Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2017
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, a smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer ¨
Accelerated Filer þ
Non-accelerated Filer ¨ (Do not check if a smaller reporting company)
Smaller Reporting Company ¨
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 pursuance 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 April 28, 2017, the registrant had 6,497,662 shares of common stock issued and outstanding.



Cautionary Note Regarding Forward-Looking Statements
  
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the current expectations of First Internet Bancorp and its consolidated subsidiaries (“we,” “our,” “us” or the “Company”) regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends,” “plan,” and similar expressions. Such statements are subject to certain risks and uncertainties including: general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products; our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans; failures of or interruptions in the communication and information systems on which we rely to conduct our business that could reduce our revenues, increase our costs or lead to disruptions in our business; our plans to grow our commercial real estate and commercial and industrial loan portfolios which may carry greater risks of non-payment or other unfavorable consequences; our dependence on capital distributions from First Internet Bank of Indiana (the “Bank”); results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets; changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Bank in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums; regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet; our liquidity requirements being adversely affected by changes in our assets and liabilities; the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals; the growth and profitability of noninterest or fee income being less than expected; the loss of any key members of senior management; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the “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, 2017
 
December 31, 2016
 
 
(Unaudited)
 
 
Assets
 
 

 
 

Cash and due from banks
 
$
4,137

 
$
2,282

Interest-bearing deposits
 
48,961

 
37,170

Total cash and cash equivalents
 
53,098

 
39,452

Interest-bearing time deposits
 
250

 
250

Securities available-for-sale, at fair value (amortized cost of $483,370 and $471,070 in 2017 and 2016, respectively)
 
470,065

 
456,700

Securities held-to-maturity, at amortized cost (fair value of $18,804 and $16,197 in 2017 and 2016, respectively)
 
19,218

 
16,671

Loans held-for-sale (includes $8,692 and $27,101 at fair value in 2017 and 2016, respectively)
 
13,202

 
27,101

Loans
 
1,433,190

 
1,250,789

Allowance for loan losses
 
(11,894
)
 
(10,981
)
Net loans
 
1,421,296

 
1,239,808

Accrued interest receivable
 
6,868

 
6,708

Federal Home Loan Bank of Indianapolis stock
 
13,050

 
8,910

Cash surrender value of bank-owned life insurance
 
24,367

 
24,195

Premises and equipment, net
 
9,853

 
10,044

Goodwill
 
4,687

 
4,687

Other real estate owned
 
4,488

 
4,533

Accrued income and other assets
 
12,361

 
15,276

Total assets
 
$
2,052,803

 
$
1,854,335

Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Noninterest-bearing deposits
 
$
34,427

 
$
31,166

Interest-bearing deposits
 
1,522,692

 
1,431,701

Total deposits
 
1,557,119

 
1,462,867

Advances from Federal Home Loan Bank
 
289,985

 
189,981

Subordinated debt, net of unamortized discounts and debt issuance costs of $1,385 and $1,422 in 2017 and 2016, respectively
 
36,615

 
36,578

Accrued interest payable
 
148

 
112

Accrued expenses and other liabilities
 
11,445

 
10,855

Total liabilities
 
1,895,312

 
1,700,393

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; 6,497,662 and 6,478,050 shares issued and outstanding in 2017 and 2016, respectively
 
119,627

 
119,506

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

 
—

Retained earnings
 
46,139

 
43,704

Accumulated other comprehensive loss
 
(8,275
)
 
(9,268
)
Total shareholders’ equity
 
157,491

 
153,942

Total liabilities and shareholders’ equity
 
$
2,052,803

 
$
1,854,335


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,
 
 
2017
 
2016
Interest Income
 
 

 
 

Loans
 
$
14,156

 
$
11,189

Securities – taxable
 
2,367

 
1,169

Securities – non-taxable
 
697

 
165

Other earning assets
 
170

 
170

Total interest income
 
17,390

 
12,693

Interest Expense
 
 

 
 

Deposits
 
4,699

 
2,888

Other borrowed funds
 
1,234

 
664

Total interest expense
 
5,933

 
3,552

Net Interest Income
 
11,457

 
9,141

Provision for Loan Losses
 
1,035

 
946

Net Interest Income After Provision for Loan Losses
 
10,422

 
8,195

Noninterest Income
 
 

 
 

Service charges and fees
 
211

 
200

Mortgage banking activities
 
1,616

 
2,254

Loss on asset disposals
 
(2
)
 
(16
)
Other
 
306

 
102

Total noninterest income
 
2,131

 
2,540

Noninterest Expense
 
 

 
 

Salaries and employee benefits
 
5,073

 
3,898

Marketing, advertising and promotion
 
518

 
464

Consulting and professional services
 
813

 
638

Data processing
 
237

 
274

Loan expenses
 
214

 
184

Premises and equipment
 
953

 
798

Deposit insurance premium
 
315

 
180

Other
 
575

 
569

Total noninterest expense
 
8,698

 
7,005

Income Before Income Taxes
 
3,855

 
3,730

Income Tax Provision
 
1,023

 
1,298

Net Income
 
$
2,832

 
$
2,432

Income Per Share of Common Stock
 
 

 
 

Basic
 
$
0.43

 
$
0.54

Diluted
 
$
0.43

 
$
0.53

Weighted-Average Number of Common Shares Outstanding
 
 

 
 

Basic
 
6,547,807

 
4,541,728

Diluted
 
6,602,200

 
4,575,555

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,
 
 
2017
 
2016
Net income
 
$
2,832

 
$
2,432

Net unrealized holding gains on securities available-for-sale recorded within other comprehensive income before income tax
 
1,065

 
1,874

Income tax provision
 
72

 
667

Other comprehensive income
 
993

 
1,207

Comprehensive income
 
$
3,825

 
$
3,639

 
 See Notes to Condensed Consolidated Financial Statements

3


First Internet Bancorp
Condensed Consolidated Statement of Shareholders’ Equity - Unaudited
Three Months Ended March 31, 2017
(Amounts in thousands except per share data)
 
 
Voting and
Nonvoting
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
Balance, January 1, 2017
 
$
119,506

 
$
43,704

 
$
(9,268
)
 
$
153,942

Net income
 
—

 
2,832

 
—

 
2,832

Other comprehensive income
 
—

 
—

 
993

 
993

Dividends declared ($0.06 per share)
 
—

 
(397
)
 
—

 
(397
)
Recognition of the fair value of share-based compensation
 
285

 
—

 
—

 
285

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
 
(173
)
 
—

 
—

 
(173
)
Balance, March 31, 2017
 
$
119,627

 
$
46,139

 
$
(8,275
)
 
$
157,491

 
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,
 
 
2017
 
2016
Operating Activities
 
 

 
 

Net income
 
$
2,832

 
$
2,432

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

 
 

Depreciation and amortization
 
1,205

 
575

Increase in cash surrender value of bank-owned life insurance
 
(172
)
 
(99
)
Provision for loan losses
 
1,035

 
946

Share-based compensation expense
 
285

 
173

Loans originated for sale
 
(86,166
)
 
(107,984
)
Proceeds from sale of loans
 
102,275

 
116,965

Gain on loans sold
 
(1,837
)
 
(1,600
)
Increase in fair value of loans held-for-sale
 
(373
)
 
(354
)
Loss (gain) on derivatives
 
594

 
(300
)
Net change in accrued income and other assets
 
2,294

 
(1,449
)
Net change in accrued expenses and other liabilities
 
(1,740
)
 
(1,319
)
Net cash provided by operating activities
 
20,232

 
7,986

Investing Activities
 
 
 
 
Net loan activity, excluding purchases
 
(173,702
)
 
(78,894
)
Proceeds from sale of other real estate owned
 
30

 
—

Maturities and calls of securities available-for-sale
 
20,565

 
6,088

Purchase of securities available-for-sale
 
(31,475
)
 
(97,928
)
Purchase of securities held-to-maturity
 
(2,550
)
 
—

Purchase of Federal Home Loan Bank of Indianapolis stock
 
(4,140
)
 
—

Purchase of premises and equipment
 
(184
)
 
(268
)
Loans purchased
 
(8,821
)
 
(8,007
)
Net cash used in investing activities
 
(200,277
)
 
(179,009
)
Financing Activities
 
 
 
 
Net increase in deposits
 
94,252

 
287,124

Cash dividends paid
 
(388
)
 
(267
)
Proceeds from advances from Federal Home Loan Bank
 
192,000

 
40,000

Repayment of advances from Federal Home Loan Bank
 
(92,000
)
 
(80,000
)
Other, net
 
(173
)
 
(42
)
Net cash provided by financing activities
 
193,691

 
246,815

Net Increase in Cash and Cash Equivalents
 
13,646

 
75,792

Cash and Cash Equivalents, Beginning of Period
 
39,452

 
25,152

Cash and Cash Equivalents, End of Period
 
$
53,098

 
$
100,944

Supplemental Disclosures
 
 
 
 
Cash paid during the period for interest
 
$
5,897

 
$
3,561

Cash paid during the period for taxes
 
—

 
1,521

Cash dividends declared, paid in subsequent period
 
390

 
269

Securities purchased during the period, settled in subsequent period
 
2,175

 
8,131


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 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, 2017 are not necessarily indicative of the results expected for the year ending December 31, 2017 or any other period. The March 31, 2017 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, 2016.
 
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 2016 financial statements to conform to the presentation of the 2017 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, 2017 and 2016. 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Basic earnings per share
 
 

 
 

Net income
 
$
2,832

 
$
2,432

Weighted-average common shares
 
6,547,807

 
4,541,728

Basic earnings per common share
 
$
0.43

 
$
0.54

Diluted earnings per share
 
 

 
 

Net income
 
$
2,832

 
$
2,432

Weighted-average common shares
 
6,547,807

 
4,541,728

Dilutive effect of warrants
 
17,940

 
11,293

Dilutive effect of equity compensation
 
36,453

 
22,534

     Weighted-average common and incremental shares
 
6,602,200

 
4,575,555

Diluted earnings per common share
 
$
0.43

 
$
0.53

Number of warrants excluded from the calculation of diluted earnings per share as the exercise prices were greater than the average market price of the Company’s common stock during the period
 
—

 
—

  
Note 3:         Securities
 
The following tables summarize securities available-for-sale and securities held-to-maturity as of March 31, 2017 and December 31, 2016.
 
 
March 31, 2017
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities available-for-sale
 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
113,933

 
$
168

 
$
(814
)
 
$
113,287

Municipal securities
 
97,578

 
82

 
(5,232
)
 
92,428

Mortgage-backed securities
 
235,879

 
39

 
(6,482
)
 
229,436

Asset-backed securities
 
9,873

 
127

 
—

 
10,000

Corporate securities
 
23,107

 
—

 
(1,125
)
 
21,982

Other securities
 
3,000

 
—

 
(68
)
 
2,932

Total available-for-sale
 
$
483,370

 
$
416

 
$
(13,721
)
 
$
470,065

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

 
 

 
 

 
 

Municipal securities
 
$
10,169

 
$
—

 
$
(466
)
 
$
9,703

Corporate securities
 
9,049

 
88

 
(36
)
 
9,101

Total held-to-maturity
 
$
19,218

 
$
88

 
$
(502
)
 
$
18,804



7


 
 
 
December 31, 2016
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities available-for-sale
 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
92,599

 
$
167

 
$
(870
)
 
$
91,896

Municipal securities
 
97,647

 
85

 
(5,846
)
 
91,886

Mortgage-backed securities
 
238,354

 
—

 
(6,713
)
 
231,641

Asset-backed securities
 
19,470

 
65

 
(1
)
 
19,534

Corporate securities
 
20,000

 
—

 
(1,189
)
 
18,811

Other securities
 
3,000

 
—

 
(68
)
 
2,932

Total available-for-sale
 
$
471,070

 
$
317

 
$
(14,687
)
 
$
456,700

 
 
December 31, 2016
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities held-to-maturity
 
 

 
 

 
 

 
 

Municipal securities
 
$
10,171

 
$
—

 
$
(498
)
 
$
9,673

Corporate securities
 
6,500

 
24

 
—

 
6,524

Total held-to-maturity
 
$
16,671

 
$
24

 
$
(498
)
 
$
16,197


The carrying value of securities at March 31, 2017 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
 
$
966

 
$
936

Five to ten years
 
38,782

 
38,038

After ten years
 
194,870

 
188,723

 
 
234,618

 
227,697

Mortgage-backed securities
 
235,879

 
229,436

Asset-backed securities
 
9,873

 
10,000

Other securities
 
3,000

 
2,932

Total
 
$
483,370

 
$
470,065

 
 
Held-to-Maturity
 
 
Amortized
Cost
 
Fair
Value
Five to ten years
 
$
12,448

 
$
12,347

After ten years
 
6,770

 
6,457

Total
 
$
19,218

 
$
18,804


There were no sales of available-for-sale securities that resulted in gross gains or gross losses during the three months ended March 31, 2017 or 2016.
 
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, 2017 and December 31, 2016 was $427.0 million and $422.9 million, which was approximately 87% and 89%, 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.

8


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.

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, 2017.
 
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, 2017.

Other Securities

The unrealized losses on the Company’s investments in other securities were caused by the investment in the Community Reinvestment Act Qualified Fund. Because the Company does not intend to sell the investment and it is not likely that the Company will be required to sell the investment before recovery of its amortized cost basis, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2017.
 
The following tables show the available-for-sale and held-to-maturity securities portfolios’ gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2017 and December 31, 2016. 
 
 
March 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
 
$
83,928

 
$
(786
)
 
$
201

 
$
(28
)
 
$
84,129

 
$
(814
)
Municipal securities
 
86,004

 
(5,232
)
 
—

 
—

 
86,004

 
(5,232
)
Mortgage-backed securities
 
216,465

 
(6,395
)
 
3,229

 
(87
)
 
219,694

 
(6,482
)
Corporate securities
 
3,088

 
(19
)
 
18,894

 
(1,106
)
 
21,982

 
(1,125
)
Other securities
 
2,932

 
(68
)
 
—

 
—

 
2,932

 
(68
)
Total
 
$
392,417

 
$
(12,500
)
 
$
22,324

 
$
(1,221
)
 
$
414,741

 
$
(13,721
)
 
 
March 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
 
$
9,703

 
$
(466
)
 
$
—

 
$
—

 
$
9,703

 
$
(466
)
Corporate securities
 
2,513

 
(36
)
 
—

 
—

 
2,513

 
(36
)
Total
 
$
12,216

 
$
(502
)
 
$
—

 
$
—

 
$
12,216

 
$
(502
)

 

9


 
 
December 31, 2016
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Securities available-for-sale
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
68,625

 
$
(840
)
 
$
260

 
$
(30
)
 
$
68,885

 
$
(870
)
Municipal securities
 
86,424

 
(5,846
)
 
—

 
—

 
86,424

 
(5,846
)
Mortgage-backed securities
 
231,641

 
(6,713
)
 
—

 
—

 
231,641

 
(6,713
)
Asset-backed securities
 
—

 
—

 
4,520

 
(1
)
 
4,520

 
(1
)
Corporate securities
 
—

 
—

 
18,811

 
(1,189
)
 
18,811

 
(1,189
)
Other securities
 
2,932

 
(68
)
 
—

 
—

 
2,932

 
(68
)
Total
 
$
389,622

 
$
(13,467
)
 
$
23,591

 
$
(1,220
)
 
$
413,213

 
$
(14,687
)
 
 
December 31, 2016
 
 
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
 
$
9,673

 
$
(498
)
 
$
—

 
$
—

 
$
9,673

 
$
(498
)
Total
 
$
9,673

 
$
(498
)
 
$
—

 
$
—

 
$
9,673

 
$
(498
)
 
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, 2017
 
December 31, 2016
Commercial loans
 
 

 
 

Commercial and industrial
 
$
97,487

 
$
102,437

Owner-occupied commercial real estate
 
62,887

 
57,668

Investor commercial real estate
 
8,510

 
13,181

Construction
 
49,618

 
53,291

Single tenant lease financing
 
665,382

 
606,568

Public finance
 
77,995

 
—

Total commercial loans
 
961,879

 
833,145

Consumer loans
 
 
 
 
Residential mortgage
 
246,014

 
205,554

Home equity
 
34,925

 
35,036

Other consumer
 
188,191

 
173,449

Total consumer loans
 
469,130

 
414,039

Total commercial and consumer loans
 
1,431,009

 
1,247,184

Deferred loan origination costs and premiums and discounts on purchased loans
 
2,181

 
3,605

Total loans
 
1,433,190

 
1,250,789

Allowance for loan losses
 
(11,894
)
 
(10,981
)
Net loans
 
$
1,421,296

 
$
1,239,808

 

10


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

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

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

Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee. 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.
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.

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

11


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.


12


The following tables present changes in the balance of the ALLL during the three month periods ended March 31, 2017 and 2016. 

 
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

 
 
Three Months Ended March 31, 2016
Allowance for loan losses:
Balance, Beginning of Period
 
Provision (Credit) Charged to Expense
 
Losses
Charged Off
 
Recoveries
 
Balance,
End of Period
Commercial and industrial
$
1,367

 
$
16

 
$
—

 
$
—

 
$
1,383

Owner-occupied commercial real estate
476

 
(1
)
 
—

 
—

 
475

Investor commercial real estate
212

 
(15
)
 
—

 
—

 
197

Construction
500

 
63

 
—

 
—

 
563

Single tenant lease financing
3,931

 
747

 
—

 
—

 
4,678

Residential mortgage
896

 
(50
)
 
—

 
25

 
871

Home equity
125

 
(7
)
 
—

 
2

 
120

Other consumer
844

 
193

 
(149
)
 
45

 
933

Total
$
8,351

 
$
946

 
$
(149
)
 
$
72

 
$
9,220

 
The following tables present the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2017, and December 31, 2016. 
 
Loans
 
Allowance for Loan Losses
March 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
$
95,340

 
$
2,147

 
$
97,487

 
$
1,278

 
$
45

 
$
1,323

Owner-occupied commercial real estate
62,887

 
—

 
62,887

 
635

 
—

 
635

Investor commercial real estate
8,510

 
—

 
8,510

 
101

 
—

 
101

Construction
49,618

 
—

 
49,618

 
462

 
—

 
462

Single tenant lease financing
665,382

 
—

 
665,382

 
6,853

 
—

 
6,853

Public finance
77,995

 
—

 
77,995

 
142

 
—

 
142

Residential mortgage
244,375

 
1,639

 
246,014

 
904

 
—

 
904

Home equity
34,925

 
—

 
34,925

 
101

 
—

 
101

Other consumer
188,071

 
120

 
188,191

 
1,373

 
—

 
1,373

Total
$
1,427,103

 
$
3,906

 
$
1,431,009

 
$
11,849

 
$
45

 
$
11,894


13


 
Loans
 
Allowance for Loan Losses
December 31, 2016
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
$
102,437

 
$
—

 
$
102,437

 
$
1,352

 
$
—

 
$
1,352

Owner-occupied commercial real estate
57,668

 
—

 
57,668

 
582

 
—

 
582

Investor commercial real estate
13,181

 
—

 
13,181

 
168

 
—

 
168

Construction
53,291

 
—

 
53,291

 
544

 
—

 
544

Single tenant lease financing
606,568

 
—

 
606,568

 
6,248

 
—

 
6,248

Residential mortgage
203,842

 
1,712

 
205,554

 
754

 
—

 
754

Home equity
35,036

 
—

 
35,036

 
102

 
—

 
102

Other consumer
173,321

 
128

 
173,449

 
1,231

 
—

 
1,231

Total
$
1,245,344

 
$
1,840

 
$
1,247,184

 
$
10,981

 
$
—

 
$
10,981


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 deserves 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. 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.
 

14


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, 2017 and December 31, 2016. 
 
March 31, 2017
 
Pass
 
Special Mention
 
Substandard
 
Total
Commercial and industrial
$
89,570

 
$
5,321

 
$
2,596

 
$
97,487

Owner-occupied commercial real estate
62,238

 
639

 
10

 
62,887

Investor commercial real estate
8,510

 
—

 
—

 
8,510

Construction
49,618

 
—

 
—

 
49,618

Single tenant lease financing
664,036

 
1,346

 
—

 
665,382

Public finance
77,995

 
—

 
—

 
77,995

Total commercial loans
$
951,967

 
$
7,306

 
$
2,606

 
$
961,879

 
March 31, 2017
 
Performing
 
Nonaccrual
 
Total
Residential mortgage
$
244,805

 
$
1,209

 
$
246,014

Home equity
34,925

 
—

 
34,925

Other consumer
188,136

 
55

 
188,191

Total consumer loans
$
467,866

 
$
1,264

 
$
469,130

 
December 31, 2016
 
Pass
 
Special Mention
 
Substandard
 
Total
Commercial and industrial
$
99,200

 
$
2,746

 
$
491

 
$
102,437

Owner-occupied commercial real estate
57,657

 
—

 
11

 
57,668

Investor commercial real estate
13,181

 
—

 
—

 
13,181

Construction
53,291

 
—

 
—

 
53,291

Single tenant lease financing
605,190

 
1,378

 
—

 
606,568

Total commercial loans
$
828,519

 
$
4,124

 
$
502

 
$
833,145

 
December 31, 2016
 
Performing
 
Nonaccrual
 
Total
Residential mortgage
$
204,530

 
$
1,024

 
$
205,554

Home equity
35,036

 
—

 
35,036

Other consumer
173,390

 
59

 
173,449

Total consumer loans
$
412,956

 
$
1,083

 
$
414,039

  

15


The following tables present the Company’s loan portfolio delinquency analysis as of March 31, 2017 and December 31, 2016. 
 
 
March 31, 2017
 
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days 
or More
Past Due
 
Total 
Past Due
 
Current
 
Total
Commercial and Consumer Loans
 
Non-
accrual
Loans
 
Total Loans
90 Days or
More Past
Due and
Accruing
Commercial and industrial
 
$
134

 
$
110

 
$
—

 
$
244

 
$
97,243

 
$
97,487

 
$
2,147

 
$
—

Owner-occupied commercial real estate
 
—

 
—

 
—

 
—

 
62,887

 
62,887

 
—

 
—

Investor commercial real estate
 
—

 
—

 
—

 
—

 
8,510

 
8,510

 
—

 
—

Construction
 
—

 
—

 
—

 
—

 
49,618

 
49,618

 
—

 
—

Single tenant lease financing
 
—

 
—

 
—

 
—

 
665,382

 
665,382

 
—

 
—

Public finance
 
—

 
—

 
—

 
—

 
77,995

 
77,995

 
—

 
—

Residential mortgage
 
—

 
—

 
1,177

 
1,177

 
244,837

 
246,014

 
1,209

 
—

Home equity
 
—

 
—

 
—

 
—

 
34,925

 
34,925

 
—

 
—

Other consumer
 
167

 
115

 
26

 
308

 
187,883

 
188,191

 
55

 
—

Total
 
$
301

 
$
225

 
$
1,203

 
$
1,729

 
$
1,429,280

 
$
1,431,009

 
$
3,411

 
$
—

 
 
December 31, 2016
 
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days 
or More
Past Due
 
Total 
Past Due
 
Current
 
Total
Commercial and Consumer Loans
 
Non-
accrual
Loans
 
Total Loans
90 Days or
More Past
Due and
Accruing
Commercial and industrial
 
$
27

 
$
—

 
$
—

 
$
27

 
$
102,410

 
$
102,437

 
$
—

 
$
—

Owner-occupied commercial real estate
 
—

 
—

 
—

 
—

 
57,668

 
57,668

 
—

 
—

Investor commercial real estate
 
—

 
—

 
—

 
—

 
13,181

 
13,181

 
—

 
—

Construction
 
—

 
—

 
—

 
—

 
53,291

 
53,291

 
—

 
—

Single tenant lease financing
 
—

 
—

 
—

 
—

 
606,568

 
606,568

 
—

 
—

Residential mortgage
 
—

 
347

 
991

 
1,338

 
204,216

 
205,554

 
1,024

 
—

Home equity
 
—

 
—

 
—

 
—

 
35,036

 
35,036

 
—

 
—

Other consumer
 
173

 
91

 
25

 
289

 
173,160

 
173,449

 
59

 
—

Total
 
$
200

 
$
438

 
$
1,016

 
$
1,654

 
$
1,245,530

 
$
1,247,184

 
$
1,083

 
$
—


Impaired Loans
 
A loan is designated as impaired, in accordance with the impairment accounting guidance, when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.
 
Impaired loans include nonperforming loans as well as loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.
 
ASC Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral, less costs to sell, and allows existing methods for recognizing interest income.
 

16


The following table presents the Company’s impaired loans as of March 31, 2017 and December 31, 2016. 
 
 
March 31, 2017
 
December 31, 2016
 
 
Recorded
Balance
 
Unpaid
Principal
Balance
 
Specific
Allowance
 
Recorded
Balance
 
Unpaid
Principal
Balance
 
Specific
Allowance
Loans without a specific valuation allowance
 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
$
2,037

 
$
2,037

 
$
—

 
$
—

 
$
—

 
$
—

Residential mortgage
 
1,639

 
1,751

 
—

 
1,712

 
1,824

 
—

Other consumer
 
120

 
159

 
—

 
128

 
184

 
—

Total
 
3,796

 
3,947

 
—

 
1,840

 
2,008

 
—

Loans with a specific valuation allowance
 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
110

 
110

 
45

 
—

 
—

 
—

Total
 
110

 
110

 
45

 
—

 
—

 
—

Total impaired loans
 
$
3,906

 
$
4,057

 
$
45

 
$
1,840

 
$
2,008

 
$
—

 
The table below presents average balances and interest income recognized for impaired loans during the three month periods ended March 31, 2017 and March 31, 2016.
 
 
Three Months Ended
 
Three Months Ended
 
 
March 31, 2017
 
March 31, 2016