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, 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
months ended
March 31, 2019
are not necessarily indicative of the results expected for the year ending
December 31, 2019
or any other period. The
March 31, 2019
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, 2018
.
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, and the accounting for income tax expense are highly dependent upon management’s estimates, judgments, and assumptions where changes in any of these could have a significant impact on the 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
2018
financial statements to conform to the presentation of the
2019
financial statements. These reclassifications had no effect on net income.
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
months ended
March 31, 2019
and
2018
.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Basic earnings per share
|
|
|
|
|
|
|
Net income
|
|
$
|
5,696
|
|
|
$
|
6,028
|
|
Weighted-average common shares
|
|
10,217,637
|
|
|
8,499,196
|
|
Basic earnings per common share
|
|
$
|
0.56
|
|
|
$
|
0.71
|
|
Diluted earnings per share
|
|
|
|
|
|
|
Net income
|
|
$
|
5,696
|
|
|
$
|
6,028
|
|
Weighted-average common shares
|
|
10,217,637
|
|
|
8,499,196
|
|
Dilutive effect of equity compensation
|
|
12,894
|
|
|
43,167
|
|
Weighted-average common and incremental shares
|
|
10,230,531
|
|
|
8,542,363
|
|
Diluted earnings per common share
|
|
$
|
0.56
|
|
|
$
|
0.71
|
|
Note 3: Securities
The following tables summarize securities available-for-sale and securities held-to-maturity as of
March 31, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored agencies
|
|
$
|
102,749
|
|
|
$
|
41
|
|
|
$
|
(1,918
|
)
|
|
$
|
100,872
|
|
Municipal securities
|
|
96,328
|
|
|
388
|
|
|
(1,271
|
)
|
|
95,445
|
|
Mortgage-backed securities
|
|
288,120
|
|
|
674
|
|
|
(6,023
|
)
|
|
282,771
|
|
Asset-backed securities
|
|
5,000
|
|
|
—
|
|
|
(72
|
)
|
|
4,928
|
|
Corporate securities
|
|
38,650
|
|
|
33
|
|
|
(2,317
|
)
|
|
36,366
|
|
Total available-for-sale
|
|
$
|
530,847
|
|
|
$
|
1,136
|
|
|
$
|
(11,601
|
)
|
|
$
|
520,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
10,150
|
|
|
$
|
27
|
|
|
$
|
(115
|
)
|
|
$
|
10,062
|
|
Corporate securities
|
|
21,072
|
|
|
167
|
|
|
(33
|
)
|
|
21,206
|
|
Total held-to-maturity
|
|
$
|
31,222
|
|
|
$
|
194
|
|
|
$
|
(148
|
)
|
|
$
|
31,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored agencies
|
|
$
|
109,631
|
|
|
$
|
20
|
|
|
$
|
(2,066
|
)
|
|
$
|
107,585
|
|
Municipal securities
|
|
97,090
|
|
|
90
|
|
|
(4,674
|
)
|
|
92,506
|
|
Mortgage-backed securities
|
|
251,492
|
|
|
162
|
|
|
(8,742
|
)
|
|
242,912
|
|
Asset-backed securities
|
|
5,002
|
|
|
—
|
|
|
(143
|
)
|
|
4,859
|
|
Corporate securities
|
|
36,678
|
|
|
—
|
|
|
(3,195
|
)
|
|
33,483
|
|
Total available-for-sale
|
|
$
|
499,893
|
|
|
$
|
272
|
|
|
$
|
(18,820
|
)
|
|
$
|
481,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
10,157
|
|
|
$
|
—
|
|
|
$
|
(356
|
)
|
|
$
|
9,801
|
|
Corporate securities
|
|
12,593
|
|
|
80
|
|
|
(56
|
)
|
|
12,617
|
|
Total held-to-maturity
|
|
$
|
22,750
|
|
|
$
|
80
|
|
|
$
|
(412
|
)
|
|
$
|
22,418
|
|
The carrying value of securities at
March 31, 2019
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
|
|
|
Amortized
Cost
|
|
Fair
Value
|
One to five years
|
|
$
|
1,570
|
|
|
$
|
1,577
|
|
Five to ten years
|
|
69,418
|
|
|
68,066
|
|
After ten years
|
|
166,739
|
|
|
163,040
|
|
|
|
237,727
|
|
|
232,683
|
|
Mortgage-backed securities
|
|
288,120
|
|
|
282,771
|
|
Asset-backed securities
|
|
5,000
|
|
|
4,928
|
|
Total
|
|
$
|
530,847
|
|
|
$
|
520,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
|
|
Amortized
Cost
|
|
Fair
Value
|
One to five years
|
|
497
|
|
|
488
|
|
Five to ten years
|
|
$
|
24,817
|
|
|
$
|
24,880
|
|
After ten years
|
|
5,908
|
|
|
5,900
|
|
Total
|
|
$
|
31,222
|
|
|
$
|
31,268
|
|
There were
no
gross gains or losses resulting from sales of available-for-sale securities during the
three
months ended
March 31, 2019
and 2018.
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
March 31, 2019
and
December 31, 2018
was
$417.5 million
and $
469.8 million
, which was approximately
76%
and
93%
, respectively, of the Company’s available-for-sale and held-to-maturity 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
March 31, 2019
.
Mortgage-Backed Securities
The unrealized losses on the Company’s investments in mortgage-backed securities were caused 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
March 31, 2019
.
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 March 31, 2019 and December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored agencies
|
|
$
|
36,230
|
|
|
$
|
(452
|
)
|
|
$
|
57,511
|
|
|
$
|
(1,466
|
)
|
|
$
|
93,741
|
|
|
$
|
(1,918
|
)
|
Municipal securities
|
|
—
|
|
|
—
|
|
|
63,267
|
|
|
(1,271
|
)
|
|
63,267
|
|
|
(1,271
|
)
|
Mortgage-backed securities
|
|
34,412
|
|
|
(185
|
)
|
|
174,828
|
|
|
(5,838
|
)
|
|
209,240
|
|
|
(6,023
|
)
|
Asset-backed securities
|
|
4,928
|
|
|
(72
|
)
|
|
—
|
|
|
—
|
|
|
4,928
|
|
|
(72
|
)
|
Corporate securities
|
|
10,040
|
|
|
(104
|
)
|
|
22,306
|
|
|
(2,213
|
)
|
|
32,346
|
|
|
(2,317
|
)
|
Total
|
|
$
|
85,610
|
|
|
$
|
(813
|
)
|
|
$
|
317,912
|
|
|
$
|
(10,788
|
)
|
|
$
|
403,522
|
|
|
$
|
(11,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
8,486
|
|
|
$
|
(115
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,486
|
|
|
$
|
(115
|
)
|
Corporate securities
|
|
5,492
|
|
|
(33
|
)
|
|
—
|
|
|
—
|
|
|
5,492
|
|
|
(33
|
)
|
Total
|
|
$
|
13,978
|
|
|
$
|
(148
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,978
|
|
|
$
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored agencies
|
|
$
|
69,798
|
|
|
$
|
(893
|
)
|
|
$
|
33,511
|
|
|
$
|
(1,173
|
)
|
|
$
|
103,309
|
|
|
$
|
(2,066
|
)
|
Municipal securities
|
|
23,747
|
|
|
(710
|
)
|
|
59,938
|
|
|
(3,964
|
)
|
|
83,685
|
|
|
(4,674
|
)
|
Mortgage-backed securities
|
|
56,177
|
|
|
(529
|
)
|
|
172,442
|
|
|
(8,213
|
)
|
|
228,619
|
|
|
(8,742
|
)
|
Asset-backed securities
|
|
4,859
|
|
|
(143
|
)
|
|
—
|
|
|
—
|
|
|
4,859
|
|
|
(143
|
)
|
Corporate securities
|
|
14,092
|
|
|
(586
|
)
|
|
19,391
|
|
|
(2,609
|
)
|
|
33,483
|
|
|
(3,195
|
)
|
Total
|
|
$
|
168,673
|
|
|
$
|
(2,861
|
)
|
|
$
|
285,282
|
|
|
$
|
(15,959
|
)
|
|
$
|
453,955
|
|
|
$
|
(18,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Less Than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities
|
|
$
|
9,801
|
|
|
$
|
(356
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,801
|
|
|
$
|
(356
|
)
|
Corporate securities
|
|
6,037
|
|
|
(56
|
)
|
|
—
|
|
|
—
|
|
|
6,037
|
|
|
(56
|
)
|
Total
|
|
$
|
15,838
|
|
|
$
|
(412
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,838
|
|
|
$
|
(412
|
)
|
There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of income during the three months ended March 31, 2019 and 2018.
Note 4: 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
Charged Off
|
|
Recoveries
|
|
Balance,
End of Period
|
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
Charged Off
|
|
Recoveries
|
|
Balance,
End of Period
|
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:
Collectively Evaluated for Impairment
|
|
Ending Balance:
Individually Evaluated for Impairment
|
|
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:
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
|
$
|
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
Days
Past Due
|
|
60-89
Days
Past Due
|
|
90 Days
or More
Past Due
|
|
Total
Past Due
|
|
Current
|
|
Total
Loans
|
|
Non-
accrual
Loans
|
|
Total Loans
90 Days or
More Past
Due and
Accruing
|
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
Days
Past Due
|
|
60-89
Days
Past Due
|
|
90 Days
or More
Past Due
|
|
Total
Past Due
|
|
Current
|
|
Total
Loans
|
|
Non-
accrual
Loans
|
|
Total Loans
90 Days or
More Past
Due and
Accruing
|
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
Balance
|
|
Unpaid
Principal
Balance
|
|
Specific
Allowance
|
|
Recorded
Balance
|
|
Unpaid
Principal
Balance
|
|
Specific
Allowance
|
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
Balance
|
|
Interest
Income
|
|
Average
Balance
|
|
Interest
Income
|
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.
Note 5: Premises and Equipment
The following table summarizes premises and equipment at
March 31, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Land
|
|
$
|
2,500
|
|
|
$
|
2,500
|
|
Right of use leased asset
|
|
1,920
|
|
|
—
|
|
Building and improvements
|
|
7,817
|
|
|
6,752
|
|
Furniture and equipment
|
|
9,575
|
|
|
9,076
|
|
Less: accumulated depreciation
|
|
(8,075
|
)
|
|
(7,631
|
)
|
Total
|
|
$
|
13,737
|
|
|
$
|
10,697
|
|
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU 2016-02
“Leases” (Topic 842)
and elected the optional transition method, which allows the Company to not separate non-lease components from the associated lease component if certain conditions are met. In addition, the Company elected not to adjust prior comparative periods. Refer to Note 13 of the condensed consolidated financial statements regarding transition guidance related to the new standard.
The Company has
two
operating leases that are used for general office operations with remaining lease terms of
two
to
four
years. With the adoption of ASU 2016-02, operating lease agreements are required to be recognized on the condensed consolidated balance sheets as a right-of-use (“ROU”) asset and a corresponding lease liability.
The following table shows the components of lease expense.
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended March 31,
|
|
|
2019
|
Operating lease cost
|
|
$
|
187
|
|
The following table shows supplemental cash flow information related to leases.
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended March 31,
|
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
200
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
|
—
|
|
The following table shows the operating leases’ impact on the condensed consolidated balance sheets. The Company elected not to include short-term leases (leases with original terms of 12 months or less) or equipment leases, as those amounts are insignificant. The Company’s leases do not provide an implicit rate. The discount rate utilized to determine the present value of lease payments is the Company’s incremental borrowing rate based on the information available at the lease inception date. The incremental borrowing rate is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
March 31, 2019
|
Operating lease right-of-use assets
|
|
$
|
1,920
|
|
Operating lease liabilities
|
|
1,920
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
Operating leases
|
|
3.0
|
|
|
|
|
Weighted average discount rate
|
|
|
Operating leases
|
|
1.9
|
%
|
The following table shows the future minimum payments of operating leases with initial or remaining terms of one year or more as of March 31, 2019.
|
|
|
|
|
|
(in thousands)
|
|
|
Twelve months ended March 31,
|
|
|
2020
|
|
$
|
750
|
|
2021
|
|
718
|
|
2022
|
|
225
|
|
2023
|
|
230
|
|
2024
|
|
58
|
|
Thereafter
|
|
—
|
|
Total lease payments
|
|
1,981
|
|
Less imputed interest
|
|
(83
|
)
|
Total
|
|
$
|
1,898
|
|
Note 7: Goodwill
As of
March 31, 2019
and
December 31, 2018
, the carrying amount of goodwill was
$4.7 million
. There have been no changes in the carrying amount of goodwill for the three months ended
March 31, 2019
. Goodwill is tested for impairment on an annual basis as of August 31, or whenever events or changes in circumstances indicate the carrying amount of goodwill exceeds its implied fair value. No events or changes in circumstances have occurred since the
August 31, 2018
annual impairment test that would suggest it was more likely than not goodwill impairment existed.
Note 8: Subordinated Debt
In October 2015, the Company entered into a term loan in the principal amount of
$10.0 million
, evidenced by a term note due 2025 (the “2025 Note”). The 2025 Note bears a fixed interest rate of
6.4375%
per year, payable quarterly, and is scheduled to mature on October 1, 2025. The 2025 Note is an unsecured subordinated obligation of the Company and may be repaid, without penalty, on any interest payment date on or after October 15, 2020. The 2025 Note is intended to qualify as Tier 2 capital under regulatory guidelines.
In September 2016, the Company issued
$25.0 million
aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2026 Notes”) in a public offering. The 2026 Notes initially bear a fixed interest rate of
6.00%
per year to, but excluding September 30, 2021, and thereafter a floating rate equal to the then-current three-month LIBOR rate plus
485
basis points. All interest on the 2026 Notes is payable quarterly. The 2026 Notes are scheduled to mature on September 30, 2026. The 2026 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after September 30, 2021. The 2026 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.
The following table presents the principal balance and unamortized discount and debt issuance costs for the 2025 Note and the 2026 Notes as of
March 31, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
2025 Note
|
10,000
|
|
|
(157
|
)
|
|
10,000
|
|
|
(162
|
)
|
2026 Notes
|
25,000
|
|
|
(932
|
)
|
|
25,000
|
|
|
(963
|
)
|
Total
|
$
|
35,000
|
|
|
$
|
(1,089
|
)
|
|
$
|
35,000
|
|
|
$
|
(1,125
|
)
|
Note 9: Benefit Plans
Employment Agreement
The Company is party to an employment agreement with its Chief Executive Officer that provides for an annual base salary and an annual bonus, if any, as determined from time to time by the Compensation Committee. The annual bonus is to be determined with reference to the achievement of annual performance objectives established by the Compensation Committee for the Chief Executive Officer and other senior officers. The agreement also provides that the Chief Executive Officer may be awarded additional compensation, benefits, or consideration as the Compensation Committee may determine.
The agreement provides for the continuation of salary and certain benefits for a specified period of time upon termination of his employment under certain circumstances, including his resignation or termination or nonrenewal of his employment within twelve months following a change in control of the Company, as defined in the agreement, along with other specific conditions.
2013 Equity Incentive Plan
The 2013 Equity Incentive Plan (the “2013 Plan”) authorizes the issuance of
750,000
shares of the Company’s common stock in the form of equity-based awards to employees, directors, and other eligible persons. Under the terms of the 2013 Plan, the pool of shares available for issuance may be used for available types of equity awards under the 2013 Plan, which includes stock options, stock appreciation rights, restricted stock awards, stock unit awards, and other share-based awards. All employees, consultants, and advisors of the Company or any subsidiary, as well as all non-employee directors of the Company, are eligible to receive awards under the 2013 Plan.
The Company recorded
$0.5 million
of share-based compensation expense for the
three
months ended
March 31, 2019
, related to awards made under th
e 2013 Plan. The Company recorded
$0.6 million
o
f share-based compensation expense for the
three
months ended
March 31, 2018
, related to awards made under th
e 2013 Plan.
The following table summarizes the status of the 2013 Plan awards as of
March 31, 2019
, and activity for the
three
months ended
March 31, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted-Average Grant Date Fair Value Per Share
|
|
Restricted Stock Awards
|
|
Weighted-Average Grant Date Fair Value Per Share
|
|
Deferred Stock Units
|
|
Weighted-Average Grant Date Fair Value Per Share
|
Nonvested at December 31, 2018
|
75,554
|
|
|
$
|
35.34
|
|
|
1,666
|
|
|
$
|
24.44
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
74,384
|
|
|
24.62
|
|
|
11,742
|
|
|
24.62
|
|
|
3
|
|
|
23.78
|
|
Vested
|
(36,218
|
)
|
|
33.08
|
|
|
(4,606
|
)
|
|
24.55
|
|
|
(3
|
)
|
|
23.78
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Nonvested at March 31, 2019
|
113,720
|
|
|
$
|
29.05
|
|
|
8,802
|
|
|
$
|
24.62
|
|
|
—
|
|
|
$
|
—
|
|
At
March 31, 2019
,
the total unrecognized compensation cost related to nonvested awards was $
3.4 million
with a weighted-average expense recognition period of
2.3 years
.
Directors Deferred Stock Plan
Until January 1, 2014, the Company had a practice of granting awards under a stock compensation plan for members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved
180,000
shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The Directors Deferred Stock Plan provided directors the option to elect to receive up to
100%
of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right.
The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the
three
months ended
March 31, 2019
.
|
|
|
|
|
|
|
Deferred Stock Rights
|
Outstanding, beginning of period
|
|
83,521
|
|
Granted
|
|
245
|
|
Exercised
|
|
—
|
|
Outstanding, end of period
|
|
83,766
|
|
All deferred stock rights granted during the
2019
period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights.
Note 10: Fair Value of Financial Instruments
ASC Topic 820,
Fair Value Measurement
, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
|
|
Level 1
|
Quoted prices in active markets for identical assets or liabilities
|
|
|
Level 2
|
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
|
|
|
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
|
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-Sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage and asset-backed securities and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but also on the investment securities’ relationship to other benchmark quoted investment securities.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of
March 31, 2019
or
December 31, 2018
.
Loans Held-for-Sale (mandatory pricing agreements)
The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).
Interest Rate Swap Agreements
The fair value of interest rate swap agreements is estimated using current market interest rates as of the balance sheet date and calculated using discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.
Forward Contracts
The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets or benchmarked thereto (Level 1).
Interest Rate Lock Commitments
The fair values of interest rate lock commitments (“IRLCs”) are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).
The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at
March 31, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
Fair Value Measurements Using
|
|
|
Fair
Value
|
|
Quoted Prices
in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
U.S. Government-sponsored agencies
|
|
$
|
100,872
|
|
|
$
|
—
|
|
|
$
|
100,872
|
|
|
$
|
—
|
|
Municipal securities
|
|
95,445
|
|
|
—
|
|
|
95,445
|
|
|
—
|
|
Mortgage-backed securities
|
|
282,771
|
|
|
—
|
|
|
282,771
|
|
|
—
|
|
Asset-backed securities
|
|
4,928
|
|
|
—
|
|
|
4,928
|
|
|
—
|
|
Corporate securities
|
|
36,366
|
|
|
—
|
|
|
36,366
|
|
|
—
|
|
Total available-for-sale securities
|
|
520,382
|
|
|
—
|
|
|
520,382
|
|
|
—
|
|
Interest rate swap liabilities
|
|
(20,418
|
)
|
|
—
|
|
|
(20,418
|
)
|
|
—
|
|
Loans held-for-sale (mandatory pricing agreements)
|
|
13,706
|
|
|
—
|
|
|
13,706
|
|
|
—
|
|
Forward contracts
|
|
(427
|
)
|
|
(427
|
)
|
|
—
|
|
|
—
|
|
IRLCs
|
|
781
|
|
|
—
|
|
|
—
|
|
|
781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
Fair Value Measurements Using
|
|
|
Fair
Value
|
|
Quoted Prices
in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
U.S. Government-sponsored agencies
|
|
$
|
107,585
|
|
|
$
|
—
|
|
|
$
|
107,585
|
|
|
$
|
—
|
|
Municipal securities
|
|
92,506
|
|
|
—
|
|
|
92,506
|
|
|
—
|
|
Mortgage-backed securities
|
|
242,912
|
|
|
—
|
|
|
242,912
|
|
|
—
|
|
Asset-backed securities
|
|
4,859
|
|
|
—
|
|
|
4,859
|
|
|
—
|
|
Corporate securities
|
|
33,483
|
|
|
—
|
|
|
33,483
|
|
|
—
|
|
Total available-for-sale securities
|
|
481,345
|
|
|
—
|
|
|
481,345
|
|
|
—
|
|
Interest rate swap assets
|
|
1,579
|
|
|
|
|
1,579
|
|
|
|
Interest rate swap liabilities
|
|
(10,727
|
)
|
|
—
|
|
|
(10,727
|
)
|
|
—
|
|
Loans held-for-sale (mandatory pricing agreements)
|
|
18,328
|
|
|
—
|
|
|
18,328
|
|
|
—
|
|
Forward contracts
|
|
(360
|
)
|
|
(360
|
)
|
|
—
|
|
|
—
|
|
IRLCs
|
|
389
|
|
|
—
|
|
|
—
|
|
|
389
|
|
The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the
three
months ended
March 31, 2019
and 2018.
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Interest Rate Lock Commitments
|
Balance, January 1, 2018
|
|
$
|
551
|
|
Total realized losses
|
|
|
Included in net income
|
|
181
|
|
Balance, March 31, 2018
|
|
$
|
732
|
|
|
|
|
Balance, January 1, 2019
|
|
$
|
389
|
|
Total realized gains
|
|
|
Included in net income
|
|
392
|
|
Balance, March 31, 2019
|
|
$
|
781
|
|
The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The amount of impairment may be determined based on the fair value of the underlying collateral, less costs to sell, the estimated present value of future cash flows or the loan’s observable market price.
If the impaired loan is identified as collateral dependent, the fair value of the underlying collateral, less costs to sell, is used to measure impairment. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is not collateral dependent, the Company utilizes a discounted cash flow analysis to measure impairment.
Impaired loans with a specific valuation allowance based on the value of the underlying collateral or a discounted cash flow analysis are classified as Level 3 assets.
Other Real Estate Owned
Other real estate owned is a level 3 asset that is adjusted to fair value less estimated selling costs, upon transfer to other real estate owned. When a current appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value as a result of known changes in the market or the collateral and there is no observable market price, such valuation inputs result in a fair value measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a Level 3 measurement.
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurement falls at December 31, 2018. There were no fair value measurements of assets and liabilities recognized on a nonrecurring basis at March 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Other real estate owned
|
|
$
|
2,065
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,065
|
|
Significant Unobservable (Level 3) Inputs
The following tables present quantitative information about significant unobservable inputs used in recurring and Level 3 fair value measurements other than goodwill.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
March 31, 2019
|
|
Valuation
Technique
|
|
Significant Unobservable
Inputs
|
|
Range
|
IRLCs
|
|
$
|
781
|
|
|
Discounted cash flow
|
|
Loan closing rates
|
|
35% - 100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
December 31, 2018
|
|
Valuation
Technique
|
|
Significant Unobservable
Inputs
|
|
Range
|
IRLCs
|
|
$
|
389
|
|
|
Discounted cash flow
|
|
Loan closing rates
|
|
34% - 100%
|
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.
Cash and Cash Equivalents
For these instruments, the carrying amount is a reasonable estimate of fair value.
Interest-Bearing Time Deposits
The fair value of these financial instruments approximates carrying value.
Securities Held-to-Maturity
Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, and interest rate spreads on relevant benchmark securities.
Loans Held-for-Sale (best efforts pricing agreements)
The fair value of these loans approximates carrying value.
Loans
The fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.
Accrued Interest Receivable
The fair value of these financial instruments approximates carrying value.
Federal Home Loan Bank of Indianapolis Stock
The fair value approximates carrying value.
Deposits
The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
The fair value of fixed rate advances is estimated using rates currently available for advances with similar remaining maturities. The carrying value of variable rate advances approximates fair value.
Subordinated Debt
The fair value of the Company’s publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments.
Accrued Interest Payable
The fair value of these financial instruments approximates carrying value.
Commitments
The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at each of
March 31, 2019
and
December 31, 2018
.
The following tables present the carrying value and estimated fair value of all financial assets and liabilities at
March 31, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
Fair Value Measurements Using
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
Quoted Prices
In Active
Market for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Cash and cash equivalents
|
|
$
|
130,494
|
|
|
$
|
130,494
|
|
|
$
|
130,494
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities held-to-maturity
|
|
31,222
|
|
|
31,268
|
|
|
—
|
|
|
31,268
|
|
|
—
|
|
Net loans
|
|
2,821,087
|
|
|
2,767,452
|
|
|
—
|
|
|
—
|
|
|
2,767,452
|
|
Accrued interest receivable
|
|
17,217
|
|
|
17,217
|
|
|
17,217
|
|
|
—
|
|
|
—
|
|
Federal Home Loan Bank of Indianapolis stock
|
|
23,625
|
|
|
23,625
|
|
|
—
|
|
|
23,625
|
|
|
—
|
|
Deposits
|
|
2,811,108
|
|
|
2,849,546
|
|
|
773,357
|
|
|
—
|
|
|
2,076,189
|
|
Advances from Federal Home Loan Bank
|
|
495,146
|
|
|
494,714
|
|
|
—
|
|
|
494,714
|
|
|
—
|
|
Subordinated debt
|
|
33,911
|
|
|
36,053
|
|
|
25,820
|
|
|
10,233
|
|
|
—
|
|
Accrued interest payable
|
|
1,549
|
|
|
1,549
|
|
|
1,549
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
Fair Value Measurements Using
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
Quoted Prices
In Active
Market for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Cash and cash equivalents
|
|
$
|
188,712
|
|
|
$
|
188,712
|
|
|
$
|
188,712
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities held-to-maturity
|
|
22,750
|
|
|
22,418
|
|
|
—
|
|
|
22,418
|
|
|
—
|
|
Net loans
|
|
2,698,332
|
|
|
2,646,060
|
|
|
—
|
|
|
—
|
|
|
2,646,060
|
|
Accrued interest receivable
|
|
16,822
|
|
|
16,822
|
|
|
16,822
|
|
|
—
|
|
|
—
|
|
Federal Home Loan Bank of Indianapolis stock
|
|
23,625
|
|
|
23,625
|
|
|
—
|
|
|
23,625
|
|
|
—
|
|
Deposits
|
|
2,671,351
|
|
|
2,687,666
|
|
|
731,378
|
|
|
—
|
|
|
1,956,288
|
|
Advances from Federal Home Loan Bank
|
|
525,153
|
|
|
520,120
|
|
|
—
|
|
|
520,120
|
|
|
—
|
|
Subordinated debt
|
|
33,875
|
|
|
34,490
|
|
|
24,250
|
|
|
10,240
|
|
|
—
|
|
Accrued interest payable
|
|
1,108
|
|
|
1,108
|
|
|
1,108
|
|
|
—
|
|
|
—
|
|
Note 11: Mortgage Banking Activities
The Company’s residential real estate lending business originates mortgage loans for customers and typically sells a majority of the originated loans into the secondary market. For most of the mortgages it sells in the secondary market, the Company hedges its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third party investors and entering into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. To facilitate the hedging of the loans, the Company has elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, IRLCs and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 12 for further information on derivative financial instruments.
During the three months ended
March 31, 2019
and
2018
, the Company originated mortgage loans held-for-sale of
$75.2 million
and
$82.5 million
, respectively, and sold
$81.0 million
and
$90.8 million
of mortgage loans, respectively, into the secondary market. Additionally, during the three months ended March 31, 2019, the Company sold
$5.2 million
of portfolio mortgage loans, resulting in a loss of
$0.1 million
.
The following table presents the components of income from mortgage banking activities for the
three
months ended
March 31, 2019
and
2018
.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Gain on loans sold
|
$
|
1,473
|
|
|
$
|
1,672
|
|
Loss resulting from the change in fair value of loans held-for-sale
|
(182
|
)
|
|
(233
|
)
|
Gain resulting from the change in fair value of derivatives
|
326
|
|
|
139
|
|
Net revenue from mortgage banking activities
|
$
|
1,617
|
|
|
$
|
1,578
|
|
Fluctuations in interest rates and changes in IRLC and loan volume within the mortgage banking pipeline may cause volatility in the fair value of loans held-for-sale and the fair value of derivatives used to hedge the mortgage banking pipeline.
Note 12: Derivative Financial Instruments
The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.
The Company entered into various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses, less any ineffectiveness, in the income statement within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.
The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.
The following table presents amounts that were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of March 31, 2019 and December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of the hedged asset
|
|
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets
|
Line item in the condensed consolidated balance sheets in which the hedged item is included
|
|
March 31, 2019
|
|
December 31, 2018
|
|
March 31, 2019
|
|
December 31, 2018
|
Loans
|
|
$
|
477,580
|
|
|
$
|
474,233
|
|
|
$
|
11,474
|
|
|
$
|
4,961
|
|
Securities available-for-sale
(1)
|
|
158,097
|
|
|
159,188
|
|
|
945
|
|
|
(229
|
)
|
(1)
These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item
is the last layer expected to be remaining at the end of the hedging relationship. At both March 31, 2019 and December 31, 2018, the amounts of the designated hedged items were
$88.2 million
.
The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company’s asset/liability management activities at March 31, 2019 and December 31, 2018, identified by the underlying interest rate-sensitive instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Notional
|
|
Weighted Average Remaining Maturity
|
|
|
|
Weighted-Average Ratio
|
Instruments Associated With
|
|
Value
|
|
(years)
|
|
Fair Value
|
|
Receive
|
|
Pay
|
Loans
|
|
$
|
435,732
|
|
|
6.3
|
|
$
|
(11,551
|
)
|
|
3 month LIBOR
|
|
2.86
|
%
|
Securities available-for-sale
|
|
88,200
|
|
|
4.9
|
|
(937
|
)
|
|
3 month LIBOR
|
|
2.54
|
%
|
Total at March 31, 2019
|
|
$
|
523,932
|
|
|
6.1
|
|
$
|
(12,488
|
)
|
|
3 month LIBOR
|
|
2.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Notional
|
|
Weighted Average Remaining Maturity
|
|
|
|
Weighted-Average Ratio
|
Instruments Associated With
|
|
Value
|
|
(years)
|
|
Fair Value
|
|
Receive
|
|
Pay
|
Loans
|
|
$
|
435,926
|
|
|
6.5
|
|
$
|
(5,025
|
)
|
|
3 month LIBOR
|
|
2.86
|
%
|
Securities available-for-sale
|
|
88,200
|
|
|
5.1
|
|
235
|
|
|
3 month LIBOR
|
|
2.54
|
%
|
Total at December 31, 2018
|
|
$
|
524,126
|
|
|
6.3
|
|
$
|
(4,790
|
)
|
|
3 month LIBOR
|
|
2.80
|
%
|
The following table presents a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable-rate liabilities used in the Company’s asset/liability management activities at March 31, 2019 and December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Notional
|
|
Weighted Average Remaining Maturity
|
|
|
|
Weighted-Average Ratio
|
Cash Flow Hedges
|
|
Value
|
|
(years)
|
|
Fair Value
|
|
Receive
|
|
Pay
|
Interest rate swaps
|
|
$
|
110,000
|
|
|
7.8
|
|
$
|
(4,679
|
)
|
|
3 month LIBOR
|
|
2.88
|
%
|
Interest rate swaps
|
|
100,000
|
|
|
4.7
|
|
(3,251
|
)
|
|
1 month LIBOR
|
|
2.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Notional
|
|
Weighted Average Remaining Maturity
|
|
|
|
Weighted-Average Ratio
|
Cash Flow Hedges
|
|
Value
|
|
(years)
|
|
Fair Value
|
|
Receive
|
|
Pay
|
Interest rate swaps
|
|
$
|
110,000
|
|
|
8.1
|
|
$
|
(2,293
|
)
|
|
3 month LIBOR
|
|
2.88
|
%
|
Interest rate swaps
|
|
100,000
|
|
|
5.0
|
|
(2,065
|
)
|
|
1 month LIBOR
|
|
2.88
|
%
|
These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Company pledged
$23.9 million
and
$7.0 million
of cash collateral to counterparties as security for its obligations related to these interest rate swap transactions at March 31, 2019 and December 31, 2018, respectively. Collateral posted and received is dependent on the market valuation of the underlying hedges.
The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at March 31, 2019 and December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Interest rate swaps associated with loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91,135
|
|
|
$
|
986
|
|
Interest rate swaps associated with securities available-for-sale
|
|
—
|
|
|
—
|
|
|
50,000
|
|
|
593
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
39,371
|
|
|
781
|
|
|
15,136
|
|
|
389
|
|
Total contracts
|
|
$
|
39,371
|
|
|
$
|
781
|
|
|
$
|
156,271
|
|
|
$
|
1,968
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Interest rate swaps associated with loans
|
|
$
|
435,732
|
|
|
$
|
(11,551
|
)
|
|
$
|
344,791
|
|
|
$
|
(6,011
|
)
|
Interest rate swaps associated with securities available-for-sale
|
|
88,200
|
|
|
(937
|
)
|
|
38,200
|
|
|
(358
|
)
|
Interest rate swaps associated with liabilities
|
|
210,000
|
|
|
(7,930
|
)
|
|
210,000
|
|
|
(4,358
|
)
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
54,000
|
|
|
(427
|
)
|
|
32,500
|
|
|
(360
|
)
|
Total contracts
|
|
$
|
787,932
|
|
|
$
|
(20,845
|
)
|
|
$
|
625,491
|
|
|
$
|
(11,087
|
)
|
The fair value of interest rate swaps was estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates form the date the Company entered into the IRLC and the balance sheet date.
The following table presents the effects of the Company’s cash flow hedge relationships on the condensed consolidated statements of comprehensive income during the three months ended March 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Recognized in Other Comprehensive Income in the Three Months Ended
|
|
|
March 31, 2019
|
|
March 31, 2018
|
Interest rate swap agreements
|
|
$
|
(3,572
|
)
|
|
$
|
—
|
|
The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the
three
months ended
March 31, 2019
and
2018
.
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain / (Loss) Recognized in the Three Months Ended
|
|
|
March 31, 2019
|
|
March 31, 2018
|
Asset Derivatives
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
IRLCs
|
|
$
|
392
|
|
|
$
|
181
|
|
Liability Derivatives
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
Forward contracts
|
|
(67
|
)
|
|
(42
|
)
|
The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of income during the three months ended March 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
Line item in the condensed consolidated statements of income
|
|
Three Months Ended
|
|
March 31, 2019
|
|
March 31, 2018
|
Interest income
|
|
|
|
|
Loans
|
|
$
|
21
|
|
|
$
|
—
|
|
Securities - taxable
|
|
(7
|
)
|
|
(29
|
)
|
Securities - non-taxable
|
|
45
|
|
|
15
|
|
Total interest income
|
|
59
|
|
|
(14
|
)
|
Interest expense
|
|
|
|
|
|
|
Deposits
|
|
90
|
|
|
—
|
|
Other borrowed funds
|
|
34
|
|
|
—
|
|
Total interest expense
|
|
124
|
|
|
—
|
|
Net interest income
|
|
$
|
(65
|
)
|
|
$
|
(14
|
)
|
Note 13: Recent Accounting Pronouncements
ASU 2016-02,
Leases (Topic 842)
(February 2016)
In February 2016, the FASB amended its standards with respect to the accounting for leases. This ASU replaces all current GAAP guidance on this topic and requires that an operating lease be recognized by the lessee on the balance sheet as a “right-of-use” asset along with a corresponding liability representing the rent obligation. Key aspects of current lessor accounting remain unchanged from existing guidance. The amended standard has resulted in an increase to assets and liabilities recognized and, therefore, increased risk-weighted assets for regulatory capital purposes.
In July 2018, the FASB issued ASU 2018-10,
Codification Improvements to Topic 842
,
Leases
and ASU 2018-11,
Leases (Topic 842): Targeted Improvements
. ASU 2018-11 allows entities adopting ASU 2016-01 to choose an additional (and optional) transition method, under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company elected the optional transition method permitted by ASU 2018-11, which allows the Company to recognize and measure leases that exist at the application date. Under this method, an entity must recognize and measure leases that exist at the application date and prior comparative periods are not adjusted.
The new ASU provides a number of optional practical expedients in transition. The Company has elected the practical expedients that allowed the Company to retain the classifications of existing leases, not re-assess if existing leases have initial direct costs and hindsight when determining the lease term and assessment of impairment. The Company also elected a practical expedient to not assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 contain a lease under this Topic.
The Company adopted the guidance on January 1, 2019 using the optional transition method and the adoption of the guidance did not have a material impact on the condensed consolidated financial statements. As a result, the Company recognized a
$1.9 million
increase in assets and liabilities on the condensed consolidated balance sheets. Refer to Note 6 for additional disclosure information.
In March 2019, the FASB issued ASU 2019-01,
Leases: Codification Improvements
. This ASU (1) states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there is not a significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC 942, such as the Company, must classify principal payments received from sales-type and direct financing leases in investing activities in the statement of cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of ASU 2016-02, the Company elected to early adopt ASU 2019-01 on January 1, 2019. The adoption of the guidance did not have a material impact on the consolidated financial statements.
ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(June 2016)
The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
The amendments affect entities holding financial assets that are not accounted for at fair value through net income. The amendments affect loans, debt securities, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. There is diversity in practice in applying the incurred loss methodology, which means that before transition some entities may be more aligned under current GAAP than others to the new measure of expected credit losses. The following describes the main provisions of this update.
•
Assets Measured at Amortized Cost: The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances.
•
Available-for-Sale Debt Securities: Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value if cash collection would result in the realization of an amount less than fair value.
For public business entities that are SEC filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the effective date of this update.
The Company does not expect to early adopt and is currently evaluating the impact of the amendments on the Company’s condensed consolidated financial statements. The Company currently cannot determine or reasonably quantify the impact of the adoption of the amendments due to the complexity and extensive changes. The Company intends to develop processes and procedures this year to ensure it is fully compliant with the amendments at adoption date. The Company has formed an implementation committee and has begun evaluating the data needed for implementation as well as considering appropriate methodologies.
ASU 2018-13 -
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
(August 2018)
The amendments in this update modify the disclosure requirements on fair value measurements in ASC 820. This ASU eliminates the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. In addition, this ASU requires entities that calculate net asset value to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly. This ASU also added new requirements, which include the disclosure of the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the amendment on the Company’s condensed consolidated financial statements.
ASU 2018-16 -
Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
(October 2018)
The amendments in this ASU allow all entities that elect to apply hedge accounting to benchmark interest rate hedges under ASC 815,
Derivatives and Hedging
, to use the OIS rate based on SOFR as a benchmark interest rate, in addition to the four eligible benchmark interest rates. The Company adopted this ASU effective December 31, 2018 and it did not have a material impact on the condensed consolidated financial statements.