INBK 10-Q Quarterly Report Sept. 30, 2020

FIRST INTERNET BANCORP

10-Ks and 10-Qs

10-Q	Quarter ended Sept. 30, 2025
10-Q	Quarter ended June 30, 2025
10-Q	Quarter ended March 31, 2025
10-K	Fiscal year ended Dec. 31, 2024
10-Q	Quarter ended Sept. 30, 2024
10-Q	Quarter ended June 30, 2024
10-Q	Quarter ended March 31, 2024
10-K	Fiscal year ended Dec. 31, 2023
10-Q	Quarter ended Sept. 30, 2023
10-Q	Quarter ended June 30, 2023
10-Q	Quarter ended March 31, 2023
10-K	Fiscal year ended Dec. 31, 2022
10-Q	Quarter ended Sept. 30, 2022
10-Q	Quarter ended June 30, 2022
10-Q	Quarter ended March 31, 2022
10-K	Fiscal year ended Dec. 31, 2021
10-Q	Quarter ended Sept. 30, 2021
10-Q	Quarter ended June 30, 2021
10-Q	Quarter ended March 31, 2021
10-K	Fiscal year ended Dec. 31, 2020
10-Q	Quarter ended Sept. 30, 2020
10-Q	Quarter ended June 30, 2020
10-Q	Quarter ended March 31, 2020
10-K	Fiscal year ended Dec. 31, 2019
10-Q	Quarter ended Sept. 30, 2019
10-Q	Quarter ended June 30, 2019
10-Q	Quarter ended March 31, 2019
10-K	Fiscal year ended Dec. 31, 2018
10-Q	Quarter ended Sept. 30, 2018
10-Q	Quarter ended June 30, 2018
10-Q	Quarter ended March 31, 2018
10-K	Fiscal year ended Dec. 31, 2017
10-Q	Quarter ended Sept. 30, 2017
10-Q	Quarter ended June 30, 2017
10-Q	Quarter ended March 31, 2017
10-K	Fiscal year ended Dec. 31, 2016
10-Q	Quarter ended Sept. 30, 2016
10-Q	Quarter ended June 30, 2016
10-Q	Quarter ended March 31, 2016
10-K	Fiscal year ended Dec. 31, 2015
10-Q	Quarter ended Sept. 30, 2015
10-Q	Quarter ended June 30, 2015
10-Q	Quarter ended March 31, 2015
10-K	Fiscal year ended Dec. 31, 2014
10-Q	Quarter ended Sept. 30, 2014
10-Q	Quarter ended June 30, 2014
10-Q	Quarter ended March 31, 2014
10-K	Fiscal year ended Dec. 31, 2013
10-Q	Quarter ended Sept. 30, 2013
10-Q	Quarter ended June 30, 2013
10-Q	Quarter ended March 31, 2013
10-K	Fiscal year ended Dec. 31, 2012

PROXIES

DEF 14A	Filed on March 27, 2025
DEF 14A	Filed on Dec. 31, 2024
DEF 14A	Filed on May 20, 2024
DEF 14A	Filed on March 28, 2024
DEF 14A	Filed on March 28, 2023
DEF 14A	Filed on May 16, 2022
DEF 14A	Filed on March 28, 2022
DEF 14A	Filed on March 31, 2021
DEF 14A	Filed on March 31, 2020
DEF 14A	Filed on March 28, 2019
DEF 14A	Filed on March 29, 2018
DEF 14A	Filed on March 30, 2017
DEF 14A	Filed on March 28, 2016
DEF 14A	Filed on April 6, 2015
DEF 14A	Filed on April 4, 2014
DEF 14A	Filed on April 9, 2013

inbk-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the Quarterly Period ended September 30, 2020


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

For the Transition Period From ________ to ________.

Commission File Number 001-35750


First Internet Bancorp
(Exact Name of Registrant as Specified in Its Charter)


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

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


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

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

Title of each class

Trading Symbols

Name of each exchange on which registered

Common Stock, without par value

INBK

The Nasdaq Stock Market LLC

6.0% Fixed to Floating Subordinated Notes due 2026

INBKL

The Nasdaq Stock Market LLC

6.0% Fixed to Floating Subordinated Notes due 2029

INBKZ

The Nasdaq Stock Market LLC

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

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

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


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

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

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

As of October 30, 2020, the registrant had 9,800,569 shares of common stock issued and outstanding.

Cautionary Note Regarding Forward-Looking Statements

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

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

PART I

ITEM 1. FINANCIAL STATEMENTS

First Internet Bancorp

Condensed Consolidated Balance Sheets

(Amounts in thousands except share data)


	September 30, 2020		December 31, 2019
	(Unaudited)
Assets
Cash and due from banks	$	5,804	$	5,061
Interest-bearing deposits	482,649		322,300
Total cash and cash equivalents	488,453		327,361

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

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Income – Unaudited

(Amounts in thousands except share and per share data)


	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Interest Income
Loans	$	29,560	$	30,594	$	89,698	$	90,654
Securities – taxable	2,240		3,468		9,135		10,332
Securities – non-taxable	381		639		1,410		1,991
Other earning assets	569		2,993		2,973		6,560
Total interest income	32,750		37,694		103,216		109,537
Interest Expense
Deposits	12,428		18,363		45,399		50,896
Other borrowed funds	4,090		4,087		12,141		11,048
Total interest expense	16,518		22,450		57,540		61,944
Net Interest Income	16,232		15,244		45,676		47,593
Provision for Loan Losses	2,509		2,824		6,461		5,498
Net Interest Income After Provision for Loan Losses	13,723		12,420		39,215		42,095
Noninterest Income
Service charges and fees	224		211		618		672
Loan servicing revenue	274		—		780		—
Loan servicing asset revaluation	( 103 )		—		( 372 )		—
Mortgage banking activities	9,630		4,307		16,706		8,588



Gain on sale of loans	2,033		523		4,596		353
Gain (loss) on sale of securities	98		—		139		( 458 )
Other	339		517		1,212		2,229
Total noninterest income	12,495		5,558		23,679		11,384
Noninterest Expense
Salaries and employee benefits	9,533		6,883		25,096		19,846
Marketing, advertising and promotion	426		456		1,212		1,391
Consulting and professional services	614		778		2,723		2,427
Data processing	388		381		1,102		1,026
Loan expenses	408		247		1,406		853
Premises and equipment	1,568		1,506		4,795		4,503
Deposit insurance premium	440		—		1,360		1,302
Write-down of other real estate owned	2,065		—		2,065		—
Other	970		952		3,383		2,673
Total noninterest expense	16,412		11,203		43,142		34,021
Income Before Income Taxes	9,806		6,775		19,752		19,458
Income Tax Provision	1,395		449		1,390		1,315
Net Income	$	8,411	$	6,326	$	18,362	$	18,143
Income Per Share of Common Stock
Basic	$	0.86	$	0.63	$	1.87	$	1.79
Diluted	$	0.86	$	0.63	$	1.87	$	1.79
Weighted-Average Number of Common Shares Outstanding
Basic	9,773,175		9,979,603		9,825,683		10,114,303
Diluted	9,773,224		9,980,612		9,827,182		10,116,507
Dividends Declared Per Share	$	0.06	$	0.06	$	0.18	$	0.18

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Comprehensive Income – Unaudited

(Amounts in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	8,411	$	6,326	$	18,362	$	18,143
Other comprehensive income (loss)
Net unrealized holding gains on securities available-for-sale recorded within other comprehensive (loss) income before income tax	1,386		1,266		6,187		11,843

Reclassification adjustment for (gains) losses realized	( 98 )		—		( 139 )		458
Net unrealized holding gains (losses) on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax	1,514		( 3,225 )		( 12,453 )		( 12,689 )

Other comprehensive income (loss) before income tax	2,802		( 1,959 )		( 6,405 )		( 388 )
Income tax provision (benefit)	754		( 482 )		( 1,506 )		126
Other comprehensive income (loss)	2,048		( 1,477 )		( 4,899 )		( 514 )
Comprehensive income	$	10,459	$	4,849	$	13,463	$	17,629

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited

Nine Months Ended September 30, 2020 and 2019

(Amounts in thousands except per share data)


	Voting and Nonvoting Common Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
Balance, January 1, 2020	$	219,423	$	99,681	$	( 14,191 )	$	304,913

Net income	—		18,362		—		18,362

Other comprehensive loss	—		—		( 4,899 )		( 4,899 )
Dividends declared ($ 0.18 per share)	—		( 1,802 )		—		( 1,802 )

Recognition of the fair value of share-based compensation	1,600		—		—		1,600

Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	21		—		—		21
Common stock redeemed for the net settlement of share-based awards	( 93 )		—		—		( 93 )

Balance, September 30, 2020	$	220,951	$	116,241	$	( 19,090 )	$	318,102

Balance, January 1, 2019	$	227,587	$	77,689	$	( 16,541 )	$	288,735
Impact of adoption of new accounting standards (1)	—		( 821 )		—		( 821 )
Net income	—		18,143		—		18,143

Other comprehensive loss	—		—		( 514 )		( 514 )
Dividends declared ($ 0.18 per share)	—		( 1,829 )		—		( 1,829 )

Recognition of the fair value of share-based compensation	1,278		—		—		1,278
Repurchase of common stock	( 9,784 )						( 9,784 )
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	26		—		—		26
Common stock redeemed for the net settlement of share-based awards	( 94 )		—		—		( 94 )

Balance, September 30, 2019	$	219,013	$	93,182	$	( 17,055 )	$	295,140

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

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited

Three Months Ended September 30, 2020 and 2019

(Amounts in thousands except per share data)


	Voting and Nonvoting Common Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
Balance, July 1, 2020	$	220,418	$	108,431	$	( 21,138 )	$	307,711

Net income	—		8,411		—		8,411

Other comprehensive income	—		—		2,048		2,048
Dividends declared ($ 0.06 per share)	—		( 601 )		—		( 601 )

Recognition of the fair value of share-based compensation	527		—		—		527

Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	6		—		—		6


Balance, September 30, 2020	$	220,951	$	116,241	$	( 19,090 )	$	318,102

Balance, July 1, 2019	$	224,244	$	87,454	$	( 15,578 )	$	296,120

Net income	—		6,326		—		6,326

Other comprehensive loss	—		—		( 1,477 )		( 1,477 )
Dividends declared ($ 0.06 per share)	—		( 598 )		—		( 598 )

Recognition of the fair value of share-based compensation	416		—		—		416
Repurchase of common stock	( 5,651 )						( 5,651 )
Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	4		—		—		4


Balance, September 30, 2019	$	219,013	$	93,182	$	( 17,055 )	$	295,140

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Cash Flows – Unaudited

(Amounts in thousands)


	Nine Months Ended September 30,
	2020		2019
Operating Activities
Net income	$	18,362	$	18,143
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	5,699		5,300
Increase in cash surrender value of bank-owned life insurance	( 712 )		( 705 )
Provision for loan losses	6,461		5,498
Share-based compensation expense	1,600		1,278
Write-down of other real estate owned	2,065		—
Gain (loss) on sale of available-for-sale securities	( 139 )		458
Loans originated for sale	( 431,384 )		( 430,453 )
Proceeds from sale of loans	429,284		415,171
Gain on loans sold	( 19,544 )		( 7,057 )

Decrease (increase) in fair value of loans held-for-sale	116		( 452 )
Gain on derivatives	( 1,974 )		( 1,295 )
Settlement of derivatives	( 46,109 )		—
Net change in servicing asset	( 337 )		—

Net change in accrued income and other assets	491		( 49,036 )
Net change in accrued expenses and other liabilities	1,098		2,297
Net cash used in operating activities	( 35,023 )		( 40,853 )
Investing Activities
Net loan activity, excluding purchases	2,284		( 173,220 )


Maturities and calls of securities available-for-sale	142,432		58,106
Proceeds from sale of securities available-for-sale	893		30,137
Purchase of securities available-for-sale	( 119,263 )		( 136,602 )
Purchase of securities held-to-maturity	( 2,000 )		( 24,116 )
Purchase of Federal Home Loan Bank of Indianapolis stock	—		( 2,025 )

Purchase of premises and equipment	( 18,571 )		( 3,581 )

Loans purchased	( 260,841 )		( 208,795 )
Net proceeds from sale of portfolio loans	234,619		238,016

Net cash used in investing activities	( 20,447 )		( 222,080 )
Financing Activities
Net increase in deposits	218,428		476,891

Cash dividends paid	( 1,773 )		( 1,808 )

Net proceeds from issuance of subordinated debt	—		35,418
Repurchase of common stock	—		( 9,784 )
Proceeds from advances from Federal Home Loan Bank	330,000		485,000
Repayment of advances from Federal Home Loan Bank	( 330,000 )		( 495,000 )

Other, net	( 93 )		( 94 )
Net cash provided by financing activities	216,562		490,623
Net Increase in Cash and Cash Equivalents	161,092		227,690
Cash and Cash Equivalents, Beginning of Period	327,361		188,712
Cash and Cash Equivalents, End of Period	$	488,453	$	416,402
Supplemental Disclosures
Initial recognition of right-of-use asset	$	—	$	2,096
Initial recognition of operating lease liabilities	—		2,096
Cash paid during the period for interest	60,058		60,417
Cash paid during the period for taxes	2,516		4,527

Loans transferred to held-for-sale from portfolio	185,797		237,942
Cash dividends declared, paid in subsequent period	588		585
Securities purchased during the period, settled in subsequent period	5,547		3,000
Transfer of available-for-sale municipal securities to held-to-maturity municipal securities	4,479		—

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Notes to Condensed Consolidated Financial Statements – Unaudited

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

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020 or any other period. The September 30, 2020 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Internet Bancorp Annual Report on Form 10-K for the year ended December 31, 2019.

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

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

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

Certain reclassifications have been made to the 2019 financial statements to conform to the presentation of the 2020 financial statements. These reclassifications had no effect on net income.

Note 2: Earnings Per Share

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

The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three and nine months ended September 30, 2020 and 2019.


(dollars in thousands, except per share data)	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Basic earnings per share
Net income	$	8,411	$	6,326	$	18,362	$	18,143
Weighted-average common shares	9,773,175		9,979,603		9,825,683		10,114,303
Basic earnings per common share	$	0.86	$	0.63	$	1.87	$	1.79
Diluted earnings per share
Net income	$	8,411	$	6,326	$	18,362	$	18,143
Weighted-average common shares	9,773,175		9,979,603		9,825,683		10,114,303

Dilutive effect of equity compensation	49		1,009		1,499		2,204
Weighted-average common and incremental shares	9,773,224		9,980,612		9,827,182		10,116,507
Diluted earnings per common share (1)	$	0.86	$	0.63	$	1.87	$	1.79

(1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 55,309 and 38,212 for the three and nine months ended September 30, 2020, respectively, and 15,256 and 22,209 for the three and nine months ended September 30, 2019, respectively .

Note 3: Securities

The following tables summarize securities available-for-sale and securities held-to-maturity as of September 30, 2020 and December 31, 2019.


	September 30, 2020
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Government-sponsored agencies	$	65,007	$	489	$	( 1,814 )	$	63,682
Municipal securities	87,365		3,296		( 4,240 )		86,421
Agency mortgage-backed securities	250,755		5,773		( 3,236 )		253,292
Private label mortgage-backed securities	71,519		1,128		( 21 )		72,626
Asset-backed securities	5,000		—		( 79 )		4,921
Corporate securities	48,406		500		( 1,537 )		47,369

Total available-for-sale	$	528,052	$	11,186	$	( 10,927 )	$	528,311


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


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

Total available-for-sale	$	546,640	$	3,426	$	( 9,214 )	$	540,852


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

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

The carrying value of securities at September 30, 2020 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Available-for-Sale
(in thousands)	Amortized Cost		Fair Value
Within one year	$	—	$	—
One to five years	31,197		26,893
Five to ten years	82,255		80,704
After ten years	87,326		89,875
	200,778		197,472
Agency mortgage-backed securities	250,755		253,292
Private label mortgage-backed securities	71,519		72,626
Asset-backed securities	5,000		4,921

Total	$	528,052	$	528,311


	Held-to-Maturity
(in thousands)	Amortized Cost		Fair Value

One to five years	$	2,869	$	2,989
Five to ten years	53,181		53,544
After ten years	12,204		12,643
Total	$	68,254	$	69,176

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

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

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

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

Agency Mortgage-Backed, Private Label Mortgage-Backed and Asset-Backed Securities

The unrealized losses on the Company’s investments in agency mortgage-backed, private label mortgage-backed and asset-backed securities were caused primarily by interest rate changes. The Company expects to recover the amortized cost bases over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.

The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2020 and December 31, 2019.


	September 30, 2020
	Less Than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities available-for-sale
U.S. Government-sponsored agencies	$	—	$	—	$	55,382	$	( 1,814 )	$	55,382	$	( 1,814 )
Municipal securities	61,269		( 4,240 )		—		—		61,269		( 4,240 )
Agency mortgage-backed securities	29,466		( 361 )		10,294		( 2,875 )		39,760		( 3,236 )
Private label mortgage-backed securities	2,410		( 9 )		1,026		( 12 )		3,436		( 21 )
Asset-backed securities	—		—		4,921		( 79 )		4,921		( 79 )
Corporate securities	—		—		20,463		( 1,537 )		20,463		( 1,537 )

Total	$	93,145	$	( 4,610 )	$	92,086	$	( 6,317 )	$	185,231	$	( 10,927 )


	September 30, 2020
	Less Than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities held-to-maturity

Corporate securities	$	21,200	$	( 375 )	$	—	$	—	$	21,200	$	( 375 )
Total	$	21,200	$	( 375 )	$	—	$	—	$	21,200	$	( 375 )


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

Total	$	127,335	$	( 2,571 )	$	176,218	$	( 6,643 )	$	303,553	$	( 9,214 )


	December 31, 2019
	Less Than 12 Months				12 Months or Longer				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities held-to-maturity

Corporate securities	13,977		( 132 )		—		—		13,977		( 132 )
Total	$	13,977	$	( 132 )	$	—	$	—	$	13,977	$	( 132 )

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


(in thousands) Details About Accumulated Other Comprehensive Loss Components									Affected Line Item in the Statements of Income
	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020		Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Realized gains (losses) on securities available-for-sale
Gain (loss) realized in earnings	$	98	$	139	$	—	$	( 458 )	Gain (loss) on sale of securities

Total reclassified amount before tax	98		139		—		( 458 )		Income Before Income Taxes
Tax expense (benefit)	26		38		—		( 124 )		Income Tax Provision
Total reclassifications out of accumulated other comprehensive loss	$	72	$	101	$	—	$	( 334 )	Net Income

Note 4: Loans

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


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

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

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

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

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

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

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

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

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

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

Healthcare Finance: These loans are made to healthcare providers, primarily dentists, for practice acquisition refinancing that occasionally includes owner-occupied commercial real estate and equipment purchases. The sources of repayment are primarily based on the identified cash flows from operations of the borrower and related entities if the real estate is held in a separate entity and secondarily on the underlying collateral provided by the borrower. This portfolio segment was initially concentrated in the Western United States but has been growing rapidly throughout the rest of the country with the addition of a growing sales force located in Eastern and Midwestern markets.

Small Business Lending: These loans are to small businesses and generally carry a partial guaranty from the U.S. Small Business Administration ("SBA") under its 7(a) loan program. We generally sell the government guaranteed portion of SBA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. Loans in the small business lending portfolio have sources of repayment that are primarily based on the identified cash flows of the borrower and secondarily on any underlying collateral provided by the borrower. Loans may, but do not always, have a collateral shortfall. For SBA loans where the guaranteed portion is retained, the SBA guaranty provides a tertiary source of repayment to the Bank in event of borrower default. Cash flows of borrowers, however, may not be as expected and collateral securing these loans may fluctuate in value. Loans are made for a broad array of purposes including, but not limited to, providing operating cash flow, funding ownership changes, and facilitating equipment purchases. These loans also include loans originated by the Bank under the SBA’s Paycheck Protection Program, which are fully guaranteed by the SBA. This portfolio segment has an emerging geography, with a nationwide focus.

Residential Mortgage: With respect to residential loans that are secured by 1-to-4 family residences and are generally owner occupied, the Company typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the financial circumstances of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels.

Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers in geographically diverse locations throughout the country.

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

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

Allowance for Loan Losses Methodology

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

Provision for Loan Losses

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

Policy for Charging Off Loans

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

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


(in thousands)	Three Months Ended September 30, 2020
Allowance for loan losses:	Balance, Beginning of Period		Provision (Credit) Charged to Expense		Losses Charged Off		Recoveries		Balance, End of Period
Commercial and industrial	$	1,477	$	( 227 )	$	( 99 )	$	—	$	1,151
Owner-occupied commercial real estate	846		167		—		—		1,013
Investor commercial real estate	130		—		—		—		130
Construction	721		155		—		—		876
Single tenant lease financing	11,318		717		—		—		12,035
Public finance	1,542		191		—		—		1,733
Healthcare finance	4,762		1,232		—		87		6,081
Small business lending	251		230		—		3		484
Residential mortgage	539		26		—		—		565
Home equity	51		( 1 )		—		3		53
Other consumer	2,828		19		( 142 )		91		2,796
Total	$	24,465	$	2,509	$	( 241 )	$	184	$	26,917


	Nine Months Ended September 30, 2020
Allowance for loan losses:	Balance, Beginning of Period		Provision (Credit) Charged to Expense		Losses Charged Off		Recoveries		Balance, End of Period
Commercial and industrial	$	1,521	$	( 22 )	$	( 353 )	$	5	$	1,151
Owner-occupied commercial real estate	561		452		—		—		1,013
Investor commercial real estate	109		21		—		—		130
Construction	380		496		—		—		876
Single tenant lease financing	11,175		860		—		—		12,035
Public finance	1,580		153		—		—		1,733
Healthcare finance	3,247		3,490		( 743 )		87		6,081
Small business lending	54		413		—		17		484
Residential mortgage	657		( 81 )		( 15 )		4		565
Home equity	46		( 1 )		—		8		53
Other consumer	2,510		680		( 644 )		250		2,796
Total	$	21,840	$	6,461	$	( 1,755 )	$	371	$	26,917


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


	Nine Months Ended September 30, 2019
Allowance for loan losses:	Balance, Beginning of Period		Provision (Credit) Charged to Expense		Losses Charged Off		Recoveries		Balance, End of Period
Commercial and industrial	$	1,384	$	1,042	$	( 912 )	$	—	$	1,514
Owner-occupied commercial real estate	891		( 241 )		—		—		650
Investor commercial real estate	61		43		—		—		104
Construction	251		90		—		—		341
Single tenant lease financing	8,827		2,467		—		—		11,294
Public finance	1,670		( 105 )		—		—		1,565
Healthcare finance	1,264		1,528		—		—		2,792
Small business lending	95		31		—		—		126
Residential mortgage	1,079		( 409 )		( 1 )		3		672
Home equity	53		( 16 )		—		8		45
Other consumer	2,321		1,068		( 1,035 )		226		2,580
Total	$	17,896	$	5,498	$	( 1,948 )	$	237	$	21,683

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2020 and December 31, 2019.


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


(in thousands)	Loans						Allowance for Loan Losses
December 31, 2019	Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance		Ending Balance: Collectively Evaluated for Impairment		Ending Balance: Individually Evaluated for Impairment		Ending Balance
Commercial and industrial	$	93,520	$	2,900	$	96,420	$	1,412	$	109	$	1,521
Owner-occupied commercial real estate	81,063		5,663		86,726		561		—		561
Investor commercial real estate	12,567		—		12,567		109		—		109
Construction	60,274		—		60,274		380		—		380
Single tenant lease financing	991,199		4,680		995,879		9,515		1,660		11,175
Public finance	687,094		—		687,094		1,580		—		1,580
Healthcare finance	300,612		—		300,612		3,247		—		3,247
Small business lending	46,945		—		46,945		54		—		54
Residential mortgage	312,714		1,135		313,849		657		—		657
Home equity	24,306		—		24,306		46		—		46
Other consumer	295,266		43		295,309		2,510		—		2,510
Total	$	2,905,560	$	14,421	$	2,919,981	$	20,071	$	1,769	$	21,840

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 September 30, 2020 and December 31, 2019.


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


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


	December 31, 2019
(in thousands)	Pass		Special Mention		Substandard		Total
Commercial and industrial	$	89,818	$	3,973	$	2,629	$	96,420
Owner-occupied commercial real estate	79,329		3,462		3,935		86,726
Investor commercial real estate	12,567		—		—		12,567
Construction	60,274		—		—		60,274
Single tenant lease financing	983,448		7,751		4,680		995,879
Public finance	687,094		—		—		687,094
Healthcare finance	300,612		—		—		300,612
Small business lending	46,945		—		—		46,945
Total commercial loans	$	2,260,087	$	15,186	$	11,244	$	2,286,517


	December 31, 2019
(in thousands)	Performing		Nonaccrual		Total
Residential mortgage	$	313,088	$	761	$	313,849
Home equity	24,306		—		24,306
Other consumer	295,276		33		295,309
Total consumer loans	$	632,670	$	794	$	633,464

The following tables present the Company’s loan portfolio delinquency analysis as of September 30, 2020 and December 31, 2019.


	September 30, 2020
(in thousands)	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	$	—	$	—	$	117	$	117	$	76,999	$	77,116	$	117	$	—
Owner-occupied commercial real estate	—		—		1,390		1,390		87,705		89,095		1,390		—
Investor commercial real estate	—		—		—		—		13,084		13,084		—		—
Construction	—		—		—		—		92,154		92,154		—		—
Single tenant lease financing	—		—		4,680		4,680		955,825		960,505		7,148		—
Public finance	—		—		—		—		625,638		625,638		—		—
Healthcare finance	—		—		—		—		461,740		461,740		—		—
Small business lending	—		—		—		—		123,168		123,168		—		—
Residential mortgage	—		—		157		157		202,884		203,041		1,085		—
Home equity	46		—		—		46		22,123		22,169		—		—
Other consumer	126		33		—		159		282,291		282,450		34		—
Total	$	172	$	33	$	6,344	$	6,549	$	2,943,611	$	2,950,160	$	9,774	$	—


	December 31, 2019
(in thousands)	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	$	15	$	96	$	122	$	233	$	96,187	$	96,420	$	226	$	—
Owner-occupied commercial real estate	—		—		464		464		86,262		86,726		464		—
Investor commercial real estate	—		—		—		—		12,567		12,567		—		—
Construction	—		—		—		—		60,274		60,274		—		—
Single tenant lease financing	—		4,680		—		4,680		991,199		995,879		4,680		—
Public finance	—		—		—		—		687,094		687,094		—		—
Healthcare finance	—		—		—		—		300,612		300,612		—		—
Small business lending	54				—		54		46,891		46,945		—		—
Residential mortgage	—		—		1,177		1,177		312,672		313,849		761		416
Home equity	—		—		—		—		24,306		24,306		—		—
Other consumer	240		107		—		347		294,962		295,309		33		—
Total	$	309	$	4,883	$	1,763	$	6,955	$	2,913,026	$	2,919,981	$	6,164	$	416

Impaired Loans

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

Impaired loans include nonperforming loans as well as loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.

ASC Topic 310, Receivables , requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral, less costs to sell, and allows existing methods for recognizing interest income.

The following table presents the Company’s impaired loans as of September 30, 2020 and December 31, 2019.


	September 30, 2020						December 31, 2019
(in thousands)	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance
Commercial and industrial	$	517	$	517	$	—	$	2,693	$	2,694	$	—
Owner-occupied commercial real estate	3,246		3,250		—		5,663		5,665		—


Single tenant lease financing	217		217		—		—		—		—

Healthcare finance	1,034		1,034		—		—		—		—

Residential mortgage	1,450		1,543		—		1,135		1,209		—

Other consumer	39		105		—		43		107		—
Total	6,503		6,666		—		9,534		9,675		—
Loans with a specific valuation allowance
Commercial and industrial	118		140		50		207		244		109



Single tenant lease financing	7,148		7,166		2,027		4,680		4,680		1,660





Total	7,266		7,306		2,077		4,887		4,924		1,769
Total impaired loans	$	13,769	$	13,972	$	2,077	$	14,421	$	14,599	$	1,769

The table below presents average balances and interest income recognized for impaired loans during the three and nine months ended September 30, 2020 and 2019.


	Three Months Ended								Nine Months Ended
	September 30, 2020				September 30, 2019				September 30, 2020				September 30, 2019
(in thousands)	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	$	971	$	18	$	4,433	$	70	$	1,210	$	54	$	4,395	$	237
Owner-occupied commercial real estate	3,586		29		4,803		52		4,244		60		3,244		145




Healthcare finance	692		8		231		8		—		—		—		—

Residential mortgage	1,233		—		2,714		—		1,286		—		2,768		—
Home equity	—		—		—		—		—		—		14		—
Other consumer	68		—		66		—		63		—		75		—
Total	6,550		55		12,016		122		7,034		122		10,496		382
Loans with a specific valuation allowance
Commercial and industrial	182		18		1,032		—		196		18		462		—



Single tenant lease financing	5,978		4		1,173		—		5,113		4		391		—





Total	6,160		51		2,205		—		5,309		51		853		—
Total impaired loans	$	12,710	$	106	$	14,221	$	122	$	12,343	$	173	$	11,349	$	382

The Company had no residential mortgage other real estate owned as of September 30, 2020 and December 31, 2019. There were no loans in the process of foreclosure at September 30, 2020 and December 31, 2019.

Troubled Debt Restructurings

The loan portfolio includes TDRs, which are loans that have been modified to grant economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain

TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six consecutive months.

When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or using the current fair value of the collateral, less selling costs, for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance.

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

There were no loans classified as new TDRs during the three months ended September 30, 2020 and one portfolio residential mortgage loan classified as a new TDR during the nine months ended September 30, 2020 with a pre-modification and post-modification outstanding recorded investment of $ 0.8 million. The Company did not allocate a specific allowance for that loan as of September 30, 2020. The modification consisted of an extension of the maturity date. There were no loans classified as new TDRs during the three months ended September 30, 2019 and four commercial and industrial loans classified as new TDRs during the nine months ended September 30, 2019 with a pre-modification and post-modification outstanding recorded investment of $ 2.0 million. The Company did not allocate a specific allowance for those loans as of September 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 nine months ended September 30, 2020 and 2019, respectively.

Non-TDR Loan Modifications due to COVID-19

The “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” was issued by our banking regulators on March 22, 2020. This guidance encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.

Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of December 31, 2020 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates.

In accordance with this guidance, the Company offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments. The table below presents loan deferrals by loan category as of June 30, 2020 and September 30, 2020, respectively.


(in thousands)	June 30, 2020 Deferrals Balance		September 30, 2020 Deferrals Balance		September 30, 2020 Number of Deferrals
Commercial loans
Commercial and industrial	$	2,312	$	722	5
Owner-occupied commercial real estate	25,254		6,235		4
Investor commercial real estate	411		—		—
Construction	—		—		—
Single tenant lease financing	275,129		8,281		4
Public finance	—		—		—
Healthcare finance	79,179		2,275		3
Small business lending	1,823		2,790		10
Total commercial loans	384,108		20,303		26
Consumer loans
Residential mortgage	4,719		2,329		5
Home equity	398		—		—
Other consumer	3,205		632		21
Total consumer loans	8,322		2,961		26
Total commercial and consumer loans	$	392,430	$	23,264	52

Note 5: Premises and Equipment

The following table summarizes premises and equipment at September 30, 2020 and December 31, 2019.


(in thousands)	September 30, 2020		December 31, 2019
Land	$	2,500	$	2,500
Right of use leased asset	1,032		1,602
Building and improvements	27,572		10,004
Furniture and equipment	10,692		9,689
Less: accumulated depreciation	( 10,534 )		( 9,165 )
Total	$	31,262	$	14,630

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 with the City of Fishers, Indiana (the “City”), and its Redevelopment Commission, among others, the City agreed to reimburse SPF15 for the purchase price and other specified land acquisition costs. The Land Acquisition Agreement was replaced by a Project Agreement in December 2018, which extended the reimbursement deadline to October 31, 2019 and made additional financial incentives available to the Company for constructing an office building and associated parking garage on the property. As contemplated under the Project Agreement, the City transferred to SPF15 two additional parcels of land consisting of approximately 0.75 acres and SPF15 transferred to the Fishers Town Hall Building Corporation and third parties a certain parcel of land consisting of approximately 1.65 acres in connection with the development of the property. On October 25, 2019, the City satisfied its reimbursement obligation, resulting in the payment of SPF15 of an aggregate of $ 11.1 million for purchase prices and other specified land acquisition costs.

Site demolition has been completed and construction of a multi-use development, to include the Company's future headquarters, began on October 7, 2019. Development of the site is estimated to be substantially completed by the fourth quarter 2021.

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.

The Company has three 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 asset and a corresponding lease liability.

The following table shows the components of lease expense.


(in thousands)	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Operating lease cost	$	225	$	182	$	691	$	550

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


(in thousands)	Nine Months Ended
		September 30, 2020		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	740	$	590

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)
	September 30, 2020			December 31, 2019
Operating lease right-of-use assets	$	1,032		$	1,602
Operating lease liabilities	1,032			1,602

Weighted-average remaining lease term (years)
Operating leases	2.0			2.4

Weighted-average discount rate
Operating leases	2.0		%	2.0		%

The following table shows the future minimum payments of operating leases with initial or remaining terms of one year or more as of September 30, 2020.


(in thousands)
Twelve months ended September 30,
2021	$	558
2022	264
2023	174
2024	—
2025	—
Thereafter	—
Total lease payments	996
Less: imputed interest	( 22 )
Total	$	974

Note 7: Goodwill

As of September 30, 2020 and December 31, 2019, 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 September 30, 2020. Goodwill is assessed for impairment annually as of August 31, or more frequently if events occur or circumstances change that indicate an impairment may exist. When assessing goodwill for impairment, first, a qualitative assessment can be made to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its estimated carrying value. If the results of the qualitative assessment are not conclusive, a quantitative goodwill test is performed. Alternatively, a quantitative goodwill test can be performed without performing a qualitative assessment.

Goodwill was assessed for impairment using a quantitative test performed as of August 31, 2020. The estimated fair value of the reporting unit exceeded the net carrying value, and therefore no goodwill impairment existed as of that date.

Note 8: Servicing Asset

Activity for the servicing asset and the related changes in fair value for the nine months ended September 30, 2020 and 2019 are shown in the table below.


(in thousands)	Nine Months Ended
	September 30, 2020		September 30, 2019
Beginning balance	$	2,481	$	—
Additions	709		—
Changes in fair value	( 372 )		—
Ending balance	$	2,818	$	—

Loans serviced for others are not included in the condensed consolidated balance sheets. The unpaid principal balances of these loans serviced for others as of September 30, 2020 and December 31, 2019 are shown in the table below.


(in thousands)
	September 30, 2020		December 31, 2019
Loan portfolios serviced for:
SBA guaranteed loans	$	131,525	$	103,981

Total	$	131,525	$	103,981

Loan servicing revenue totaled $ 0.3 million and $ 0.8 million during the three and nine months ended September 30, 2020, respectively. There was no loan servicing revenue during the three and nine months ended September 30, 2019.

Loan servicing asset revaluation, which represents the change in fair value of the servicing asset, resulted in a $ 0.1 million and $ 0.4 million downward valuation for the three and nine months ended September 30, 2020, respectively. There was no loan servicing asset revaluation during the three and nine months ended September 30, 2019.

The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Though fluctuations in prepayment speeds and changes in secondary market premiums generally have the most substantial impact on the fair value of servicing rights, other influencing factors include changing economic conditions, changes to the discount rate assumption and the weighted average life of the servicing portfolio. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time; however, those assumptions may change over time. Refer to Note 12 - Fair Value of Financial Instruments for further details.

Note 9: 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 September 30, 2020 and December 31, 2019.


	September 30, 2020				December 31, 2019
(in thousands)	Principal		Unamortized Debt Issuance Costs		Principal		Unamortized Debt Issuance Costs

2025 Note	10,000		( 120 )		10,000		( 138 )
2026 Notes	25,000		( 746 )		25,000		( 839 )
2029 Notes	37,000		( 1,376 )		37,000		( 1,495 )
Total	$	72,000	$	( 2,242 )	$	72,000	$	( 2,472 )

Note 10: 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 $ 0.5 million and $ 1.6 million of share-based compensation expense for the three and nine months ended September 30, 2020, respectively, related to awards made under th e 2013 Plan. The Company recorded $ 0.4 million and $ 1.3 million of share-based compensation expense for the three and nine months ended September 30, 2019, respectively, related to awards made under the 2013 Plan.

The following table summarizes the status of the 2013 Plan awards as of September 30, 2020 , and activity for the nine months ended September 30, 2020.


	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, 2019	107,244	$	29.03	—	$	—	—	$	—
Granted	66,855	27.56		16,090	25.58		10	17.96
Vested	( 48,499 )	30.34		( 10,630 )	25.68		( 10 )	17.96
Forfeited	—	—		( 1,638 )	27.56		—	—
Nonvested at September 30, 2020	125,600	$	27.74	3,822	$	24.44	—	$	—

At September 30, 2020, the total unrecognized compensation cost related to nonvested awards was $ 2.6 million with a weighted-average expense recognition period of 1.8 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 nine months ended September 30, 2020.


						Deferred Stock Rights
Outstanding, beginning of period						84,505
Granted						640
Exercised						—
Outstanding, end of period						85,145

All deferred stock rights granted during the 2020 period were additional rights issued in lieu of cash dividends payable on outstanding deferred stock rights.

Note 11: Commitments and Credit Risk

In the normal course of business, the Company makes various commitments to extend credit which are not reflected in the accompanying condensed consolidated financial statements. At September 30, 2020 and December 31, 2019, the Company had outstanding loan commitments totaling approximately $ 278.7 million and $ 254.4 million, respectively.

In addition, the Company is a limited partner in a Small Business Investment Company fund (the “SBIC Fund”). As of September 30, 2020, the Company has committed to contribute up to $ 1.7 million of capital to the SBIC Fund.

Capital Commitments

Capital expenditures contracted to at the balance sheet date but not yet recognized in the financial statements are associated with the construction of premises intended to house our future corporate headquarters. The Company has entered into construction-related contracts in the amount of $ 65.1 million. As of September 30, 2020, $ 44.7 million of such contract commitments had not yet been incurred. These commitments are due within two years .

Note 12: 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 corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but also on the investment securities’ relationship to other benchmark quoted investment securities.

In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of September 30, 2020 or December 31, 2019.

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).

Servicing Asset

Fair value is based on a loan-by-loan basis taking into consideration the original maturity of the loans, the current age of the loans and the remaining term to maturity. The valuation methodology utilized for the servicing assets begins with generating estimated future cash flows for each servicing asset, based on their unique characteristics and market-based assumptions for prepayment speeds and costs to service. The present value of the future cash flows is then calculated utilizing market-based discount rate assumptions (Level 3).

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 (Level 2).

Forward Contracts

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

Interest Rate Lock Commitments

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

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and December 31, 2019.


			September 30, 2020 Fair Value Measurements Using
(in thousands)	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	$	63,682	$	—	$	63,682	$	—
Municipal securities	86,421		—		86,421		—
Agency mortgage-backed securities	253,292		—		253,292		—
Private label mortgage-backed securities	72,626				72,626		—
Asset-backed securities	4,921		—		4,921		—
Corporate securities	47,369		—		47,369		—

Total available-for-sale securities	528,311		—		528,311		—
Loans held-for-sale (mandatory pricing agreements)	35,321		—		35,321		—
Servicing asset	2,818		—		—		2,818

Interest rate swap agreements	( 32,492 )		—		( 32,492 )		—
Forward contracts	( 485 )		( 485 )		—		—
IRLCs	3,116		—		—		3,116


			December 31, 2019 Fair Value Measurements Using
(in thousands)	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	$	75,872	$	—	$	75,872	$	—
Municipal securities	97,652		—		97,652		—
Agency mortgage-backed securities	261,440		—		261,440		—
Private label mortgage-backed securities	63,613		—		63,613		—
Asset-backed securities	4,955		—		4,955		—
Corporate securities	37,320		—		37,320		—

Total available-for-sale securities	540,852		—		540,852		—
Loans held-for-sale (mandatory pricing agreements)	56,097		—		56,097		—
Servicing asset	2,481		—		—		2,481

Interest rate swap agreements	( 37,786 )		—		( 37,786 )		—
Forward contracts	( 153 )		( 153 )		—		—
IRLCs	910		—		—		910

The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three and nine months ended September 30, 2020 and 2019.


	Three Months Ended
(in thousands)	Servicing Asset		Interest Rate Lock Commitments
Balance, July 1, 2020	$	2,522	$	282
Total realized gains (losses)
Additions	399		—
Change in fair value	( 103 )		2,834

Balance, September 30, 2020	2,818		3,116

Balance as of July 1, 2019	$	—	$	1,209
Total realized gains

Change in fair value	—		275

Balance, September 30, 2019	$	—	$	1,484



(in thousands)	Nine Months Ended
	Servicing Asset		Interest Rate Lock Commitments
Balance January 1, 2020	$	2,481	$	910
Total realized gains (losses)
Additions	709		—
Change in fair value	( 372 )		2,206

Balance, September 30, 2020	$	2,818	3,116

Balance as of January 1, 2019	$	—	$	389
Total realized gains
Change in fair value	—		1,095

Balance, September 30, 2019	$	—	$	1,484

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.

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 September 30, 2020 and December 31, 2019.


			September 30, 2020
(in thousands)			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)
Impaired Loans	$	2,102	$	—	$	—	$	2,102

Other real estate owned	—		—		—		—


			December 31, 2019
(in thousands)			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)
Impaired loans	$	3,019	$	—	$	—	$	3,019

Significant Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.


(dollars in thousands)	Fair Value at September 30, 2020		Valuation Technique	Significant Unobservable Inputs	Range	Weighted-Average Range

Impaired loans	$	2,102	Fair value of collateral	Discount for type of property and current market conditions	8% - 20%	15 %
IRLCs	3,116		Discounted cash flow	Loan closing rates	45% - 100%	84 %
Servicing asset	2,818		Discounted cash flow	Prepayment speeds	0% - 25%	12.8 %
Other real estate owned	—		Fair value of collateral	Discount to reflect current market conditions	100 %	100 %


(dollars in thousands)	Fair Value at December 31, 2019		Valuation Technique	Significant Unobservable Inputs	Range	Weighted-Average Range
Impaired loans	$	3,019	Fair value of collateral	Discount for type of property and current market conditions	10 %	10 %

IRLCs	910		Discounted cash flow	Loan closing rates	50% - 100%	84 %
Servicing asset	2,481		Discounted cash flow	Prepayment speeds	0% - 25%	13.5 %

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.

Securities Held-to-Maturity

Level 2 securities include municipal securities and 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.

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 September 30, 2020 and December 31, 2019.

The following tables present the carrying value and estimated fair value of all financial assets and liabilities at September 30, 2020 and December 31, 2019.


	September 30, 2020 Fair Value Measurements Using
(in thousands)	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	$	488,453	$	488,453	$	488,453	$	—	$	—

Securities held-to-maturity	68,254		69,176		—		69,176		—
Loans held-for-sale (best efforts pricing agreements)	40,887		40,887		—		40,887		—
Net loans	2,985,997		3,049,741		—		—		3,049,741
Accrued interest receivable	17,768		17,768		17,768		—		—
Federal Home Loan Bank of Indianapolis stock	25,650		25,650		—		25,650		—
Deposits	3,372,391		3,417,780		1,650,210		—		1,767,570
Advances from Federal Home Loan Bank	514,914		545,751		—		545,751		—
Subordinated debt	69,758		72,333		62,146		10,187		—
Accrued interest payable	1,249		1,249		1,249		—		—


	December 31, 2019 Fair Value Measurements Using
(in thousands)	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	$	327,361	$	327,361	$	327,361	$	—	$	—

Securities held-to-maturity	61,878		62,560		—		62,560		—

Net loans	2,941,707		2,876,688		—		—		2,876,688
Accrued interest receivable	18,607		18,607		18,607		—		—
Federal Home Loan Bank of Indianapolis stock	25,650		25,650		—		25,650		—
Deposits	3,153,963		3,232,065		1,002,141		—		2,229,924
Advances from Federal Home Loan Bank	514,910		520,950		—		520,950		—
Subordinated debt	69,528		75,206		64,996		10,210		—
Accrued interest payable	3,767		3,767		3,767		—		—

Note 13: 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 14 for further information on derivative financial instruments.

During the three months ended September 30, 2020 and 2019, the Company originated mortgage loans held-for-sale of $ 216.0 million and $ 210.2 million, respectively, and sold $ 203.7 million and $ 203.7 million of mortgage loans, respectively, into the secondary market. During the nine months ended September 30, 2020 and 2019, the Company originated mortgage loans held-for-sale of $ 431.4 million and $ 430.5 million, respectively, and sold $ 429.3 million and $ 415.2 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 nine months ended September 30, 2020 and 2019.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Gain on loans sold	$	6,441	$	3,606	$	14,948	$	7,608
Gain (loss) resulting from the change in fair value of loans held-for-sale	823		( 100 )		( 116 )		( 452 )
Gain resulting from the change in fair value of derivatives	2,366		801		1,874		1,432
Net revenue from mortgage banking activities	$	9,630	$	4,307	$	16,706	$	8,588

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 14: 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 had 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 September 30, 2020 and December 31, 2019.


(in thousands)	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	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Loans	$	—	$	474,957	$	—	$	21,440
Securities available-for-sale (1)	134,949		151,538		6,595		2,802

(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 September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019, identified by the underlying interest rate-sensitive instruments.


(dollars in thousands) September 30, 2020	Notional Value		Weighted- Average Remaining Maturity (years)			Weighted-Average Ratio
Instruments Associated With				Fair Value		Receive	Pay

Securities available-for-sale	$	88,200	3.4	$	( 6,610 )	3-month LIBOR	2.54	%
Total at September 30, 2020	$	88,200	3.4	$	( 6,610 )	3-month LIBOR	2.54	%


(dollars in thousands) December 31, 2019	Notional Value		Weighted- Average Remaining Maturity (years)			Weighted-Average Ratio
Instruments Associated With				Fair Value		Receive	Pay
Loans	$	427,446	5.5	$	( 21,551 )	3-month LIBOR	2.86	%
Securities available-for-sale	88,200		4.1	( 2,806 )		3-month LIBOR	2.54	%
Total at December 31, 2019	$	515,646	5.3	$	( 24,357 )	3-month LIBOR	2.80	%

In June 2020, the Company terminated all fair value hedging relationships associated with loans, which resulted in swap termination payments to counterparties totaling $ 46.1 million. The corresponding loan fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated loans. As of September 30, 2020, the remaining unamortized loan fair value hedging adjustment was $ 44.3 million and the remaining lives of the designated loans have a weighted-average term to maturity of 13.4 years.

The following tables present 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 September 30, 2020 and December 31, 2019.


(dollars in thousands) September 30, 2020	Notional		Weighted- Average Remaining Maturity			Weighted-Average Ratio
Cash Flow Hedges	Value		(years)	Fair Value		Receive	Pay
Interest rate swaps	$	110,000	6.3	$	( 17,177 )	3-month LIBOR	2.88	%
Interest rate swaps	100,000		3.2	( 8,705 )		1-month LIBOR	2.88	%


(dollars in thousands) December 31, 2019	Notional		Weighted- Average Remaining Maturity			Weighted-Average Ratio
Cash Flow Hedges	Value		(years)	Fair Value		Receive	Pay
Interest rate swaps	$	110,000	7.1	$	( 8,390 )	3-month LIBOR	2.88	%
Interest rate swaps	100,000		4.0	( 5,040 )		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 $ 33.7 million and $ 42.3 million of cash collateral to counterparties as security for its obligations related to these interest rate swap transactions at September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019.


	September 30, 2020				December 31, 2019
(in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Asset Derivatives




Derivatives not designated as hedging instruments
IRLCs	$	114,546	$	3,116	$	56,256	$	910

Total contracts	$	114,546	$	3,116	$	56,256	$	910
Liability Derivatives
Derivatives designated as hedging instruments
Interest rate swaps associated with loans	$	—	$	—	$	427,446	$	( 21,551 )
Interest rate swaps associated with securities available-for-sale	88,200		( 6,610 )		88,200		( 2,806 )
Interest rate swaps associated with liabilities	210,000		( 25,882 )		210,000		( 13,429 )
Derivatives not designated as hedging instruments
Forward contracts	118,000		( 485 )		115,000		( 153 )

Total contracts	$	416,200	$	( 32,977 )	$	840,646	$	( 37,939 )

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 nine months ended September 30, 2020 and 2019.


	Amount of Gain (Loss )Recognized in Other Comprehensive Income (Loss) in The Three Months Ended				Amount of Loss Recognized in Other Comprehensive Income (Loss) in The Nine Months Ended
(in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019

Interest rate swap agreements	$	1,514	$	( 3,225 )	$	( 12,453 )	$	( 12,689 )

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 nine months ended September 30, 2020 and 2019.


	Amount of Gain / (Loss) Recognized in the Three Months Ended				Amount of Gain / (Loss) Recognized in the Nine Months Ended
(in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Asset Derivatives
Derivatives not designated as hedging instruments
IRLCs	$	2,834	$	275	$	2,206	$	1,095


Liability Derivatives
Derivatives not designated as hedging instruments

Forward contracts	$	( 468 )	$	526	$	( 332 )	$	337

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 nine months ended September 30, 2020 and 2019.


(in thousands) Line item in the condensed consolidated statements of income	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Interest income
Loans	$	—	$	( 521 )	$	( 2,445 )	$	( 785 )
Securities - taxable	( 229 )		( 42 )		( 479 )		( 59 )
Securities - non-taxable	( 242 )		—		( 472 )		72
Total interest income	( 471 )		( 563 )		( 3,396 )		( 772 )
Interest expense
Deposits	685		161		1,585		355
Other borrowed funds	721		136		1,632		249
Total interest expense	1,406		297		3,217		604
Net interest income	$	( 1,877 )	$	( 860 )	$	( 6,613 )	$	( 1,376 )

Note 15: Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, included in stockholders' equity, for the nine months ended September 30, 2020 and 2019, respectively, are presented in the table below.


(in thousands)	Available-For-Sale Securities		Cash Flow Hedges		Total
Balance, January 1, 2020	$	( 4,388 )	$	( 9,803 )	$	( 14,191 )
Net change in unrealized gain (loss)	6,187		( 12,453 )		( 6,266 )
Reclassification of gain realized and included in earnings	( 139 )		—		( 139 )
Accumulated other comprehensive income (loss) before income tax	1,660		( 22,256 )		( 20,596 )
Income tax provision (benefit)	2,096		( 3,602 )		( 1,506 )
Balance, September 30, 2020	$	( 436 )	$	( 18,654 )	$	( 19,090 )

Balance, January 1, 2019	$	( 13,360 )	$	( 3,181 )	$	( 16,541 )
Net change in unrealized gain (loss)	11,843		( 12,689 )		( 846 )
Reclassification of net loss realized and included in earnings	458		—		458
Accumulated other comprehensive loss before income tax	( 1,059 )		( 15,870 )		( 16,929 )
Income tax provision (benefit)	3,552		( 3,426 )		126
Balance, September 30, 2019	$	( 4,611 )	$	( 12,444 )	$	( 17,055 )

The components of accumulated other comprehensive loss, included in stockholders' equity, for the three months ended September 30, 2020 and 2019, respectively, are presented in the table below.


(in thousands)	Available-For-Sale Securities		Cash Flow Hedges		Total
Balance, July 1, 2020	$	( 1,388 )	$	( 19,750 )	$	( 21,138 )
Net change in unrealized loss	1,386		1,514		2,900
Reclassification of gain realized and included in earnings	( 98 )		—		( 98 )
Accumulated other comprehensive loss before income tax	( 100 )		( 18,236 )		( 18,336 )
Income tax benefit	336		418		754
Balance, September 30, 2020	$	( 436 )	$	( 18,654 )	$	( 19,090 )

Balance, July 1, 2019	$	( 5,488 )	$	( 10,090 )	$	( 15,578 )
Net change in unrealized gain (loss)	1,266		( 3,225 )		( 1,959 )

Accumulated other comprehensive loss before income tax	( 4,222 )		( 13,315 )		( 17,537 )
Income tax (benefit) provision	389		( 871 )		( 482 )
Balance, September 30, 2019	$	( 4,611 )	$	( 12,444 )	$	( 17,055 )

Note 16: Recent Accounting Pronouncements

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. In October 2019, the FASB voted to delay the effective date for smaller reporting companies to fiscal years beginning after December 15, 2022. 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 prior to the effective date 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 current expected credit losses (“CECL”) models using appropriate methodologies.

ASU 2017-04 - Intangibles - Goodwill and other (Topic 350) - Simplifying the Test for Goodwill Impairment” (January 2017)

The amendments in this update simplify the goodwill impairment test by eliminating Step 2 of the goodwill impairment process, which requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities. Under the new guidance, an entity will record an impairment charge if a reporting unit’s carrying amount exceeds its fair value. Entities still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment is necessary. The amendments in this ASU are effective for smaller reporting companies for annual and interim impairment tests performed in periods beginning after December 15, 2022. Early adoption is permitted. The Company adopted this guidance effective July 1, 2020 and it did not have a material impact on the condensed consolidated financial statements.

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. The Company adopted this guidance 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 ASC Topic 326, Topic 815 and Topic 825. 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 have 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 transitioning from a quantitative method of assessing hedge effectiveness to a more simplified method. The amendments to Topic 815 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. With respect to Topic 825, ASU 2019-04 addresses the scope of the guidance, the requirement for remeasurement under ASC Topic 820 when using the measurement alternative, certain disclosure requirements, and which equity securities must 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.

Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)

In March 2020 in connection with the implementation of the CARES Act and related provisions, the Company adopted the temporary relief issued under the CARES Act, thereby suspending the guidance in ASC 310-40 on accounting for TDRs to loan modifications related to COVID-19. Section 4013 of the CARES Act specifies that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of December 31, 2020 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. See the “Non-TDR Loan Modifications due to COVID-19” section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information.

Note 17: Subsequent Event

Subsequent to the end of the quarter, on October 26, 2020, the Company issued $ 10.0 million in aggregate principal amount of 6.0 % Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”). The Notes were offered and sold by the Company in a private placement and are scheduled to mature on November 1, 2030. The 2030 Notes bear interest at a fixed rate of 6.0 % per annum from and including October 26, 2020, to, but excluding, November 1, 2025, and thereafter at a floating interest rate initially equal to the three-month term SOFR plus 5.795 %. The 2030 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines.

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” sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2019 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, small business lending 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 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. 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, acquisition or refinancing of owner-occupied CRE and equipment purchases. This portfolio segment is generally concentrated in the Western and Southwestern regions of the 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.

In 2018, we identified small business as an area for potential growth in loans, revenue and deposits. We believe that we can differentiate ourselves from larger financial institutions through providing a full suite of services to emerging small businesses and entrepreneurs. We have been focused on adding experienced personnel to build out our capabilities in small business lending and U.S. government guaranteed lending programs, including loans originated under the Small Business Administration (“SBA”) guidelines. To accelerate our efforts in this area, on November 1, 2019 we acquired a loan portfolio, a servicing portfolio and a team of experienced SBA professionals from First Colorado National Bank. During 2020, we have continued to hire additional small business sales, credit and operations personnel and plan to continue our efforts in onboarding talent as we build out our nationwide small business platform.

COVID-19 Pandemic

The third quarter 2020 was characterized by continued uncertainty as the coronavirus pandemic (“COVID-19”) persisted globally, resulting in high unemployment and market volatility. However, Federal, state and local governments have taken steps to reopen and stimulate economies, evidenced by improving economic indicators as the quarter progressed. While the effects of COVID-19 did have an impact on our operating results as of September 30, 2020, we believe the impact was consistent with the effects of COVID-19 on the overall banking industry. The low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 had a negative impact on our variable rate assets in the second and third quarters of 2020. However, the low interest rate environment has also allowed us to reprice our interest-bearing deposits at lower rates, which provided a benefit to net interest income in the third quarter 2020. The benefit from lower deposit pricing is expected to continue in the fourth quarter 2020 and into 2021. Additionally, the low interest rate environment has driven residential mortgage rates to historically low levels, which has resulted in increased mortgage originations and has benefited our residential mortgage business.

At this time, the ultimate impact of COVID-19 on our business continues to remain uncertain as we cannot predict the duration of the pandemic or when the economies in which we operate will return to conditions existing prior to COVID-19. As a result of continued measures to either contain or reduce the impact of COVID-19, or an increase in the number of reported cases or mortality rates, we may experience issues that negatively impact our business, such as a decline in the liquidity of our borrowers or volatility in interest rates.

Throughout the COVID-19 pandemic, our top priority has been the health of our team and clients. Most of our employees who worked remotely during the earlier stages of the pandemic have returned to the office. We have implemented social distancing policies, require our employees to wear masks while at work and increased cleaning frequency and protocols at all Company locations. Management will continue to assess the evolving health and safety situations at local and regional levels. Our plans remain flexible to adapt as these situations evolve.

As a digitally-focused institution without branch locations, we were able to continue serving clients when they needed us most, while minimizing operational disruptions caused by COVID-19. Beginning in the first quarter 2020, we offered loan payment deferral programs for clients affected by COVID-19. Loan balances on payment deferral programs peaked in late May 2020 but as of October 30, 2020, less than 1% of loan balances were in deferral status and all borrowers coming off deferrals have resumed normal payment schedules. Despite the challenging environment, we have continued to prudently extend credit to both commercial and consumer clients.

Results of Operations

The following table presents a summary of the Company’s financial performance for the last five completed fiscal quarters and the nine months ended September 30, 2020 and 2019.


(dollars in thousands except for per share data)	Three Months Ended															Nine Months Ended
	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			September 30, 2020			September 30, 2019
Income Statement Summary:
Net interest income	$	16,232		$	14.426		$	15,018		$	15,374		$	15,244		$	45,676		$	47,593
Provision for loan losses	2,509			2,491			1,461			468			2,824			6,461			5,498
Noninterest income	12,495			4,973			6,211			5,405			5,558			23,679			11,384
Noninterest expense	16,412			13,244			13,486			12,613			11,203			43,142			34,021
Income tax provision (benefit)	1,395			(268)			263			602			449			1,390			1,315
Net income	$	8,411		$	3,932		$	6,019		$	7,096		$	6,326		$	18,362		$	18,143
Per Share Data:
Earnings per share - basic	$	0.86		$	0.40		$	0.62		$	0.72		$	0.63		$	1.87		$	1.79
Earnings per share - diluted	$	0.86		$	0.40		$	0.62		$	0.72		$	0.63		$	1.87		$	1.79
Dividends declared per share	$	0.06		$	0.06		$	0.06		$	0.06		$	0.06		$	0.18		$	0.18
Book value per common share	$	32.46		$	31.40		$	31.13		$	31.30		$	30.30		$	32.46		$	30.30
Tangible book value per common share 1	$	31.98		$	30.92		$	30.65		$	30.82		$	29.82		$	31.98		$	29.82
Common shares outstanding	9,800,569			9,799,047			9,801,825			9,741,800			9,741,800			9,800,569			9,741,800
Average common shares outstanding:
Basic	9,773,175			9,768,227			9,721,485			9,825,784			9,979,603			9,825,683			10,114,303
Diluted	9,773,224			9,768,227			9,750,528			9,843,829			9,980,612			9,827,182			10,116,507
Dividend payout ratio 2	6.98		%	15.00		%	9.68		%	8.33		%	9.52		%	9.63		%	10.06		%
Performance Ratios:
Return on average assets	0.78		%	0.37		%	0.59		%	0.69		%	0.63		%	0.58		%	0.64		%
Return on average shareholders’ equity	10.67		%	5.15		%	7.78		%	9.46		%	8.40		%	7.90		%	8.20		%
Return on average tangible common equity 1	10.83		%	5.23		%	7.90		%	9.61		%	8.53		%	8.02		%	8.33		%
Net interest margin	1.53		%	1.37		%	1.50		%	1.51		%	1.54		%	1.47		%	1.70		%
Net interest margin - FTE 1,3	1.67		%	1.50		%	1.65		%	1.67		%	1.70		%	1.61		%	1.87		%
Noninterest expense to average assets	1.52		%	1.22		%	1.32		%	1.22		%	1.11		%	1.36		%	1.19		%
Capital Ratios:
Total shareholders’ equity to assets	7.34		%	7.12		%	7.32		%	7.44		%	7.21		%	7.34		%	7.21		%
Tangible common equity to tangible assets ratio 1	7.24		%	7.01		%	7.22		%	7.33		%	7.10		%	7.24		%	7.10		%
Tier 1 leverage ratio	7.72		%	7.49		%	7.82		%	7.64		%	7.66		%	7.72		%	7.66		%
Common equity tier 1 capital ratio	11.13		%	10.94		%	10.76		%	10.84		%	10.93		%	11.13		%	10.93		%
Tier 1 capital ratio	11.13		%	10.94		%	10.76		%	10.84		%	10.93		%	11.13		%	10.93		%
Total risk-based capital ratio	14.38		%	14.13		%	13.87		%	13.99		%	14.17		%	14.38		%	14.17		%

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

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 third quarter 2020, net income was $8.4 million, or $0.86 per diluted share, compared to the third quarter 2019 net income of $6.3 million, or $0.63 per diluted share, representing an increase in net income of $2.1 million, or 33.0%. During the nine months ended September 30, 2020, net income was $18.4 million, or $1.87 per diluted share, compared to the nine months ended September 30, 2019 net income of $18.1 million, or $1.79 per diluted share, representing an increase in net income of $0.2 million, or 1.2%.

The $2.1 million increase in net income in the third quarter 2020 compared to the third quarter 2019 was due primarily to an increase of $6.9 million, or 124.8%, in noninterest income, an increase of $1.0 million, or 6.5%, in net interest income and a $0.3 million, or 11.2%, decrease in provision for loan losses, partially offset by a $5.2 million, or 46.5%, increase in noninterest expense and an increase of $0.9 million, or 210.7%, in income tax expense.

The $0.2 million increase in net income in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due primarily to a $12.3 million, or 108.0%, increase in noninterest income, partially offset by a $9.1 million, or 26.8%, increase in noninterest expense, a $1.9 million, or 4.0%, decrease in net interest income, a $1.0 million, or 17.5%, increase in provision for loan losses and a $0.1 million, or 5.7%, increase in income tax expense.

During the third quarter 2020, return on average assets (“ROAA”) and return on average shareholders’ equity (“ROAE”) were 0.78% and 10.67%, respectively, compared to 0.63% and 8.40%, respectively, for the third quarter 2019. During the nine months ended September 30, 2020, ROAA and ROAE were 0.58% and 7.90%, respectively, compared to 0.64% and 8.20%, respectively, for the nine months ended September 30, 2019. The increase in ROAA for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due primarily to the increase in net income. The decrease in ROAA for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due primarily to the Company’s growth in average assets. The increase in ROAE during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due mainly to the increase in net income. The decrease in ROAE during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to the Company’s growth in average equity.

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
	September 30, 2020						June 30, 2020						September 30, 2019
	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	$	3,031,024	$	29,560	3.88	%	$	2,989,772	$	29,730	4.00	%	$	2,902,081	$	30,594	4.18	%
Securities - taxable	539,154		2,240		1.65	%	560,947		3,276		2.35	%	462,490		3,468		2.97	%
Securities - non-taxable	94,398		381		1.61	%	96,675		457		1.90	%	99,290		639		2.55	%
Other earning assets	552,058		569		0.41	%	594,296		759		0.51	%	469,454		2,993		2.53	%
Total interest-earning assets	4,216,634		32,750		3.09	%	4,241,690		34,222		3.24	%	3,933,315		37,694		3.80	%

Allowance for loan losses	(25,347)						(23,388)						(20,050)
Noninterest-earning assets	116,532						111,872						102,168
Total assets	$	4,307,819					$	4,330,174					$	4,015,433

Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits	$	154,275	$	228	0.59	%	$	137,487	$	237	0.69	%	$	126,130	$	233	0.73	%
Regular savings accounts	45,466		79		0.69	%	37,204		92		0.99	%	32,434		91		1.11	%
Money market accounts	1,295,249		2,442		0.75	%	1,089,063		3,541		1.31	%	639,181		3,261		2.02	%
Certificates and brokered deposits	1,784,631		9,679		2.16	%	2,006,966		11,893		2.38	%	2,233,350		14,778		2.63	%
Total interest-bearing deposits	3,279,621		12,428		1.51	%	3,270,720		15,763		1.94	%	3,031,095		18,363		2.40	%
Other borrowed funds	584,634		4,090		2.78	%	584,543		4,033		2.77	%	584,308		4,087		2.78	%
Total interest-bearing liabilities	3,864,255		16,518		1.70	%	3,855,263		19,796		2.07	%	3,615,403		22,450		2.46	%
Noninterest-bearing deposits	75,901						73,758						43,972
Other noninterest-bearing liabilities	54,052						94,285						57,276
Total liabilities	3,994,208						4,023,306						3,716,651

Shareholders’ equity	313,611						306,868						298,782
Total liabilities and shareholders’ equity	$	4,307,819					$	4,330,174					$	4,015,433

Net interest income			$	16,232					$	14,426					$	15,244

Interest rate spread 1					1.39%						1.17%						1.34	%
Net interest margin 2					1.53%						1.37%						1.54	%
Net interest margin - FTE 3					1.67%						1.50%						1.70	%

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 “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most directly comparable GAAP measure.


(dollars in thousands)	Nine Months Ended
	September 30, 2020						September 30, 2019
	Average Balance		Interest /Dividends		Yield /Cost		Average Balance		Interest /Dividends		Yield /Cost
Assets
Interest-earning assets
Loans, including loans held-for-sale	$	2,999,711	$	89,698	3.99	%	$	2,864,802	$	90,654	4.23	%
Securities - taxable	543,699		9,135		2.24	%	450,898		10,322		3.06	%
Securities - non-taxable	96,960		1,410		1.94	%	97,042		1,991		2.74	%
Other earning assets	520,875		2,973		0.76	%	322,544		6,560		2.72	%
Total interest-earning assets	4,161,245		103,216		3.31	%	3,735,286		109,537		3.92	%

Allowance for loan losses	(23,605)						(19,191)
Noninterest-earning assets	108,561						101,313
Total assets	$	4,246,201					$	3,817,408

Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits	$	138,288	$	684	0.66	%	$	117,811	$	659	0.75	%
Regular savings accounts	37,700		249		0.88	%	36,241		304		1.12	%
Money market accounts	1,084,411		9,726		1.20	%	598,410		9,009		2.01	%
Certificates and brokered deposits	1,952,973		34,740		2.38	%	2,128,239		40,924		2.57	%
Total interest-bearing deposits	3,213,372		45,399		1.89	%	2,880,701		50,896		2.36	%
Other borrowed funds	584,547		12,141		2.77	%	558,141		11,048		2.65	%
Total interest-bearing liabilities	3,797,919		57,540		2.02	%	3,438,842		61,944		2.41	%
Noninterest-bearing deposits	70,060						43,035
Other noninterest-bearing liabilities	67,716						39,568
Total liabilities	3,936,695						3,521,455

Shareholders’ equity	310,506						295,963
Total liabilities and shareholders’ equity	$	4,246,201					$	3,817,408

Net interest income			$	45,676					$	47,593

Interest rate spread 1					1.29	%					1.51	%
Net interest margin 2					1.47	%					1.70	%
Net interest margin - FTE 3					1.61	%					1.87	%

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 September 30, 2020 vs. June 30, 2020 Due to Changes in						Three Months Ended September 30, 2020 vs. September 30, 2019 Due to Changes in						Nine Months Ended September 30, 2020 vs. September 30, 2019 Due to Changes in
	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Interest income
Loans, including loans held-for-sale	$	2,207	$	(2,377)	$	(170)	$	6,263	$	(7,297)	$	(1,034)	$	5,804	$	(6,167)	$	(363)
Securities – taxable	(119)		(917)		(1,036)		2,983		(4,211)		(1,228)		2,692		(3,889)		(1,197)
Securities – non-taxable	(10)		(66)		(76)		(30)		(228)		(258)		(1)		(580)		(581)
Other earning assets	(50)		(140)		(190)		3,034		(5,458)		(2,424)		4,170		(7,757)		(3,587)
Total	2,028		(3,500)		(1,472)		12,250		(17,194)		(4,944)		12,665		(18,393)		(5,728)

Interest expense
Interest-bearing deposits	301		(3,636)		(3,335)		8,695		(14,630)		(5,935)		7,921		(13,418)		(5,497)
Other borrowed funds	3		54		57		3		—		3		558		535		1,093
Total	304		(3,582)		(3,278)		8,698		(14,630)		(5,932)		8,479		(12,883)		(4,404)

Increase (decrease) in net interest income	$	1,724	$	82	$	1,806	$	3,552	$	(2,564)	$	988	$	4,186	$	(5,510)	$	(1,324)

Net interest income for the third quarter 2020 was $16.2 million, an increase of $1.0 million, or 6.5%, compared to $15.2 million for the third quarter 2019. The increase in net interest income was primarily the result of a $5.9 million, or 26.4%, decrease in total interest expense to $16.5 million for the third quarter 2020 from $22.5 million for the third quarter 2019. The decrease in total interest expense was partially offset by a $4.9 million, or 13.1%, decrease in total interest income to $32.8 million for the third quarter 2020 from $37.7 million for the third quarter 2019.

Net interest income for the nine months ended September 30, 2020 was $45.7 million, a decrease of $1.9 million, or 4.0%, compared to $47.6 million for the nine months ended September 30, 2019. The decrease in net interest income was the result of a decrease in total interest income of $6.3 million, or 5.8%, from $109.5 million for the nine months ended September 30, 2019 to $103.2 million for the nine months ended September 30, 2020. This decrease was partially offset by a $4.4 million, or 7.1%, decrease in total interest expense to $57.5 million for the nine months ended September 30, 2020 from $61.9 million the nine months ended September 30, 2019.

The decrease in total interest income for the third quarter 2020 compared to the third quarter 2019 was due to decreases in interest earned on loans, including loans held-for-sale, other earning assets and securities. Interest income earned on other earning assets declined $2.4 million, or 81.0%, due mainly to a 212 basis point (“bp”) decline in the yield earned on these assets, partially offset by an increase of $82.6 million, or 17.6%, in the average balance of other earning assets. The increase in other earning assets was due to higher cash balances driven by growth in the average balance of deposits. Additionally, interest income earned on securities decreased $1.5 million, or 36.2%, due to a decline of 118 bps in the yield earned on securities, partially offset by an increase of $71.8 million, or 12.8%, in the average balance of securities. The increase in average securities balances was due to the deployment of liquidity driven by deposit growth. Interest income earned on loans decreased $1.0 million, or 3.4%, due primarily to a decline of 30 bps in the yield earned on average loan balances, partially offset by an increase of $128.9 million, or 4.4%, in average loan balances. The increase in average loan balances was due to growth in the healthcare finance portfolio and the small business lending portfolio, which included loans acquired from First Colorado National Bank, as well as loans originated through PPP.

The decrease in total interest income for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to decreases in interest income earned on loans, including loans held-for-sale, other earning assets and securities. Interest income earned on other earning assets decreased $3.6 million, or 54.7%, due to a decline of 196 bps in the yield earned on these assets, partially offset by an increase of $198.3 million, or 61.5%, in the average balance of other earning assets. The increase in other earning assets was due to higher cash balances driven by growth in the average balance of deposits. Interest income earned on securities decreased $1.8 million, or 14.4%, due to a decline of 81 bps in the yield earned on securities, partially offset by an increase of $92.7 million, or 16.9%, in the average balance of securities. The increase in average securities balances was due to deployment of liquidity driven by deposit growth. Interest income earned on

loans, including loans held-for-sale, decreased by $1.0 million as an increase of $134.9 million, or 4.7%, in the average balance of loans was partially offset by a decline of 24 bps in the yield earned on loans. The increase in average loan balances was due to growth in the healthcare finance portfolio and the small business lending portfolio, which included loans acquired from First Colorado National Bank, as well as loans originated through PPP.

Overall, the yield on interest-earning assets for the third quarter 2020 declined 71 bps to 3.09% from 3.80% for the third quarter 2019. Additionally, the yield on interest-earning assets for the nine months ended September 30, 2020 declined 61 bps to 3.31% from 3.92% for the nine months ended September 30, 2019. The declines in the yields earned on interest-earning assets were due to the continued decrease in market interest rates from the year-ago periods. Interest rates began declining during 2019 and have declined significantly in 2020 following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19. The decline in interest rates negatively impacted the yields earned on variable rate loans, including fixed rate loans that have been effectively converted to variable rate loans through the use of interest rate swap agreements, and new loan originations as well as variable rate securities and cash balances, which were elevated throughout both the third quarter 2020 and the nine months ended September 30, 2020 due to growth in average deposit balances.

The decrease in total interest expense for the third quarter 2020 compared to the third quarter 2019 was due primarily to a decrease in interest expense related to certificates and brokered deposits and money market accounts. Interest expense on certificates and brokered deposits decreased $5.1 million, or 34.5%, due to a decline of 47 bps in the cost of these deposits as well as a $448.7 million, or 20.1%, decrease in the average balance of these deposits. The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits. The decrease in interest expense related to money market accounts of $0.8 million, or 25.1%, was driven by a decline of 127 bps in the cost of these deposits, partially offset by an increase of $656.1 million, or 102.6%, in the average balance of these deposits. Money market balances have increased throughout 2020 due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19.

The decrease in total interest expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to a decrease in interest expense related to certificates and brokered deposits, partially offset by increases in interest expense on money market accounts and other borrowed funds. The decrease in expense related to certificates and brokered deposits of $6.2 million, or 15.1%, was due to a decline of 19 bps in the cost of these deposits as well as a $175.3 million, or 8.2%, decrease in the average balance of these deposits. The decrease in certificates and brokered deposit balances was driven by the Company’s pricing strategy to reduce the level of these higher cost deposits. Interest expense on money market accounts increased $0.7 million, or 8.0%, driven by an increase of $486.0 million, or 81.2%, in the average balance of these deposits, partially offset by a decline of 81 bps in the cost of these deposits. Money market balances have increased throughout 2020 due to targeted digital marketing efforts to grow small business accounts as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from COVID-19. The increase in expense related to other borrowed funds of $1.1 million, or 9.8%, was due primarily to the impact of the issuance of the 2029 Notes (subordinated debt) issued in June 2019 with an aggregate principal amount of $37.0 million and an initial fixed interest rate of 6.00%.

Overall, the cost of total interest-bearing liabilities for the third quarter 2020 declined 76 bps to 1.70% from 2.46% for the third quarter 2019. Additionally, the cost of total interest-bearing liabilities for the nine months ended September 30, 2020 declined 39 bps to 2.02% from 2.41% for the nine months ended September 30, 2019. Similar to asset yields, the declines in the cost of funds were due to the continued decrease in market interest rates from the year-ago periods. The sharp declines in both short- and long-term interest rates due to COVID-19 have allowed the Company to reprice all of its deposit products at lower rates. Furthermore, a shift in the deposit composition from higher cost certificates and brokered deposits to lower cost money market accounts also contributed to the decline in the cost of deposit funding.

Net interest margin (“NIM”) was 1.53% for the third quarter 2020 compared to 1.54% for the third quarter 2019. On a fully-taxable equivalent basis, NIM was 1.67% for the third quarter 2020 compared to 1.70% for the third quarter 2019.

NIM was 1.47% for the nine months ended September 30, 2020 compared to 1.70% for the nine months ended September 30, 2019. On a fully-taxable equivalent basis, NIM was 1.61% for the nine months ended September 30, 2020 compared to 1.87% for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, the decrease in NIM reflects the greater decline in asset yields compared to the decline in the cost of funds during the applicable periods. Following the Federal Reserve’s interest rate cuts in March 2020 in response to COVID-19, variable rate assets tied to market rates repriced faster than deposits. However, as the pace of short-term market interest rate declines has slowed over the course of the year, the Company believes that yields on

interest-earning assets have largely stabilized. Furthermore, the Company has approximately $931.0 million of certificates and brokered deposits with a weighted average cost of 2.02% that mature over the next twelve months. As the weighted average cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline.

Noninterest Income

The following table presents noninterest income for the last five completed fiscal quarters and the nine months ended September 30, 2020 and 2019.


(in thousands)	Three Months Ended										Nine Months Ended
	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		September 30, 2020		September 30, 2019
Service charges and fees	$	224	$	182	$	212	$	213	$	211	$	618	$	672
Loan servicing revenue	274		255		251		166		—		780		—
Loan servicing asset revaluation	(103)		(90)		(179)		—		—		(372)		—
Mortgage banking activities	9,630		3,408		3,668		2,953		4,307		16,706		8,588
Gain on sale of loans	2,033		762		1,801		1,721		523		4,596		353
Gain (loss) on sale of securities	98		—		41		—		—		139		(458)
Other	339		456		417		352		517		1,212		2,229
Total noninterest income	$	12,495	$	4,973	$	6,211	$	5,405	$	5,558	$	23,679	$	11,384

During the third quarter 2020, noninterest income was $12.5 million, representing an increase of $6.9 million, or 124.8%, compared to $5.6 million for the third quarter 2019. The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities, gain on sale of loans and loan servicing revenue, which were partially offset by lower other income and loan servicing asset revaluation. The increase in mortgage banking revenue was due mainly to an increase in loan origination volume, driven by historically low mortgage interest rates, and higher gain-on-sale margins. The increase in gain on sale of loans was due to the Company selling $12.9 million of SBA 7(a) guaranteed loans and $12.2 million of single tenant lease financing loans during the third quarter 2020, recognizing a net gain of $2.0 million, as compared to a $0.5 million net gain on the sale of loans in the third quarter 2019 from sales totaling $53.4 million of single tenant lease financing and public finance loans. The Company recognized $0.2 million of loan servicing revenue, net of the loan servicing asset revaluation, in the third quarter 2020, in connection with its SBA 7(a) servicing portfolio, which includes the portfolio acquired in the fourth quarter 2019 as well as loans originated by the Company in 2020. The decrease in other noninterest income was mainly the result of income recognized in the prior year related to the Company’s temporary ownership of the land associated with the Company’s future corporate headquarters. Refer to Note 11 to the condensed consolidated financial statements for additional information about the Company’s new headquarters.

During the nine months ended September 30, 2020, noninterest income was $23.7 million, representing an increase of $12.3 million, or 108.0%, compared to $11.4 million for the nine months ended September 30, 2019. The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities, gain on sale of loans, loan servicing revenue and gain (loss) on sale of securities, which were partially offset by a decrease in other income. The increase in mortgage banking revenue was due mainly to an increase in loan origination volume, driven by historically low mortgage interest rates, and higher gain-on-sale margins. The increase in gain on sale of loans was due to sales of portfolio loans with book values totaling $216.7 million that resulted in a gain of $1.3 million, as well as a gain of $3.3 million on the sale of SBA 7(a) guaranteed loans during the nine months ended September 30, 2020, compared to the Company selling portfolio loans with book values of $201.8 million that resulted in a net gain of $0.4 million during the nine months ended September 30, 2019. The increase in gain (loss) on sale of securities was due to a gain of $0.1 million being recorded during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 when the Company sold lower-yielding mortgage-backed and U.S. Government Agency securities that resulted in a loss of $0.5 million. The Company also recognized loan servicing revenue, net of the loan servicing asset revaluation, of $0.4 million, during the nine months ended September 30, 2020, in connection with its SBA 7(a) servicing portfolio, which includes the portfolio acquired in the fourth quarter 2019, as well as loans originated by the Company in 2020. The decrease in other noninterest income was mainly the result of income recognized in the prior year associated with the sale of the Company’s Visa Class B shares at a gain of $0.5 million and $0.4 million of income related to the Company’s temporary ownership of the land associated with its future corporate headquarters. Refer to Note 11 to the condensed consolidated financial statements for additional information about the Company’s new headquarters.

Noninterest Expense

The following table presents noninterest expense for the last five completed fiscal quarters and the nine months ended September 30, 2020 and 2019.


(in thousands)	Three Months Ended										Nine Months Ended
	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		September 30, 2020		September 30, 2019
Salaries and employee benefits	$	9,533	$	7,789	$	7,774	$	7,168	$	6,883	$	25,096	$	19,846
Marketing, advertising and promotion	426		411		375		409		456		1,212		1,391
Consulting and professional services	614		932		1,177		1,242		778		2,723		2,427
Data processing	388		339		375		312		381		1,102		1,026
Loan expenses	408		399		599		289		247		1,406		853
Premises and equipment	1,568		1,602		1,625		1,556		1,506		4,795		4,503
Deposit insurance premium	440		435		485		601		—		1,360		1,302
Write-down of other real estate owned	2,065		—		—		—		—		2,065		—
Other	970		1,337		1,076		1,036		952		3,383		2,673
Total noninterest expense	$	16,412	$	13,244	$	13,486	$	12,613	$	11,203	$	43,142	$	34,021

Noninterest expense for the third quarter 2020 was $16.4 million, compared to $11.2 million for the third quarter 2019. The increase of $5.2 million, or 46.5%, compared to the third quarter 2019 was due primarily to increases of $2.7 million in salaries and employee benefits and $0.4 million in deposit insurance premium, as well as a $2.1 million write-down of a legacy commercial other real estate owned (“OREO”) property. The increase in salaries and employee benefits was due mainly to an increase in headcount, which includes the impact of personnel growth associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation. The increase in deposit insurance premium was due primarily to the Company not incurring deposit insurance premium expense during the third quarter 2019 as a result of the small bank assessment credit applied by the FDIC.

Noninterest expense for the nine months ended September 30, 2020 was $43.1 million, compared to $34.0 million for the nine months ended September 30, 2019. The increase of $9.1 million, or 26.8%, compared to the nine months ended September 30, 2019 was due primarily to increases of $5.3 million in salaries and employee benefits, $0.7 million in other expenses, $0.6 million in loan expenses, $0.3 million in consulting and professional services and $0.3 million in premises and equipment, as well as a $2.1 million write-down of a legacy commercial OREO property. The increase in salaries and employee benefits was primarily the result of personnel growth, mostly associated with the Company’s small business lending platform, as well as increased mortgage and small business lending incentive compensation. The increase in other expenses was due primarily to a $0.3 million charitable contribution the Company made to assist small businesses and nonprofits address the economic challenges of the COVID-19 pandemic, as well as various other miscellaneous expenses, none of which were individually significant. The increase in loan expenses was driven primarily by costs associated with nonperforming loans. The increase in consulting and professional services was due primarily to increased recruitment costs and directors’ fees. The increase in premises and equipment was due primarily to higher software expense.

Income tax provision was $1.4 million for the third quarter 2020, resulting in an effective tax rate of 14.2%, compared to $0.5 million and an effective tax rate of 6.6% for the third quarter 2019. Income tax provision was $1.4 million for the nine months ended September 30, 2020, resulting in an effective tax rate of 7.0%, compared to $1.3 million and an effective tax rate of 6.8% for the nine months ended September 30, 2019. The increase in income tax provision for the third quarter 2020 compared to the third quarter 2019 was due primarily to the increase in pre-tax earnings driven by a higher proportion of taxable revenue from mortgage banking and gain on sale of loans.

Financial Condition

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


(in thousands)
Balance Sheet Data:	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019
Total assets	$	4,333,624	$	4,324,600	$	4,168,146	$	4,100,083	$	4,095,491
Loans	3,012,914		2,973,674		2,892,093		2,963,547		2,881,272
Total securities	596,565		657,312		675,013		602,730		591,549


Loans held-for-sale	76,208		38,813		52,394		56,097		41,119
Noninterest-bearing deposits	86,088		82,864		70,562		57,115		50,560
Interest-bearing deposits	3,286,303		3,297,925		3,107,944		3,096,848		3,097,682
Total deposits	3,372,391		3,380,789		3,178,506		3,153,963		3,148,242
Advances from Federal Home Loan Bank	514,914		514,913		514,911		514,910		514,908
Total shareholders’ equity	318,102		307,711		307,711		304,913		295,140

Total assets increased $233.5 million, or 5.7%, to $4.3 billion at September 30, 2020 compared to $4.1 billion at December 31, 2019. Balance sheet growth was driven by an increase in deposits of $218.4 million, or 6.9%. The deposit growth drove an increase in liquid assets as cash balances increased $161.1 million, or 49.2%. Additionally, loan balances increased $49.4 million, or 1.7%, and loans held-for-sale increased $20.1 million, or 35.9%. As deposit growth outpaced loan growth, balance sheet liquidity increased as reflected in the percentage of loans to deposits, which declined to 89.3% as of September 30, 2020, compared to 94.0% as of December 31, 2019.

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)	September 30, 2020				June 30, 2020				March 31, 2020				December 31, 2019				September 30, 2019
Commercial loans
Commercial and industrial	$	77,116	2.6	%	$	81,687	2.7	%	$	95,227	3.3	%	$	96,420	3.3	%	$	83,481	2.9	%
Owner-occupied commercial real estate (1)	89,095		3.0	%	86,897		2.9	%	87,957		3.0	%	86,726		2.9	%	86,357		3.0	%
Investor commercial real estate	13,084		0.4	%	13,286		0.4	%	13,421		0.5	%	12,567		0.4	%	11,852		0.4	%
Construction	92,154		3.1	%	77,591		2.6	%	64,581		2.2	%	60,274		2.0	%	54,131		1.9	%
Single tenant lease financing	960,505		31.9	%	980,292		33.0	%	972,275		33.6	%	995,879		33.6	%	1,008,247		35.0	%
Public finance	625,638		20.8	%	647,107		21.8	%	627,678		21.7	%	687,094		23.2	%	686,622		23.8	%
Healthcare finance	461,740		15.3	%	380,956		12.8	%	372,266		12.9	%	300,612		10.1	%	251,530		8.6	%
Small business lending (1)	123,168		4.1	%	118,526		4.0	%	54,055		1.9	%	46,945		1.6	%	11,597		0.4	%
Total commercial loans	2,442,500		81.2	%	2,386,342		80.2	%	2,287,460		79.1	%	2,286,517		77.1	%	2,193,817		76.0	%
Consumer loans
Residential mortgage	203,041		6.7	%	208,728		7.0	%	218,730		7.6	%	313,849		10.6	%	320,451		11.1	%
Home equity	22,169		0.7	%	22,640		0.8	%	23,855		0.8	%	24,306		0.8	%	25,042		0.9	%
Other consumer	282,450		9.3	%	291,632		9.8	%	296,605		10.2	%	295,309		10.0	%	296,573		10.4	%
Total consumer loans	507,660		16.7	%	523,000		17.6	%	539,190		18.6	%	633,464		21.4	%	642,066		22.4	%
Net deferred loan origination costs, premiums and discounts on purchased loans and other (2)	62,754		2.1	%	64,332		2.2	%	65,443		2.3	%	43,566		1.5	%	45,389		1.6	%
Total loans	3,012,914		100.0	%	2,973,674		100.0	%	2,892,093		100.0	%	2,963,547		100.0	%	2,881,272		100.0	%
Allowance for loan losses	(26,917)				(24,465)				(22,857)				(21,840)				(21,683)
Net loans	$	2,985,997			$	2,949,209			$	2,869,236			$	2,941,707			$	2,859,589

(1) As of December 31, 2019, the Company held $13.3 million of SBA loans which were classified within the small business lending category. In the third quarter 2020, those balances were reclassified into the owner-occupied commercial real estate category.

(2) Includes carrying value adjustments of $44.3 and $46.0 million related to terminated interest rate swaps associated with public finance loans as of September 30, 2020 and June 30, 2020, respectively, and $44.6 million, $21.4 million and $27.6 million, as of March 31, 2020, December 31, 2019 and September 30, 2019, respectively, related to interest rate swaps associated with public finance loans.

Total loans were $3.0 billion as of September 30, 2020, an increase of $49.4 million, or 1.7%, compared to December 31, 2019. Total commercial balances were $2.4 billion as of September 30, 2020, up $156.0 million, or 6.8%, from December 31, 2019. Compared to December 31, 2019, production in healthcare finance, small business lending and construction was partially offset by lower balances in the public finance and single tenant lease financing loan portfolios, due primarily to sales of $106.6 million of loans in these categories during 2020, as well as a decline in commercial and industrial balances. The growth in healthcare finance balances was due primarily to a combination of strong borrower demand following the re-opening of state and local economies across the U.S. subsequent to shelter-in-place orders in response to COVID-19 and growth in loan originations by the sales team at Lendeavor, the Company’s origination partner in this loan category. The growth in small business lending was driven by $58.3 million of PPP loan balances originated during the second quarter 2020, as well as an increase in originated SBA 7(a) loans during 2020.

Total consumer loan balances were $507.7 million as of September 30, 2020, a decrease of $125.8 million, or 19.9%, compared to December 31, 2019. The decline in consumer loan balances from December 31, 2019 was due primarily to the sale of $90.8 million of portfolio residential mortgage loans in the first quarter 2020, which included seasoned lower-yielding loans. Additionally, the balances of residential mortgage loans and other consumer loans have been impacted by elevated prepayment activity, which more than offset new origination activity.

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)	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019
Nonaccrual loans
Commercial loans:
Commercial and industrial	$	117		$	299		$	218		$	226		$	585
Owner-occupied commercial real estate	1,390			2,066			1,390			464			465


Single tenant lease financing	7,148			4,680			4,680			4,680			4,691

Total commercial loans	8,655			7,045			6,288			5,370			5,741
Consumer loans:
Residential mortgage	1,085			1,042			991			761			—

Other consumer	34			108			39			33			41
Total consumer loans	1,119			1,150			1,030			794			41
Total nonaccrual loans	9,774			8,195			7,318			6,164			5,782

Past Due 90 days and accruing loans
Commercial loans:
Commercial and industrial	—			—			73			—			—




Total commercial loans	—			—			73			—			—
Consumer loans:
Residential mortgage	—			—			51			568			—

Other consumer	—			—			1			—			1
Total consumer loans	—			—			52			568			1
Total past due 90 days and accruing loans	—			—			125			568			1

Total nonperforming loans	9,774			8,195			7,443			6,732			5,783

Other real estate owned
Investor commercial real estate	—			2,065			2,065			2,065			2,066
Residential mortgage	—			—			—			—			553
Total other real estate owned	—			2,065			2,065			2,065			2,619

Other nonperforming assets	8			44			114			75			95

Total nonperforming assets	$	9,782		$	10,304		$	9,622		$	8,872		$	8,497

Total nonperforming loans to total loans	0.32		%	0.28		%	0.26		%	0.23		%	0.20		%
Total nonperforming assets to total assets	0.23		%	0.24		%	0.23		%	0.22		%	0.21		%
Allowance for loan losses to total loans	0.89		%	0.82		%	0.79		%	0.74		%	0.75		%
Allowance for loan losses to total loans, excluding PPP loans (1)	0.91		%	0.84		%	0.79		%	0.74		%	0.75		%
Allowance for loan losses to nonperforming loans	275.4		%	298.5		%	307.1		%	324.4		%	374.9		%

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

Troubled Debt Restructurings

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


(in thousands)	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019
Troubled debt restructurings – nonaccrual	$	811	$	854	$	94	$	94	$	171
Troubled debt restructurings – performing	365		372		378		427		470
Total troubled debt restructurings	$	1,176	$	1,226	$	472	$	521	$	641

The increase in nonperforming loans of 3.0 million, or 45.2%, to $9.8 million as of September 30, 2020 compared to $6.7 million as of December 31, 2019 was due primarily to an increase in nonperforming owner-occupied commercial real estate loans with unpaid principal balances of $1.6 million and an increase in nonperforming single tenant lease financing loans with unpaid principal balances of $2.5 million that were placed on nonaccrual status during 2020, partially offset by a decrease in accruing residential mortgage loans that were 90 days past due and one nonaccrual owner-occupied commercial real estate loan that paid off during the third quarter 2020. Total nonperforming assets increased $0.9 million, or 10.3%, as of September 30, 2020 compared to December 31, 2019, due primarily to the increase in nonperforming loans discussed above, partially offset by a $2.1 million write-down of a legacy commercial OREO property in the third quarter 2020. The ratio of nonperforming loans to total loans increased to 0.32% as of September 30, 2020 compared to 0.23% as of December 31, 2019 and the ratio of nonperforming assets to total assets increased to 0.23% as of September 30, 2020 compared to 0.22% as of December 31, 2019, due primarily to the loans mentioned above.

Total TDRs as of September 30, 2020 were $1.2 million, up $0.7 million from December 31, 2019. The increase was driven by one residential mortgage loan that became a TDR during the second quarter 2020.

As of September 30, 2020, the Company did not have any OREO. As of December 31, 2019, the Company had one commercial property in OREO with a carrying value of $2.1 million. This property consisted of two buildings that are residential units adjacent to a university campus. During the third quarter 2020, we wrote off the balance of OREO and are currently evaluating alternatives related to the ultimate disposition of this property.

As of September 30, 2020, our financial results have reflected little impact on asset quality as a result of COVID-19. Actions taken to either contain or reduce the impact of the pandemic have had a detrimental effect on the national and our local economies. The ultimate impact it may have on our business and asset quality is still uncertain; however, we remain optimistic that the combination of government stimulus programs and relief programs we have provided to our clients will lessen the economic stress on our borrowers. However, if the pandemic extends for a prolonged period of time, we may experience negative trends in nonperforming loans and assets.

Non-TDR Loan Modifications due to COVID-19

Additionally, Section 4013 of the CARES Act further provides that loan modifications due to the impact of COVID-19 that would otherwise be classified as TDRs under GAAP will not be so classified. Modifications within the scope of this relief are in effect from the period beginning March 1, 2020 until the earlier of December 31, 2020 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates.

In accordance with this guidance, the Company has offered modifications to borrowers who were both impacted by COVID-19 and current on all principal and interest payments.

The following table shows the Company’s deferrals by loan portfolio type that have been granted through October 30, 2020. The balances shown are as of September 30, 2020.


(dollars in thousands)	Deferrals		Total Loan Balance		% Of Balances With Deferrals
Commercial loans
Commercial and industrial	$	680	$	77,116	0.9	%
Owner-occupied commercial real estate	—		89,095		—	%
Investor commercial real estate	—		13,084		0.0	%
Construction	—		92,154		0.0	%
Single tenant lease financing	5,362		960,505		0.6	%
Public finance	—		625,638		0.0	%
Healthcare finance	2,275		461,740		0.5	%
Small business lending	8,637		123,168		7.0	%
Total commercial loans	16,954		2,442,500		0.7	%
Consumer loans
Residential mortgage	2,542		203,041		1.3	%
Home equity	—		22,169		—	%
Other consumer	436		282,450		0.2	%
Total consumer loans	2,978		507,660		0.5	%

Total commercial and consumer loans	$	19,932	$	2,950,160	0.7	%

During the first and second quarters 2020 and into early third quarter 2020, the single tenant lease financing and healthcare finance portfolios had comprised a significant majority of total loan deferrals. However, as of October 30, 2020, these portfolios had declined to approximately 0.26% of the total loan portfolio. Earlier in the year, borrowers in these portfolios had experienced short-term cash flow challenges due to broad-based federal and state government actions to contain COVID-19. Within the single tenant lease financing portfolio, the portfolio average loan-to-value ratio is 49% and all borrowers, except for one relationship that is on nonaccrual status, made their loan payments in a timely manner prior to entering a deferral program. Furthermore, there are no delinquencies for performing loans not on deferral status. Related to the healthcare finance portfolio, over 90% of the loans are made to dental practices, many of which have been allowed to resume seeing patients as certain states across the country have reopened their economies. The amount of healthcare finance loans on deferral status peaked in late May when approximately 80% of this portfolio balance was under deferral. As of October 30, 2020, this percentage had dropped to 0.5%. All borrowers who have come off a deferral program have resumed making scheduled loan payments without delinquency.

U.S. Small Business Administration Paycheck Protection Program

Section 1102 of the CARES Act created the PPP, which is jointly administered by the U.S. Small Business Administration (“SBA”) and the Department of the Treasury. The PPP is designed to provide a direct incentive to small businesses to retain employees on their payroll during COVID-19 as well as to help cover certain utility costs and rent payments. These loans may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. As a preferred SBA lender, we assisted our clients in participating in the PPP to help them maintain their workforces in an uncertain and challenging environment. The loans bear an interest rate of 1.00% and we received weighted average origination fees of 3.86% of the amount funded, or approximately $2.3 million in total. The Company received this fee revenue from the SBA in late June and it will be deferred over the life of the PPP loans and recognized as interest income. As of September 30, 2020, we had 447 PPP loans totaling $58.3 million outstanding.

The Company anticipates that the majority of these loans will ultimately be forgiven, in whole or in part, by the SBA in accordance with the terms of the program. As of September 30, 2020, the Company did not receive any formal applications for forgiveness from PPP borrowers. Management anticipates that loan forgiveness applications will increase during the fourth quarter 2020.

Allowance for Loan Losses

The following table provides a rollforward of the allowance for loan losses for the last five completed fiscal quarters.


(dollars in thousands)	Three Months Ended
	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019
Balance, beginning of period	$	24,465		$	22,857		$	21,840		$	21,683		$	19,976
Provision charged to expense	2,509			2,491			1,461			468			2,824
Losses charged off	(241)			(1,016)			(498)			(409)			(1,182)
Recoveries	184			133			54			98			65
Balance, end of period	$	26,917		$	24,465		$	22,857		$	21,840		$	21,683

Net charge-offs to average loans	0.01		%	0.12		%	0.06		%	0.04		%	0.15		%

The allowance for loan losses was $26.9 million as of September 30, 2020, compared to $21.8 million as of December 31, 2019. While total loan balances experienced a modest increase of $49.4 million, or 1.7%, compared to December 31, 2019, the Company made additional adjustments to qualitative factors in its allowance model to reflect the continued economic uncertainty resulting from COVID-19. As a result, both the allowance for loan losses and the allowance as a percentage of total loans increased compared to December 31, 2019.

The allowance for loan losses as a percentage of total loans was 0.89% at September 30, 2020, or 0.91% when excluding PPP Loans, compared to 0.74% at December 31, 2019. The allowance for loan losses as a percentage of nonperforming loans decreased to 275.4% as of September 30, 2020, compared to 324.4% as of December 31, 2019. The provision for loan losses in the third quarter 2020 was $2.5 million, compared to $2.8 million for the third quarter 2019. During the third quarter 2020, the Company recorded net charge-offs of $0.1 million, compared to net charge-offs of $1.1 million for the third quarter 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.


(in thousands)
Amortized Cost	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019
Securities available-for-sale
U.S. Government-sponsored agencies	$	65,007	$	68,203	$	71,387	$	77,715	$	83,024
Municipal securities	87,365		91,906		94,981		97,447		96,076
Agency mortgage-backed securities	250,755		275,433		279,458		264,142		278,327
Private label mortgage-backed securities	71,519		101,110		114,363		63,704		45,969
Asset-backed securities	5,000		5,000		5,000		5,000		5,000
Corporate securities	48,406		48,394		43,378		38,632		38,638

Total available-for-sale	528,052		590,046		608,567		546,640		547,034
Securities held-to-maturity
Municipal securities	14,582		14,603		14,617		10,142		10,145
Corporate securities	53,672		53,692		51,714		51,736		36,662
Total held-to-maturity	68,254		68,295		66,331		61,878		46,807
Total securities	$	596,306	$	658,341	$	674,898	$	608,518	$	593,841


(in thousands)
Approximate Fair Value	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019
Securities available-for-sale
U.S. Government-sponsored agencies	$	63,682	$	66,544	$	70,004	$	75,872	$	81,435
Municipal securities	86,421		90,562		94,819		97,652		97,942
Agency mortgage-backed securities	253,292		278,530		282,632		261,440		277,530
Private label mortgage-backed securities	72,626		101,925		115,024		63,613		46,459
Asset-backed securities	4,921		4,837		4,713		4,955		4,931
Corporate securities	47,369		46,619		41,490		37,320		36,445

Total available-for-sale	528,311		589,017		608,682		540,852		544,742
Securities held-to-maturity
Municipal securities	15,328		15,274		15,678		10,368		10,490
Corporate securities	53,848		53,878		53,790		52,192		37,065
Total held-to-maturity	69,176		69,152		69,468		62,560		47,555
Total securities	$	597,487	$	658,169	$	678,150	$	603,412	$	592,297

The approximate fair value of available-for-sale investment securities decreased $12.5 million, or 2.4%, to $528.3 million as of September 30, 2020, compared to $540.9 million as of December 31, 2019. The decrease was due primarily to decreases of $12.2 million in agency securities, $11.2 million in municipal securities and $8.1 million in agency mortgage-backed securities. These decreases were driven primarily by prepayments and maturities in agency and agency mortgage-backed securities, as well as early redemptions and maturities in municipal securities. The decreases were partially offset by purchases of corporate and private label mortgage-backed securities as liquidity from deposit growth was deployed.

Accrued Income and Other Assets

Accrued income and other assets were $66.5 million at September 30, 2020 compared to $67.1 million at December 31, 2019. As of these dates, the Company pledged $33.7 million and $42.3 million, respectively, of cash collateral to counterparties on interest rate swap agreements as security for its obligations related to these agreements. Collateral posted and received is dependent on the fair value of the underlying agreements as of the respective date. The decrease in cash collateral pledged was partially offset by an increase of $5.3 million in deferred tax assets.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities were $57.2 million at September 30, 2020 compared to $53.0 million at December 31, 2019. The increase of $4.2 million, or 7.9%, was due primarily to a $4.9 million trade date accrual related to securities that were purchased in September 2020 but did not settle until October 2020, a $3.4 million increase in income taxes payable and a $1.5 million increase in accrued salaries and benefits. These increases were partially offset by a $5.0 million decrease in the fair value of interest rate swap agreements.

Deposits

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


(dollars in thousands)	September 30, 2020				June 30, 2020				March 31, 2020				December 31, 2019				September 30, 2019
Noninterest-bearing deposits	$	86,088	2.6	%	$	82,864	2.5	%	$	70,562	2.2	%	$	57,115	1.8	%	$	50,560	1.6	%
Interest-bearing demand deposits	155,054		4.6	%	152,391		4.5	%	123,233		3.9	%	129,020		4.1	%	122,551		3.9	%
Savings accounts	49,890		1.5	%	43,366		1.3	%	32,485		1.0	%	29,616		0.9	%	34,886		1.1	%
Money market accounts	1,359,178		40.3	%	1,241,874		36.7	%	930,698		29.3	%	786,390		24.9	%	698,077		22.2	%
Certificates of deposits	1,360,575		40.3	%	1,470,905		43.5	%	1,493,644		47.0	%	1,613,453		51.2	%	1,681,377		53.4	%
Brokered deposits	361,606		10.7	%	389,389		11.5	%	527,884		16.6	%	538,369		17.1	%	560,791		17.8	%
Total deposits	$	3,372,391	100.0	%	$	3,380,789	100.0	%	$	3,178,506	100.0	%	$	3,153,963	100.0	%	$	3,148,242	100.0	%

Total deposits increased $218.4 million, or 6.9%, to $3.4 billion as of September 30, 2020, compared to $3.2 billion as of December 31, 2019. This increase was due primarily to an increase of $572.8 million, or 72.8%, in money market accounts, offset by declines of $252.9 million, or 15.7%, in certificates of deposits and $176.8 million, or 2.8%, in brokered deposits. The Company experienced strong growth in money market balances due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small businesses and commercial clients increasing their cash balances due in part to the economic uncertainty resulting from the COVID-19 pandemic. The declines in certificates of deposits and brokered deposits were due to the maturity of higher cost balances and reduced pricing strategies designed to limit the volume of new production.

Recent Debt Offerings

Subsequent to the end of the quarter, on October 26, 2020, the Company issued $10.0 million in aggregate principal amount of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030 (the “2030 Notes”). The Notes were offered and sold by the Company in a private placement and are scheduled to mature on November 1, 2030. The 2030 Notes bear interest at a fixed rate of 6.0% per annum from and including October 26, 2020, to, but excluding, November 1, 2025, and thereafter at a floating interest rate initially equal to the three-month term SOFR plus 5.795%. The 2030 Notes are unsecured subordinated obligations of the Company and may be repaid, without penalty, on any interest payment date on or after November 1, 2025. The 2030 Notes are intended to qualify as Tier 2 capital under regulatory guidelines. We intend to use the net proceeds to redeem the 2025 Note on or before January 15, 2021, subject to the receipt of any applicable regulatory approvals.

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.”

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 September 30, 2020 and December 31, 2019 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2020 and December 31, 2019 based on the Basel III Capital Rules. 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 September 30, 2020:
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	331,408	11.13	%		$	208,452	7.00	%	N/A		N/A
Bank	364,889		12.27	%		208,246		7.00	%	$	193,372	6.50	%
Tier 1 capital to risk-weighted assets
Consolidated	331,408		11.13	%		253,121		8.50	%	N/A		N/A
Bank	364,889		12.27	%		252,870		8.50	%	237,996		8.00	%
Total capital to risk-weighted assets
Consolidated	428,083		14.38	%		312,679		10.50	%	N/A		N/A
Bank	391,806		13.17	%		312,369		10.50	%	297,495		10.00	%
Leverage ratio
Consolidated	331,408		7.72	%		171,779		4.00	%	N/A		N/A
Bank	364,889		8.50	%		171,666		4.00	%	214,582		5.00	%


	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 December 31, 2019:
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	313,803	10.84	%		$	202,661	7.00	%	N/A		N/A
Bank	341,242		11.80	%		202,480		7.00	%	$	188,017	6.50	%
Tier 1 capital to risk-weighted assets
Consolidated	313,803		10.84	%		246,088		8.50	%	N/A		N/A
Bank	341,242		11.80	%		245,869		8.50	%	231,406		8.00	%
Total capital to risk-weighted assets
Consolidated	405,171		13.99	%		303,991		10.50	%	N/A		N/A
Bank	363,082		12.55	%		303,720		10.50	%	289,257		10.00	%
Leverage ratio
Consolidated	313,803		7.64	%		164,219		4.00	%	N/A		N/A
Bank	341,242		8.32	%		164,121		4.00	%	205,151		5.00	%

Shareholders’ Dividends

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable October 15, 2020 to shareholders of record as of October 1, 2020. 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, including any potential impact resulting from COVID-19.

As of September 30, 2020, the Company had $72.0 million principal amount of subordinated debt outstanding pursuant its term loan evidenced by a term note due 2025 (the “2025 Note”), its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026 and the 2029 Notes. Subsequent to the end of the quarter, on October 26, 2020, we issued an additional $10.0 million aggregate principal amount of 2030 Notes. The agreements that govern our outstanding subordinated debt, including the 2030 Notes, 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. The Company may explore strategic alternatives, including 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.

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.

Additionally, the Company has enhanced its liquidity management process during 2019 and 2020 through increased loan sale activity. During the first nine months of 2020, the Company sold $143.0 million of public finance, single tenant lease financing and SBA 7(a) guaranteed loans at premiums to book value, as well as a $90.8 million pool of residential mortgage loans. During 2019, the Company sold $237.5 million of portfolio residential mortgage, single tenant lease financing and public finance loans. These loan sales have provided liquidity to manage overall loan portfolio growth and capital utilization.

The Company holds cash and investment securities that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operations and meet its financial commitments. We intend to modestly reduce the size of our balance sheet during the fourth quarter 2020 through continued deposit repricing to help manage capital levels. A component of this balance sheet management strategy is expected to include reducing our cash balances from the levels at September 30, 2020. However, given the uncertainty regarding the length and ultimate economic effect of COVID-19, we believe it will be prudent to maintain higher levels of cash on the balance sheet than we have historically maintained until the crisis passes. We believe we have sufficient on-balance sheet liquidity, supplemented by access to additional funding sources, to manage the potential economic impact of COVID-19. At September 30, 2020, on a consolidated basis, the Company had $1.1 billion in cash and cash equivalents and investment securities available-for-sale and $76.2 million in loans held-for-sale that were generally available for its cash needs. The Company can also generate funds from wholesale funding sources and collateralized borrowings. At September 30, 2020, the Bank had the ability to borrow an additional $558.4 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 September 30, 2020, the Company, on an unconsolidated basis, had $36.0 million in cash generally available for its cash needs, which is in excess of its current annual regular shareholder dividend and operating expenses.

The Company uses its sources of funds primarily to meet ongoing financial commitments, including withdrawals by depositors, credit commitments to borrowers, operating expenses and capital expenditures. At September 30, 2020, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $267.4 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at September 30, 2020 totaled $931.0 million.

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, tangible book value per common share, tangible common equity to tangible assets ratio, average tangible common equity, return on average tangible common equity, total interest income - FTE, net interest income - FTE, net interest margin - FTE, allowance for loan losses to loans, excluding PPP loans, adjusted income before income taxes, adjusted income tax provision, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on shareholders’ equity, adjusted return on average tangible common equity 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 nine months ended September 30, 2020 and 2019.


(dollars in thousands, except share and per share data)	Three Months Ended															Nine Months Ended
	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			September 30, 2020			September 30, 2019
Total equity - GAAP	$	318,102		$	307,711		$	304,913		$	295,140		$	295,140		$	318,102		$	295,140
Adjustments:
Goodwill	(4,687)			(4,687)			(4,687)			(4,687)			(4,687)			(4,687)			(4,687)
Tangible common equity	$	313,415		$	303,024		$	300,226		$	290,453		$	290,453		$	313,415		$	290,453

Total assets - GAAP	$	4,333,624		$	4,324,600		$	4,100,083		$	4,095,491		$	4,095,491		$	4,333,624		$	4,095,491
Adjustments:
Goodwill	(4,687)			(4,687)			(4,687)			(4,687)			(4,687)			(4,687)			(4,687)
Tangible assets	$	4,328,937		$	4,319,913		$	4,095,396		$	4,090,804		$	4,090,804		$	4,328,937		$	4,090,804

Total common shares outstanding	9,800,569			9,799,047			9,741,800			9,741,800			9,741,800			9,800,569			9,741,800

Book value per common share	$	32.46		$	31.40		$	31.30		$	30.30		$	30.30		$	32.46		$	30.30
Effect of goodwill	(0.48)			(0.48)			(0.48)			(0.48)			(0.48)			(0.48)			(0.48)
Tangible book value per common share	$	31.98		$	30.92		$	30.82		$	29.82		$	29.82		$	31.98		$	29.82

Total shareholders’ equity to assets	7.34		%	7.12		%	7.44		%	7.21		%	7.21		%	7.34		%	7.21		%
Effect of goodwill	(0.10)		%	(0.11)		%	(0.11)		%	(0.11)		%	(0.11)		%	(0.10)		%	(0.11)		%
Tangible common equity to tangible assets	7.24		%	7.01		%	7.33		%	7.10		%	7.10		%	7.24		%	7.10		%

Total average equity - GAAP	$	313,611		$	306,868		$	297,623		$	298,782		$	298,782		$	310,506		$	295,963
Adjustments:
Average goodwill	(4,687)			(4,687)			(4,687)			(4,687)			(4,687)			(4,687)			(4,687)
Average tangible common equity	$	308,924		$	302,181		$	292,936		$	294,095		$	294,095		$	305,819		$	291,276

Return on average shareholders’ equity	10.67		%	5.15		%	9.46		%	8.40		%	8.40		%	7.90		%	8.20		%
Effect of goodwill	0.16		%	0.08		%	0.15		%	0.13		%	0.13		%	0.12		%	0.13		%
Return on average tangible common equity	10.83		%	5.23		%	9.61		%	8.53		%	8.53		%	8.02		%	8.33		%


(dollars in thousands, except share and per share data)	Three Months Ended															Nine Months Ended
	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			September 30, 2020			September 30, 2019
Total interest income	$	32,750		$	34,222		$	37,877		$	37,964		$	37,694		$	103,216		$	109,537
Adjustments:
Fully-taxable equivalent adjustments 1	1,424			1,437			1,570			1,595			1,595			4,396			4,764
Total interest income - FTE	$	34,174		$	35,659		$	39,447		$	33,326		$	33,326		$	107,612		$	114,301

Net interest income	$	16,232		$	14		$	15,018		$	15,374		$	15,244		$	45,676		$	47,593
Adjustments:
Fully-taxable equivalent adjustments 1	1,424			1,437			1,570			1,595			1,595			4,396			4,764
Net interest income - FTE	$	17,656		$	1,451		$	16,588		$	16,969		$	16,839		$	50,072		$	52,357

Net interest margin	1.53		%	1.37		%	1.50		%	1.51		%	1.54		%	1.47		%	1.70		%
Effect of fully-taxable equivalent adjustments 1	0.14		%	0.13		%	0.15		%	0.16		%	0.16		%	0.14		%	0.17		%
Net interest margin - FTE	1.67		%	1.50		%	1.65		%	1.67		%	1.70		%	1.61		%	1.87		%

Allowance for loan losses	$	26,917		$	24,465		$	22,857		$	21,840		$	21,683		$	26,917		$	21,683

Loans	$	3,012,914		$	2,973,674		$	2,892,093		$	2,963,547		$	2,881,272		$	3,012,914		$	2,881,272
Adjustments:
PPP loans	(58,337)			(58,948)			—			—			—			(58,337)			—
Loans, excluding PPP loans	$	2,954,577		$	2,914,726		$	2,892,093		$	2,963,547		$	2,881,272		$	2,954,577		$	2,881,272

Allowance for loan losses to loans	0.89		%	0.82		%	0.79		%	0.74		%	0.75		%	0.89		%	0.75		%
Effect of PPP loans	0.02		%	0.02		%	0.00		%	0.00		%	0.00		%	0.02		%	0.00		%
Allowance for loan losses to loans, excluding PPP loans	0.91		%	0.84		%	0.79		%	0.74		%	0.75		%	0.91		%	0.75		%

1 Assuming a 21% tax rate





(dollars in thousands, except share and per share data)	Three Months Ended															Nine Months Ended
	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			September 30, 2020			September 30, 2019
Income before income taxes - GAAP	$	9,806		$	3,664		$	6,282		$	7,698		$	6,775		$	19,752		$	19,458
Adjustments:
Write-down of other real estate owned	2,065			—			—			—			—			2,065			—
Adjusted income before income taxes	$	11,871		$	3,664		$	6,282		$	7,698		$	6,775		$	21,817		$	19,458

Income tax provision (benefit) - GAAP	$	1,395		$	(268)		$	263		$	602		$	449		$	1,390		$	1,315
Adjustments:
Write-down of other real estate owned	434			—			—			—			—			434			—
Adjusted income tax provision (benefit)	$	1,829		$	(268)		$	263		$	602		$	449		$	1,824		$	1,315

Net income - GAAP	$	8,411		$	3,932		$	6,019		$	7,096		$	6,326		$	18,362		$	18,143
Adjustments:
Write-down of other real estate owned	1,631			—			—			—			—			1,631			—
Adjusted net income	$	10,042		$	3,932		$	6,019		$	7,096		$	6,326		$	19,993		$	18,143

Diluted average common shared outstanding	9,773,224			9,768,227			9,750,528			9,843,829			9,980,612			9,827,182			10,116,507

Diluted earnings per share - GAAP	$	0.86		$	0.40		$	0.62		$	0.72		$	0.63		$	1.87		$	1.79
Adjustments:
Effect of write-down of other real estate owned	0.17			—			—			—			—			0.16			—
Adjusted diluted earnings per share	$	1.03		$	0.40		$	0.62		$	0.72		$	0.63		$	2.03		$	1.79

Return on average assets	0.78		%	0.37		%	0.59		%	0.69		%	0.63		%	0.58		%	0.64		%
Effect of write-down of other real estate owned	0.15		%	0.00		%	0.00		%	0.00		%	0.00		%	0.05		%	0.00		%
Adjusted return on average assets	0.93		%	0.37		%	0.59		%	0.69		%	0.63		%	0.63		%	0.64		%

Return on average shareholders' equity	10.67		%	5.15		%	7.78		%	9.46		%	8.40		%	7.90		%	8.20		%
Effect of write-down of other real estate owned	2.07		%	0.00		%	0.00		%	0.00		%	0.00		%	0.70		%	0.00		%
Adjusted return on average shareholders’ equity	12.74		%	5.15		%	7.78		%	9.46		%	8.40		%	8.60		%	8.20		%

Return on average tangible common equity	10.83		%	5.23		%	7.90		%	9.61		%	8.53		%	8.02		%	8.33		%
Effect of write-down of other real estate owned	2.10		%	0.00		%							0.00		%	0.71		%	0.00		%
Adjusted return on average tangible common equity	12.93		%	5.23		%	7.90		%	9.61		%	8.53		%	8.73		%	8.33		%

Effective income tax rate	14.2		%	(7.3)		%	4.2		%	7.8		%	6.6		%	7.0		%	6.8		%
Effect of write-down of other real estate owned	1.2		%	0.0		%	0.0		%	0.0		%	0.0		%	1.4		%	0.0		%
Adjusted effective income tax rate	15.4		%	(7.3)		%	4.2		%	7.8		%	6.6		%	8.4		%	6.8		%

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, 2019.

Recent Accounting Pronouncements

Refer to Note 16 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 swap agreements 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. In June 2020, the Company terminated all fair value hedging instruments associated with loans. At September 30, 2020 and December 31, 2019, the Company had interest rate swaps with notional amounts of $298.2 million and $725.6 million, respectively. Additionally, we enter into forward contracts related 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 September 30, 2020 and December 31, 2019, the Company had commitments to sell residential real estate loans of $118.0 million and $115.0 million, respectively. These contracts mature in less than one year. Refer to Note 14 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 September 30, 2020, assuming parallel shifts in interest rates and a static balance sheet:


	% Change from Base Case for Parallel Changes in Rates
	-50 Basis Points		-25 Basis Points		+100 Basis Points		+200 Basis Points
NII - Year 1	(0.84)	%	0.85	%	(1.50)	%	(4.95)	%
NII - Year 2	10.90	%	13.43	%	8.33	%	2.64	%
EVE	(1.58)	%	(0.21)	%	(0.64)	%	(8.17)	%

The Company’s objective is to manage the balance sheet with 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 September 30, 2020.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2020 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 our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”), as updated in Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended June 30, 2020 (“Second Quarter 2020 Form 10-Q”), except as described below. The risk factor set forth below updates, and should be read together with, the risk factors described in our 2019 Form 10-K. In addition, the COVID-19 pandemic could exacerbate or trigger other risks discussed in our 2019 Form 10-K, any of which could materially affect our business, financial condition and results of operations.

The COVID-19 pandemic has resulted in deterioration of general business and economic conditions and continued to impact us, our customers, counterparties, employees, and third-party service providers. The ultimate magnitude and duration of the pandemic is still unknown at this time and, therefore, the extent of the impact on our business, financial position, results of operations, liquidity and prospects remains uncertain.

Global health concerns related to the ongoing COVID-19 pandemic and related government actions taken to reduce the spread of the virus have had a significant negative impact on the macroeconomic environment and market conditions, including significant disruption of, and volatility in, financial markets, and the pandemic has significantly increased economic uncertainty, reduced economic activity and resulted in lost revenues and increased unemployment throughout the United States, but also specifically in Indiana, where we maintain a significant portion of our operations. Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The continuing effects of the COVID-19 pandemic, or any other highly contagious or infectious disease, could negatively impact the ability of our employees and customers to conduct such transactions and disrupt the business activities and operations in the areas in which we operate. While the spread of the COVID-19 virus has minimally impacted our operations as of September 30, 2020, we could experience temporary closures of our corporate offices and/or suspension of certain services in particular markets. Currently, it is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses across the country will be fully lifted. Additionally, new information may emerge regarding the severity or spread of COVID-19 and additional actions may be taken by federal, state and local governments to contain COVID-19 or treat its impact. Should there be sustained disruption in our operations, or that of our customers, our financial condition and results of operations could be negatively impacted.

The COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve actions, which have resulted in a significant decline in market interest rates. Most of our assets and liabilities are financial in nature and are sensitive to movements in market interest rates. A prolonged period of volatile and unstable market conditions will impact both the level of income and expense recorded on our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have an adverse effect on our net interest income, net interest margin and profitability.

Although we have business continuity plans and other safeguards against pandemics or another contagious disease, the spread of COVID-19 could also negatively impact the availability of our employees who are necessary to conduct business operations, as well as potentially impact the business and operations of our third-party service providers. If the response to contain COVID-19, or another highly infectious or contagious disease, is unsuccessful, we could experience a material adverse effect on our business operations, asset valuations, financial condition and results of operations. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, loan servicing rights, deferred tax assets, or derivatives. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments that are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. After the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business, financial condition and results of operations as a result of the virus’s global and local economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.

Description

Method of Filing

3.1

Amended and Restated Articles of Incorporation of First Internet Bancorp (incorporated by reference to Exhibit 3.1 to current report on Form 8-K filed May 21, 2020)

Incorporated by Reference

3.2

Amended and Restated Bylaws of First Internet Bancorp (incorporated by reference to Exhibit 3.2 to current report on Form 8-K filed May 21, 2020)

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

Third Supplemental Indenture, dated as of October 26, 2020, between First Internet Bancorp and U.S. Bank National Association, as trustee (including form of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030) (incorporated by reference to Exhibit 4.2 to current report on Form 8-K filed October 26, 2020)

Incorporated by Reference

10.1

Form of Subordinated Note Purchase Agreement, dated as of October 26, 2020, between First Internet Bancorp and the purchaser thereunder (incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed October 26, 2020)

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

Inline XBRL Instance Document (does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document)

Filed Electronically

101.SCH

Inline XBRL Taxonomy Extension Schema

Filed Electronically

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

Filed Electronically

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase

Filed Electronically

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

Filed Electronically

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

Filed Electronically

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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

11/5/2020	By	/s/ David B. Becker
		David B. Becker, Chairman, President and Chief Executive Officer (on behalf of Registrant)

11/5/2020	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: Servicing Asset Note 9: Subordinated Debt Note 10: Benefit Plans Note 11: Commitments and Credit Risk Note 12: Fair Value Of Financial Instruments Note 13: Mortgage Banking Activities Note 14: Derivative Financial Instruments Note 15: Accumulated Other Comprehensive Loss Note 16: Recent Accounting Pronouncements Note 17: Subsequent Event 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 Amended and Restated Articles of Incorporation of First Internet Bancorp(incorporated by reference to Exhibit 3.1 to current report on Form 8-K filed May 21, 2020) Incorporated by Reference 3.2 Amended and Restated Bylaws of First Internet Bancorp(incorporated by reference to Exhibit 3.2 to current report on Form 8-K filed May 21, 2020) 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 Third Supplemental Indenture, dated as of October 26, 2020, between First Internet Bancorp and U.S. Bank National Association, as trustee (including form of 6.0% Fixed-to-Floating Rate Subordinated Notes due 2030)(incorporated by reference to Exhibit 4.2 to current report on Form 8-K filed October 26, 2020) Incorporated by Reference 10.1 Form of Subordinated Note Purchase Agreement, dated as of October 26, 2020, between First Internet Bancorp and the purchaser thereunder(incorporated by reference to Exhibit 10.1 to current report on Form 8-K filed October 26, 2020) 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 Sept. 30, 2020

Exhibits