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EX-32.1 - EXHIBIT 32.1 - First Internet Bancorpinbk-2018q1xex321.htm
EX-31.2 - EXHIBIT 31.2 - First Internet Bancorpinbk-2018q1xex312.htm
EX-31.1 - EXHIBIT 31.1 - First Internet Bancorpinbk-2018q1xex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ to ________.
 
Commission File Number 001-35750 
First Internet Bancorp
(Exact Name of Registrant as Specified in Its Charter)
Indiana
 
20-3489991
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
11201 USA Parkway
Fishers, IN
 
46037
(Address of Principal Executive Offices)
 
(Zip Code)
 
(317) 532-7900
 
 
(Registrant’s Telephone Number, Including Area Code)
 
 
 
 
 
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
 
  
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨
Accelerated Filer þ
Non-accelerated Filer ¨ (Do not check if a smaller reporting company)
Smaller Reporting Company ¨
Emerging growth company ¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
As of May 4, 2018, the registrant had 8,450,925 shares of common stock issued and outstanding.




Cautionary Note Regarding Forward-Looking Statements
  
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the current expectations of First Internet Bancorp and its consolidated subsidiaries (“we,” “our,” “us” or the “Company”) regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “anticipate,” “believe,” “can,” “estimate,” “expect,” “intend,” “may,” “plan,” “should” and similar expressions. Such statements are subject to certain risks and uncertainties including: general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products; our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans; failures or breaches of or interruptions in the communication and information systems on which we rely to conduct our business that could reduce our revenues, increase our costs or lead to disruptions in our business; our plans to grow our commercial real estate, commercial and industrial, public finance and healthcare finance loan portfolios which may carry greater risks of non-payment or other unfavorable consequences; our dependence on capital distributions from First Internet Bank of Indiana (the “Bank”); results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets; changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Bank in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums; regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet; our liquidity requirements being adversely affected by changes in our assets and liabilities; the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals; execution of future acquisition, reorganization or disposition transactions including without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings and other anticipated benefits from such transactions; changes in applicable tax laws; the growth and profitability of noninterest or fee income being less than expected; the loss of any key members of senior management; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board (the “PCAOB”) and other regulatory agencies; and the effect of fiscal and governmental policies of the United States federal government. Additional factors that may affect our results include those discussed in our most recent Annual Report on Form 10-K under the heading “Risk Factors” and in other reports filed with the SEC. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
Except as required by law, we do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.


i



PART I

ITEM 1.
FINANCIAL STATEMENTS 

First Internet Bancorp
Condensed Consolidated Balance Sheets
(Amounts in thousands except share data)
 
 
March 31, 2018
 
December 31, 2017
 
 
(Unaudited)
 
 
Assets
 
 

 
 

Cash and due from banks
 
$
5,675

 
$
4,539

Interest-bearing deposits
 
58,072

 
43,442

Total cash and cash equivalents
 
63,747

 
47,981

Securities available-for-sale, at fair value (amortized cost of $479,399 and $481,357 in 2018 and 2017, respectively)
 
463,652

 
473,275

Securities held-to-maturity, at amortized cost (fair value of $18,909 and $19,083 in 2018 and 2017, respectively)
 
19,206

 
19,209

Loans held-for-sale (includes $17,067 and $23,571 at fair value in 2018 and 2017, respectively)
 
17,067

 
51,407

Loans
 
2,209,405

 
2,091,193

Allowance for loan losses
 
(15,560
)
 
(14,970
)
Net loans
 
2,193,845

 
2,076,223

Accrued interest receivable
 
11,898

 
11,944

Federal Home Loan Bank of Indianapolis stock
 
20,250

 
19,575

Cash surrender value of bank-owned life insurance
 
35,342

 
35,105

Premises and equipment, net
 
10,110

 
10,058

Goodwill
 
4,687

 
4,687

Other real estate owned
 
5,041

 
5,041

Accrued income and other assets
 
17,883

 
13,182

Total assets
 
$
2,862,728

 
$
2,767,687

Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Noninterest-bearing deposits
 
$
47,678

 
$
44,686

Interest-bearing deposits
 
2,129,443

 
2,040,255

Total deposits
 
2,177,121

 
2,084,941

Advances from Federal Home Loan Bank
 
413,173

 
410,176

Subordinated debt, net of unamortized discounts and debt issuance costs of $1,237 and $1,274 in 2018 and 2017, respectively
 
36,763

 
36,726

Accrued interest payable
 
410

 
311

Accrued expenses and other liabilities
 
10,437

 
11,406

Total liabilities
 
2,637,904

 
2,543,560

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; 8,450,925 and 8,411,077 shares issued and outstanding in 2018 and 2017, respectively
 
172,421

 
172,043

Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none
 

 

Retained earnings
 
63,677

 
57,103

Accumulated other comprehensive loss
 
(11,274
)
 
(5,019
)
Total shareholders’ equity
 
224,824

 
224,127

Total liabilities and shareholders’ equity
 
$
2,862,728

 
$
2,767,687


See Notes to Condensed Consolidated Financial Statements

1



First Internet Bancorp
Condensed Consolidated Statements of Income – Unaudited
(Amounts in thousands except share and per share data)
 
 
Three Months Ended
 
 
March 31, 2018
 
March 31, 2017
Interest Income
 
 

 
 

Loans
 
$
22,115

 
$
14,156

Securities – taxable
 
2,488

 
2,367

Securities – non-taxable
 
711

 
697

Other earning assets
 
665

 
170

Total interest income
 
25,979

 
17,390

Interest Expense
 
 

 
 

Deposits
 
8,270

 
4,699

Other borrowed funds
 
2,294

 
1,234

Total interest expense
 
10,564

 
5,933

Net Interest Income
 
15,415

 
11,457

Provision for Loan Losses
 
850

 
1,035

Net Interest Income After Provision for Loan Losses
 
14,565

 
10,422

Noninterest Income
 
 

 
 

Service charges and fees
 
230

 
211

Mortgage banking activities
 
1,578

 
1,616

Gain on sale of loans
 
414

 

Other
 
320

 
304

Total noninterest income
 
2,542

 
2,131

Noninterest Expense
 
 

 
 

Salaries and employee benefits
 
5,905

 
5,073

Marketing, advertising and promotion
 
716

 
518

Consulting and professional services
 
851

 
813

Data processing
 
263

 
237

Loan expenses
 
237

 
214

Premises and equipment
 
1,214

 
953

Deposit insurance premium
 
465

 
315

Other
 
566

 
575

Total noninterest expense
 
10,217

 
8,698

Income Before Income Taxes
 
6,890

 
3,855

Income Tax Provision
 
862

 
1,023

Net Income
 
$
6,028

 
$
2,832

Income Per Share of Common Stock
 
 

 
 

Basic
 
$
0.71

 
$
0.43

Diluted
 
$
0.71

 
$
0.43

Weighted-Average Number of Common Shares Outstanding
 
 

 
 

Basic
 
8,499,196

 
6,547,807

Diluted
 
8,542,363

 
6,602,200

Dividends Declared Per Share
 
$
0.06

 
$
0.06


See Notes to Condensed Consolidated Financial Statements

2



First Internet Bancorp
Condensed Consolidated Statements of Comprehensive Income – Unaudited
(Amounts in thousands)
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net income
 
$
6,028

 
$
2,832

Other comprehensive income (loss)
 
 
 
 
Net unrealized holding (losses) gains on securities available-for-sale recorded within other comprehensive income before income tax
 
(7,665
)
 
1,065

Other comprehensive (loss) income before income tax
 
(7,665
)
 
1,065

Income tax (benefit) provision
 
(2,473
)
 
72

Other comprehensive (loss) income
 
(5,192
)
 
993

Comprehensive income
 
$
836

 
$
3,825

 
 See Notes to Condensed Consolidated Financial Statements

3



First Internet Bancorp
Condensed Consolidated Statement of Shareholders’ Equity - Unaudited
Three Months Ended March 31, 2018
(Amounts in thousands except per share data)
 
 
Voting and
Nonvoting
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
Balance, January 1, 2018
 
$
172,043

 
$
57,103

 
$
(5,019
)
 
$
224,127

Impact of adoption of new accounting standards (1)
 

 
1,063

 
(1,063
)
 

Net income
 

 
6,028

 

 
6,028

Other comprehensive loss
 

 

 
(5,192
)
 
(5,192
)
Dividends declared ($0.06 per share)
 

 
(517
)
 

 
(517
)
Recognition of the fair value of share-based compensation
 
579

 

 

 
579

Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units
 
9

 

 

 
9

Common stock redeemed for the net settlement of share-based awards
 
(210
)
 

 

 
(210
)
Balance, March 31, 2018
 
$
172,421

 
$
63,677

 
$
(11,274
)
 
$
224,824


(1) Represents the impact of adopting Accounting Standards Update (“ASU”) 2018-02 and ASU 2016-01. ASU 2018-02 increased retained earnings and accumulated other comprehensive loss by $1.1 million. ASU 2016-01 decreased retained earnings and accumulated other comprehensive loss by $0.1 million. See Note 12 to the condensed consolidated financial statements for more information.
 
See Notes to Condensed Consolidated Financial Statements

4



First Internet Bancorp
Condensed Consolidated Statements of Cash Flows – Unaudited
(Amounts in thousands)
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Operating Activities
 
 

 
 

Net income
 
$
6,028

 
$
2,832

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
1,425

 
1,205

Increase in cash surrender value of bank-owned life insurance
 
(237
)
 
(172
)
Provision for loan losses
 
850

 
1,035

Share-based compensation expense
 
579

 
285

Loans originated for sale
 
(82,483
)
 
(86,166
)
Proceeds from sale of loans
 
90,841

 
102,275

Gain on loans sold
 
(2,086
)
 
(1,837
)
Gain on sale of OREO
 
(105
)
 

Decrease (increase) in fair value of loans held-for-sale
 
233

 
(373
)
(Gain) loss on derivatives
 
(142
)
 
594

Net change in accrued income and other assets
 
941

 
2,294

Net change in accrued expenses and other liabilities
 
(924
)
 
(1,740
)
Net cash provided by operating activities
 
14,920

 
20,232

Investing Activities
 
 
 
 
Net loan activity, excluding purchases
 
(68,991
)
 
(173,702
)
Proceeds from sale of other real estate owned
 
332

 
30

Maturities and calls of securities available-for-sale
 
12,422

 
20,565

Purchase of securities available-for-sale
 
(14,458
)
 
(31,475
)
Purchase of securities held-to-maturity
 

 
(2,550
)
Purchase of Federal Home Loan Bank of Indianapolis stock
 
(675
)
 
(4,140
)
Purchase of premises and equipment
 
(448
)
 
(184
)
Loans purchased
 
(47,516
)
 
(8,821
)
Net proceeds from sale of portfolio loans
 
25,717

 

Net cash used in investing activities
 
(93,617
)
 
(200,277
)
Financing Activities
 
 
 
 
Net increase in deposits
 
92,180

 
94,252

Cash dividends paid
 
(507
)
 
(388
)
Proceeds from advances from Federal Home Loan Bank
 
55,000

 
192,000

Repayment of advances from Federal Home Loan Bank
 
(52,000
)
 
(92,000
)
Other, net
 
(210
)
 
(173
)
Net cash provided by financing activities
 
94,463

 
193,691

Net Increase in Cash and Cash Equivalents
 
15,766

 
13,646

Cash and Cash Equivalents, Beginning of Period
 
47,981

 
39,452

Cash and Cash Equivalents, End of Period
 
$
63,747

 
$
53,098

Supplemental Disclosures
 
 
 
 
Cash paid during the period for interest
 
$
10,465

 
$
5,897

Cash paid during the period for taxes
 
1,700

 

Loans transferred to other real estate owned
 
227

 

Cash dividends declared, paid in subsequent period
 
504

 
390

Securities purchased during the period, settled in subsequent period
 

 
2,175

Transfer of other equity investments from securities available-for-sale to other assets in accordance with adoption of ASU 2016-01
 
2,932

 

See Notes to Condensed Consolidated Financial Statements

5



First Internet Bancorp
Notes to Condensed Consolidated Financial Statements – Unaudited
(Table amounts in thousands except share and per share data)
  
Note 1:        Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results expected for the year ending December 31, 2018 or any other period. The March 31, 2018 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended December 31, 2017.
 
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for loan losses, valuations and impairments of investment securities, and the accounting for income tax expense are highly dependent upon management’s estimates, judgments, and assumptions where changes in any of these could have a significant impact on the financial statements.

The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly-owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s two wholly-owned subsidiaries, First Internet Public Finance Corp. and JKH Realty Services, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company.
 
Certain reclassifications have been made to the 2017 financial statements to conform to the presentation of the 2018 financial statements. These reclassifications had no effect on net income.



    




6



Note 2:        Earnings Per Share
 
Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period.
 
The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three months ended March 31, 2018 and 2017
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Basic earnings per share
 
 

 
 

Net income
 
$
6,028

 
$
2,832

Weighted-average common shares
 
8,499,196

 
6,547,807

Basic earnings per common share
 
$
0.71

 
$
0.43

Diluted earnings per share
 
 

 
 

Net income
 
$
6,028

 
$
2,832

Weighted-average common shares
 
8,499,196

 
6,547,807

Dilutive effect of warrants
 

 
17,940

Dilutive effect of equity compensation
 
43,167

 
36,453

     Weighted-average common and incremental shares
 
8,542,363

 
6,602,200

Diluted earnings per common share
 
$
0.71

 
$
0.43

  
Note 3:         Securities
 
The following tables summarize securities available-for-sale and securities held-to-maturity as of March 31, 2018 and December 31, 2017.
 
 
March 31, 2018
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities available-for-sale
 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
128,175

 
$
247

 
$
(1,088
)
 
$
127,334

Municipal securities
 
97,299

 
92

 
(4,164
)
 
93,227

Mortgage-backed securities
 
219,295

 
28

 
(9,201
)
 
210,122

Asset-backed securities
 
5,000

 
9

 

 
5,009

Corporate securities
 
29,630

 
65

 
(1,735
)
 
27,960

Total available-for-sale
 
$
479,399

 
$
441

 
$
(16,188
)
 
$
463,652

 
 
March 31, 2018
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities held-to-maturity
 
 

 
 

 
 

 
 

Municipal securities
 
$
10,163

 
$
3

 
$
(423
)
 
$
9,743

Corporate securities
 
9,043

 
123

 

 
9,166

Total held-to-maturity
 
$
19,206

 
$
126

 
$
(423
)
 
$
18,909



7



 
 
 
December 31, 2017
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities available-for-sale
 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
133,424

 
$
531

 
$
(765
)
 
$
133,190

Municipal securities
 
97,370

 
366

 
(1,359
)
 
96,377

Mortgage-backed securities
 
215,452

 
15

 
(5,747
)
 
209,720

Asset-backed securities
 
5,000

 
9

 

 
5,009

Corporate securities
 
27,111

 
103

 
(1,167
)
 
26,047

Other securities
 
3,000

 

 
(68
)
 
2,932

Total available-for-sale
 
$
481,357

 
$
1,024

 
$
(9,106
)
 
$
473,275

 
 
December 31, 2017
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities held-to-maturity
 
 

 
 

 
 

 
 

Municipal securities
 
$
10,164

 
$
40

 
$
(357
)
 
$
9,847

Corporate securities
 
9,045

 
191

 

 
9,236

Total held-to-maturity
 
$
19,209

 
$
231

 
$
(357
)
 
$
19,083


The carrying value of securities at March 31, 2018 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
One to five years
 
$
641

 
$
610

Five to ten years
 
59,600

 
58,232

After ten years
 
194,863

 
189,679

 
 
255,104

 
248,521

Mortgage-backed securities
 
219,295

 
210,122

Asset-backed securities
 
5,000

 
5,009

Total
 
$
479,399

 
$
463,652

 
 
Held-to-Maturity
 
 
Amortized
Cost
 
Fair
Value
Five to ten years
 
$
13,290

 
$
13,199

After ten years
 
5,916

 
5,710

Total
 
$
19,206

 
$
18,909


There were no gross gains or losses resulting from sales of available-for-sale securities during the three months ended March 31, 2018 and 2017.
 
Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at March 31, 2018 and December 31, 2017 was $400.6 million and $354.6 million, which was approximately 83% and 72%, respectively, of the Company’s available-for-sale and held-to-maturity securities portfolios. 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 (“OTTI”) is identified.


8



U. S. Government-Sponsored Agencies, Municipal Securities and Corporate Securities

The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2018.
 
Mortgage-Backed Securities
 
The unrealized losses on the Company’s investments in 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 be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2018.

 
 
March 31, 2018
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Securities available-for-sale
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
56,902

 
$
(482
)
 
$
19,283

 
$
(606
)
 
$
76,185

 
$
(1,088
)
Municipal securities
 
29,488

 
(716
)
 
56,078

 
(3,448
)
 
85,566

 
(4,164
)
Mortgage-backed securities
 
37,336

 
(723
)
 
169,888

 
(8,478
)
 
207,224

 
(9,201
)
Corporate securities
 
4,319

 
(203
)
 
18,468

 
(1,532
)
 
22,787

 
(1,735
)
Total
 
$
128,045

 
$
(2,124
)
 
$
263,717

 
$
(14,064
)
 
$
391,762

 
$
(16,188
)
 
 
March 31, 2018
 
 
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
 
 

 
 

 
 

 
 

 
 

 
 

Municipal securities
 
$
8,788

 
$
(423
)
 
$

 
$

 
$
8,788

 
$
(423
)
Total
 
$
8,788

 
$
(423
)
 
$

 
$

 
$
8,788

 
$
(423
)

 
 
 
December 31, 2017
 
 
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
 
$
30,194

 
$
(256
)
 
$
22,824

 
$
(509
)
 
$
53,018

 
$
(765
)
Municipal securities
 
5,638

 
(77
)
 
57,128

 
(1,282
)
 
62,766

 
(1,359
)
Mortgage-backed securities
 
29,542

 
(251
)
 
177,266

 
(5,496
)
 
206,808

 
(5,747
)
Corporate securities
 
1,852

 
(148
)
 
18,981

 
(1,019
)
 
20,833

 
(1,167
)
Other securities
 

 

 
2,932

 
(68
)
 
2,932

 
(68
)
Total
 
$
67,226

 
$
(732
)
 
$
279,131

 
$
(8,374
)
 
$
346,357

 
$
(9,106
)

9



 
 
December 31, 2017
 
 
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
 
 

 
 

 
 

 
 

 
 

 
 

Municipal securities
 
$
8,255

 
$
(357
)
 
$

 
$

 
$
8,255

 
$
(357
)
Total
 
$
8,255

 
$
(357
)
 
$

 
$

 
$
8,255

 
$
(357
)

There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of income during the three months ended March 31, 2018 and 2017.

10



Note 4:        Loans
 
Loans that management intends to hold until maturity are reported at their outstanding principal balance adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans.
 
For loans recorded at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
 
Categories of loans include:
 
 
March 31, 2018
 
December 31, 2017
Commercial loans
 
 

 
 

Commercial and industrial
 
$
119,893

 
$
122,940

Owner-occupied commercial real estate
 
81,998

 
75,768

Investor commercial real estate
 
6,273

 
7,273

Construction
 
47,013

 
49,213

Single tenant lease financing
 
834,335

 
803,299

Public finance
 
481,923

 
438,341

Healthcare finance
 
48,891

 
31,573

Total commercial loans
 
1,620,326

 
1,528,407

Consumer loans
 
 
 
 
Residential mortgage
 
318,298

 
299,935

Home equity
 
29,296

 
30,554

Other consumer
 
236,185

 
227,533

Total consumer loans
 
583,779

 
558,022

Total commercial and consumer loans
 
2,204,105

 
2,086,429

Deferred loan origination costs and premiums and discounts on purchased loans
 
5,300

 
4,764

Total loans
 
2,209,405

 
2,091,193

Allowance for loan losses
 
(15,560
)
 
(14,970
)
Net loans
 
$
2,193,845

 
$
2,076,223

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

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

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


11



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

Construction: Construction loans are secured by real estate and improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, multi-family) properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. This portfolio segment is generally concentrated in Central Indiana.
Single Tenant Lease Financing: These loans are made to property owners of real estate subject to long term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses.  The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant.  Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria.

Public Finance: These loans are made to governmental and not-for-profit entities to provide both tax-exempt and taxable loans for a variety of purposes including: short term cash-flow needs; debt refinancing; economic development; quality of life projects; infrastructure improvements; and equipment financing. The primary sources of repayment for public finance loans include pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenues; sales tax; and pledged general revenue. Certain loans may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment. Public finance loans have been completed in seven states, primarily in the Midwest, with plans to continue expanding nationwide.

Healthcare Finance: These loans are made to healthcare providers, primarily dentists, for refinancing or acquiring practices, refinancing or acquiring owner-occupied commercial real estate, and equipment purchases. These loans’ sources of repayment are primarily based on the identified cash flows of the borrower (including ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property) and secondarily on the underlying collateral provided by the borrower. This portfolio segment is generally concentrated in the Western United States with plans to expand nationwide.

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

12



Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.
Allowance for Loan Losses Methodology
 
Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). The portfolio is segmented by loan type, and the required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on average historical losses, adjusted for current economic factors and portfolio trends. Management believes the historical loss experience methodology is appropriate in the current economic environment as it captures loss rates that are comparable to the current period being analyzed. Management adds qualitative factors for observable trends, changes in internal practices, changes in delinquencies and impairments, and external factors. Observable factors include changes in the composition and size of portfolios, as well as loan terms or concentration levels. The Company evaluates the impact of internal changes such as management and staff experience levels or modification to loan underwriting processes. Delinquency trends are scrutinized for both volume and severity of past due, nonaccrual, or classified loans as well as any changes in the value of underlying collateral. Finally, the Company considers the effect of other external factors such as national, regional, and local economic and business conditions, as well as competitive, legal, and regulatory requirements. Loans that are considered to be impaired are evaluated to determine the need for a specific allowance by applying at least one of three methodologies: present value of future cash flows; fair value of collateral less costs to sell; or the loan’s observable market price. All troubled debt restructurings (“TDR”) are considered impaired loans. Loans evaluated for impairment are removed from other pools to prevent double-counting. Accounting Standards Codification (“ASC”) Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral less costs to sell and allows existing methods for recognizing interest income.
 
Provision for Loan Losses
 
A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations.
 
Policy for Charging Off Loans
 
The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest.


13



The following tables present changes in the balance of the ALLL during the three months ended March 31, 2018 and 2017

 
Three Months Ended March 31, 2018
Allowance for loan losses:
Balance, Beginning of Period
 
Provision (Credit) Charged to Expense
 
Losses
Charged Off
 
Recoveries
 
Balance,
End of Period
Commercial and industrial
$
1,738

 
$
(102
)
 
$

 
$

 
$
1,636

Owner-occupied commercial real estate
803

 
58

 

 

 
861

Investor commercial real estate
85

 
(14
)
 

 

 
71

Construction
423

 
(56
)
 

 

 
367

Single tenant lease financing
7,872

 
221

 

 

 
8,093

Public finance
959

 
159

 

 

 
1,118

Healthcare finance
313

 
171

 

 

 
484

Residential mortgage
956

 
36

 
(9
)
 
1

 
984

Home equity
70

 
(16
)
 

 
4

 
58

Other consumer
1,751

 
393

 
(296
)
 
40

 
1,888

Total
$
14,970

 
$
850

 
$
(305
)
 
$
45

 
$
15,560


 
Three Months Ended March 31, 2017
Allowance for loan losses:
Balance, Beginning of Period
 
Provision (Credit) Charged to Expense
 
Losses
Charged Off
 
Recoveries
 
Balance,
End of Period
Commercial and industrial
$
1,352

 
$
(73
)
 
$

 
$
44

 
$
1,323

Owner-occupied commercial real estate
582

 
53

 

 

 
635

Investor commercial real estate
168

 
(67
)
 

 

 
101

Construction
544

 
(82
)
 

 

 
462

Single tenant lease financing
6,248

 
605

 

 

 
6,853

Public finance

 
142

 

 

 
142

Residential mortgage
754

 
150

 

 

 
904

Home equity
102

 
(4
)
 

 
3

 
101

Other consumer
1,231

 
311

 
(223
)
 
54

 
1,373

Total
$
10,981

 
$
1,035

 
$
(223
)
 
$
101

 
$
11,894





14



The following tables present the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2018 and December 31, 2017
 
Loans
 
Allowance for Loan Losses
March 31, 2018
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
$
116,020

 
$
3,873

 
$
119,893

 
$
1,636

 
$

 
$
1,636

Owner-occupied commercial real estate
81,992

 
6

 
81,998

 
861

 

 
861

Investor commercial real estate
6,273

 

 
6,273

 
71

 

 
71

Construction
47,013

 

 
47,013

 
367

 

 
367

Single tenant lease financing
834,335

 

 
834,335

 
8,093

 

 
8,093

Public finance
481,923

 

 
481,923

 
1,118

 

 
1,118

Healthcare finance
48,891

 

 
48,891

 
484

 

 
484

Residential mortgage
317,393

 
905

 
318,298

 
984

 

 
984

Home equity
29,213

 
83

 
29,296

 
58

 

 
58

Other consumer
236,049

 
136

 
236,185

 
1,888

 

 
1,888

Total
$
2,199,102

 
$
5,003

 
$
2,204,105

 
$
15,560

 
$

 
$
15,560

 
Loans
 
Allowance for Loan Losses
December 31, 2017
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
$
119,054

 
$
3,886

 
$
122,940

 
$
1,738

 
$

 
$
1,738

Owner-occupied commercial real estate
75,761

 
7

 
75,768

 
803

 

 
803

Investor commercial real estate
7,273

 

 
7,273

 
85

 

 
85

Construction
49,213

 

 
49,213

 
423

 

 
423

Single tenant lease financing
803,299

 

 
803,299

 
7,872

 

 
7,872

Public finance
438,341

 

 
438,341

 
959

 

 
959

Healthcare finance
31,573

 

 
31,573

 
313

 

 
313

Residential mortgage
298,796

 
1,139

 
299,935

 
956

 

 
956

Home equity
30,471

 
83

 
30,554

 
70

 

 
70

Other consumer
227,443

 
90

 
227,533

 
1,751

 

 
1,751

Total
$
2,081,224

 
$
5,205

 
$
2,086,429

 
$
14,970

 
$

 
$
14,970


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 that lacks clear certainty.

15



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.

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.

16



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 March 31, 2018 and December 31, 2017
 
March 31, 2018
 
Pass
 
Special Mention
 
Substandard
 
Total
Commercial and industrial
$
111,139

 
$
4,895

 
$
3,859

 
$
119,893

Owner-occupied commercial real estate
79,270

 
2,722

 
6

 
81,998

Investor commercial real estate
6,273

 

 

 
6,273

Construction
47,013

 

 

 
47,013

Single tenant lease financing
828,608

 
5,727

 

 
834,335

Public finance
481,923

 

 

 
481,923

Healthcare finance
48,891

 

 

 
48,891

Total commercial loans
$
1,603,117

 
$
13,344

 
$
3,865

 
$
1,620,326

 
March 31, 2018
 
Performing
 
Nonaccrual
 
Total
Residential mortgage
$
317,803

 
$
495

 
$
318,298

Home equity
29,213

 
83

 
29,296

Other consumer
236,104

 
81

 
236,185

Total consumer loans
$
583,120

 
$
659

 
$
583,779

 
December 31, 2017
 
Pass
 
Special Mention
 
Substandard
 
Total
Commercial and industrial
$
113,840

 
$
5,203

 
$
3,897

 
$
122,940

Owner-occupied commercial real estate
72,995

 
2,766

 
7

 
75,768

Investor commercial real estate
7,273

 

 

 
7,273

Construction
49,213

 

 

 
49,213

Single tenant lease financing
796,307

 
6,992

 

 
803,299

Public finance
438,341

 

 

 
438,341

Healthcare finance
31,573

 

 

 
31,573

Total commercial loans
$
1,509,542

 
$
14,961

 
$
3,904

 
$
1,528,407

 
December 31, 2017
 
Performing
 
Nonaccrual
 
Total
Residential mortgage
$
299,211

 
$
724

 
$
299,935

Home equity
30,471

 
83

 
30,554

Other consumer
227,501

 
32

 
227,533

Total consumer loans
$
557,183

 
$
839

 
$
558,022

  

17



The following tables present the Company’s loan portfolio delinquency analysis as of March 31, 2018 and December 31, 2017

 
 
March 31, 2018
 
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days 
or More
Past Due
 
Total 
Past Due
 
Current
 
Total
Loans
 
Non-
accrual
Loans
 
Total Loans
90 Days or
More Past
Due and
Accruing
Commercial and industrial
 
$
14

 
$

 
$

 
$
14

 
$
119,879

 
$
119,893

 
$

 
$

Owner-occupied commercial real estate
 

 

 

 

 
81,998

 
81,998

 

 

Investor commercial real estate
 

 

 

 

 
6,273

 
6,273

 

 

Construction
 

 

 

 

 
47,013

 
47,013

 

 

Single tenant lease financing
 

 

 

 

 
834,335

 
834,335

 

 

Public finance
 

 

 

 

 
481,923

 
481,923

 

 

Healthcare finance
 

 

 

 

 
48,891

 
48,891

 

 

Residential mortgage
 
121

 

 
332

 
453

 
317,845

 
318,298

 
495

 

Home equity
 
83

 

 

 
83

 
29,213

 
29,296

 
83

 

Other consumer
 
231

 
104

 
47

 
382

 
235,803

 
236,185

 
81

 

Total
 
$
449

 
$
104

 
$
379

 
$
932

 
$
2,203,173

 
$
2,204,105

 
$
659

 
$

 
 
December 31, 2017
 
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days 
or More
Past Due
 
Total 
Past Due
 
Current
 
Total
Loans
 
Non-
accrual
Loans
 
Total Loans
90 Days or
More Past
Due and
Accruing
Commercial and industrial
 
$

 
$
10

 
$

 
$
10

 
$
122,930

 
$
122,940

 
$

 
$

Owner-occupied commercial real estate
 

 

 

 

 
75,768

 
75,768

 

 

Investor commercial real estate
 

 

 

 

 
7,273

 
7,273

 

 

Construction
 

 

 

 

 
49,213

 
49,213

 

 

Single tenant lease financing
 

 

 

 

 
803,299

 
803,299

 

 

Public finance
 

 

 

 

 
438,341

 
438,341

 

 

Healthcare finance
 

 

 

 

 
31,573

 
31,573

 

 

Residential mortgage
 

 
23</