10-Q 1 inbk-20150930x10q.htm 10-Q 10-Q


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 September 30, 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 November 2, 2015, the registrant had 4,481,347 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)
 
 
September 30,
2015
 
December 31,
2014
 
 
(Unaudited)
 
 
Assets
 
 

 
 

Cash and due from banks
 
$
1,460

 
$
1,940

Interest-bearing demand deposits
 
19,185

 
26,349

Total cash and cash equivalents
 
20,645

 
28,289

Interest-bearing time deposits
 
1,250

 
2,000

Securities available-for-sale, at fair value (amortized cost of $203,302 and $137,727, respectively)
 
202,565

 
137,518

Loans held-for-sale (includes $21,305 and $32,618 at fair value, respectively)
 
27,773

 
34,671

Loans receivable
 
876,578

 
732,426

Allowance for loan losses
 
(7,671
)
 
(5,800
)
Net loans receivable
 
868,907

 
726,626

Accrued interest receivable
 
3,581

 
2,833

Federal Home Loan Bank of Indianapolis stock
 
6,946

 
5,350

Cash surrender value of bank-owned life insurance
 
12,625

 
12,325

Premises and equipment, net
 
8,508

 
7,061

Goodwill
 
4,687

 
4,687

Other real estate owned
 
4,488

 
4,488

Accrued income and other assets
 
4,195

 
4,655

Total assets
 
$
1,166,170

 
$
970,503

Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Noninterest-bearing deposits
 
$
22,338

 
$
21,790

Interest-bearing deposits
 
877,412

 
736,808

Total deposits
 
899,750

 
758,598

Advances from Federal Home Loan Bank
 
150,946

 
106,897

Subordinated debt
 
2,937

 
2,873

Accrued interest payable
 
112

 
97

Accrued expenses and other liabilities
 
9,513

 
5,253

Total liabilities
 
1,063,258

 
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
 
72,409

 
71,774

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

 

Retained earnings
 
30,977

 
25,146

Accumulated other comprehensive loss
 
(474
)
 
(135
)
Total shareholders’ equity
 
102,912

 
96,785

Total liabilities and shareholders’ equity
 
$
1,166,170

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest Income
 
 

 
 

 
 

 
 

Loans
 
$
9,326

 
$
7,218

 
$
26,759

 
$
19,918

Securities – taxable
 
994

 
684

 
2,661

 
2,421

Securities – non-taxable
 
116

 

 
175

 
58

Other earning assets
 
100

 
45

 
258

 
195

Total interest income
 
10,536

 
7,947

 
29,853

 
22,592

Interest Expense
 
 

 
 

 
 

 
 

Deposits
 
2,260

 
1,958

 
6,350

 
5,740

Other borrowed funds
 
437

 
316

 
1,318

 
940

Total interest expense
 
2,697

 
2,274

 
7,668

 
6,680

Net Interest Income
 
7,839

 
5,673

 
22,185

 
15,912

Provision (Credit) for Loan Losses
 
454

 
(112
)
 
1,200

 
(38
)
Net Interest Income After Provision (Credit) for Loan Losses
 
7,385

 
5,785

 
20,985

 
15,950

Noninterest Income
 
 

 
 

 
 

 
 

Service charges and fees
 
202

 
179

 
571

 
533

Mortgage banking activities
 
2,095

 
1,638

 
7,195

 
3,767

Gain on sale of securities
 

 
54

 

 
538

Loss on asset disposals
 
(27
)
 
(28
)
 
(74
)
 
(59
)
Other
 
104

 
100

 
306

 
297

Total noninterest income
 
2,374

 
1,943

 
7,998

 
5,076

Noninterest Expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
3,446

 
3,264

 
10,811

 
9,219

Marketing, advertising, and promotion
 
544

 
381

 
1,330

 
1,148

Consulting and professional services
 
544

 
409

 
1,700

 
1,307

Data processing
 
248

 
245

 
729

 
718

Loan expenses
 
97

 
208

 
459

 
458

Premises and equipment
 
676

 
742

 
2,009

 
2,204

Deposit insurance premium
 
163

 
155

 
473

 
437

Other
 
489

 
381

 
1,280

 
1,292

Total noninterest expense
 
6,207

 
5,785

 
18,791

 
16,783

Income Before Income Taxes
 
3,552

 
1,943

 
10,192

 
4,243

Income Tax Provision
 
1,229

 
661

 
3,541

 
1,384

Net Income
 
$
2,323

 
$
1,282


$
6,651

 
$
2,859

Income Per Share of Common Stock
 
 

 
 

 
 

 
 

Basic
 
$
0.51

 
$
0.29

 
$
1.47

 
$
0.64

Diluted
 
$
0.51

 
$
0.28

 
$
1.46

 
$
0.63

Weighted-Average Number of Common Shares Outstanding
 
 

 
 

 
 

 
 

Basic
 
4,532,360

 
4,497,762

 
4,526,377

 
4,496,228

Diluted
 
4,574,455

 
4,511,291

 
4,549,447

 
4,505,801

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,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
2,323

 
$
1,282

 
$
6,651

 
$
2,859

Other comprehensive income
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on securities available-for-sale
 
1,193

 
(1,451
)
 
(528
)
 
2,099

Reclassification adjustment for gains realized
 

 
(54
)
 

 
(538
)
Net unrealized holding gains on securities available-for-sale for which an other-than-temporary impairment has been recognized in income
 

 

 

 
751

Other comprehensive income (loss) before income tax
 
1,193

 
(1,505
)
 
(528
)
 
2,312

Income tax provision (benefit)
 
429

 
(536
)
 
(189
)
 
822

Other comprehensive income (loss)
 
764

 
(969
)
 
(339
)
 
1,490

Comprehensive income
 
$
3,087

 
$
313

 
$
6,312

 
$
4,349

 
 See Notes to Condensed Consolidated Financial Statements

3



First Internet Bancorp
Condensed Consolidated Statement of Shareholders’ Equity - Unaudited
Nine Months Ended September 30, 2015
(Amounts in thousands except per share data)
 
 
Voting and
Nonvoting
Common
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Shareholders’
Equity
Balance, January 1, 2015
 
$
71,774

 
$
(135
)
 
$
25,146

 
$
96,785

Net income
 

 

 
6,651

 
6,651

Other comprehensive loss
 

 
(339
)
 

 
(339
)
Dividends declared ($0.18 per share)
 

 

 
(820
)
 
(820
)
Recognition of the fair value of share-based compensation
 
631

 

 

 
631

Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units
 
17

 

 

 
17

Excess tax benefit on share-based compensation
 
25

 

 

 
25

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

 

 
(38
)
Balance, September 30, 2015
 
$
72,409

 
$
(474
)
 
$
30,977

 
$
102,912

 
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,
 
 
2015
 
2014
Operating Activities
 
 

 
 

Net income
 
$
6,651

 
$
2,859

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

 
 

Depreciation and amortization
 
1,388

 
1,432

Increase in cash surrender value of bank-owned life insurance
 
(300
)
 
(291
)
Provision (credit) for loan losses
 
1,200

 
(38
)
Share-based compensation expense
 
631

 
443

Gain from sale of available-for-sale securities
 

 
(538
)
Loans originated for sale
 
(386,353
)
 
(285,686
)
Proceeds from sale of loans
 
400,003

 
290,454

Gain on loans sold
 
(6,895
)
 
(3,278
)
Decrease (increase) in fair value of loans held-for-sale
 
143

 
(427
)
Gain on derivatives
 
(443
)
 
(62
)
Loss on disposition of assets
 
74

 
101

Net change in accrued income and other assets
 
230

 
530

Net change in accrued expenses and other liabilities
 
407

 
638

Net cash provided by operating activities
 
16,736

 
6,137

Investing Activities
 
 
 
 
Net loan activity, excluding sales and purchases
 
(143,481
)
 
(88,148
)
Proceeds from sale of other real estate owned
 

 
235

Net change in interest bearing deposits
 
750

 
500

Maturities of securities available-for-sale
 
16,322

 
14,394

Proceeds from sale of securities available-for-sale
 

 
137,816

Purchase of securities available-for-sale
 
(78,481
)
 
(96,803
)
Purchase of Federal Home Loan Bank of Indianapolis stock
 
(1,596
)
 

Purchase of premises and equipment
 
(2,233
)
 
(683
)
Loans purchased
 

 
(106,480
)
Net cash used in investing activities
 
(208,719
)
 
(139,169
)
Financing Activities
 
 
 
 
Net increase in deposits
 
141,152

 
64,875

Cash dividends paid
 
(800
)
 
(794
)
Proceeds from advances from Federal Home Loan Bank
 
220,000

 
95,000

Repayment of advances from Federal Home Loan Bank
 
(176,000
)
 
(40,000
)
Other, net
 
(13
)
 
(132
)
Net cash provided by financing activities
 
184,339

 
118,949

Net Decrease in Cash and Cash Equivalents
 
(7,644
)
 
(14,083
)
Cash and Cash Equivalents, Beginning of Period
 
28,289

 
53,690

Cash and Cash Equivalents, End of Period
 
$
20,645

 
$
39,607

Supplemental Disclosures of Cash Flows Information
 
 
 
 
Cash paid during the period for interest
 
$
7,653

 
$
6,700

Cash paid during the period for taxes
 
2,503

 
1,225

Cash dividends declared, not paid
 
267

 
265

See Notes to Condensed Consolidated Financial Statements

5



First Internet Bancorp
Notes to Condensed Consolidated Financial Statements – Unaudited
(Table amounts in thousands except share and per share data)
  
Note 1:        Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, or cash flows in accordance with 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 and nine months ended September 30, 2015 are not necessarily indicative of the results expected for the year ending December 31, 2015 or any other period. The September 30, 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 presentation of the 2015 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, 2015 and 2014
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Basic earnings per share
 
 

 
 

 
 
 
 
Net income available to common shareholders
 
$
2,323

 
$
1,282

 
$
6,651

 
$
2,859

Weighted-average common shares
 
4,532,360

 
4,497,762

 
4,526,377

 
4,496,228

Basic earnings per common share
 
$
0.51

 
$
0.29

 
$
1.47

 
$
0.64

Diluted earnings per share
 
 

 
 

 
 

 
 

Net income applicable to diluted earnings per share
 
$
2,323

 
$
1,282

 
$
6,651

 
$
2,859

Weighted-average common shares
 
4,532,360

 
4,497,762

 
4,526,377

 
4,496,228

Dilutive effect of warrants
 
17,264

 

 
8,153

 
3,871

Dilutive effect of equity compensation
 
24,831

 
13,529

 
14,917

 
5,702

     Weighted-average common and incremental shares
 
4,574,455

 
4,511,291

 
4,549,447

 
4,505,801

Diluted earnings per common share
 
$
0.51

 
$
0.28

 
$
1.46

 
$
0.63

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
 
The following tables summarize securities available-for-sale as of September 30, 2015 and December 31, 2014.
 
 
September 30, 2015
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities available-for-sale
 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
36,006

 
$
203

 
$
(585
)
 
$
35,624

Municipal securities
 
15,213

 
100

 
(89
)
 
15,224

Mortgage-backed securities
 
109,645

 
598

 
(191
)
 
110,052

Asset-backed securities
 
19,438

 
11

 
(26
)
 
19,423

Corporate securities
 
20,000

 

 
(771
)
 
19,229

Other securities
 
3,000

 
13

 

 
3,013

Total available-for-sale
 
$
203,302

 
$
925

 
$
(1,662
)
 
$
202,565

 
 
 
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 September 30, 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
 
491

 
458

Five to ten years
 
24,323

 
23,930

After ten years
 
46,405

 
45,689

 
 
71,219

 
70,077

Mortgage-backed securities
 
109,645

 
110,052

Asset-backed securities
 
19,438

 
19,423

Other securities
 
3,000

 
3,013

Total
 
$
203,302

 
$
202,565

 
Gross realized gains of $0 and $0.4 million, and gross losses of $0 and $0.4 million, resulting from sales of available-for-sale securities were recognized during the three months ended September 30, 2015 and 2014, respectively. Gross realized gains of $0 and $2.7 million, and gross losses of $0 and $2.2 million, resulting from sales of available-for-sale securities were recognized during the nine months ended September 30, 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. The total fair value of these investments at September 30, 2015 and December 31, 2014 was $81.0 million and $86.9 million, which was approximately 40% and 63%, respectively, of the Company’s available-for-sale securities portfolio. These declines resulted primarily 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 security will be reduced, with 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 securities portfolio's 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 September 30, 2015 and December 31, 2014
 
 
September 30, 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
 
$
13,568

 
$
(427
)
 
$
8,771

 
$
(158
)
 
$
22,339

 
$
(585
)
Municipal securities
 
6,152

 
(89
)
 

 

 
6,152

 
(89
)
Mortgage-backed securities
 

 

 
23,741

 
(191
)
 
23,741

 
(191
)
Asset-backed securities
 
9,586

 
(26
)
 

 

 
9,586

 
(26
)
Corporate securities
 
19,229

 
(771
)
 

 

 
19,229

 
(771
)
Total
 
$
48,535

 
$
(1,313
)
 
$
32,512

 
$
(349
)
 
$
81,047

 
$
(1,662
)

8



  
 
 
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
)
Total
 
$
56,917

 
$
(68
)
 
$
29,956

 
$
(558
)
 
$
86,873

 
$
(626
)

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

The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2015.
 
Mortgage-Backed and Asset-Backed Securities
 
The unrealized losses on the Company’s investments in mortgage-backed and asset-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 September 30, 2015.

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 table provides information about debt securities for which only a credit loss was recognized in income and other losses were recorded in accumulated other comprehensive loss during the nine months ended September 30, 2014. The Company did not own any OTTI securities during the three and nine months ended September 30, 2015 or during the three months ended September 30, 2014.  
 
Accumulated Credit Losses
Credit losses on debt securities held
 

January 1, 2014
$
1,183

Realized losses related to OTTI
(1,139
)
Recoveries related to OTTI
(44
)
September 30, 2014
$


There were no amounts reclassified from accumulated other comprehensive loss during the three and nine months ended September 30, 2015. 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, 2014, were as follows:

9



Details About Accumulated Other Comprehensive Loss Components
 
Amounts Reclassified from Accumulated Other
Comprehensive Loss for the
Three Months Ended September 30, 2014
 
Affected Line Item in the
Statements of Income
Unrealized gains and losses on securities available-for-sale
 
 

 
 
Gain realized in earnings
 
$
54

 
Gain on sale of securities
Total reclassified amount before tax
 
54

 
Income Before Income Taxes
Tax expense
 
18

 
Income Tax Provision
Total reclassifications out of accumulated other comprehensive loss
 
$
36

 
Net Income
Details About Accumulated Other Comprehensive Loss Components
 
Amounts Reclassified from Accumulated Other
Comprehensive Loss for the
Nine Months Ended September 30, 2014
 
Affected Line Item in the
Statements of Income
Unrealized gains and losses on securities available-for-sale
 
 

 
 
Gain realized in earnings
 
$
538

 
Gain on sale of securities
Total reclassified amount before tax
 
538

 
Income Before Income Taxes
Tax expense
 
183

 
Income Tax Provision
Total reclassifications out of accumulated other comprehensive loss
 
$
355

 
Net Income


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:
 
 
September 30,
2015
 
December 31,
2014
Commercial loans
 
 

 
 

Commercial and industrial
 
$
89,762

 
$
77,232

Owner-occupied commercial real estate
 
42,117

 
34,295

Investor commercial real estate
 
17,483

 
22,069

Construction
 
30,196

 
24,883

Single tenant lease financing
 
329,149

 
192,608

Total commercial loans
 
508,707

 
351,087

Consumer loans
 
 
 
 
Residential mortgage
 
209,507

 
220,612

Home equity
 
47,319

 
58,434

Other consumer
 
106,187

 
97,094

Total consumer loans
 
363,013

 
376,140

Total commercial and consumer loans
 
871,720

 
727,227

Deferred loan origination costs and premiums and discounts on purchased loans
 
4,858

 
5,199

Total loans receivable
 
876,578

 
732,426

Allowance for loan losses
 
(7,671
)
 
(5,800
)
Net loans receivable
 
$
868,907

 
$
726,626


10



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

Commercial and Industrial: Commercial and industrial loans’ source of repayment is 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 generally concentrated in the Central Indiana and greater Phoenix, Arizona markets and often times is 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 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, 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 help mitigate risk.

Construction: Construction loans are secured by real estate and improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, multi-family) properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes.
Single Tenant Lease Financing: These loans are made to property owners of real estate subject to long term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses.  The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant.  Similar to the other loan portfolios, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends 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 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 are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of home equity loans and lines of credit may be impacted by changes in property values on residential properties and unemployment levels, among other economic conditions and financial circumstances in the market.

11



Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.
Allowance for Loan Losses Methodology
 
Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). The portfolio is segmented by loan type, and the required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on average historical losses, adjusted for current economic factors and portfolio trends. Management believes the historical loss experience methodology is appropriate in the current economic environment as it captures loss rates that are comparable to the current period being analyzed.  Management adds qualitative factors for observable trends, changes in internal practices, changes in delinquencies and impairments, and external factors.  Observable factors include changes in the composition and size of portfolios, as well as loan terms or concentration levels.  The Company evaluates the impact of internal changes such as management and staff experience levels or modification to loan underwriting processes.  Delinquency trends are scrutinized for both volume and severity of past due, nonaccrual, or classified loans as well as any changes in the value of underlying collateral.  Finally, the Company considers the effect of other external factors such as national, regional, and local economic and business conditions, as well as competitive, legal, and regulatory requirements. Loans that are considered to be impaired are evaluated to determine the need for a specific allowance by applying at least one of three methodologies: present value of future cash flows; fair value of collateral less costs to sell; or the loan’s observable market price.  All troubled debt restructurings (“TDR”) are considered impaired loans.  Loans evaluated for impairment are removed from other pools to prevent double-counting. Accounting Standards Codification (“ASC”) Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral less costs to sell and allows existing methods for recognizing interest income.
 
Provision for Loan Losses
 
A provision for estimated losses on loans is charged to earnings 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 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.

The following tables present changes in the balance of the ALLL during the three and nine month periods ended September 30, 2015 and 2014

12



 
 
Three Months Ended September 30, 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
 
$
1,201

 
$
439

 
$
261

 
$
227

 
$
3,093

 
$
933

 
$
157

 
$
762

 
$
7,073

Provision (credit) charged to expense
 
29

 
16

 
(31
)
 
129

 
429

 
(132
)
 
(1
)
 
15

 
454

Losses charged off
 

 

 

 

 

 
(14
)
 

 
(62
)
 
(76
)
Recoveries
 

 

 

 

 

 
130

 

 
90

 
220

Balance, end of period
 
$
1,230

 
$
455

 
$
230

 
$
356

 
$
3,522

 
$
917

 
$
156

 
$
805

 
$
7,671


 
 
Nine Months Ended September 30, 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
 
310

 
110

 
(531
)
 
26

 
1,461

 
(284
)
 
(51
)
 
159

 
1,200

Losses charged off
 

 

 

 

 

 
(185
)
 

 
(351
)
 
(536
)
Recoveries
 

 

 
500

 

 

 
401

 

 
306

 
1,207

Balance, end of period
 
$
1,230

 
$
455

 
$
230

 
$
356

 
$
3,522

 
$
917

 
$
156

 
$
805

 
$
7,671


 
 
Three Months Ended September 30, 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
 
$
735

 
$
271

 
$
205

 
$
259

 
$
1,660

 
$
990

 
$
213

 
$
807

 
$
5,140

Provision (credit) charged to expense
 
188

 
24

 
(441
)
 
23

 
146

 
44

 
9

 
(105
)
 
(112
)
Losses charged off
 
(14
)
 

 

 

 

 
(5
)
 

 
(92
)
 
(111
)
Recoveries
 

 

 
459

 

 

 
7

 

 
81

 
547

Balance, end of period
 
$
909

 
$
295

 
$
223

 
$
282

 
$
1,806

 
$
1,036

 
$
222

 
$
691

 
$
5,464



13



 
 
Nine Months Ended September 30, 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
 
104

 
5

 
(455
)
 
5

 
75

 
213

 
11

 
4

 
(38
)
Losses charged off
 
(14
)
 

 

 

 

 
(216
)
 

 
(427
)
 
(657
)
Recoveries
 

 

 
459

 

 

 
31

 

 
243

 
733

Balance, end of period
 
$
909

 
$
295

 
$
223

 
$
282

 
$
1,806

 
$
1,036

 
$
222

 
$
691

 
$
5,464


The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2015, and December 31, 2014
 
 
September 30, 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
 
$
89,762

 
$
42,117

 
$
17,483

 
$
30,196

 
$
329,149

 
$
208,363

 
$
47,319

 
$
106,000

 
$
870,389

Ending balance:   individually evaluated for impairment
 

 

 

 

 

 
1,144

 

 
187

 
1,331

Ending balance
 
$
89,762

 
$
42,117

 
$
17,483

 
$
30,196

 
$
329,149

 
$
209,507

 
$
47,319

 
$
106,187

 
$
871,720

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Ending balance:   collectively evaluated for impairment
 
$
1,230

 
$
455

 
$
230

 
$
356

 
$
3,522

 
$
917

 
$
156

 
$
805

 
$
7,671

Ending balance:   individually evaluated for impairment
 

 

 

 

 

 

 

 

 

Ending balance
 
$
1,230

 
$
455

 
$
230

 
$
356

 
$
3,522

 
$
917

 
$
156

 
$
805

 
$
7,671


14



 
 
 
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.

“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 that 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.
 

15



The following tables present the credit risk profile of the Company’s commercial loan portfolio based on rating category and payment activity as of September 30, 2015 and December 31, 2014
 
 
September 30, 2015
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Total
Rating:
 
 

 
 

 
 

 
 

 
 

 
 
1-5 Pass
 
$
83,230

 
$
42,102

 
$
16,028

 
$
29,773

 
$
329,149

 
$
500,282

6 Special Mention
 
2,283

 

 

 
346

 

 
2,629

7 Substandard
 
4,249

 
15

 
1,455

 
77

 

 
5,796

8 Doubtful
 

 

 

 

 

 

Total
 
$
89,762

 
$
42,117

 
$
17,483

 
$
30,196

 
$
329,149

 
$
508,707


 
 
September 30, 2015
 
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Performing
 
$
209,403

 
$
47,319

 
$
106,095

 
$
362,817

Nonaccrual
 
104

 

 
92

 
196

Total
 
$
209,507

 
$
47,319

 
$
106,187

 
$
363,013


 
 
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


 
 
December 31, 2014
 
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Performing
 
$
220,587

 
$
58,434

 
$
96,971

 
$
375,992

Nonaccrual
 
25

 

 
123

 
148

Total
 
$
220,612

 
$
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