QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ to ________.
Commission File Number 001-35750
First Internet Bancorp
(Exact Name of Registrant as Specified in Its Charter)
Indiana
20-3489991
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
11201 USA Parkway
Fishers, IN
46037
(Address of Principal Executive Offices)
(Zip Code)
(317) 532-7900
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of each exchange on which registered
Common Stock, without par value
INBK
The Nasdaq Stock Market LLC
6.0% Fixed to Floating Subordinated Notes due 2026
INBKL
The Nasdaq Stock Market LLC
6.0% Fixed to Floating Subordinated Notes due 2029
INBKZ
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨
Accelerated Filer þ
Non-accelerated Filer ¨
Smaller Reporting Company þ
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of November 1, 2019, the registrant had 9,741,800 shares of common stock issued and outstanding.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the current expectations of First Internet Bancorp and its consolidated subsidiaries (“we,” “our,” “us” or the “Company”) regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “anticipate,” “believe,” “can,” “continue,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “should,” “will” and similar expressions. Such statements are subject to certain risks and uncertainties including: general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products; our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans; failures or breaches of or interruptions in the communication and information systems on which we rely to conduct our business that could reduce our revenues, increase our costs or lead to disruptions in our business; our plans to grow our commercial real estate, commercial and industrial, public finance and healthcare finance loan portfolios which may carry greater risks of non-payment or other unfavorable consequences; our dependence on capital distributions from First Internet Bank of Indiana (the “Bank”); results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets; changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Bank in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums; regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet; our liquidity requirements being adversely affected by changes in our assets and liabilities; the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals; execution of future acquisition, reorganization or disposition transactions including without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings and other anticipated benefits from such transactions; changes in applicable tax laws; the growth and profitability of noninterest or fee income being less than expected; the loss of any key members of senior management; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies; and the effect of fiscal and governmental policies of the United States federal government. Additional factors that may affect our results include those discussed in our most recent Annual Report on Form 10-K under the heading “Risk Factors” and in other reports filed with the SEC. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
Except as required by law, we do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
i
PART I
ITEM 1.
FINANCIAL STATEMENTS
First Internet Bancorp
Condensed Consolidated Balance Sheets
(Amounts in thousands except share data)
September 30, 2019
December 31, 2018
(Unaudited)
Assets
Cash and due from banks
$
6,283
$
7,080
Interest-bearing deposits
410,119
181,632
Total cash and cash equivalents
416,402
188,712
Securities available-for-sale, at fair value (amortized cost of $547,034 and $499,893 in 2019 and 2018, respectively)
544,742
481,345
Securities held-to-maturity, at amortized cost (fair value of $47,555 and $22,418 in 2019 and 2018, respectively)
46,807
22,750
Loans held-for-sale (includes $41,119 and $18,328 at fair value in 2019 and 2018, respectively)
41,119
18,328
Loans
2,881,272
2,716,228
Allowance for loan losses
(21,683
)
(17,896
)
Net loans
2,859,589
2,698,332
Accrued interest receivable
16,652
16,822
Federal Home Loan Bank of Indianapolis stock
25,650
23,625
Cash surrender value of bank-owned life insurance
36,764
36,059
Premises and equipment, net
14,512
10,697
Goodwill
4,687
4,687
Other real estate owned
2,619
2,619
Accrued income and other assets
85,948
37,716
Total assets
$
4,095,491
$
3,541,692
Liabilities and Shareholders’ Equity
Liabilities
Noninterest-bearing deposits
$
50,560
$
43,301
Interest-bearing deposits
3,097,682
2,628,050
Total deposits
3,148,242
2,671,351
Advances from Federal Home Loan Bank
514,908
525,153
Subordinated debt, net of unamortized debt issuance costs of $2,548 and $1,125 in 2019 and 2018, respectively
69,452
33,875
Accrued interest payable
2,635
1,108
Accrued expenses and other liabilities
65,114
21,470
Total liabilities
3,800,351
3,252,957
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; 9,741,800 and 10,170,778 shares issued and outstanding in 2019 and 2018, respectively
219,013
227,587
Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none
—
—
Retained earnings
93,182
77,689
Accumulated other comprehensive loss
(17,055
)
(16,541
)
Total shareholders’ equity
295,140
288,735
Total liabilities and shareholders’ equity
$
4,095,491
$
3,541,692
See Notes to Condensed Consolidated Financial Statements
1
First Internet Bancorp
Condensed Consolidated Statements of Income – Unaudited
(Amounts in thousands except share and per share data)
Three Months Ended
Nine Months Ended
September 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Interest Income
Loans
$
30,594
$
26,019
$
90,654
$
71,833
Securities – taxable
3,468
2,659
10,332
7,703
Securities – non-taxable
639
698
1,991
2,109
Other earning assets
2,993
847
6,560
1,973
Total interest income
37,694
30,223
109,537
83,618
Interest Expense
Deposits
18,363
11,650
50,896
29,146
Other borrowed funds
4,087
2,603
11,048
7,626
Total interest expense
22,450
14,253
61,944
36,772
Net Interest Income
15,244
15,970
47,593
46,846
Provision for Loan Losses
2,824
888
5,498
2,405
Net Interest Income After Provision for Loan Losses
12,420
15,082
42,095
44,441
Noninterest Income
Service charges and fees
211
236
672
697
Mortgage banking activities
4,307
1,402
8,588
4,577
Gain on sale of loans
523
—
353
414
Loss on sale of securities
—
—
(458
)
—
Other
517
356
2,229
1,025
Total noninterest income
5,558
1,994
11,384
6,713
Noninterest Expense
Salaries and employee benefits
6,883
5,704
19,846
17,436
Marketing, advertising and promotion
456
601
1,391
1,925
Consulting and professional services
778
709
2,427
2,193
Data processing
381
368
1,026
913
Loan expenses
247
241
853
738
Premises and equipment
1,506
1,244
4,503
3,689
Deposit insurance premium
—
441
1,302
1,386
Other
952
737
2,673
2,164
Total noninterest expense
11,203
10,045
34,021
30,444
Income Before Income Taxes
6,775
7,031
19,458
20,710
Income Tax Provision
449
743
1,315
2,386
Net Income
$
6,326
$
6,288
$
18,143
$
18,324
Income Per Share of Common Stock
Basic
$
0.63
$
0.61
$
1.79
$
1.99
Diluted
$
0.63
$
0.61
$
1.79
$
1.98
Weighted-Average Number of Common Shares Outstanding
Basic
9,979,603
10,261,967
10,114,303
9,230,149
Diluted
9,980,612
10,273,766
10,116,507
9,250,839
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,
2019
2018
2019
2018
Net income
$
6,326
$
6,288
$
18,143
$
18,324
Other comprehensive loss
Net unrealized holding gains (losses) on securities available-for-sale recorded within other comprehensive income before income tax
1,266
(3,063
)
11,843
(12,301
)
Reclassification adjustment for losses realized
—
—
458
—
Net unrealized holding (losses) gains on cash flow hedging derivatives recorded within other comprehensive (loss) income before tax
(3,225
)
1,366
(12,689
)
408
Other comprehensive loss before income tax
(1,959
)
(1,697
)
(388
)
(11,893
)
Income tax (benefit) provision
(482
)
(1,328
)
126
(3,528
)
Other comprehensive loss
(1,477
)
(369
)
(514
)
(8,365
)
Comprehensive income
$
4,849
$
5,919
$
17,629
$
9,959
See Notes to Condensed Consolidated Financial Statements
3
First Internet Bancorp
Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
Three Months Ended September 30, 2019 and 2018
(Amounts in thousands except per share data)
Voting and
Nonvoting
Common
Stock
Retained Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance, July 1, 2019
$
224,244
$
87,454
$
(15,578
)
$
296,120
Net income
—
6,326
—
6,326
Other comprehensive loss
—
—
(1,477
)
(1,477
)
Dividends declared ($0.06 per share)
—
(598
)
—
(598
)
Recognition of the fair value of share-based compensation
416
—
—
416
Repurchase of common stock
(5,651
)
—
—
(5,651
)
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units
4
—
—
4
Balance, September 30, 2019
$
219,013
$
93,182
$
(17,055
)
$
295,140
Balance, July 1, 2018
$
227,099
$
69,066
$
(14,078
)
$
282,087
Net income
—
6,288
—
6,288
Other comprehensive loss
—
—
(369
)
(369
)
Dividends declared ($0.06 per share)
—
(621
)
—
(621
)
Recognition of the fair value of share-based compensation
345
—
—
345
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units
10
—
—
10
Balance, September 30, 2018
$
227,454
$
74,733
$
(14,447
)
$
287,740
See Notes to Condensed Consolidated Financial Statements
4
First Internet Bancorp
Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
Nine Months Ended September 30, 2019 and 2018
(Amounts in thousands except per share data)
Voting and
Nonvoting
Common
Stock
Retained Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance, January 1, 2019
$
227,587
$
77,689
$
(16,541
)
$
288,735
Impact of adoption of new accounting standards (1)
—
(821
)
—
(821
)
Net income
—
18,143
—
18,143
Other comprehensive loss
—
—
(514
)
(514
)
Dividends declared ($0.18 per share)
—
(1,829
)
—
(1,829
)
Recognition of the fair value of share-based compensation
1,278
—
—
1,278
Repurchase of common stock
(9,784
)
—
—
(9,784
)
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units
26
—
—
26
Common stock redeemed for the net settlement of share-based awards
(94
)
—
—
(94
)
Balance, September 30, 2019
$
219,013
$
93,182
$
(17,055
)
$
295,140
Balance, January 1, 2018
$
172,043
$
57,103
$
(5,019
)
$
224,127
Impact of adoption of new accounting standards (2)
—
1,063
(1,063
)
—
Net income
—
18,324
—
18,324
Other comprehensive loss
—
—
(8,365
)
(8,365
)
Dividends declared ($0.18 per share)
—
(1,757
)
—
(1,757
)
Net cash proceeds from common stock issuance
54,334
—
—
54,334
Recognition of the fair value of share-based compensation
1,257
—
—
1,257
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units
30
—
—
30
Common stock redeemed for the net settlement of share-based awards
(210
)
—
—
(210
)
Balance, September 30, 2018
$
227,454
$
74,733
$
(14,447
)
$
287,740
(1) Represents the impact of adopting Accounting Standards Update (“ASU”) 2017-08.
(2) Represents the impact of adopting ASU 2018-02 and ASU 2016-01. ASU 2018-02 increased retained earnings and accumulated other comprehensive loss by $1.1 million. ASU 2016-01 decreased retained earnings and accumulated other comprehensive loss by $0.1 million.
See Notes to Condensed Consolidated Financial Statements
5
First Internet Bancorp
Condensed Consolidated Statements of Cash Flows – Unaudited
(Amounts in thousands)
Nine Months Ended September 30,
2019
2018
Operating Activities
Net income
$
18,143
$
18,324
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization
5,300
4,262
Increase in cash surrender value of bank-owned life insurance
(705
)
(714
)
Provision for loan losses
5,498
2,405
Share-based compensation expense
1,278
1,257
Loss on sale of available-for-sale securities
458
—
Loans originated for sale
(430,453
)
(282,527
)
Proceeds from sale of loans
415,171
287,556
Gain on loans sold
(7,057
)
(5,201
)
Gain on sale of other real estate owned
—
(105
)
(Increase) decrease in fair value of loans held-for-sale
(452
)
250
Gain on derivatives
(1,295
)
(100
)
Amortization of operating lease right-of-use assets
531
—
Net change in accrued income and other assets
(49,567
)
(149
)
Net change in accrued expenses and other liabilities
2,297
(1,924
)
Net cash (used in) provided by operating activities
(40,853
)
23,334
Investing Activities
Net loan activity, excluding purchases
(173,220
)
(274,507
)
Proceeds from sale of other real estate owned
—
332
Maturities and calls of securities available-for-sale
58,106
48,938
Proceeds from sale of securities available-for-sale
30,137
—
Purchase of securities available-for-sale
(136,602
)
(65,289
)
Purchase of securities held-to-maturity
(24,116
)
(1,000
)
Purchase of Federal Home Loan Bank of Indianapolis stock
(2,025
)
(2,475
)
Purchase of premises and equipment
(3,581
)
(1,161
)
Loans purchased
(208,795
)
(132,041
)
Net proceeds from sale of portfolio loans
238,016
25,717
Other investing activities
—
(10,166
)
Net cash used in investing activities
(222,080
)
(411,652
)
Financing Activities
Net increase in deposits
476,891
361,623
Cash dividends paid
(1,808
)
(1,620
)
Repayment of subordinated debt
—
(3,000
)
Net proceeds from issuance of subordinated debt
35,418
—
Repurchase of common stock
(9,784
)
—
Proceeds from advances from Federal Home Loan Bank
485,000
225,000
Repayment of advances from Federal Home Loan Bank
(495,000
)
(210,000
)
Net proceeds from common stock issuance
—
54,334
Other, net
(94
)
(210
)
Net cash provided by financing activities
490,623
426,127
Net Increase in Cash and Cash Equivalents
227,690
37,809
Cash and Cash Equivalents, Beginning of Period
188,712
47,981
Cash and Cash Equivalents, End of Period
$
416,402
$
85,790
Supplemental Disclosures
Initial recognition of right-of-use asset
$
2,096
$
—
Initial recognition of operating lease liabilities
2,096
—
Cash paid during the period for interest
60,417
36,196
Cash paid during the period for taxes
4,527
360
Loans transferred to other real estate owned
—
227
Loans transferred to held-for-sale from portfolio
237,942
—
Cash dividends declared, paid in subsequent period
585
611
Securities purchased during the period, settled in subsequent period
3,000
—
Transfer of other equity investments from securities available-for-sale to other assets in accordance with adoption of ASU 2016-01
—
2,932
See Notes to Condensed Consolidated Financial Statements
6
First Internet Bancorp
Notes to Condensed Consolidated Financial Statements – Unaudited
(Table amounts in thousands except share and per share data)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results expected for the year ending December 31, 2019 or any other period. The September 30, 2019 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, 2018.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for loan losses, valuations and impairments of investment securities, and the accounting for income tax expense are highly dependent upon management’s estimates, judgments, and assumptions, and changes in any of these could have a significant impact on the condensed consolidated financial statements.
The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s three wholly owned subsidiaries, First Internet Public Finance Corp., JKH Realty Services, LLC and SPF15, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company.
Certain reclassifications have been made to the 2018 financial statements to conform to the presentation of the 2019 financial statements. These reclassifications had no effect on net income.
7
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, 2019 and 2018.
(dollars in thousands, except per share data)
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
2019
2018
Basic earnings per share
Net income
$
6,326
$
6,288
$
18,143
$
18,324
Weighted-average common shares
9,979,603
10,261,967
10,114,303
9,230,149
Basic earnings per common share
$
0.63
$
0.61
$
1.79
$
1.99
Diluted earnings per share
Net income
$
6,326
$
6,288
$
18,143
$
18,324
Weighted-average common shares
9,979,603
10,261,967
10,114,303
9,230,149
Dilutive effect of equity compensation
1,009
11,799
2,204
20,690
Weighted-average common and incremental shares
9,980,612
10,273,766
10,116,507
9,250,839
Diluted earnings per common share (1)
$
0.63
$
0.61
$
1.79
$
1.98
(1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 15,256 and 22,209 for the three and nine months ended September 30, 2019, respectively, and 3,002 and 7,083 for the three and nine months ended September 30, 2018, respectively.
Note 3: Securities
The following tables summarize securities available-for-sale and securities held-to-maturity as of September 30, 2019 and December 31, 2018.
September 30, 2019
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
Value
Securities available-for-sale
U.S. Government-sponsored agencies
$
83,024
$
197
$
(1,786
)
$
81,435
Municipal securities
96,076
1,872
(6
)
97,942
Mortgage-backed securities
324,296
2,096
(2,403
)
323,989
Asset-backed securities
5,000
—
(69
)
4,931
Corporate securities
38,638
99
(2,292
)
36,445
Total available-for-sale
$
547,034
$
4,264
$
(6,556
)
$
544,742
September 30, 2019
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
Value
Securities held-to-maturity
Municipal securities
$
10,145
$
345
$
—
$
10,490
Corporate securities
36,662
454
(51
)
37,065
Total held-to-maturity
$
46,807
$
799
$
(51
)
$
47,555
8
December 31, 2018
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
Value
Securities available-for-sale
U.S. Government-sponsored agencies
$
109,631
$
20
$
(2,066
)
$
107,585
Municipal securities
97,090
90
(4,674
)
92,506
Mortgage-backed securities
251,492
162
(8,742
)
242,912
Asset-backed securities
5,002
—
(143
)
4,859
Corporate securities
36,678
—
(3,195
)
33,483
Total available-for-sale
$
499,893
$
272
$
(18,820
)
$
481,345
December 31, 2018
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
Value
Securities held-to-maturity
Municipal securities
$
10,157
$
—
$
(356
)
$
9,801
Corporate securities
12,593
80
(56
)
12,617
Total held-to-maturity
$
22,750
$
80
$
(412
)
$
22,418
The carrying value of securities at September 30, 2019 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
$
30
$
31
One to five years
7,725
7,794
Five to ten years
73,495
72,118
After ten years
136,488
135,879
217,738
215,822
Mortgage-backed securities
324,296
323,989
Asset-backed securities
5,000
4,931
Total
$
547,034
$
544,742
Held-to-Maturity
Amortized
Cost
Fair
Value
One to five years
$
999
$
1,010
Five to ten years
35,775
36,311
After ten years
10,033
10,234
Total
$
46,807
$
47,555
There were no gross gains or losses resulting from sales of available securities during the three months ended September 30, 2019 and $0.5 million of gross losses resulting from sales of available-for-sale securities during the nine months ended September 30, 2019. There were no gross gains or losses resulting from sales of available-for-sale securities during the three and nine months ended September 30, 2018.
9
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, 2019 and December 31, 2018 was $272.1 million and $469.8 million, which was approximately 46% and 93%, respectively, of the Company’s available-for-sale and held-to-maturity securities portfolios. These declines resulted primarily from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, with the resulting loss recognized in net income in the period the other-than-temporary impairment (“OTTI”) is identified.
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 primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2019.
Mortgage-Backed Securities
The unrealized losses on the Company’s investments in mortgage-backed securities were caused by interest rate changes. The Company expects to recover the amortized cost bases over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2019.
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, 2019 and December 31, 2018.
September 30, 2019
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
$
5,821
$
(53
)
$
65,936
$
(1,733
)
$
71,757
$
(1,786
)
Municipal securities
2,020
(6
)
—
—
2,020
(6
)
Mortgage-backed securities
68,414
(364
)
90,215
(2,039
)
158,629
(2,403
)
Asset-backed securities
—
—
4,931
(69
)
4,931
(69
)
Corporate securities
—
—
22,225
(2,292
)
22,225
(2,292
)
Total
$
76,255
$
(423
)
$
183,307
$
(6,133
)
$
259,562
$
(6,556
)
September 30, 2019
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Securities held-to-maturity
Corporate securities
$
10,058
$
(45
)
$
2,514
$
(6
)
$
12,572
$
(51
)
Total
$
10,058
$
(45
)
$
2,514
$
(6
)
$
12,572
$
(51
)
10
December 31, 2018
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Securities available-for-sale
U.S. Government-sponsored agencies
$
69,798
$
(893
)
$
33,511
$
(1,173
)
$
103,309
$
(2,066
)
Municipal securities
23,747
(710
)
59,938
(3,964
)
83,685
(4,674
)
Mortgage-backed securities
56,177
(529
)
172,442
(8,213
)
228,619
(8,742
)
Asset-backed securities
4,859
(143
)
—
—
4,859
(143
)
Corporate securities
14,092
(586
)
19,391
(2,609
)
33,483
(3,195
)
Total
$
168,673
$
(2,861
)
$
285,282
$
(15,959
)
$
453,955
$
(18,820
)
December 31, 2018
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Securities held-to-maturity
Municipal securities
$
9,801
$
(356
)
$
—
$
—
$
9,801
$
(356
)
Corporate securities
6,037
(56
)
—
—
6,037
(56
)
Total
$
15,838
$
(412
)
$
—
$
—
$
15,838
$
(412
)
There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of income during the three and nine months ended September 30, 2018. Amounts reclassified from accumulated other comprehensive loss and the affected line items in the condensed consolidated statements of income during the three and nine months ended September 30, 2019 were as follows:
Details About Accumulated Other Comprehensive Loss Components
Amounts Reclassified from
Accumulated Other Comprehensive Loss for the
Affected Line Item in the
Statements of Income
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
Realized losses on securities available-for-sale
Loss realized in earnings
$
—
$
(458
)
Loss on sale of securities
Total reclassified amount before tax
—
(458
)
Income Before Income Taxes
Tax benefit
—
(124
)
Income Tax Provision
Total reclassifications out of accumulated other comprehensive loss
$
—
$
(334
)
Net Income
Note 4: Loans
Loans that management intends to hold until maturity are reported at their outstanding principal balance adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans.
For loans recorded at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
11
Categories of loans include:
September 30, 2019
December 31, 2018
Commercial loans
Commercial and industrial
$
95,078
$
114,382
Owner-occupied commercial real estate
86,357
87,962
Investor commercial real estate
11,852
5,391
Construction
54,131
39,916
Single tenant lease financing
1,008,247
919,440
Public finance
686,622
706,342
Healthcare finance
251,530
117,007
Total commercial loans
2,193,817
1,990,440
Consumer loans
Residential mortgage
320,451
399,898
Home equity
25,042
28,735
Other consumer
296,573
279,771
Total consumer loans
642,066
708,404
Total commercial and consumer loans
2,835,883
2,698,844
Net deferred loan origination costs and premiums and discounts on purchased loans and other(1)
45,389
17,384
Total loans
2,881,272
2,716,228
Allowance for loan losses
(21,683
)
(17,896
)
Net loans
$
2,859,589
$
2,698,332
(1) Includes carrying value adjustments of $27.6 million and $5.0 million as of September 30, 2019 and December 31, 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 the Central Indiana and the 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 typically 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. The Company generally avoids financing special use projects or properties outside of its designated market areas unless other underwriting factors are present to mitigate these additional risks.
12
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 on a nationwide basis 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 are pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenue; 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.
Healthcare Finance: These loans are made to healthcare providers, primarily dentists, for refinancing or acquiring practices, refinancing or acquiring owner-occupied commercial real estate, and equipment purchases. The sources of repayment for these loans are primarily based on the identified cash flows of the borrower (including ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property) and secondarily on the underlying collateral provided by the borrower. This portfolio segment is generally concentrated in the Western and Southwestern regions of the United States with plans to continue expanding nationwide.
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 Company's home equity portfolio segment are generally geographically diverse, as the Company offers these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property values on residential properties, among other economic conditions in the market.
Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.
13
Allowance for Loan Losses Methodology
Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). The portfolio is segmented by loan type, and the required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on average historical losses, adjusted for current economic factors and portfolio trends. Management believes the historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. Management adds qualitative factors for observable trends, changes in internal practices, changes in delinquencies and impairments, and external factors. Observable factors include changes in the composition and size of portfolios, as well as loan terms or concentration levels. The Company evaluates the impact of internal changes such as management and staff experience levels or modification to loan underwriting processes. Delinquency trends are scrutinized for both volume and severity of past due, nonaccrual, or classified loans, as well as any changes in the value of underlying collateral. Finally, the Company considers the effect of other external factors such as national, regional, and local economic and business conditions, as well as competitive, legal, and regulatory requirements. Loans that are considered to be impaired are evaluated to determine the need for a specific allowance by applying at least one of three methodologies: present value of future cash flows; fair value of collateral less costs to sell; or the loan’s observable market price. All troubled debt restructurings (“TDR”) are considered impaired loans. Loans evaluated for impairment are removed from other pools to prevent double-counting. Accounting Standards Codification (“ASC”) Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral less costs to sell and allows existing methods for recognizing interest income.
Provision for Loan Losses
A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations.
Policy for Charging Off Loans
The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest.
14
The following tables present changes in the balance of the ALLL during the three and nine months ended September 30, 2019 and 2018.