Loans | Loans Categories of loans include: December 31, 2017 2016 Commercial loans Commercial and industrial $ 122,940 $ 102,437 Owner-occupied commercial real estate 75,768 57,668 Investor commercial real estate 7,273 13,181 Construction 49,213 53,291 Single tenant lease financing 803,299 606,568 Public finance 438,341 — Healthcare finance 31,573 — Total commercial loans 1,528,407 833,145 Consumer loans Residential mortgage 299,935 205,554 Home equity 30,554 35,036 Other consumer 227,533 173,449 Total consumer loans 558,022 414,039 Total commercial and consumer loans 2,086,429 1,247,184 Net deferred loan origination costs and premiums and discounts on purchased loans 4,764 3,605 Total loans 2,091,193 1,250,789 Allowance for loan losses (14,970 ) (10,981 ) Net loans $ 2,076,223 $ 1,239,808 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 ideally 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 in seven states, primarily in the Midwest, with plans to continue expanding nationwide. Healthcare Finance: These loans are made to healthcare providers, primarily dentists, for refinancing or acquiring practices, refinancing or acquiring owner-occupied commercial real estate, and equipment purchases. These loans’ sources of repayment are primarily based on the identified cash flows of the borrower (including ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property) and secondarily on the underlying collateral provided by the borrower. This portfolio segment is generally concentrated in the Western United States with plans to expand nationwide. Residential Mortgage: With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-4 family residences. The properties securing the 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 allowance for loan losses during the twelve months ended December 31, 2017 , 2016 , and 2015 . 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 $ 588 $ (271 ) $ 69 $ 1,738 Owner-occupied commercial real estate 582 221 — — 803 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 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 Twelve Months Ended December 31, 2016 Balance, beginning of period Provision (credit) charged to expense Losses charged off Recoveries Balance, end of period Allowance for loan losses: Commercial and industrial $ 1,367 $ 1,380 $ (1,582 ) $ 187 $ 1,352 Owner-occupied commercial real estate 476 106 — — 582 Investor commercial real estate 212 (44 ) — — 168 Construction 500 44 — — 544 Single tenant lease financing 3,931 2,317 — — 6,248 Residential mortgage 896 (38 ) (134 ) 30 754 Home equity 125 (3 ) (33 ) 13 102 Other consumer 844 568 (440 ) 259 1,231 Total $ 8,351 $ 4,330 $ (2,189 ) $ 489 $ 10,981 Twelve Months Ended December 31, 2015 Balance, beginning of period Provision (credit) charged to expense Losses charged off Recoveries Balance, end of period Allowance for loan losses: Commercial and industrial $ 920 $ 447 $ — $ — $ 1,367 Owner-occupied commercial real estate 345 131 — — 476 Investor commercial real estate 261 (549 ) — 500 212 Construction 330 170 — — 500 Single tenant lease financing 2,061 1,870 — — 3,931 Residential mortgage 985 (311 ) (185 ) 407 896 Home equity 207 (83 ) — 1 125 Other consumer 691 271 (451 ) 333 844 Total $ 5,800 $ 1,946 $ (636 ) $ 1,241 $ 8,351 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, 2017 and 2016 . Loans Allowance for Loan Losses December 31, 2017 Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Ending Balance: Ending Balance: Ending Balance Commercial and industrial $ 119,054 $ 3,886 $ 122,940 $ 1,738 $ — $ 1,738 Owner-occupied commercial real estate 75,761 7 75,768 803 — 803 Investor commercial real estate 7,273 — 7,273 85 — 85 Construction 49,213 — 49,213 423 — 423 Single tenant lease financing 803,299 — 803,299 7,872 — 7,872 Public finance 438,341 — 438,341 959 — 959 Healthcare finance 31,573 — 31,573 313 — 313 Residential mortgage 298,796 1,139 299,935 956 — 956 Home equity 30,471 83 30,554 70 — 70 Other consumer 227,443 90 227,533 1,751 — 1,751 Total $ 2,081,224 $ 5,205 $ 2,086,429 $ 14,970 $ — $ 14,970 Loans Allowance for Loan Losses December 31, 2016 Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Ending Balance: Ending Balance: Ending Balance Commercial and industrial $ 102,437 $ — $ 102,437 $ 1,352 $ — $ 1,352 Owner-occupied commercial real estate 57,668 — 57,668 582 — 582 Investor commercial real estate 13,181 — 13,181 168 — 168 Construction 53,291 — 53,291 544 — 544 Single tenant lease financing 606,568 — 606,568 6,248 — 6,248 Residential mortgage 203,842 1,712 205,554 754 — 754 Home equity 35,036 — 35,036 102 — 102 Other consumer 173,321 128 173,449 1,231 — 1,231 Total $ 1,245,344 $ 1,840 $ 1,247,184 $ 10,981 $ — $ 10,981 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, 2017 and 2016 . December 31, 2017 Pass Special Mention Substandard Total Commercial and industrial $ 113,840 $ 5,203 $ 3,897 $ 122,940 Owner-occupied commercial real estate 72,995 2,766 7 75,768 Investor commercial real estate 7,273 — — 7,273 Construction 49,213 — — 49,213 Single tenant lease financing 796,307 6,992 — 803,299 Public finance 438,341 — — 438,341 Healthcare finance 31,573 — — 31,573 Total commercial loans $ 1,509,542 $ 14,961 $ 3,904 $ 1,528,407 December 31, 2017 Performing Nonaccrual Total Residential mortgage $ 299,211 $ 724 $ 299,935 Home equity 30,471 83 30,554 Other consumer 227,501 32 227,533 Total $ 557,183 $ 839 $ 558,022 December 31, 2016 Pass Special Mention Substandard Total Commercial and industrial $ 99,200 $ 2,746 $ 491 $ 102,437 Owner-occupied commercial real estate 57,657 — 11 57,668 Investor commercial real estate 13,181 — — 13,181 Construction 53,291 — — 53,291 Single tenant lease financing 605,190 1,378 — 606,568 Total commercial loans $ 828,519 $ 4,124 $ 502 $ 833,145 December 31, 2016 Performing Nonaccrual Total Residential mortgage $ 204,530 $ 1,024 $ 205,554 Home equity 35,036 — 35,036 Other consumer 173,390 59 173,449 Total $ 412,956 $ 1,083 $ 414,039 The following tables present the Company’s loan portfolio delinquency analysis as of December 31, 2017 and 2016 . December 31, 2017 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 $ — $ 10 $ — $ 10 $ 122,930 $ 122,940 $ — $ — Owner-occupied commercial real estate — — — — 75,768 75,768 — — Investor commercial real estate — — — — 7,273 7,273 — — Construction — — — — 49,213 49,213 — — Single tenant lease financing — — — — 803,299 803,299 — — Public finance — — — — 438,341 438,341 — — Healthcare finance — — — — 31,573 31,573 — — Residential mortgage — 23 560 583 299,352 299,935 724 — Home equity — — 83 83 30,471 30,554 83 — Other consumer 299 110 6 415 227,118 227,533 32 — Total $ 299 $ 143 $ 649 $ 1,091 $ 2,085,338 $ 2,086,429 $ 839 $ — December 31, 2016 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 $ 27 $ — $ — $ 27 $ 102,410 $ 102,437 $ — $ — Owner-occupied commercial real estate — — — — 57,668 57,668 — — Investor commercial real estate — — — — 13,181 13,181 — — Construction — — — — 53,291 53,291 — — Single tenant lease financing — — — — 606,568 606,568 — — Residential mortgage — 347 991 1,338 204,216 205,554 1,024 — Home equity — — — — 35,036 35,036 — — Other consumer 173 91 25 289 173,160 173,449 59 — Total $ 200 $ 438 $ 1,016 $ 1,654 $ 1,245,530 $ 1,247,184 $ 1,083 $ — The following tables present the Company’s impaired loans as of December 31, 2017 and 2016 . There were no impaired loans with a specific valuation allowance as of December 31, 2017 and 2016 . December 31, 2017 December 31, 2016 Recorded Unpaid Specific Recorded Unpaid Specific Loans without a specific valuation allowance Commercial and industrial $ 3,886 $ 3,886 $ — $ — $ — $ — Owner-occupied commercial real estate 7 7 — — — — Residential mortgage 1,139 1,144 — 1,712 1,824 — Home equity 83 83 — — — — Other consumer 90 143 — 128 184 — Total impaired loans $ 5,205 $ 5,263 $ — $ 1,840 $ 2,008 $ — The table below presents average balances and interest income recognized for impaired loans during the twelve months ended December 31, 2017 , 2016 , and 2015 . Twelve Months Ended December 31, 2017 December 31, 2016 December 31, 2015 Average Interest Average Interest Average Interest Loans without a specific valuation allowance Commercial and industrial $ 2,942 $ 146 $ — $ — $ — $ — Owner-occupied commercial real estate 3 — — — — — Investor commercial real estate — — — — 21 2 Residential mortgage 1,546 6 1,595 8 1,112 8 Home equity 5 — — — — — Other consumer 105 4 149 5 193 16 Total 4,601 156 1,744 13 1,326 26 Loans with a specific valuation allowance Commercial and industrial 35 — 1,084 — — — Residential mortgage — — — — 15 — Other consumer — — — — 13 1 Total 35 — 1,084 — 28 1 Total impaired loans $ 4,636 $ 156 $ 2,828 $ 13 $ 1,354 $ 27 As of December 31, 2017 and December 31, 2016 , the Company had $0.6 million and less than $0.1 million , respectively, in residential mortgage other real estate owned. There were $0.2 million and $1.0 million of loans at December 31, 2017 and December 31, 2016 , respectively, in the process of foreclosure. Troubled Debt Restructurings (“TDRs”) The loan portfolio includes TDRs, which are loans that have been modified to grant economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six consecutive months. When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or using the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance. In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability of the loan. Any loan 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 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. There were no loans classified as new TDRs during the twelve months ended December 31, 2016. The 2017 modifications consisted of maturity date amendments and certain other term modifications. |