Loans

Categories of loans include:



	December 31,
	2019			2018
Commercial loans
Commercial and industrial	$	96,420		$	107,405
Owner-occupied commercial real estate	73,392			77,569
Investor commercial real estate	12,567			5,391
Construction	60,274			39,916
Single tenant lease financing	995,879			919,440
Public finance	687,094			706,342
Healthcare finance	300,612			117,007
Small business lending	60,279			17,370
Total commercial loans	2,286,517			1,990,440
Consumer loans
Residential mortgage	313,849			399,898
Home equity	24,306			28,735
Other consumer	295,309			279,771
Total consumer loans	633,464			708,404
Total commercial and consumer loans	2,919,981			2,698,844
Net deferred loan origination costs and premiums and discounts on purchased loans and other⁽¹⁾	43,566			17,384
Total loans	2,963,547			2,716,228
Allowance for loan losses	(21,840		)	(17,896		)
Net loans	$	2,941,707		$	2,698,332

⁽¹⁾ Includes carrying value adjustments of $21.4 million and $5.0 million as of December 31, 2019 and 2018, respectively, related to interest rate swaps associated with public finance loans.

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

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

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

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

Construction: Construction loans are secured by land and related 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, architectural services, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. This portfolio segment is generally concentrated in Central Indiana.

Single Tenant Lease Financing: These loans are made on a nationwide basis to property owners of real estate subject to long-term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria.

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

Healthcare Finance: These loans are made to healthcare providers, primarily dentists, for practice acquisition refinancing that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment are primarily based on the identified cash flows from operations of the borrower and related entities if the real estate is held in a separate entity and secondarily on the underlying collateral provided by the borrower. This portfolio segment was initially concentrated in the Western United States but has been growing rapidly throughout the rest of the country with the addition of a growing sales force located in Eastern and Midwestern markets.

Small Business Lending: These loans are to small businesses and generally carry a partial guaranty from the U.S. Small Business Administration ("SBA"). We generally sell the government guaranteed portion of SBA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. An SBA guaranty provides a tertiary source or repayment to the Bank in event of borrower default. Cash flows of borrowers; however, may not be as expected, and collateral securing these loans may fluctuate in value. Loans are made for a broad array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating equipment purchases. This portfolio segment has an emerging geography, with a nationwide focus.

Residential Mortgage: With respect to residential loans that are secured by 1 to 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 to 4 family residences. The properties securing the home equity portfolio segment are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property values on residential properties, among other economic conditions in the market.

Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.

The following tables present changes in the balance of the ALLL during the twelve months ended December 31, 2019, 2018, and 2017.



	Twelve Months Ended December 31, 2019
	Balance, beginning of period		Provision (credit) charged to expense			Losses charged off			Recoveries		Balance, end of period
Allowance for loan losses:
Commercial and industrial	$	1,384	$	1,029		$	(921	)	$	29	$	1,521
Owner-occupied commercial real estate	783		(222		)	—			—		561
Investor commercial real estate	61		48			—			—		109
Construction	251		129			—			—		380
Single tenant lease financing	8,827		2,348			—			—		11,175
Public finance	1,670		(90		)	—			—		1,580
Healthcare finance	1,264		1,983			—			—		3,247
Small business lending	203		(154		)	—			5		54
Residential mortgage	1,079		(350		)	(76		)	4		657
Home equity	53		51			(68		)	10		46
Other consumer	2,321		1,194			(1,292		)	287		2,510
Total	$	17,896	$	5,966		$	(2,357	)	$	335	$	21,840



	Twelve Months Ended December 31, 2018
	Balance, beginning of period		Provision (credit) charged to expense			Losses charged off			Recoveries		Balance, end of period
Allowance for loan losses:
Commercial and industrial	$	1,724	$	(251	)	$	(92	)	$	3	$	1,384
Owner-occupied commercial real estate	762		21			—			—		783
Investor commercial real estate	85		(24		)	—			—		61
Construction	423		(172		)	—			—		251
Single tenant lease financing	7,872		955			—			—		8,827
Public finance	959		711			—			—		1,670
Healthcare finance	313		951			—			—		1,264
Small business lending	55		148			—			—		203
Residential mortgage	956		127			(9		)	5		1,079
Home equity	70		(33		)	—			16		53
Other consumer	1,751		1,459			(1,176		)	287		2,321
Total	$	14,970	$	3,892		$	(1,277	)	$	311	$	17,896



	Twelve Months Ended December 31, 2017
	Balance, beginning of period		Provision (credit) charged to expense			Losses charged off			Recoveries		Balance, end of period
Allowance for loan losses:
Commercial and industrial	$	1,352	$	574		$	(271	)	$	69	$	1,724
Owner-occupied commercial real estate	582		180			—			—		762
Investor commercial real estate	168		(83		)	—			—		85
Construction	544		(121		)	—			—		423
Single tenant lease financing	6,248		1,624			—			—		7,872
Public finance	—		959			—			—		959
Healthcare finance	—		313			—			—		313
Small business lending	—		55			—			—		55
Residential mortgage	754		314			(116		)	4		956
Home equity	102		(55		)	—			23		70
Other consumer	1,231		1,112			(895		)	303		1,751
Total	$	10,981	$	4,872		$	(1,282	)	$	399	$	14,970

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2019 and 2018.



	Loans						Allowance for Loan Losses
December 31, 2019	Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance		Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance
Commercial and industrial	$	93,520	$	2,900	$	96,420	$	1,412	$	109	$	1,521
Owner-occupied commercial real estate	71,067		2,325		73,392		561		—		561
Investor commercial real estate	12,567		—		12,567		109		—		109
Construction	60,274		—		60,274		380		—		380
Single tenant lease financing	991,199		4,680		995,879		9,515		1,660		11,175
Public finance	687,094		—		687,094		1,580		—		1,580
Healthcare finance	300,612		—		300,612		3,247		—		3,247
Small business lending	56,941		3,338		60,279		54		—		54
Residential mortgage	312,714		1,135		313,849		657		—		657
Home equity	24,306		—		24,306		46		—		46
Other consumer	295,266		43		295,309		2,510		—		2,510
Total	$	2,905,560	$	14,421	$	2,919,981	$	20,071	$	1,769	$	21,840



	Loans						Allowance for Loan Losses
December 31, 2018	Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance		Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance
Commercial and industrial	$	101,765	$	5,640	$	107,405	$	1,384	$	—	$	1,384
Owner-occupied commercial real estate	76,216		1,353		77,569		783		—		783
Investor commercial real estate	5,391		—		5,391		61		—		61
Construction	39,916		—		39,916		251		—		251
Single tenant lease financing	919,440		—		919,440		8,827		—		8,827
Public finance	706,342		—		706,342		1,670		—		1,670
Healthcare finance	117,007		—		117,007		1,264		—		1,264
Small business lending	16,414		956		17,370		203		—		203
Residential mortgage	399,328		570		399,898		1,079		—		1,079
Home equity	28,680		55		28,735		53		—		53
Other consumer	279,714		57		279,771		2,321		—		2,321
Total	$	2,690,213	$	8,631	$	2,698,844	$	17,896	$	—	$	17,896

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. A description of the general characteristics of the risk grades is as follows:


•	“Pass” - Higher quality loans that do not fit any of the other categories described below.


•	“Special Mention” - Loans that possess some credit deficiency or potential weakness which deserve close attention.


•	“Substandard” - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

•

“Doubtful” - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event 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” - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.

The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of December 31, 2019 and 2018.



	December 31, 2019
	Pass		Special Mention		Substandard		Total
Commercial and industrial	$	89,818	$	3,973	$	2,629	$	96,420
Owner-occupied commercial real estate	71,068		1,727		597		73,392
Investor commercial real estate	12,567		—		—		12,567
Construction	60,274		—		—		60,274
Single tenant lease financing	983,448		7,751		4,680		995,879
Public finance	687,094		—		—		687,094
Healthcare finance	300,612		—		—		300,612
Small business lending	55,206		1,735		3,338		60,279
Total commercial loans	$	2,260,087	$	15,186	$	11,244	$	2,286,517



	December 31, 2019
	Performing		Nonaccrual		Total
Residential mortgage	$	313,088	$	761	$	313,849
Home equity	24,306		—		24,306
Other consumer	295,276		33		295,309
Total	$	632,670	$	794	$	633,464



	December 31, 2018
	Pass		Special Mention		Substandard		Total
Commercial and industrial	$	100,689	$	1,076	$	5,640	$	107,405
Owner-occupied commercial real estate	73,593		2,623		1,353		77,569
Investor commercial real estate	5,391		—		—		5,391
Construction	39,916		—		—		39,916
Single tenant lease financing	913,984		5,456		—		919,440
Public finance	706,342		—		—		706,342
Healthcare finance	117,007		—		—		117,007
Small business lending	14,648		1,766		956		17,370
Total commercial loans	$	1,971,570	$	10,921	$	7,949	$	1,990,440



	December 31, 2018
	Performing		Nonaccrual		Total
Residential mortgage	$	399,723	$	175	$	399,898
Home equity	28,680		55		28,735
Other consumer	279,729		42		279,771
Total	$	708,132	$	272	$	708,404

The following tables present the Company’s loan portfolio delinquency analysis as of December 31, 2019 and 2018.



	December 31, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total loans		Nonaccrual Loans		Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial	$	15	$	96	$	122	$	233	$	96,187	$	96,420	$	226	$	—
Owner-occupied commercial real estate	—		—		464		464		72,928		73,392		464		—
Investor commercial real estate	—		—		—		—		12,567		12,567		—		—
Construction	—		—		—		—		60,274		60,274		—		—
Single tenant lease financing	—		4,680		—		4,680		991,199		995,879		4,680		—
Public finance	—		—		—		—		687,094		687,094		—		—
Healthcare finance	—		—		—		—		300,612		300,612		—		—
Small business lending	54		—		—		54		60,225		60,279		—		—
Residential mortgage	—		—		1,177		1,177		312,672		313,849		761		416
Home equity	—		—		—		—		24,306		24,306		—		—
Other consumer	240		107		—		347		294,962		295,309		33		—
Total	$	309	$	4,883	$	1,763	$	6,955	$	2,913,026	$	2,919,981	$	6,164	$	416



	December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total loans		Nonaccrual Loans		Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial	$	9	$	—	$	—	$	9	$	107,396	$	107,405	$	195	$	—
Owner-occupied commercial real estate	92		234		—		326		77,243		77,569		325		—
Investor commercial real estate	—		—		—		—		5,391		5,391		—		—
Construction	—		—		—		—		39,916		39,916		—		—
Single tenant lease financing	—		—		—		—		919,440		919,440		—		—
Public finance	—		—		—		—		706,342		706,342		—		—
Healthcare finance	—		—		—		—		117,007		117,007		—		—
Small business lending	—		—		—		—		17,370		17,370		—		—
Residential mortgage	—		3,118		98		3,216		396,682		399,898		175		97
Home equity	—		—		55		55		28,680		28,735		55		—
Other consumer	235		170		4		409		279,362		279,771		42		—
Total	$	336	$	3,522	$	157	$	4,015	$	2,694,829	$	2,698,844	$	792	$	97

The following tables present the Company’s impaired loans as of December 31, 2019 and 2018.



	December 31, 2019						December 31, 2018
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance
Commercial and industrial	$	2,693	$	2,694	$	—	$	5,640	$	5,652	$	—
Owner-occupied commercial real estate	2,325		2,327		—		1,353		1,353		—
Small business lending	3,338		3,338		—		956		956
Residential mortgage	1,135		1,209		—		570		570		—
Home equity	—		—		—		55		55		—
Other consumer	43		107		—		57		124		—
Total	9,534		9,675		—		8,631		8,710		—
Loans with a specific valuation allowance
Commercial and industrial	$	207	$	244	$	109	$	—	$	—	$	—
Single tenant lease financing	4,680		4,680		1,660		—		—		—
Total	4,887		4,924		1,769		—		—		—
Total impaired loans	$	14,421	$	14,599	$	1,769	$	8,631	$	8,710	$	—

The following table presents average balances and interest income recognized for impaired loans during the twelve months ended December 31, 2019, 2018, and 2017.



	Twelve Months Ended
	December 31, 2019				December 31, 2018				December 31, 2017
	Average Balance		Interest Income		Average Balance		Interest Income		Average Balance		Interest Income
Loans without a specific valuation allowance
Commercial and industrial	$	3,293	$	289	$	5,961	$	426	$	2,942	$	146
Owner-occupied commercial real estate	3,292		170		833		44		3		—
Small business lending	331		94		60		15		—		—
Residential mortgage	2,265		—		720		—		1,546		6
Home equity	10		—		61		—		5		—
Other consumer	68		1		108		—		105		4
Total	9,259		554		7,743		485		4,601		156
Loans with a specific valuation allowance
Commercial and industrial	1,077		—		—		—		35		—
Single tenant lease financing	1,464		—		—		—		—		—
Total	2,541		—		—		—		35		—
Total impaired loans	$	11,800	$	554	$	7,743	$	485	$	4,636	$	156

The Company had $0.0 million and $0.6 million in residential mortgage other real estate owned as of December 31, 2019 and December 31, 2018, respectively. There were no loans in the process of foreclosure at December 31, 2019 and December 31, 2018, respectively.

Troubled Debt Restructurings

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 modification 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 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.

There were four commercial and industrial loans classified as new TDRs during the twelve months ended December 31, 2019 with a pre-modification and post-modification outstanding recorded investment of $2.0 million. The Company did not allocate a specific allowance for those loans as of December 31, 2019 and the modifications consisted of interest-only payments for a period of time. There were no loans classified as new TDRs during the twelve months ended December 31, 2018. There were two commercial and industrial loans classified as new TDRs during the twelve months ended December 31, 2017 with a pre-modification and post-modification outstanding recorded investment of $1.8 million. These loans were paid-in-full in the fourth quarter of 2017. The 2017 modifications consisted of maturity date amendments and certain other term modifications.

There were no performing TDRs which had payment defaults within the twelve months following modification during the years ended December 31, 2019, 2018 and 2017.