Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2016
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)
 
 
 
 
 
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
 
  
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
 
Large Accelerated Filer ¨
Accelerated Filer þ
Non-accelerated Filer ¨ (Do not check if a smaller reporting company)
Smaller Reporting Company ¨
 
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 November 3, 2016, the registrant had 5,533,050 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 “expects,” “believes,” “anticipates,” “intends,” “plan,” and similar expressions. Such statements are subject to certain risks and uncertainties including: 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 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 and commercial and industrial 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; 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 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, 2016
 
December 31, 2015
 
 
(Unaudited)
 
 
Assets
 
 

 
 

Cash and due from banks
 
$
2,314

 
$
1,063

Interest-bearing demand deposits
 
65,511

 
24,089

Total cash and cash equivalents
 
67,825

 
25,152

Interest-bearing time deposits
 
250

 
1,000

Securities available-for-sale, at fair value (amortized cost of $469,539 and $215,576 in 2016 and 2015, respectively)
 
470,978

 
213,698

Securities held-to-maturity, at amortized cost (fair value of $5,578 and $0 in 2016 and 2015, respectively)
 
5,500

 

Loans held-for-sale (includes $31,196 and $24,065 at fair value in 2016 and 2015, respectively)
 
32,471

 
36,518

Loans
 
1,198,932

 
953,859

Allowance for loan losses
 
(10,561
)
 
(8,351
)
Net loans
 
1,188,371

 
945,508

Accrued interest receivable
 
5,848

 
4,105

Federal Home Loan Bank of Indianapolis stock
 
8,595

 
8,595

Cash surrender value of bank-owned life insurance
 
18,044

 
12,727

Premises and equipment, net
 
10,116

 
8,521

Goodwill
 
4,687

 
4,687

Other real estate owned
 
4,533

 
4,488

Accrued income and other assets
 
6,978

 
4,871

Total assets
 
$
1,824,196

 
$
1,269,870

Liabilities and Shareholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Noninterest-bearing deposits
 
$
32,938

 
$
23,700

Interest-bearing deposits
 
1,460,663

 
932,354

Total deposits
 
1,493,601

 
956,054

Advances from Federal Home Loan Bank
 
147,978

 
190,957

Subordinated debt, net of unamortized discounts and debt issuance costs of $1,459 and $276 in 2016 and 2015, respectively
 
36,541

 
12,724

Accrued interest payable
 
125

 
117

Accrued expenses and other liabilities
 
8,797

 
5,688

Total liabilities
 
1,687,042

 
1,165,540

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; 5,533,050 and 4,481,347 shares issued and outstanding in 2016 and 2015, respectively
 
95,839

 
72,559

Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none
 

 

Retained earnings
 
40,389

 
32,980

Accumulated other comprehensive income (loss)
 
926

 
(1,209
)
Total shareholders’ equity
 
137,154

 
104,330

Total liabilities and shareholders’ equity
 
$
1,824,196

 
$
1,269,870


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 September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Interest Income
 
 

 
 

 
 

 
 

Loans
 
$
12,544

 
$
9,326

 
$
35,394

 
$
26,759

Securities – taxable
 
2,148

 
994

 
5,064

 
2,661

Securities – non-taxable
 
637

 
116

 
1,170

 
175

Other earning assets
 
142

 
100

 
507

 
258

Total interest income
 
15,471

 
10,536

 
42,135

 
29,853

Interest Expense
 
 

 
 

 
 

 
 

Deposits
 
4,368

 
2,260

 
11,186

 
6,350

Other borrowed funds
 
765

 
437

 
2,164

 
1,318

Total interest expense
 
5,133

 
2,697

 
13,350

 
7,668

Net Interest Income
 
10,338

 
7,839

 
28,785

 
22,185

Provision for Loan Losses
 
2,204

 
454

 
4,074

 
1,200

Net Interest Income After Provision for Loan Losses
 
8,134

 
7,385

 
24,711

 
20,985

Noninterest Income
 
 

 
 

 
 

 
 

Service charges and fees
 
207

 
202

 
622

 
571

Mortgage banking activities
 
4,442

 
2,095

 
9,991

 
7,195

Gain on sale of securities
 

 

 
177

 

Gain (loss) on asset disposals
 
5

 
(27
)
 
(59
)
 
(74
)
Other
 
244

 
104

 
455

 
306

Total noninterest income
 
4,898

 
2,374

 
11,186

 
7,998

Noninterest Expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
4,550

 
3,446

 
12,777

 
10,811

Marketing, advertising, and promotion
 
454

 
544

 
1,352

 
1,330

Consulting and professional services
 
901

 
544

 
2,434

 
1,700

Data processing
 
286

 
248

 
835

 
729

Loan expenses
 
240

 
97

 
624

 
459

Premises and equipment
 
983

 
676

 
2,744

 
2,009

Deposit insurance premium
 
420

 
163

 
815

 
473

Other
 
579

 
489

 
1,712

 
1,280

Total noninterest expense
 
8,413

 
6,207

 
23,293

 
18,791

Income Before Income Taxes
 
4,619

 
3,552

 
12,604

 
10,192

Income Tax Provision
 
1,521

 
1,229

 
4,240

 
3,541

Net Income
 
$
3,098

 
$
2,323


$
8,364

 
$
6,651

Income Per Share of Common Stock
 
 

 
 

 
 

 
 

Basic
 
$
0.55

 
$
0.51

 
$
1.66

 
$
1.47

Diluted
 
$
0.55

 
$
0.51

 
$
1.65

 
$
1.46

Weighted-Average Number of Common Shares Outstanding
 
 

 
 

 
 

 
 

Basic
 
5,597,867

 
4,532,360

 
5,039,497

 
4,526,377

Diluted
 
5,622,181

 
4,574,455

 
5,063,299

 
4,549,447

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,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
3,098

 
$
2,323

 
$
8,364

 
$
6,651

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) on securities available-for-sale recorded within other comprehensive income (loss) before income tax
 
(2,297
)
 
1,193

 
3,494

 
(528
)
Reclassification adjustment for gains realized
 

 

 
(177
)
 

Other comprehensive income (loss) before income tax
 
(2,297
)
 
1,193

 
3,317

 
(528
)
Income tax provision (benefit)
 
(816
)
 
429

 
1,182

 
(189
)
Other comprehensive income (loss)
 
(1,481
)
 
764

 
2,135

 
(339
)
Comprehensive income
 
$
1,617

 
$
3,087

 
$
10,499

 
$
6,312

 
 See Notes to Condensed Consolidated Financial Statements

3



First Internet Bancorp
Condensed Consolidated Statement of Shareholders’ Equity - Unaudited
Nine Months Ended September 30, 2016
(Amounts in thousands except per share data)
 
 
Voting and
Nonvoting
Common
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Shareholders’
Equity
Balance, January 1, 2016
 
$
72,559

 
$
(1,209
)
 
$
32,980

 
$
104,330

Net income
 

 

 
8,364

 
8,364

Other comprehensive income
 

 
2,135

 

 
2,135

Dividends declared ($0.18 per share)
 

 

 
(955
)
 
(955
)
Net cash proceeds from common stock issuance
 
22,754

 

 

 
22,754

Recognition of the fair value of share-based compensation
 
547

 

 

 
547

Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units
 
22

 

 

 
22

Excess tax benefit on share-based compensation
 
48

 

 

 
48

Common stock redeemed for the net settlement of share-based awards
 
(91
)
 

 

 
(91
)
Balance, September 30, 2016
 
$
95,839

 
$
926

 
$
40,389

 
$
137,154

 
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,
 
 
2016
 
2015
Operating Activities
 
 

 
 

Net income
 
$
8,364

 
$
6,651

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
2,567

 
1,388

Increase in cash surrender value of bank-owned life insurance
 
(317
)
 
(300
)
Provision for loan losses
 
4,074

 
1,200

Share-based compensation expense
 
547

 
631

Gain from sale of available-for-sale securities
 
(177
)
 

Loans originated for sale
 
(439,159
)
 
(386,353
)
Proceeds from sale of loans
 
452,242

 
400,003

Gain on loans sold
 
(8,476
)
 
(6,895
)
(Increase) decrease in fair value of loans held-for-sale
 
(560
)
 
143

Gain on derivatives
 
(955
)
 
(443
)
Net change in accrued income and other assets
 
(3,318
)
 
304

Net change in accrued expenses and other liabilities
 
350

 
407

Net cash provided by operating activities
 
15,182

 
16,736

Investing Activities
 
 
 
 
Net loan activity, excluding purchases
 
(210,844
)
 
(143,481
)
Net change in interest-bearing time deposits
 
750

 
750

Maturities of securities available-for-sale
 
29,015

 
16,322

Proceeds from sale of securities available-for-sale
 
49,430

 

Purchase of securities available-for-sale
 
(331,501
)
 
(78,481
)
Purchase of securities held-to-maturity
 
(5,500
)
 

Purchase of Federal Home Loan Bank of Indianapolis stock
 

 
(1,596
)
Purchase of bank-owned life insurance
 
(5,000
)
 

Purchase of premises and equipment
 
(2,867
)
 
(2,233
)
Loans purchased
 
(36,138
)
 

Net cash used in investing activities
 
(512,655
)
 
(208,719
)
Financing Activities
 
 
 
 
Net increase in deposits
 
537,547

 
141,152

Cash dividends paid
 
(869
)
 
(800
)
Net proceeds from issuance of subordinated debt
 
23,757

 

Proceeds from advances from Federal Home Loan Bank
 
65,000

 
220,000

Repayment of advances from Federal Home Loan Bank
 
(108,000
)
 
(176,000
)
Net proceeds from common stock issuance
 
22,754

 

Other, net
 
(43
)
 
(13
)
Net cash provided by financing activities
 
540,146

 
184,339

Net Increase (Decrease) in Cash and Cash Equivalents
 
42,673

 
(7,644
)
Cash and Cash Equivalents, Beginning of Period
 
25,152

 
28,289

Cash and Cash Equivalents, End of Period
 
$
67,825

 
$
20,645

Supplemental Disclosures
 
 
 
 
Cash paid during the period for interest
 
$
13,342

 
$
7,653

Cash paid during the period for taxes
 
5,886

 
2,503

Loans transferred to other real estate owned
 
45

 

Cash dividends declared, paid in subsequent period
 
331

 
267

Securities purchased during the period, settled in subsequent period
 
2,238

 
3,922

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 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 and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the year ending December 31, 2016 or any other period. The September 30, 2016 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, 2015.
 
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 wholly-owned subsidiary, JKH Realty Services, LLC. 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 2015 financial statements to conform to the presentation of the 2016 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, 2016 and 2015
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Basic earnings per share
 
 

 
 

 
 
 
 
Net income
 
$
3,098

 
$
2,323

 
$
8,364

 
$
6,651

Weighted-average common shares
 
5,597,867

 
4,532,360

 
5,039,497

 
4,526,377

Basic earnings per common share
 
$
0.55

 
$
0.51

 
$
1.66

 
$
1.47

Diluted earnings per share
 
 

 
 

 
 

 
 

Net income
 
$
3,098

 
$
2,323

 
$
8,364

 
$
6,651

Weighted-average common shares
 
5,597,867

 
4,532,360

 
5,039,497

 
4,526,377

Dilutive effect of warrants
 
8,877

 
17,264

 
9,967

 
8,153

Dilutive effect of equity compensation
 
15,437

 
24,831

 
13,835

 
14,917

     Weighted-average common and incremental shares
 
5,622,181

 
4,574,455

 
5,063,299

 
4,549,447

Diluted earnings per common share
 
$
0.55

 
$
0.51

 
$
1.65

 
$
1.46

Number of warrants excluded from the calculation of diluted earnings per share as the exercise prices were greater than the average market price of the Company’s common stock during the period
 

 

 

 

  
Note 3:         Securities
 
The following tables summarize securities available-for-sale and securities held-to-maturity as of September 30, 2016 and December 31, 2015. There were no securities held-to-maturity as of December 31, 2015.
 
 
September 30, 2016
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities available-for-sale
 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
85,630

 
$
652

 
$
(292
)
 
$
85,990

Municipal securities
 
96,665

 
1,345

 
(509
)
 
97,501

Mortgage-backed securities
 
244,780

 
1,715

 
(410
)
 
246,085

Asset-backed securities
 
19,464

 
59

 
(27
)
 
19,496

Corporate securities
 
20,000

 

 
(1,120
)
 
18,880

Other securities
 
3,000

 
26

 

 
3,026

Total available-for-sale
 
$
469,539

 
$
3,797

 
$
(2,358
)
 
$
470,978

 
 
September 30, 2016
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities held-to-maturity
 
 

 
 

 
 

 
 

Corporate securities
 
$
5,500

 
$
78

 
$

 
$
5,578

Total held-to-maturity
 
$
5,500

 
$
78

 
$

 
$
5,578



7



 
 
 
December 31, 2015
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
Value
Securities available-for-sale
 
 

 
 

 
 

 
 

U.S. Government-sponsored agencies
 
$
38,093

 
$
139

 
$
(482
)
 
$
37,750

Municipal securities
 
21,091

 
385

 
(7
)
 
21,469

Mortgage-backed securities
 
113,948

 
110

 
(1,006
)
 
113,052

Asset-backed securities
 
19,444

 

 
(83
)
 
19,361

Corporate securities
 
20,000

 

 
(913
)
 
19,087

Other securities
 
3,000

 

 
(21
)
 
2,979

Total available-for-sale
 
$
215,576

 
$
634

 
$
(2,512
)
 
$
213,698


The carrying value of securities at September 30, 2016 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
Within one year
 
$

 
$

One to five years
 
298

 
263

Five to ten years
 
36,851

 
36,536

After ten years
 
165,146

 
165,572

 
 
202,295

 
202,371

Mortgage-backed securities
 
244,780

 
246,085

Asset-backed securities
 
19,464

 
19,496

Other securities
 
3,000

 
3,026

Total
 
$
469,539

 
$
470,978

 
 
Held-to-Maturity
 
 
Amortized
Cost
 
Fair
Value
Five to ten years
 
$
5,500

 
$
5,578

Total
 
$
5,500

 
$
5,578


 
There were no sales of available-for-sale securities during the three months ended September 30, 2016. Gross gains of $0.2 million and gross losses of $0.0 million resulted from sales of available-for-sale securities during the nine months ended September 30, 2016. There were no sales of available-for-sale securities during the three and nine months ended September 30, 2015.
 
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, 2016 and December 31, 2015 was $166.9 million and $166.1 million, which was approximately 35% and 78%, respectively, of the Company’s available-for-sale securities portfolio. These declines resulted primarily from fluctuations in market interest rates after purchase.

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 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 maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2016.

8



 
Mortgage-Backed and Asset-Backed Securities
 
The unrealized losses on the Company’s investments in mortgage-backed and asset-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 maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2016.

Should any future impairment of these securities become other-than-temporary, the cost basis of the security will be reduced, with the resulting loss recognized in net income in the period in which the other-than-temporary impairment (“OTTI”) is identified.
 
The following tables show the available-for-sale 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, 2016 and December 31, 2015
 
 
September 30, 2016
 
 
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
 
$
29,919

 
$
(257
)
 
$
263

 
$
(35
)
 
$
30,182

 
$
(292
)
Municipal securities
 
38,854

 
(509
)
 

 

 
38,854

 
(509
)
Mortgage-backed securities
 
64,526

 
(410
)
 

 

 
64,526

 
(410
)
Asset-backed securities
 
4,913

 
(9
)
 
9,589

 
(18
)
 
14,502

 
(27
)
Corporate securities
 
4,861

 
(139
)
 
14,019

 
(981
)
 
18,880

 
(1,120
)
Total
 
$
143,073

 
$
(1,324
)
 
$
23,871

 
$
(1,034
)
 
$
166,944

 
$
(2,358
)
 
 
 
December 31, 2015
 
 
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
 
$
18,289

 
$
(237
)
 
$
8,537

 
$
(245
)
 
$
26,826

 
$
(482
)
Municipal securities
 
1,026

 
(7
)
 

 

 
1,026

 
(7
)
Mortgage-backed securities
 
74,198

 
(562
)
 
22,655

 
(444
)
 
96,853

 
(1,006
)
Asset-backed securities
 
19,361

 
(83
)
 

 

 
19,361

 
(83
)
Corporate securities
 
19,087

 
(913
)
 

 

 
19,087

 
(913
)
Other securities
 
2,979

 
(21
)
 

 

 
2,979

 
(21
)
Total
 
$
134,940

 
$
(1,823
)
 
$
31,192

 
$
(689
)
 
$
166,132

 
$
(2,512
)

There were no held-to-maturity securities in an unrealized loss position at September 30, 2016, and there were no held-to-maturity securities at December 31, 2015.


9



There were no amounts reclassified from accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2015. Amounts reclassified from accumulated other comprehensive income (loss) and the affected line items in the consolidated statements of income during the three and nine months ended September 30, 2016 were as follows:
Details About Accumulated Other Comprehensive Income (Loss) Components
 
Amounts Reclassified from
Accumulated Other Comprehensive Income (Loss) for the
 
Affected Line Item in the
Statements of Income
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
 
Unrealized gains and losses on securities available-for-sale
 
 

 
 

 
 
Gain realized in earnings
 
$

 
$
177

 
Gain on sale of securities
Total reclassified amount before tax
 

 
177

 
Income Before Income Taxes
Tax expense
 

 
60

 
Income Tax Provision
Total reclassifications out of accumulated other comprehensive income (loss)
 
$

 
$
117

 
Net Income

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:
 
 
September 30,
2016
 
December 31,
2015
Commercial loans
 
 

 
 

Commercial and industrial
 
$
107,250

 
$
102,000

Owner-occupied commercial real estate
 
45,540

 
44,462

Investor commercial real estate
 
12,752

 
16,184

Construction
 
56,391

 
45,898

Single tenant lease financing
 
571,972

 
374,344

Total commercial loans
 
793,905

 
582,888

Consumer loans
 
 
 
 
Residential mortgage
 
200,889

 
214,559

Home equity
 
37,849

 
43,279

Other consumer
 
163,158

 
108,312

Total consumer loans
 
401,896

 
366,150

Total commercial and consumer loans
 
1,195,801

 
949,038

Deferred loan origination costs and premiums and discounts on purchased loans
 
3,131

 
4,821

Total loans
 
1,198,932

 
953,859

Allowance for loan losses
 
(10,561
)
 
(8,351
)
Net loans
 
$
1,188,371

 
$
945,508

 

10



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.

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 greater Phoenix, Arizona markets and its loans often times are secured by manufacturing and service facilities, as well as office buildings.

Investor Commercial Real Estate: These loans are underwritten primarily based on the cash flow expected to be generated from the property and are secondarily supported by the value of the real estate. These loans typically incorporate a personal guarantee. This portfolio segment typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Investor commercial real estate loans may be more adversely affected by conditions in the real estate markets, changing industry dynamics, or the overall health of the general economy. The properties securing the Company’s investor commercial real estate portfolio tend to be diverse in terms of property type and are typically located in the state of Indiana and markets adjacent to Indiana. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value, guarantor strength, and other risk grade criteria. As a general rule, the Company avoids financing special use projects or properties outside of its designated market areas unless other underwriting factors are present to help mitigate risk.

Construction: Construction loans are secured by real estate and improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, multi-family) properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes.
Single Tenant Lease Financing: These loans are made to property owners of real estate subject to long term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses.  The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant.  Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria.

Residential Mortgage: With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.
Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1-4 family residences. The properties securing the Company's home equity portfolio segment are generally geographically diverse as the Company offers these products on a nationwide basis. Repayment of home equity loans and lines of credit may be impacted by changes in property values on residential properties and unemployment levels, among other economic conditions and financial circumstances 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.

11



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 and nine month periods ended September 30, 2016 and 2015
 
 
Three Months Ended September 30, 2016
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
1,834

 
$
461

 
$
171

 
$
555

 
$
5,059

 
$
781

 
$
121

 
$
1,034

 
$
10,016

Provision (credit) charged to expense
 
1,174

 
(5
)
 
(7
)
 
37

 
832

 
(67
)
 
(15
)
 
255

 
2,204

Losses charged off
 
(1,582
)
 

 

 

 

 

 

 
(155
)
 
(1,737
)
Recoveries
 

 

 

 

 

 
2

 
4

 
72

 
78

Balance, end of period
 
$
1,426

 
$
456

 
$
164

 
$
592

 
$
5,891

 
$
716

 
$
110

 
$
1,206

 
$
10,561


12



 
 
Nine Months Ended September 30, 2016
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
1,367

 
$
476

 
$
212

 
$
500

 
$
3,931

 
$
896

 
$
125

 
$
844

 
$
8,351

Provision (credit) charged to expense
 
1,641

 
(20
)
 
(48
)
 
92

 
1,960

 
(75
)
 
8

 
516

 
4,074

Losses charged off
 
(1,582
)
 

 

 

 

 
(134
)
 
(33
)
 
(369
)
 
(2,118
)
Recoveries
 

 

 

 

 

 
29

 
10

 
215

 
254

Balance, end of period
 
$
1,426

 
$
456

 
$
164

 
$
592

 
$
5,891

 
$
716

 
$
110

 
$
1,206

 
$
10,561

 
 
Three Months Ended September 30, 2015
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
1,201

 
$
439

 
$
261

 
$
227

 
$
3,093

 
$
933

 
$
157

 
$
762

 
$
7,073

Provision (credit) charged to expense
 
29

 
16

 
(31
)
 
129

 
429

 
(132
)
 
(1
)
 
15

 
454

Losses charged off
 

 

 

 

 

 
(14
)
 

 
(62
)
 
(76
)
Recoveries
 

 

 

 

 

 
130

 

 
90

 
220

Balance, end of period
 
$
1,230

 
$
455

 
$
230

 
$
356

 
$
3,522

 
$
917

 
$
156

 
$
805

 
$
7,671

 
 
Nine Months Ended September 30, 2015
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
920

 
$
345

 
$
261

 
$
330

 
$
2,061

 
$
985

 
$
207

 
$
691

 
$
5,800

Provision (credit) charged to expense
 
310

 
110

 
(531
)
 
26

 
1,461

 
(284
)
 
(51
)
 
159

 
1,200

Losses charged off
 

 

 

 

 

 
(185
)
 

 
(351
)
 
(536
)
Recoveries
 

 

 
500

 

 

 
401

 

 
306

 
1,207

Balance, end of period
 
$
1,230

 
$
455

 
$
230

 
$
356

 
$
3,522

 
$
917

 
$
156

 
$
805

 
$
7,671



13



The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2016, and December 31, 2015
 
 
September 30, 2016
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Ending balance: collectively evaluated for impairment
 
$
107,250

 
$
45,540

 
$
12,752

 
$
56,391

 
$
571,972

 
$
198,871

 
$
37,849

 
$
162,976

 
$
1,193,601

Ending balance:   individually evaluated for impairment
 

 

 

 

 

 
2,018

 

 
182

 
2,200

Ending balance
 
$
107,250

 
$
45,540

 
$
12,752

 
$
56,391

 
$
571,972

 
$
200,889

 
$
37,849

 
$
163,158

 
$
1,195,801

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Ending balance:   collectively evaluated for impairment
 
$
1,426

 
$
456

 
$
164

 
$
592

 
$
5,891

 
$
716

 
$
110

 
$
1,206

 
$
10,561

Ending balance:   individually evaluated for impairment
 

 

 

 

 

 

 

 

 

Ending balance
 
$
1,426

 
$
456

 
$
164

 
$
592

 
$
5,891

 
$
716

 
$
110

 
$
1,206

 
$
10,561

 
 
 
December 31, 2015
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Ending balance:   collectively evaluated for impairment
 
$
102,000

 
$
44,462

 
$
16,184

 
$
45,898

 
$
374,344

 
$
213,426

 
$
43,279

 
$
108,163

 
$
947,756

Ending balance:   individually evaluated for impairment
 

 

 

 

 

 
1,133

 

 
149

 
1,282

Ending balance
 
$
102,000

 
$
44,462

 
$
16,184

 
$
45,898

 
$
374,344

 
$
214,559

 
$
43,279

 
$
108,312

 
$
949,038

Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Ending balance: collectively evaluated for impairment
 
$
1,367

 
$
476

 
$
212

 
$
500

 
$
3,931

 
$
896

 
$
125

 
$
844

 
$
8,351

Ending balance:   individually evaluated for impairment
 

 

 

 

 

 

 

 

 

Ending balance
 
$
1,367

 
$
476

 
$
212

 
$
500

 
$
3,931

 
$
896

 
$
125

 
$
844

 
$
8,351




14



The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. In the third quarter 2016, the Company updated its risk grading matrix to improve precision within the “Pass” risk grades. Commercial loans are now graded on a scale of 1 to 10, whereas commercial loans were previously graded on a scale of 1 to 9. This update to the risk grading matrix did not have an impact on the ALLL. The following table illustrates the risk ratings utilized as of September 30, 2016 and December 31, 2015.
Rating
 
September 30, 2016
 
December 31, 2015
Pass
 
Grade 1-6
 
Grade 1-5
Special Mention
 
Grade 7
 
Grade 6
Substandard
 
Grade 8
 
Grade 7
Doubtful
 
Grade 9
 
Grade 8
Loss
 
Grade 10
 
Grade 9

A description of the general characteristics of the ten risk grades is as follows:
 
“Pass” (Grades 1-6) - Higher quality loans that do not fit any of the other categories described below.

“Special Mention” (Grade 7) - Loans that possess some credit deficiency or potential weakness which deserve close attention.

“Substandard” (Grade 8) - 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” (Grade 9) - 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 which 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” (Grade 10) - 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 September 30, 2016 and December 31, 2015
 
 
September 30, 2016
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Total
Rating:
 
 

 
 

 
 

 
 

 
 

 
 
1-6 Pass
 
$
106,482

 
$
45,529

 
$
12,752

 
$
56,391

 
$
571,972

 
$
793,126

7 Special Mention
 
243

 

 

 

 

 
243

8 Substandard
 
525

 
11

 

 

 

 
536

9 Doubtful
 

 

 

 

 

 

Total
 
$
107,250

 
$
45,540

 
$
12,752

 
$
56,391

 
$
571,972

 
$
793,905


15



 
 
September 30, 2016
 
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Performing
 
$
199,864

 
$
37,849

 
$
163,050

 
$
400,763

Nonaccrual
 
1,025

 

 
108

 
1,133

Total
 
$
200,889

 
$
37,849

 
$
163,158

 
$
401,896

 
 
December 31, 2015
 
 
Commercial and industrial
 
Owner-occupied commercial real estate
 
Investor commercial real estate
 
Construction
 
Single tenant lease financing
 
Total
Rating:
 
 

 
 

 
 

 
 

 
 

 
 
1-5 Pass
 
$
95,589

 
$
43,913

 
$
14,746

 
$
45,599

 
$
374,344

 
$
574,191

6 Special Mention
 
2,006

 
535

 

 
299

 

 
2,840

7 Substandard
 
4,405

 
14

 
1,438

 

 

 
5,857

8 Doubtful
 

 

 

 

 

 

Total
 
$
102,000

 
$
44,462

 
$
16,184

 
$
45,898

 
$
374,344

 
$
582,888

 
 
December 31, 2015
 
 
Residential mortgage
 
Home equity
 
Other consumer
 
Total
Performing
 
$
214,456

 
$
43,279

 
$
108,248

 
$
365,983

Nonaccrual
 
103

 

 
64

 
167

Total
 
$
214,559

 
$
43,279

 
$
108,312

 
$
366,150

  
The following tables present the Company’s loan portfolio delinquency analysis as of September 30, 2016 and December 31, 2015
 
 
September 30, 2016
 
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days 
or More
Past Due
 
Total 
Past Due
 
Current
 
Total
Commercial and Consumer Loans
 
Non-
accrual
Loans
 
Total Loans
90 Days or
More Past
Due and
Accruing
Commercial and industrial
 
$
257

 
$

 
$

 
$
257

 
$
106,993

 
$
107,250

 
$

 
$

Owner-occupied commercial real estate
 

 

 

 

 
45,540

 
45,540

 

 

Investor commercial real estate
 

 

 

 

 
12,752

 
12,752

 

 

Construction
 

 

 

 

 
56,391

 
56,391

 

 

Single tenant lease financing
 

 

 

 

 
571,972

 
571,972

 

 

Residential mortgage
 

 

 
991

 
991

 
199,898

 
200,889

 
1,025

 

Home equity
 

 

 

 

 
37,849

 
37,849

 

 

Other consumer
 
232

 
35

 

 
267

 
162,891

 
163,158

 
108

 

Total
 
$
489

 
$
35

 
$
991

 
$
1,515

 
$
1,194,286

 
$
1,195,801

 
$
1,133

 
$


16



 
 
 
December 31, 2015
 
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days 
or More
Past Due
 
Total 
Past Due
 
Current
 
Total
Commercial and C
onsumer Loans
 
Non-
accrual
Loans
 
Total Loans
90 Days or
More Past
Due and
Accruing
Commercial and industrial
 
$
29

 
$

 
$

 
$
29

 
$
101,971

 
$
102,000

 
$

 
$

Owner-occupied commercial real estate
 

 

 

 

 
44,462

 
44,462

 

 

Investor commercial real estate
 

 

 

 

 
16,184

 
16,184

 

 

Construction
 

 

 

 

 
45,898

 
45,898

 

 

Single tenant lease financing
 

 

 

 

 
374,344

 
374,344

 

 

Residential mortgage
 
300

 
23

 
45

 
368

 
214,191

 
214,559

 
103

 

Home equity
 
20

 

 

 
20

 
43,259

 
43,279

 

 

Other consumer
 
116

 
12

 

 
128

 
108,184

 
108,312

 
64

 

Total
 
$
465

 
$
35

 
$
45

 
$
545

 
$
948,493

 
$
949,038

 
$
167

 
$


Impaired Loans
 
A loan is designated as impaired, in accordance with the impairment accounting guidance, when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.
 
Impaired loans include nonperforming loans as well as loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.
 
ASC Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral, less costs to sell, and allows existing methods for recognizing interest income.
 
The following table presents the Company’s impaired loans as of September 30, 2016 and December 31, 2015.  The Company had no impaired loans with a specific valuation allowance as of September 30, 2016 or December 31, 2015.
 
 
September 30, 2016
 
December 31, 2015
 
 
Recorded
Balance
 
Unpaid
Principal
Balance
 
Specific
Allowance
 
Recorded
Balance
 
Unpaid
Principal
Balance
 
Specific
Allowance
Loans without a specific valuation allowance
 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage
 
$
2,018

 
$
2,130

 
$

 
$
1,133

 
$
1,154

 
$

Other consumer
 
182

 
237

 

 
149

 
178

 

Total
 
2,200

 
2,367

 

 
1,282

 
1,332

 

Total impaired loans
 
$
2,200

 
$
2,367

 
$

 
$
1,282

 
$
1,332

 
$

 

17



The table below presents average balances and interest income recognized for impaired loans during the three and nine month periods ended September 30, 2016 and September 30, 2015.
 
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
 
 
Average
Balance
 
Interest
Income
 
Average
Balance
 
Interest
Income
 
Average
Balance
 
Interest
Income
 
Average
Balance
 
Interest
Income
Loans without a specific valuation allowance
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Investor commercial real estate
 
$

 
$

 
$

 
$

 
$

 
$

 
$
28

 
$
2

Residential mortgage
 
1,876

 
2

 
1,478

 
6

 
1,146

 
3

 
1,105

 
7

Other consumer
 
167

 
1

 
153

 
5

 
254

 
3

 
197

 
9

Total
 
2,043

 
3

 
1,631

 
11

 
1,400

 
6

 
1,330

 
18

Loans with a specific valuation allowance
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
$
3,524

 
$

 
$
1,568

 
$

 
$

 
$

 
$

 
$

Residential mortgage
 

 

 

 

 

 

 
20

 

Other consumer
 

 

 

 

 

 

 
18

 
1

Total
 
3,524

 

 
1,568

 

 

 

 
38

 
1

Total impaired loans
 
$
5,567

 
$
3

 
$
3,199

 
$
11

 
$
1,400

 
$
6

 
$
1,368

 
$
19

 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016 and December 31, 2015, the Company had less than $0.1 million and $0.0 million, respectively, in residential mortgage other real estate owned. There were $0.8 million and less than $0.1 million of loans at September 30, 2016 and December 31, 2015, respectively, in the process of foreclosure.

Note 5:        Premises and Equipment
 
The following table summarizes premises and equipment at September 30, 2016 and December 31, 2015.
 
 
September 30,
2016
 
December 31,
2015
Land
 
$
2,500

 
$
2,500

Building and improvements
 
5,330

 
4,636

Furniture and equipment
 
6,884

 
6,164

Less: accumulated depreciation
 
(4,598
)
 
(4,779
)
Total
 
$
10,116

 
$
8,521

  
Note 6:        Goodwill        
 
The following table shows the changes in the carrying amount of goodwill for the periods ended September 30, 2016 and December 31, 2015
Balance as of January 1, 2015
$
4,687

Changes in goodwill during the year

Balance as of December 31, 2015
4,687

Changes in goodwill during the period

Balance as of September 30, 2016
$
4,687

 
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, 2016 annual impairment test that would suggest it was more likely than not goodwill impairment existed.
 

18



Note 7:        Subordinated Debt
 
In June 2013, the Company issued a subordinated debenture (the “2021 Debenture”) in the principal amount of $3.0 million. The 2021 Debenture bears a fixed interest rate of 8.00% per year, payable quarterly, and is scheduled to mature on June 28, 2021. The 2021 Debenture may be repaid, without penalty, at any time after June 28, 2016. The 2021 Debenture is intended to qualify as Tier 2 capital under regulatory guidelines.
 
In connection with the 2021 Debenture, the Company also issued a warrant to purchase up to 48,750 shares of common stock at an initial per share exercise price equal to $19.33. The warrant became exercisable on June 28, 2014 and, unless previously exercised, will expire on June 28, 2021. The Company has the right to force an exercise of the warrant after the 2021 Debenture has been repaid in full if the 20-day volume-weighted average price of a share of its common stock exceeds $30.00.
  
The Company used the Black-Scholes option pricing model to assign a fair value of $0.3 million to the warrant as of June 28, 2013. The following assumptions were used to value the warrant: a risk-free interest rate of 0.66% per the U.S. Treasury yield curve in effect at the date of issuance, an expected dividend yield of 1.19% calculated using the dividend rate and stock price at the date of the issuance, and an expected volatility of 34% based on the estimated volatility of the Company’s stock over the expected term of the warrant, which is estimated to be three years

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 2021 Debenture, the 2025 Note and the 2026 Notes as of September 30, 2016 and December 31, 2015.
 
September 30, 2016
 
December 31, 2015
 
Principal
 
Unamortized Discount and Debt Issuance Costs
 
Principal
 
Unamortized Discount and Debt Issuance Costs
2021 Debenture
$
3,000

 
$

 
$
3,000

 
$
(42
)
2025 Note
10,000

 
(216
)
 
10,000

 
(234
)
2026 Notes
25,000

 
(1,243
)
 

 

Total
$
38,000

 
$
(1,459
)
 
$
13,000

 
$
(276
)


19



Note 8:        Benefit Plans
 
Employment Agreement
 
The Company has entered into an employment agreement with its Chief Executive Officer that provides for the continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the agreement, these payments could occur in the event of 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 $0.2 million and $0.5 million of share-based compensation expense for the three and nine month periods ended September 30, 2016, respectively, related to awards made under the 2013 Plan. The Company recorded $0.2 million and $0.6 million of share-based compensation expense for the three and nine month periods ended September 30, 2015, respectively, related to awards made under the 2013 Plan.

The following table summarizes the status of the 2013 Plan awards as of September 30, 2016, and activity for the nine months ended September 30, 2016.
 
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, 2015
28,302

 
$
18.90

 
27,529

 
$
18.17

 

 
$

   Granted
30,824

 
25.63

 
10,232

 
24.44

 
7

 
24.28

   Vested
(9,470
)
 
18.92

 
(20,123
)
 
20.23

 
(7
)
 
24.28

Nonvested at September 30, 2016
49,656

 
$
23.07

 
17,638

 
$
19.46

 

 
$


At September 30, 2016, the total unrecognized compensation cost related to nonvested awards was $1.0 million with a weighted-average expense recognition period of 2.0 years.

Directors Deferred Stock Plan
 
Until January 1, 2014, the Company had 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 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 nine months ended September 30, 2016.
 
 
Deferred Stock Rights
Outstanding, beginning of period
 
81,693

Granted
 
512

Exercised
 

Outstanding, end of period
 
82,205


All deferred stock rights granted during the 2016 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights.

20



Note 9:        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.

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 September 30, 2016 or December 31, 2015.
 
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).
 
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).
 

21



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 September 30, 2016 and December 31, 2015.
 
 
 
 
September 30, 2016
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
 
$
85,990

 
$

 
$
85,990

 
$

Municipal securities
 
97,501

 

 
97,501

 

Mortgage-backed securities
 
246,085

 

 
246,085

 

Asset-backed securities
 
19,496

 

 
19,496

 

Corporate securities
 
18,880

 

 
18,880

 

Other securities
 
3,026

 
3,026

 

 

Total available-for-sale securities
 
470,978

 
3,026

 
467,952

 

Loans held-for-sale (mandatory pricing agreements)
 
31,196

 

 
31,196

 

Forward contracts
 
(465
)
 
(465
)
 

 

IRLCs
 
2,032

 

 

 
2,032

 
 
 
 
 
December 31, 2015
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
 
$
37,750

 
$

 
$
37,750

 
$

Municipal securities
 
21,469

 

 
21,469

 

Mortgage-backed securities
 
113,052

 

 
113,052

 

Asset-backed securities
 
19,361

 

 
19,361

 

Corporate securities
 
19,087

 

 
19,087

 

Other securities
 
2,979

 
2,979

 

 

Total available-for-sale securities
 
213,698

 
2,979

 
210,719

 

Loans held-for-sale (mandatory pricing agreements)
 
24,065

 

 
24,065

 

Forward contracts
 
30

 
30

 

 

IRLCs
 
582

 

 

 
582



22



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 and nine month periods ended September 30, 2016 and September 30, 2015.
 
 
Three Months Ended
 
 
Interest Rate Lock Commitments
Balance, July 1, 2016
 
$
1,724

Total realized gains
 
 
Included in net income
 
308

Balance, September 30, 2016
 
$
2,032

 
 
 
Balance, July 1, 2015
 
$
623

Total realized gains
 
 
Included in net income
 
284

Balance, September 30, 2015
 
$
907

 
 
Nine Months Ended
 
 
Interest Rate Lock Commitments
Balance, January 1, 2016
 
$
582

Total realized gains
 
 

Included in net income
 
1,450

Balance, September 30, 2016
 
$
2,032


 
 
Balance, January 1, 2015
 
$
521

Total realized gains
 
 
Included in net income
 
386

Balance, September 30, 2015
 
$
907

  

The following describes 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
 
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 the 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.

There were no impaired loans that were measured at fair value on a nonrecurring basis at September 30, 2016 or December 31, 2015.
 
 

23



 Significant Unobservable (Level 3) Inputs
 
The following tables present quantitative information about significant unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill.
 
 
Fair Value at
September 30, 2016
 
Valuation
Technique
 
Significant Unobservable
Inputs
 
Range
IRLCs
 
2,032

 
Discounted cash flow
 
Loan closing rates
 
41% - 99%
 
 
Fair Value at
December 31, 2015
 
Valuation
Technique
 
Significant Unobservable
Inputs
 
Range
IRLCs
 
$
582

 
Discounted cash flow
 
Loan closing rates
 
43% - 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.
  
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 by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities.
 
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.


24



 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 September 30, 2016 and December 31, 2015.
  
The following tables summarize the carrying value and estimated fair value of all financial assets and liabilities at September 30, 2016 and December 31, 2015.
 
 
 
 
September 30, 2016
Fair Value Measurements Using
 
 
Carrying
Amount
 
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
 
$
67,825

 
$
67,825

 
$

 
$

Interest-bearing time deposits
 
250

 
250

 

 

Securities held-to-maturity
 
5,500

 

 
5,578

 

Loans held-for-sale (best efforts pricing agreements)
 
1,275

 

 
1,275

 


Loans
 
1,198,932

 

 

 
1,209,791

Accrued interest receivable
 
5,848

 
5,848

 

 

Federal Home Loan Bank of Indianapolis stock
 
8,595

 

 
8,595

 

Deposits
 
1,493,601

 
510,055

 

 
971,679

Advances from Federal Home Loan Bank
 
147,978

 

 
146,334

 

Subordinated debt
 
36,541

 
25,000

 
13,542

 

Accrued interest payable
 
125

 
125

 

 

 
 
 
 
December 31, 2015
Fair Value Measurements Using
 
 
Carrying
Amount
 
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
 
$
25,152

 
$
25,152

 
$

 
$

Interest-bearing time deposits
 
1,000

 
1,000

 

 

Loans held-for-sale (best efforts pricing agreements)
 
12,453

 

 
12,453

 

Loans
 
953,859

 

 

 
967,303

Accrued interest receivable
 
4,105

 
4,105

 

 

Federal Home Loan Bank of Indianapolis stock
 
8,595

 

 
8,595

 

Deposits
 
956,054

 
472,481

 

 
478,360

Advances from Federal Home Loan Bank
 
190,957

 

 
188,126

 

Subordinated debt
 
12,724

 

 
13,212

 

Accrued interest payable
 
117

 
117

 

 

 

25



Note 10:        Mortgage Banking Activities

The Company’s residential real estate lending business originates mortgage loans for customers and sells a majority of the originated loans into 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 interest rate lock commitments 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, interest rate lock commitments and forward contracts are recorded in the mortgage banking activities line item within noninterest income.  Refer to Note 11 for further information on derivative financial instruments. 

During the three months ended September 30, 2016 and 2015, the Company originated mortgage loans held-for-sale of $180.1 million and $108.4 million, respectively, and sold $195.7 million and $112.9 million of mortgage loans, respectively, into the secondary market. During the nine months ended September 30, 2016 and 2015, the Company originated mortgage loans held-for-sale of $439.2 million and $386.4 million, respectively, and sold $452.2 million and $400.0 million of mortgage loans, respectively, into the secondary market.

The following table provides the components of income from mortgage banking activities for the three and nine months ended September 30, 2016 and 2015.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Gain on loans sold
$
3,980

 
$
2,050

 
$
8,476

 
$
6,895

Gain (loss) resulting from the change in fair value of loans held-for-sale
(426
)
 
349

 
560

 
(143
)
Gain (loss) resulting from the change in fair value of derivatives
888

 
(304
)
 
955

 
443

Net revenue from mortgage banking activities
$
4,442

 
$
2,095

 
$
9,991

 
$
7,195


Note 11:        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 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.
 
Each of these items are considered derivatives, but 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 the notional amount and fair value of IRLCs and forward contracts utilized by the Company at September 30, 2016 and December 31, 2015
 
 
September 30, 2016
 
December 31, 2015
 
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Asset Derivatives
 
 

 
 

 
 

 
 

Derivatives not designated as hedging instruments
 
 

 
 

 
 

 
 

IRLCs
 
$
79,376

 
$
2,032

 
$
28,444

 
$
582

Forward contracts
 

 

 
42,743

 
30

 
 
 
 
 
 
 
 
 
Liability Derivatives
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Forward contracts
 
115,695

 
(465
)
 

 


26



  
Fair values of derivative financial instruments were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date. The following table summarizes the periodic changes in the fair value of the derivative financial instruments on the condensed consolidated statements of income for the three and nine month periods ended September 30, 2016 and 2015.
 
 
Amount of gain / (loss) recognized in the three months ended
 
Amount of gain / (loss) recognized in the nine months ended
 
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Asset Derivatives
 
 

 
 

 
 

 
 

Derivatives not designated as hedging instruments
 
 

 
 

 
 

 
 

IRLCs
 
$
308

 
$
284

 
$
1,450

 
$
386

 
 
 
 
 
 
 
 
 
Liability Derivatives
 
 

 
 

 
 

 
 

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Forward contracts
 
580

 
(588
)
 
(495
)
 
57

  
Note 12:     Recent Accounting Pronouncements

Accounting Standards Update (“Update”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (August 2016)

Stakeholders indicated that there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This Update addresses specific cash flow issues with the objective of reducing the existing diversity in practice.

The amendments in this Update apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230. The amendments in this Update provide guidance on the following specific cash flow issues:

Debt Prepayment or Debt Extinguishment Costs: Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows from financing activities.

Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing: At the settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, the issuer should classify the portion of the cash payment attributable to the accreted interest related to the debt discount as cash outflows from operating activities, and the portion of the cash payment attributable to the principal as cash outflows for financing activities.

Proceeds from the Settlement of Insurance Claims: Cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage (that is, the nature of the loss). For insurance proceeds that are received in a lump sum settlement, an entity should determine the classification on the basis of the nature of each loss included in the settlement.

Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies: Cash proceeds received from the settlement of corporate-owned life insurance policies should be classified as cash inflows from investing activities. The cash payments for premiums on corporate-owned policies may be classified as cash outflows from investing activities, operating activities, or a combination of investing and operating activities.


27



Separately Identifiable Cash Flows and Application of the Predominance Principle: The classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in GAAP. In the absence of specific guidance, an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. An entity should then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item.

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact of adopting this Update on the consolidated financial statements, but it is not expected to have a significant effect.


28



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions. You should review the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.
 
Overview
 
First Internet Bancorp (“we,” “our,” “us,” or the “Company”) is a bank holding company that conducts its business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank (the “Bank”). The Bank was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999. The Company was incorporated under the laws of the State of Indiana on September 15, 2005. On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank.
We offer a full complement of products and services on a nationwide basis. We conduct our deposit operations primarily over the Internet and have no traditional branch offices. We have diversified our operations by adding commercial real estate (“CRE”) lending, including nationwide single tenant lease financing, and commercial and industrial (“C&I”) lending, including business banking/treasury management services to meet the needs of high-quality commercial borrowers and depositors.
Our business model differs from that of a typical community bank. We do not have a conventional brick and mortar branch system; but instead operate through our scalable Internet banking platform. The market area for our residential real estate lending, consumer lending, and deposit gathering activities is the entire United States. We also offer single tenant lease financing on a nationwide basis. Our other commercial banking activities, including CRE and C&I loans, corporate credit cards, and corporate treasury management services, are offered by our commercial banking team to businesses primarily within Central Indiana, Phoenix, Arizona, and adjacent markets. We have no significant customer concentrations within our loan portfolio.

29



Results of Operations

The following table provides a summary of the Company’s financial performance for the five most recent quarters and nine months ended September 30, 2016 and 2015.
(dollars in thousands except for share and per share data)
Three Months Ended
 
Nine Months Ended
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
Income Statement Summary:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
10,338

 
$
9,306

 
$
9,141

 
$
8,568

 
$
7,839

 
$
28,785

 
$
22,185

Provision for loan losses
2,204

 
924

 
946

 
746

 
454

 
4,074

 
1,200

Noninterest income
4,898

 
3,748

 
2,540

 
2,143

 
2,374

 
11,186

 
7,998

Noninterest expense
8,413

 
7,875

 
7,005

 
6,492

 
6,207

 
23,293

 
18,791

Income tax provision
1,521

 
1,421

 
1,298

 
1,195

 
1,229

 
4,240

 
3,541

Net income
$
3,098

 
$
2,834

 
$
2,432

 
$
2,278

 
$
2,323

 
$
8,364

 
$
6,651

Per Share Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share - basic
$
0.55

 
$
0.57

 
$
0.54

 
$
0.50

 
$
0.51

 
$
1.66

 
$
1.47

Earnings per share - diluted
$
0.55

 
$
0.57

 
$
0.53

 
$
0.50

 
$
0.51

 
$
1.65

 
$
1.46

Dividends declared per share
$
0.06

 
$
0.06

 
$
0.06

 
$
0.06

 
$
0.06

 
$
0.18

 
$
0.18

Book value per common share
$
24.79

 
$
24.52

 
$
23.98

 
$
23.28

 
$
22.95

 
$
24.79

 
$
22.95

Tangible book value per common share1
$
23.94

 
$
23.67

 
$
22.93

 
$
22.24

 
$
21.90

 
$
23.94

 
$
21.90

Common shares outstanding
5,533,050

 
5,533,050

 
4,497,284

 
4,481,347

 
4,484,513

 
5,533,050

 
4,484,513

Average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
5,597,867

 
4,972,759

 
4,541,728

 
4,534,910

 
4,532,360

 
5,039,497

 
4,526,377

Diluted
5,622,181

 
4,992,025

 
4,575,555

 
4,580,353

 
4,574,455

 
5,063,299

 
4,549,447

Performance Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets
0.71
%
 
0.71
%
 
0.72
%
 
0.74
%
 
0.82
%
 
0.72
%
 
0.83
%
Return on average shareholders’ equity
9.08
%
 
9.67
%
 
9.20
%
 
8.73
%
 
9.14
%
 
9.31
%
 
8.95
%
Return on average tangible common equity1
9.41
%
 
10.07
%
 
9.63
%
 
9.14
%
 
9.58
%
 
9.69
%
 
9.39
%
Net interest margin
2.42
%
 
2.39
%
 
2.78
%
 
2.85
%
 
2.84
%
 
2.51
%
 
2.85
%
Capital Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tangible common equity to tangible assets ratio1
7.28
%
 
7.72
%
 
6.77
%
 
7.88
%
 
8.46
%
 
7.28
%
 
8.46
%
Tier 1 leverage ratio
7.62
%
 
8.08
%
 
7.65
%
 
8.28
%
 
8.81
%
 
7.62
%
 
8.81
%
Common equity tier 1 capital ratio
10.07
%
 
10.66
%
 
9.38
%
 
10.11
%
 
10.74
%
 
10.07
%
 
10.74
%
Tier 1 capital ratio
10.07
%
 
10.66
%
 
9.38
%
 
10.11
%
 
10.74
%
 
10.07
%
 
10.74
%
Total risk-based capital ratio
13.67
%
 
12.54
%
 
11.38
%
 
12.25
%
 
11.90
%
 
13.67
%
 
11.90
%

1 This information represents a non-GAAP financial measure. See the “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of these measures to their most directly comparable GAAP measures.

During the third quarter 2016, net income was $3.1 million, or $0.55 per diluted share, compared to third quarter 2015 net income of $2.3 million, or $0.51 per diluted share, representing an increase in net income of $0.8 million, or 33.4%. During the nine months ended September 30, 2016, net income was $8.4 million, or $1.65 per diluted share, compared to the nine months ended September 30, 2015 net income of $6.7 million, or $1.46 per diluted share, representing an increase in net income of $1.7 million, or 25.8%.

The increase in net income in the third quarter 2016 compared to the third quarter 2015 was primarily due to a $2.5 million, or 31.9%, increase in net interest income and a $2.5 million, or 106.3%, increase in noninterest income, partially offset by a $2.2 million, or 35.5%, increase in noninterest expense, a $1.8 million, or 385.5%, increase in provision for loan losses and a $0.3 million, or 23.8%, increase in income tax expense.

30



The increase in net income in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 was primarily due to a $6.6 million, or 29.7%, increase in net interest income and a $3.2 million, or 39.9%, increase in noninterest income, partially offset by a $4.5 million, or 24.0%, increase in noninterest expense, a $2.9 million, or 239.5%, increase in provision for loan losses and a $0.7 million, or 19.7%, increase in income tax expense.

During the third quarter 2016, return on average assets and return on average shareholders’ equity were 0.71% and 9.08%, respectively, compared to 0.82% and 9.14%, respectively, for the third quarter 2015. During the nine months ended September 30, 2016, return on average assets and return on average shareholders’ equity were 0.72% and 9.31%, respectively, compared to 0.83% and 8.95%, respectively, for the nine months ended September 30, 2015.

Consolidated Average Balance Sheets and Net Interest Income Analyses
 
For the periods presented, the following tables provide the average balances of interest-earning assets and interest-bearing liabilities and the related yields and cost of funds. The tables do not reflect any effect of income taxes. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances.
(dollars in thousands)
 
Three Months Ended
 
 
September 30, 2016
 
June 30, 2016
 
September 30, 2015
 
 
Average Balance
 
Yield/Cost
 
Average Balance
 
Yield/Cost
 
Average Balance
 
Yield/Cost
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans, including loans held-for-sale
 
$
1,192,816

 
4.18
%
 
$
1,110,282

 
4.22
%
 
$
865,350

 
4.28
%
Securities - taxable
 
366,810

 
2.33
%
 
307,336

 
2.29
%
 
176,722

 
2.23
%
Securities - non-taxable
 
90,597

 
2.80
%
 
51,162

 
2.89
%
 
14,912

 
3.09
%
Other earning assets
 
51,779

 
1.09
%
 
97,774

 
0.80
%
 
37,638

 
1.05
%
Total interest-earning assets
 
1,702,002

 
3.62
%
 
1,566,554

 
3.59
%
 
1,094,622

 
3.82
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
(10,378
)
 
 
 
(9,472
)
 
 
 
(7,223
)
 
 
Noninterest-earning assets
 
43,319

 
 
 
39,422

 
 
 
36,342

 
 
Total assets
 
$
1,734,943

 
 
 
$
1,596,504

 
 
 
$
1,123,741

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
$
81,151

 
0.55
%
 
$
83,712

 
0.55
%
 
$
75,965

 
0.55
%
Regular savings accounts
 
27,479

 
0.58
%
 
28,023

 
0.57
%
 
25,500

 
0.59
%
Money market accounts
 
369,082

 
0.71
%
 
363,767

 
0.71
%
 
297,545

 
0.71
%
Certificates and brokered deposits
 
907,775

 
1.56
%
 
809,450

 
1.56
%
 
455,879

 
1.38
%
Total interest-bearing deposits
 
1,385,487

 
1.25
%
 
1,284,952

 
1.23
%
 
854,889

 
1.05
%
Other borrowed funds
 
173,568

 
1.75
%
 
161,127

 
1.83
%
 
139,731

 
1.24
%
Total interest-bearing liabilities
 
1,559,055

 
1.31
%
 
1,446,079

 
1.30
%
 
994,620

 
1.08
%
Noninterest-bearing deposits
 
32,897

 
 
 
27,687

 
 
 
23,267

 
 
Other noninterest-bearing liabilities
 
7,325

 
 
 
4,825

 
 
 
4,969

 
 
Total liabilities
 
1,599,277

 
 
 
1,478,591

 
 
 
1,022,856

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
135,666

 
 
 
117,913

 
 
 
100,885

 
 
Total liabilities and shareholders’ equity
 
$
1,734,943

 
 
 
$
1,596,504

 
 
 
$
1,123,741

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate spread1
 
 
 
2.31
%
 
 
 
2.29
%
 
 
 
2.74
%
Net interest margin2
 
 
 
2.42
%
 
 
 
2.39
%
 
 
 
2.84
%
1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities
2 Net interest income divided by total average interest-earning assets (annualized)


31



(dollars in thousands)
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
 
 
Average Balance
 
Yield/Cost
 
Average Balance
 
Yield/Cost
Assets
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
Loans, including loans held-for-sale
 
$
1,108,066

 
4.27
%
 
$
824,069

 
4.34
%
Securities - taxable
 
292,620

 
2.31
%
 
165,456

 
2.15
%
Securities - non-taxable
 
54,777

 
2.85
%
 
7,627

 
3.07
%
Other earning assets
 
75,860

 
0.89
%
 
42,746

 
0.81
%
Total interest-earning assets
 
1,531,323

 
3.68
%
 
1,039,898

 
3.84
%
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
(9,505
)
 
 
 
(6,555
)
 
 
Noninterest-earning assets
 
40,241

 
 
 
35,362

 
 
Total assets
 
$
1,562,059

 
 
 
$
1,068,705

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
$
82,063

 
0.55
%
 
$
75,824

 
0.55
%
Regular savings accounts
 
26,844

 
0.58
%
 
23,836

 
0.58
%
Money market accounts
 
361,248

 
0.71
%
 
284,709

 
0.72
%
Certificates and brokered deposits
 
764,923

 
1.54
%
 
429,152

 
1.37
%
Total interest-bearing deposits
 
1,235,078

 
1.21
%
 
813,521

 
1.04
%
Other borrowed funds
 
173,438

 
1.67
%
 
129,089

 
1.37
%
Total interest-bearing liabilities
 
1,408,516

 
1.27
%
 
942,610

 
1.09
%
Noninterest-bearing deposits
 
27,846

 
 
 
22,080

 
 
Other noninterest-bearing liabilities
 
5,687

 
 
 
4,650

 
 
Total liabilities
 
1,442,049

 
 
 
969,340

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
120,010

 
 
 
99,365

 
 
Total liabilities and shareholders’ equity
 
$
1,562,059

 
 
 
$
1,068,705

 
 
 
 
 
 
 
 
 
 
 
Interest rate spread1
 
 
 
2.41
%
 
 
 
2.75
%
Net interest margin2
 
 
 
2.51
%
 
 
 
2.85
%
1 Yield on total interest-earning assets minus cost of total interest-bearing liabilities
2 Net interest income divided by total average interest-earning assets (annualized)


32



Rate/Volume Analysis 

The following table illustrates the impact of changes in the volume of interest-earning assets and interest-bearing liabilities and interest rates on net interest income for the periods indicated. The change in interest not due solely to volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. 
 
 
Rate/Volume Analysis of Net Interest Income
(dollars in thousands)
 
Three Months Ended September 30, 2016 vs. June 30, 2016 Due to Changes in
 
Three Months Ended September 30, 2016 vs. September 30, 2015 Due to Changes in
 
Nine Months Ended September 30, 2016 vs. September 30, 2015 Due to Changes in
 
 
Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
Interest income
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans, including loans held-for-sale
 
$
1,571

 
$
(688
)
 
$
883

 
$
4,660

 
$
(1,442
)
 
$
3,218

 
$
9,351

 
$
(716
)
 
$
8,635

Securities – taxable
 
368

 
33

 
401

 
1,108

 
46

 
1,154

 
2,191

 
212

 
2,403

Securities – non-taxable
 
347

 
(78
)
 
269

 
596

 
(75
)
 
521

 
1,017

 
(22
)
 
995

Other earning assets
 
(351
)
 
298

 
(53
)
 
38

 
4

 
42

 
221

 
28

 
249

Total
 
1,935

 
(435
)
 
1,500

 
6,402

 
(1,467
)
 
4,935

 
12,780

 
(498
)
 
12,282

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits
 
363

 
75

 
438

 
1,613

 
495

 
2,108

 
3,676

 
1,160

 
4,836

Other borrowed funds
 
184

 
(154
)
 
30

 
122

 
206

 
328

 
517

 
329

 
846

Total
 
547

 
(79
)
 
468

 
1,735

 
701

 
2,436

 
4,193

 
1,489

 
5,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase (decrease) in net interest income
 
$
1,388

 
$
(356
)
 
$
1,032

 
$
4,667

 
$
(2,168
)
 
$
2,499

 
$
8,587

 
$
(1,987
)
 
$
6,600

 

Net interest income for the third quarter 2016 was $10.3 million, an increase of $2.5 million, or 31.9%, compared to $7.8 million for the third quarter 2015. The increase in net interest income was the result of a $4.9 million, or 46.8%, increase in total interest income to $15.5 million for the third quarter 2016 from $10.5 million for the third quarter 2015. The increase in total interest income was partially offset by a $2.4 million, or 90.3%, increase in total interest expense to $5.1 million for the third quarter 2016 from $2.7 million for the third quarter 2015.

The increase in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of $327.5 million, or 37.8%, in the average balance of loans, including loans held-for-sale, as well as an increase in interest earned on securities resulting from an increase of $265.8 million, or 138.7%, in the average balance of securities for the third quarter 2016 compared to the third quarter 2015. The increase in total interest income was also due to a 12 basis point (“bp”) increase in the yield earned on the securities portfolio, partially offset by a 10 bp decline in the yield earned on loans, including loans held-for-sale.

The increase in total interest expense was driven primarily by an increase in interest expense related to interest-bearing deposits as a result of a $530.6 million, or 62.1%, increase in the average balance of interest-bearing deposits for the third quarter 2016 compared to the third quarter 2015, as well as a 20 bp increase in the cost of funds related to interest-bearing deposits. The increase in the cost of interest-bearing deposits was primarily due to an 18 bp increase in the cost of certificates and brokered deposits as new certificates of deposits production in 2016 was predominately in longer duration products with higher costs of funds. Interest expense related to other borrowed funds also contributed to the increase in total interest expense due to a $33.8 million, or 24.2%, increase in the average balance of other borrowed funds for the third quarter 2016 compared to the third quarter 2015 as well as an increase of 51 bps in the cost of other borrowed funds. The increase in the average balance of other borrowed funds was primarily due to the Company’s issuance of subordinated debt in the fourth quarter 2015 as well as an increase in the cost and average balance of Federal Home Loan Bank advances compared to the third quarter 2015.

Net interest margin (“NIM”) was 2.42% for the third quarter 2016 compared to 2.84% for the third quarter 2015. The decline in NIM for the third quarter 2016 compared to the third quarter 2015 was driven primarily by an increase of 23 bps in the cost of interest-bearing liabilities as well as the decline of 20 bps in the yield earned on interest-earning assets.
 

33



Net interest income for the nine months ended September 30, 2016 was $28.8 million, increasing $6.6 million, or 29.7%, compared to $22.2 million for the nine months ended September 30, 2015. The increase in net interest income was the result of a $12.3 million, or 41.1%, increase in total interest income to $42.1 million for the nine months ended September 30, 2016 from $29.9 million for the nine months ended September 30, 2015. The increase in total interest income was partially offset by a $5.7 million, or 74.1%, increase in total interest expense to $13.4 million for the nine months ended September 30, 2016 from $7.7 million for the nine months ended September 30, 2015.

The increase in total interest income was due primarily to an increase in interest earned on loans resulting from an increase of $284.0 million, or 34.5%, in the average balance of loans, including loans held-for-sale, as well as an increase in interest earned on securities resulting from an increase of $174.3 million, or 100.7%, in the average balance of securities for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increase in total interest income was also due to a 21 bps increase in the yield earned on the securities portfolio, partially offset by a 7 bps decline in the yield earned on loans, including loans held-for-sale.

The increase in total interest expense was driven primarily by an increase in interest expense related to interest-bearing deposits as a result of a $421.6 million, or 51.8%, increase in the average balance of interest-bearing deposits for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, as well as an increase in the cost of funds relating to interest-bearing deposits of 17 bps. The increase in the cost of interest-bearing deposits was primarily due to a 17 bps increase in the cost of certificates and brokered deposits as new certificates of deposits production in the nine months ended September 30, 2016 was predominately in longer duration products with higher costs of funds. Interest expense related to other borrowed funds also contributed to the increase in total interest expense due to a $44.3 million, or 34.4%, increase in the average balance of other borrowed funds for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, as well as an increase of 30 bps in the cost of other borrowed funds. The increase in the average balance of other borrowed funds was primarily due to the Company’s issuance of subordinated debt in the fourth quarter 2015 as well as the increase in the average balance of Federal Home Loan Bank advances compared to the nine months ended September 30, 2015.

NIM was 2.51% for the nine months ended September 30, 2016 compared to 2.85% for the nine months ended September 30, 2015. The decline in NIM for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 was driven primarily by an increase of 18 bps in the cost of interest-bearing liabilities as well as a decline of 7 bps in the yield earned on loans, including loans held-for-sale, partially offset by an increase of 21 bps in the yield earned on the securities portfolio.

Noninterest Income

The following table presents noninterest income for the five most recent quarters and the nine months ended September 30, 2016 and 2015.
(dollars in thousands)
Three Months Ended
 
Nine Months Ended
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
Service charges and fees
$
207

 
$
215

 
$
200

 
$
193

 
$
202

 
$
622

 
$
571

Mortgage banking activities
4,442

 
3,295

 
2,254

 
1,805

 
2,095

 
9,991

 
7,195

Gain on sale of securities

 
177

 

 

 

 
177

 

Gain (loss) on asset disposals
5

 
(48
)
 
(16
)
 
40

 
(27
)
 
(59
)
 
(74
)
Other
244

 
109

 
102

 
105

 
104

 
455

 
306

Total noninterest income
$
4,898

 
$
3,748

 
$
2,540

 
$
2,143

 
$
2,374

 
$
11,186

 
$
7,998


During the third quarter 2016, noninterest income was $4.9 million, representing an increase of $2.5 million, or 106.3%, compared to $2.4 million for the third quarter 2015. The increase in noninterest income was primarily driven by an increase of $2.3 million, or 112.0%, in mortgage banking activities resulting primarily from increases in mortgage originations and sales as well as higher gain on sale margins.

During the nine months ended September 30, 2016, noninterest income was $11.2 million, representing an increase of $3.2 million, or 39.9%, compared to $8.0 million for the nine months ended September 30, 2015. The increase in noninterest income was primarily driven by an increase of $2.8 million, or 38.9%, in mortgage banking activities resulting primarily from higher origination volumes and an improvement in gain on sale margin, as well as a $0.2 million increase from the gain on sale of securities.

34



Noninterest Expense

The following table presents noninterest expense for the five most recent quarters and the nine months ended September 30, 2016 and 2015.
(dollars in thousands)
Three Months Ended
 
Nine Months Ended
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
Salaries and employee benefits
$
4,550

 
$
4,329

 
$
3,898

 
$
3,460

 
$
3,446

 
$
12,777

 
$
10,811

Marketing, advertising, and promotion
454

 
434

 
464

 
426

 
544

 
1,352

 
1,330

Consulting and professional services
901

 
895

 
638

 
674

 
544

 
2,434

 
1,700

Data processing
286

 
275

 
274

 
287

 
248

 
835

 
729

Loan expenses
240

 
200

 
184

 
172

 
97

 
624

 
459

Premises and equipment
983

 
963

 
798

 
759

 
676

 
2,744

 
2,009

Deposit insurance premium
420

 
215

 
180

 
170

 
163

 
815

 
473

Other
579

 
564

 
569

 
544

 
489

 
1,712

 
1,280

Total noninterest expense
$
8,413

 
$
7,875

 
$
7,005

 
$
6,492

 
$
6,207

 
$
23,293

 
$
18,791


Noninterest expense for the third quarter 2016 was $8.4 million, compared to $6.2 million for the third quarter 2015. The increase of $2.2 million, or 35.5%, compared to the third quarter 2015 was primarily due to an increase of $1.1 million in salaries and employee benefits, an increase of $0.4 million in consulting and professional services, an increase of $0.3 million in premises and equipment and an increase of $0.3 million in deposit insurance premium. The increase in salaries and employee benefits resulted from personnel growth and higher incentive compensation related to increased mortgage production. The increase in consulting and professional fees was due to higher legal fees incurred in the normal course of business commensurate with the Company’s growth and certain consulting projects that occurred during the third quarter 2016. The increase in premises and equipment was due to expenses associated with the Company’s new headquarters location. The increase in deposit insurance premium was due to the new methodology implemented by the FDIC as of July 1, 2016, which places a heavier weighting on year-over-year asset growth used to determine the cost of FDIC deposit insurance.

Noninterest expense for the nine months ended September 30, 2016 was $23.3 million, compared to $18.8 million for the nine months ended September 30, 2015. The increase of $4.5 million, or 24.0%, compared to the nine months ended September 30, 2015 was primarily due to an increase of $2.0 million in salaries and employee benefits, an increase of $0.7 million in premises and equipment, an increase of $0.7 million in consulting and professional services, an increase of $0.4 million in other expenses and an increase of $0.3 million in deposit insurance premium. The increase in salaries and employee benefits resulted primarily from personnel growth and higher incentive compensation related to increased mortgage production. The increase in premises and equipment was partially due to certain expenses associated with the Company exiting its former headquarters location, as well as the Company’s build out of its corporate headquarters facility and further investments in technology. The increase in consulting and professional fees was due to higher legal fees incurred in the normal course of business commensurate with the Company’s growth and certain consulting projects that occurred during the 2016 period. The increase in other expenses were comprised of varying expenses, none of which were individually significant. The increase in deposit insurance premium was due to the new methodology implemented by the FDIC as of July 1, 2016, which places a heavier weighting on year-over-year asset growth used to determine the cost of FDIC deposit insurance.


35



Financial Condition

The following table presents summary balance sheet data for the last five quarters.
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Total assets
 
$
1,824,196

 
$
1,702,468

 
$
1,527,719

 
$
1,269,870

 
$
1,166,170

Loans
 
1,198,932

 
1,111,622

 
1,040,683

 
953,859

 
876,578

Securities available-for-sale
 
470,978

 
433,806

 
315,311

 
213,698

 
202,565

Securities held-to-maturity
 
5,500

 

 

 

 

Loans held-for-sale
 
32,471

 
44,503

 
29,491

 
36,518

 
27,773

Noninterest-bearing deposits
 
32,938

 
28,066

 
28,945

 
23,700

 
22,338

Interest-bearing deposits
 
1,460,663

 
1,360,867

 
1,214,233

 
932,354

 
877,412

Total deposits
 
1,493,601

 
1,388,933

 
1,243,178

 
956,054

 
899,750

Total shareholders’ equity
 
137,154

 
135,679

 
107,830

 
104,330

 
102,912


Total assets were $1.8 billion at September 30, 2016, compared to $1.3 billion at December 31, 2015, representing an increase of $554.3 million, or 43.7%. The increase in total assets was due primarily to increases of $257.3 million, or 120.4%, in securities available-for-sale, $245.1 million, or 25.7%, in loans and $42.7 million, or 169.7%, in cash and cash equivalents.

Loan Portfolio Analysis

The following table provides a detailed listing of the Company’s loan portfolio for the last five quarters.
(dollars in thousands)
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Commercial loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
107,250

 
8.9
%
 
$
111,130

 
10.0
%
 
$
106,431

 
10.2
%
 
$
102,000

 
10.7
%
 
$
89,762

 
10.2
%
Owner-occupied commercial real estate
45,540

 
3.8
%
 
46,543

 
4.2
%
 
47,010

 
4.5
%
 
44,462

 
4.7
%
 
42,117

 
4.8
%
Investor commercial real estate
12,752

 
1.1
%
 
12,976

 
1.2
%
 
14,756

 
1.4
%
 
16,184

 
1.7
%
 
17,483

 
2.0
%
Construction
56,391

 
4.7
%
 
53,368

 
4.8
%
 
52,591

 
5.1
%
 
45,898

 
4.8
%
 
30,196

 
3.4
%
Single tenant lease financing
571,972

 
47.7
%
 
500,937

 
45.1
%
 
445,534

 
42.8
%
 
374,344

 
39.2
%
 
329,149

 
37.6
%
Total commercial loans
793,905

 
66.2
%
 
724,954

 
65.3
%
 
666,322

 
64.0
%
 
582,888

 
61.1
%
 
508,707

 
58.0
%
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
200,889

 
16.7
%
 
202,107

 
18.2
%
 
208,636

 
20.1
%
 
214,559

 
22.5
%
 
209,507

 
23.9
%
Home equity
37,849

 
3.2
%
 
38,981

 
3.5
%
 
40,000

 
3.8
%
 
43,279

 
4.5
%
 
47,319

 
5.4
%
Other consumer
163,158

 
13.6
%
 
141,756

 
12.7
%
 
121,323

 
11.7
%
 
108,312

 
11.4
%
 
106,187

 
12.1
%
Total consumer loans
401,896

 
33.5
%
 
382,844

 
34.4
%
 
369,959

 
35.6
%
 
366,150

 
38.4
%
 
363,013

 
41.4
%
Deferred loan origination costs and premiums and discounts on purchased loans
3,131

 
0.3
%
 
3,824

 
0.3
%
 
4,402

 
0.4
%
 
4,821

 
0.5
%
 
4,858

 
0.6
%
Total loans
1,198,932

 
100.0
%
 
1,111,622

 
100.0
%
 
1,040,683

 
100.0
%
 
953,859

 
100.0
%
 
876,578

 
100.0
%
Allowance for loan losses
(10,561
)
 
 
 
(10,016
)
 
 
 
(9,220
)
 
 
 
(8,351
)
 
 
 
(7,671
)
 
 
Net loans
$
1,188,371

 
 
 
$
1,101,606

 
 
 
$
1,031,463

 
 
 
$
945,508

 
 
 
$
868,907

 
 

 Total loans as of September 30, 2016 were $1.2 billion, increasing $245.1 million, or 25.7%, compared to $953.9 million as of December 31, 2015.

Total commercial loans increased $211.0 million, or 36.2%, as of September 30, 2016, compared to December 31, 2015, due to increases of $197.6 million, or 52.8%, in single tenant lease financing, $10.5 million, or 22.9%, in construction, $5.3 million, or 5.1%, in commercial and industrial and $1.1 million, or 2.4%, in owner-occupied commercial real estate. These increases were partially offset by a decline of $3.4 million, or 21.2%, in investor commercial real estate.


36



Total consumer loans increased $35.7 million, or 9.8%, as of September 30, 2016, compared to December 31, 2015, due primarily to an increase of $54.8 million, or 50.6%, in other consumer loans. This increase was partially offset by decreases of $13.7 million, or 6.4%, in residential mortgages and $5.4 million, or 12.5%, in home equity loans.

Asset Quality

Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, other real estate owned and other nonperforming assets, which consist of repossessed assets. The following table provides a detailed listing of the Company’s nonperforming assets for the last five quarters.
(dollars in thousands)
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Nonaccrual loans
 
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$

 
$
4,716

 
$

 
$

 
$

Total commercial loans

 
4,716

 

 

 

Consumer loans:
 
 
 
 
 
 
 
 
 
Residential mortgage
1,025

 
844

 
103

 
103

 
104

Other consumer
108

 
74

 
69

 
64

 
92

Total consumer loans
1,133

 
918

 
172

 
167

 
196

Total nonaccrual loans
1,133

 
5,634

 
172

 
167

 
196

 
 
 
 
 
 
 
 
 
 
Past Due 90 days and accruing loans
 
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
 
Commercial and industrial

 

 

 

 
10

Total commercial loans

 

 

 

 
10

Consumer loans:
 
 
 
 
 
 
 
 
 
Residential mortgage

 

 
195

 

 

Other consumer

 
5

 

 

 

Total consumer loans

 
5

 
195

 

 

Total past due 90 days and accruing loans

 
5

 
195

 

 
10

 
 
 
 
 
 
 
 
 
 
Total nonperforming loans
1,133

 
5,639

 
367

 
167

 
206

 
 
 
 
 
 
 
 
 
 
Other real estate owned
 
 
 
 
 
 
 
 
 
Investor commercial real estate
4,488

 
4,488

 
4,488

 
4,488

 
4,488

Residential mortgage
45

 

 

 

 

Total other real estate owned
4,533

 
4,488

 
4,488

 
4,488

 
4,488

 
 
 
 
 
 
 
 
 
 
Other nonperforming assets
69

 
46

 
75

 
85

 
30

 
 
 
 
 
 
 
 
 
 
Total nonperforming assets
$
5,735

 
$
10,173

 
$
4,930

 
$
4,740

 
$
4,724

 
 
 
 
 
 
 
 
 
 
Total nonperforming loans to total loans
0.09
%
 
0.51
%
 
0.04
%
 
0.02
%
 
0.02
%
Total nonperforming assets to total assets
0.31
%
 
0.60
%
 
0.32
%
 
0.37
%
 
0.41
%

Troubled Debt Restructurings

The following table provides a summary of troubled debt restructurings for the last five quarters.
(dollars in thousands)
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Troubled debt restructurings – nonaccrual
$
1

 
$

 
$

 
$

 
$

Troubled debt restructurings – performing
$
1,067

 
$
1,082

 
$
1,100

 
$
1,115

 
$
1,134

Total troubled debt restructurings
$
1,068

 
$
1,082

 
$
1,100

 
$
1,115

 
$
1,134


37



 
The increase of $1.0 million, or 21.0%, in total nonperforming assets as of September 30, 2016 compared to December 31, 2015 was due primarily to an increase in nonaccrual loans. Total nonperforming loans increased $1.0 million, or 578.4%, to $1.1 million as of September 30, 2016 compared to $0.2 million as of December 31, 2015. This increase was primarily driven by two residential mortgage loans totaling $1.0 million that were placed on nonaccrual status during 2016. As a result, the ratio of nonperforming loans to total loans increased to 0.09% as of September 30, 2016 compared to 0.02% as of December 31, 2015. The ratio of nonperforming assets to total assets decreased to 0.31% as of September 30, 2016 compared to 0.37% as of December 31, 2015 due to the increase in total assets outpacing the increase in total nonperforming assets.

As of September 30, 2016 and December 31, 2015, the Company had one commercial property in other real estate owned with a carrying value of $4.5 million. This property consists of two buildings which are residential units adjacent to a university campus. Improvements to the property have been made in collaboration with the university and the property continues to be occupied. As of September 30, 2016 and December 31, 2015, the Company also had residential mortgage other real estate owned of less than $0.1 million and $0, respectively.

Allowance for Loan Losses 

The following table provides a rollforward of the allowance for loan losses for the last five quarters and the nine months ended September 30, 2016 and 2015.
(dollars in thousands)
Three Months Ended
 
Nine Months Ended
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
Balance, beginning of period
$
10,016

 
$
9,220

 
$
8,351

 
$
7,671

 
$
7,073

 
$
8,351

 
$
5,800

Provision charged to expense
2,204

 
924

 
946

 
746

 
454

 
4,074

 
1,200

Losses charged off
(1,737
)
 
(232
)
 
(149
)
 
(100
)
 
(76
)
 
(2,118
)
 
(536
)
Recoveries
78

 
104

 
72

 
34

 
220

 
254

 
1,207

Balance, end of period
$
10,561

 
$
10,016

 
$
9,220

 
$
8,351

 
$
7,671

 
$
10,561

 
$
7,671

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net charge-offs (recoveries) to average loans
0.57
%
 
0.05
%
 
0.03
%
 
0.03
%
 
(0.07
)%
 
0.23
%
 
(0.11
)%

The allowance for loan losses was $10.6 million as of September 30, 2016, compared to $8.4 million as of December 31, 2015. The increase of $2.2 million, or 26.5%, was due primarily to the growth in commercial and other consumer loan balances. During the third quarter 2016, the Company recorded net charge-offs of $1.7 million, compared to net recoveries of $0.1 million during the third quarter 2015. During the nine months ended September 30, 2016, the Company recorded net charge-offs of $1.9 million, compared to net recoveries of $0.7 million during nine months ended September 30, 2015. The increase in net charge-offs for both the third quarter 2016 and nine months ended September 30, 2016 was due to the Company charging off the full balance of a commercial and industrial loan it placed on nonaccrual status during the second quarter 2016.

The allowance for loan losses as a percentage of total loans remained stable at 0.88% as of September 30, 2016, compared to 0.88% as of December 31, 2015. Due primarily to the increase in nonaccrual loans, the allowance for loan losses as a percentage of nonperforming loans decreased to 932.1% as of September 30, 2016, compared to 5,000.6% as of December 31, 2015.


38



Investment Securities

The following tables present the amortized cost and approximate fair value of our investment portfolio by security type for the last five quarters.   
(dollars in thousands)
 
 
 
 
 
 
 
 
 
Amortized Cost
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Securities available-for-sale
 
 
 
 
 
 
 
 
 
U.S. Government-sponsored agencies
$
85,630

 
$
75,133

 
$
60,511

 
$
38,093

 
$
36,006

Municipal securities
96,665

 
78,594

 
35,016

 
21,091

 
15,213

Mortgage-backed securities
244,780

 
233,886

 
177,337

 
113,948

 
109,645

Asset-backed securities
19,464

 
19,457

 
19,451

 
19,444

 
19,438

Corporate securities
20,000

 
20,000

 
20,000

 
20,000

 
20,000

Other securities
3,000

 
3,000

 
3,000

 
3,000

 
3,000

Total available-for-sale
$
469,539

 
$
430,070

 
$
315,315

 
$
215,576

 
$
203,302

 
 
 
 
 
 
 
 
 
 
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
Corporate securities
$
5,500

 
$

 
$

 
$

 
$

Total held-to-maturity
$
5,500

 
$

 
$

 
$

 
$

(dollars in thousands)
 
 
 
 
 
 
 
 
 
Approximate Fair Value
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Securities available-for-sale
 
 
 
 
 
 
 
 
 
U.S. Government-sponsored agencies
$
85,990

 
$
75,678

 
$
60,792

 
$
37,750

 
$
35,624

Municipal securities
97,501

 
80,798

 
35,639

 
21,469

 
15,224

Mortgage-backed securities
246,085

 
235,911

 
177,989

 
113,052

 
110,052

Asset-backed securities
19,496

 
19,332

 
18,892

 
19,361

 
19,423

Corporate securities
18,880

 
19,074

 
18,978

 
19,087

 
19,229

Other securities
3,026

 
3,013

 
3,021

 
2,979

 
3,013

Total available-for-sale
$
470,978

 
$
433,806

 
$
315,311

 
$
213,698

 
$
202,565

 
 
 
 
 
 
 
 
 
 
Securities held-to-maturity
 
 
 
 
 
 
 
 
 
Corporate securities
$
5,578

 
$

 
$

 
$

 
$

Total held-to-maturity
$
5,578

 
$

 
$

 
$

 
$


The approximate fair value of investment securities available-for-sale increased $257.3 million, or 120.4%, to $471.0 million as of September 30, 2016 compared to $213.7 million as of December 31, 2015. During the nine month period ended September 30, 2016, the Company deployed funds generated through deposit growth to purchase additional securities to further diversify the securities portfolio and enhance net interest income while supporting liquidity and interest rate risk management. The increase was due primarily to increases of $133.0 million in mortgage-backed securities, $76.0 million in municipal securities and $48.2 million in U.S. Government-sponsored agencies. During the third quarter 2016, the Company purchased $5.5 million in corporate securities with the intention to hold these securities to maturity. At September 30, 2016, the Company had purchased $2.2 million of securities available-for-sale that had not settled. This obligation is recorded within accrued expenses and other liabilities on the condensed consolidated balance sheet.


39



Deposits  

The following table presents the composition of the Company’s deposit base for the last five quarters.
(dollars in thousands)
 
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
Noninterest-bearing deposits
 
$
32,938

 
2.2
%
 
$
28,066

 
2.0
%
 
$
28,945

 
2.3
%
 
$
23,700

 
2.5
%
 
$
22,338

 
2.5
%
Interest-bearing demand deposits
 
84,939

 
5.7
%
 
83,031

 
6.0
%
 
89,180

 
7.2
%
 
84,241

 
8.8
%
 
79,031

 
8.8
%
Regular savings accounts
 
27,661

 
1.8
%
 
28,900

 
2.1
%
 
27,279

 
2.2
%
 
22,808

 
2.4
%
 
26,316

 
2.9
%
Money market accounts
 
364,517

 
24.4
%
 
373,932

 
26.9
%
 
366,195

 
29.5
%
 
341,732

 
35.7
%
 
314,105

 
34.9
%
Certificates of deposits
 
970,684

 
65.0
%
 
862,150

 
62.1
%
 
718,733

 
57.8
%
 
470,736

 
49.2
%
 
444,396

 
49.4
%
Brokered deposits
 
12,862

 
0.9
%
 
12,854

 
0.9
%
 
12,846

 
1.0
%
 
12,837

 
1.4
%
 
13,564

 
1.5
%
Total deposits
 
$
1,493,601

 
100.0
%
 
$
1,388,933

 
100.0
%
 
$
1,243,178

 
100.0
%
 
$
956,054

 
100.0
%
 
$
899,750

 
100.0
%
   
Total deposits increased $537.5 million, or 56.2%, to $1.5 billion as of September 30, 2016 as compared to $956.1 million as of December 31, 2015. This increase was due primarily to increases of $499.9 million, or 106.2%, in certificates of deposits, $22.8 million, or 6.7%, in money market accounts, $9.2 million, or 39.0%, in noninterest-bearing deposits, $4.9 million, or 21.3%, in regular savings accounts and $0.7 million, or 0.8%, in interest-bearing demand deposits. The increase in the balance of certificates of deposits during the first nine months of 2016 was primarily due to the Company’s concentrated efforts to capitalize on customer demand for longer duration deposit products and to enhance liquidity and asset/liability management.

Recent Common Stock Offerings

In May 2016, the Company and the Bank entered into a Sales Agency Agreement with Sandler O’Neill & Partners, L.P. (the “Agent”) to sell shares (the “ATM Shares”) of the Company’s common stock having an aggregate gross sales price of up to $25.0 million, from time to time, through an “at-the-market” equity offering program (the “ATM Program”). The sales, if any, of the ATM Shares, may be made in sales deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on or through The NASDAQ Stock Market, or another market for the Company’s common stock, sales made to or through a market maker other than on an exchange or otherwise, in negotiated transactions at market prices prevailing at the time of sale or at negotiated prices, or as otherwise agreed with the Agent.  Subject to the terms and conditions of the Sales Agency Agreement, upon its acceptance of written instructions from the Company, the Agent will use its commercially reasonable efforts to sell on the Company’s behalf all of the designated ATM Shares.  The Sales Agency Agreement provides for the Company to pay the Agent a commission of up to 3.0% of the gross sales price per share sold through it as sales agent under the Sales Agency Agreement.  The Company may also sell ATM Shares under the Sales Agency Agreement to the Agent, as principal for its own account, at a price per share agreed upon at the time of sale. Actual sales will depend on a variety of factors to be determined by the Company from time to time.  The Company has no obligation to sell any of the ATM Shares under the Sales Agency Agreement, and may at any time suspend solicitation and offers under the Sales Agency Agreement. In addition, the Company has agreed to indemnify the Agent against certain liabilities on customary terms. The Company did not sell any shares through the ATM Program during the three months ended September 30, 2016. The Company has sold a total of 139,811 ATM Shares through the ATM Program for gross proceeds of approximately $3.4 million.

As of September 30, 2016, approximately $21.6 million remained available for sale under the ATM Program.

In May 2016, the Company separately entered into an Underwriting Agreement with the Agent, pursuant to which the Company sold an additional 895,955 shares of common stock at $24.00 per share, resulting in gross proceeds to the Company of $21.5 million.

The net proceeds to the Company from the above offerings after deducting underwriting discounts and commissions and offering expenses was $22.8 million.

Debt Offerings

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 represents 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.


40



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 at 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. Subsequent to the end of the quarter, the 2026 Notes commenced trading on The NASDAQ Global Select Market under the symbol “INBKL.”

Capital

The Company and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to a phase-in period for certain provisions. Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios of Common Equity Tier 1 capital, Tier 1 capital and Total capital, as defined in the regulations, to risk-weighted assets, and of Tier 1 capital to adjusted quarterly average assets (“Leverage Ratio”).

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to maintain: 1) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 7.0% upon full implementation); 2) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); 3) a minimum ratio of Total capital to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum Total capital ratio of 10.5% upon full implementation); and 4) a minimum Leverage Ratio of 4.0%.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period increasing by increments of that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Failure to maintain the minimum Common Equity Tier 1 capital ratio plus the capital conservation buffer will result in potential restrictions on a banking institution’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees.

The following tables present actual and required capital ratios as of September 30, 2016 and December 31, 2015 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2016 and December 31, 2015 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

41



 
Actual
 
Minimum Capital Required - Basel III Phase-In Schedule
 
Minimum Capital Required - Basel III Fully Phased-In
 
Minimum Required to be Considered Well Capitalized
(dollars in thousands)
Capital Amount
 
Ratio
 
Capital Amount
 
Ratio
 
Capital Amount
 
Ratio
 
Capital Amount
 
Ratio
As of September 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
131,541

 
10.07
%
 
$
66,963

 
5.13
%
 
$
91,462

 
7.00
%
 
N/A

 
N/A

Bank
148,086

 
11.36
%
 
66,798

 
5.13
%
 
91,236

 
7.00
%
 
$
84,719

 
6.50
%
Tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
131,541

 
10.07
%
 
86,563

 
6.63
%
 
111,061

 
8.50
%
 
N/A

 
N/A

Bank
148,086

 
11.36
%
 
86,348

 
6.63
%
 
110,787

 
8.50
%
 
104,270

 
8.00
%
Total capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
178,655

 
13.67
%
 
112,695

 
8.63
%
 
137,193

 
10.50
%
 
N/A

 
N/A

Bank
158,659

 
12.17
%
 
112,416

 
8.63
%
 
136,854

 
10.50
%
 
130,337

 
10.00
%
Leverage ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
131,541

 
7.62
%
 
69,093

 
4.00
%
 
69,093

 
4.00
%
 
N/A

 
N/A

Bank
148,086

 
8.59
%
 
68,974

 
4.00
%
 
68,974

 
4.00
%
 
86,218

 
5.00
%
 
Actual
 
Minimum Capital Required - Basel III Phase-In Schedule
 
Minimum Capital Required - Basel III Fully Phased-In
 
Minimum Required to be Considered Well Capitalized
(dollars in thousands)
Capital Amount
 
Ratio
 
Capital Amount
 
Ratio
 
Capital Amount
 
Ratio
 
Capital Amount
 
Ratio
As of December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common equity tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
100,839

 
10.11
%
 
$
44,881

 
4.50
%
 
$
69,815

 
7.00
%
 
N/A

 
N/A

Bank
104,434

 
10.50
%
 
44,768

 
4.50
%
 
69,639

 
7.00
%
 
$
64,664

 
6.50
%
Tier 1 capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
100,839

 
10.11
%
 
59,842

 
6.00
%
 
84,776

 
8.50
%
 
N/A

 
N/A

Bank
104,434

 
10.50
%
 
59,690

 
6.00
%
 
84,561

 
8.50
%
 
79,587

 
8.00
%
Total capital to risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
122,190

 
12.25
%
 
79,789

 
8.00
%
 
104,723

 
10.50
%
 
N/A

 
N/A

Bank
112,785

 
11.34
%
 
79,587

 
8.00
%
 
104,458

 
10.50
%
 
99,484

 
10.00
%
Leverage ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
100,839

 
8.28
%
 
48,713

 
4.00
%
 
48,713

 
4.00
%
 
N/A

 
N/A

Bank
104,434

 
8.59
%
 
48,636

 
4.00
%
 
48,636

 
4.00
%
 
60,796

 
5.00
%


42



Shareholders’ Dividends

The Company’s Board of Directors declared a cash dividend for the third quarter 2016 of $0.06 per share of common stock payable October 17, 2016 to shareholders of record as of September 30, 2016. The Company expects to continue to pay cash dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of the Board of Directors and will depend upon many factors, including its results of operations, financial condition, capital requirements, regulatory and contractual restrictions (including with respect to the Company’s outstanding subordinated debt), business strategy and other factors deemed relevant by the Board of Directors.

As of September 30, 2016, the Company had $38.0 million principal amount of subordinated debt outstanding pursuant to the 2021 Debenture, the 2025 Note, and the 2026 Notes. The agreements under which subordinated debt was issued prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred and be continuing an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock.

Capital Resources

While the Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for at least the next twelve months, including any cash dividends it may pay, the Company intends to continue pursuing its growth strategy, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to execute its growth strategy could be adversely affected.

Liquidity

Liquidity management is the process used by the Company to manage the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost while also maintaining safe and sound operations. Liquidity, represented by cash and investment securities, is a product of the Company’s operating, investing and financing activities. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, maturing loans and investment securities, access to wholesale funding sources and collateralized borrowings. While scheduled payments and maturities of loans and investment securities are relatively predictable sources of funds, deposit flows are greatly influenced by interest rates, general economic conditions and competition. Therefore, the Company supplements deposit growth and enhances interest rate risk management through borrowings, which are generally advances from the Federal Home Loan Bank.

The Company maintains cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments. At September 30, 2016, on a consolidated basis, the Company had $539.1 million in cash and cash equivalents, interest-bearing time deposits and investment securities available-for-sale and $32.5 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At September 30, 2016, the Bank had the ability to borrow an additional $324.5 million in advances from the Federal Home Loan Bank, the Federal Reserve and correspondent bank Fed Funds lines of credit.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its common stockholders and interest and principal on outstanding debt. The Company’s primary sources of funds are cash maintained at the holding company level and dividends from the Bank, the payment of which is subject to regulatory limits. At September 30, 2016, the Company, on an unconsolidated basis, had $17.3 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.
 
The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At September 30, 2016, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $129.6 million. Certificates of deposits scheduled to mature in one year or less at September 30, 2016 totaled $401.3 million. Generally, the Company believes that a majority of maturing deposits will remain with the Bank.

Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on either the Company’s or the Bank’s liquidity.


43



Reconciliation of Non-GAAP Financial Measures

This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial measures, specifically tangible common equity, tangible assets, average tangible common equity, tangible book value per common share, return on average tangible common equity and tangible common equity to tangible assets ratio are used by the Company’s management to measure the strength of its capital and its ability to generate earnings on tangible capital invested by its shareholders. Although the Company believes these non-GAAP measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the following table for the past five quarters and nine months ended September 30, 2016 and 2015.
(dollars in thousands, except share and per share data)
Three Months Ended
 
Nine Months Ended
September 30,
2016
 
June 30,
2016
 
March 31,
2016
 
December 31,
2015
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
Total equity - GAAP
$
137,154

 
$
135,679

 
$
107,830

 
$
104,330

 
$
102,912

 
$
137,154

 
$
102,912

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
     Goodwill
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
Tangible common equity
$
132,467

 
$
130,992

 
$
103,143

 
$
99,643

 
$
98,225

 
$
132,467

 
$
98,225

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets - GAAP
$
1,824,196

 
$
1,702,468

 
$
1,527,719

 
$
1,269,870

 
$
1,166,170

 
$
1,824,196

 
$
1,166,170

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
     Goodwill
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
Tangible assets
$
1,819,509

 
$
1,697,781

 
$
1,523,032

 
$
1,265,183

 
$
1,161,483

 
$
1,819,509

 
$
1,161,483

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total common shares outstanding
5,533,050

 
5,533,050

 
4,497,284

 
4,481,347

 
4,484,513

 
5,533,050

 
4,484,513

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Book value per common share
$
24.79

 
$
24.52

 
$
23.98

 
$
23.28

 
$
22.95

 
$
24.79

 
$
22.95

Effect of goodwill
(0.85
)
 
(0.85
)
 
(1.05
)
 
(1.04
)
 
(1.05
)
 
(0.85
)
 
(1.05
)
Tangible book value per common share
$
23.94

 
$
23.67

 
$
22.93

 
$
22.24

 
$
21.90

 
$
23.94

 
$
21.90

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total shareholders’ equity to assets ratio
7.52
 %
 
7.97
 %
 
7.06
 %
 
8.22
 %
 
8.82
 %
 
7.52
 %
 
8.82
 %
Effect of goodwill
(0.24
)%
 
(0.25
)%
 
(0.29
)%
 
(0.34
)%
 
(0.36
)%
 
(0.24
)%
 
(0.36
)%
Tangible common equity to tangible assets ratio
7.28
 %
 
7.72
 %
 
6.77
 %
 
7.88
 %
 
8.46
 %
 
7.28
 %
 
8.46
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total average equity - GAAP
$
135,666

 
$
117,913

 
$
106,278

 
$
103,583

 
$
100,885

 
$
120,010

 
$
99,365

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
     Average goodwill
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
 
(4,687
)
Average tangible common equity
$
130,979

 
$
113,226

 
$
101,591

 
$
98,896

 
$
96,198

 
$
115,323

 
$
94,678

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average shareholders’ equity
9.08
 %
 
9.67
 %
 
9.20
 %
 
8.73
 %
 
9.14
 %
 
9.31
 %
 
8.95
 %
Effect of goodwill
0.33
 %
 
0.40
 %
 
0.43
 %
 
0.41
 %
 
0.44
 %
 
0.38
 %
 
0.44
 %
Return on average tangible common equity
9.41
 %
 
10.07
 %
 
9.63
 %
 
9.14
 %
 
9.58
 %
 
9.69
 %
 
9.39
 %

Critical Accounting Policies and Estimates
 
There have been no material changes in the Company’s critical accounting policies or estimates from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2015.
 

44



Recent Accounting Pronouncements
 
Refer to Note 12 of the condensed consolidated financial statements.

Off-Balance Sheet Arrangements
 
In the ordinary course of business, the Company enters into financial transactions to extend credit and forms of commitments that may be considered off-balance sheet arrangements. The Company enters into forward contracts related to its mortgage banking business to hedge the exposures from commitments to extend new residential mortgage loans to customers and from its mortgage loans held-for-sale. At September 30, 2016 and December 31, 2015, the Company had commitments to sell residential real estate loans of $115.7 million and $42.7 million, respectively. These contracts mature in less than one year. The Company does not believe that off-balance sheet arrangements have had or are reasonably likely to have a material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, foreign exchange rates and equity prices. The primary source of market risk for the Company is interest rate risk. Interest rate risk is the risk to earnings and the value of the Company’s equity resulting from changes in market interest rates and arises in the normal course of business to the extent that there are timing and volume differences between the amount of interest-earning assets and the amount of interest-bearing liabilities that are prepaid, withdrawn, re-priced or mature in specified periods. The Company seeks to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates.
The Company monitors its interest rate risk position using income simulation models and economic value of equity (“EVE”) sensitivity analysis that capture both short-term and long-term interest rate risk exposure. Income simulation involves forecasting net interest income (“NII”) under a variety of interest rate scenarios. The Company uses EVE sensitivity analysis to understand the impact of changes in interest rates on long-term cash flows, income and capital. EVE is calculated by discounting the cash flows for all balance sheet instruments under different interest-rate scenarios. Modeling the sensitivity of NII and EVE to changes in market interest rates is highly dependent on the assumptions incorporated into the modeling process. The Company continually reviews and refines the assumptions used in its interest rate risk modeling.
Presented below is the estimated impact on the Company’s NII and EVE position as of September 30, 2016, assuming parallel shifts in interest rates:
 
% Change from Base Case for Parallel Changes in Rates
 
-100 Basis Points 1
 
+100 Basis Points
 
+200 Basis Points
NII - next twelve months
(3.05
)%
 
6.22
 %
 
10.63
 %
EVE
(2.87
)%
 
(6.77
)%
 
(14.50
)%
1 Because certain current interest rates are at or below 1.00%, the 100 basis point downward shock assumes that certain corresponding interest rates approach an implied floor that, in effect, reflects a decrease of less than the full 100 basis point downward shock.
The Company’s objective is to manage the balance sheet with a bias toward asset sensitivity while simultaneously balancing the potential earnings impact of this strategy. A “risk-neutral” position refers to the absence of a strong bias toward either asset or liability sensitivity. An “asset sensitive” position refers to when the characteristics of the balance sheet are expected to generate higher net interest income when interest rates, primarily short-term rates, increase as rates earned on interest-earning assets would reprice upward more quickly or in greater quantities than rates paid on interest-bearing liabilities would reprice.  A “liability sensitive” position refers to when the characteristics of the balance sheet are expected to generate lower net interest income when short-term interest rates increase as rates paid on interest-bearing liabilities would reprice upward more quickly or in greater quantities than rates earned on interest-earning assets.

45



ITEM 4.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
The Company maintains disclosure controls and procedures that are designed to ensure that information it is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time period specified in SEC rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, the Company has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating its controls and procedures.
 
The Company performed an evaluation under the supervision and with the participation of management, including the principal executive and principal financial officers, to assess the effectiveness of the design and operation of its disclosure controls and procedures under the Exchange Act. Based on that evaluation, the principal executive and principal financial officers concluded that the disclosure controls and procedures were effective as of September 30, 2016.
 
Changes in Internal Control Over Financial Reporting
 
There has been no change in the Company’s internal control over financial reporting during the three months ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
  

46



PART II
 
ITEM 1.
LEGAL PROCEEDINGS
 
The Company is not party to any material legal proceedings. From time to time, the Bank is a party to legal actions arising from its normal business activities.
 
ITEM 1A.
RISK FACTORS
 
Other than set forth below, there have been no material changes to the risk factors previously disclosed in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
 We may not be able to generate sufficient cash to service all of our debt.
        Our ability to make scheduled payments of principal and interest, or to satisfy our obligations in respect of our debt or to refinance our debt, will depend on our future performance of our operating subsidiaries. Prevailing economic conditions (including interest rates), regulatory constraints, including, among other things, limiting distributions to us from the Bank and required capital levels with respect to the Bank and certain of our nonbank subsidiaries, and financial, business and other factors, many of which are beyond our control, will also affect our ability to meet these needs. Our subsidiaries may not be able to generate sufficient cash flows from operations, or we may be unable to obtain future borrowings in an amount sufficient to enable us to pay our debt, or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt when needed on commercially reasonable terms or at all.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
Not Applicable.
 
ITEM 5.
OTHER INFORMATION
 
None.
 

47



ITEM 6.
EXHIBITS
 
Unless otherwise indicated, all documents incorporated into this quarterly report on Form 10-Q by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 1-35750.

Exhibit No.
 
Description
3.1
 
Articles of Incorporation of First Internet Bancorp (incorporated by reference to Exhibit 3.1 to registration statement on Form 10 filed November 30, 2012)
3.2
 
Amended and Restated Bylaws of First Internet Bancorp, as amended March 18, 2013 (incorporated by reference to Exhibit 3.2 to annual report on Form 10-K for the year ended December 31, 2012)
4.1
 
Subordinated Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to current report on Form 8-K filed on September 30, 2016)
4.2
 
First Supplemental Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to current report on Form 8-K filed on September 30, 2016)
4.3
 
Form of Global Note representing 6.0% Subordinated Notes due 2026 (incorporated by reference to Exhibit A included in Exhibit 4.2 to current report on Form 8-K filed on September 30, 2016)
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1
 
Section 1350 Certifications
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase


48



SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
FIRST INTERNET BANCORP
 
 
 
Date: November 7, 2016
By
/s/ David B. Becker
 
 
David B. Becker,
Chairman, President and Chief Executive Officer
(on behalf of Registrant)
 
 
 
Date: November 7, 2016
By
/s/ Kenneth J. Lovik
 
 
Kenneth J. Lovik,
Senior Vice President and Chief Financial Officer (principal financial officer)

 

49


EXHIBIT INDEX
 
Exhibit No.
 
Description
 
Method of Filing
3.1
 
Articles of Incorporation of First Internet Bancorp
 
Incorporated by Reference
3.2
 
Amended and Restated Bylaws of First Internet Bancorp, as amended March 18, 2013
 
Incorporated by Reference
4.1
 
Subordinated Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee
 
Incorporated by Reference
4.2
 
First Supplemental Indenture, dated as of September 30, 2016, between First Internet Bancorp and U.S. Bank National Association, as trustee
 
Incorporated by Reference
4.3
 
Form of Global Note representing 6.0% Subordinated Notes due 2026
 
Incorporated by Reference
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
Filed Electronically
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
Filed Electronically
32.1
 
Section 1350 Certifications
 
Filed Electronically
101.INS
 
XBRL Instance Document
 
Filed Electronically
101.SCH
 
XBRL Taxonomy Extension Schema
 
Filed Electronically
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
Filed Electronically
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
Filed Electronically
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
Filed Electronically
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
Filed Electronically