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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ to ________.
 
Commission File Number 001-35750 
First Internet Bancorp
(Exact Name of Registrant as Specified in Its Charter)
Indiana   20-3489991
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     
11201 USA Parkway
Fishers, IN
  46037
(Address of Principal Executive Offices)   (Zip Code)
(317) 532-7900
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbols Name of each exchange on which registered
Common Stock, without par value INBK The Nasdaq Stock Market LLC
6.0% Fixed to Floating Subordinated Notes due 2026 INBKL The Nasdaq Stock Market LLC
6.0% Fixed to Floating Subordinated Notes due 2029 INBKZ The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨
Accelerated Filer þ
Non-accelerated Filer ¨
Smaller Reporting Company ☑
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No þ
 
As of October 30, 2020, the registrant had 9,800,569 shares of common stock issued and outstanding.



Cautionary Note Regarding Forward-Looking Statements
  
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the current expectations of First Internet Bancorp and its consolidated subsidiaries (“we,” “our,” “us” or the “Company”) regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “anticipate,” “attempt,” “believe,” “can,” “continue,” “could,” “effort,” “estimate,” “expect,” “intend,” “likely,” “may,” “objective,” “optimistic,” “pending,” “plan,” “position,” “potential,” “preliminary,” “remain,” “should,” “will,” “would” and other similar expressions. Forward-looking statements are not a guarantee of future performance or results, are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the information in the forward-looking statements.  The COVID-19 pandemic has resulted in deterioration of general business and economic conditions and continued to impact us, our customers, counterparties, employees, and third-party service providers. Sustained deterioration in market conditions could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. The ultimate magnitude and duration of the pandemic is still unknown at this time, therefore, the extent of the impact on our business, financial position, results of operations, liquidity and prospects remains uncertain. Other factors that may cause such differences include: general economic conditions, whether national or regional, and conditions in the lending markets in which we participate that may have an adverse effect on the demand for our loans and other products; our credit quality and related levels of nonperforming assets and loan losses, and the value and salability of the real estate that we own or that is the collateral for our loans; failures or breaches of or interruptions in the communication and information systems on which we rely to conduct our business that could reduce our revenues, increase our costs or lead to disruptions in our business; our plans to grow our commercial real estate, commercial and industrial, public finance, U.S. Small Business Administration and healthcare finance loan portfolios, which may carry greater risks of non-payment or other unfavorable consequences; our dependence on capital distributions from First Internet Bank of Indiana (the “Bank”); results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets; changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Bank in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums; regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet; our liquidity requirements being adversely affected by changes in our assets and liabilities; the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals; execution of future acquisition, reorganization or disposition transactions, including without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings and other anticipated benefits from such transactions; changes in applicable tax laws; the growth and profitability of noninterest or fee income being less than expected; the loss of any key members of senior management; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board and other regulatory agencies; and the effect of fiscal and governmental policies of the United States federal government. Additional factors that may affect our results include those discussed in this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K under the heading “Risk Factors” and in other reports filed with the SEC. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

Except as required by law, we do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

i


PART I

ITEM 1.    FINANCIAL STATEMENTS 

First Internet Bancorp
Condensed Consolidated Balance Sheets
(Amounts in thousands except share data)
  September 30, 2020 December 31, 2019
  (Unaudited)  
Assets    
Cash and due from banks $ 5,804  $ 5,061 
Interest-bearing deposits 482,649  322,300 
Total cash and cash equivalents 488,453  327,361 
Securities available-for-sale, at fair value (amortized cost of $528,052 and $546,640 in 2020 and 2019, respectively) 528,311  540,852 
Securities held-to-maturity, at amortized cost (fair value of $69,176 and $62,560 in 2020 and 2019, respectively) 68,254  61,878 
Loans held-for-sale (includes 35,321 and 56,097 at fair value in 2020 and 2019, respectively) 76,208  56,097 
Loans 3,012,914  2,963,547 
Allowance for loan losses (26,917) (21,840)
Net loans 2,985,997  2,941,707 
Accrued interest receivable 17,768  18,607 
Federal Home Loan Bank of Indianapolis stock 25,650  25,650 
Cash surrender value of bank-owned life insurance 37,714  37,002 
Premises and equipment, net 31,262  14,630 
Goodwill 4,687  4,687 
Servicing asset, at fair value 2,818  2,481 
Other real estate owned —  2,065 
Accrued income and other assets 66,502  67,066 
Total assets $ 4,333,624  $ 4,100,083 
Liabilities and Shareholders’ Equity    
Liabilities    
Noninterest-bearing deposits $ 86,088  $ 57,115 
Interest-bearing deposits 3,286,303  3,096,848 
Total deposits 3,372,391  3,153,963 
Advances from Federal Home Loan Bank 514,914  514,910 
Subordinated debt, net of unamortized debt issuance costs of $2,242 and $2,472 in 2020 and 2019, respectively 69,758  69,528 
Accrued interest payable 1,249  3,767 
Accrued expenses and other liabilities 57,210  53,002 
Total liabilities 4,015,522  3,795,170 
Commitments and Contingencies
Shareholders’ Equity    
Preferred stock, no par value; 4,913,779 shares authorized; issued and outstanding - none —  — 
Voting common stock, no par value; 45,000,000 shares authorized; 9,800,569 and 9,741,800 shares issued and outstanding in 2020 and 2019, respectively 220,951  219,423 
Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none —  — 
Retained earnings 116,241  99,681 
Accumulated other comprehensive loss (19,090) (14,191)
Total shareholders’ equity 318,102  304,913 
Total liabilities and shareholders’ equity $ 4,333,624  $ 4,100,083 

See Notes to Condensed Consolidated Financial Statements
1


First Internet Bancorp
Condensed Consolidated Statements of Income – Unaudited
(Amounts in thousands except share and per share data)
  Three Months Ended Nine Months Ended
  September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
Interest Income      
Loans $ 29,560  $ 30,594  $ 89,698  $ 90,654 
Securities – taxable 2,240  3,468  9,135  10,332 
Securities – non-taxable 381  639  1,410  1,991 
Other earning assets 569  2,993  2,973  6,560 
Total interest income 32,750  37,694  103,216  109,537 
Interest Expense      
Deposits 12,428  18,363  45,399  50,896 
Other borrowed funds 4,090  4,087  12,141  11,048 
Total interest expense 16,518  22,450  57,540  61,944 
Net Interest Income 16,232  15,244  45,676  47,593 
Provision for Loan Losses 2,509  2,824  6,461  5,498 
Net Interest Income After Provision for Loan Losses 13,723  12,420  39,215  42,095 
Noninterest Income      
Service charges and fees 224  211  618  672 
Loan servicing revenue 274  —  780  — 
Loan servicing asset revaluation (103) —  (372) — 
Mortgage banking activities 9,630  4,307  16,706  8,588 
Gain on sale of loans 2,033  523  4,596  353 
Gain (loss) on sale of securities 98  —  139  (458)
Other 339  517  1,212  2,229 
Total noninterest income 12,495  5,558  23,679  11,384 
Noninterest Expense      
Salaries and employee benefits 9,533  6,883  25,096  19,846 
Marketing, advertising and promotion 426  456  1,212  1,391 
Consulting and professional services 614  778  2,723  2,427 
Data processing 388  381  1,102  1,026 
Loan expenses 408  247  1,406  853 
Premises and equipment 1,568  1,506  4,795  4,503 
Deposit insurance premium 440  —  1,360  1,302 
Write-down of other real estate owned 2,065  —  2,065  — 
Other 970  952  3,383  2,673 
Total noninterest expense 16,412  11,203  43,142  34,021 
Income Before Income Taxes 9,806  6,775  19,752  19,458 
Income Tax Provision 1,395  449  1,390  1,315 
Net Income $ 8,411  $ 6,326  $ 18,362  $ 18,143 
Income Per Share of Common Stock      
Basic $ 0.86  $ 0.63  $ 1.87  $ 1.79 
Diluted $ 0.86  $ 0.63  $ 1.87  $ 1.79 
Weighted-Average Number of Common Shares Outstanding      
Basic 9,773,175  9,979,603  9,825,683  10,114,303 
Diluted 9,773,224  9,980,612  9,827,182  10,116,507 
Dividends Declared Per Share $ 0.06  $ 0.06  $ 0.18  $ 0.18 

See Notes to Condensed Consolidated Financial Statements
2


First Internet Bancorp
Condensed Consolidated Statements of Comprehensive Income – Unaudited
(Amounts in thousands)
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
Net income $ 8,411  $ 6,326  $ 18,362  $ 18,143 
Other comprehensive income (loss)
Net unrealized holding gains on securities available-for-sale recorded within other comprehensive (loss) income before income tax 1,386  1,266  6,187  11,843 
Reclassification adjustment for (gains) losses realized (98) —  (139) 458 
Net unrealized holding gains (losses) on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax 1,514  (3,225) (12,453) (12,689)
Other comprehensive income (loss) before income tax 2,802  (1,959) (6,405) (388)
Income tax provision (benefit) 754  (482) (1,506) 126 
Other comprehensive income (loss) 2,048  (1,477) (4,899) (514)
Comprehensive income $ 10,459  $ 4,849  $ 13,463  $ 17,629 
 
 See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp
Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
Nine Months Ended September 30, 2020 and 2019
(Amounts in thousands except per share data)
Voting and
Nonvoting
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance, January 1, 2020 $ 219,423  $ 99,681  $ (14,191) $ 304,913 
Net income —  18,362  —  18,362 
Other comprehensive loss —  —  (4,899) (4,899)
Dividends declared ($0.18 per share)
—  (1,802) —  (1,802)
Recognition of the fair value of share-based compensation 1,600  —  —  1,600 
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 21  —  —  21 
Common stock redeemed for the net settlement of share-based awards (93) —  —  (93)
Balance, September 30, 2020 $ 220,951  $ 116,241  $ (19,090) $ 318,102 
Balance, January 1, 2019 $ 227,587  $ 77,689  $ (16,541) $ 288,735 
Impact of adoption of new accounting standards (1)
—  (821) —  (821)
Net income —  18,143  —  18,143 
Other comprehensive loss —  —  (514) (514)
Dividends declared ($0.18 per share)
—  (1,829) —  (1,829)
Recognition of the fair value of share-based compensation 1,278  —  —  1,278 
Repurchase of common stock (9,784) (9,784)
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 26  —  —  26 
Common stock redeemed for the net settlement of share-based awards (94) —  —  (94)
Balance, September 30, 2019 $ 219,013  $ 93,182  $ (17,055) $ 295,140 

(1) Represents the impact of adopting Accounting Standards Update (“ASU”) 2017-08.

See Notes to Condensed Consolidated Financial Statements
3



First Internet Bancorp
Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited
Three Months Ended September 30, 2020 and 2019
(Amounts in thousands except per share data)
Voting and
Nonvoting
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance, July 1, 2020 $ 220,418  $ 108,431  $ (21,138) $ 307,711 
Net income —  8,411  —  8,411 
Other comprehensive income —  —  2,048  2,048 
Dividends declared ($0.06 per share)
—  (601) —  (601)
Recognition of the fair value of share-based compensation 527  —  —  527 
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units —  — 
Balance, September 30, 2020 $ 220,951  $ 116,241  $ (19,090) $ 318,102 
Balance, July 1, 2019 $ 224,244  $ 87,454  $ (15,578) $ 296,120 
Net income —  6,326  —  6,326 
Other comprehensive loss —  —  (1,477) (1,477)
Dividends declared ($0.06 per share)
—  (598) —  (598)
Recognition of the fair value of share-based compensation 416  —  —  416 
Repurchase of common stock (5,651) (5,651)
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units —  — 
Balance, September 30, 2019 $ 219,013  $ 93,182  $ (17,055) $ 295,140 

See Notes to Condensed Consolidated Financial Statements





4


First Internet Bancorp
Condensed Consolidated Statements of Cash Flows – Unaudited
(Amounts in thousands)
  Nine Months Ended September 30,
  2020 2019
Operating Activities    
Net income $ 18,362  $ 18,143 
Adjustments to reconcile net income to net cash used in operating activities:    
Depreciation and amortization 5,699  5,300 
Increase in cash surrender value of bank-owned life insurance (712) (705)
Provision for loan losses 6,461  5,498 
Share-based compensation expense 1,600  1,278 
Write-down of other real estate owned 2,065  — 
Gain (loss) on sale of available-for-sale securities (139) 458 
Loans originated for sale (431,384) (430,453)
Proceeds from sale of loans 429,284  415,171 
Gain on loans sold (19,544) (7,057)
Decrease (increase) in fair value of loans held-for-sale 116  (452)
Gain on derivatives (1,974) (1,295)
Settlement of derivatives (46,109) — 
Net change in servicing asset (337) — 
Net change in accrued income and other assets 491  (49,036)
Net change in accrued expenses and other liabilities 1,098  2,297 
Net cash used in operating activities (35,023) (40,853)
Investing Activities
Net loan activity, excluding purchases 2,284  (173,220)
Maturities and calls of securities available-for-sale 142,432  58,106 
Proceeds from sale of securities available-for-sale 893  30,137 
Purchase of securities available-for-sale (119,263) (136,602)
Purchase of securities held-to-maturity (2,000) (24,116)
Purchase of Federal Home Loan Bank of Indianapolis stock —  (2,025)
Purchase of premises and equipment (18,571) (3,581)
Loans purchased (260,841) (208,795)
Net proceeds from sale of portfolio loans 234,619  238,016 
Net cash used in investing activities (20,447) (222,080)
Financing Activities
Net increase in deposits 218,428  476,891 
Cash dividends paid (1,773) (1,808)
Net proceeds from issuance of subordinated debt —  35,418 
Repurchase of common stock —  (9,784)
Proceeds from advances from Federal Home Loan Bank 330,000  485,000 
Repayment of advances from Federal Home Loan Bank (330,000) (495,000)
Other, net (93) (94)
Net cash provided by financing activities 216,562  490,623 
Net Increase in Cash and Cash Equivalents 161,092  227,690 
Cash and Cash Equivalents, Beginning of Period 327,361  188,712 
Cash and Cash Equivalents, End of Period $ 488,453  $ 416,402 
Supplemental Disclosures
Initial recognition of right-of-use asset $ —  $ 2,096 
Initial recognition of operating lease liabilities —  2,096 
Cash paid during the period for interest 60,058  60,417 
Cash paid during the period for taxes 2,516  4,527 
Loans transferred to held-for-sale from portfolio 185,797  237,942 
Cash dividends declared, paid in subsequent period 588  585 
Securities purchased during the period, settled in subsequent period 5,547  3,000 
Transfer of available-for-sale municipal securities to held-to-maturity municipal securities 4,479  — 
See Notes to Condensed Consolidated Financial Statements
5


First Internet Bancorp
Notes to Condensed Consolidated Financial Statements – Unaudited
(Table amounts in thousands except share and per share data)
  
Note 1:        Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020 or any other period. The September 30, 2020 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended December 31, 2019.
 
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for loan losses, valuations and impairments of investment securities, valuation of the servicing asset and the accounting for income tax expense are highly dependent upon management’s estimates, judgments, and assumptions, and changes in any of these could have a significant impact on the condensed consolidated financial statements.

The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s three wholly owned subsidiaries, First Internet Public Finance Corp., JKH Realty Services, LLC and SPF15, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company.
 
Certain reclassifications have been made to the 2019 financial statements to conform to the presentation of the 2020 financial statements. These reclassifications had no effect on net income.



    



6


Note 2:        Earnings Per Share
 
Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period.
 
The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three and nine months ended September 30, 2020 and 2019. 
(dollars in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
Basic earnings per share    
Net income $ 8,411  $ 6,326  $ 18,362  $ 18,143 
Weighted-average common shares 9,773,175  9,979,603  9,825,683  10,114,303 
Basic earnings per common share $ 0.86  $ 0.63  $ 1.87  $ 1.79 
Diluted earnings per share        
Net income $ 8,411  $ 6,326  $ 18,362  $ 18,143 
Weighted-average common shares 9,773,175  9,979,603  9,825,683  10,114,303 
Dilutive effect of equity compensation 49  1,009  1,499  2,204 
     Weighted-average common and incremental shares 9,773,224  9,980,612  9,827,182  10,116,507 
Diluted earnings per common share (1)
$ 0.86  $ 0.63  $ 1.87  $ 1.79 
(1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 55,309 and 38,212 for the three and nine months ended September 30, 2020, respectively, and 15,256 and 22,209 for the three and nine months ended September 30, 2019, respectively.
  
Note 3:         Securities
 
The following tables summarize securities available-for-sale and securities held-to-maturity as of September 30, 2020 and December 31, 2019.
  September 30, 2020
  Amortized Gross Unrealized Fair
(in thousands) Cost Gains Losses Value
Securities available-for-sale        
U.S. Government-sponsored agencies $ 65,007  $ 489  $ (1,814) $ 63,682 
Municipal securities 87,365  3,296  (4,240) 86,421 
Agency mortgage-backed securities 250,755  5,773  (3,236) 253,292 
Private label mortgage-backed securities 71,519  1,128  (21) 72,626 
Asset-backed securities 5,000  —  (79) 4,921 
Corporate securities 48,406  500  (1,537) 47,369 
Total available-for-sale $ 528,052  $ 11,186  $ (10,927) $ 528,311 

  September 30, 2020
  Amortized Gross Unrealized Fair
(in thousands) Cost Gains Losses Value
Securities held-to-maturity        
Municipal securities $ 14,582  $ 746  $ —  $ 15,328 
Corporate securities 53,672  551  (375) 53,848 
Total held-to-maturity $ 68,254  $ 1,297  $ (375) $ 69,176 
7


  December 31, 2019
  Amortized Gross Unrealized Fair
(in thousands) Cost Gains Losses Value
Securities available-for-sale        
U.S. Government-sponsored agencies $ 77,715  $ 99  $ (1,942) $ 75,872 
Municipal securities 97,447  1,706  (1,501) 97,652 
Agency mortgage-backed securities
264,142  1,304  (4,006) 261,440 
Private label mortgage-backed securities
63,704  97  (188) 63,613 
Asset-backed securities
5,000  —  (45) 4,955 
Corporate securities 38,632  220  (1,532) 37,320 
Total available-for-sale $ 546,640  $ 3,426  $ (9,214) $ 540,852 

  December 31, 2019
  Amortized Gross Unrealized Fair
(in thousands) Cost Gains Losses Value
Securities held-to-maturity        
Municipal securities $ 10,142  $ 226  $ —  $ 10,368 
Corporate securities 51,736  588  (132) 52,192 
Total held-to-maturity $ 61,878  $ 814  $ (132) $ 62,560 

The Company elected to transfer ten available-for-sale (“AFS”) securities with an aggregate fair value of $4.5 million to a classification of held-to-maturity (“HTM”) on March 1, 2020. The net unrealized holding gain of $0.1 million, net of tax, as the date of the transfer was retained in accumulated other comprehensive loss, with the associated pretax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to interest income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities as of March 1, 2020, with no unrealized gain or loss at that date.

The carrying value of securities at September 30, 2020 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
  Available-for-Sale
(in thousands) Amortized
Cost
Fair
Value
Within one year $ —  $ — 
One to five years 31,197  26,893 
Five to ten years 82,255  80,704 
After ten years 87,326  89,875 
  200,778  197,472 
Agency mortgage-backed securities 250,755  253,292 
Private label mortgage-backed securities 71,519  72,626 
Asset-backed securities 5,000  4,921 
Total $ 528,052  $ 528,311 

  Held-to-Maturity
(in thousands) Amortized
Cost
Fair
Value
One to five years $ 2,869  $ 2,989 
Five to ten years 53,181  53,544 
After ten years 12,204  12,643 
Total $ 68,254  $ 69,176 
8


There were $0.1 million of gross gains resulting from sales of AFS securities during the three and nine months ended September 30, 2020. There were zero and $0.5 million of gross losses resulting from sales of AFS securities during the three and nine months ended September 30, 2019, respectively.

Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at September 30, 2020 and December 31, 2019 was $206.4 million and $317.5 million, which was approximately 35% and 53%, respectively, of the Company’s AFS and HTM securities portfolios. These declines resulted primarily from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, with the resulting loss recognized in net income in the period the other-than-temporary impairment (“OTTI”) is identified.

U. S. Government-Sponsored Agencies, Municipal Securities and Corporate Securities

The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.
 
Agency Mortgage-Backed, Private Label Mortgage-Backed and Asset-Backed Securities
 
The unrealized losses on the Company’s investments in agency mortgage-backed, private label mortgage-backed and asset-backed securities were caused primarily by interest rate changes. The Company expects to recover the amortized cost bases over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.

The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2020 and December 31, 2019.
  September 30, 2020
  Less Than 12 Months 12 Months or Longer Total
(in thousands) Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Securities available-for-sale            
U.S. Government-sponsored agencies $ —  $ —  $ 55,382  $ (1,814) $ 55,382  $ (1,814)
Municipal securities 61,269  (4,240) —  —  61,269  (4,240)
     Agency mortgage-backed securities 29,466  (361) 10,294  (2,875) 39,760  (3,236)
Private label mortgage-backed securities
2,410  (9) 1,026  (12) 3,436  (21)
     Asset-backed securities —  —  4,921  (79) 4,921  (79)
Corporate securities —  —  20,463  (1,537) 20,463  (1,537)
Total $ 93,145  $ (4,610) $ 92,086  $ (6,317) $ 185,231  $ (10,927)

  September 30, 2020
  Less Than 12 Months 12 Months or Longer Total
(in thousands) Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Securities held-to-maturity            
Corporate securities $ 21,200  $ (375) $ —  $ —  $ 21,200  $ (375)
Total $ 21,200  $ (375) $ —  $ —  $ 21,200  $ (375)
 
9


  December 31, 2019
  Less Than 12 Months 12 Months or Longer Total
(in thousands) Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Securities available-for-sale            
U.S. Government-sponsored agencies $ 4,820  $ (61) $ 62,182  $ (1,881) $ 67,002  $ (1,942)
Municipal securities 1,279  (1,501) —  —  1,279  (1,501)
Agency mortgage-backed securities
91,159  (829) 83,212  (3,177) 174,371  (4,006)
Private label mortgage-backed securities
30,077  (180) 2,884  (8) 32,961  (188)
Asset-backed securities
—  —  4,955  (45) 4,955  (45)
Corporate securities —  —  22,985  (1,532) 22,985  (1,532)
Total $ 127,335  $ (2,571) $ 176,218  $ (6,643) $ 303,553  $ (9,214)

  December 31, 2019
  Less Than 12 Months 12 Months or Longer Total
(in thousands) Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Securities held-to-maturity            
Corporate securities 13,977  (132) —  —  13,977  (132)
Total $ 13,977  $ (132) $ —  $ —  $ 13,977  $ (132)

Amounts reclassified from accumulated other comprehensive loss and the affected line items in the condensed consolidated statements of income during the three and nine months ended September 30, 2020 and September 30, 2019 were as follows:

(in thousands)



Details About Accumulated Other Comprehensive Loss Components
Affected Line Item in the
Statements of Income
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Realized gains (losses) on securities available-for-sale      
Gain (loss) realized in earnings $ 98  $ 139  $ —  $ (458) Gain (loss) on sale of securities
Total reclassified amount before tax 98  139  —  (458) Income Before Income Taxes
Tax expense (benefit) 26  38  —  (124) Income Tax Provision
Total reclassifications out of accumulated other comprehensive loss
$ 72  $ 101  $ —  $ (334) Net Income
10


Note 4:        Loans
 
Loan balances as of September 30, 2020 and December 31, 2019 are summarized in the table below. Categories of loans include:

(in thousands) September 30, 2020 December 31, 2019
Commercial loans    
Commercial and industrial $ 77,116  $ 96,420 
Owner-occupied commercial real estate(1)
89,095  86,726 
Investor commercial real estate 13,084  12,567 
Construction 92,154  60,274 
Single tenant lease financing 960,505  995,879 
Public finance 625,638  687,094 
Healthcare finance 461,740  300,612 
Small business lending(1)
123,168  46,945 
Total commercial loans 2,442,500  2,286,517 
Consumer loans
Residential mortgage 203,041  313,849 
Home equity 22,169  24,306 
Other consumer 282,450  295,309 
Total consumer loans 507,660  633,464 
Total commercial and consumer loans 2,950,160  2,919,981 
Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other(2)
62,754  43,566 
Total loans 3,012,914  2,963,547 
Allowance for loan losses (26,917) (21,840)
Net loans $ 2,985,997  $ 2,941,707 

(1) As of September 30, 2020, $12.0 million of commercial real estate loan balances were reclassified from small business lending to owner-occupied commercial real estate.

(2) Includes carrying value adjustments of $44.3 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2020 and $21.4 million related to interest rate swaps associated with public finance loans as of December 31, 2019. 


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.

11


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 lending has been conducted primarily in the Midwest, but continues to expand 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") under its 7(a) loan program. 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. These loans also include loans originated by the Bank under the SBA’s Paycheck Protection Program, which are fully guaranteed by the SBA. 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.
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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.

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The following tables present changes in the balance of the ALLL during the three and nine months ended September 30, 2020 and 2019. 

(in thousands) Three Months Ended September 30, 2020
Allowance for loan losses: Balance, Beginning of Period Provision (Credit) Charged to Expense Losses
Charged Off
Recoveries Balance,
End of Period
Commercial and industrial $ 1,477  $ (227) $ (99) $ —  $ 1,151 
Owner-occupied commercial real estate 846  167  —  —  1,013 
Investor commercial real estate 130  —  —  —  130 
Construction 721  155  —  —  876 
Single tenant lease financing 11,318  717  —  —  12,035 
Public finance 1,542  191  —  —  1,733 
Healthcare finance 4,762  1,232  —  87  6,081 
Small business lending 251  230  —  484 
Residential mortgage 539  26  —  —  565 
Home equity 51  (1) —  53 
Other consumer 2,828  19  (142) 91  2,796 
Total $ 24,465  $ 2,509  $ (241) $ 184  $ 26,917 



Nine Months Ended September 30, 2020
Allowance for loan losses: Balance, Beginning of Period Provision (Credit) Charged to Expense Losses
Charged Off
Recoveries Balance,
End of Period
Commercial and industrial $ 1,521  $ (22) $ (353) $ $ 1,151 
Owner-occupied commercial real estate 561  452  —  —  1,013 
Investor commercial real estate 109  21  —  —  130 
Construction 380  496  —  —  876 
Single tenant lease financing 11,175  860  —  —  12,035 
Public finance 1,580  153  —  —  1,733 
Healthcare finance 3,247  3,490  (743) 87  6,081 
Small business lending 54  413  —  17  484 
Residential mortgage 657  (81) (15) 565 
Home equity 46  (1) —  53 
Other consumer 2,510  680  (644) 250  2,796 
Total $ 21,840  $ 6,461  $ (1,755) $ 371  $ 26,917 





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(in thousands) Three Months Ended September 30, 2019
Allowance for loan losses: Balance, Beginning of Period Provision (Credit) Charged to Expense Losses
Charged Off
Recoveries Balance,
End of Period
Commercial and industrial $ 1,795  $ 519  $ (800) $ —  $ 1,514 
Owner-occupied commercial real estate 624  26  —  —  650 
Investor commercial real estate 169  (65) —  —  104 
Construction 302  39  —  —  341 
Single tenant lease financing 9,661  1,633  —  —  11,294 
Public finance 1,763  (198) —  —  1,565 
Healthcare finance 2,293  499  —  —  2,792 
Small business lending 129  (3) —  —  126 
Residential mortgage 662  10  (1) 672 
Home equity 48  (5) —  45 
Other consumer 2,530  369  (381) 62  2,580 
Total $ 19,976  $ 2,824  $ (1,182) $ 65  $ 21,683 


Nine Months Ended September 30, 2019
Allowance for loan losses: Balance, Beginning of Period Provision (Credit) Charged to Expense Losses
Charged Off
Recoveries Balance,
End of Period
Commercial and industrial $ 1,384  $ 1,042  $ (912) $ —  $ 1,514 
Owner-occupied commercial real estate 891  (241) —  —  650 
Investor commercial real estate 61  43  —  —  104 
Construction 251  90  —  —  341 
Single tenant lease financing 8,827  2,467  —  —  11,294 
Public finance 1,670  (105) —  —  1,565 
Healthcare finance 1,264  1,528  —  —  2,792 
Small business lending 95  31  —  —  126 
Residential mortgage 1,079  (409) (1) 672 
Home equity 53  (16) —  45 
Other consumer 2,321  1,068  (1,035) 226  2,580 
Total $ 17,896  $ 5,498  $ (1,948) $ 237  $ 21,683 



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The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2020 and December 31, 2019. 
(in thousands) Loans Allowance for Loan Losses
September 30, 2020 Ending Balance:  
Collectively Evaluated for Impairment
Ending Balance:  
Individually Evaluated for Impairment
Ending Balance Ending Balance:  
Collectively Evaluated for Impairment
Ending Balance:  
Individually Evaluated for Impairment
Ending Balance
Commercial and industrial $ 76,481  $ 635  $ 77,116  $ 1,101  $ 50  $ 1,151 
Owner-occupied commercial real estate 85,848  3,247  89,095  1,013  —  1,013 
Investor commercial real estate 13,084  —  13,084  130  —  130 
Construction 92,154  —  92,154  876  —  876 
Single tenant lease financing 953,140  7,365  960,505  10,008  2,027  12,035 
Public finance 625,638  —  625,638  1,733  —  1,733 
Healthcare finance 460,706  1,034  461,740  6,081  —  6,081 
Small business lending 123,168  —  123,168  484  —  484 
Residential mortgage 201,591  1,450  203,041  565  —  565 
Home equity 22,169  —  22,169  53  —  53 
Other consumer 282,412  38  282,450  2,796  —  2,796 
Total $ 2,936,391  $ 13,769  $ 2,950,160  $ 24,840  $ 2,077  $ 26,917 



(in thousands) Loans Allowance for Loan Losses
December 31, 2019 Ending Balance:  
Collectively Evaluated for Impairment
Ending Balance:  
Individually Evaluated for Impairment
Ending Balance Ending Balance:  
Collectively Evaluated for Impairment
Ending Balance:  
Individually Evaluated for Impairment
Ending Balance
Commercial and industrial $ 93,520  $ 2,900  $ 96,420  $ 1,412  $ 109  $ 1,521 
Owner-occupied commercial real estate 81,063  5,663  86,726  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 46,945  —  46,945  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 

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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.
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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 September 30, 2020 and December 31, 2019. 
September 30, 2020
(in thousands) Pass Special Mention Substandard Total
Commercial and industrial $ 74,760  $ 1,721  $ 635  $ 77,116 
Owner-occupied commercial real estate 80,463  5,385  3,247  89,095 
Investor commercial real estate 13,084  —  —  13,084 
Construction 92,154  —  —  92,154 
Single tenant lease financing 947,050  6,090  7,365  960,505 
Public finance 625,638  —  —  625,638 
Healthcare finance 460,706  —  1,034  461,740 
Small business lending 123,168  —  —  123,168 
Total commercial loans $ 2,417,023  $ 13,196  $ 12,281  $ 2,442,500 

September 30, 2020
(in thousands) Performing Nonaccrual Total
Residential mortgage $ 201,956  $ 1,085  $ 203,041 
Home equity 22,169  —  22,169 
Other consumer 282,416  34  282,450 
Total consumer loans $ 506,541  $ 1,119  $ 507,660 

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 79,329  3,462  3,935  86,726 
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 46,945  —  —  46,945 
Total commercial loans $ 2,260,087  $ 15,186  $ 11,244  $ 2,286,517