was characterized by continued uncertainty asCompany incurred total pre-tax expense of $3.1 million in 2023 associated with exiting the coronavirus (“COVID-19”) pandemic persisted globally. However, federal, state and local governments have continued to take additional steps to reopen and stimulate economies, evidenced by improving economic indicators as 2021 progressed. While the effects of COVID-19 did have an impact on our operating results during 2021, we believe the impact was consistent with the effects of COVID-19 on the overall banking industry. The extent to which COVID-19 will continue to impact our business will depend on numerous evolving factors and future developments that we are not able to predict, including potential new variants of COVID-19, the effectiveness of continuing containment measures, including the speed of the ongoing vaccine distribution effort, the efficacy of the various vaccines, and how quickly and to what extent normal economic and operating conditions can resume.consumer mortgage origination business.

During the twelve months ended December 31, 2021,2023, net income was $48.1$8.4 million, or $4.82$0.95 per diluted share, compared to net income of $29.5$35.5 million, or $2.99$3.70 per diluted share, for the twelve months ended December 31, 20202022 and net income of $25.2$48.1 million, or $2.51$4.82 per diluted share, for the twelve months ended December 31, 2019.2021.

The $18.7$27.1 million increasedecrease in net income for the twelve months ended December 31, 20212023 compared to the twelve months ended December 31, 20202022 was due primarily to a $22.0decrease of $22.2 million, increaseor 22.9%, in net interest income, an increase of $11.7 million, or 234.6%, in provision for credit losses and an $8.3increase of $6.2 million, or 8.4%, in noninterest expense, partially offset by a decrease of $8.0 million, or 176.3%, in income tax expense and an increase of $4.9 million, or 22.9%, in noninterest income.

The decrease in net income of $12.6 million for the twelve months ended December 31, 2022 compared to the twelve months ended December 31, 2021 was due primarily to an $11.6 million decrease in noninterest income, an $11.5 million increase in noninterest expense and a $3.9 million increase in provision for loan losses, partially offset by a $4.1 million increase in noninterest expense, a $4.0 million increase in income tax expense and a $3.5 million decrease in noninterest income.

During the twelve months ended December 31, 2021,2023, return on average assets was 1.14%(“ROAA”), compared to 0.69%return on average equity (“ROAE”) and return on average tangible common equity (“ROATCE”) were 0.17%, 2.35% and 2.38%. Excluding the impact of exiting consumer mortgage and the partial charge-off, adjusted net income for the twelve months ended December 31, 2020. During the twelve months ended December 31, 2021, return on average shareholders’ equity 2023,

During the twelve months ended December 31, 2022, ROAA, ROAE and ROATCE were 0.85%, 9.53% and 9.65%, respectively. The Company recognized a nonrecurring consulting fee associated with a special project of $0.9 million, paid a $0.5 million discretionary inflation bonus to certain employees, recognized accelerated equity was 13.61% comparedcompensation expense of $0.3 million related to 9.53%several retirements, incurred acquisition-related expenses of $0.3 million and recognized a $0.1 million write-down of software. Excluding these items, adjusted net income for the twelve months ended December 31, 2020. These profitability ratios improved during 2021 due to net income growth of 63.4%2022 was $37.2 million and adjusted diluted earnings per share was $3.86. Additionally, for the twelve months ended December 31, 2022, adjusted ROAA, adjusted ROAE and adjusted ROATCE were 0.90%, while total average assets was down slightly from 2020. Additionally, the growth in net income outpaced growth in average shareholders' equity of 14.1%9.98% and growth in average tangible common equity of 14.4%. 10.10%, respectively.

Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.     

Net interest income for the twelve months ended December 31, 20212023 was $86.6$74.9 million, an increasea decrease of $22.0$22.2 million, or 34.1%22.9%, compared to $64.5$97.1 million for the twelve months ended December 31, 2020.2022. The increasedecrease in net interest income was the result of a $25.0$104.7 million, or 34.6%175.1%, decreaseincrease in total interest expense to $47.3$164.5 million for the twelve months ended December 31, 20212023 compared to $72.3$59.8 million for the twelve months ended December 31, 2020. This decrease2022. The increase in total interest expense was partially offset by a $3.0an $82.5 million, or 2.2%52.6%, decreaseincrease in total interest income to $133.9$239.4 million for the twelve months ended December 31, 20212023 compared to $136.9$156.9 million for the twelve months ended December 31, 2020.2022.

The decreasegrowth in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of 75 bps in the yield earned on loans, as well as an increase of $543.6 million, or 17.3%, in the average balance of loans, including loans held-for-sale. Furthermore, the yield on other earning assets increased 390 bps and the average balance of other earning assets increased $222.0 million, or 79.8%. Additionally, the average balance of securities increased $10.7 million, or 1.8%, and the yield earned on the securities portfolio increased 129 bps. The increase in the yields earned on loans, other earning assets and securities was due to the continued rise in interest rates during the fourth quarter 2022 and into 2023. As a result of the higher interest rate environment, the yield on funded portfolio originations was 8.41% for the twelve months ended December 31, 2023, an increase of 302 bps compared to the twelve months ended December 31, 2022.

The increase in total interest expense was drivendue primarily by decreasesto increases of $65.7 million, or 330.5%, in interest expense associated with certificates and brokered deposits, $31.4 million, or 169.5%, in interest expense associated with money market accounts, $4.1 million, or 200.9%, in interest expense associated with interest-bearing demand deposits and $3.2 million, or 17.8%, in interest expense associated with other borrowed funds. The increase in interest expense related to certificates and brokered deposits and money market accounts. Interest expense on certificates and brokered deposits decreased $20.3 million, or 46.7%, due to a declinewas driven by an increase of 67247 bps in the cost of these deposits, as well as a $471.6an increase of $893.0 million, or 25.0%77.9%, decrease in the average balance of these deposits. The decreaseincrease in certificates and brokered deposit balancesthe average balance of these deposits was driven by our pricing strategystrong consumer and small business demand for certificates of deposits in 2023, as well as the funding of brokered deposits during the fourth quarter 2022 and earlier in 2023 to reduce the level of these higher cost deposits.supplement on-balance sheet liquidity. The decreaseincrease in interest expense related to money market accounts of $5.5 million, or 48.2%, was driven primarily by a declinean increase of 57261 bps in the cost of these deposits, partially offset by an increasea decrease of $278.7$146.6 million, or 24.1%10.3%, in the average balance of these deposits. Money market balances increased throughout 2021 due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the continued economic uncertainty resulting from COVID-19. The decrease in interest expense related to interest-bearing demand deposits and savings accounts was due primarily to decreases of 28 bps and 39 bps, respectively, in the cost of these deposits, partially offset by increases of $50.5 million, or 34.8%, and $16.4 million, or 40.3%, respectively, in the average balance of these deposits. The increase in interest expense associated withrelated to interest-bearing demand deposits was due primarily to a 107 bp increase in the cost of these deposits, as well as an increase of $32.3 million, or 9.7%, in the average balance of these deposits. The increase in interest expense related to other borrowed funds was due primarily to additional long-term FHLB advances in the recognitionsecond half of $0.8 million2022 at rates lower than market deposit costs, as the cost of costs related to the Company redeemingborrowed funds increased only 12 bps while the 2026 Notes on September 30, 2021.

Net interest margin (“NIM”) was 2.11%1.56% for the twelve months ended December 31, 20212023 compared to 1.55%2.41% for the twelve months ended December 31, 2020.2022. On a fully-taxable equivalent (“FTE”) basis, NIM was 1.67% for the twelve months ended December 31, 2023 compared to 2.54% for the twelve months ended December 31, 2022, a decrease of 87 bps. The increasedecrease in net interest margin was due primarilyNIM and FTE NIM compared to a 62 bp decreasethe twelve months ended December 31, 2022 reflects the increase in the cost of interest-bearing liabilities of 206 bps, partially offset by a 1 bp decreasethe increase in the yield earned on interest-earning assets. The decline in the costearning asset yields of interest-bearing liabilities was driven primarily by the lower deposit costs, as discussed above, due primarily to the continued low interest rate environment following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19. Looking ahead into 2022, we believe that yields on interest-earning assets will increase as we anticipate growing our commercial loan portfolio. We have approximately $712.8 million of certificates and brokered deposits with a weighted average cost of 1.02% that mature over the next twelve months. As the weighted average of cost of these deposits is significantly higher than current new production costs, we expect the cost of deposit funding to continue to decline in 2022, although at a much slower pace than in 2021.109 bps.

During the twelve months ended December 31, 2021,2023, noninterest income totaled $32.8$26.1 million, representing a decreasean increase of $3.5$4.9 million, or 9.6%22.9%, compared to $36.3$21.3 million for the twelve months ended December 31, 2020.2022. The decreaseincrease in noninterest income was driven primarily by a decrease in revenue from mortgage banking activities, which was partially offset by increases in gain on sale of loans and net loan servicing revenue, partially offset by a decrease in mortgage banking activities. Due to growth in the Company’s small business lending line of business, the amount of SBA 7(a) loan sales increased 110.4% during 2023 to $281.1 million from sales of $133.6 million during 2022. As a result, gain on sale of premises and equipment.loans increased $9.2 million, or 80.5%, in 2023 compared to the prior year. The increase in net loan servicing revenue was due to growth in the balance of the Company’s SBA 7(a) servicing portfolio, as well as slower prepayment speeds in 2023. The decrease in mortgage banking revenue was due mainly to decreases in interest rate locks and sold loan volume as well as lower gain-on-sale margins. The increase in gain on sale of loans for the twelve months ended December 31, 2021 was due to a higher amount of SBA 7(a) guaranteed loan sales as well as the sale of single tenant lease financing loans. The increase in gain on sale of premises and equipmentactivities was due to the Company completingCompany’s exit from the sale of its headquarters during 2021.

Noninterest expense for the twelve months ended December 31, 20212023 was $61.8$79.4 million, compared to $57.7$73.3 million for the twelve months ended December 31, 2020.2022. The increase of $4.1$6.2 million, or 7.2%8.4%, compared to the twelve months ended December 31, 20202022 was due primarily to a $4.0increases of $3.8 million increase in salaries and employee benefits, a $1.6$2.8 million increase in marketing, advertisingdeposit insurance premium and promotion, a $0.7$1.3 million increase in premises and equipment, and a $0.5loan expenses, partially offset by decreases of $1.7 million increase in consulting and professional fees partially offset by a $2.1and $1.0 million decrease in write-down of other real estate ownedmarketing, advertising and a $0.6 million decrease in deposit insurance premium.promotion. The increase in salaries and employee benefits was due mainlyprimarily to increasedmortgage exit costs, as well as an increase in headcount predominatelyand higher incentive compensation in the Company’s small business lending, information technology and construction lending groups.lending. The increase in marketing, advertisingdeposit insurance premium was due mainly to year-over-year asset growth, as well as the composition of loans and promotiondeposits. The increase in loan expenses was due primarily to higher mortgage lead generationexit costs and digital marketing initiatives.accrued contract expenses, as well as higher third-party loan servicing fees and other miscellaneous lending costs. The increasedecrease in consulting and professional fees was due primarily to acquisition-related expenses. The increase in premises and equipment was driven primarily by a $0.5 million termination feeconsulting fees related to an information technology contract.a special project that occurred in the first quarter 2022, as well as lower legal fees in 2023. The decrease in write-down of other real estate owned was due to no write-down in 2021, as opposed to a $2.1 million write-down in 2020. The decrease in deposit insurance premiummarketing, advertising and promotion expense was due primarily to a decrease in asset growth and an increasecost savings from the Company’s exit from the mortgage business in the Bank's regulatory capital ratios, both of which positively impact the formula used to calculate deposit insurance expense.first quarter 2023.

We recognized an income tax expensebenefit of $8.5$3.5 million in 2021, resulting in an effective tax rate of 15.0%,2023, compared to $4.4an income tax provision of $4.6 million and an effective tax rate of 13.1%11.4% in 2020.2022. Our federal statutory tax rate was 21% in 20212023 and 2020.2022. In both 20212023 and 2020,2022, the variance from the federal statutory rate was due primarily to tax-exempt income, partially offset by state income taxes.income. Interest income on certain loans or securities issued by governmental, municipal and not-for-profit entities, and earnings from bank-owned life insurance were the primary components of tax-exempt income.     The increase in the effective tax rate and income tax expense was due primarily to the increase in pre-tax earnings driven by a higher proportion of taxable revenue, including higher net interest income, gain on sale of loans and gain on sale of premises and equipment.    

As of December 31, 2021,2023, total shareholders’ equity was $380.3$362.8 million, an increasea decrease of $49.4$2.2 million, or 14.9%0.6%, compared to December 31, 2020,2022. The decrease in shareholders’ equity was due primarily to stock repurchase activity and the day 1 CECL adjustment, partially offset by net income earned during the year, as well as a decrease in accumulated other comprehensive loss.period. Tangible common equity totaled $375.7$358.1 million as of December 31, 2021,2023, representing an increasea decrease of $49.4$2.2 million, or 15.1%0.6%, compared to December 31, 2020. As both total shareholders’ equity and tangible common equity increased compared to a slight decline in both total assets and tangible assets, the2022. The ratio of total shareholders’ equity to total assets increaseddecreased to 9.03%7.02% as of December 31, 20212023 from 7.79%8.03% as of December 31, 20202022 and the ratio of tangible common equity to tangible assets increaseddecreased to 8.93%6.94% as of December 31, 20212023 from 7.69%7.94% as of December 31, 2020.2022. The decrease in both shareholders’ equity to total assets and tangible common equity to tangible assets is due primarily to the stock repurchase activity and day 1 CECL adjustment mentioned above, as well as an increase in total assets, partially offset by net income earned during the period.

Book value per common share increased 15.5%4.2% to $38.99 as of December 30, 2021 from $33.77$41.97 as of December 31, 2020.2023 from $40.26 as of December 31, 2022. Tangible book value per share increased 15.7%4.2% to $38.51$41.43 as of December 31, 20212023 from $33.29$39.74 as of December 31, 2020.2022. The growthincrease in both book value per common share and tangible book value per share reflects the growtheffect of stock repurchase activity throughout the year, partially offset by the declines in total shareholders’ equity and tangible common equity while total common shares outstanding decreased slightly year-over-year, or 0.5%.equity. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Item 7 of Part II of this report, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.