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Section 1: 10-Q (10-Q)

Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit 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. 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 ¨ 
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 November 2, 2018, the registrant had 10,181,675 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)
 
 
September 30, 2018
 
December 31, 2017
 
 
(Unaudited)
 
 
Assets
 
 

 
 

Cash and due from banks
 
$
3,517

 
$
4,539

Interest-bearing deposits
 
82,273

 
43,442

Total cash and cash equivalents
 
85,790

 
47,981

Securities available-for-sale, at fair value (amortized cost of $491,726 and $481,357 in 2018 and 2017, respectively)
 
468,997

 
473,275

Securities held-to-maturity, at amortized cost (fair value of $19,510 and $19,083 in 2018 and 2017, respectively)
 
20,200

 
19,209

Loans held-for-sale (includes $23,493 and $23,571 at fair value in 2018 and 2017, respectively)
 
23,493

 
51,407

Loans
 
2,493,622

 
2,091,193

Allowance for loan losses
 
(16,704
)
 
(14,970
)
Net loans
 
2,476,918

 
2,076,223

Accrued interest receivable
 
14,472

 
11,944

Federal Home Loan Bank of Indianapolis stock
 
22,050

 
19,575

Cash surrender value of bank-owned life insurance
 
35,819

 
35,105

Premises and equipment, net
 
10,041

 
10,058

Goodwill
 
4,687

 
4,687

Other real estate owned
 
5,041

 
5,041

Accrued income and other assets
 
35,410

 
13,182

Total assets
 
$
3,202,918

 
$
2,767,687

Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Noninterest-bearing deposits
 
$
42,750

 
$
44,686

Interest-bearing deposits
 
2,403,814

 
2,040,255

Total deposits
 
2,446,564

 
2,084,941

Advances from Federal Home Loan Bank
 
425,160

 
410,176

Subordinated debt, net of unamortized discounts and debt issuance costs of $1,163 and $1,274 in 2018 and 2017, respectively
 
33,837

 
36,726

Accrued interest payable
 
887

 
311

Accrued expenses and other liabilities
 
8,730

 
11,406

Total liabilities
 
2,915,178

 
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; 10,181,675 and 8,411,077 shares issued and outstanding in 2018 and 2017, respectively
 
227,454

 
172,043

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

 

Retained earnings
 
74,733

 
57,103

Accumulated other comprehensive loss
 
(14,447
)
 
(5,019
)
Total shareholders’ equity
 
287,740

 
224,127

Total liabilities and shareholders’ equity
 
$
3,202,918

 
$
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
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Interest Income
 
 

 
 

 
 
 
 

Loans
 
$
26,019

 
$
18,922

 
$
71,833

 
$
49,494

Securities – taxable
 
2,659

 
2,582

 
7,703

 
7,515

Securities – non-taxable
 
698

 
697

 
2,109

 
2,090

Other earning assets
 
847

 
493

 
1,973

 
960

Total interest income
 
30,223

 
22,694

 
83,618

 
60,059

Interest Expense
 
 

 
 

 
 
 
 

Deposits
 
11,650

 
6,594

 
29,146

 
16,617

Other borrowed funds
 
2,603

 
1,909

 
7,626

 
4,820

Total interest expense
 
14,253

 
8,503

 
36,772

 
21,437

Net Interest Income
 
15,970

 
14,191

 
46,846

 
38,622

Provision for Loan Losses
 
888

 
1,336

 
2,405

 
3,693

Net Interest Income After Provision for Loan Losses
 
15,082

 
12,855

 
44,441

 
34,929

Noninterest Income
 
 

 
 

 
 
 
 

Service charges and fees
 
236

 
226

 
697

 
657

Mortgage banking activities
 
1,402

 
2,535

 
4,577

 
6,306

Gain on sale of loans
 

 

 
414

 

Other
 
356

 
374

 
1,025

 
1,039

Total noninterest income
 
1,994

 
3,135


6,713

 
8,002

Noninterest Expense
 
 

 
 

 
 
 
 

Salaries and employee benefits
 
5,704

 
5,197

 
17,436

 
15,463

Marketing, advertising and promotion
 
601

 
741

 
1,925

 
1,803

Consulting and professional services
 
709

 
897

 
2,193

 
2,474

Data processing
 
368

 
247

 
913

 
729

Loan expenses
 
241

 
262

 
738

 
724

Premises and equipment
 
1,244

 
1,080

 
3,689

 
3,058

Deposit insurance premium
 
441

 
375

 
1,386

 
990

Other
 
737

 
602

 
2,164

 
1,781

Total noninterest expense
 
10,045

 
9,401


30,444

 
27,022

Income Before Income Taxes
 
7,031

 
6,589

 
20,710

 
15,909

Income Tax Provision
 
743

 
1,694

 
2,386

 
4,181

Net Income
 
$
6,288

 
$
4,895


$
18,324

 
$
11,728

Income Per Share of Common Stock
 
 

 
 

 
 
 
 

Basic
 
$
0.61

 
$
0.72

 
$
1.99

 
$
1.76

Diluted
 
$
0.61

 
$
0.71

 
$
1.98

 
$
1.75

Weighted-Average Number of Common Shares Outstanding
 
 

 
 

 
 
 
 

Basic
 
10,261,967

 
6,834,011

 
9,230,149

 
6,656,160

Diluted
 
10,273,766

 
6,854,614

 
9,250,839

 
6,683,379

Dividends Declared Per Share
 
$
0.06

 
$
0.06

 
$
0.18

 
$
0.18


See Notes to Condensed Consolidated Financial Statements

2



First Internet Bancorp
Condensed Consolidated Statements of Comprehensive Income – Unaudited
(Amounts in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
6,288

 
$
4,895

 
$
18,324

 
$
11,728

Other comprehensive income
 
 
 
 
 
 
 
 
Net unrealized holding (losses) gains on securities available-for-sale recorded within other comprehensive income before income tax
 
(3,063
)
 
1,231

 
(12,301
)
 
6,287

Reclassification adjustment for losses realized
 

 
8

 

 
8

Net unrealized holding gains on cash flow hedging derivatives recorded within other comprehensive income tax
 
1,366

 

 
408

 

Other comprehensive (loss) income before income tax
 
(1,697
)
 
1,239

 
(11,893
)
 
6,295

Income tax (benefit) provision
 
(1,328
)
 
483

 
(3,528
)
 
2,062

Other comprehensive (loss) income
 
(369
)
 
756

 
(8,365
)
 
4,233

Comprehensive income
 
$
5,919

 
$
5,651

 
$
9,959

 
$
15,961

 
 See Notes to Condensed Consolidated Financial Statements

3



First Internet Bancorp
Condensed Consolidated Statement of Shareholders’ Equity - Unaudited
Nine Months Ended September 30, 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
 

 
18,324

 

 
18,324

Other comprehensive loss
 

 

 
(8,365
)
 
(8,365
)
Dividends declared ($0.18 per share)
 

 
(1,757
)
 

 
(1,757
)
Net cash proceeds from common stock issuance
 
54,334

 

 

 
54,334

Recognition of the fair value of share-based compensation
 
1,257

 

 

 
1,257

Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units
 
30

 

 

 
30

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

 

 
(210
)
Balance, September 30, 2018
 
$
227,454

 
$
74,733

 
$
(14,447
)
 
$
287,740


(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)
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Operating Activities
 
 

 
 

Net income
 
$
18,324

 
$
11,728

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

 
 

Depreciation and amortization
 
4,262

 
3,876

Increase in cash surrender value of bank-owned life insurance
 
(714
)
 
(661
)
Provision for loan losses
 
2,405

 
3,693

Share-based compensation expense
 
1,257

 
787

Loss (gain) from sale of available-for-sale securities
 

 
8

Loans originated for sale
 
(282,527
)
 
(302,887
)
Proceeds from sale of loans
 
287,556

 
317,170

Gain on loans sold
 
(5,201
)
 
(5,876
)
Gain on sale of other real estate owned
 
(105
)
 

Decrease (increase) in fair value of loans held-for-sale
 
250

 
(519
)
(Gain) loss on derivatives
 
(100
)
 
89

Net change in accrued income and other assets
 
(149
)
 
(2,310
)
Net change in accrued expenses and other liabilities
 
(1,924
)
 
1,530

Net cash provided by operating activities
 
23,334

 
26,628

Investing Activities
 
 
 
 
Net loan activity, excluding purchases
 
(274,507
)
 
(629,541
)
Proceeds from sale of other real estate owned
 
332

 
30

Net change in interest-bearing time deposits
 

 
250

Maturities and calls of securities available-for-sale
 
48,938

 
50,165

Proceeds from sale of securities available-for-sale
 

 
9,192

Purchase of securities available-for-sale
 
(65,289
)
 
(90,306
)
Purchase of securities held-to-maturity
 
(1,000
)
 
(2,550
)
Purchase of Federal Home Loan Bank of Indianapolis stock
 
(2,475
)
 
(10,665
)
Purchase of bank-owned life insurance
 

 
(10,000
)
Purchase of premises and equipment
 
(1,161
)
 
(821
)
Loans purchased
 
(132,041
)
 
(42,345
)
Net proceeds from sale of portfolio loans
 
25,717

 
26,679

Other investing activities
 
(10,166
)
 

Net cash used in investing activities
 
(411,652
)
 
(699,912
)
Financing Activities
 
 
 
 
Net increase in deposits
 
361,623

 
534,161

Cash dividends paid
 
(1,620
)
 
(1,283
)
Repayment of subordinated debt
 
(3,000
)
 

Proceeds from advances from Federal Home Loan Bank
 
225,000

 
447,000

Repayment of advances from Federal Home Loan Bank
 
(210,000
)
 
(271,805
)
Net proceeds from common stock issuance
 
54,334

 
51,636

Other, net
 
(210
)
 
(173
)
Net cash provided by financing activities
 
426,127

 
759,536

Net Increase in Cash and Cash Equivalents
 
37,809

 
86,252

Cash and Cash Equivalents, Beginning of Period
 
47,981

 
39,452

Cash and Cash Equivalents, End of Period
 
$
85,790

 
$
125,704

Supplemental Disclosures
 
 
 
 
Cash paid during the period for interest
 
$
36,196

 
$
21,312

Cash paid during the period for taxes
 
360

 
2,922

Loans transferred to other real estate owned
 
227

 
648

Cash dividends declared, paid in subsequent period
 
611

 
504

Securities purchased during the period, settled in subsequent period
 

 
1,158

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 and nine months ended September 30, 2018 are not necessarily indicative of the results expected for the year ending December 31, 2018 or any other period. The September 30, 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 three wholly-owned subsidiaries, First Internet Public Finance Corp., JKH Realty Services, LLC and SPF15, Inc. 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 and nine months ended September 30, 2018 and 2017
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Basic earnings per share
 
 

 
 

 
 
 
 
Net income
 
$
6,288

 
$
4,895

 
$
18,324

 
$
11,728

Weighted-average common shares
 
10,261,967

 
6,834,011

 
9,230,149

 
6,656,160

Basic earnings per common share
 
$
0.61

 
$
0.72

 
$
1.99

 
$
1.76

Diluted earnings per share
 
 

 
 

 
 

 
 

Net income
 
$
6,288

 
$
4,895

 
$
18,324

 
$
11,728

Weighted-average common shares
 
10,261,967

 
6,834,011

 
9,230,149

 
6,656,160

Dilutive effect of warrants
 

 


 

 
8,094

Dilutive effect of equity compensation
 
11,799

 
20,603

 
20,690

 
19,125

     Weighted-average common and incremental shares
 
10,273,766

 
6,854,614

 
9,250,839

 
6,683,379

Diluted earnings per common share
 
$
0.61

 
$
0.71

 
$
1.98

 
$
1.75

  
Note 3:         Securities
 
The following tables summarize securities available-for-sale and securities held-to-maturity as of September 30, 2018 and December 31, 2017.
 
 
September 30, 2018
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities available-for-sale
 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
115,176

 
$
20

 
$
(2,436
)
 
$
112,760

Municipal securities
 
97,160

 
39

 
(6,119
)
 
91,080

Mortgage-backed securities
 
237,703

 
33

 
(12,044
)
 
225,692

Asset-backed securities
 
5,003

 

 
(43
)
 
4,960

Corporate securities
 
36,684

 
41

 
(2,220
)
 
34,505

Total available-for-sale
 
$
491,726

 
$
133

 
$
(22,862
)
 
$
468,997

 
 
September 30, 2018
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities held-to-maturity
 
 

 
 

 
 

 
 

Municipal securities
 
$
10,159

 
$

 
$
(640
)
 
$
9,519

Corporate securities
 
10,041

 
24

 
(74
)
 
9,991

Total held-to-maturity
 
$
20,200

 
$
24

 
$
(714
)
 
$
19,510


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 September 30, 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
 
$
425

 
$
403

Five to ten years
 
63,004

 
61,057

After ten years
 
185,591

 
176,885

 
 
249,020

 
238,345

Mortgage-backed securities
 
237,703

 
225,692

Asset-backed securities
 
5,003

 
4,960

Total
 
$
491,726

 
$
468,997

 
 
Held-to-Maturity
 
 
Amortized
Cost
 
Fair
Value
Five to ten years
 
$
14,286

 
$
13,956

After ten years
 
5,914

 
5,554

Total
 
$
20,200

 
$
19,510


There were no gross gains or losses resulting from sales of available-for-sale securities during the three and nine months ended September 30, 2018 and gross losses of $0.0 million for the three and nine months ended September 30, 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 September 30, 2018 and December 31, 2017 was $466.6 million and $354.6 million, which was approximately 96% 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 upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 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 upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2018.

 
 
September 30, 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
 
$
75,589

 
$
(1,019
)
 
$
31,049

 
$
(1,417
)
 
$
106,638

 
$
(2,436
)
Municipal securities
 
30,647

 
(1,292
)
 
56,008

 
(4,827
)
 
86,655

 
(6,119
)
Mortgage-backed securities
 
55,063

 
(1,061
)
 
167,901

 
(10,983
)
 
222,964

 
(12,044
)
Asset-backed securities
 
4,960

 
(43
)
 

 

 
4,960

 
(43
)
Corporate securities
 
9,548

 
(33
)
 
19,813

 
(2,187
)
 
29,361

 
(2,220
)
Total
 
$
175,807

 
$
(3,448
)
 
$
274,771

 
$
(19,414
)
 
$
450,578

 
$
(22,862
)
 
 
September 30, 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
 
$
9,519

 
$
(640
)
 
$

 
$

 
$
9,519

 
$
(640
)
Corporate securities
 
6,467

 
(74
)
 

 

 
6,467

 
(74
)
Total
 
$
15,986

 
$
(714
)
 
$

 
$

 
$
15,986

 
$
(714
)

 
 
 
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 and nine months ended September 30, 2018. Amounts reclassified from accumulated other comprehensive loss and the affected line items in the condensed consolidated statements of income during the three and nine months ended September 30, 2017 were as follows:

Details About Accumulated Other Comprehensive Loss Components
 
Amounts Reclassified from
Accumulated Other Comprehensive Loss for the
 
Affected Line Item in the
Statements of Income
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
Realized gains and losses on securities available-for-sale
 
 

 
 

 
 
Loss realized in earnings
 
$
(8
)
 
$
(8
)
 
Other
Total reclassified amount before tax
 
(8
)
 
(8
)
 
Income Before Income Taxes
Tax benefit
 
(3
)
 
(3
)
 
Income Tax Provision
Total reclassifications out of accumulated other comprehensive loss
 
$
(5
)
 
$
(5
)
 
Net Income


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

10



Categories of loans include:
 
 
September 30, 2018
 
December 31, 2017
Commercial loans
 
 

 
 

Commercial and industrial
 
$
105,489

 
$
122,940

Owner-occupied commercial real estate
 
93,568

 
75,768

Investor commercial real estate
 
5,595

 
7,273

Construction
 
38,228

 
49,213

Single tenant lease financing
 
883,372

 
803,299

Public finance
 
610,858

 
438,341

Healthcare finance
 
89,525

 
31,573

Total commercial loans
 
1,826,635

 
1,528,407

Consumer loans
 
 
 
 
Residential mortgage
 
362,574

 
299,935

Home equity
 
28,713

 
30,554

Other consumer
 
270,567

 
227,533

Total consumer loans
 
661,854

 
558,022

Total commercial and consumer loans
 
2,488,489

 
2,086,429

Deferred loan origination costs and premiums and discounts on purchased loans
 
5,133

 
4,764

Total loans
 
2,493,622

 
2,091,193

Allowance for loan losses
 
(16,704
)
 
(14,970
)
Net loans
 
$
2,476,918

 
$
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.

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.


11



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 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. The sources of repayment for these loans 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.
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.

12



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 and nine months ended September 30, 2018 and 2017

 
Three Months Ended September 30, 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
$
1,364

 
$
(51
)
 
$
(6
)
 
$

 
$
1,307

Owner-occupied commercial real estate
889

 
69

 

 

 
958

Investor commercial real estate
67

 
(5
)
 

 

 
62

Construction
295

 
(54
)
 

 

 
241

Single tenant lease financing
8,294

 
186

 

 

 
8,480

Public finance
1,372

 
82

 

 

 
1,454

Healthcare finance
676

 
249

 

 

 
925

Residential mortgage
909

 
68

 

 
1

 
978

Home equity
54

 
(5
)
 

 
5

 
54

Other consumer
2,133

 
349

 
(330
)
 
93

 
2,245

Total
$
16,053

 
$
888

 
$
(336
)
 
$
99

 
$
16,704



 
Nine Months Ended September 30, 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

 
$
(428
)
 
$
(6
)
 
$
3

 
$
1,307

Owner-occupied commercial real estate
803

 
155

 

 

 
958

Investor commercial real estate
85

 
(23
)
 

 

 
62

Construction
423

 
(182
)
 

 

 
241

Single tenant lease financing
7,872

 
608

 

 

 
8,480

Public finance
959

 
495

 

 

 
1,454

Healthcare finance
313

 
612

 

 

 
925

Residential mortgage
956

 
27

 
(9
)
 
4

 
978

Home equity
70

 
(28
)
 

 
12

 
54

Other consumer
1,751

 
1,169

 
(881
)
 
206

 
2,245

Total
$
14,970

 
$
2,405

 
$
(896
)
 
$
225

 
$
16,704



14



 
Three Months Ended September 30, 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
$
1,525

 
$
361

 
$
(205
)
 
$

 
$
1,681

Owner-occupied commercial real estate
716

 
89

 

 

 
805

Investor commercial real estate
109

 
(22
)
 

 

 
87

Construction
395

 
38

 

 

 
433

Single tenant lease financing
7,403

 
281

 

 

 
7,684

Public finance
362

 
201

 

 

 
563

Healthcare finance
28

 
95

 

 

 
123

Residential mortgage
991

 
81

 
(116
)
 
2

 
958

Home equity
80

 
(6
)
 

 
1

 
75

Other consumer
1,585

 
218

 
(211
)
 
86

 
1,678

Total
$
13,194

 
$
1,336

 
$
(532
)
 
$
89

 
$
14,087



 
Nine Months Ended September 30, 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

 
$
465

 
$
(205
)
 
$
69

 
$
1,681

Owner-occupied commercial real estate
582

 
223

 

 

 
805

Investor commercial real estate
168

 
(81
)
 

 

 
87

Construction
544

 
(111
)
 

 

 
433

Single tenant lease financing
6,248

 
1,436

 

 

 
7,684

Public finance

 
563

 

 

 
563

Healthcare finance

 
123

 

 

 
123

Residential mortgage
754

 
316

 
(116
)
 
4

 
958

Home equity
102

 
(48
)
 

 
21

 
75

Other consumer
1,231

 
807

 
(604
)
 
244

 
1,678

Total
$
10,981

 
$
3,693

 
$
(925
)
 
$
338

 
$
14,087



15



The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2018 and December 31, 2017
 
Loans
 
Allowance for Loan Losses
September 30, 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
$
97,540

 
$
7,949

 
$
105,489

 
$
1,307

 
$

 
$
1,307

Owner-occupied commercial real estate
92,089

 
1,479

 
93,568

 
958

 

 
958

Investor commercial real estate
5,595

 

 
5,595

 
62

 

 
62

Construction
38,228

 

 
38,228

 
241

 

 
241

Single tenant lease financing
883,372

 

 
883,372

 
8,480

 

 
8,480

Public finance
610,858

 

 
610,858

 
1,454

 

 
1,454

Healthcare finance
89,525

 

 
89,525

 
925

 

 
925

Residential mortgage
361,995

 
579

 
362,574

 
978

 

 
978

Home equity
28,713

 

 
28,713

 
54

 

 
54

Other consumer
270,456

 
111

 
270,567

 
2,245

 

 
2,245

Total
$
2,478,371

 
$
10,118

 
$
2,488,489

 
$
16,704

 
$

 
$
16,704

 
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



16



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. 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.

17




The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of September 30, 2018 and December 31, 2017
 
September 30, 2018
 
Pass
 
Special Mention
 
Substandard
 
Total
Commercial and industrial
$
95,573

 
$
1,967

 
$
7,949

 
$
105,489

Owner-occupied commercial real estate
90,571

 
1,518