| Loans | 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. Categories of loans include: March 31, 2018 December 31, 2017 Commercial loans Commercial and industrial $ 119,893 $ 122,940 Owner-occupied commercial real estate 81,998 75,768 Investor commercial real estate 6,273 7,273 Construction 47,013 49,213 Single tenant lease financing 834,335 803,299 Public finance 481,923 438,341 Healthcare finance 48,891 31,573 Total commercial loans 1,620,326 1,528,407 Consumer loans Residential mortgage 318,298 299,935 Home equity 29,296 30,554 Other consumer 236,185 227,533 Total consumer loans 583,779 558,022 Total commercial and consumer loans 2,204,105 2,086,429 Deferred loan origination costs and premiums and discounts on purchased loans 5,300 4,764 Total loans 2,209,405 2,091,193 Allowance for loan losses (15,560 ) (14,970 ) Net loans $ 2,193,845 $ 2,076,223 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 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. This portfolio segment generally 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 mitigate these additional risks. 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. This portfolio segment is generally concentrated in Central Indiana. 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 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 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. 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. The following tables present changes in the balance of the ALLL during the three months ended March 31, 2018 and 2017 . Three Months Ended March 31, 2018 Allowance for loan losses: Balance, Beginning of Period Provision (Credit) Charged to Expense Losses Recoveries Balance, Commercial and industrial $ 1,738 $ (102 ) $ — $ — $ 1,636 Owner-occupied commercial real estate 803 58 — — 861 Investor commercial real estate 85 (14 ) — — 71 Construction 423 (56 ) — — 367 Single tenant lease financing 7,872 221 — — 8,093 Public finance 959 159 — — 1,118 Healthcare finance 313 171 — — 484 Residential mortgage 956 36 (9 ) 1 984 Home equity 70 (16 ) — 4 58 Other consumer 1,751 393 (296 ) 40 1,888 Total $ 14,970 $ 850 $ (305 ) $ 45 $ 15,560 Three Months Ended March 31, 2017 Allowance for loan losses: Balance, Beginning of Period Provision (Credit) Charged to Expense Losses Recoveries Balance, Commercial and industrial $ 1,352 $ (73 ) $ — $ 44 $ 1,323 Owner-occupied commercial real estate 582 53 — — 635 Investor commercial real estate 168 (67 ) — — 101 Construction 544 (82 ) — — 462 Single tenant lease financing 6,248 605 — — 6,853 Public finance — 142 — — 142 Residential mortgage 754 150 — — 904 Home equity 102 (4 ) — 3 101 Other consumer 1,231 311 (223 ) 54 1,373 Total $ 10,981 $ 1,035 $ (223 ) $ 101 $ 11,894 The following tables present the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2018 and December 31, 2017 . Loans Allowance for Loan Losses March 31, 2018 Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Ending Balance: Ending Balance: Ending Balance Commercial and industrial $ 116,020 $ 3,873 $ 119,893 $ 1,636 $ — $ 1,636 Owner-occupied commercial real estate 81,992 6 81,998 861 — 861 Investor commercial real estate 6,273 — 6,273 71 — 71 Construction 47,013 — 47,013 367 — 367 Single tenant lease financing 834,335 — 834,335 8,093 — 8,093 Public finance 481,923 — 481,923 1,118 — 1,118 Healthcare finance 48,891 — 48,891 484 — 484 Residential mortgage 317,393 905 318,298 984 — 984 Home equity 29,213 83 29,296 58 — 58 Other consumer 236,049 136 236,185 1,888 — 1,888 Total $ 2,199,102 $ 5,003 $ 2,204,105 $ 15,560 $ — $ 15,560 Loans Allowance for Loan Losses December 31, 2017 Ending Balance: Ending Balance: 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 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 that 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. Nonaccrual Loans Any loan which becomes 90 days delinquent or for which the full collection of principal and interest may be in doubt will be considered for nonaccrual status. At the time a loan is placed on nonaccrual status, all accrued but unpaid interest will be reversed from interest income. Placing the loan on nonaccrual status does not relieve the borrower of the obligation to repay interest. A loan placed on nonaccrual status may be restored to accrual status when all delinquent principal and interest has been brought current, and the Company expects full payment of the remaining contractual principal and interest. The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of March 31, 2018 and December 31, 2017 . March 31, 2018 Pass Special Mention Substandard Total Commercial and industrial $ 111,139 $ 4,895 $ 3,859 $ 119,893 Owner-occupied commercial real estate 79,270 2,722 6 81,998 Investor commercial real estate 6,273 — — 6,273 Construction 47,013 — — 47,013 Single tenant lease financing 828,608 5,727 — 834,335 Public finance 481,923 — — 481,923 Healthcare finance 48,891 — — 48,891 Total commercial loans $ 1,603,117 $ 13,344 $ 3,865 $ 1,620,326 March 31, 2018 Performing Nonaccrual Total Residential mortgage $ 317,803 $ 495 $ 318,298 Home equity 29,213 83 29,296 Other consumer 236,104 81 236,185 Total consumer loans $ 583,120 $ 659 $ 583,779 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 consumer loans $ 557,183 $ 839 $ 558,022 The following tables present the Company’s loan portfolio delinquency analysis as of March 31, 2018 and December 31, 2017 . March 31, 2018 30-59 60-89 90 Days Total Current Total Non- Total Loans Commercial and industrial $ 14 $ — $ — $ 14 $ 119,879 $ 119,893 $ — $ — Owner-occupied commercial real estate — — — — 81,998 81,998 — — Investor commercial real estate — — — — 6,273 6,273 — — Construction — — — — 47,013 47,013 — — Single tenant lease financing — — — — 834,335 834,335 — — Public finance — — — — 481,923 481,923 — — Healthcare finance — — — — 48,891 48,891 — — Residential mortgage 121 — 332 453 317,845 318,298 495 — Home equity 83 — — 83 29,213 29,296 83 — Other consumer 231 104 47 382 235,803 236,185 81 — Total $ 449 $ 104 $ 379 $ 932 $ 2,203,173 $ 2,204,105 $ 659 $ — December 31, 2017 30-59 60-89 90 Days Total Current Total Non- Total Loans 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 $ — Impaired Loans A loan is designated as impaired, in accordance with the impairment accounting guidance, when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. Impaired loans include nonperforming loans as well as loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. 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. The following table presents the Company’s impaired loans as of March 31, 2018 and December 31, 2017 . March 31, 2018 December 31, 2017 Recorded Unpaid Specific Recorded Unpaid Specific Loans without a specific valuation allowance Commercial and industrial $ 3,873 $ 3,873 $ — $ 3,886 $ 3,886 $ — Owner-occupied commercial real estate 6 6 — 7 7 — Residential mortgage 905 911 — 1,139 1,144 — Home equity 83 83 — 83 83 — Other consumer 136 205 — 90 143 — Total impaired loans $ 5,003 $ 5,078 $ — $ 5,205 $ 5,263 $ — The table below presents average balances and interest income recognized for impaired loans during the three months ended March 31, 2018 and 2017. Three Months Ended Three Months Ended March 31, 2018 March 31, 2017 Average Interest Average Interest Loans without a specific valuation allowance Commercial and industrial $ 3,875 $ 75 $ 535 $ — Owner-occupied commercial real estate 7 — — — Residential mortgage 1,079 — 1,692 — Home equity 83 — — — Other consumer 113 — 140 — Total 5,157 75 2,367 — Loans with a specific valuation allowance Commercial and industrial — — 28 — Total — — 28 — Total impaired loans $ 5,157 $ 75 $ 2,395 $ — The Company had $0.6 million in residential mortgage other real estate owned as of March 31, 2018 and had $0.6 million in residential mortgage other real estate owned as of December 31, 2017 . There were $0.3 million and $0.2 million of loans at March 31, 2018 and December 31, 2017 , 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 no loans classified as new TDRs during the three months ended March 31, 2018 and 2017. |
