| Loans | Loans Loan balances as of March 31, 2020 and December 31, 2019 are summarized in the table below. Categories of loans include: (in thousands) March 31, 2020 December 31, 2019 Commercial loans Commercial and industrial $ 95,227 $ 96,420 Owner-occupied commercial real estate 74,737 73,392 Investor commercial real estate 13,421 12,567 Construction 64,581 60,274 Single tenant lease financing 972,275 995,879 Public finance 627,678 687,094 Healthcare finance 372,266 300,612 Small business lending 67,275 60,279 Total commercial loans 2,287,460 2,286,517 Consumer loans Residential mortgage 218,730 313,849 Home equity 23,855 24,306 Other consumer 296,605 295,309 Total consumer loans 539,190 633,464 Total commercial and consumer loans 2,826,650 2,919,981 Net deferred loan origination costs and premiums and discounts on purchased loans and other (1) 65,443 43,566 Total loans 2,892,093 2,963,547 Allowance for loan losses (22,857 ) (21,840 ) Net loans $ 2,869,236 $ 2,941,707 (1) Includes carrying value adjustments of $44.6 million and $21.4 million as of March 31, 2020 and December 31, 2019, respectively, related to interest rate swaps associated with public finance loans. The risk characteristics of each loan portfolio segment are as follows: Commercial and Industrial: Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. This portfolio segment is generally concentrated in Central Indiana and adjacent markets and the greater Phoenix, Arizona market. Owner-Occupied Commercial Real Estate: The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio segment is generally concentrated in Central Indiana and adjacent markets and the greater Phoenix, Arizona market and its loans are often secured by manufacturing and service facilities, as well as office buildings. Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee from the primary sponsor or sponsors. This portfolio segment generally involves larger loan amounts with repayment primarily dependent on the successful leasing and operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by changing economic conditions in the real estate markets, industry dynamics or the overall health of the local economy where the property is located. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are generally located in the state of Indiana or markets immediately adjacent to Indiana. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, economic and industry conditions together with other risk grade criteria. As a general rule, the Company avoids financing special use projects or properties outside of its designated market areas unless other underwriting factors are present to mitigate these additional risks. Construction: Construction loans are secured by land and related improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, multi-family) properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, architectural services, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. This portfolio segment is generally concentrated in Central Indiana. Single Tenant Lease Financing: These loans are made on a nationwide basis to property owners of real estate subject to long-term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria. Public Finance: These loans are made to governmental and not-for-profit entities to provide both tax-exempt and taxable loans for a variety of purposes including: short-term cash-flow needs; debt refinancing; economic development; quality of life projects; infrastructure improvements; and equipment financing. The primary sources of repayment for public finance loans include pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenues; sales tax; and pledged general revenue. Certain loans may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment. Public finance loans have been completed primarily in the Midwest, with plans to continue expanding nationwide. Healthcare Finance: These loans are made to healthcare providers, primarily dentists, for practice acquisition refinancing that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment are primarily based on the identified cash flows from operations of the borrower and related entities if the real estate is held in a separate entity and secondarily on the underlying collateral provided by the borrower. This portfolio segment was initially concentrated in the Western United States but has been growing rapidly throughout the rest of the country with the addition of a growing sales force located in Eastern and Midwestern markets. Small Business Lending: These loans are to small businesses and generally carry a partial guaranty from the U.S. Small Business Administration ("SBA"). We generally sell the government guaranteed portion of SBA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. For SBA loans where the guaranteed portion is retained, the SBA guaranty provides a tertiary source of repayment to the Bank in event of borrower default. Cash flows of borrowers, however, may not be as expected and collateral securing these loans may fluctuate in value. Loans are made for a broad array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating equipment purchases. This portfolio segment has an emerging geography, with a nationwide focus. Residential Mortgage: With respect to residential loans that are secured by 1-to-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-to-4 family residences. The properties securing the home equity portfolio segment are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property values on residential properties, among other economic conditions in the market. Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country. 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 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, 2020 and 2019 . (in thousands) Three Months Ended March 31, 2020 Allowance for loan losses: Balance, Beginning of Period Provision (Credit) Charged to Expense Losses Recoveries Balance, Commercial and industrial $ 1,521 $ 346 $ (197 ) $ — $ 1,670 Owner-occupied commercial real estate 561 84 — — 645 Investor commercial real estate 109 19 — — 128 Construction 380 80 — — 460 Single tenant lease financing 11,175 (420 ) — — 10,755 Public finance 1,580 (97 ) — — 1,483 Healthcare finance 3,247 1,071 — — 4,318 Small business lending 54 203 — 8 265 Residential mortgage 657 (143 ) (15 ) 1 500 Home equity 46 5 — 2 53 Other consumer 2,510 313 (286 ) 43 2,580 Total $ 21,840 $ 1,461 $ (498 ) $ 54 $ 22,857 (in thousands) 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 $ 1,384 $ 79 $ (112 ) $ — $ 1,351 Owner-occupied commercial real estate 783 (38 ) — — 745 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 Small business lending 203 (8 ) — — 195 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 The following tables present the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2020 and December 31, 2019 . (in thousands) Loans Allowance for Loan Losses March 31, 2020 Ending Balance: Collectively Evaluated for Impairment Ending Balance: Individually Evaluated for Impairment Ending Balance Ending Balance: Ending Balance: Ending Balance Commercial and industrial $ 94,329 $ 898 $ 95,227 $ 1,561 $ 109 $ 1,670 Owner-occupied commercial real estate 74,142 595 74,737 645 — 645 Investor commercial real estate 13,421 — 13,421 128 — 128 Construction 64,581 — 64,581 460 — 460 Single tenant lease financing 967,595 4,680 972,275 9,095 1,660 10,755 Public finance 627,678 — 627,678 1,483 — 1,483 Healthcare finance 372,266 — 372,266 4,318 — 4,318 Small business lending 63,948 3,327 67,275 265 265 Residential mortgage 217,370 1,360 218,730 500 — 500 Home equity 23,855 — 23,855 53 — 53 Other consumer 296,557 48 296,605 2,580 — 2,580 Total $ 2,815,742 $ 10,908 $ 2,826,650 $ 21,088 $ 1,769 $ 22,857 (in thousands) Loans Allowance for Loan Losses December 31, 2019 Ending Balance: Ending Balance: Ending Balance Ending Balance: Ending Balance: Ending Balance Commercial and industrial $ 93,520 $ 2,900 $ 96,420 $ 1,412 $ 109 $ 1,521 Owner-occupied commercial real estate 71,067 2,325 73,392 561 — 561 Investor commercial real estate 12,567 — 12,567 109 — 109 Construction 60,274 — 60,274 380 — 380 Single tenant lease financing 991,199 4,680 995,879 9,515 1,660 11,175 Public finance 687,094 — 687,094 1,580 — 1,580 Healthcare finance 300,612 — 300,612 3,247 — 3,247 Small business lending 56,941 3,338 60,279 54 54 Residential mortgage 312,714 1,135 313,849 657 — 657 Home equity 24,306 — 24,306 46 — 46 Other consumer 295,266 43 295,309 2,510 — 2,510 Total $ 2,905,560 $ 14,421 $ 2,919,981 $ 20,071 $ 1,769 $ 21,840 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, 2020 and December 31, 2019 . March 31, 2020 (in thousands) Pass Special Mention Substandard Total Commercial and industrial $ 91,028 $ 3,301 $ 898 $ 95,227 Owner-occupied commercial real estate 74,142 — 595 74,737 Investor commercial real estate 13,421 — — 13,421 Construction 64,581 — — 64,581 Single tenant lease financing 959,161 8,434 4,680 972,275 Public finance 627,678 — — 627,678 Healthcare finance 371,203 1,063 — 372,266 Small business lending 62,226 1,722 3,327 67,275 Total commercial loans $ 2,263,440 $ 14,520 $ 9,500 $ 2,287,460 March 31, 2020 (in thousands) Performing Nonaccrual Total Residential mortgage $ 217,739 $ 991 $ 218,730 Home equity 23,855 — 23,855 Other consumer 296,566 39 296,605 Total consumer loans $ 538,160 $ 1,030 $ 539,190 December 31, 2019 (in thousands) Pass Special Mention Substandard Total Commercial and industrial $ 89,818 $ 3,973 $ 2,629 $ 96,420 Owner-occupied commercial real estate 71,068 1,727 597 73,392 Investor commercial real estate 12,567 — — 12,567 Construction 60,274 — — 60,274 Single tenant lease financing 983,448 7,751 4,680 995,879 Public finance 687,094 — — 687,094 Healthcare finance 300,612 — — 300,612 Small business lending 55,206 1,735 3,338 60,279 Total commercial loans $ 2,260,087 $ 15,186 $ 11,244 $ 2,286,517 December 31, 2019 (in thousands) Performing Nonaccrual Total Residential mortgage $ 313,088 $ 761 $ 313,849 Home equity 24,306 — 24,306 Other consumer 295,276 33 295,309 Total consumer loans $ 632,670 $ 794 $ 633,464 The following tables present the Company’s loan portfolio delinquency analysis as of March 31, 2020 and December 31, 2019 . March 31, 2020 (in thousands) 30-59 60-89 90 Days Total Current Total Non- Total Loans Commercial and industrial $ — $ — $ 285 $ 285 $ 94,942 $ 95,227 $ 218 $ 73 Owner-occupied commercial real estate — — 464 464 74,273 74,737 464 — Investor commercial real estate — — — — 13,421 13,421 — — Construction — — — — 64,581 64,581 — — Single tenant lease financing — — 4,680 4,680 967,595 972,275 4,680 — Public finance — — — — 627,678 627,678 — — Healthcare finance — — — — 372,266 372,266 — — Small business lending 676 43 926 1,645 65,630 67,275 926 — Residential mortgage 870 — 1,042 1,912 216,818 218,730 991 51 Home equity — — — — 23,855 23,855 — — Other consumer 95 149 1 245 296,360 296,605 39 1 Total $ 1,641 $ 192 $ 7,398 $ 9,231 $ 2,817,419 $ 2,826,650 $ 7,318 $ 125 December 31, 2019 (in thousands) 30-59 60-89 90 Days Total Current Total Non- Total Loans Commercial and industrial $ 15 $ 96 $ 122 $ 233 $ 96,187 $ 96,420 $ 226 $ — Owner-occupied commercial real estate — — 464 464 72,928 73,392 464 — Investor commercial real estate — — — — 12,567 12,567 — — Construction — — — — 60,274 60,274 — — Single tenant lease financing — 4,680 — 4,680 991,199 995,879 4,680 — Public finance — — — — 687,094 687,094 — — Healthcare finance — — — — 300,612 300,612 — — Small business lending 54 — 54 60,225 60,279 — — Residential mortgage — — 1,177 1,177 312,672 313,849 761 416 Home equity — — — — 24,306 24,306 — — Other consumer 240 107 — 347 294,962 295,309 33 — Total $ 309 $ 4,883 $ 1,763 $ 6,955 $ 2,913,026 $ 2,919,981 $ 6,164 $ 416 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, 2020 and December 31, 2019 . March 31, 2020 December 31, 2019 (in thousands) Recorded Unpaid Specific Recorded Unpaid Specific Loans without a specific valuation allowance Commercial and industrial $ 695 $ 697 $ — $ 2,693 $ 2,694 $ — Owner-occupied commercial real estate 595 598 — 2,325 2,327 — Small business lending 3,327 3,327 — 3,338 3,338 — Residential mortgage 1,360 1,450 — 1,135 1,209 — Other consumer 48 116 — 43 107 — Total 6,025 6,188 — 9,534 9,675 — Loans with a specific valuation allowance Commercial and industrial 203 240 109 207 244 109 Single tenant lease financing 4,680 4,680 1,660 4,680 4,680 1,660 Total 4,883 4,920 1,769 4,887 4,924 1,769 Total impaired loans $ 10,908 $ 11,108 $ 1,769 $ 14,421 $ 14,599 $ 1,769 The table below presents average balances and interest income recognized for impaired loans during the three months ended March 31, 2020 and 2019. Three Months Ended March 31, 2020 March 31, 2019 (in thousands) Average Interest Average Interest Loans without a specific valuation allowance Commercial and industrial $ 2,066 $ 18 $ 4,699 $ 81 Owner-occupied commercial real estate 1,890 2 1,253 13 Small business lending 3,332 — 952 14 Residential mortgage 1,274 — 2,054 — Home equity — — 41 — Other consumer 45 — 76 — Total 8,607 20 9,075 108 Loans with a specific valuation allowance Commercial and industrial 204 — — — Single tenant lease financing 4,680 — — — Total 4,884 — — — Total impaired loans $ 13,491 $ 20 $ 9,075 $ 108 The Company had no residential mortgage other real estate owned as of March 31, 2020 and December 31, 2019 . There were no loans in the process of foreclosure at March 31, 2020 and December 31, 2019 . Troubled Debt Restructurings The loan portfolio includes TDRs, which are loans that have been modified to grant economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six consecutive months. When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or using the current fair value of the collateral, less selling costs, for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance. In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability of the loan. Any loan modification is reviewed by the Company to identify whether a TDR has occurred when the Company grants a concession to the borrower that it would not otherwise consider based on economic or legal reasons related to a borrower’s financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status or the loan may be restructured to secure additional collateral and/or guarantees to support the debt, or a combination of the two. There were no commercial and industrial loans classified as new TDRs during the three months ended March 31, 2020 and 2019. There were no performing TDRs that had payment defaults within the twelve months following modification during the three months ended March 31, 2020 and 2019. Non-TDR Loan Modifications due to COVID-19 The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) further provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of December 31, 2020 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. In accordance with this guidance, the Company offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments. The modifications completed in the three months ended March 31, 2020 consisted of only loans in the healthcare finance portfolio with total balances of $233.5 million . |
