10-Q 1 inbk-20150331x10q.htm 10-Q INBK-2015.03.31-10Q


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 March 31, 2015
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.)
 
 
 
8888 Keystone Crossing, Suite 1700
Indianapolis, Indiana
 
46240
(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 or a smaller reporting 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 ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes ¨ No þ
 
As of May 4, 2015, the registrant had 4,484,513 shares of common stock issued and outstanding.




Cautionary Note Regarding Forward-Looking Statements
  
This Quarterly Report on Form 10-Q may contain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance, or business of First Internet Bancorp (“we,” “our,” “us” or the “Company”). Forward-looking statements are generally identifiable by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “should,” “will,” “would,” or other similar expressions. Forward-looking statements are not a guarantee of future performance or results, are based on information available at the time the statements are made, and involve known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the information in the forward-looking statements. Factors that may cause such differences include: failures of or interruptions in the communications and information systems on which we rely to conduct our business; our plans to grow our commercial real estate and commercial and industrial loan portfolios; competition with national, regional, and community financial institutions; the loss of any key members of senior management; fluctuations in interest rates; general economic conditions and risks relating to the regulation of financial institutions. 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 Securities and Exchange Commission (“SEC”). All statements in this Quarterly Report on Form 10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

(i)



PART I

ITEM 1.
FINANCIAL STATEMENTS 

First Internet Bancorp
Condensed Consolidated Balance Sheets
(Amounts in thousands except share data)
 
 
March 31,
2015
 
December 31,
2014
 
 
(Unaudited)
 
 
Assets
 
 

 
 

Cash and due from banks
 
$
1,472

 
$
1,940

Interest-bearing demand deposits
 
38,100

 
26,349

Total cash and cash equivalents
 
39,572

 
28,289

Interest-bearing time deposits
 
2,000

 
2,000

Securities available-for-sale, at fair value (amortized cost of $163,067 and $137,727, respectively)
 
163,676

 
137,518

Loans held-for-sale (includes $26,771 and $32,618 at fair value, respectively)
 
27,584

 
34,671

Loans receivable
 
767,682

 
732,426

Allowance for loan losses
 
(6,378
)
 
(5,800
)
Net loans receivable
 
761,304

 
726,626

Accrued interest receivable
 
3,040

 
2,833

Federal Home Loan Bank of Indianapolis stock
 
5,350

 
5,350

Cash surrender value of bank-owned life insurance
 
12,423

 
12,325

Premises and equipment, net
 
7,040

 
7,061

Goodwill
 
4,687

 
4,687

Other real estate owned
 
4,488

 
4,488

Accrued income and other assets
 
4,513

 
4,655

Total assets
 
$
1,035,677

 
$
970,503

Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Noninterest-bearing deposits
 
$
19,178

 
$
21,790

Interest-bearing deposits
 
801,991

 
736,808

Total deposits
 
821,169

 
758,598

Advances from Federal Home Loan Bank
 
106,921

 
106,897

Subordinated debt
 
2,894

 
2,873

Accrued interest payable
 
104

 
97

Accrued expenses and other liabilities
 
5,227

 
5,253

Total liabilities
 
936,315

 
873,718

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; 4,484,513 and 4,439,575 shares issued and outstanding, respectively
 
72,032

 
71,774

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

 

Retained earnings
 
26,938

 
25,146

Accumulated other comprehensive income (loss)
 
392

 
(135
)
Total shareholders’ equity
 
99,362

 
96,785

Total liabilities and shareholders’ equity
 
$
1,035,677

 
$
970,503

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,
 
 
2015
 
2014
Interest Income
 
 

 
 

Loans
 
$
8,390

 
$
6,129

Securities – taxable
 
722

 
750

Securities – non-taxable
 

 
58

Other earning assets
 
75

 
96

Total interest income
 
9,187

 
7,033

Interest Expense
 
 

 
 

Deposits
 
1,953

 
1,860

Other borrowed funds
 
460

 
307

Total interest expense
 
2,413

 
2,167

Net Interest Income
 
6,774

 
4,866

Provision for Loan Losses
 
442

 
147

Net Interest Income After Provision for Loan Losses
 
6,332

 
4,719

Noninterest Income
 
 

 
 

Service charges and fees
 
176

 
167

Mortgage banking activities
 
2,886

 
900

Gain on sale of securities
 

 
359

Loss on asset disposals
 
(14
)
 
(13
)
Other
 
100

 
98

Total noninterest income
 
3,148

 
1,511

Noninterest Expense
 
 

 
 

Salaries and employee benefits
 
3,578

 
3,007

Marketing, advertising, and promotion
 
452

 
380

Consulting and professional services
 
592

 
433

Data processing
 
248

 
234

Loan expenses
 
181

 
114

Premises and equipment
 
642

 
701

Deposit insurance premium
 
150

 
144

Other
 
414

 
425

Total noninterest expense
 
6,257

 
5,438

Income Before Income Taxes
 
3,223

 
792

Income Tax Provision
 
1,160

 
192

Net Income
 
$
2,063


$
600

Income Per Share of Common Stock
 
 

 
 

Basic
 
$
0.46

 
$
0.13

Diluted
 
$
0.46

 
$
0.13

Weighted-Average Number of Common Shares Outstanding
 
 

 
 

Basic
 
4,516,776

 
4,494,670

Diluted
 
4,523,246

 
4,501,705

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
(Dollar amounts in thousands)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net income
 
$
2,063

 
$
600

Other comprehensive income
 
 
 
 
Net unrealized holding gains on securities available-for-sale
 
818

 
925

Reclassification adjustment for gains realized
 

 
(359
)
Net unrealized holding gains on securities available-for-sale for which an other-than-temporary impairment has been recognized in income
 

 
63

Other comprehensive income before income tax
 
818

 
629

Income tax provision
 
291

 
224

Other comprehensive income
 
527

 
405

Comprehensive income
 
$
2,590

 
$
1,005

 
 See Notes to Condensed Consolidated Financial Statements

3



First Internet Bancorp
Condensed Consolidated Statements of Shareholders’ Equity - Unaudited
Three Months Ended March 31, 2015
(Dollar amounts in thousands except per share data)
 
 
Voting and
Nonvoting
Common
Stock
 
Accumulated
Other
Comprehensive
 Income (Loss)
 
Retained
Earnings
 
Total
Shareholders’
Equity
Balance, January 1, 2015
 
$
71,774

 
$
(135
)
 
$
25,146

 
$
96,785

Net income
 

 

 
2,063

 
2,063

Other comprehensive income
 

 
527

 

 
527

Dividends declared ($0.06 per share)
 

 

 
(271
)
 
(271
)
Recognition of the fair value of share-based compensation
 
282

 

 

 
282

Deferred stock rights issued in lieu of cash dividends payable on outstanding deferred stock rights
 
5

 

 

 
5

Excess tax benefit on shared-based compensation
 
9

 

 

 
9

Common stock redeemed for the net settlement of share-based awards
 
(38
)
 

 

 
(38
)
Balance, March 31, 2015
 
$
72,032

 
$
392

 
$
26,938

 
$
99,362

 
See Notes to Condensed Consolidated Financial Statements

4



First Internet Bancorp
Condensed Consolidated Statements of Cash Flows – Unaudited
(Dollar amounts in thousands)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Operating Activities
 
 

 
 

Net income
 
$
2,063

 
$
600

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

 
 

Depreciation and amortization
 
456

 
458

Increase in cash surrender value of bank-owned life insurance
 
(98
)
 
(96
)
Provision for loan losses
 
442

 
147

Share-based compensation expense
 
282

 
125

Gain from sale of available-for-sale securities
 

 
(359
)
Loans originated for sale
 
(134,159
)
 
(76,952
)
Proceeds from sale of loans
 
143,737

 
89,293

Gain on loans sold
 
(2,314
)
 
(807
)
Increase in fair value of loans held-for-sale
 
(177
)
 
(197
)
(Gain) loss on derivatives
 
(395
)
 
104

Net change in:
 
 
 
 
Accrued income and other assets
 
128

 
820

Accrued expenses and other liabilities
 
(17
)
 
438

Net cash provided by operating activities
 
9,948

 
13,574

Investing Activities
 
 
 
 
Net change in loans
 
(35,120
)
 
(31,281
)
Maturities of securities available-for-sale
 
5,092

 
3,196

Proceeds from sale of securities available-for-sale
 

 
46,373

Purchase of securities available-for-sale
 
(30,598
)
 
(72,231
)
Purchase of premises and equipment
 
(316
)
 
(24
)
Net cash used in investing activities
 
(60,942
)
 
(53,967
)
Financing Activities
 
 
 
 
Net increase in deposits
 
62,571

 
54,557

Cash dividends paid
 
(265
)
 
(264
)
Proceeds from advances from Federal Home Loan Bank
 
90,000

 

Repayment of advances from Federal Home Loan Bank
 
(90,000
)
 
(10,000
)
Other, net
 
(29
)
 
(130
)
Net cash provided by financing activities
 
62,277

 
44,163

Net Increase in Cash and Cash Equivalents
 
11,283

 
3,770

Cash and Cash Equivalents, Beginning of Period
 
28,289

 
53,690

Cash and Cash Equivalents, End of Period
 
$
39,572

 
$
57,460

Supplemental Disclosures of Cash Flows Information
 
 
 
 
Cash paid during the period for interest
 
$
2,406

 
$
2,186

Cash dividends declared, not paid
 
268

 
264

See Notes to Condensed Consolidated Financial Statements

5



First Internet Bancorp
Notes to Condensed Consolidated Financial Statements – Unaudited
(Dollar amounts in thousands except 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 U.S. 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, 2015 are not necessarily indicative of the results expected for the year ending December 31, 2015 or any other period. The March 31, 2015 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, 2014.
 
The preparation of the condensed consolidated financial statements in conformity with U.S. 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 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.

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 wholly-owned subsidiary, JKH Realty Services, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Certain reclassifications have been made to the 2014 financial statements to conform to the 2015 financial statement presentation. 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, 2015 and 2014
 
 
Three Months Ended
March 31,
 
 
2015
 
2014
Basic earnings per share
 
 

 
 

Net income available to common shareholders
 
$
2,063

 
$
600

Weighted-average common shares
 
4,516,776

 
4,494,670

Basic earnings per common share
 
$
0.46

 
$
0.13

Diluted earnings per share
 
 

 
 

Net income applicable to diluted earnings per share
 
$
2,063

 
$
600

Weighted-average common shares
 
4,516,776

 
4,494,670

Dilutive effect of warrants
 

 
6,852

Dilutive effect of equity compensation
 
6,470

 
183

     Weighted-average common and incremental shares
 
4,523,246

 
4,501,705

Diluted earnings per common share
 
$
0.46

 
$
0.13

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
 
48,750

 

  

Note 3:         Securities
 
Securities at March 31, 2015 and December 31, 2014 are as follows: 
 
 
March 31, 2015
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities available-for-sale
 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
28,238

 
$
130

 
$
(305
)
 
$
28,063

Mortgage-backed securities
 
112,401

 
966

 
(235
)
 
113,132

Asset-backed securities
 
19,428

 
29

 

 
19,457

Other securities
 
3,000

 
24

 

 
3,024

Total available-for-sale
 
$
163,067

 
$
1,149

 
$
(540
)
 
$
163,676

 
 
 
December 31, 2014
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities available-for-sale
 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
13,680

 
$
129

 
$
(257
)
 
$
13,552

Mortgage-backed securities
 
117,134

 
282

 
(368
)
 
117,048

Asset-backed securities
 
4,913

 

 
(1
)
 
4,912

Other securities
 
2,000

 
6

 

 
2,006

Total available-for-sale
 
$
137,727

 
$
417

 
$
(626
)
 
$
137,518

 

7



The carrying value of securities at March 31, 2015 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
Available-for-Sale
 
 
Amortized
Cost
 
Fair
Value
Within one year
 
$

 
$

One to five years
 

 

Five to ten years
 
10,739

 
10,630

After ten years
 
17,499

 
17,433

 
 
28,238

 
28,063

Mortgage-backed securities
 
112,401

 
113,132

Asset-backed securities
 
19,428

 
19,457

Other securities
 
3,000

 
3,024

Totals
 
$
163,067

 
$
163,676

 
Gross gains of $0 and $1.4 million, and gross losses of $0 and $1.0 million resulting from sales of available-for-sale securities were realized for the three months ended March 31, 2015 and 2014, respectively.
 
Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2015 and December 31, 2014 was $49.7 million and $86.9 million, which is approximately 30% and 63%, respectively, of the Company’s available-for-sale investment portfolio. These declines primarily resulted from fluctuations in market interest rates after purchase.
 
Except as discussed below, 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 and the resulting loss recognized in net income in the period in which the other-than-temporary impairment (“OTTI”) is identified.
 
The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2015 and December 31, 2014
 
 
March 31, 2015
 
 
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
 
$
15,621

 
$
(109
)
 
$
8,582

 
$
(196
)
 
$
24,203

 
$
(305
)
Mortgage-backed securities
 
4,772

 
(7
)
 
20,719

 
(228
)
 
25,491

 
(235
)
 
 
$
20,393

 
$
(116
)
 
$
29,301

 
$
(424
)
 
$
49,694

 
$
(540
)
  
 
 
December 31, 2014
 
 
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
 
$
801

 
$
(10
)
 
$
8,719

 
$
(247
)
 
$
9,520

 
$
(257
)
Mortgage-backed securities
 
51,204

 
(57
)
 
21,237

 
(311
)
 
72,441

 
(368
)
Asset-backed securities
 
4,912

 
(1
)
 

 

 
4,912

 
(1
)
 
 
$
56,917

 
$
(68
)
 
$
29,956

 
$
(558
)
 
$
86,873

 
$
(626
)

8



U. S. Government-Sponsored Agencies

The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies 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, 2015.
 
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, 2015.

For identified mortgage-backed securities in the investment portfolio, an extensive, quarterly review is conducted to determine if an other-than-temporary impairment has occurred. Various inputs to the economic models are used to determine if an unrealized loss is other-than-temporary. The most significant inputs are voluntary prepayment rates, default rates, liquidation rates, and loss severity.
 
To determine if the unrealized loss for mortgage-backed securities is other-than-temporary, the Company projects total estimated defaults of the underlying assets (mortgages) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also evaluates the current credit enhancement underlying the security to determine the impact on cash flows. If the Company determines that a given mortgage-backed security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.
 
Credit Losses Recognized on Investments
 
Certain debt securities have experienced fair value deterioration due to credit losses and other market factors, but are not considered other-than-temporarily impaired.
 
The following tables provide information about debt securities for which only a credit loss was recognized in income and other losses are recorded in accumulated other comprehensive loss. The Company did not own any OTTI securities during the three months ended March 31, 2015.  
 
Accumulated Credit Losses
Credit losses on debt securities held
 

January 1, 2014
$
1,183

Realized losses related to OTTI
(33
)
March 31, 2014
$
1,150


There were no amounts reclassified from accumulated other comprehensive income during the three months ended March 31, 2015. Amounts reclassified from accumulated other comprehensive loss and the affected line items in the condensed consolidated statements of income during the three months ended March 31, 2014, were as follows:
Details About Accumulated Other Comprehensive Loss Components
 
Amounts Reclassified from Accumulated Other
Comprehensive Loss for the
Three Months Ended March 31, 2014
 
Affected Line Item in the
Statements of Income
Unrealized gains and losses on securities available for sale
 
 

 
 
Gain realized in earnings
 
$
359

 
Gain on sale of securities
Total reclassified amount before tax
 
359

 
Income Before Income Taxes
Tax expense
 
126

 
Income Tax Provision
Total reclassifications out of accumulated other comprehensive loss
 
$
233

 
Net Income

9



Note 4:        Loans Receivable
 
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,
2015
 
December 31,
2014
Commercial loans
 
 

 
 

Commercial and industrial
 
$
83,849

 
$
77,232

Owner-occupied commercial real estate
 
38,536

 
34,295

Investor commercial real estate
 
18,491

 
22,069

Construction
 
26,847

 
24,883

Single tenant lease financing
 
227,229

 
192,608

Total commercial loans
 
394,952

 
351,087

Consumer loans
 
 
 
 
Residential mortgage
 
215,910

 
220,612

Home equity
 
54,838

 
58,434

Other consumer
 
97,192

 
97,094

Total consumer loans
 
367,940

 
376,140

 
 
 
 
 
Total loans
 
762,892

 
727,227

Deferred loan origination costs and premiums and discounts on purchased loans
 
4,790

 
5,199

Allowance for loan losses
 
(6,378
)
 
(5,800
)
Net loans receivable
 
$
761,304

 
$
726,626

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

Commercial and Industrial: Commercial and industrial loans' source 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 is diverse in terms of property type and geographic location and often times are secured by recreational facilities, retail establishments and office buildings.

Investor Commercial Real Estate: These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. These loans may also incorporate a personal guarantee. This portfolio typically 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 or in the general economy. The properties securing the Company’s investor commercial real estate portfolio are diverse in terms of property type and geographic location. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, and other risk grade criteria. As a general rule, the Company avoids financing special use projects or properties outside of its designated market areas (Central Indiana and Phoenix, Arizona, as well as markets adjacent to these area) unless other underwriting factors are present to help mitigate risk.


10



Construction: Construction loans are secured by real estate made to finance land development in preparation to erecting new structures or the on-site construction of industrial, commercial or residential. These loans are typically made for vacant land, as well as the acquisition and improvement of developed and undeveloped property. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value.
Single Tenant Lease Financing: These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Unlike the owner-occupied and investor commercial real estate loan portfolios, these loans are financed for properties supporting the operations and activities of an individual business with strong creditworthiness and are typically nationally branded. Similar to the other loan portfolios, management monitors and evaluates these loans based on property financial performance, collateral value, and other risk grade criteria.

Residential Mortgage: With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally 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 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.
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 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 ensure that an adequate allowance for loan losses (“ALLL”) is maintained. The portfolio is segmented by loan type.  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 cost 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.
 
Provision for Loan Losses
 
A provision for estimated losses on loans is charged to operations based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full collectability may not be reasonably assured considers, among other factors, the estimated net realizable value of the underlying collateral, 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

11



evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations.
 
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.
 
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.

The following tables present changes in the balance of the ALLL during the three month periods ended March 31, 2015 and 2014
 
 
Three Months Ended March 31, 2015
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
920

 
$
345

 
$
261

 
$
330

 
$
2,061

 
$
985

 
$
207

 
$
691

 
$
5,800

Provision (credit) charged to expense
 
90

 
46

 
(43
)
 
29

 
391

 
(194
)
 
(4
)
 
127

 
442

Losses charged off
 

 

 

 

 

 
(71
)
 

 
(157
)
 
(228
)
Recoveries
 

 

 

 

 

 
268

 

 
96

 
364

Balance, end of period
 
$
1,010

 
$
391

 
$
218

 
$
359

 
$
2,452

 
$
988

 
$
203

 
$
757

 
$
6,378


 
 
Three Months Ended March 31, 2014
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
819

 
$
290

 
$
219

 
$
277

 
$
1,731

 
$
1,008

 
$
211

 
$
871

 
$
5,426

Provision (credit) charged to expense
 
52

 
15

 
12

 
15

 
137

 
(40
)
 
(26
)
 
(18
)
 
147

Losses charged off
 

 

 

 

 

 
(122
)
 

 
(169
)
 
(291
)
Recoveries
 

 

 

 

 

 
13

 

 
93

 
106

Balance, end of period
 
$
871

 
$
305

 
$
231

 
$
292

 
$
1,868

 
$
859

 
$
185

 
$
777

 
$
5,388




12



The following tables present the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2015, and December 31, 2014: 
 
 
March 31, 2015
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Ending balance: collectively evaluated for impairment
 
$
83,849

 
$
38,536

 
$
18,408

 
$
26,847

 
$
227,229

 
$
214,852

 
$
54,838

 
$
97,041

 
$
761,600

Ending balance:   individually evaluated for impairment
 

 

 
83

 

 

 
1,058

 

 
151

 
1,292

Ending balance
 
$
83,849

 
$
38,536

 
$
18,491

 
$
26,847

 
$
227,229

 
$
215,910

 
$
54,838

 
$
97,192

 
$
762,892

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Ending balance:   collectively evaluated for impairment
 
$
1,010

 
$
391

 
$
218

 
$
359

 
$
2,452

 
$
988

 
$
203

 
$
738

 
$
6,359

Ending balance:   individually evaluated for impairment
 

 

 

 

 

 

 

 
19

 
19

Ending balance
 
$
1,010

 
$
391

 
$
218

 
$
359

 
$
2,452

 
$
988

 
$
203

 
$
757

 
$
6,378

 
 
 
December 31, 2014
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Ending balance:   collectively evaluated for impairment
 
$
77,232

 
$
34,295

 
$
21,982

 
$
24,883

 
$
192,608

 
$
219,473

 
$
58,434

 
$
96,789

 
$
725,696

Ending balance:   individually evaluated for impairment
 

 

 
87

 

 

 
1,139

 

 
305

 
1,531

Ending balance
 
$
77,232

 
$
34,295

 
$
22,069

 
$
24,883

 
$
192,608

 
$
220,612

 
$
58,434

 
$
97,094

 
$
727,227

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Ending balance: collectively evaluated for impairment
 
$
920

 
$
345

 
$
261

 
$
330

 
$
2,061

 
$
985

 
$
207

 
$
676

 
$
5,785

Ending balance:   individually evaluated for impairment
 

 

 

 

 

 

 

 
15

 
15

Ending balance
 
$
920

 
$
345

 
$
261

 
$
330

 
$
2,061

 
$
985

 
$
207

 
$
691

 
$
5,800



The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the nine risk grades is as follows:
 
“Pass” (Grades 1-5) - Higher quality loans that do not fit any of the other categories described below.

“Special Mention” (Grade 6) - Loans that possess some credit deficiency or potential weakness which deserve close attention.


13



“Substandard” (Grade 7) - 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” (Grade 8) - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.

“Loss” (Grade 9) - 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 has the full collection of principal and interest in doubt will be considered for nonaccrual status. At the time a loan is placed on nonaccrual, all accrued but unpaid interest will be reversed from interest income. Placing the loan on nonaccrual does not relieve the borrower of the obligation to repay interest. A loan placed on nonaccrual 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.
 
The following tables present the credit risk profile of the Company’s commercial loan portfolio based on rating category as of March 31, 2015 and December 31, 2014
 
 
March 31, 2015
 
 
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Total
Rating:
 
 

 
 

 
 

 
 

 
 

 
 
1-5 Pass
 
$
83,849

 
$
38,519

 
$
16,921

 
$
26,477

 
$
227,229

 
$
392,995

6 Special Mention
 

 

 

 
370

 

 
370

7 Substandard
 

 
17

 
1,570

 

 

 
1,587

8 Doubtful
 

 

 

 

 

 

Total
 
$
83,849

 
$
38,536

 
$
18,491

 
$
26,847

 
$
227,229

 
$
394,952

 
 
 
December 31, 2014
 
 
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Total
Rating:
 
 

 
 

 
 

 
 

 
 

 
 
1-5 Pass
 
$
77,232

 
$
34,278

 
$
20,478

 
$
24,504

 
$
192,608

 
$
349,100

6 Special Mention
 

 

 

 
379

 

 
379

7 Substandard
 

 
17

 
1,591

 

 

 
1,608

8 Doubtful
 

 

 

 

 

 

Total
 
$
77,232

 
$
34,295

 
$
22,069

 
$
24,883

 
$
192,608

 
$
351,087

  

14




The following tables present the Company’s loan portfolio delinquency analysis as of March 31, 2015 and December 31, 2014
 
 
March 31, 2015
 
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days 
or More
Past Due
 
Total 
Past Due
 
Current
 
Total
Loans
Receivable
 
Non-
accrual
Loans
 
Total Loans
90 Days or
More Past
Due and
Accruing
Commercial and industrial
 
$

 
$

 
$

 
$

 
$
83,849

 
$
83,849

 
$

 
$

Owner-occupied commercial real estate
 

 

 

 

 
38,536

 
38,536

 

 

Investor commercial real estate
 

 

 

 

 
18,491

 
18,491

 
83

 

Construction
 

 

 

 

 
26,847

 
26,847

 

 

Single tenant lease financing
 

 

 

 

 
227,229

 
227,229

 

 

Residential mortgage
 
36

 

 

 
36

 
215,874

 
215,910

 
61

 

Home equity
 

 

 

 

 
54,838

 
54,838

 

 

Other consumer
 
76

 
45

 
52

 
173

 
97,019

 
97,192

 
102

 

Total
 
$
112

 
$
45

 
$
52

 
$
209

 
$
762,683

 
$
762,892

 
$
246

 
$

 
 
 
December 31, 2014
 
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days 
or More
Past Due
 
Total 
Past Due
 
Current
 
Total
Loans
Receivable
 
Non-
accrual
Loans
 
Total Loans
90 Days or
More Past
Due and
Accruing
Commercial and industrial
 
$

 
$

 
$

 
$

 
$
77,232

 
$
77,232

 
$

 
$

Owner-occupied commercial real estate
 

 

 

 

 
34,295

 
34,295

 

 

Investor commercial real estate
 

 

 

 

 
22,069

 
22,069

 
87

 

Construction
 

 

 

 

 
24,883

 
24,883

 

 

Single tenant lease financing
 

 

 

 

 
192,608

 
192,608

 

 

Residential mortgage
 
161

 

 
57

 
218

 
220,394

 
220,612

 
25

 
57

Home equity
 

 

 

 

 
58,434

 
58,434

 

 

Other consumer
 
249

 
56

 
53

 
358

 
96,736

 
97,094

 
123

 
4

Total
 
$
410

 
$
56

 
$
110

 
$
576

 
$
726,651

 
$
727,227

 
$
235

 
$
61



Impaired Loans
 
A loan is designated as impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16) 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 commercial loans but also include loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.
 

15



The following table presents the Company’s impaired loans as of March 31, 2015 and December 31, 2014
 
 
March 31, 2015
 
December 31, 2014
 
 
Recorded
Balance
 
Unpaid
Principal
Balance
 
Specific
Allowance
 
Recorded
Balance
 
Unpaid
Principal
Balance
 
Specific
Allowance
Loans without a specific valuation allowance
 
 

 
 

 
 

 
 

 
 

 
 

Investor commercial real estate
 
$
83

 
$
83

 
$

 
$
87

 
$
87

 
$

Residential mortgage
 
1,058

 
1,065

 

 
1,139

 
1,146

 

Other consumer
 
112

 
211

 

 
268

 
338

 

Total
 
1,253

 
1,359

 

 
1,494

 
1,571

 

Loans with a specific valuation allowance
 
 

 
 

 
 

 
 

 
 

 
 

Other consumer
 
39

 
67

 
19

 
37

 
51

 
15

Total
 
39

 
67

 
19

 
37

 
51

 
15

Total impaired loans
 
$
1,292

 
$
1,426

 
$
19

 
$
1,531

 
$
1,622

 
$
15

 
The table below presents average balances and interest income recognized for impaired loans during the three month periods ended March 31, 2015 and March 31, 2014:

 
 
March 31, 2015
 
March 31, 2014
 
 
Three Months
Ended
 
Three Months
Ended
 
 
Average
Balance
 
Interest
Income
 
Average
Balance
 
Interest
Income
Loans without a specific valuation allowance
 
 

 
 

 
 

 
 

Investor commercial real estate
 
$
85

 
$
2

 
$
1,052

 
$

Residential mortgage
 
1,060

 
2

 
1,162

 
7

Other consumer
 
121

 
3

 
296

 
4

Total
 
1,266

 
7

 
2,510

 
11

Loans with a specific valuation allowance
 
 

 
 

 
 

 
 

Residential mortgage
 

 

 
26

 

Other consumer
 
53

 
1

 
78

 

Total
 
53

 
1

 
104

 

Total impaired loans
 
$
1,319

 
$
8

 
$
2,614

 
$
11

 

Troubled Debt Restructurings (“TDRs”)
 
The loan portfolio includes TDRs which are loans that have been modified to grant economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six consecutive months.
 
When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or using the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance.
 
In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability of the loan. Any loan modified is reviewed by the Company to identify whether a TDR has occurred when the Company grants a concession to the borrower that it would not otherwise consider based on economic or legal reasons related to a borrower’s financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current

16



financial status or the loan may be restructured to secure additional collateral and/or guarantees to support the debt, or a combination of the two.
 
Loans classified as new TDRs during the three months ended March 31, 2015 and 2014 are shown in the table below. The 2015 and 2014 modifications consisted solely of maturity date concessions.
 
 
New TDRs During the Three Months Ended
 
 
March 31, 2015
 
March 31, 2014
 
 
Number of Contracts
 
Recorded Balance Before
 
Recorded Balance After
 
Number of Contracts
 
Recorded Balance Before
 
Recorded Balance After
Residential mortgage
 
1

 
$
57

 
$
57

 
$

 
$

 
$

Other consumer
 

 

 

 
1

 
21

 
21

Total loans
 
1

 
$
57

 
$
57

 
1

 
$
21

 
$
21


There were no TDR loans which had payment defaults during the three months ended March 31, 2015 and 2014. Default occurs when a loan is 90 days or more past due or transferred to nonaccrual within twelve months of restructuring.

Note 5:        Premises and Equipment
 
Premises and equipment at March 31, 2015 and December 31, 2014 consisted of the following: 
 
 
March 31,
2015
 
December 31,
2014
Land
 
$
2,500

 
$
2,500

Building and improvements
 
3,135

 
3,018

Furniture and equipment
 
5,380

 
5,277

Less: accumulated depreciation
 
(3,975
)
 
(3,734
)
 
 
$
7,040

 
$
7,061

  
Note 6:        Goodwill        
 
The change in the carrying amount of goodwill for the periods ended March 31, 2015 and December 31, 2014 were: 
Balance as of January 1, 2014
$
4,687