| 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, 2019 December 31, 2018 Commercial loans Commercial and industrial $ 112,146 $ 114,382 Owner-occupied commercial real estate 87,482 87,962 Investor commercial real estate 11,188 5,391 Construction 42,319 39,916 Single tenant lease financing 975,841 919,440 Public finance 708,816 706,342 Healthcare finance 158,796 117,007 Total commercial loans 2,096,588 1,990,440 Consumer loans Residential mortgage 404,869 399,898 Home equity 27,794 28,735 Other consumer 285,259 279,771 Total consumer loans 717,922 708,404 Total commercial and consumer loans 2,814,510 2,698,844 Net deferred loan origination costs and premiums and discounts on purchased loans and other (1) 25,418 17,384 Total loans 2,839,928 2,716,228 Allowance for loan losses (18,841 ) (17,896 ) Net loans $ 2,821,087 $ 2,698,332 (1) Includes carrying value adjustments of $11.5 million and $5.0 million as of March 31, 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. 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 include 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 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. 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, 2019 and 2018 . Three Months Ended March 31, 2019 Allowance for loan losses: Balance, Beginning of Period Provision (Credit) Charged to Expense Losses Recoveries Balance, Commercial and industrial $ 1,479 $ 77 $ (112 ) $ — $ 1,444 Owner-occupied commercial real estate 891 (44 ) — — 847 Investor commercial real estate 61 42 — — 103 Construction 251 16 — — 267 Single tenant lease financing 8,827 541 — — 9,368 Public finance 1,670 (20 ) — — 1,650 Healthcare finance 1,264 467 — — 1,731 Residential mortgage 1,079 (36 ) — 1 1,044 Home equity 53 (6 ) — 2 49 Other consumer 2,321 248 (317 ) 86 2,338 Total $ 17,896 $ 1,285 $ (429 ) $ 89 $ 18,841 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 The following tables present the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2019 and December 31, 2018 . Loans Allowance for Loan Losses March 31, 2019 Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Ending Balance: Ending Balance: Ending Balance Commercial and industrial $ 108,564 $ 3,582 $ 112,146 $ 1,444 $ — $ 1,444 Owner-occupied commercial real estate 85,528 1,954 87,482 847 — 847 Investor commercial real estate 11,188 — 11,188 103 — 103 Construction 42,319 — 42,319 267 — 267 Single tenant lease financing 975,841 — 975,841 9,368 — 9,368 Public finance 708,816 — 708,816 1,650 — 1,650 Healthcare finance 158,796 — 158,796 1,731 — 1,731 Residential mortgage 401,316 3,553 404,869 1,044 — 1,044 Home equity 27,794 — 27,794 49 — 49 Other consumer 285,177 82 285,259 2,338 — 2,338 Total $ 2,805,339 $ 9,171 $ 2,814,510 $ 18,841 $ — $ 18,841 Loans Allowance for Loan Losses December 31, 2018 Ending Balance: Ending Balance: Ending Balance Ending Balance: Ending Balance: Ending Balance Commercial and industrial $ 108,742 $ 5,640 $ 114,382 $ 1,479 $ — $ 1,479 Owner-occupied commercial real estate 85,653 2,309 87,962 891 — 891 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 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 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, 2019 and December 31, 2018 . March 31, 2019 Pass Special Mention Substandard Total Commercial and industrial $ 105,096 $ 3,611 $ 3,439 $ 112,146 Owner-occupied commercial real estate 73,947 11,581 1,954 87,482 Investor commercial real estate 11,188 — — 11,188 Construction 42,319 — — 42,319 Single tenant lease financing 971,304 4,537 — 975,841 Public finance 708,816 — — 708,816 Healthcare finance 158,796 — — 158,796 Total commercial loans $ 2,071,466 $ 19,729 $ 5,393 $ 2,096,588 March 31, 2019 Performing Nonaccrual Total Residential mortgage $ 401,706 $ 3,163 $ 404,869 Home equity 27,794 — 27,794 Other consumer 285,191 68 285,259 Total consumer loans $ 714,691 $ 3,231 $ 717,922 December 31, 2018 Pass Special Mention Substandard Total Commercial and industrial $ 107,666 $ 1,076 $ 5,640 $ 114,382 Owner-occupied commercial real estate 81,264 4,389 2,309 87,962 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 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 consumer loans $ 708,132 $ 272 $ 708,404 The following tables present the Company’s loan portfolio delinquency analysis as of March 31, 2019 and December 31, 2018 . March 31, 2019 30-59 60-89 90 Days Total Current Total Non- Total Loans Commercial and industrial $ — $ — $ — $ — $ 112,146 $ 112,146 $ 192 $ — Owner-occupied commercial real estate — — — — 87,482 87,482 — — Investor commercial real estate — — — — 11,188 11,188 — — Construction — — — — 42,319 42,319 — — Single tenant lease financing 1,563 — — 1,563 974,278 975,841 — — Public finance — — — — 708,816 708,816 — — Healthcare finance — — — — 158,796 158,796 — — Residential mortgage — — 3,118 3,118 401,751 404,869 3,163 — Home equity — — — — 27,794 27,794 — — Other consumer 227 172 32 431 284,828 285,259 68 9 Total $ 1,790 $ 172 $ 3,150 $ 5,112 $ 2,809,398 $ 2,814,510 $ 3,423 $ 9 December 31, 2018 30-59 60-89 90 Days Total Current Total Non- Total Loans Commercial and industrial $ 9 $ — $ — $ 9 $ 114,373 $ 114,382 $ 195 $ — Owner-occupied commercial real estate 92 234 — 326 87,636 87,962 325 — 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 — — 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 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 troubled debt restructurings 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, 2019 and December 31, 2018 . March 31, 2019 December 31, 2018 Recorded Unpaid Specific Recorded Unpaid Specific Loans without a specific valuation allowance Commercial and industrial $ 3,582 $ 3,597 $ — $ 5,640 $ 5,652 $ — Owner-occupied commercial real estate 1,954 1,954 — 2,309 2,309 — Residential mortgage 3,553 3,554 — 570 570 — Home equity — — — 55 55 — Other consumer 82 166 — 57 124 — Total impaired loans $ 9,171 $ 9,271 $ — $ 8,631 $ 8,710 $ — The table below presents average balances and interest income recognized for impaired loans during the three months ended March 31, 2019 and 2018. Three Months Ended March 31, 2019 March 31, 2018 Average Interest Average Interest Loans without a specific valuation allowance Commercial and industrial $ 4,699 $ 81 $ 3,875 $ 75 Owner-occupied commercial real estate 2,205 27 7 — Residential mortgage 2,054 — 1,079 — Home equity 41 — 83 — Other consumer 76 — 113 — Total impaired loans $ 9,075 $ 108 $ 5,157 $ 75 The Company had $0.6 million in residential mortgage other real estate owned as of March 31, 2019 and December 31, 2018 . There were no loans in the process of foreclosure at March 31, 2019 and December 31, 2018 . 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, 2019 and 2018. There were no performing TDRs that had payment defaults within the twelve months following modification during the three months ended March 31, 2019 and 2018. |
