INBK 10-Q Quarterly Report June 30, 2019

FIRST INTERNET BANCORP

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10-Q 1 inbk-2019q2x10q.htm 10-Q 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 June 30, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to ________.

Commission File Number 001-35750

First Internet Bancorp

(Exact Name of Registrant as Specified in Its Charter)



Indiana		20-3489991
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

11201 USA Parkway Fishers, IN		46037
(Address of Principal Executive Offices)		(Zip Code)



	(317) 532-7900
	(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbols	Name of each exchange on which registered
Common Stock, without par value	INBK	The Nasdaq Stock Market LLC
6.0% Fixed to Floating Subordinated Notes due 2026	INBKL	The Nasdaq Stock Market LLC
6.0% Fixed to Floating Subordinated Notes due 2029	INBKZ	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer ¨	Accelerated Filer þ
Non-accelerated Filer ¨	Smaller Reporting Company þ
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of August 2, 2019 , the registrant had 9,959,923 shares of common stock issued and outstanding.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the current expectations of First Internet Bancorp and its consolidated subsidiaries (“we,” “our,” “us” or the “Company”) regarding its business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “anticipate,” “believe,” “can,” “continue,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “should,” “will” 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 or breaches of or interruptions in the communication and information systems on which we rely to conduct our business that could reduce our revenues, increase our costs or lead to disruptions in our business; our plans to grow our commercial real estate, commercial and industrial, public finance and healthcare finance loan portfolios which may carry greater risks of non-payment or other unfavorable consequences; our dependence on capital distributions from First Internet Bank of Indiana (the “Bank”); results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses or to write-down assets; changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Bank in particular; more restrictive regulatory capital requirements; increased costs, including deposit insurance premiums; regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; changes in market rates and prices that may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet; our liquidity requirements being adversely affected by changes in our assets and liabilities; the effect of legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals; execution of future acquisition, reorganization or disposition transactions including without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings and other anticipated benefits from such transactions; changes in applicable tax laws; the growth and profitability of noninterest or fee income being less than expected; the loss of any key members of senior management; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the “FASB”), the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board (the “PCAOB”) 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.

PART I


ITEM 1.	FINANCIAL STATEMENTS

First Internet Bancorp

Condensed Consolidated Balance Sheets

(Amounts in thousands except share data)



	June 30, 2019			December 31, 2018
	(Unaudited)
Assets
Cash and due from banks	$	5,638		$	7,080
Interest-bearing deposits	342,660			181,632
Total cash and cash equivalents	348,298			188,712
Securities available-for-sale, at fair value (amortized cost of $526,679 and $499,893 in 2019 and 2018, respectively)	522,334			481,345
Securities held-to-maturity, at amortized cost (fair value of $36,288 and $22,418 in 2019 and 2018, respectively)	35,826			22,750
Loans held-for-sale (includes $30,642 and $18,328 at fair value in 2019 and 2018, respectively)	30,642			18,328
Loans	2,861,156			2,716,228
Allowance for loan losses	(19,976		)	(17,896		)
Net loans	2,841,180			2,698,332
Accrued interest receivable	18,887			16,822
Federal Home Loan Bank of Indianapolis stock	25,650			23,625
Cash surrender value of bank-owned life insurance	36,527			36,059
Premises and equipment, net	14,405			10,697
Goodwill	4,687			4,687
Other real estate owned	2,619			2,619
Accrued income and other assets	77,774			37,716
Total assets	$	3,958,829		$	3,541,692
Liabilities and Shareholders’ Equity
Liabilities
Noninterest-bearing deposits	$	44,040		$	43,301
Interest-bearing deposits	2,962,223			2,628,050
Total deposits	3,006,263			2,671,351
Advances from Federal Home Loan Bank	514,906			525,153
Subordinated debt, net of unamortized debt issuance costs of $2,625 and $1,125 in 2019 and 2018, respectively	69,375			33,875
Accrued interest payable	2,930			1,108
Accrued expenses and other liabilities	69,235			21,470
Total liabilities	3,662,709			3,252,957
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; 10,016,458 and 10,170,778 shares issued and outstanding in 2019 and 2018, respectively	224,244			227,587
Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none	—			—
Retained earnings	87,454			77,689
Accumulated other comprehensive loss	(15,578		)	(16,541		)
Total shareholders’ equity	296,120			288,735
Total liabilities and shareholders’ equity	$	3,958,829		$	3,541,692

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Income – Unaudited

(Amounts in thousands except share and per share data)



	Three Months Ended					Six Months Ended
	June 30, 2019			June 30, 2018		June 30, 2019			June 30, 2018
Interest Income
Loans	$	30,842		$	23,699	$	60,060		$	45,814
Securities – taxable	3,540			2,556		6,864			5,044
Securities – non-taxable	668			700		1,352			1,411
Other earning assets	1,794			461		3,567			1,126
Total interest income	36,844			27,416		71,843			53,395
Interest Expense
Deposits	17,147			9,226		32,533			17,496
Other borrowed funds	3,592			2,729		6,961			5,023
Total interest expense	20,739			11,955		39,494			22,519
Net Interest Income	16,105			15,461		32,349			30,876
Provision for Loan Losses	1,389			667		2,674			1,517
Net Interest Income After Provision for Loan Losses	14,716			14,794		29,675			29,359
Noninterest Income
Service charges and fees	225			231		461			461
Mortgage banking activities	2,664			1,597		4,281			3,175
(Loss) gain on sale of loans	(66		)	—		(170		)	414
Loss on sale of securities	(458		)	—		(458		)	—
Other	1,089			349		1,712			669
Total noninterest income	3,454			2,177		5,826			4,719
Noninterest Expense
Salaries and employee benefits	6,642			5,827		12,963			11,732
Marketing, advertising and promotion	466			608		935			1,324
Consulting and professional services	835			633		1,649			1,484
Data processing	328			282		645			545
Loan expenses	292			260		606			497
Premises and equipment	1,497			1,231		2,997			2,445
Deposit insurance premium	747			480		1,302			945
Other	902			861		1,721			1,427
Total noninterest expense	11,709			10,182		22,818			20,399
Income Before Income Taxes	6,461			6,789		12,683			13,679
Income Tax Provision	340			781		866			1,643
Net Income	$	6,121		$	6,008	$	11,817		$	12,036
Income Per Share of Common Stock
Basic	$	0.60		$	0.67	$	1.16		$	1.38
Diluted	$	0.60		$	0.67	$	1.16		$	1.38
Weighted-Average Number of Common Shares Outstanding
Basic	10,148,285			8,909,913		10,182,770			8,705,689
Diluted	10,148,285			8,919,460		10,186,833			8,731,331
Dividends Declared Per Share	$	0.06		$	0.06	$	0.12		$	0.12

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Comprehensive Income – Unaudited

(Amounts in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income	$	6,121		$	6,008		$	11,817		$	12,036
Other comprehensive income
Net unrealized holding gains (losses) on securities available-for-sale recorded within other comprehensive income before income tax	3,667			(3,209		)	10,577			(10,874		)
Reclassification adjustment for losses realized	458			—			458			—
Net unrealized holding losses on cash flow hedging derivatives recorded within other comprehensive (loss) income before tax	(5,892		)	(958		)	(9,464		)	(958		)
Other comprehensive (loss) income before income tax	(1,767		)	(4,167		)	1,571			(11,832		)
Income tax (benefit) provision	(357		)	(1,363		)	608			(3,836		)
Other comprehensive (loss) income	(1,410		)	(2,804		)	963			(7,996		)
Comprehensive income	$	4,711		$	3,204		$	12,780		$	4,040

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited

Six Months Ended June 30, 2019 and 2018

(Amounts in thousands except per share data)



	Voting and Nonvoting Common Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance, January 1, 2019	$	227,587		$	77,689		$	(16,541	)	$	288,735
Impact of adoption of new accounting standards ⁽¹⁾	—			(821		)	—			(821		)
Net income	—			11,817			—			11,817
Other comprehensive income	—			—			963			963
Dividends declared ($0.12 per share)	—			(1,231		)	—			(1,231		)
Recognition of the fair value of share-based compensation	862			—			—			862
Repurchase of common stock	(4,133		)	—			—			(4,133		)
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
Common stock redeemed for the net settlement of share-based awards	(94		)	—			—			(94		)
Balance, June 30, 2019	$	224,244		$	87,454		$	(15,578	)	$	296,120

Balance, January 1, 2018	$	172,043		$	57,103		$	(5,019	)	$	224,127
Impact of adoption of new accounting standards ⁽²⁾	—			1,063			(1,063		)	—
Net income	—			12,036			—			12,036
Other comprehensive loss	—			—			(7,996		)	(7,996		)
Dividends declared ($0.12 per share)	—			(1,136		)	—			(1,136		)
Net cash proceeds from common stock issuance	54,334			—			—			54,334
Recognition of the fair value of share-based compensation	911			—			—			911
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	21			—			—			21
Common stock redeemed for the net settlement of share-based awards	(210		)	—			—			(210		)
Balance, June 30, 2018	$	227,099		$	69,066		$	(14,078	)	$	282,087

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

(2) Represents the impact of adopting ASU 2018-02 and ASU 2016-01. ASU 2018-02 increased retained earnings and accumulated other comprehensive loss by $1.1 million . ASU 2016-01 decreased retained earnings and accumulated other comprehensive loss by $0.1 million . See Note 13 to the condensed consolidated financial statements for more information.

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited

Three Months Ended June 30, 2019 and 2018

(Amounts in thousands except per share data)



	Voting and Nonvoting Common Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance, April 1, 2019	$	226,235		$	81,946		$	(14,168	)	$	294,013
Net income	—			6,121			—			6,121
Other comprehensive loss	—			—			(1,410		)	(1,410		)
Dividends declared ($0.06 per share)	—			(613		)	—			(613		)
Recognition of the fair value of share-based compensation	383			—			—			383
Repurchase of common stock	(2,387		)	—			—			(2,387		)
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	13			—			—			13
Balance, June 30, 2019	$	224,244		$	87,454		$	(15,578	)	$	296,120

Balance, April 1, 2018	$	172,420		$	63,677		$	(11,274	)	$	224,823
Net income	—			6,008			—			6,008
Other comprehensive loss	—			—			(2,804		)	(2,804		)
Dividends declared ($0.06 per share)	—			(619		)	—			(619		)
Net cash proceeds from common stock issuance	54,334									54,334
Recognition of the fair value of share-based compensation	333			—			—			333
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	12			—			—			12
Balance, June 30, 2018	$	227,099		$	69,066		$	(14,078	)	$	282,087

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Cash Flows – Unaudited

(Amounts in thousands)



	Six Months Ended June 30,
	2019			2018
Operating Activities
Net income	$	11,817		$	12,036
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	3,747			2,948
Increase in cash surrender value of bank-owned life insurance	(468		)	(474		)
Provision for loan losses	2,674			1,517
Share-based compensation expense	862			911
Loss on sale of available-for-sale securities	458			—
Loans originated for sale	(220,266		)	(178,382		)
Proceeds from sale of loans	211,432			184,779
Gain on loans sold	(3,128		)	(3,579		)
Gain on sale of other real estate owned	—			(105		)
(Increase) decrease in fair value of loans held-for-sale	(352		)	82
Gain on derivatives	(553		)	(132		)
Amortization of operating lease right-of-use assets	353			—
Net change in accrued income and other assets	(44,383		)	(2,239		)
Net change in accrued expenses and other liabilities	4,476			(1,477		)
Net cash (used in) provided by operating activities	(33,331		)	15,885
Investing Activities
Net loan activity, excluding purchases	(153,259		)	(202,187		)
Proceeds from sale of other real estate owned	—			332
Maturities and calls of securities available-for-sale	30,950			31,601
Proceeds from sale of securities available-for-sale	30,137			—
Purchase of securities available-for-sale	(76,834		)	(31,185		)
Purchase of securities held-to-maturity	(13,116		)	—
Purchase of Federal Home Loan Bank of Indianapolis stock	(2,025		)	(2,475		)
Purchase of premises and equipment	(2,852		)	(903		)
Loans purchased	(159,068		)	(81,865		)
Net proceeds from sale of portfolio loans	184,095			25,717
Net cash used in investing activities	(161,972		)	(260,965		)
Financing Activities
Net increase in deposits	334,912			309,343
Cash dividends paid	(1,214		)	(1,008		)
Repayment of subordinated debt	—			(3,000		)
Net proceeds from issuance of subordinated debt	35,418			—
Repurchase of common stock	(4,133		)	—
Proceeds from advances from Federal Home Loan Bank	375,000			140,000
Repayment of advances from Federal Home Loan Bank	(385,000		)	(160,000		)
Net proceeds from common stock issuance	—			54,334
Other, net	(94		)	(210		)
Net cash provided by financing activities	354,889			339,459
Net Increase in Cash and Cash Equivalents	159,586			94,379
Cash and Cash Equivalents, Beginning of Period	188,712			47,981
Cash and Cash Equivalents, End of Period	$	348,298		$	142,360
Supplemental Disclosures
Initial recognition of right-of-use asset	$	2,096		$	—
Initial recognition of operating lease liabilities	2,096			—
Cash paid during the period for interest	37,672			22,395
Cash paid during the period for taxes	1,793			360
Loans transferred to other real estate owned	—			227
Loans transferred to held-for-sale from portfolio	184,021			—
Cash dividends declared, paid in subsequent period	601			611
Securities purchased during the period, settled in subsequent period	14,247			3,923
Transfer of other equity investments from securities available-for-sale to other assets in accordance with adoption of ASU 2016-01	—			2,932

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Notes to Condensed Consolidated Financial Statements – Unaudited

(Table amounts in thousands except share and per share data)

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results expected for the year ending December 31, 2019 or any other period. The June 30, 2019 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended December 31, 2018 .

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, or assumptions that could have a material effect on the carrying value of certain assets and liabilities. These estimates, judgments, and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided. The determination of the allowance for loan losses, valuations and impairments of investment securities, and the accounting for income tax expense are highly dependent upon management’s estimates, judgments, and assumptions, and changes in any of these could have a significant impact on the condensed consolidated financial statements.

The condensed consolidated financial statements include the accounts of First Internet Bancorp (the “Company”), its wholly owned subsidiary, First Internet Bank of Indiana (the “Bank”), and the Bank’s three wholly-owned subsidiaries, First Internet Public Finance Corp., JKH Realty Services, LLC and SPF15, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations, and cash flows of the Company.

Certain reclassifications have been made to the 2018 financial statements to conform to the presentation of the 2019 financial statements. These reclassifications had no effect on net income.

Note 2: Earnings Per Share

Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period.

The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three and six months ended June 30, 2019 and 2018 .



(dollars in thousands, except per share data)	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Basic earnings per share
Net income	$	6,121	$	6,008	$	11,817	$	12,036
Weighted-average common shares	10,148,285		8,909,913		10,182,770		8,705,689
Basic earnings per common share	$	0.60	$	0.67	$	1.16	$	1.38
Diluted earnings per share
Net income	$	6,121	$	6,008	$	11,817	$	12,036
Weighted-average common shares	10,148,285		8,909,913		10,182,770		8,705,689
Dilutive effect of equity compensation	—		9,547		4,063		25,642
Weighted-average common and incremental shares	10,148,285		8,919,460		10,186,833		8,731,331
Diluted earnings per common share ⁽¹⁾	$	0.60	$	0.67	$	1.16	$	1.38

⁽¹⁾ Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 30,250 and 23,305 for the three and six months ended June 30, 2019, respectively, and 2,113 and 7,581 for the three and six months ended June 30, 2018, respectively.

Note 3: Securities

The following tables summarize securities available-for-sale and securities held-to-maturity as of June 30, 2019 and December 31, 2018 .



	June 30, 2019
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Securities available-for-sale
U.S. Government-sponsored agencies	$	89,088	$	196	$	(1,547	)	$	87,737
Municipal securities	96,202		982		(196		)	96,988
Mortgage-backed securities	297,745		1,486		(3,243		)	295,988
Asset-backed securities	5,000		—		(72		)	4,928
Corporate securities	38,644		54		(2,005		)	36,693
Total available-for-sale	$	526,679	$	2,718	$	(7,063	)	$	522,334



	June 30, 2019
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Securities held-to-maturity
Municipal securities	$	10,147	$	149	$	—		$	10,296
Corporate securities	25,679		353		(40		)	25,992
Total held-to-maturity	$	35,826	$	502	$	(40	)	$	36,288



	December 31, 2018
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Securities available-for-sale
U.S. Government-sponsored agencies	$	109,631	$	20	$	(2,066	)	$	107,585
Municipal securities	97,090		90		(4,674		)	92,506
Mortgage-backed securities	251,492		162		(8,742		)	242,912
Asset-backed securities	5,002		—		(143		)	4,859
Corporate securities	36,678		—		(3,195		)	33,483
Total available-for-sale	$	499,893	$	272	$	(18,820	)	$	481,345



	December 31, 2018
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Securities held-to-maturity
Municipal securities	$	10,157	$	—	$	(356	)	$	9,801
Corporate securities	12,593		80		(56		)	12,617
Total held-to-maturity	$	22,750	$	80	$	(412	)	$	22,418

The carrying value of securities at June 30, 2019 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Available-for-Sale
	Amortized Cost		Fair Value
One to five years	$	4,160	$	4,212
Five to ten years	68,125		67,063
After ten years	151,649		150,143
	223,934		221,418
Mortgage-backed securities	297,745		295,988
Asset-backed securities	5,000		4,928
Total	$	526,679	$	522,334



	Held-to-Maturity
	Amortized Cost		Fair Value
One to five years	$	497	$	499
Five to ten years	29,423		29,763
After ten years	5,906		6,026
Total	$	35,826	$	36,288

There were $0.5 million of gross losses resulting from sales of available-for-sale securities during the three and six months ended June 30, 2019 and no gross gains or losses resulting from sales of available-for-sale securities during the three and six months ended June 30, 2018.

Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at June 30, 2019 and December 31, 2018 was $309.5 million and $ 469.8 million , which was approximately 55% and 93% , respectively, of the Company’s available-for-sale and held-to-maturity securities portfolios. These declines resulted primarily from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, with the resulting loss recognized in net income in the period the other-than-temporary impairment (“OTTI”) is identified.

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

The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2019 .

Mortgage-Backed Securities

The unrealized losses on the Company’s investments in mortgage-backed securities were caused by interest rate changes. The Company expects to recover the amortized cost bases over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2019 .

The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2019 and December 31, 2018.



	June 30, 2019
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Securities available-for-sale
U.S. Government-sponsored agencies	$	4,664	$	(31	)	$	71,613	$	(1,516	)	$	76,277	$	(1,547	)
Municipal securities	355		—			28,120		(196		)	28,475		(196		)
Mortgage-backed securities	22,985		(82		)	140,606		(3,161		)	163,591		(3,243		)
Asset-backed securities	—		—			4,928		(72		)	4,928		(72		)
Corporate securities	8,097		(30		)	22,544		(1,975		)	30,641		(2,005		)
Total	$	36,101	$	(143	)	$	267,811	$	(6,920	)	$	303,912	$	(7,063	)



	June 30, 2019
	Less Than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities held-to-maturity
Corporate securities	$	5,595	$	(40	)	$	—	$	—	$	5,595	$	(40	)
Total	$	5,595	$	(40	)	$	—	$	—	$	5,595	$	(40	)



	December 31, 2018
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Securities available-for-sale
U.S. Government-sponsored agencies	$	69,798	$	(893	)	$	33,511	$	(1,173	)	$	103,309	$	(2,066	)
Municipal securities	23,747		(710		)	59,938		(3,964		)	83,685		(4,674		)
Mortgage-backed securities	56,177		(529		)	172,442		(8,213		)	228,619		(8,742		)
Asset-backed securities	4,859		(143		)	—		—			4,859		(143		)
Corporate securities	14,092		(586		)	19,391		(2,609		)	33,483		(3,195		)
Total	$	168,673	$	(2,861	)	$	285,282	$	(15,959	)	$	453,955	$	(18,820	)



	December 31, 2018
	Less Than 12 Months					12 Months or Longer				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities held-to-maturity
Municipal securities	$	9,801	$	(356	)	$	—	$	—	$	9,801	$	(356	)
Corporate securities	6,037		(56		)	—		—		6,037		(56		)
Total	$	15,838	$	(412	)	$	—	$	—	$	15,838	$	(412	)

There were no amounts reclassified from accumulated other comprehensive loss to the condensed consolidated statements of income during the three and six months ended June 30, 2018. Amounts reclassified from accumulated other comprehensive loss and the affected line items in the condensed consolidated statements of income during the three and six months ended June 30, 2019 were as follows:



Details About Accumulated Other Comprehensive Loss Components	Amounts Reclassified from Accumulated Other Comprehensive Loss for the						Affected Line Item in the Statements of Income
	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019			Affected Line Item in the Statements of Income
Realized gains and losses on securities available-for-sale
Loss realized in earnings	$	(458	)	$	(458	)	Loss on sale of securities
Total reclassified amount before tax	(458		)	(458		)	Income Before Income Taxes
Tax benefit	(124		)	(124		)	Income Tax Provision
Total reclassifications out of accumulated other comprehensive loss	$	(334	)	$	(334	)	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:



	June 30, 2019			December 31, 2018
Commercial loans
Commercial and industrial	$	110,143		$	114,382
Owner-occupied commercial real estate	83,979			87,962
Investor commercial real estate	21,179			5,391
Construction	47,849			39,916
Single tenant lease financing	1,001,196			919,440
Public finance	706,161			706,342
Healthcare finance	212,351			117,007
Total commercial loans	2,182,858			1,990,440
Consumer loans
Residential mortgage	318,678			399,898
Home equity	26,825			28,735
Other consumer	294,251			279,771
Total consumer loans	639,754			708,404
Total commercial and consumer loans	2,822,612			2,698,844
Net deferred loan origination costs and premiums and discounts on purchased loans and other ⁽¹⁾	38,544			17,384
Total loans	2,861,156			2,716,228
Allowance for loan losses	(19,976		)	(17,896		)
Net loans	$	2,841,180		$	2,698,332

⁽¹⁾ Includes carrying value adjustments of $22.2 million and $5.0 million as of June 30, 2019 and December 31, 2018, respectively, related

to interest rate swaps associated with public finance loans.

The risk characteristics of each loan portfolio segment are as follows:

Commercial and Industrial: Commercial and industrial loans’ sources of repayment are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. This portfolio segment is generally concentrated in Central Indiana and adjacent markets and the greater Phoenix, Arizona market.

Owner-Occupied Commercial Real Estate: The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property. This portfolio segment is generally concentrated in the Central Indiana and the adjacent markets and the greater Phoenix, Arizona market, and its loans are often secured by manufacturing and service facilities, as well as office buildings.

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

Construction: Construction loans are secured by land and related improvements and are made to assist in the construction of new structures, which may include commercial (retail, industrial, office, multi-family) properties or single family residential properties offered for sale by the builder. These loans generally finance a variety of project costs, including land, site preparation, architectural services, construction, closing and soft costs and interim financing needs. The cash flows of builders, while initially predictable, may fluctuate with market conditions, and the value of the collateral securing these loans may be subject to fluctuations based on general economic changes. This portfolio segment is generally concentrated in Central Indiana.

Single Tenant Lease Financing: These loans are made on a nationwide basis to property owners of real estate subject to long-term lease arrangements with single tenant operators. The real estate is typically operated by regionally, nationally or globally branded businesses. The loans are underwritten based on the financial strength of the borrower, characteristics of the real estate, cash flows generated from the lease arrangements and the financial strength of the tenant. Similar to the other loan portfolio segments, management monitors and evaluates these loans based on borrower and tenant financial performance, collateral value, industry trends and other risk grade criteria.

Public Finance: These loans are made on a nationwide basis to governmental and not-for-profit entities to provide both tax-exempt and taxable loans for a variety of purposes including: short-term cash-flow needs; debt refinancing; economic development; quality of life projects; infrastructure improvements; and equipment financing. The primary sources of repayment for public finance loans are pledged revenue sources including but not limited to: general obligations; property taxes; income taxes; tax increment revenue; utility revenue; gaming revenue; sales tax; and pledged general revenue. Certain loans may also include an additional collateral pledge of mortgaged property or a security interest in financed equipment.

Healthcare Finance: These loans are made to healthcare providers, primarily dentists, for refinancing or acquiring practices, refinancing or acquiring owner-occupied commercial real estate, and equipment purchases. The sources of repayment for these loans are primarily based on the identified cash flows of the borrower (including ongoing operations and activities conducted by the borrower, or an affiliate of the borrower, who owns the property) and secondarily on the underlying collateral provided by the borrower. This portfolio segment is generally concentrated in the Western United States with plans to continue expanding nationwide.

Residential Mortgage: With respect to residential loans that are secured by 1 to 4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.

Home Equity: Home equity loans and lines of credit are typically secured by a subordinate interest in 1 to 4 family residences. The properties securing the Company's home equity portfolio segment are generally geographically diverse, as the Company offers these products on a nationwide basis. Repayment of these loans and lines of credit is primarily dependent on the financial circumstances of the borrowers and may be impacted by changes in unemployment levels and property values on residential properties, among other economic conditions in the market.

Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans, home improvement loans and certain lines of credit. Repayment of consumer loans is primarily dependent upon the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.

Allowance for Loan Losses Methodology

Company policy is designed to maintain an adequate allowance for loan losses (“ALLL”). The portfolio is segmented by loan type, and the required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on average historical losses, adjusted for current economic factors and portfolio trends. Management believes the historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. Management adds qualitative factors for observable trends, changes in internal practices, changes in delinquencies and impairments, and external factors. Observable factors include changes in the composition and size of portfolios, as well as loan terms or concentration levels. The Company evaluates the impact of internal changes such as management and staff experience levels or modification to loan underwriting processes. Delinquency trends are scrutinized for both volume and severity of past due, nonaccrual, or classified loans, as well as any changes in the value of underlying collateral. Finally, the Company considers the effect of other external factors such as national, regional, and local economic and business conditions, as well as competitive, legal, and regulatory requirements. Loans that are considered to be impaired are evaluated to determine the need for a specific allowance by applying at least one of three methodologies: present value of future cash flows; fair value of collateral less costs to sell; or the loan’s observable market price. All troubled debt restructurings (“TDR”) are considered impaired loans. Loans evaluated for impairment are removed from other pools to prevent double-counting. Accounting Standards Codification (“ASC”) Topic 310, Receivables , requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral less costs to sell and allows existing methods for recognizing interest income.

Provision for Loan Losses

A provision for estimated losses on loans is charged to income based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full repayment may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience, and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management attempts to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations.

Policy for Charging Off Loans

The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectible within the parameters of policy. A secured loan is generally charged down to the estimated fair value of the collateral, less costs to sell, no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. A home improvement loan generally is charged off no later than when it is 90 days past due as to principal or interest.

The following tables present changes in the balance of the ALLL during the three and six months ended June 30, 2019 and 2018 .



	Three Months Ended June 30, 2019
Allowance for loan losses:	Balance, Beginning of Period		Provision (Credit) Charged to Expense			Losses Charged Off			Recoveries		Balance, End of Period
Commercial and industrial	$	1,444	$	480		$	—		$	—	$	1,924
Owner-occupied commercial real estate	847		(223		)	—			—		624
Investor commercial real estate	103		66			—			—		169
Construction	267		35			—			—		302
Single tenant lease financing	9,368		293			—			—		9,661
Public finance	1,650		113			—			—		1,763
Healthcare finance	1,731		562			—			—		2,293
Residential mortgage	1,044		(383		)	—			1		662
Home equity	49		(5		)	—			4		48
Other consumer	2,338		451			(337		)	78		2,530
Total	$	18,841	$	1,389		$	(337	)	$	83	$	19,976



	Six Months Ended June 30, 2019
Allowance for loan losses:	Balance, Beginning of Period		Provision (Credit) Charged to Expense			Losses Charged Off			Recoveries		Balance, End of Period
Commercial and industrial	$	1,479	$	557		$	(112	)	$	—	$	1,924
Owner-occupied commercial real estate	891		(267		)	—			—		624
Investor commercial real estate	61		108			—			—		169
Construction	251		51			—			—		302
Single tenant lease financing	8,827		834			—			—		9,661
Public finance	1,670		93			—			—		1,763
Healthcare finance	1,264		1,029			—			—		2,293
Residential mortgage	1,079		(419		)	—			2		662
Home equity	53		(11		)	—			6		48
Other consumer	2,321		699			(654		)	164		2,530
Total	$	17,896	$	2,674		$	(766	)	$	172	$	19,976



	Three Months Ended June 30, 2018
Allowance for loan losses:	Balance, Beginning of Period		Provision (Credit) Charged to Expense			Losses Charged Off			Recoveries		Balance, End of Period
Commercial and industrial	$	1,636	$	(275	)	$	—		$	3	$	1,364
Owner-occupied commercial real estate	861		28			—			—		889
Investor commercial real estate	71		(4		)	—			—		67
Construction	367		(72		)	—			—		295
Single tenant lease financing	8,093		201			—			—		8,294
Public finance	1,118		254			—			—		1,372
Healthcare finance	484		192			—			—		676
Residential mortgage	984		(77		)	—			2		909
Home equity	58		(7		)	—			3		54
Other consumer	1,888		427			(254		)	72		2,133
Total	$	15,560	$	667		$	(254	)	$	80	$	16,053



	Six Months Ended June 30, 2018
Allowance for loan losses:	Balance, Beginning of Period		Provision (Credit) Charged to Expense			Losses Charged Off			Recoveries		Balance, End of Period
Commercial and industrial	$	1,738	$	(377	)	$	—		$	3	$	1,364
Owner-occupied commercial real estate	803		86			—			—		889
Investor commercial real estate	85		(18		)	—			—		67
Construction	423		(128		)	—			—		295
Single tenant lease financing	7,872		422			—			—		8,294
Public finance	959		413			—			—		1,372
Healthcare finance	313		363			—			—		676
Residential mortgage	956		(41		)	(9		)	3		909
Home equity	70		(23		)	—			7		54
Other consumer	1,751		820			(551		)	113		2,133
Total	$	14,970	$	1,517		$	(560	)	$	126	$	16,053

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2019 and December 31, 2018 .



	Loans						Allowance for Loan Losses
June 30, 2019	Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance		Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance
Commercial and industrial	$	103,247	$	6,896	$	110,143	$	1,324	$	600	$	1,924
Owner-occupied commercial real estate	78,918		5,061		83,979		624		—		624
Investor commercial real estate	21,179		—		21,179		169		—		169
Construction	47,849		—		47,849		302		—		302
Single tenant lease financing	1,001,196		—		1,001,196		9,661		—		9,661
Public finance	706,161		—		706,161		1,763		—		1,763
Healthcare finance	212,351		—		212,351		2,293		—		2,293
Residential mortgage	315,179		3,499		318,678		662		—		662
Home equity	26,825		—		26,825		48		—		48
Other consumer	294,189		62		294,251		2,530		—		2,530
Total	$	2,807,094	$	15,518	$	2,822,612	$	19,376	$	600	$	19,976



	Loans						Allowance for Loan Losses
December 31, 2018	Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance		Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance
Commercial and industrial	$	108,742	$	5,640	$	114,382	$	1,479	$	—	$	1,479
Owner-occupied commercial real estate	85,653		2,309		87,962		891		—		891
Investor commercial real estate	5,391		—		5,391		61		—		61
Construction	39,916		—		39,916		251		—		251
Single tenant lease financing	919,440		—		919,440		8,827		—		8,827
Public finance	706,342		—		706,342		1,670		—		1,670
Healthcare finance	117,007		—		117,007		1,264		—		1,264
Residential mortgage	399,328		570		399,898		1,079		—		1,079
Home equity	28,680		55		28,735		53		—		53
Other consumer	279,714		57		279,771		2,321		—		2,321
Total	$	2,690,213	$	8,631	$	2,698,844	$	17,896	$	—	$	17,896

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. A description of the general characteristics of the risk grades is as follows:


•	“Pass” - Higher quality loans that do not fit any of the other categories described below.


•	“Special Mention” - Loans that possess some credit deficiency or potential weakness, which deserve close attention.


•	“Substandard” - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

•

“Doubtful” - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event that lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.


•	“Loss” - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.

Nonaccrual Loans

Any loan which becomes 90 days delinquent or for which the full collection of principal and interest may be in doubt will be considered for nonaccrual status. At the time a loan is placed on nonaccrual status, all accrued but unpaid interest will be reversed from interest income. Placing the loan on nonaccrual status does not relieve the borrower of the obligation to repay interest. A loan placed on nonaccrual status may be restored to accrual status when all delinquent principal and interest has been brought current, and the Company expects full payment of the remaining contractual principal and interest.

The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of June 30, 2019 and December 31, 2018 .



	June 30, 2019
	Pass		Special Mention		Substandard		Total
Commercial and industrial	$	102,190	$	3,869	$	4,084	$	110,143
Owner-occupied commercial real estate	75,580		5,093		3,306		83,979
Investor commercial real estate	21,179		—		—		21,179
Construction	47,849		—		—		47,849
Single tenant lease financing	995,552		5,644		—		1,001,196
Public finance	706,161		—		—		706,161
Healthcare finance	212,351		—		—		212,351
Total commercial loans	$	2,160,862	$	14,606	$	7,390	$	2,182,858



	June 30, 2019
	Performing		Nonaccrual		Total
Residential mortgage	$	315,544	$	3,134	$	318,678
Home equity	26,825		—		26,825
Other consumer	294,202		49		294,251
Total consumer loans	$	636,571	$	3,183	$	639,754



	December 31, 2018
	Pass		Special Mention		Substandard		Total
Commercial and industrial	$	107,666	$	1,076	$	5,640	$	114,382
Owner-occupied commercial real estate	81,264		4,389		2,309		87,962
Investor commercial real estate	5,391		—		—		5,391
Construction	39,916		—		—		39,916
Single tenant lease financing	913,984		5,456		—		919,440
Public finance	706,342		—		—		706,342
Healthcare finance	117,007		—		—		117,007
Total commercial loans	$	1,971,570	$	10,921	$	7,949	$	1,990,440



	December 31, 2018
	Performing		Nonaccrual		Total
Residential mortgage	$	399,723	$	175	$	399,898
Home equity	28,680		55		28,735
Other consumer	279,729		42		279,771
Total consumer loans	$	708,132	$	272	$	708,404

The following tables present the Company’s loan portfolio delinquency analysis as of June 30, 2019 and December 31, 2018 .



	June 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Non- accrual Loans		Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial	$	1,414	$	—	$	—	$	1,414	$	108,729	$	110,143	$	1,604	$	—
Owner-occupied commercial real estate	—		—		—		—		83,979		83,979		478		—
Investor commercial real estate	—		—		—		—		21,179		21,179		—		—
Construction	—		—		—		—		47,849		47,849		—		—
Single tenant lease financing	—		1,557		—		1,557		999,639		1,001,196		—		—
Public finance	—		—		—		—		706,161		706,161		—		—
Healthcare finance	—		—		—		—		212,351		212,351		—		—
Residential mortgage	—		146		3,238		3,384		315,294		318,678		3,134		121
Home equity	—		—		—		—		26,825		26,825		—		—
Other consumer	301		72		6		379		293,872		294,251		49		—
Total	$	1,715	$	1,775	$	3,244	$	6,734	$	2,815,878	$	2,822,612	$	5,265	$	121



	December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Non- accrual Loans		Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial	$	9	$	—	$	—	$	9	$	114,373	$	114,382	$	195	$	—
Owner-occupied commercial real estate	92		234		—		326		87,636		87,962		325		—
Investor commercial real estate	—		—		—		—		5,391		5,391		—		—
Construction	—		—		—		—		39,916		39,916		—		—
Single tenant lease financing	—		—		—		—		919,440		919,440		—		—
Public finance	—		—		—		—		706,342		706,342		—		—
Healthcare finance	—		—		—		—		117,007		117,007		—		—
Residential mortgage	—		3,118		98		3,216		396,682		399,898		175		97
Home equity	—		—		55		55		28,680		28,735		55		—
Other consumer	235		170		4		409		279,362		279,771		42		—
Total	$	336	$	3,522	$	157	$	4,015	$	2,694,829	$	2,698,844	$	792	$	97

Impaired Loans

A loan is designated as impaired, in accordance with the impairment accounting guidance, when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with delays generally not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans more than 90 days past due may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.

Impaired loans include nonperforming loans as well as loans modified in 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 June 30, 2019 and December 31, 2018 .



	June 30, 2019						December 31, 2018
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance
Commercial and industrial	$	5,484	$	5,496	$	—	$	5,640	$	5,652	$	—
Owner-occupied commercial real estate	5,061		5,061		—		2,309		2,309		—
Residential mortgage	3,499		3,500		—		570		570		—
Home equity	—		—		—		55		55		—
Other consumer	62		145		—		57		124		—
Total	14,106		14,202		—		8,631		8,710		—
Loans with a specific valuation allowance
Commercial and industrial	1,412		1,412		600		—		—		—
Total	1,412		1,412		600		—		—		—
Total impaired loans	$	15,518	$	15,614	$	600	$	8,631	$	8,710	$	—

The table below presents average balances and interest income recognized for impaired loans during the three and six months ended June 30, 2019 and 2018.



	Three Months Ended								Six Months Ended
	June 30, 2019				June 30, 2018				June 30, 2019				June 30, 2018
	Average Balance		Interest Income		Average Balance		Interest Income		Average Balance		Interest Income		Average Balance		Interest Income
Loans without a specific valuation allowance
Commercial and industrial	$	4,053	$	86	$	5,183	$	87	$	4,376	$	167	$	2,264	$	162
Owner-occupied commercial real estate	2,723		66		402		7		2,464		93		102		7
Residential mortgage	3,538		—		653		—		2,796		—		433		—
Home equity	—		—		83		—		21		—		42		—
Other consumer	83		—		113		—		79		—		57		—
Total	10,397		152		6,434		94		9,736		260		2,898		169
Loans with a specific valuation allowance
Commercial and industrial	353		—		—		—		177		—		—		—
Total	353		—		—		—		177		—		—		—
Total impaired loans	$	10,750	$	152	$	6,434	$	94	$	9,913	$	260	$	2,898	$	169

The Company had $0.6 million in residential mortgage other real estate owned as of June 30, 2019 and December 31, 2018 . There was one residential mortgage loan with a balance of $3.1 million in the process of foreclosure at June 30, 2019 . There were no loans in the process of foreclosure at December 31, 2018 .

Troubled Debt Restructurings

The loan portfolio includes TDRs, which are loans that have been modified to grant economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six consecutive months.

When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or using the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the

value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance.

In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability of the loan. Any loan modification is reviewed by the Company to identify whether a TDR has occurred when the Company grants a concession to the borrower that it would not otherwise consider based on economic or legal reasons related to a borrower’s financial difficulties. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status or the loan may be restructured to secure additional collateral and/or guarantees to support the debt, or a combination of the two.

There were four commercial and industrial loans classified as new TDRs during the three and six months ended June 30, 2019 with a pre-modification and post-modification outstanding recorded investment of $2.0 million . There were no loans classified as new TDRs during the three and six months ended June 30, 2018. The Company did not allocate a specific allowance for those loans as of June 30, 2019. The modifications consisted of interest-only payments for a period of time. There were no performing TDRs that had payment defaults within the twelve months following modification during the three and six months ended June 30, 2019 and 2018.

Note 5: Premises and Equipment

The following table summarizes premises and equipment at June 30, 2019 and December 31, 2018 .



(in thousands)	June 30, 2019			December 31, 2018
Land	$	2,500		$	2,500
Right of use leased asset	1,743			—
Building and improvements	8,980			6,752
Furniture and equipment	9,701			9,076
Less: accumulated depreciation	(8,519		)	(7,631		)
Total	$	14,405		$	10,697


Note 6:	Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU 2016-02 - Leases (Topic 842) and elected the optional transition method, which allows the Company to not separate non-lease components from the associated lease component if certain conditions are met. In addition, the Company elected not to adjust prior comparative periods. Refer to Note 13 for further information regarding transition guidance related to the new standard.

The Company has two operating leases that are used for general office operations with remaining lease terms of two to four years. With the adoption of ASU 2016-02, operating lease agreements are required to be recognized on the condensed consolidated balance sheets as a right-of-use (“ROU”) asset and a corresponding lease liability.

The following table shows the components of lease expense.



(in thousands)	Three Months Ended June 30,		Six Months Ended June 30,
	2019		2019
Operating lease cost	$	187	368

The following table shows supplemental cash flow information related to leases.



(in thousands)	Six Months Ended June 30,
	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	394

The following table shows the operating leases’ impact on the condensed consolidated balance sheets. The Company elected not to include short-term leases (leases with original terms of 12 months or less) or equipment leases, as those amounts are insignificant. The Company’s leases do not provide an implicit rate. The discount rate utilized to determine the present value of lease payments is the Company’s incremental borrowing rate based on the information available at the lease inception date. The incremental borrowing rate is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.



(dollars in thousands)
	June 30, 2019
Operating lease right-of-use assets	$	1,743
Operating lease liabilities	1,743

Weighted average remaining lease term (years)
Operating leases	2.8

Weighted average discount rate
Operating leases	1.9		%

The following table shows the future minimum payments of operating leases with initial or remaining terms of one year or more as of June 30, 2019.



(in thousands)
Twelve months ended June 30,
2020	$	753
2021	584
2022	226
2023	232
2024	—
Thereafter	—
Total lease payments	1,795
Less imputed interest	(68		)
Total	$	1,727

Note 7: Goodwill

As of June 30, 2019 and December 31, 2018 , the carrying amount of goodwill was $4.7 million . There have been no changes in the carrying amount of goodwill for the three months ended June 30, 2019 . Goodwill is tested for impairment on an annual basis as of August 31, or whenever events or changes in circumstances indicate the carrying amount of goodwill exceeds its implied fair value. No events or changes in circumstances have occurred since the August 31, 2018 annual impairment test that would suggest it was more likely than not goodwill impairment existed.

Note 8: Subordinated Debt

In October 2015, the Company entered into a term loan in the principal amount of $10.0 million , evidenced by a term note due 2025 (the “2025 Note”). The 2025 Note bears a fixed interest rate of 6.4375% per year, payable quarterly, and is scheduled to mature on October 1, 2025. The 2025 Note is an unsecured subordinated obligation of the Company and may be repaid, without penalty, on any interest payment date on or after October 15, 2020. The 2025 Note is intended to qualify as Tier 2 capital under regulatory guidelines.

In September 2016, the Company issued $25.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 (the “2026 Notes”) in a public offering. The 2026 Notes initially bear a fixed interest rate of 6.0% 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.

In June 2019, the Company issued $37.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering. The 2029 Notes initially bear a fixed interest rate of 6.0% per year to, but excluding, June 30, 2024, and thereafter a floating rate equal to the then-current benchmark rate (initially three-month LIBOR rate) plus 411 basis points. All interest on the 2029 Notes is payable quarterly. The 2029 Notes are scheduled to mature on June 30, 2029. The 2029 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after June 30, 2024. The 2029 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.

The following table presents the principal balance and unamortized debt issuance costs for the 2025 Note, the 2026 Notes and the 2029 Notes as of June 30, 2019 and December 31, 2018 .



	June 30, 2019					December 31, 2018
	Principal		Unamortized Debt Issuance Costs			Principal		Unamortized Debt Issuance Costs
2025 Note	10,000		(150		)	10,000		(162		)
2026 Notes	25,000		(901		)	25,000		(963		)
2029 Notes	37,000		(1,574		)	—		—
Total	$	72,000	$	(2,625	)	$	35,000	$	(1,125	)

Note 9: Benefit Plans

Employment Agreement

The Company is party to an employment agreement with its Chief Executive Officer that provides for an annual base salary and an annual bonus, if any, as determined from time to time by the Compensation Committee of our Board of Directors. The annual bonus is to be determined with reference to the achievement of annual performance objectives established by the Compensation Committee for the Chief Executive Officer and other senior officers. The agreement also provides that the Chief Executive Officer may be awarded additional compensation, benefits, or consideration as the Compensation Committee may determine.

The agreement provides for the continuation of salary and certain other benefits for a specified period of time upon termination of his employment under certain circumstances, including his resignation for “good reason” or termination by the Company without “cause” at any time or any termination of his employment for any reason within twelve months following a “change in control,” 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 $0.4 million and $0.9 million of share-based compensation expense for the three and six months ended June 30, 2019 , respectively, related to awards made under th e 2013 Plan. The Company recorded $0.3 million and $0.9 million o f share-based compensation expense for the three and six months ended June 30, 2018 , respectively, related to awards made under th e 2013 Plan.

The following table summarizes the status of the 2013 Plan awards as of June 30, 2019 , and activity for the six months ended June 30, 2019 .



	Restricted Stock Units		Weighted-Average Grant Date Fair Value Per Share		Restricted Stock Awards		Weighted-Average Grant Date Fair Value Per Share		Deferred Stock Units		Weighted-Average Grant Date Fair Value Per Share
Nonvested at December 31, 2018	75,554		$	35.34	1,666		$	24.44	—		$	—
Granted	74,493		24.62		11,742		24.62		6		22.32
Vested	(36,218	)	33.08		(7,540	)	24.58		(6	)	22.32
Forfeited	(6,790	)	29.10		—		—		—		—
Nonvested at June 30, 2019	107,039		$	29.04	5,868		$	24.62	—		$	—

At June 30, 2019 , the total unrecognized compensation cost related to nonvested awards was $ 2.8 million with a weighted-average expense recognition period of 2.1 years .

Directors Deferred Stock Plan

Until January 1, 2014, the Company had a practice of granting awards under a stock compensation plan for members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The Directors Deferred Stock Plan provided directors the option to elect to receive up to 100% of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right.

The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the six months ended June 30, 2019 .



		Deferred Stock Rights
Outstanding, beginning of period		83,521
Granted		491
Exercised		—
Outstanding, end of period		84,012

All deferred stock rights granted during the 2019 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights.

Note 10: Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurement , defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also

specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:


Level 1	Quoted prices in active markets for identical assets or liabilities


Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities


Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

Level 2 securities include U.S. Government-sponsored agencies, municipal securities, mortgage and asset-backed securities and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but also on the investment securities’ relationship to other benchmark quoted investment securities.

In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of June 30, 2019 or December 31, 2018 .

Loans Held-for-Sale (mandatory pricing agreements)

The fair value of loans held-for-sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

Interest Rate Swap Agreements

The fair value of interest rate swap agreements is estimated using current market interest rates as of the balance sheet date and calculated using discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.

Forward Contracts

The fair values of forward contracts on to-be-announced securities are determined using quoted prices in active markets or benchmarked thereto (Level 1).

Interest Rate Lock Commitments

The fair values of interest rate lock commitments (“IRLCs”) are determined using the projected sale price of individual loans based on changes in market interest rates, projected pull-through rates (the probability that an IRLC will ultimately result in an originated loan), the reduction in the value of the applicant’s option due to the passage of time, and the remaining origination costs to be incurred based on management’s estimate of market costs (Level 3).

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2019 and December 31, 2018 .



				June 30, 2019 Fair Value Measurements Using
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
U.S. Government-sponsored agencies	$	87,737		$	—		$	87,737		$	—
Municipal securities	96,988			—			96,988			—
Mortgage-backed securities	295,988			—			295,988			—
Asset-backed securities	4,928			—			4,928			—
Corporate securities	36,693			—			36,693			—
Total available-for-sale securities	522,334			—			522,334			—
Interest rate swap liabilities	(39,076		)	—			(39,076		)	—
Loans held-for-sale (mandatory pricing agreements)	30,642			—			30,642			—
Forward contracts	(549		)	(549		)	—			—
IRLCs	1,209			—			—			1,209



				December 31, 2018 Fair Value Measurements Using
	Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
U.S. Government-sponsored agencies	$	107,585		$	—		$	107,585		$	—
Municipal securities	92,506			—			92,506			—
Mortgage-backed securities	242,912			—			242,912			—
Asset-backed securities	4,859			—			4,859			—
Corporate securities	33,483			—			33,483			—
Total available-for-sale securities	481,345			—			481,345			—
Interest rate swap assets	1,579						1,579
Interest rate swap liabilities	(10,727		)	—			(10,727		)	—
Loans held-for-sale (mandatory pricing agreements)	18,328			—			18,328			—
Forward contracts	(360		)	(360		)	—			—
IRLCs	389			—			—			389

The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three and six months ended June 30, 2019 and 2018.



	Three Months Ended
	Interest Rate Lock Commitments
Balance, April 1, 2019	$	781
Total realized gains
Included in net income	428
Balance, June 30, 2019	$	1,209

Balance, April 1, 2018	$	732
Total realized losses
Included in net income	(8		)
Balance, June 30, 2018	$	724



	Six Months Ended
	Interest Rate Lock Commitments
Balance, January 1, 2019	$	389
Total realized gains
Included in net income	820
Balance, June 30, 2019	$	1,209

Balance as of January 1, 2018	$	551
Total realized gains
Included in net income	173
Balance, June 30, 2018	$	724

The following describes the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. The amount of impairment may be determined based on the fair value of the underlying collateral, less costs to sell, the estimated present value of future cash flows or the loan’s observable market price.

If the impaired loan is identified as collateral dependent, the fair value of the underlying collateral, less costs to sell, is used to measure impairment. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is not collateral dependent, the Company utilizes a discounted cash flow analysis to measure impairment.

Impaired loans with a specific valuation allowance based on the value of the underlying collateral or a discounted cash flow analysis are classified as Level 3 assets.

Other Real Estate Owned

Other real estate owned is a Level 3 asset that is adjusted to fair value less estimated selling costs, upon transfer to other real estate owned. When a current appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value as a result of known changes in the market or the collateral

and there is no observable market price, such valuation inputs result in a fair value measurement. To the extent a negotiated sales price or reduced listing price represents a significant discount to an observable market price, such valuation input would result in a fair value measurement that is also considered a Level 3 measurement.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurement falls at December 31, 2018. There were no fair value measurements of assets and liabilities recognized on a nonrecurring basis at June 30, 2019.



			December 31, 2018
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other real estate owned	$	2,065	$	—	$	—	$	2,065

Significant Unobservable (Level 3) Inputs

The following tables present quantitative information about significant unobservable inputs used in recurring and Level 3 fair value measurements other than goodwill.



	Fair Value at June 30, 2019		Valuation Technique	Significant Unobservable Inputs	Range
IRLCs	$	1,209	Discounted cash flow	Loan closing rates	35% - 100%



	Fair Value at December 31, 2018		Valuation Technique	Significant Unobservable Inputs	Range
IRLCs	$	389	Discounted cash flow	Loan closing rates	34% - 100%

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.

Cash and Cash Equivalents

For these instruments, the carrying amount is a reasonable estimate of fair value.

Interest-Bearing Time Deposits

The fair value of these financial instruments approximates carrying value.

Securities Held-to-Maturity

Fair values are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices and interest rate spreads on relevant benchmark securities.

Loans Held-for-Sale (best efforts pricing agreements)

The fair value of these loans approximates carrying value.

Loans

The fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.

Accrued Interest Receivable

The fair value of these financial instruments approximates carrying value.

Federal Home Loan Bank of Indianapolis Stock

The fair value approximates carrying value.

Deposits

The fair value of noninterest-bearing and interest-bearing demand deposits, savings and money market accounts approximates carrying value. The fair value of fixed maturity certificates of deposit and brokered deposits are estimated using rates currently offered for deposits of similar remaining maturities.

Advances from Federal Home Loan Bank

The fair value of fixed rate advances is estimated using rates currently available for advances with similar remaining maturities. The carrying value of variable rate advances approximates fair value.

Subordinated Debt

The fair value of the Company’s publicly traded subordinated debt is obtained from quoted market prices. The fair value of the Company’s remaining subordinated debt is estimated using discounted cash flow analysis, based on current borrowing rates for similar types of debt instruments.

Accrued Interest Payable

The fair value of these financial instruments approximates carrying value.

Commitments

The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at each of June 30, 2019 and December 31, 2018 .

The following tables present the carrying value and estimated fair value of all financial assets and liabilities at June 30, 2019 and December 31, 2018 .



	June 30, 2019 Fair Value Measurements Using
	Carrying Amount		Fair Value		Quoted Prices In Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	348,298	$	348,298	$	348,298	$	—	$	—
Securities held-to-maturity	35,826		36,288		—		36,288		—
Net loans	2,841,180		2,820,278		—		—		2,820,278
Accrued interest receivable	18,887		18,887		18,887		—		—
Federal Home Loan Bank of Indianapolis stock	25,650		25,650		—		25,650		—
Deposits	3,006,263		3,046,347		810,003		—		2,236,344
Advances from Federal Home Loan Bank	514,906		522,132		—		522,132		—
Subordinated debt	69,375		74,895		64,670		10,225		—
Accrued interest payable	2,930		2,930		2,930		—		—



	December 31, 2018 Fair Value Measurements Using
	Carrying Amount		Fair Value		Quoted Prices In Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	188,712	$	188,712	$	188,712	$	—	$	—
Securities held-to-maturity	22,750		22,418		—		22,418		—
Net loans	2,698,332		2,646,060		—		—		2,646,060
Accrued interest receivable	16,822		16,822		16,822		—		—
Federal Home Loan Bank of Indianapolis stock	23,625		23,625		—		23,625		—
Deposits	2,671,351		2,687,666		731,378		—		1,956,288
Advances from Federal Home Loan Bank	525,153		520,120		—		520,120		—
Subordinated debt	33,875		34,490		24,250		10,240		—
Accrued interest payable	1,108		1,108		1,108		—		—

Note 11: Mortgage Banking Activities

The Company’s residential real estate lending business originates mortgage loans for customers and typically sells a majority of the originated loans into the secondary market. For most of the mortgages it sells in the secondary market, the Company hedges its mortgage banking pipeline by entering into forward contracts for the future delivery of mortgage loans to third party investors and entering into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. To facilitate the hedging of the loans, the Company has elected the fair value option for loans originated and intended for sale in the secondary market under mandatory pricing agreements. Changes in the fair value of loans held-for-sale, IRLCs and forward contracts are recorded in the mortgage banking activities line item within noninterest income. Refer to Note 12 for further information on derivative financial instruments.

During the three months ended June 30, 2019 and 2018 , the Company originated mortgage loans held-for-sale of $145.0 million and $95.9 million , respectively, and sold $130.4 million and $93.9 million of mortgage loans, respectively, into the secondary market. During the six months ended June 30, 2019 and 2018 , the Company originated mortgage loans held-for-sale of $220.3 million and $178.4 million , respectively, and sold $211.4 million and $184.8 million of mortgage loans, respectively, into the secondary market.

The following table presents the components of income from mortgage banking activities for the three and six months ended June 30, 2019 and 2018 .



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Gain on loans sold	$	1,825		$	1,493		$	3,298		$	3,165
(Loss) gain resulting from the change in fair value of loans held-for-sale	(170		)	151			(352		)	(82		)
Gain (loss) resulting from the change in fair value of derivatives	1,009			(47		)	1,335			92
Net revenue from mortgage banking activities	$	2,664		$	1,597		$	4,281		$	3,175

Fluctuations in interest rates and changes in IRLC and loan volume within the mortgage banking pipeline may cause volatility in the fair value of loans held-for-sale and the fair value of derivatives used to hedge the mortgage banking pipeline.

Note 12: Derivative Financial Instruments

The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. Additionally, the Company enters into forward contracts for the future delivery of mortgage loans to third-party investors and enters into IRLCs with potential borrowers to fund specific mortgage loans that will be sold into the secondary market. The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.

The Company entered into various interest rate swap agreements designated and qualifying as accounting hedges during the reported periods. Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses, less any ineffectiveness, in the condensed consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.

The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets.

The following table presents amounts that were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of June 30, 2019 and December 31, 2018.



	Carrying amount of the hedged asset				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets
Line item in the condensed consolidated balance sheets in which the hedged item is included	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018
Loans	$	487,002	$	474,233	$	22,177	$	4,961
Securities available-for-sale ⁽¹⁾	157,867		159,188		2,940		(229		)

⁽¹⁾ These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item

is the last layer expected to be remaining at the end of the hedging relationship. At both June 30, 2019 and December 31, 2018, the amounts of the designated hedged items were $88.2 million .

The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company’s asset/liability management activities at June 30, 2019 and December 31, 2018, identified by the underlying interest rate-sensitive instruments.



June 30, 2019	Notional		Weighted Average Remaining Maturity				Weighted-Average Ratio
Instruments Associated With	Value		(years)	Fair Value			Receive	Pay
Loans	$	435,532	6.0	$	(22,319	)	3-month LIBOR	2.86	%
Securities available-for-sale	88,200		4.6	(2,936		)	3-month LIBOR	2.54	%
Total at June 30, 2019	$	523,732	5.8	$	(25,255	)	3-month LIBOR	2.80	%



December 31, 2018	Notional		Weighted Average Remaining Maturity				Weighted-Average Ratio
Instruments Associated With	Value		(years)	Fair Value			Receive	Pay
Loans	$	435,926	6.5	$	(5,025	)	3-month LIBOR	2.86	%
Securities available-for-sale	88,200		5.1	235			3-month LIBOR	2.54	%
Total at December 31, 2018	$	524,126	6.3	$	(4,790	)	3-month LIBOR	2.80	%

The following table presents a summary of interest rate swap derivatives designated as cash flow accounting hedges of variable-rate liabilities used in the Company’s asset/liability management activities at June 30, 2019 and December 31, 2018.



June 30, 2019	Notional		Weighted Average Remaining Maturity				Weighted-Average Ratio
Cash Flow Hedges	Value		(years)	Fair Value			Receive	Pay
Interest rate swaps	$	110,000	7.8	$	(4,679	)	3-month LIBOR	2.88	%
Interest rate swaps	100,000		4.7	(3,251		)	1-month LIBOR	2.88	%



December 31, 2018	Notional		Weighted Average Remaining Maturity				Weighted-Average Ratio
Cash Flow Hedges	Value		(years)	Fair Value			Receive	Pay
Interest rate swaps	$	110,000	8.1	$	(2,293	)	3-month LIBOR	2.88	%
Interest rate swaps	100,000		5.0	(2,065		)	1-month LIBOR	2.88	%

These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Company pledged $43.2 million and $7.0 million of cash collateral to counterparties as security for its obligations related to these interest rate swap transactions at June 30, 2019 and December 31, 2018, respectively. Collateral posted and received is dependent on the market valuation of the underlying hedges.

The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at June 30, 2019 and December 31, 2018.



	June 30, 2019					December 31, 2018
	Notional Amount		Fair Value			Notional Amount		Fair Value
Asset Derivatives
Derivatives designated as hedging instruments
Interest rate swaps associated with loans	$	—	$	—		$	91,135	$	986
Interest rate swaps associated with securities available-for-sale	—		—			50,000		593
Derivatives not designated as hedging instruments
IRLCs	62,555		1,209			15,136		389
Total contracts	$	62,555	$	1,209		$	156,271	$	1,968
Liability Derivatives
Derivatives designated as hedging instruments
Interest rate swaps associated with loans	$	435,532	$	(22,319	)	$	344,791	$	(6,011	)
Interest rate swaps associated with securities available-for-sale	88,200		(2,936		)	38,200		(358		)
Interest rate swaps associated with liabilities	210,000		(13,822		)	210,000		(4,358		)
Derivatives not designated as hedging instruments
Forward contracts	101,000		(549		)	32,500		(360		)
Total contracts	$	834,732	$	(39,626	)	$	625,491	$	(11,087	)

The fair value of interest rate swaps was estimated using a discounted cash flow method that incorporates current market interest rates as of the balance sheet date. Fair values of IRLCs and forward contracts were estimated using changes in mortgage interest rates from the date the Company entered into the IRLC and the balance sheet date.

The following table presents the effects of the Company’s cash flow hedge relationships on the condensed consolidated statements of comprehensive income during the three and six months ended June 30, 2019 and 2018.



	Amount of Loss Recognized in Other Comprehensive Income in the Three Months Ended						Amount of Loss Recognized in Other Comprehensive Income in the Six Months Ended
	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Interest rate swap agreements	$	(5,892	)	$	(958	)	$	(9,464	)	$	(958	)

The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three and six months ended June 30, 2019 and 2018 .



	Amount of Gain / (Loss) Recognized in the Three Months Ended						Amount of gain / (loss) recognized in the Six Months Ended
	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Asset Derivatives
Derivatives not designated as hedging instruments
IRLCs	$	428		$	(8	)	$	820		$	173
Liability Derivatives
Derivatives not designated as hedging instruments
Forward contracts	$	(122	)	$	(39	)	$	(189	)	$	(81	)

The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of income during the three and six months ended June 30, 2019 and 2018.



Line item in the condensed consolidated statements of income	Three Months Ended						Six Months Ended
	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Interest income
Loans	$	(285	)	$	17		$	(264	)	$	17
Securities - taxable	(10		)	(46		)	(17		)	(76		)
Securities - non-taxable	27			4			72			18
Total interest income	(268		)	(25		)	(209		)	(41		)
Interest expense
Deposits	104			—			194			—
Other borrowed funds	79			15			113			15
Total interest expense	183			15			307			15
Net interest income	$	(451	)	$	(40	)	$	(516	)	$	(56	)

Note 13: Recent Accounting Pronouncements

ASU 2016-02 - Leases (Topic 842) (February 2016)

In February 2016, the FASB amended its standards with respect to the accounting for leases. This ASU replaces all current GAAP guidance on this topic and requires that an operating lease be recognized by the lessee on the balance sheet as a “right-of-use” asset along with a corresponding liability representing the rent obligation. Key aspects of current lessor accounting remain unchanged from existing guidance. The amended standard has resulted in an increase to assets and liabilities recognized and, therefore, increased risk-weighted assets for regulatory capital purposes.

In July 2018, the FASB issued ASU 2018-10 - Codification Improvements to Topic 842 , Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements . ASU 2018-11 allows entities adopting ASU 2016-02 to choose an additional (and optional) transition method, under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company elected the optional transition method permitted by ASU 2018-11, which allowed the Company to recognize and measure leases that exist at the application date. Under this method, an entity must recognize and measure leases that exist at the application date and prior comparative periods are not adjusted.

The new ASU provides a number of optional practical expedients in transition. The Company has elected the practical expedients that allowed the Company to retain the classifications of existing leases, rather than re-assessing if existing leases have initial direct costs, and to use hindsight when determining the lease term and assessment of impairment. The Company also elected a practical expedient to not assess whether existing or expired land easements that were not previously accounted for as leases under ASC Topic 840 contain a lease.

The Company adopted the guidance on January 1, 2019 using the optional transition method and the adoption of the guidance did not have a material impact on the condensed consolidated financial statements. As a result, the Company recognized a $1.9 million increase in assets and liabilities on the condensed consolidated balance sheets. Refer to Note 6 for additional disclosure information.

In March 2019, the FASB issued ASU 2019-01 - Leases (Topic 842): Codification Improvements . This ASU (1) states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there is not a significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC Topic 942, such as the Company, must classify principal payments received from sales-type and direct financing leases in investing activities in the statements of cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of ASU 2016-02, the Company elected to early adopt ASU 2019-01 on January 1, 2019. The adoption of the guidance did not have a material impact on the condensed consolidated financial statements.

ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (June 2016)

The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The amendments affect entities holding financial assets that are not accounted for at fair value through net income. The amendments affect loans, debt securities, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this update affect an entity to varying degrees depending on the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. There is diversity in practice in applying the incurred loss methodology, which means that before transition some entities may be more aligned under current GAAP than others to the new measure of expected credit losses. The following describes the main provisions of this update.

• Assets Measured at Amortized Cost: The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The statements of income reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increase or decrease of credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances.

• Available-for-Sale Debt Securities: Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available-for-sale is premised on an investment strategy that recognizes that the investment could be sold at fair value if cash collection would result in the realization of an amount less than fair value.

• In May 2019, the FASB issued ASU 2019-05 - Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief . This ASU allows an option for preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. This increases the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially decreasing costs for financial statement preparers while providing more useful information to investors and other users.

For public business entities that are SEC filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may early adopt the amendments in this update as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an OTTI had been recognized before the effective date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the effective date of this update.

The Company does not expect to early adopt and is currently evaluating the impact of the amendments on the Company’s condensed consolidated financial statements. The Company currently cannot determine or reasonably quantify the impact of the adoption of the amendments due to the complexity and extensive changes. The Company intends to develop processes and procedures this year to ensure it is fully compliant with the amendments at the adoption date. The Company has formed an implementation committee and has engaged a third-party consultant to assist in developing CECL models using appropriate methodologies.

ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (August 2018)

The amendments in this update modify the disclosure requirements on fair value measurements in ASC Topic 820. This ASU eliminates the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. In addition, this ASU requires entities that calculate net asset value to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly. This ASU also adds new requirements, which include the disclosure of the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the condensed consolidated financial statements.

ASU 2018-16 - Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (October 2018)

The amendments in this ASU allow all entities that elect to apply hedge accounting to benchmark interest rate hedges under ASC Topic 815, Derivatives and Hedging , to use the OIS rate based on SOFR as a benchmark interest rate, in addition to the four eligible benchmark interest rates. The Company adopted this ASU effective December 31, 2018 and it did not have a material impact on the condensed consolidated financial statements.

ASU 2019-04 - Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (April 2019)

The amendments in this ASU clarify or correct the guidance in these Topics. With respect to Topic 326, ASU 2019-04 addresses a number of issues as it relates to the CECL standard including consideration of accrued interest, recoveries, variable-rate financial instruments, prepayments, extension and renewal options, among other things, in the measurement of expected credit losses. The amendments to Topic 326 has the same effective dates as ASU 2016-13 and the Company is currently evaluating the potential impact of these amendments on the condensed consolidated financial statements. With respect to Topic 815, ASU 2019-04 clarifies issues related to partial-term hedges, hedged debt securities, and transitional from a quantitative method of assessing hedge effectiveness to a more simplified method. With respect to Topic 825, 2019-04 addresses the scope of the guidance, the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements, and which equity securities have to be remeasured at historical exchanges rates. The amendments to Topic 825 are effective for interim and annual reporting periods beginning after December 15, 2019 and are not expected to have a material impact on the condensed consolidated financial statements.


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, 2018 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 primary 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.

The Bank has three wholly-owned subsidiaries. First Internet Public Finance Corp. provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities. JKH Realty Services, LLC, manages other real estate owned (“OREO”) properties as needed. SPF15, Inc. is a real estate holding company.

We offer a wide range of commercial, small business, consumer and municipal banking products and services. We conduct our consumer and small business deposit operations primarily through online channels on a nationwide basis and have no traditional branch offices. Our residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending. Our consumer lending products are primarily originated on a nationwide basis over the Internet, as well as through relationships with dealerships and financing partners.

Our commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking, public finance, healthcare finance and commercial deposits and treasury management. Through our CRE team, we offer single tenant lease financing on a nationwide basis in addition to traditional investor CRE and construction loans primarily within Central Indiana and adjacent markets. To meet the needs of commercial borrowers and depositors located primarily in Central Indiana, Phoenix, Arizona and adjacent markets, our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards. Additionally, we have begun adding experienced personnel to build out our capabilities in small business lending and U.S. government guaranteed lending programs. Currently, these activities are part of our C&I banking team, but we have plans to continue adding resources in this area in order to originate U.S. government guaranteed loans on a nationwide basis. Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis. Our Healthcare finance team was established in conjunction with our strategic partnership with Lendeavor, Inc., a San Francisco-based technology-enabled lender to healthcare practices, and provides lending for healthcare practice finance or acquisition, acquiring or refinancing owner-occupied CRE and equipment purchases. This portfolio segment is generally concentrated in the Western United States with plans to continue expanding nationwide. Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships.

Results of Operations

The following table presents a summary of the Company’s financial performance for the last five completed fiscal quarters and the six months ended June 30, 2019 and 2018.



(dollars in thousands except for per share data)	Three Months Ended															Six Months Ended
(dollars in thousands except for per share data)	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			June 30, 2019			June 30, 2018
Income Statement Summary:
Net interest income	$	16,105		$	16,244		$	15,421		$	15,970		$	15,461		$	32,349		$	30,876
Provision for loan losses	1,389			1,285			1,487			888			667			2,674			1,517
Noninterest income	3,454			2,372			2,047			1,994			2,177			5,826			4,719
Noninterest expense	11,709			11,109			12,739			10,045			10,182			22,818			20,399
Income tax provision (benefit)	340			526			(334		)	743			781			866			1,643
Net income	$	6,121		$	5,696		$	3,576		$	6,288		$	6,008		$	11,817		$	12,036
Per Share Data:
Earnings per share - basic	$	0.60		$	0.56		$	0.35		$	0.61		$	0.67		$	1.16		$	1.38
Earnings per share - diluted	$	0.60		$	0.56		$	0.35		$	0.61		$	0.67		$	1.16		$	1.38
Dividends declared per share	$	0.06		$	0.06		$	0.06		$	0.06		$	0.06		$	0.12		$	0.12
Book value per common share	$	29.56		$	29.03		$	28.39		$	28.26		$	27.71		$	29.56		$	27.71
Tangible book value per common share ¹	$	29.10		$	28.57		$	27.93		$	27.80		$	27.25		$	29.10		$	27.25
Common shares outstanding	10,016,458			10,128,587			10,170,778			10,181,675			10,181,675			10,016,458			10,181,675
Average common shares outstanding:
Basic	10,148,285			10,217,637			10,263,086			10,261,967			8,909,913			10,182,770			8,705,689
Diluted	10,148,285			10,230,531			10,275,040			10,273,766			8,919,460			10,186,833			8,731,331
Dividend payout ratio ²	10.00		%	10.71		%	17.14		%	9.84		%	8.96		%	10.34		%	8.70		%
Performance Ratios:
Return on average assets	0.65		%	0.64		%	0.43		%	0.79		%	0.82		%	0.64		%	0.84		%
Return on average shareholders’ equity	8.26		%	7.91		%	4.89		%	8.75		%	10.11		%	8.09		%	10.51		%
Return on average tangible common equity ¹	8.39		%	8.04		%	4.98		%	8.89		%	10.31		%	8.22		%	10.73		%
Net interest margin	1.73		%	1.86		%	1.89		%	2.06		%	2.17		%	1.79		%	2.22		%
Net interest margin - FTE ^1,3	1.91		%	2.04		%	2.07		%	2.23		%	2.33		%	1.97		%	2.37		%
Noninterest expense to average assets	1.23		%	1.24		%	1.52		%	1.27		%	1.40		%	1.55		%	1.87		%
Capital Ratios:
Total shareholders’ equity to assets	7.48		%	8.01		%	8.15		%	8.98		%	9.05		%	7.48		%	9.05		%
Tangible common equity to tangible assets ratio ¹	7.37		%	7.89		%	8.03		%	8.85		%	8.92		%	7.37		%	8.92		%
Tier 1 leverage ratio	8.06		%	8.34		%	9.00		%	9.40		%	9.93		%	8.06		%	9.93		%
Common equity tier 1 capital ratio	11.08		%	11.66		%	12.39		%	13.14		%	13.54		%	11.08		%	13.54		%
Tier 1 capital ratio	11.08		%	11.66		%	12.39		%	13.14		%	13.54		%	11.08		%	13.54		%
Total risk-based capital ratio	14.31		%	13.68		%	14.53		%	15.38		%	15.85		%	14.31		%	15.85		%

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.

² Dividends per share divided by diluted earnings per share.

³ On a fully-taxable equivalent (“FTE”) basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis as these measures provide useful information to make peer comparisons.

During the second quarter 2019 , net income was $6.1 million , or $0.60 per diluted share, compared to the second quarter 2018 net income of $6.0 million , or $0.67 per diluted share, representing an increase in net income of $0.1 million , or 1.9% . During the six months ended June 30, 2019 , net income was $11.8 million , or $1.16 per diluted share, compared to the six months ended June 30, 2018 net income of $12.0 million , or $1.38 per diluted share, representing a decrease in net income of $0.2 million , or 1.8% . The comparability of diluted earnings per share between the second quarter 2019 and the second quarter 2018 , as well as the six months ended June 30, 2019 and June 30, 2018, is impacted by the effect on average diluted shares outstanding resulting from the Company’s issuance of 1,730,750 shares of common stock through an underwritten public offering in June 2018, partially offset by repurchase activity.

The $0.1 million increase in net income in the second quarter 2019 compared to the second quarter 2018 was due primarily to an increase of $1.3 million , or 58.7% , in noninterest income , an increase of $0.6 million , or 4.2% , in net interest income , and a decrease of $0.4 million , or 56.5% , in income tax expense , partially offset by a $1.5 million , or 15.0% , increase in noninterest expense and a $0.7 million , or 108.2% , increase in provision for loan losses .

The $0.2 million decrease in net income in the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was due primarily to a $2.4 million , or 11.9% , increase in noninterest expense and a $1.2 million , or 76.3% , increase in provision for loan losses , partially offset by a $1.5 million , or 4.8% , increase in net interest income , a $1.1 million , or 23.5% , increase in noninterest income , and a $0.8 million , or 47.3% , decrease in income tax expense .

During the second quarter 2019 , return on average assets (“ROAA”) and return on average shareholders’ equity (“ROAE”) were 0.65% and 8.26% , respectively, compared to 0.82% and 10.11% , respectively, for the second quarter 2018 . During the six months ended June 30, 2019 , ROAA and ROAE were 0.64% and 8.09% , respectively, compared to 0.84% and 10.51% , respectively, for the six months ended June 30, 2018 . The decrease in ROAA for both the three and six months ended June 30, 2019 was due primarily to the Company’s growth in average assets. The decrease in ROAE during the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018 was mainly the result of the Company’s growth in average shareholders’ equity. The increase in average shareholders’ equity was due primarily to the equity offering completed in June 2018, which resulted in net proceeds to the Company of $54.3 million.

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 except for net interest margin - FTE, as discussed below. Balances are based on the average of daily balances. Nonaccrual loans are included in average loan balances.



(dollars in thousands)	Three Months Ended
	June 30, 2019							March 31, 2019							June 30, 2018
	Average Balance			Interest /Dividends		Yield /Cost		Average Balance			Interest /Dividends		Yield /Cost		Average Balance			Interest /Dividends		Yield /Cost
Assets
Interest-earning assets
Loans, including loans held-for-sale	$	2,916,076		$	30,842	4.24	%	$	2,774,852		$	29,218	4.27	%	$	2,295,970		$	23,699	4.14	%
Securities - taxable	460,816			3,540		3.08	%	429,020			3,324		3.14	%	386,207			2,556		2.65	%
Securities - non-taxable	97,536			668		2.75	%	94,245			684		2.94	%	94,506			700		2.97	%
Other earning assets	248,996			1,794		2.89	%	246,732			1,773		2.91	%	79,346			461		2.33	%
Total interest-earning assets	3,723,424			36,844		3.97	%	3,544,849			34,999		4.00	%	2,856,029			27,416		3.85	%

Allowance for loan losses	(19,275		)					(18,229		)					(15,782		)
Noninterest-earning assets	100,872							100,888							81,293
Total assets	$	3,805,021						$	3,627,508						$	2,921,540

Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits	$	117,665		$	214	0.73	%	$	109,453		$	212	0.79	%	$	93,599		$	145	0.62	%
Regular savings accounts	37,507			106		1.13	%	38,853			108		1.13	%	55,273			158		1.15	%
Money market accounts	592,106			2,995		2.03	%	563,106			2,752		1.98	%	571,398			2,130		1.50	%
Certificates and brokered deposits	2,131,729			13,832		2.60	%	2,017,262			12,314		2.48	%	1,416,775			6,793		1.92	%
Total interest-bearing deposits	2,879,007			17,147		2.39	%	2,728,674			15,386		2.29	%	2,137,045			9,226		1.73	%
Other borrowed funds	548,932			3,592		2.62	%	540,705			3,369		2.53	%	492,068			2,729		2.22	%
Total interest-bearing liabilities	3,427,939			20,739		2.43	%	3,269,379			18,755		2.33	%	2,629,113			11,955		1.82	%
Noninterest-bearing deposits	42,566							42,551							44,524
Other noninterest-bearing liabilities	37,368							23,695							9,438
Total liabilities	3,507,873							3,335,625							2,683,075

Shareholders’ equity	297,148							291,883							238,465
Total liabilities and shareholders’ equity	$	3,805,021						$	3,627,508						$	2,921,540

Net interest income				$	16,105						$	16,244						$	15,461

Interest rate spread ¹						1.54%							1.67	%						2.03	%
Net interest margin ²						1.73%							1.86	%						2.17	%
Net interest margin - FTE ³						1.91%							2.04	%						2.33	%

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).

³ On an FTE basis assuming a 21% tax rate. Net interest income is adjusted to reflect income from assets such as municipal loans and securities that are exempt from Federal income taxes. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis as these measures provide useful information to make peer comparisons. Net interest margin - FTE 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.



(dollars in thousands)	Six Months Ended
	June 30, 2019							June 30, 2018
	Average Balance			Interest /Dividends		Yield /Cost		Average Balance			Interest /Dividends		Yield /Cost
Assets
Interest-earning assets
Loans, including loans held-for-sale	$	2,845,854		$	60,060	4.26	%	$	2,234,706		$	45,814	4.13	%
Securities - taxable	445,006			6,864		3.11	%	387,818			5,044		2.62	%
Securities - non-taxable	95,899			1,352		2.84	%	95,113			1,411		2.99	%
Other earning assets	247,871			3,567		2.90	%	91,946			1,126		2.47	%
Total interest-earning assets	3,634,630			71,843		3.99	%	2,809,583			53,395		3.83	%

Allowance for loan losses	(18,755		)					(15,495		)
Noninterest-earning assets	100,880							78,847
Total assets	$	3,716,755						$	2,872,935

Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits	$	113,582		$	427	0.76	%	$	92,323		$	268	0.59	%
Regular savings accounts	38,177			213		1.13	%	55,611			316		1.15	%
Money market accounts	577,686			5,747		2.01	%	566,897			4,022		1.43	%
Certificates and brokered deposits	2,074,812			26,146		2.54	%	1,406,326			12,890		1.85	%
Total interest-bearing deposits	2,804,257			32,533		2.34	%	2,121,157			17,496		1.66	%
Other borrowed funds	544,841			6,961		2.58	%	467,157			5,023		2.17	%
Total interest-bearing liabilities	3,349,098			39,494		2.38	%	2,588,314			22,519		1.75	%
Noninterest-bearing deposits	42,558							44,252
Other noninterest-bearing liabilities	30,569							9,529
Total liabilities	3,422,225							2,642,095

Shareholders’ equity	294,530							230,840
Total liabilities and shareholders’ equity	$	3,716,755						$	2,872,935

Net interest income				$	32,349						$	30,876

Interest rate spread ¹						1.61	%						2.08	%
Net interest margin ²						1.79	%						2.22	%
Net interest margin - FTE ³						1.97	%						2.37	%

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).

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.



(dollars in thousands)	Three Months Ended June 30, 2019 vs. March 31, 2019 Due to Changes in								Three Months Ended June 30, 2019 vs. June 30, 2018 Due to Changes in								Six Months Ended June 30, 2019 vs. June 30, 2018 Due to Changes in
	Volume		Rate			Net			Volume		Rate			Net			Volume		Rate			Net
Interest income
Loans, including loans held-for-sale	$	2,889	$	(1,265	)	$	1,624		$	6,557	$	586		$	7,143		$	12,776	$	1,470		$	14,246
Securities – taxable	581		(365		)	216			535		449			984			802		1,018			1,820
Securities – non-taxable	120		(136		)	(16		)	116		(148		)	(32		)	33		(92		)	(59		)
Other earning assets	68		(47		)	21			1,198		135			1,333			2,214		227			2,441
Total	3,658		(1,813		)	1,845			8,406		1,022			9,428			15,825		2,623			18,448

Interest expense
Interest-bearing deposits	982		779			1,761			3,774		4,147			7,921			6,618		8,419			15,037
Other borrowed funds	67		156			223			337		526			863			907		1,031			1,938
Total	1,049		935			1,984			4,111		4,673			8,784			7,525		9,450			16,975

Increase (decrease) in net interest income	$	2,609	$	(2,748	)	$	(139	)	$	4,295	$	(3,651	)	$	644		$	8,300	$	(6,827	)	$	1,473

Net interest income for the second quarter 2019 was $16.1 million , an increase of $0.6 million , or 4.2% , compared to $15.5 million for the second quarter 2018 . The increase in net interest income was the result of a $9.4 million , or 34.4% , increase in total interest income to $36.8 million for the second quarter 2019 from $27.4 million for the second quarter 2018 . The increase in total interest income was partially offset by an $8.8 million , or 73.5% , increase in total interest expense to $20.7 million for the second quarter 2019 from $12.0 million for the second quarter 2018 .

Net interest income for the six months ended June 30, 2019 was $32.3 million , an increase of $1.5 million , or 4.8% , compared to $30.9 million for the six months ended June 30, 2018 . The increase in net interest income was the result of an $18.4 million , or 34.6% , increase in total interest income to $71.8 million for the six months ended June 30, 2019 from $53.4 million for the six months ended June 30, 2018 . The increase in total interest income was partially offset by a $17.0 million , or 75.4% , increase in total interest expense to $39.5 million for the six months ended June 30, 2019 from $22.5 million for the six months ended June 30, 2018 .

The increase in total interest income for the second quarter 2019 compared to the second quarter 2018 was due primarily to an increase in interest earned on loans resulting from an increase of $620.1 million , or 27.0% , in the average balance of loans, including loans held-for-sale and an increase of 10 basis points (“bps”) in the yield on loans, including loans held-for-sale. The increase in average loan balances was driven by growth in the single tenant lease financing, public finance, healthcare finance and consumer loan portfolios. All loan portfolios experienced an increase in yields, which drove the overall increase in the yield earned on loans. The average balance of securities increased $77.6 million , or 16.2% , and the yield earned on the securities portfolio increased 30 bps for the second quarter 2019 compared to the second quarter 2018 . The increase in yield is due primarily to recent purchases of securities producing higher yields as well as an increase in yield on variable rate securities from second quarter 2018 to the second quarter 2019. Additionally, the average balance of other earning assets increased $169.7 million, or 213.8%, and the yield earned on these assets increased 56 bps for the second quarter 2019 compared to the second quarter 2018. The increase in the average balance of other earning assets was due to the Company carrying higher cash balances for balance sheet liquidity purposes and the increase in the yield was due to higher short-term market interest rates, as compared to the second quarter 2018. During the second quarter 2019, however, both short- and long-term market interest rates declined. Should these market interest rates continue to decline, yields on interest-earning assets may be negatively impacted.

The increase in total interest income for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was due primarily to an increase in interest earned on loans resulting from an increase of $611.1 million , or 27.3% , in the average balance of loans, including loans held-for-sale, as well as an increase of 13 bps in the yield on loans, including loans held-for-sale. All loan portfolios experienced an increase in yields, which drove the overall increase in the yield earned on loans. In addition, the average balance of securities increased $58.0 million , or 12.0% , and the yield earned on the securities portfolio

increased 36 bps for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 due primarily to purchases of securities producing higher yields as well as an increase in yield on variable rate securities.

The increase in total interest expense for the second quarter 2019 compared to the second quarter 2018 was driven primarily by an increase of $742.0 million , or 34.7% , in the average balance of interest-bearing deposits for the second quarter 2019 compared to the second quarter 2018 , as well as a 66 bp increase in the cost of funds related to interest-bearing deposits. The increase in the cost of interest-bearing deposits was due primarily to a $715.0 million, or 50.5%, increase in average certificates and brokered deposit balances and a 68 bp increase in the related costs of those deposits. An increase in market interest rates and an increase in deposit competition during the second half of 2018 contributed to increased costs associated with certificates of deposits in the second quarter 2019 compared to the second quarter 2018. While rates paid on new certificates of deposits production peaked in the first quarter 2019 and have declined since then, new production during the second quarter 2019 continued to exceed the costs of maturing certificates of deposits, which led to an increase in the overall cost associated with these deposits. Additionally, the increase in the cost of interest-bearing deposits was impacted by a 54 bp increase in the cost of funds related to money market deposits. The increase in the costs of funds related to money market accounts and certificates and brokered deposits was due primarily to increases in interest rates, as the Federal Reserve increased its benchmark Fed Funds target rate by 50 bps from June 30, 2018 through June 30, 2019. Additionally, during mid-to-late 2018, the Company initiated a liability hedging strategy using pay fixed/receive variable interest rate swaps to extend the duration of brokered variable rate money market deposits to increase asset sensitivity, reduce long-term interest rate risk and reduce volatility in total shareholders’ equity due to the impact of changes in interest rates on other comprehensive income (loss). The resulting long-term funding strategy also contributed to the increase in cost of deposit funding.

Interest expense related to other borrowed funds also contributed to the increase in total interest expense due to a $56.9 million , or 11.6% , increase in the average balance of other borrowed funds for the second quarter 2019 compared to the second quarter 2018 . The increase in the interest expense of other borrowed funds was due primarily to the cost of funds related to Federal Home Loan Bank (“FHLB”) advances increasing 44 bps. Similar to the brokered deposit liability hedging strategy described above, the cost of FHLB advances increased as the Company also employed a similar hedging strategy using short-term FHLB advances to increase asset sensitivity and reduce long-term interest rate risk. In addition, the average balance of other borrowed funds increased due to the issuance of the 2029 Notes in June 2019, which currently bear a fixed interest rate of 6.0% per year. In future periods, interest expense will reflect a full quarter’s impact of the 2029 Notes.

The increase in total interest expense was driven primarily by an increase of $683.1 million , or 32.2% , in the average balance of interest-bearing deposits for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 , as well as a 68 bp increase in the cost of funds related to interest-bearing deposits. The increase in the cost of interest-bearing deposits was due primarily to a $668.5 million, or 47.5%, increase in average certificates of deposits balances and an 69-bp increase in the related cost of those deposits. Interest expense related to other borrowed funds also contributed to the increase in total interest expense due to a $77.7 million , or 16.6% , increase in the average balance of other borrowed funds for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 as well as an increase of 41 bps in the cost of other borrowed funds. The average balance of other borrowed funds increased due primarily to the average balance of Federal Home Loan Bank advances, which increased $76.7 million, or 17.3%, compared to the six months ended June 30, 2018 , as the Company used FHLB advances to supplement deposit growth and to manage interest rate risk. In addition, the average balance of other borrowed funds increased due to the issuance of the 2029 Notes in June 2019, which increased interest expense compared to the six months ended June 30, 2018.

Net interest margin (“NIM”) was 1.73% for the second quarter 2019 compared to 2.17% for the second quarter 2018 . The decrease in NIM for the second quarter 2019 compared to the second quarter 2018 was driven primarily by an increase of 61 bps in the cost of interest-bearing liabilities, partially offset by an increase of 12 bps in the yield earned on interest-earning assets. On a fully-taxable equivalent basis, NIM was 1.91% for the second quarter 2019 compared to 2.33% for the second quarter 2018 .

NIM was 1.79% for the six months ended June 30, 2019 compared to 2.22% for the six months ended June 30, 2018 . The decline in NIM for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was driven primarily by an increase of 63 bps in the cost of interest-bearing liabilities, partially offset by a 16 bp increase in the yield earned on interest-earning assets. On a fully-taxable equivalent basis, NIM was 1.97% for the six months ended June 30, 2019 , compared to a NIM of 2.37% for the six months ended June 30, 2018 .

Noninterest Income

The following table presents noninterest income for the last five completed fiscal quarters and the six months ended June 30, 2019 and 2018.



(dollars in thousands)	Three Months Ended												Six Months Ended
	June 30, 2019			March 31, 2019			December 31, 2018		September 30, 2018		June 30, 2018		June 30, 2019			June 30, 2018
Service charges and fees	$	225		$	236		$	237	$	236	$	231	$	461		$	461
Mortgage banking activities	2,664			1,617			1,141		1,402		1,597		4,281			3,175
(Loss) gain on sale of loans	(66		)	(104		)	89		—		—		(170		)	414
Loss on sale of securities	(458		)	—			—		—		—		(458		)	—
Other	1,089			623			580		356		349		1,712			669
Total noninterest income	$	3,454		$	2,372		$	2,047	$	1,994	$	2,177	$	5,826		$	4,719

During the second quarter 2019 , noninterest income was $3.5 million , representing an increase of $1.3 million , or 58.7% , compared to $2.2 million for the second quarter 2018 . The increase was due primarily to an increase in revenue from mortgage banking activities and other noninterest income, which was partially offset by loss of sale of securities and loss on sale of loans. The increase in mortgage banking revenue was due mainly to an increase in mandatory pipeline volumes as the decline in mortgage interest rates during the quarter drove increased interest rate lock commitment activity. The increase in other noninterest income was due primarily to the Company recognizing a $0.5 million gain on the sale of its ownership of Visa Class B shares. The $0.5 million loss on sale of securities during the second quarter 2019 resulted from the Company selling lower-yielding mortgage backed and U.S. Government Agency securities with a book value of $30.6 million.

During the second quarter 2019, the Company recognized a $0.1 million loss on the sale of portfolio residential mortgage, public finance and single tenant lease financing loans with a book value of $148.4 million. Gains recognized on the sale of single tenant lease financing loans were offset by losses on the sales of portfolio residential mortgages, which included fixed rate and seasoned lower-yielding adjustable rate loans. Additionally, public finance loans were sold at approximately book value.

During the six months ended June 30, 2019 , noninterest income was $5.8 million , an increase of $1.1 million , or 23.5% , from the six months ended June 30, 2018 . The increase was due to a $1.1 million, or 34.8%, increase in revenue from mortgage banking activities and a $1.0 million, or 155.9%, increase in other noninterest income, partially offset by a $0.2 million loss on sale of loans, down from a $0.4 million gain on sale of loans in the prior-year period, and a $0.5 million decrease in loss on sale of securities. The increase in mortgage banking revenue was due to an increase in mandatory pipeline volumes as discussed above. The increase in other noninterest income was mainly the result of the gain on the sale of the Company’s Visa Class B shares and income associated with the Company’s temporary ownership of the land described under the heading “Other Assets” within this Management’s Discussion and Analysis. During the six months ended June 30, 2018 , the Company completed two sales of single tenant lease financing loans, which resulted in the gain of $0.4 million. The loss on sale of securities was the result of the sales of securities discussed above. The Company did not sell any securities during the six months ended June 30, 2018 .

Noninterest Expense

The following table presents noninterest expense for the last five completed fiscal quarters and the six months ended June 30, 2019 and 2018.



(dollars in thousands)	Three Months Ended										Six Months Ended
	June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018		June 30, 2018		June 30, 2019		June 30, 2018
Salaries and employee benefits	$	6,642	$	6,321	$	5,738	$	5,704	$	5,827	$	12,963	$	11,732
Marketing, advertising and promotion	466		469		543		601		608		935		1,324
Consulting and professional services	835		814		862		709		633		1,649		1,484
Data processing	328		317		320		368		282		645		545
Loan expenses	292		314		204		241		260		606		497
Premises and equipment	1,497		1,500		1,307		1,244		1,231		2,997		2,445
Deposit insurance premium	747		555		570		441		480		1,302		945
Write-down of other real estate owned	—		—		2,423		—		—		—		—
Other	902		819		772		737		861		1,721		1,427
Total noninterest expense	$	11,709	$	11,109	$	12,739	$	10,045	$	10,182	$	22,818	$	20,399

Noninterest expense for the second quarter 2019 was $11.7 million , compared to $10.2 million for the second quarter 2018 . The increase of $1.5 million , or 15.0% , compared to the second quarter 2018 was due primarily to increases of $0.8 million in salaries and employee benefits , $0.3 million in deposit insurance premium , $0.3 million in premises and equipment and $0.2 million in consulting and professional services , partially offset by a decrease of $0.1 million in marketing, advertising and promotion expenses. The increase in salaries and employee benefits resulted primarily from an increase related to employee compensation and higher incentive compensation associated with the increased mortgage production and personnel growth. Recent hires in the Company’s commercial lending verticals and support areas were generally in higher skill positions, which contributed to the increase in salaries and benefits expense. The increase in deposit insurance premium was due primarily to the Company’s year-over-year asset growth, as the FDIC uses annual asset growth as a component of their calculation to determine the cost of FDIC deposit insurance. The increase in premises and equipment was due primarily to higher software expenses. The increase in consulting and professional services expenses was due primarily to various expenses, none of which were deemed significant individually.

Noninterest expense for the six months ended June 30, 2019 was $22.8 million , compared to $20.4 million for the six months ended June 30, 2018 . The increase of $2.4 million , or 11.9% , compared to the six months ended June 30, 2018 was due primarily to increases of $1.2 million in salaries and employee benefits , $0.6 million in premises and equipment , $0.4 million in deposit insurance premium and $0.2 million in consulting and professional services, partially offset by a $0.4 million decrease in marketing, advertising and promotion expenses. The increase in salaries and employee benefits was primarily the result of an increase related to employee compensation, higher incentive compensation associated with the increased mortgage production and personnel growth. Recent hires in the Company’s commercial lending verticals and support areas were generally in higher skill positions, which contributed to the increase in salaries and benefits expense. The increase in premises and equipment was due primarily to higher software expenses. The increase in deposit insurance premium was due primarily to the Company’s year-over-year asset growth. The increase in consulting and professional services expenses was due primarily to various expenses, none of which were deemed significant individually. The decrease in marketing, advertising and promotion was driven by digital marketing initiatives and higher mortgage lead generation costs that occurred in 2018.

Income tax provision was $0.3 million for the second quarter 2019, resulting in an effective tax rate of 5.3%, compared to $0.8 million and an effective tax rate of 11.5% for the second quarter 2018. Income tax provision was $0.9 million for the six months ended June 30, 2019, resulting in an effective tax rate of 6.8%, compared to $1.6 million, and an effective tax rate of 12.0% for the six months ended June 30, 2018. The decrease in the effective tax rate for both the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018 was due primarily to an increase in the average balance of tax-exempt earning assets resulting from growth in the public finance loan portfolio.

Financial Condition

The following table presents summary balance sheet data for the last five completed fiscal quarters.



(dollars in thousands)
Balance Sheet Data:	June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018		June 30, 2018
Total assets	$	3,958,829	$	3,670,176	$	3,541,692	$	3,202,918	$	3,115,773
Loans	2,861,156		2,839,928		2,716,228		2,493,622		2,374,035
Total securities	558,160		551,604		504,095		489,197		480,025
Loans held-for-sale	30,642		13,706		18,328		23,493		20,672
Noninterest-bearing deposits	44,040		45,878		43,301		42,750		44,671
Interest-bearing deposits	2,962,223		2,765,230		2,628,050		2,403,814		2,349,613
Total deposits	3,006,263		2,811,108		2,671,351		2,446,564		2,394,284
Advances from Federal Home Loan Bank	514,906		495,146		525,153		425,160		390,167
Total shareholders’ equity	296,120		294,013		288,735		287,740		282,087

Total assets increased $417.1 million , or 11.8% , to $4.0 billion at June 30, 2019 compared to $3.5 billion at December 31, 2018 . Balance sheet expansion during the first six months of 2019 was funded primarily by deposit growth of $334.9 million, or 12.5%. This deposit growth contributed to an increase in cash liquidity as cash increased $159.6 million from December 31, 2018. Additionally, this funding was deployed to support loan growth of $144.9 million , or 5.3% .

Loan Portfolio Analysis

The following table presents a summary of the Company’s loan portfolio for the last five completed fiscal quarters.



(dollars in thousands)	June 30, 2019					March 31, 2019					December 31, 2018					September 30, 2018					June 30, 2018
Commercial loans
Commercial and industrial	$	110,143		3.8	%	$	112,146		3.9	%	$	114,382		4.2	%	$	105,489		4.2	%	$	107,394		4.5	%
Owner-occupied commercial real estate	83,979			2.9	%	87,482			3.1	%	87,962			3.2	%	93,568			3.8	%	86,068			3.6	%
Investor commercial real estate	21,179			0.7	%	11,188			0.4	%	5,391			0.2	%	5,595			0.2	%	6,185			0.3	%
Construction	47,849			1.7	%	42,319			1.5	%	39,916			1.5	%	38,228			1.5	%	46,769			2.0	%
Single tenant lease financing	1,001,196			35.1	%	975,841			34.3	%	919,440			33.8	%	883,372			35.4	%	863,981			36.4	%
Public finance	706,161			24.7	%	708,816			25.0	%	706,342			26.0	%	610,858			24.5	%	566,184			23.8	%
Healthcare finance	212,351			7.4	%	158,796			5.6	%	117,007			4.4	%	89,525			3.7	%	65,605			2.8	%
Total commercial loans	2,182,858			76.3	%	2,096,588			73.8	%	1,990,440			73.3	%	1,826,635			73.3	%	1,742,186			73.4	%
Consumer loans
Residential mortgage	318,678			11.1	%	404,869			14.3	%	399,898			14.7	%	362,574			14.5	%	337,143			14.2	%
Home equity	26,825			0.9	%	27,794			1.0	%	28,735			1.1	%	28,713			1.2	%	28,826			1.2	%
Other consumer	294,251			10.4	%	285,259			10.0	%	279,771			10.3	%	270,567			10.8	%	260,164			11.0	%
Total consumer loans	639,754			22.4	%	717,922			25.3	%	708,404			26.1	%	661,854			26.5	%	626,133			26.4	%
Net deferred loan origination costs and premiums and discounts on purchased loans and other ⁽¹⁾	38,544			1.3	%	25,418			0.9	%	17,384			0.6	%	5,133			0.2	%	5,716			0.2	%
Total loans	2,861,156			100.0	%	2,839,928			100.0	%	2,716,228			100.0	%	2,493,622			100.0	%	2,374,035			100.0	%
Allowance for loan losses	(19,976		)			(18,841		)			(17,896		)			(16,704		)			(16,053		)
Net loans	$	2,841,180				$	2,821,087				$	2,698,332				$	2,476,918				$	2,357,982

(1) Includes carrying value adjustments of $22.2 million, $11.5 million, $5.0 million, ($5.2) million and ($2.5) million as of June 30, 2019, March 31, 2019, December 31, 2018, September 30, 2018 and June 30, 2018, respectively, related to interest rate swaps associated with public finance loans.

Total loans were $2.9 billion as of June 30, 2019 , an increase of $144.9 million , or 5.3% , compared to December 31, 2018 . The growth in commercial loan balances was driven largely by production in healthcare finance, which increased $95.3 million, or 81.5%, and single tenant lease financing, which increased $81.8 million, or 8.9%. During the six months ended June 30, 2019, the Company sold lower-yielding seasoned loans, which consisted of $100.5 million of portfolio residential mortgage loans, $48.6 million of public finance loans and $35.0 million of single tenant lease financing loans. The Company expects to pursue additional loan sales in the future to help manage balance sheet growth and capital, provide liquidity and improve NIM and profitability.

Asset Quality

Nonperforming loans are comprised of nonaccrual loans and loans 90 days past due and accruing. Nonperforming assets include nonperforming loans, OREO and other nonperforming assets, which consist of repossessed assets. The following table provides a summary of the Company’s nonperforming assets for the last five completed fiscal quarters.



(dollars in thousands)	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
Nonaccrual loans
Commercial loans:
Commercial and industrial	$	1,604		$	192		$	195		$	—		$	—
Owner-occupied commercial real estate	478			—			325			—			—
Total commercial loans	2,082			192			520			—			—
Consumer loans:
Residential mortgage	3,134			3,163			175			179			161
Home equity	—			—			55			—			83
Other consumer	49			68			42			61			41
Total consumer loans	3,183			3,231			272			240			285
Total nonaccrual loans	5,265			3,423			792			240			285

Past Due 90 days and accruing loans
Consumer loans:
Residential mortgage	121			—			97			—			—
Other consumer	—			9			—			16			—
Total consumer loans	121			9			97			16			—
Total past due 90 days and accruing loans	121			9			97			16			—

Total nonperforming loans	5,386			3,432			889			256			285

Other real estate owned
Investor commercial real estate	2,066			2,066			2,066			4,488			4,488
Residential mortgage	553			553			553			553			553
Total other real estate owned	2,619			2,619			2,619			5,041			5,041

Other nonperforming assets	36			20			—			7			9

Total nonperforming assets	$	8,041		$	6,071		$	3,508		$	5,304		$	5,335

Total nonperforming loans to total loans	0.19		%	0.12		%	0.03		%	0.01		%	0.01		%
Total nonperforming assets to total assets	0.20		%	0.17		%	0.10		%	0.17		%	0.17		%
Allowance for loan losses to total loans	0.70		%	0.66		%	0.66		%	0.67		%	0.68		%
Allowance for loan losses to nonperforming loans	370.9		%	549.0		%	2,013.1		%	6,525.0		%	5,632.6		%

Troubled Debt Restructurings

The following table provides a summary of troubled debt restructurings for the last five completed fiscal quarters.



(dollars in thousands)	June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018		June 30, 2018
Troubled debt restructurings – performing	$	1,985	$	404	$	410	$	450	$	457
Total troubled debt restructurings	$	1,985	$	404	$	410	$	450	$	457

The increase in nonperforming loans of $4.5 million , or 505.8% , to $5.4 million as of June 30, 2019 compared to $0.9 million as of December 31, 2018 was due primarily to a seasoned residential mortgage loan with an unpaid principal balance of $3.1 million that was placed on nonaccrual status during the first quarter after becoming delinquent late in the fourth quarter 2018, as well as a commercial loan relationship with a total unpaid principal balance of $1.9 million that was placed on nonaccrual status late during the second quarter 2019. This increase was partially offset by one nonaccrual owner-occupied CRE relationship with a balance of $0.3 million that was paid in full during the first quarter 2019. Total nonperforming assets increased $4.5 million , or 129.2% , as of June 30, 2019 compared to December 31, 2018 . The ratio of nonperforming loans to total loans increased to 0.19% as of June 30, 2019 compared to 0.03% as of December 31, 2018 and the ratio of nonperforming assets to total assets increased to 0.20% as of June 30, 2019 compared to 0.10% as of December 31, 2018 , due primarily to the increases in the nonperforming seasoned residential mortgage loan and commercial loan relationship discussed above.

Total TDRs increased to $2.0 million as of June 30, 2019 compared to $0.4 million as of December 31, 2018. This is the result of four loans with a combined unpaid principal balance of $1.8 million that became TDRs during the second quarter 2019. The modifications consisted of interest-only payments for a period of time.

As of June 30, 2019 and December 31, 2018 , the Company had one commercial property in OREO with a carrying value of $2.1 million. This property consists of two buildings which are residential units adjacent to a university campus. As of June 30, 2019 and December 31, 2018, the Company had residential mortgage OREO of $0.6 million.

Allowance for Loan Losses

The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters and the six months ended June 30, 2019 and 2018.



(dollars in thousands)	Three Months Ended															Six Months Ended
	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			June 30, 2019			June 30, 2018
Balance, beginning of period	$	18,841		$	17,896		$	16,704		$	16,053		$	15,560		$	17,896		$	14,970
Provision charged to expense	1,389			1,285			1,487			888			667			2,674			1,517
Losses charged off	(337		)	(429		)	(381		)	(336		)	(254		)	(766		)	(560		)
Recoveries	83			89			86			99			80			172			126
Balance, end of period	$	19,976		$	18,841		$	17,896		$	16,704		$	16,053		$	19,976		$	16,053

Net charge-offs to average loans	0.05		%	0.05		%	0.05		%	0.04		%	0.03		%	0.04		%	0.04		%

The allowance for loan losses was $20.0 million as of June 30, 2019 , compared to $17.9 million as of December 31, 2018 . The increase of $2.1 million , or 11.6% , was due primarily to the growth in single tenant lease financing and healthcare finance loan balances, as well as a specific reserve of $0.6 million for one commercial loan that was placed on nonaccrual status during the second quarter 2019. During the second quarter 2019 , the Company recorded net charge-offs of $0.3 million, compared to net charge-offs of $0.2 million for the second quarter 2018 . The net charge-offs for both the second quarter 2019 and 2018 were driven primarily by other consumer loans.

During the six months ended June 30, 2019 , the Company recorded net charge-offs of $0.6 million , compared to net charge-offs of $0.4 million during the six months ended June 30, 2018 . The net charge-offs for the six months ended June 30, 2019 were primarily driven by charge-offs in other consumer loans and one charge-off in C&I loans. The net charge-offs for the six months ended June 30, 2018 were primarily driven by charge-offs in other consumer loans.

The allowance for loan losses as a percentage of total loans was 0.70% at June 30, 2019 and 0.66% at December 31, 2018 . The allowance for loan losses as a percentage of nonperforming loans decreased to 370.9% as of June 30, 2019 , compared to 2,013.1% as of December 31, 2018 . The decrease was due primarily to the previously mentioned seasoned residential mortgage loan with an unpaid principal balance of $3.1 million and the commercial loan relationship with a total unpaid principal balance of $1.9 million that were placed on nonaccrual status in 2019.

Investment Securities Portfolio

The following tables present the amortized cost and approximate fair value of our investment portfolio by security type for the last five completed fiscal quarters.



(dollars in thousands)
Amortized Cost	June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018		June 30, 2018
Securities available-for-sale
U.S. Government-sponsored agencies	$	89,088	$	102,749	$	109,631	$	115,176	$	122,162
Municipal securities	96,202		96,328		97,090		97,160		97,230
Mortgage-backed securities	297,745		288,120		251,492		237,703		225,756
Asset-backed securities	5,000		5,000		5,002		5,003		5,003
Corporate securities	38,644		38,650		36,678		36,684		29,627
Total available-for-sale	526,679		530,847		499,893		491,726		479,778
Securities held-to-maturity
Municipal securities	10,147		10,150		10,157		10,159		10,161
Corporate securities	25,679		21,072		12,593		10,041		9,042
Total held-to-maturity	35,826		31,222		22,750		20,200		19,203
Total securities	$	562,505	$	562,069	$	522,643	$	511,926	$	498,981



(dollars in thousands)
Approximate Fair Value	June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018		June 30, 2018
Securities available-for-sale
U.S. Government-sponsored agencies	$	87,737	$	100,872	$	107,585	$	112,760	$	120,232
Municipal securities	96,988		95,445		92,506		91,080		92,824
Mortgage-backed securities	295,988		282,771		242,912		225,692		215,383
Asset-backed securities	4,928		4,928		4,859		4,960		4,983
Corporate securities	36,693		36,366		33,483		34,505		27,400
Total available-for-sale	522,334		520,382		481,345		468,997		460,822
Securities held-to-maturity
Municipal securities	10,296		10,062		9,801		9,519		9,675
Corporate securities	25,992		21,206		12,617		9,991		9,052
Total held-to-maturity	36,288		31,268		22,418		19,510		18,727
Total securities	$	558,622	$	551,650	$	503,763	$	488,507	$	479,549

The approximate fair value of available-for-sale investment securities increased $41.0 million , or 8.5% , to $522.3 million as of June 30, 2019 , compared to $481.3 million as of December 31, 2018 . The increase was due primarily to an increase of $53.1 million in mortgage-backed securities. The increase in mortgage-backed securities was driven by purchases as excess liquidity was deployed, as well as by market value increases due to interest rate changes, but was partially offset by the sale of $22.1 million of lower-yielding securities. The increase in approximate fair value of investment securities available-for-sale was partially offset by a decrease of $19.8 million in U.S. Government-sponsored agencies securities. The decrease in U.S. Government-sponsored agencies was due primarily to market value decreases resulting from interest rate changes, as well as the sale of $8.5 million of lower-yielding securities. As of June 30, 2019 , the Company had securities with an amortized cost basis of $35.8 million designated as held-to-maturity compared to $22.8 million as of December 31, 2018 . The increase was due to the Company using additional liquidity to purchase held-to-maturity corporate securities.

Other Assets

During 2018, the Bank's subsidiary, SPF15, Inc., (“SPF15”), acquired several parcels of land consisting of approximately 3.3 acres located in Fishers, Indiana for approximately $10.2 million, inclusive of acquisition costs. Pursuant to a Land Acquisition Agreement among SPF15, the City of Fishers, Indiana (the “City”), and its Redevelopment Commission (the “RDC”), among others, the City agreed to reimburse SPF15 for the purchase price and other specified land acquisition costs on or before December 31, 2018. On December 17, 2018, the City approved a Project Agreement that replaced the Land Acquisition Agreement. The Project Agreement extended the reimbursement deadline to October 30, 2019. The Project Agreement makes additional financial incentives available to the Company for constructing an office building and associated parking garage on the property. The City has agreed to transfer two additional parcels of land to SPF15 consisting of approximately 0.75 acres and SPF15 has agreed to transfer certain parcels of land to the Fishers Town Hall Building Corporation and third parties in connection with the development of the property. Site demolition has been completed, enabling further evaluation of the site for construction of a multi-use development to include the Company’s future headquarters.

Other assets were $77.8 million at June 30, 2019 compared to $37.7 million at December 31, 2018. The increase of $40.1 million, or 106.2%, was due primarily to cash collateral pledged for interest rate swaps. The Company pledged $43.2 million and $7.0 million of cash collateral to counterparties as security for its obligations related to these interest rate swap transactions at June 30, 2019 and December 31, 2018, respectively. Collateral posted and received is dependent on the market valuation of the underlying hedges.

Other Liabilities

Other liabilities were $69.2 million at June 30, 2019 compared to $21.5 million at December 31, 2018. The increase of $47.8 million, or 222.5%, was due primarily to a $28.6 million decrease in the fair value of interest rate swaps as well as a $14.3 million accrual for securities that were purchased in June but did not settle until July.

Deposits

The following table presents the composition of the Company’s deposit base for the last five completed fiscal quarters.



(dollars in thousands)	June 30, 2019				March 31, 2019				December 31, 2018				September 30, 2018				June 30, 2018
Noninterest-bearing deposits	$	44,040	1.5	%	$	45,878	1.6	%	$	43,301	1.6	%	$	42,750	1.7	%	$	44,671	1.9	%
Interest-bearing demand deposits	126,669		4.2	%	111,626		4.0	%	121,055		4.5	%	94,681		3.9	%	91,748		3.8	%
Savings accounts	31,445		1.0	%	41,958		1.5	%	38,489		1.4	%	47,033		1.9	%	48,897		2.1	%
Money market accounts	607,849		20.3	%	573,895		20.4	%	528,533		19.9	%	478,548		19.6	%	582,565		24.3	%
Certificates of deposits	1,629,886		54.2	%	1,464,543		52.1	%	1,292,883		48.4	%	1,252,690		51.2	%	1,231,438		51.4	%
Brokered deposits	566,374		18.8	%	573,208		20.4	%	647,090		24.2	%	530,862		21.7	%	394,965		16.5	%
Total deposits	$	3,006,263	100.0	%	$	2,811,108	100.0	%	$	2,671,351	100.0	%	$	2,446,564	100.0	%	$	2,394,284	100.0	%

Total deposits increased $334.9 million , or 12.5% , to $3.0 billion as of June 30, 2019 , compared to approximately $2.7 billion as of December 31, 2018 . This increase was due primarily to increases of $337.0 million , or 26.1% , in certificates of deposits and $79.3 million , or 15.0% , in money market accounts, partially offset by decreases of $80.7 million , or 12.5% , in brokered deposits and $7.0 million, or 18.3%, in savings accounts deposits. The increase in certificates of deposits was due to strong production during the first six months of 2019, which consequently reduced the need for brokered deposit funding.

Recent Debt and Equity Offerings

In June 2019, the Company issued $37.0 million aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2029 (the “2029 Notes”) in a public offering. The 2029 Notes initially bear a fixed interest rate of 6.0% per year to, but excluding June 30, 2024, and thereafter a floating rate equal to the then-current Benchmark rate (initially three-month LIBOR rate) plus 411 basis points. All interest on the 2029 Notes is payable quarterly. The 2029 Notes are scheduled to mature on June 30, 2029. The 2029 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after June 30, 2024. The 2029 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. The 2029 Notes are trading on the Nasdaq Global Select Market under the symbol “INBKZ.”

In June 2018, the Company completed an underwritten public offering of 1,730,750 shares of its common stock at a price of $33.25 per share. The Company received net proceeds of approximately $54.3 million after deducting underwriting discounts and commissions and offering expenses.

Regulatory Capital Requirements

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”).

The Basel III Capital Rules were fully phased in on January 1, 2019 and 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%); 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%); 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%); 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 was phased in over a four-year period, increasing by increments of that amount on each subsequent January 1 until it reached 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 June 30, 2019 and December 31, 2018 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 June 30, 2019 and December 31, 2018 based on the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019. 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.



	Actual				Minimum Capital Required - Basel III				Minimum Required to be Considered Well Capitalized
(dollars in thousands)	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
As of June 30, 2019:
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	306,919	11.08	%	$	193,820	7.00	%	N/A		N/A
Bank	324,625		11.73	%	193,653		7.00	%	$	179,821	6.50	%
Tier 1 capital to risk-weighted assets
Consolidated	306,919		11.08	%	253,353		8.50	%	N/A		N/A
Bank	324,625		11.73	%	235,150		8.50	%	221,318		8.00	%
Total capital to risk-weighted assets
Consolidated	396,270		14.31	%	290,730		10.50	%	N/A		N/A
Bank	344,601		12.46	%	290,480		10.50	%	276,647		10.00	%
Leverage ratio
Consolidated	306,919		8.06	%	152,378		4.00	%	N/A		N/A
Bank	324,625		8.53	%	152,280		4.00	%	190,351		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, 2018:
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	300,589	12.39	%	$	112,866	5.75	%	$	169,771	7.00	%	N/A		N/A
Bank	286,012		11.81	%	112,672		5.75	%	169,545		7.00	%	$	157,435	6.50	%
Tier 1 capital to risk-weighted assets
Consolidated	300,589		12.39	%	142,309		7.25	%	206,150		8.50	%	N/A		N/A
Bank	286,012		11.81	%	142,064		7.25	%	205,876		8.50	%	193,766		8.00	%
Total capital to risk-weighted assets
Consolidated	352,360		14.53	%	181,566		9.25	%	254,656		10.50	%	N/A		N/A
Bank	300,908		12.55	%	181,255		9.25	%	254,318		10.50	%	242,207		10.00	%
Leverage ratio
Consolidated	300,589		9.00	%	106,196		4.00	%	133,602		4.00	%	N/A		N/A
Bank	286,012		8.57	%	106,059		4.00	%	133,474		4.00	%	166,843		5.00	%

Shareholders’ Dividends

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable July 15, 2019 to shareholders of record as of June 28, 2019 . 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 June 30, 2019 , the Company had $72.0 million principal amount of subordinated debt outstanding pursuant to the 2025 Note, 2026 Notes and 2029 Notes. The agreements that govern our outstanding subordinated debt 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 to occur, 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

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 may explore additional asset, deposit or revenue generation channels that complement our commercial and consumer banking platforms, which may require additional capital. If the Company is unable to secure such capital at favorable terms, its ability to take advantage of such opportunities could be adversely affected.

On December 18, 2018, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $10 million of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue in the future, economic and market conditions (including the trading price of our stock), and regulatory and legal considerations. See Part II, Item 2, of this report for information regarding recent repurchase activity and our remaining authority under the program.

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 and wholesale funding, which are generally advances from the FHLB and brokered deposits.

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 June 30, 2019 , on a consolidated basis, the Company had $870.6 million in cash and cash equivalents and investment securities available-for-sale and $30.6 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 June 30, 2019 , the Bank had the ability to borrow an additional $553.4 million from the FHLB, 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 shareholders 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 June 30, 2019 , the Company, on an unconsolidated basis, had $49.4 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 June 30, 2019 , approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $261.8 million . Certificates of deposits and brokered deposits scheduled to mature in one year or less at June 30, 2019 totaled $1.05 billion . 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.

Reconciliation of Non-GAAP Financial Measures

This Management’s Discussion and Analysis contains financial information determined by methods other than in accordance with 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 the tangible common equity to tangible assets ratio, total interest income - FTE, net interest income - FTE, net interest margin - FTE, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average shareholders’ equity, adjusted return on average tangible common equity, adjusted income before income taxes, adjusted income tax provision and adjusted effective income tax rate are used by the Company’s management to measure the strength of its capital and analyze profitability, including its ability to generate earnings on tangible capital invested by its shareholders. The Company also believes that it is a standard practice in the banking industry to present total interest income, net interest income and net interest margin on a fully-taxable equivalent basis, as those measures provide useful information for peer comparisons. Although the Company believes these non-GAAP financial 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 financial 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 last five completed fiscal quarters and the six months ended June 30, 2019 and 2018.



(dollars in thousands, except share and per share data)	Three Months Ended															Six Months Ended
(dollars in thousands, except share and per share data)	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			June 30, 2019			June 30, 2018
Total equity - GAAP	$	296,120		$	294,013		$	288,735		$	287,740		$	282,087		$	296,120		$	282,087
Adjustments:
Goodwill	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)
Tangible common equity	$	291,433		$	289,326		$	284,048		$	283,053		$	277,400		$	291,433		$	277,400

Total assets - GAAP	$	3,958,829		$	3,670,176		$	3,541,692		$	3,202,918		$	3,115,773		$	3,958,829		$	3,115,773
Adjustments:
Goodwill	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)
Tangible assets	$	3,954,142		$	3,665,489		$	3,537,005		$	3,198,231		$	3,111,086		$	3,954,142		$	3,111,086

Total common shares outstanding	10,016,458			10,128,587			10,170,778			10,181,675			10,181,675			10,016,458			10,181,675

Book value per common share	$	29.56		$	29.03		$	28.39		$	28.26		$	27.71		$	29.56		$	27.71
Effect of goodwill	(0.46		)	(0.46		)	(0.46		)	(0.46		)	(0.46		)	(0.46		)	(0.46		)
Tangible book value per common share	$	29.10		$	28.57		$	27.93		$	27.80		$	27.25		$	29.10		$	27.25

Total shareholders’ equity to assets	7.48		%	8.01		%	8.15		%	8.98		%	9.05		%	7.48		%	9.05		%
Effect of goodwill	(0.11		)%	(0.12		)%	(0.12		)%	(0.13		)%	(0.13		)%	(0.11		)%	(0.13		)%
Tangible common equity to tangible assets	7.37		%	7.89		%	8.03		%	8.85		%	8.92		%	7.37		%	8.92		%

Total average equity - GAAP	$	297,148		$	291,883		$	289,844		$	285,207		$	238,465		$	294,530		$	230,840
Adjustments:
Average goodwill	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)	(4,687		)
Average tangible common equity	$	292,461		$	287,196		$	285,157		$	280,520		$	233,778		$	289,843		$	226,153

Return on average shareholders’ equity	8.26		%	7.91		%	4.89		%	8.75		%	10.11		%	8.09		%	10.51		%
Effect of goodwill	0.13		%	0.13		%	0.09		%	0.14		%	0.20		%	0.13		%	0.22		%
Return on average tangible common equity	8.39		%	8.04		%	4.98		%	8.89		%	10.31		%	8.22		%	10.73		%



(dollars in thousands, except share and per share data)	Three Months Ended															Six Months Ended
(dollars in thousands, except share and per share data)	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			June 30, 2019			June 30, 2018
Total interest income	$	36,844		$	34,999		$	31,849		$	30,223		$	27,416		$	71,843		$	53,395
Adjustments:
Fully-taxable equivalent adjustments ¹	1,612			1,557			1,477			1,351			1,164			3,169			2,182
Total interest income - FTE	$	38,456		$	36,556		$	33,326		$	31,574		$	28,580		$	75,012		$	55,577

Net interest income	$	16,105		$	16,244		$	15,421		$	15,970		$	15,461		$	32,349		$	30,876
Adjustments:
Fully-taxable equivalent adjustments ¹	1,612			1,557			1,477			1,351			1,164			3,169			2,182
Net interest income - FTE	$	17,717		$	17,801		$	16,898		$	17,321		$	16,625		$	35,518		$	33,058

Net interest margin	1.73		%	1.86		%	1.89		%	2.06		%	2.17		%	1.79		%	2.22		%
Effect of fully-taxable equivalent adjustments ¹	0.18		%	0.18		%	0.18		%	0.17		%	0.16		%	0.18		%	0.15		%
Net interest margin - FTE	1.91		%	2.04		%	2.07		%	2.23		%	2.33		%	1.97		%	2.37		%

¹ Assuming a 21% tax rate



(dollars in thousands, except share and per share data)	Three Months Ended															Six Months Ended
	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			June 30, 2019			June 30, 2018
Income before income taxes - GAAP	6,461			6,222			$	3,242		$	7,031		$	6,789		$	12,683		$	13,679
Adjustments:
Write-down of other real estate owned	—			—			2,423			—			—			—			—
Adjusted income before income taxes	$	6,461		$	6,222		$	5,665		$	7,031		$	6,789		$	12,683		$	13,679

Income tax provision (benefit) - GAAP	340			526			$	(334	)	$	743		$	781		$	866		$	1,643
Adjustments:
Write-down of other real estate owned	—			—			509			—			—			—			—
Adjusted income tax provision	340			526			175			743			781			866			1,643

Net income - GAAP	6,121			5,696			$	3,576		$	6,288		6,008			11,817			12,036
Adjustments:
Write-down of other real estate owned	—			—			1,914			—			—			—			—
Adjusted net income	6,121			5,696			5,490			6,288			6,008			11,817			12,036

Diluted average common shares outstanding	10,148,285			10,230,531			10,275,040			10,273,766			8,919,460			10,186,833			8,731,331

Diluted earnings per share - GAAP	0.60			0.56			$	0.35		$	0.61		$	0.67		$	1.16		$	1.38
Adjustments:
Effect of write-down of other real estate owned	—			—			0.18			—			—			—			—
Adjusted diluted earnings per share	0.60			0.56			0.53			0.61			0.67			1.16			1.38

Return on average assets	0.65		%	0.64		%	0.43		%	0.79		%	0.82		%	0.64		%	0.84		%
Effect of write-down of other real estate owned	0.00		%	0.00		%	0.23		%	0.00		%	0.00		%	0.00		%	0.00		%
Adjusted return on average assets	0.65		%	0.64		%	0.66		%	0.79		%	0.82		%	0.64		%	0.84		%

Return on average shareholders' equity	8.26		%	7.91		%	4.89		%	8.75		%	10.11		%	8.09		%	10.51		%
Effect of write-down of other real estate owned	0.00		%	0.00		%	2.62		%	0.00		%	0.00		%	0.00		%	0.00		%
Adjusted return on average shareholders' equity	8.26		%	7.91		%	7.51		%	8.75		%	10.11		%	8.09		%	10.51		%

Return on average tangible common equity	8.39		%	8.04		%	4.98		%	8.89		%	10.31		%	8.22		%	10.73		%
Effect of write-down of other real estate owned	0.00		%	0.00		%	2.66		%	0.00		%	0.00		%	0.00		%	0.00		%
Adjusted return on average tangible common equity	8.39		%	8.04		%	7.64		%	8.89		%	10.31		%	8.22		%	10.73		%

Effective income tax rate	5.3		%	8.5		%	(10.3		)%	10.6		%	11.5		%	6.8		%	12.0		%
Effect of write-down of other real estate owned	0.0		%	0.0		%	13.4		%	0.0		%	0.0		%	0.0		%	0.0		%
Adjusted effective income tax rate	5.3		%	8.5		%	3.1		%	10.6		%	11.5		%	6.8		%	12.0		%

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, 2018 .

Recent Accounting Pronouncements

Refer to Note 13 to the condensed consolidated financial statements.

Off-Balance Sheet Arrangements

In the ordinary course of business, the Company enters into financial transactions to extend credit, interest rate swaps and forms of commitments that may be considered off-balance sheet arrangements. Interest rate swaps are arranged to receive hedge accounting treatment and are classified as either fair value or cash flow hedges. Fair value hedges are purchased to convert certain fixed rate assets to floating rate. Cash flow hedges are used to convert certain variable rate liabilities into fixed rate liabilities. At June 30, 2019 and December 31, 2018, the Company had interest rate swaps with notional amounts of $733.7 million and $734.1 million, respectively. Additionally, we enter into forward contracts relating to our mortgage banking business to hedge the exposures we have from commitments to extend new residential mortgage loans to our customers and from our mortgage loans held-for-sale. At June 30, 2019 and December 31, 2018 , the Company had commitments to sell residential real estate loans of $101.0 million and $32.5 million , respectively. These contracts mature in less than one year. Refer to Note 12 to the condensed consolidated financial statements for additional information about derivative financial instruments.


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 June 30, 2019 , assuming parallel shifts in interest rates:



	% Change from Base Case for Parallel Changes in Rates
	-100 Basis Points		-50 Basis Points		-25 Basis Points		+100 Basis Points
NII - Year 1	(5.07	)%	(2.38	)%	(1.17	)%	5.11	%
NII - Year 2	7.85	%	9.61	%	10.14	%	5.66	%
EVE	(1.38	)%	0.19	%	0.38	%	(6.87	)%

The Company’s objective is to manage the balance sheet with a bias toward a “risk-neutral” position. 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 NII when interest 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. A “liability sensitive” position refers to when the characteristics of the balance sheet are expected to generate higher NII when interest rates decrease as rates paid on interest-bearing liabilities would reprice downward more quickly or in greater quantities than rates earned on interest-earning assets.


ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed 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 the SEC’s rules and forms. These controls and procedures are also designed to provide reasonable assurance 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 disclosures. 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 at a reasonable assurance level as of June 30, 2019 .

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 June 30, 2019 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

PART II


ITEM 1.	LEGAL PROCEEDINGS

Neither we nor any of our subsidiaries are 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

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, 2018 .


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

On December 18, 2018 the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $10.0 million of its outstanding common stock from time to time on the open market or in privately negotiated transactions. The stock repurchase program is scheduled to expire on December 31, 2019. Under this program, the Company has repurchased 208,312 shares of common stock through June 30, 2019, at an average price of $20.87, for a total investment of $4.3 million. The following table presents information with respect to purchases of the Company’s common stock made during the second quarter of fiscal 2019 by or on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3).



(dollars in thousands, except per share data)	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs
April 1, 2019 - April 30, 2019	41,630	$	21.14	41,630	$	7,158
May 1, 2019 - May 31, 2019	37,390	22.00		37,390	6,335
June 1, 2019 - June 30, 2019	33,109	20.65		33,109	5,652
Total	112,129	20.93		112,129


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

Not Applicable.


ITEM 5.	OTHER INFORMATION

None.


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	Method of Filing
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)	Incorporated by Reference
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)	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 to Exhibit 4.1 to current report on Form 8-K filed September 30, 2016)	Incorporated by Reference
4.2	Second Supplemental Indenture, dated as of June 12, 2019, 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 June 12, 2019)	Incorporated by Reference
4.3	Form of Global Note representing Fixed-floating Rate Subordinated Notes due 2029 (incorporated by reference to Exhibit 4.2 to current report on Form 8-K filed June 12, 2019)	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

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: August 7, 2019	By	/s/ David B. Becker
		David B. Becker, Chairman, President and Chief Executive Officer (on behalf of Registrant)

Date: August 7, 2019	By	/s/ Kenneth J. Lovik
		Kenneth J. Lovik, Executive Vice President and Chief Financial Officer (principal financial officer)

TABLE OF CONTENTS

Part I Item 1. Financial Statements Note 1: Basis Of Presentation Note 2: Earnings Per Share Note 3: Securities Note 4: Loans Note 5: Premises and Equipment Note 6:leases Note 7: Goodwill Note 8: Subordinated Debt Note 9: Benefit Plans Note 10: Fair Value Of Financial Instruments Note 11: Mortgage Banking Activities Note 12: Derivative Financial Instruments Note 13: Recent Accounting Pronouncements Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

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) Incorporated by Reference 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) 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 to Exhibit 4.1 to current report on Form 8-K filed September 30, 2016) Incorporated by Reference 4.2 Second Supplemental Indenture, dated as of June 12, 2019, 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 June 12, 2019) Incorporated by Reference 4.3 Form of Global Note representing Fixed-floating Rate Subordinated Notes due 2029(incorporated by reference to Exhibit 4.2 to current report on Form 8-K filed June 12, 2019) 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

INBK 10-Q Quarter ended June 30, 2019

Exhibits