INBK 10-Q Quarterly Report March 31, 2021

FIRST INTERNET BANCORP

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inbk-20210331

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 March 31, 2021


☐			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 May 7, 2021, the registrant had 9,854,002 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” or other similar expressions. Such statements are subject to certain risks and uncertainties including: the effects of the COVID-19 global pandemic and other adverse public health developments on the economy, our business and operations and the business and operations of our vendors and customers: 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 continue originating our commercial real estate, commercial and industrial, public finance, U.S. Small Business Administration (“SBA”) and healthcare finance loans, 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)


	March 31, 2021		December 31, 2020
	(Unaudited)
Assets
Cash and due from banks	$	4,440	$	7,367
Interest-bearing deposits	411,765		412,439
Total cash and cash equivalents	416,205		419,806

Securities available-for-sale, at fair value (amortized cost of $463,947 and $497,004 in 2021 and 2020, respectively)	462,376		497,628
Securities held-to-maturity, at amortized cost (fair value of $69,383 and $69,452 in 2021 and 2020, respectively)	68,190		68,223
Loans held-for-sale (includes $21,961 and $26,341 at fair value in 2021 and 2020, respectively)	30,235		39,584
Loans	3,058,694		3,059,231
Allowance for loan losses	( 30,642 )		( 29,484 )
Net loans	3,028,052		3,029,747
Accrued interest receivable	16,433		17,416
Federal Home Loan Bank of Indianapolis stock	25,650		25,650
Cash surrender value of bank-owned life insurance	38,185		37,952
Premises and equipment, net	42,381		37,590
Goodwill	4,687		4,687
Servicing asset, at fair value	3,817		3,569

Accrued income and other assets	52,359		64,304
Total assets	$	4,188,570	$	4,246,156
Liabilities and Shareholders’ Equity
Liabilities
Noninterest-bearing deposits	$	100,700	$	96,753
Interest-bearing deposits	3,116,903		3,174,132
Total deposits	3,217,603		3,270,885
Advances from Federal Home Loan Bank	514,917		514,916
Subordinated debt, net of unamortized debt issuance costs of $2,206 and $2,397 in 2021 and 2020, respectively	69,794		79,603
Accrued interest payable	1,418		1,439
Accrued expenses and other liabilities	40,272		48,369
Total liabilities	3,844,004		3,915,212
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; 9,823,831 and 9,800,569 shares issued and outstanding in 2021 and 2020, respectively	221,911		221,408
Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none	—		—
Retained earnings	136,575		126,732
Accumulated other comprehensive loss	( 13,920 )		( 17,196 )
Total shareholders’ equity	344,566		330,944
Total liabilities and shareholders’ equity	$	4,188,570	$	4,246,156

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
	March 31, 2021		March 31, 2020
Interest Income
Loans	$	30,885	$	30,408
Securities – taxable	1,779		3,619
Securities – non-taxable	281		572
Other earning assets	335		1,645
Total interest income	33,280		36,244
Interest Expense
Deposits	8,628		17,208
Other borrowed funds	4,127		4,018
Total interest expense	12,755		21,226
Net Interest Income	20,525		15,018
Provision for Loan Losses	1,276		1,461
Net Interest Income After Provision for Loan Losses	19,249		13,557
Noninterest Income
Service charges and fees	266		212
Loan servicing revenue	422		251
Loan servicing asset revaluation	( 155 )		( 179 )
Mortgage banking activities	5,750		3,668



Gain on sale of loans	1,723		1,801
Gain on sale of securities	—		41
Other	369		417
Total noninterest income	8,375		6,211
Noninterest Expense
Salaries and employee benefits	9,492		7,774
Marketing, advertising and promotion	680		375
Consulting and professional services	986		1,177
Data processing	462		375
Loan expenses	534		599
Premises and equipment	1,601		1,625
Deposit insurance premium	425		485

Other	1,137		1,076
Total noninterest expense	15,317		13,486
Income Before Income Taxes	12,307		6,282
Income Tax Provision	1,857		263
Net Income	$	10,450	$	6,019
Income Per Share of Common Stock
Basic	$	1.06	$	0.62
Diluted	$	1.05	$	0.62
Weighted-Average Number of Common Shares Outstanding
Basic	9,899,230		9,721,485
Diluted	9,963,036		9,750,528
Dividends Declared Per Share	$	0.06	$	0.06

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Comprehensive Income – Unaudited

(Amounts in thousands)


	Three Months Ended March 31,
	2021		2020
Net income	$	10,450	$	6,019
Other comprehensive income (loss)
Net unrealized holding gains on securities available-for-sale recorded within other comprehensive (loss) income before income tax	( 2,195 )		6,299

Reclassification adjustment for gains realized	—		( 41 )
Net unrealized holding gains (losses) on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax	6,280		( 13,458 )

Other comprehensive income (loss) before income tax	4,085		( 7,200 )
Income tax provision (benefit)	809		( 1,525 )
Other comprehensive income (loss)	3,276		( 5,675 )
Comprehensive income	$	13,726	$	344

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited

Three Months Ended March 31, 2021 and 2020

(Amounts in thousands except per share data)


	Voting and Nonvoting Common Stock		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
Balance, January 1, 2021	$	221,408	$	126,732	$	( 17,196 )	$	330,944

Net income	—		10,450		—		10,450

Other comprehensive income	—		—		3,276		3,276
Dividends declared ($ 0.06 per share)	—		( 607 )		—		( 607 )

Recognition of the fair value of share-based compensation	692		—		—		692

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
Common stock redeemed for the net settlement of share-based awards	( 195 )		—		—		( 195 )

Balance, March 31, 2021	$	221,911	$	136,575	$	( 13,920 )	$	344,566

Balance, January 1, 2020	$	219,423	$	99,681	$	( 14,191 )	$	304,913
Net income	—		6,019		—		6,019

Other comprehensive loss	—		—		( 5,675 )		( 5,675 )
Dividends declared ($ 0.06 per share)	—		( 600 )		—		( 600 )

Recognition of the fair value of share-based compensation	555		—		—		555

Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units	8		—		—		8
Common stock redeemed for the net settlement of share-based awards	( 93 )		—		—		( 93 )

Balance, March 31, 2020	$	219,893	$	105,100	$	( 19,866 )	$	305,127

See Notes to Condensed Consolidated Financial Statements

First Internet Bancorp

Condensed Consolidated Statements of Cash Flows – Unaudited

(Amounts in thousands)


	Three Months Ended March 31,
	2021		2020
Operating Activities
Net income	$	10,450	$	6,019
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	283		1,644
Increase in cash surrender value of bank-owned life insurance	( 233 )		( 236 )
Provision for loan losses	1,276		1,461
Share-based compensation expense	692		555

Loss on sale of available-for-sale securities	—		( 41 )
Loans originated for sale	( 223,880 )		( 215,385 )
Proceeds from sale of loans	241,589		225,547
Gain on loans sold	( 9,222 )		( 6,144 )

Decrease (increase) in fair value of loans held-for-sale	862		( 316 )
Gain on derivatives	881		1,163

Net change in servicing asset	( 248 )		66

Net change in accrued income and other assets	10,695		( 40,479 )
Net change in accrued expenses and other liabilities	( 2,012 )		311
Net cash provided by ( used in) operating activities	31,133		( 25,835 )
Investing Activities
Net loan activity, excluding purchases	47,653		( 1,305 )


Maturities and calls of securities available-for-sale	55,901		30,851
Proceeds from sale of securities available-for-sale	—		795
Purchase of securities available-for-sale	( 21,279 )		( 95,835 )



Purchase of premises and equipment	( 5,697 )		( 4,856 )

Loans purchased	( 47,234 )		( 97,306 )
Net proceeds from sale of portfolio loans	—		193,533

Net cash provided by investing activities	29,344		25,877
Financing Activities
Net increase in deposits	( 53,282 )		24,543

Cash dividends paid	( 601 )		( 585 )
Repayment of subordinated debt	( 10,000 )		—


Proceeds from advances from Federal Home Loan Bank	110,000		110,000
Repayment of advances from Federal Home Loan Bank	( 110,000 )		( 110,000 )

Other, net	( 195 )		( 93 )
Net cash (used in) provided by financing activities	( 64,078 )		23,865
Net (Decrease) Increase in Cash and Cash Equivalents	( 3,601 )		23,907
Cash and Cash Equivalents, Beginning of Period	419,806		327,361
Cash and Cash Equivalents, End of Period	$	416,205	$	351,268
Supplemental Disclosures


Cash paid during the period for interest	12,777		21,699
Cash paid during the period for taxes	10		—

Loans transferred to held-for-sale from portfolio	—		192,768
Cash dividends declared, paid in subsequent period	592		585
Securities purchased during the period, settled in subsequent period	2,035		—
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 months ended March 31, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021 or any other period. The March 31, 2021 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, 2020.

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 2020 financial statements to conform to the presentation of the 2021 financial statements. These reclassifications had no effect on net income.

Note 2: Earnings Per Share

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

The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three months ended March 31, 2021 and 2020.


(dollars in thousands, except per share data)	Three Months Ended March 31,
	2021		2020
Basic earnings per share
Net income	$	10,450	$	6,019
Weighted-average common shares	9,899,230		9,721,485
Basic earnings per common share	$	1.06	$	0.62
Diluted earnings per share
Net income	$	10,450	$	6,019
Weighted-average common shares	9,899,230		9,721,485

Dilutive effect of equity compensation	63,806		29,043
Weighted-average common and incremental shares	9,963,036		9,750,528
Diluted earnings per common share (1)	$	1.05	$	0.62

(1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. There were no weighted-average antidilutive shares excluded from the computation of diluted EPS for the three months ended March 31, 2021 and 8,575 weighted-average antidilutive shares excluded from the computation of diluted EPS for the three months ended March 31, 2020 .

Note 3: Securities

The following tables summarize securities available-for-sale and securities held-to-maturity as of March 31, 2021 and December 31, 2020.


	March 31, 2021
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Government-sponsored agencies	$	60,815	$	227	$	( 1,564 )	$	59,478
Municipal securities	79,168		530		( 490 )		79,208
Agency mortgage-backed securities	229,981		2,927		( 4,090 )		228,818
Private label mortgage-backed securities	40,550		557		( 1 )		41,106
Asset-backed securities	5,000		6		—		5,006
Corporate securities	48,433		869		( 542 )		48,760

Total available-for-sale	$	463,947	$	5,116	$	( 6,687 )	$	462,376


	March 31, 2021
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
Securities held-to-maturity
Municipal securities	$	14,560	$	549	$	—	$	15,109
Corporate securities	53,630		720		( 76 )		54,274
Total held-to-maturity	$	68,190	$	1,269	$	( 76 )	$	69,383


	December 31, 2020
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Government-sponsored agencies	$	61,765	$	432	$	( 1,652 )	$	60,545
Municipal securities	82,757		463		( 731 )		82,489
Agency mortgage-backed securities	241,795		4,591		( 2,465 )		243,921
Private label mortgage-backed securities	57,268		850		( 2 )		58,116
Asset-backed securities	5,000		—		( 39 )		4,961
Corporate securities	48,419		771		( 1,594 )		47,596

Total available-for-sale	$	497,004	$	7,107	$	( 6,483 )	$	497,628


	December 31, 2020
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
Securities held-to-maturity
Municipal securities	$	14,571	$	746	$	—	$	15,317
Corporate securities	53,652		610		( 127 )		54,135
Total held-to-maturity	$	68,223	$	1,356	$	( 127 )	$	69,452

The carrying value of securities at March 31, 2021 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	$	500	$	530
One to five years	29,412		26,876
Five to ten years	74,218		73,751
After ten years	84,286		86,289
	188,416		187,446
Agency mortgage-backed securities	229,981		228,818
Private label mortgage-backed securities	40,550		41,106
Asset-backed securities	5,000		5,006

Total	$	463,947	$	462,376


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

One to five years	$	3,379	$	3,528
Five to ten years	52,617		53,465
After ten years	12,194		12,390
Total	$	68,190	$	69,383

There were no gross gains or losses resulting from sale of available-for-sale securities during the three months ended March 31, 2021. There were less than $0.1 million gross gains resulting from sales of available securities during the three months ended March 31, 2020.

Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at March 31, 2021 and December 31, 2020 was $ 247.3 million and $ 226.5 million, which was approximately 47 % and 40 %, respectively, of the Company’s AFS and HTM securities portfolios. As of March 31, 2021, the Company’s security portfolio consisted of 437 securities, of which 146 were in an unrealized loss position. The unrealized losses are related to the categories noted below. These declines resulted primarily from fluctuations in market interest rates after purchase. Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced, with the resulting loss recognized in net income in the period the other-than-temporary impairment (“OTTI”) is identified.

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

The unrealized losses on the Company’s investments in securities issued by U.S. Government-sponsored agencies, municipal organizations and corporate entities were caused primarily by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2021.

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 terms of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be upon maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2021.

The following tables show the securities portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2021 and December 31, 2020.


	March 31, 2021
	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	$	2,919	$	( 81 )	$	49,737	$	( 1,483 )	$	52,656	$	( 1,564 )
Municipal securities	60,936		( 490 )		—		—		60,936		( 490 )
Agency mortgage-backed securities	107,821		( 3,660 )		8,023		( 430 )		115,844		( 4,090 )
Private label mortgage-backed securities	1,980		( 1 )		—		—		1,980		( 1 )

Corporate securities	—		—		9,458		( 542 )		9,458		( 542 )

Total	$	173,656	$	( 4,232 )	$	67,218	$	( 2,455 )	$	240,874	$	( 6,687 )


	March 31, 2021
	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	$	6,449	$	( 76 )	$	—	$	—	$	6,449	$	( 76 )
Total	$	6,449	$	( 76 )	$	—	$	—	$	6,449	$	( 76 )


	December 31, 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	$	—	$	—	$	52,351	$	( 1,652 )	$	52,351	$	( 1,652 )
Municipal securities	18,731		( 114 )		23,519		( 617 )		42,250		( 731 )
Agency mortgage-backed securities	38,987		( 276 )		45,297		( 2,189 )		84,284		( 2,465 )
Private label mortgage-backed securities	1,277		( 1 )		558		( 1 )		1,835		( 2 )
Asset-backed securities	—		—		4,961		( 39 )		4,961		( 39 )
Corporate securities	—		—		20,406		( 1,594 )		20,406		( 1,594 )

Total	$	58,995	$	( 391 )	$	147,092	$	( 6,092 )	$	206,087	$	( 6,483 )


	December 31, 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	17,456		( 126 )		2,999		( 1 )		20,455		( 127 )
Total	$	17,456	$	( 126 )	$	2,999	$	( 1 )	$	20,455	$	( 127 )

There were no amounts reclassified form accumulated other comprehensive loss to the condensed consolidated statements of income during the three months ended March 31, 2021. Amounts reclassified from accumulated other comprehensive loss and the affected line items in the condensed consolidated statements of income during the three months ended March 31, 2020 were as follows:

(in thousands)

Details About Accumulated Other Comprehensive Loss Components

Affected Line Item in the
Statements of Income

Three Months Ended
March 31, 2020

Realized gains on securities available-for-sale

Gain realized in earnings

Gain on sale of securities

Total reclassified amount before tax

Income Before Income Taxes

Tax expense

Income Tax Provision

Total reclassifications out of accumulated other comprehensive loss

Net Income

Note 4: Loans

Loan balances as of March 31, 2021 and December 31, 2020 are summarized in the table below. Categories of loans include:


(in thousands)	March 31, 2021		December 31, 2020
Commercial loans
Commercial and industrial	$	71,835	$	75,387
Owner-occupied commercial real estate	87,930		89,785
Investor commercial real estate	14,832		13,902
Construction	123,483		110,385
Single tenant lease financing	941,322		950,172
Public finance	637,600		622,257
Healthcare finance	510,237		528,154
Small business lending	132,490		125,589
Total commercial loans	2,519,729		2,515,631
Consumer loans
Residential mortgage	190,148		186,787
Home equity	17,949		19,857
Other consumer	270,209		275,692
Total consumer loans	478,306		482,336
Total commercial and consumer loans	2,998,035		2,997,967
Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other (1)	60,659		61,264
Total loans	3,058,694		3,059,231
Allowance for loan losses	( 30,642 )		( 29,484 )
Net loans	$	3,028,052	$	3,029,747

(1) Includes carrying value adjustments of $ 41.6 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2021 and $ 42.7 million related to interest rate swaps associated with public finance loans as of December 31, 2020.

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 months ended March 31, 2021 and 2020.


(in thousands)	Three Months Ended March 31, 2021
Allowance for loan losses:	Balance, Beginning of Period		Provision (Credit) Charged to Expense		Losses Charged Off		Recoveries		Balance, End of Period
Commercial and industrial	$	1,146	$	434	$	—	$	82	$	1,662
Owner-occupied commercial real estate	1,082		( 53 )		—		—		1,029
Investor commercial real estate	155		14		—		—		169
Construction	1,192		228		—		—		1,420
Single tenant lease financing	12,990		188		—		—		13,178
Public finance	1,732		16		—		—		1,748
Healthcare finance	7,485		270		—		—		7,755
Small business lending	628		147		( 79 )		4		700
Residential mortgage	519		77		—		5		601
Home equity	48		58		( 51 )		2		57
Other consumer	2,507		( 103 )		( 181 )		100		2,323
Total	$	29,484	$	1,276	$	( 311 )	$	193	$	30,642


	Three Months Ended March, 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	$	346	$	( 197 )	$	—	$	1,670
Owner-occupied commercial real estate	561		84		—		—		645
Investor commercial real estate	109		19		—		—		128
Construction	380		80		—		—		460
Single tenant lease financing	11,175		( 420 )		—		—		10,755
Public finance	1,580		( 97 )		—		—		1,483
Healthcare finance	3,247		1,071		—		—		4,318
Small business lending	54		203		—		8		265
Residential mortgage	657		( 143 )		( 15 )		1		500
Home equity	46		5		—		2		53
Other consumer	2,510		313		( 286 )		43		2,580
Total	$	21,840	$	1,461	$	( 498 )	$	54	$	22,857

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2021 and December 31, 2020.


(in thousands)	Loans						Allowance for Loan Losses
March 31, 2021	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	$	70,316	$	1,519	$	71,835	$	1,063	$	599	$	1,662
Owner-occupied commercial real estate	83,664		4,266		87,930		1,029		—		1,029
Investor commercial real estate	14,832		—		14,832		169		—		169
Construction	123,483		—		123,483		1,420		—		1,420
Single tenant lease financing	934,044		7,278		941,322		10,088		3,090		13,178
Public finance	637,600		—		637,600		1,748		—		1,748
Healthcare finance	509,250		987		510,237		7,231		524		7,755
Small business lending (1)	131,625		865		132,490		700		—		700
Residential mortgage	187,845		2,303		190,148		601		—		601
Home equity	17,934		15		17,949		57		—		57
Other consumer	270,182		27		270,209		2,323		—		2,323
Total	$	2,980,775	$	17,260	$	2,998,035	$	26,429	$	4,213	$	30,642

1 Balance of loans individually evaluated for impairment are guaranteed by the U.S. government.


(in thousands)	Loans						Allowance for Loan Losses
December 31, 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	$	74,870	$	517	$	75,387	$	1,146	$	—	$	1,146
Owner-occupied commercial real estate	87,947		1,838		89,785		1,082		—		1,082
Investor commercial real estate	13,902		—		13,902		155		—		155
Construction	110,385		—		110,385		1,192		—		1,192
Single tenant lease financing	942,848		7,324		950,172		9,900		3,090		12,990
Public finance	622,257		—		622,257		1,732		—		1,732
Healthcare finance	527,144		1,010		528,154		7,485		—		7,485
Small business lending	125,589		—		125,589		628		—		628
Residential mortgage	185,241		1,546		186,787		519		—		519
Home equity	19,857		—		19,857		48		—		48
Other consumer	275,642		50		275,692		2,507		—		2,507
Total	$	2,985,682	$	12,285	$	2,997,967	$	26,394	$	3,090	$	29,484

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

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

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

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

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

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

Nonaccrual Loans

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

The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of March 31, 2021 and December 31, 2020.


	March 31, 2021
(in thousands)	Pass		Special Mention		Substandard		Total
Commercial and industrial	$	54,534	$	15,782	$	1,519	$	71,835
Owner-occupied commercial real estate	78,809		4,855		4,266		87,930
Investor commercial real estate	14,832		—		—		14,832
Construction	123,483		—		—		123,483
Single tenant lease financing	924,082		9,962		7,278		941,322
Public finance	637,600		—		—		637,600
Healthcare finance	508,623		627		987		510,237
Small business lending (1)	123,959		7,666		865		132,490
Total commercial loans	$	2,465,922	$	38,892	$	14,915	$	2,519,729

1 Balance in “Substandard” is guaranteed by the U.S. government.


	March 31, 2021
(in thousands)	Performing		Nonaccrual		Total
Residential mortgage	$	189,028	$	1,120	$	190,148
Home equity	17,934		15		17,949
Other consumer	270,186		23		270,209
Total consumer loans	$	477,148	$	1,158	$	478,306


	December 31, 2020
(in thousands)	Pass		Special Mention		Substandard		Total
Commercial and industrial	$	74,138	$	732	$	517	$	75,387
Owner-occupied commercial real estate	84,292		3,655		1,838		89,785
Investor commercial real estate	13,902		—		—		13,902
Construction	110,385		—		—		110,385
Single tenant lease financing	932,830		10,018		7,324		950,172
Public finance	622,257		—		—		622,257
Healthcare finance	526,517		627		1,010		528,154
Small business lending	117,474		2,930		5,185		125,589
Total commercial loans	$	2,481,795	$	17,962	$	15,874	$	2,515,631


	December 31, 2020
(in thousands)	Performing		Nonaccrual		Total
Residential mortgage	$	185,604	$	1,183	$	186,787
Home equity	19,857		—		19,857
Other consumer	275,646		46		275,692
Total consumer loans	$	481,107	$	1,229	$	482,336

The following tables present the Company’s loan portfolio delinquency analysis as of March 31, 2021 and December 31, 2020.


	March 31, 2021
(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	$	68	$	—	$	—	$	68	$	71,767	$	71,835	$	1,002	$	—
Owner-occupied commercial real estate	—		—		—		—		87,930		87,930		4,266		—
Investor commercial real estate	—		—		—		—		14,832		14,832		—		—
Construction	—		—		—		—		123,483		123,483		—		—
Single tenant lease financing	—		1,100		4,680		5,780		935,542		941,322		7,080		—
Public finance	—		—		—		—		637,600		637,600		—		—
Healthcare finance	—		—		—		—		510,237		510,237		—		—
Small business lending (1)	—		—		865		865		131,625		132,490		865		—
Residential mortgage	—		—		497		497		189,651		190,148		1,120		278
Home equity	—		—		—		—		17,949		17,949		15		—
Other consumer	128		9		12		149		270,060		270,209		23		—
Total	$	196	$	1,109	$	6,054	$	7,359	$	2,990,676	$	2,998,035	$	14,371	$	278

1 Balance in “90 Days Or More Past Due” is guaranteed by the U.S. government.


	December 31, 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	$	—	$	—	$	—	$	—	$	75,387	$	75,387	$	—	$	—
Owner-occupied commercial real estate	—		—		—		—		89,785		89,785		1,838		—
Investor commercial real estate	—		—		—		—		13,902		13,902		—		—
Construction	—		—		—		—		110,385		110,385		—		—
Single tenant lease financing	—		—		4,680		4,680		945,492		950,172		7,116		—
Public finance	—		—		—		—		622,257		622,257		—		—
Healthcare finance	—		—		—		—		528,154		528,154		—		—
Small business lending	—				—		—		125,589		125,589		—		—
Residential mortgage	49		—		269		318		186,469		186,787		1,183		—
Home equity	—		15		—		15		19,842		19,857		—		—
Other consumer	176		51		5		232		275,460		275,692		46		—
Total	$	225	$	66	$	4,954	$	5,245	$	2,992,722	$	2,997,967	$	10,183	$	—

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 March 31, 2021 and December 31, 2020.


	March 31, 2021						December 31, 2020
(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	$	—	$	517	$	517	$	—
Owner-occupied commercial real estate	4,266		4,266		—		1,838		1,850		—


Single tenant lease financing	197		197		—		1,315		1,334		—

Healthcare finance	—		—		—		1,010		1,010		—
Small business lending (1)	865		865		—		—		—		—
Residential mortgage	2,303		2,416		—		1,546		1,652		—
Home equity	15		15		—		—		—		—
Other consumer	28		63		—		50		120		—
Total	8,191		8,339		—		6,276		6,483		—
Loans with a specific valuation allowance
Commercial and industrial	1,002		1,002		599		—		—		—



Single tenant lease financing	7,080		7,154		3,090		6,009		6,036		3,090

Healthcare Finance	987		987		524		—		—		—




Total	9,069		9,143		4,213		6,009		6,036		3,090
Total impaired loans	$	17,260	$	17,482	$	4,213	$	12,285	$	12,519	$	3,090

1 Entire balance is guaranteed by the U.S. government.

The table below presents average balances and interest income recognized for impaired loans during the three months ended March 31, 2021 and 2020.


	Three Months Ended
	March 31, 2021				March 30, 2020
(in thousands)	Average Balance		Interest Income		Average Balance		Interest Income
Loans without a specific valuation allowance
Commercial and industrial	$	517	$	9	$	2,066	$	18
Owner-occupied commercial real estate	2,440		—		1,890		2


Single tenant lease financing	151		5		—		—

Healthcare finance	1,008		—		—		—
Small business lending (1)	577		—		3,332		—
Residential mortgage	1,736		4		1,274		—
Home equity	11		—		—		—
Other consumer	37		—		45		—
Total	6,477		18		8,607		20
Loans with a specific valuation allowance
Commercial and industrial	501		—		204		—



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

Healthcare Finance	494		12		—		—




Total	8,143		12		4,884		—
Total impaired loans	$	14,620	$	30	$	13,491	$	20

1 Entire balance is guaranteed by the U.S. government.

The Company had no residential mortgage other real estate owned as of March 31, 2021 and December 31, 2020. There was one loan for $ 0.1 million and no loans in the process of foreclosure at March 31, 2021 and December 31, 2020, respectively.

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 was one residential mortgage loan classified as a new TDR during the three months ended March 31, 2021 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 March 31, 2021. The modifications consisted of interest-only payments for a period of time. There were no loans classified as new TDRs during the three months ended March 31, 2020. There were no performing TDRs that had payment defaults within the twelve months following modification during the three ended March 31, 2021 and 2020, 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 January 1, 2022 or 60 days after the date on which the national emergency related to the COVID-19 pandemic formally terminates. As of March 31, 2021, the Company had 37 loans totaling $ 14.3 million in non-TDR loan modifications due to COVID-19.

Note 5: Premises and Equipment

The following table summarizes premises and equipment at March 31, 2021 and December 31, 2020.


(in thousands)	March 31, 2021		December 31, 2020
Land	$	2,500	$	2,500
Right of use leased asset	351		819
Construction in process	34,221		28,754
Building and improvements	5,962		5,819
Furniture and equipment	10,757		10,671
Less: accumulated depreciation	( 11,410 )		( 10,973 )
Total	$	42,381	$	37,590

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.

On February 16, 2021, the Company entered into an agreement to sell its current headquarters and certain equipment currently located in the building to a third party. At March 31, 2021 the net book value of the land, building and improvements was $ 5.3 million. The sale was completed on April 16, 2021 and as a part of the sale agreement, the buyer has agreed to lease the office building back to the Company through December 31, 2021, with an option to extend up to 90 days beyond that date. The sale price was $ 8.9 million in cash paid in full at closing. The Bank is expected to continue to sublease substantially all of the office space for the duration of the leaseback arrangement.

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 two operating leases that are used for general office operations with remaining lease terms of two to three 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
	March 31, 2021		March 31, 2020
Operating lease cost	$	143	$	215

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


(in thousands)	Three Months Ended
		March 31, 2021		March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	158	$	231

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


(dollars in thousands)
	March 31, 2021			December 31, 2020
Operating lease right-of-use assets	$	351		$	819
Operating lease liabilities	351			819

Weighted-average remaining lease term (years)
Operating leases	1.9			2.0

Weighted-average discount rate
Operating leases	2.3		%	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 March 31, 2021.


(in thousands)
Twelve months ended March 31, 2021
2022	$	1,166
2023	129
2024	31
2025	—
Thereafter	—
Total lease payments	1,326
Less: imputed interest	( 8 )
Total	$	1,318

Note 7: Goodwill

As of March 31, 2021 and December 31, 2020, the carrying amount of goodwill was $ 4.7 million. There have been no changes in the carrying amount of goodwill for the three months ended March 31, 2021. 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 three months ended March 31, 2021 and 2020 are shown in the table below.


(in thousands)	Three Months Ended
	March 31, 2021		March 31, 2020
Balance, beginning of period	$	3,569	$	2,481
Additions
Originated and purchased servicing	403		113
Subtractions
Paydowns	( 170 )		( 179 )
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model	15		—
Balance, end of period	$	3,817	$	2,415

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 March 31, 2021 and December 31, 2020 are shown in the table below.


(in thousands)
	March 31, 2021		December 31, 2020
Loan portfolios serviced for:
SBA guaranteed loans	$	179,556	$	165,961

Total	$	179,556	$	165,961

Loan servicing revenue totaled $ 0.4 million and $ 0.3 million for the three months ended March 31, 2021 and 2020, respectively. Loan servicing asset revaluation, which represents the change in fair value of the servicing asset, resulted in a $ 0.2 million downward valuation for the three months ended March 31, 2021 and 2020.

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 had a fixed interest rate of 6.4375 % per year, payable quarterly, and was scheduled to mature on October 1, 2025. The 2025 Note was an unsecured subordinated obligation of the Company and was eligible to be repaid, without penalty, on any interest payment date on or after October 15, 2020. The 2025 Note was intended to qualify as Tier 2 capital under regulatory guidelines. The Company redeemed the 2025 Note on January 4, 2021.

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.

In October 2020, the Company, entered into a term loan in the principal amount of $ 10.0 million, evidenced by term notes due 2030 (the “2030 Notes”). The 2030 Notes initially bears a fixed interest rate of 6.0 % per year to, but excluding, November 1, 2025 and thereafter at a floating rate equal to the then-current benchmark rate (initially three-month Term SOFR plus 5.795 %). The 2030 Notes are an unsecured subordinated obligation 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. The Company used the net proceeds from the issuance of the 2030 Notes to redeem the 2025 Note as discussed above.

The following table presents the principal balance and unamortized debt issuance costs for the 2025 Note, the 2026 Notes, the 2029 Notes and the 2030 Notes as of March 31, 2021 and December 31, 2020.


	March 31, 2021				December 31, 2020
(in thousands)	Principal		Unamortized Debt Issuance Costs		Principal		Unamortized Debt Issuance Costs

2025 Note	—		—		10,000		( 114 )
2026 Notes	25,000		( 684 )		25,000		( 715 )
2029 Notes	37,000		( 1,297 )		37,000		( 1,337 )
2030 Notes	$	10,000	$	( 225 )	$	10,000	$	( 231 )
Total	$	72,000	$	( 2,206 )	$	82,000	$	( 2,397 )

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 $ 0.7 million of share-based compensation expense for the three months ended March 31, 2021, related to awards made under th e 2013 Plan. The Company recorded $ 0.6 million of share-based compensation expense for the three months ended March 31, 2020, related to awards made under the 2013 Plan.

The following table summarizes the status of the 2013 Plan awards as of March 31, 2021 , and activity for the three months ended March 31, 2021.


	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, 2020	112,985	$	27.76	—	$	—	—	$	—
Granted	57,150	30.27		12,670	30.13		2	30.85
Vested	( 35,745 )	30.12		( 3,157 )	30.13		( 2 )	30.85

Nonvested at March 31, 2021	134,390	$	28.20	9,513	$	30.13	—	$	—

At March 31, 2021, the total unrecognized compensation cost related to nonvested awards was $ 3.5 million with a weighted-average expense recognition period of 2.0 years.

Directors Deferred Stock Plan

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

The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the three months ended March 31, 2021.


						Deferred Stock Rights
Outstanding, beginning of period						83,835
Granted						175
Exercised						—
Outstanding, end of period						84,010

All deferred stock rights granted during the 2021 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 March 31, 2021 and December 31, 2020, the Company had outstanding loan commitments totaling approximately $ 260.8 million and $ 263.9 million, respectively.

In addition, the Company is a limited partner in a Small Business Investment Company fund (the “SBIC Fund”). As of March 31, 2021, the Company has committed to contribute up to $ 1.4 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 and change orders in the amount of $ 66.3 million. As of March 31, 2021, $ 32.9 million of such contract commitments had not yet been incurred. These commitments are due within twelve months .

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 March 31, 2021 or December 31, 2020.

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 March 31, 2021 and December 31, 2020.


			March 31, 2021 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	$	59,478	$	—	$	59,478	$	—
Municipal securities	79,208		—		79,208		—
Agency mortgage-backed securities	228,818		—		228,818		—
Private label mortgage-backed securities	41,106				41,106		—
Asset-backed securities	5,006		—		5,006		—
Corporate securities	48,760		—		48,760		—

Total available-for-sale securities	462,376		—		462,376		—
Loans held-for-sale (mandatory pricing agreements)	21,961		—		21,961		—
Servicing asset	3,817		—		—		3,817

Interest rate swap agreements	( 20,390 )		—		( 20,390 )		—
Forward contracts	721		721		—		—
IRLCs	1,110		—		—		1,110


			December 31, 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	$	60,545	$	—	$	60,545	$	—
Municipal securities	82,489		—		82,489		—
Agency mortgage-backed securities	243,921		—		243,921		—
Private label mortgage-backed securities	58,116		—		58,116		—
Asset-backed securities	4,961		—		4,961		—
Corporate securities	47,596		—		47,596		—

Total available-for-sale securities	497,628		—		497,628		—
Loans held-for-sale (mandatory pricing agreements)	26,341		—		26,341		—
Servicing asset	3,569		—		—		3,569

Interest rate swap agreements	( 17,606 )		—		( 17,606 )		—
Forward contracts	( 640 )		( 640 )		—		—
IRLCs	3,361		—		—		3,361

The following tables reconcile the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheets using significant unobservable (Level 3) inputs for the three months ended March 31, 2021 and 2020.


	Three Months Ended
(in thousands)	Servicing Asset		Interest Rate Lock Commitments
Balance, January 1, 2021	$	3,569	$	3,361
Total realized gains
Additions	403		—
Paydowns	( 170 )		—
Change in fair value	15		( 2,251 )

Balance, March 31, 2021	3,817		1,110

Balance as of January 1, 2020	$	2,481	$	910
Total realized gains
Additions	113		—
Paydowns	( 179 )		—
Change in fair value	—		1,154

Balance, March 31, 2020	$	2,415	$	2,064

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 March 31, 2021 and December 31, 2020.


			March 31, 2021
(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	$	9,069	$	—	$	—	$	9,069


			December 31, 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	$	4,026	$	—	$	—	$	4,026

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 March 31, 2021		Valuation Technique	Significant Unobservable Inputs	Range	Weighted-Average Range

Impaired loans	$	9,069	Fair value of collateral	Discount for type of property and current market conditions	10 %	10 %
IRLCs	1,110		Discounted cash flow	Loan closing rates	68 % - 100 %	98 %
Servicing asset	3,817		Discounted cash flow	Prepayment speeds Discount rate	0 % - 25 % 10 %	12.1 % 10 %


(dollars in thousands)	Fair Value at December 31, 2020		Valuation Technique	Significant Unobservable Inputs	Range	Weighted-Average Range
Impaired loans	$	4,026	Fair value of collateral	Discount for type of property and current market conditions	10 %	10 %

IRLCs	3,361		Discounted cash flow	Loan closing rates	44 % - 100 %	87 %
Servicing asset	3,569		Discounted cash flow	Prepayment speeds Discount rate	0 % - 25 % 10 %	12.1 % 10 %

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 March 31, 2021 and December 31, 2020.

The following tables present the carrying value and estimated fair value of all financial assets and liabilities at March 31, 2021 and December 31, 2020.


	March 31, 2021 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	$	416,205	$	416,205	$	416,205	$	—	$	—

Securities held-to-maturity	68,190		69,383		—		69,383		—
Loans held-for-sale (best efforts pricing agreements)	8,273		8,273		—		8,273		—
Net loans	3,028,052		3,049,747		—		—		3,049,747
Accrued interest receivable	16,433		16,433		16,433		—		—
Federal Home Loan Bank of Indianapolis stock	25,650		25,650		—		25,650		—
Deposits	3,217,603		3,254,435		1,735,415		—		1,519,020
Advances from Federal Home Loan Bank	514,917		533,138		—		533,138		—
Subordinated debt	69,794		74,736		64,566		10,170		—
Accrued interest payable	1,418		1,418		1,418		—		—


	December 31, 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	$	419,806	$	419,806	$	419,806	$	—	$	—

Securities held-to-maturity	68,223		69,452		—		69,452		—
Loans held-for-sale (best efforts pricing agreements)	13,243		13,243		—		13,243		—
Net loans	3,029,747		3,084,375		—		—		3,084,375
Accrued interest receivable	17,416		17,416		17,416		—		—
Federal Home Loan Bank of Indianapolis stock	25,650		25,650		—		25,650		—
Deposits	3,270,885		3,307,038		1,679,164		—		1,627,874
Advances from Federal Home Loan Bank	514,916		541,945		—		541,945		—
Subordinated debt	79,603		83,682		63,325		20,357		—
Accrued interest payable	1,439		1,439		1,439		—		—

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 March 31, 2021 and 2020, the Company originated mortgage loans held-for-sale of $ 223.9 million and $ 215.4 million, respectively, and sold $ 241.6 million and $ 225.5 million of mortgage loans, respectively, into the secondary market.

The following table presents the components of income from mortgage banking activities for the three months ended March 31, 2021 and 2020.


	Three Months Ended March 31,
(in thousands)	2021		2020
Gain on loans sold	$	7,499	$	4,343
(Loss) gain resulting from the change in fair value of loans held-for-sale	( 862 )		316
Gain resulting from the change in fair value of derivatives	( 887 )		( 991 )
Net revenue from mortgage banking activities	$	5,750	$	3,668

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 March 31, 2021 and December 31, 2020.

(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

March 31, 2021

December 31, 2020

March 31, 2021

December 31, 2020

Securities available-for-sale (1)

79,164

124,210

2,989

6,064

(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. The designated hedged items were $ 50.0 million and $ 88.2 million, at March 31, 2021 and December 31, 2020.

The following tables present a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Company’s asset/liability management activities at March 31, 2021 and December 31, 2020, identified by the underlying interest rate-sensitive instruments.


(dollars in thousands) March 31, 2021	Notional Value		Weighted- Average Remaining Maturity (years)			Weighted-Average Ratio
Instruments Associated With				Fair Value		Receive	Pay

Securities available-for-sale	$	50,000	3.6	$	( 2,992 )	3-month LIBOR	2.33	%
Total at March 31, 2021	$	50,000	3.6	$	( 2,992 )	3-month LIBOR	2.33	%

In March 2021, the Company terminated fair value hedging relationships with a notional value of $ 38.2 million associated with agency mortgage-backed securities available-for-sale, which resulted in swap termination payments to counterparties totaling $ 1.9 million. The corresponding securities fair value hedging adjustment as of the date of termination is being amortized over the remaining lives of the designated securities.


(dollars in thousands) December 31, 2020	Notional Value		Weighted- Average Remaining Maturity (years)			Weighted-Average Ratio
Instruments Associated With				Fair Value		Receive	Pay

Securities available-for-sale	88,200		3.1	( 6,072 )		3-month LIBOR	2.54	%
Total at December 31, 2020	$	88,200	3.1	$	( 6,072 )	3-month LIBOR	2.54	%

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, which have a weighted average term to maturity of 12.86 years as of March 31, 2021.

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 March 31, 2021 and December 31, 2020.


(dollars in thousands) March 31, 2021	Notional		Weighted- Average Remaining Maturity			Weighted-Average Ratio
Cash Flow Hedges	Value		(years)	Fair Value		Receive	Pay
Interest rate swaps	$	110,000	5.8	$	( 10,638 )	3-month LIBOR	2.88	%
Interest rate swaps	100,000		2.7	( 6,760 )		1-month LIBOR	2.88	%


(dollars in thousands) December 31, 2020	Notional		Weighted- Average Remaining Maturity			Weighted-Average Ratio
Cash Flow Hedges	Value		(years)	Fair Value		Receive	Pay
Interest rate swaps	$	110,000	6.1	$	( 15,727 )	3-month LIBOR	2.88	%
Interest rate swaps	100,000		3	( 7,951 )		1-month LIBOR	2.88	%

These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Company pledged $ 23.4 million and $ 30.6 million of cash collateral to counterparties as security for its obligations related to these interest rate swap transactions at March 31, 2021 and December 31, 2020, respectively. Collateral posted and received is dependent on the market valuation of the underlying hedges.

The following table presents the notional amount and fair value of interest rate swaps, IRLCs and forward contracts utilized by the Company at March 31, 2021 and December 31, 2020.


	March 31, 2021				December 31, 2020
(in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Asset Derivatives




Derivatives not designated as hedging instruments
IRLCs	$	70,230	$	1,110	$	108,095	$	3,361
Forward contracts	81,500		721		—		—
Total contracts	$	151,730	$	1,831	$	108,095	$	3,361
Liability Derivatives
Derivatives designated as hedging instruments
Interest rate swaps associated with loans	$	—	$	—	$	—	$	—
Interest rate swaps associated with securities available-for-sale	50,000		( 2,992 )		88,200		( 6,072 )
Interest rate swaps associated with liabilities	210,000		( 17,398 )		210,000		( 23,678 )
Derivatives not designated as hedging instruments
Forward contracts	—		—		107,500		( 640 )

Total contracts	$	260,000	$	( 20,390 )	$	405,700	$	( 30,390 )

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 months ended March 31, 2021 and 2020.


	Amount of Gain (Loss )Recognized in Other Comprehensive Income (Loss) in The Three Months Ended
(in thousands)	March 31, 2021		March 31, 2020

Interest rate swap agreements	$	6,280	$	( 13,458 )

The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three months ended March 31, 2021 and 2020.


	Amount of Gain / (Loss) Recognized in the Three Months Ended
(in thousands)	March 31, 2021		March 31, 2020
Asset Derivatives
Derivatives not designated as hedging instruments
IRLCs	$	( 2,251 )	$	1,154
Forward contracts	1,361		—

Liability Derivatives
Derivatives not designated as hedging instruments

Forward contracts	$	—	$	( 2,145 )

The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of income during the three months ended March 31, 2021 and 2020.


(in thousands) Line item in the condensed consolidated statements of income	Three Months Ended
	March 31, 2021		March 31, 2020
Interest income
Loans	$	—	$	( 1,224 )
Securities - taxable	( 253 )		( 91 )
Securities - non-taxable	( 266 )		( 67 )
Total interest income	( 519 )		( 1,382 )
Interest expense
Deposits	678		307
Other borrowed funds	730		322
Total interest expense	1,408		629
Net interest income	$	( 1,927 )	$	( 2,011 )

Note 15: Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, included in stockholders' equity, for the three months ended March 31, 2021 and 2020, respectively, are presented in the table below.


(in thousands)	Available-For-Sale Securities		Cash Flow Hedges		Total
Balance, January 1, 2021	$	468	$	( 17,664 )	$	( 17,196 )
Net unrealized holding (losses) gains recorded within other comprehensive income before income tax	( 2,195 )		6,280		4,085

Other comprehensive (loss) gain before tax	( 2,195 )		6,280		4,085
Income tax (benefit) provision	( 508 )		1,317		809
Other comprehensive (loss) income - net of tax	$	( 1,687 )	$	4,963	$	3,276
Balance, March 31, 2021	$	( 1,219 )	$	( 12,701 )	$	( 13,920 )

Balance, January 1, 2020	$	( 4,388 )	$	( 9,803 )	$	( 14,191 )
Net unrealized holding gains (losses) recorded within other comprehensive income before income tax	6,299		( 13,458 )		( 7,159 )
Reclassification of net loss realized and included in earnings	( 41 )		—		( 41 )
Other comprehensive income (loss) before tax	6,258		( 13,458 )		( 7,200 )
Income tax provision (benefit)	2,109		( 3,634 )		( 1,525 )
Other comprehensive income (loss) - net of tax	4,149		( 9,824 )		( 5,675 )
Balance, March 31, 2020	$	( 239 )	$	( 19,627 )	$	( 19,866 )

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 expects to adopt this guidance on January 1, 2023 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 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 were effective for interim and annual reporting periods beginning after December 15, 2019 and did not 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 were effective for interim and annual reporting periods beginning after December 15, 2019 and did not 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 January 1, 2022 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 Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information.

ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (March 2020)

In March 2020, FASB issued ASU 2020-04 to ease the potential burden in accounting for the transition away from the LIBORon financial reporting. The ASU provides optional expedients and exceptions for applying GAAP to contract modification and hedge accounting relationships. The guidance is effective March 12, 2020 through December 31, 2022. The Company believes the adoption of this guidance will not have a material impact on the condensed consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties, and assumptions. You should review the “Risk Factors” sections of this report and our Annual Report on Form 10-K for the year ended December 31, 2020 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, which manages other real estate owned (“OREO”) properties as needed; and SPF15, Inc., which was established to acquire and hold real estate.

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 digital channels on a nationwide basis and have no traditional branch offices. Our residential mortgage products are offered nationwide primarily through a digital 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 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. Our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards to commercial borrowers located primarily in Central Indiana, Phoenix, Arizona and adjacent markets. 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 Provide, Inc. (formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, and provides lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases. 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 revenue, loans and deposits. We believe that we can differentiate ourselves from larger financial institutions by providing a full suite of services to emerging small businesses and entrepreneurs on a nationwide basis. We have hired and continue to recruit experienced small business sales, credit and operations personnel to expand our capabilities in small business lending and U.S. government guaranteed lending programs. As this business scales up, we expect it will drive increased earnings and profitability in future periods.

COVID-19 Pandemic

Throughout the coronavirus pandemic (“COVID-19”), our top priority has been the health of our team and clients. 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. 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 continues to assess the evolving health and safety situations at local and regional levels. Our plans remain flexible to adapt as these situations evolve.

COVID-19 impacted our business during 2020 as the low interest rate environment following Federal Reserve rate cuts in the first quarter 2020 reduced the yield on interest-earning assets but also allowed us to reprice our interest-bearing deposits significantly lower, which provided an increase to net interest income. Additionally, the low interest rate environment has driven residential mortgage rates to historically low levels, which continued to benefit our mortgage business.

In 2021, federal, state and local governments have continued to take additional steps to reopen and stimulate economies. We are optimistic that the nationwide rollout of vaccinations coupled with elevated government spending will help mitigate any significant negative effects from the pandemic on our business and credit quality. However, should economic conditions worsen to levels experienced in 2020, our business and credit quality could be adversely affected.

Results of Operations

During the first quarter 2021, net income was $10.5 million, or $1.05 per diluted share, compared to the first quarter 2020 net income of $6.0 million, or $0.62 per diluted share, representing an increase in net income of $4.4 million, or 73.6%.

The $4.4 million increase in net income in the first quarter 2021 compared to the first quarter 2020 was due primarily to an increase of $5.5 million, or 36.7%, in net interest income, an increase of $2.2 million, or 34.8%, in noninterest income and a $0.2 million, or 12.7%, decrease in provision for loan losses, partially offset by a $1.8 million, or 13.6%, increase in noninterest expense and an increase of $1.6 million, or 606.1%, in income tax expense.

During the first quarter 2021, return on average assets and return on average shareholders’ equity were 1.02% and 12.61%, respectively, compared to 0.59% and 7.78%, respectively, for the first quarter 2020. Additionally, for the three months ended March 31, 2021, return on average tangible common equity was 12.79% compared to 7.90% for the three months ended March 31, 2020. These profitability ratios improved during 2021 as net income growth of 73.6% outpaced total average balance sheet growth of 1.8%, as well as average shareholders’ equity growth of 8.0% and average tangible common equity growth of 8.1%. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

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
	March 31, 2021						December 31, 2020						March 31, 2020
	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	$	3,079,130	$	30,885	4.07	%	$	3,104,251	$	30,930	3.96	%	$	2,977,994	$	30,408	4.11	%
Securities - taxable	461,300		1,779		1.56	%	492,573		1,988		1.61	%	531,046		3,619		2.74	%
Securities - non-taxable	87,129		281		1.31	%	89,852		318		1.41	%	99,833		572		2.30	%
Other earning assets	446,045		335		0.30	%	532,466		407		0.30	%	415,927		1,645		1.59	%
Total interest-earning assets	4,073,604		33,280		3.31	%	4,219,142		33,643		3.17	%	4,024,800		36,244		3.62	%

Allowance for loan losses	(29,884)						(27,805)						(22,059)
Noninterest-earning assets	129,553						124,870						97,191
Total assets	$	4,173,273					$	4,316,207					$	4,099,932

Liabilities
Interest-bearing liabilities
Interest-bearing demand deposits	$	180,746	$	133	0.30	%	$	165,815	$	156	0.37	%	$	122,925	$	219	0.72	%
Regular savings accounts	46,035		40		0.35	%	49,209		54		0.44	%	30,345		78		1.03	%
Money market accounts	1,369,626		1,391		0.41	%	1,369,543		1,655		0.48	%	866,605		3,743		1.74	%
Certificates and brokered deposits	1,519,580		7,064		1.89	%	1,673,702		8,712		2.07	%	2,069,170		13,168		2.56	%
Total interest-bearing deposits	3,115,987		8,628		1.12	%	3,258,269		10,577		1.29	%	3,089,045		17,208		2.24	%
Other borrowed funds	583,780		4,127		2.87	%	591,806		4,201		2.82	%	584,465		4,018		2.76	%
Total interest-bearing liabilities	3,699,767		12,755		1.40	%	3,850,075		14,778		1.53	%	3,673,510		21,226		2.32	%
Noninterest-bearing deposits	90,764						86,836						60,456
Other noninterest-bearing liabilities	46,774						55,832						54,961
Total liabilities	3,837,305						3,992,743						3,788,927

Shareholders’ equity	335,968						323,464						311,005
Total liabilities and shareholders’ equity	$	4,173,273					$	4,316,207					$	4,099,932

Net interest income			$	20,525					$	18,865					$	15,018

Interest rate spread 1					1.91%						1.64%						1.30	%
Net interest margin 2					2.04%						1.78%						1.50	%
Net interest margin - FTE 3					2.18%						1.91%						1.65	%

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.

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 March 31, 2021 vs. December 31, 2020 Due to Changes in						Three Months Ended March 31, 2021 vs. March 31, 2020 Due to Changes in
	Volume		Rate		Net		Volume		Rate		Net
Interest income
Loans, including loans held-for-sale	$	(1,551)	$	1,506	$	(45)	$	2,222	$	(1,745)	$	477
Securities – taxable	(140)		(69)		(209)		(430)		(1,410)		(1,840)
Securities – non-taxable	(11)		(26)		(37)		(66)		(225)		(291)
Other earning assets	(72)		—		(72)		772		(2,082)		(1,310)
Total	(1,774)		1,411		(363)		2,498		(5,462)		(2,964)

Interest expense
Interest-bearing deposits	(485)		(1,464)		(1,949)		1,040		(9,620)		(8,580)
Other borrowed funds	(288)		214		(74)		(34)		143		109
Total	(773)		(1,250)		(2,023)		1,006		(9,477)		(8,471)

(Decrease) increase in net interest income	$	(1,001)	$	2,661	$	1,660	$	1,492	$	4,015	$	5,507

Net interest income for the first quarter 2021 was $20.5 million, an increase of $5.5 million, or 36.7%, compared to $15.0 million for the first quarter 2020. The increase in net interest income was the result of an $8.5 million, or 39.9%, decrease in total interest expense to $12.8 million for the first quarter 2021 from $21.2 million for the first quarter 2020. The decrease in total interest expense was partially offset by a $3.0 million, or 8.2%, decrease in total interest income to $33.3 million for the first quarter 2021 from $36.2 million for the first quarter 2020.

The decrease in total interest income for the first quarter 2021 compared to the first quarter 2020 was due to decreases in interest earned on securities and other earning assets, but partially offset by an increase in interest earned on loans. Interest income earned on securities decreased $2.1 million, or 50.9%, due to a decline of 115 basis points (“bps”) in the yield earned on securities, as well as a decrease of $82.5 million, or 13.1%, in the average balance of securities. The decrease in the average balance of securities was driven primarily by prepayments and maturities in private label mortgage-backed securities and agency mortgage-backed securities and early redemptions and maturities in municipal securities, as well as a decrease in purchases of securities. Interest income earned on other earning assets declined $1.3 million, or 79.6%, due mainly to a 129 bp decline in the yield earned on these assets, partially offset by an increase of $30.1 million, or 7.2%, in the average balance of other earning assets. The increase in the average balance of other earning assets was due primarily to higher cash balances driven by growth in the average balance of deposits. Interest income earned on loans increased $0.5 million, or 1.6%, due primarily to an increase of $101.1 million, or 3.4%, in average loan balances, partially offset by a decline of 4 bps in the yield earned on average loan balances. The increase in average loan balances was due primarily to growth in the healthcare finance, construction and small business lending portfolios, which included loans originated through the Paycheck Protection Program (“PPP”), but partially offset by a decrease in the average balance of single tenant lease financing, public finance and commercial, and industrial loan balances.

Overall, the yield on interest-earning assets for the first quarter 2021 declined 31 bps to 3.31% from 3.62% for the first quarter 2020. The decline in the yield earned on interest-earning assets was due to the continued decrease in market interest rates from the year-ago period. Interest rates began declining 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, new loan originations, and securities and cash balances throughout the first quarter 2021.

The decrease in total interest expense for the first quarter 2021 compared to the first quarter 2020 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 $6.1 million, or 46.4%, due to a decline of 67 bps in the cost of these deposits as well as a $549.6 million, or 26.6%, 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 $2.4 million, or 62.8%, was driven by a decline of 133 bps in the cost of these deposits, partially offset by an increase of $503.0 million, or 58.0%, in the average balance of these deposits. Average money market balances increased from the year ago period due primarily 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.

Overall, the cost of total interest-bearing liabilities for the first quarter 2021 declined 92 bps to 1.40% from 2.32% for the first quarter 2020. 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 period. 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 2.04% for the first quarter 2021 compared to 1.50% for the first quarter 2020. On a fully-taxable equivalent basis, NIM was 2.18% for the first quarter 2021 compared to 1.65% for the first quarter 2020. The increase in net interest margin was due primarily to the 92 bp decrease in the cost of interest-bearing liabilities, but was partially offset by the 31 bp decrease in the yield on interest-earning assets. The decline in the cost of interest-bearing liabilities and yield earned on interest-earning assets was due primarily to the continued decrease in market interest rates from the year-ago period. Interest rates declined significantly in 2020 following Federal Reserve interest rate cuts in March 2020 in response to the economic effects of COVID-19. During this time, variable rate assets tied to market interest rates repriced faster than deposits. However, as the pace of short-term market interest rate declines slowed over the course of 2020 and into 2021, the Company believes that yields on interest-earning assets have largely stabilized. Furthermore, the Company has approximately $807.0 million of certificates and brokered deposits with a weighted average cost of 1.58% that mature over the next twelve months. As the weighted average of cost of these deposits is significantly higher than current new production costs, the Company expects the cost of deposit funding to continue to decline in 2021.

Noninterest Income

The following table presents noninterest income for the last five completed fiscal quarters.


(in thousands)	Three Months Ended
	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Service charges and fees	$	266	$	206	$	224	$	182	$	212
Loan servicing revenue	422		379		274		255		251
Loan servicing asset revaluation	(155)		(60)		(103)		(90)		(179)
Mortgage banking activities	5,750		7,987		9,630		3,408		3,668
Gain on sale of loans	1,723		3,702		2,033		762		1,801
Gain on sale of securities	—		—		98		—		41
Other	369		443		339		456		417
Total noninterest income	$	8,375	$	12,657	$	12,495	$	4,973	$	6,211

During the first quarter 2021, noninterest income was $8.4 million, representing an increase of $2.2 million, or 34.8%, compared to $6.2 million for the first quarter 2020. The increase in noninterest income was due primarily to increases in revenue from mortgage banking activities and loan servicing revenue of $2.1 million and $0.2 million, respectively. The increase in mortgage banking revenue was due mainly to higher gain-on-sale margins. The increase in loan servicing revenue was due to an increase in the balance of the Company’s SBA 7(a) servicing portfolio.

Noninterest Expense

The following table presents noninterest expense for the last five completed fiscal quarters.


(in thousands)	Three Months Ended
	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Salaries and employee benefits	$	9,492	$	9,135	$	9,533	$	7,789	$	7,774
Marketing, advertising and promotion	680		443		426		411		375
Consulting and professional services	986		788		614		932		1,177
Data processing	462		426		388		339		375
Loan expenses	534		630		408		399		599
Premises and equipment	1,601		1,601		1,568		1,602		1,625
Deposit insurance premium	425		450		440		435		485
Write-down of other real estate owned	—		—		2,065		—		—
Other	1,137		1,040		970		1,337		1,076
Total noninterest expense	$	15,317	$	14,513	$	16,412	$	13,244	$	13,486

Noninterest expense for the first quarter 2021 was $15.3 million, compared to $13.5 million for the first quarter 2020. The increase of $1.8 million, or 13.6%, compared to the first quarter 2020 was due primarily to increases of $1.7 million in salaries and employee benefits and $0.3 million in marketing, advertising and promotion but partially offset by a $0.2 million decrease in consulting and professional fees. 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 marketing, advertising and promotion was due primarily to increased digital marketing initiatives related to deposits. The decrease in consulting and professional services is primarily related to a decrease in routine legal costs. Additionally, during the first quarter 2021, and reflected in other noninterest expense, the Company made a $0.3 million contribution to a foundation that supports not-for-profit organizations and community-based initiatives in Hamilton County, Indiana.

Income tax provision was $1.9 million for the first quarter 2021, resulting in an effective tax rate of 15.1%, compared to $0.3 million and an effective tax rate of 4.2% for the first quarter 2020. The increase in income tax provision for the first quarter 2021 compared to the first quarter 2020 was due primarily to the increase in pre-tax earnings driven by increased net interest income, as well as a higher proportion of taxable revenue from mortgage banking. Additionally, the lower income tax provision and effective tax rate during the year ago period was impacted by the passage of the CARES Act, which was signed into law on March 27, 2020, and provided the Company the ability to carryback certain federal net operating losses in the first quarter 2020.

Financial Condition

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


(in thousands)
Balance Sheet Data:	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Total assets	$	4,188,570	$	4,246,156	$	4,333,624	$	4,324,600	$	4,168,146
Loans	3,058,694		3,059,231		3,012,914		2,973,674		2,892,093
Total securities	530,566		565,851		596,565		657,312		675,013


Loans held-for-sale	30,235		39,584		76,208		38,813		52,394
Noninterest-bearing deposits	100,700		96,753		86,088		82,864		70,562
Interest-bearing deposits	3,116,903		3,174,132		3,286,303		3,297,925		3,107,944
Total deposits	3,217,603		3,270,885		3,372,391		3,380,789		3,178,506
Advances from Federal Home Loan Bank	514,917		514,916		514,914		514,913		514,911
Total shareholders’ equity	344,566		330,944		318,102		307,711		305,127

Total assets decreased $57.6 million, or 1.4%, to $4.2 billion at March 31, 2021 compared to $4.2 billion at December 31, 2020. This was driven by a $53.3 million, or 1.6%, decrease in deposit balances, which includes a $114.6 million, or 8.9% decrease in certificates of deposits and a $46.9 million, or 3.5%, increase in money market account balances.

As of March 31, 2021, total shareholders’ equity was $344.6 million, an increase of $13.6 million, or 4.1%, compared to December 31, 2020, due primarily to the net income earned during the period, as well as a decrease in accumulated other comprehensive loss. Tangible common equity totaled $339.9 million as of March 31, 2021, representing an increase of $13.6 million, or 4.2%, compared to December 31, 2020. As both total shareholders’ equity and tangible common equity increased, while both total assets and tangible assets decreased 1.4%, the ratio of total shareholders’ equity to total assets increased to 8.23% as of March 31, 2021 from 7.79% as of December 31, 2020 and the ratio of tangible common equity to tangible assets increased to 8.12% as of March 31, 2021 from 7.69% as of December 31, 2020.

Book value per common share increased 3.8% to $35.07 as of March 31, 2021 from $33.77 as of December 31, 2020. Tangible book value per share increased 3.9% to $34.60 as of March 31, 2021 from $33.29 as of December 31, 2020. The growth in both book value per common share and tangible book value per share reflects the growth in total shareholders’ equity and tangible common equity while total common shares outstanding increased slightly from December 31, 2020. Refer to the “Reconciliation of Non-GAAP Financial Measures” section of Part I, Item 2 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

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)	March 31, 2021				December 31, 2020				September 30, 2020				June 30, 2020				March 31, 2020
Commercial loans
Commercial and industrial	$	71,835	2.3	%	$	75,387	2.5	%	$	77,116	2.6	%	$	81,687	2.7	%	$	95,227	3.3	%
Owner-occupied commercial real estate	87,930		2.9	%	89,785		2.9	%	89,095		3.0	%	86,897		2.9	%	74,737		2.6	%
Investor commercial real estate	14,832		0.5	%	13,902		0.5	%	13,084		0.4	%	13,286		0.4	%	13,421		0.5	%
Construction	123,483		4.0	%	110,385		3.6	%	92,154		3.1	%	77,591		2.6	%	64,581		2.2	%
Single tenant lease financing	941,322		30.8	%	950,172		31.1	%	960,505		31.9	%	980,292		33.0	%	972,275		33.6	%
Public finance	637,600		20.8	%	622,257		20.3	%	625,638		20.8	%	647,107		21.8	%	627,678		21.7	%
Healthcare finance	510,237		16.8	%	528,154		17.3	%	461,740		15.3	%	380,956		12.8	%	372,266		12.9	%
Small business lending	132,490		4.3	%	125,589		4.1	%	123,168		4.1	%	118,526		4.0	%	67,275		2.3	%
Total commercial loans	2,519,729		82.4	%	2,515,631		82.3	%	2,442,500		81.2	%	2,386,342		80.2	%	2,287,460		79.1	%
Consumer loans
Residential mortgage	190,148		6.2	%	186,787		6.1	%	203,041		6.7	%	208,728		7.0	%	218,730		7.6	%
Home equity	17,949		0.6	%	19,857		0.6	%	22,169		0.7	%	22,640		0.8	%	23,855		0.8	%
Other consumer	270,209		8.8	%	275,692		9.0	%	282,450		9.3	%	291,632		9.8	%	296,605		10.2	%
Total consumer loans	478,306		15.6	%	482,336		15.7	%	507,660		16.7	%	523,000		17.6	%	539,190		18.6	%
Net deferred loan origination costs, premiums and discounts on purchased loans and other (1)	60,659		2.0	%	61,264		2.0	%	62,754		2.1	%	64,332		2.2	%	65,443		2.3	%
Total loans	3,058,694		100.0	%	3,059,231		100.0	%	3,012,914		100.0	%	2,973,674		100.0	%	2,892,093		100.0	%
Allowance for loan losses	(30,642)				(29,484)				(26,917)				(24,465)				(22,857)
Net loans	$	3,028,052			$	3,029,747			$	2,985,997			$	2,949,209			$	2,869,236

(1) Includes carrying value adjustments of $41.6 million, $42.7 million, $44.3 million and $46.0 million related to terminated interest rate swaps associated with public finance loans as of March 31, 2021, December 31, 2020, September 30, 2020 and June 30, 2020, respectively, and $44.6 million related to interest rate swaps associated with public finance loans as of March 31, 2020.

Total loans were $3.1 billion as of March 31, 2021, relatively consistent with December 31, 2020. Total commercial loan balances were $2.5 billion as of March 31, 2021, up $4.1 million, or 0.2%, from December 31, 2020. Compared to December 31, 2020, the growth in commercial loan balances was driven largely by production in public finance, construction and small business lending, but was partially offset by a decrease in healthcare finance and single tenant lease financing balances due to elevated prepayment activity.

Total consumer loan balances were $478.3 million as of March 31, 2021, a decrease of $4.0 million, or 0.8%, compared to December 31, 2020. The slight decline in consumer loan balances from December 31, 2020 was due primarily to increased prepayment activity across the recreational vehicle and trailer portfolios.

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)	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Nonaccrual loans
Commercial loans:
Commercial and industrial	$	1,002		$	—		$	117		$	299		$	218
Owner-occupied commercial real estate	4,266			1,838			1,390			2,066			1,390


Single tenant lease financing	7,080			7,116			7,148			4,680			4,680
Small business lending (1)	865			—			—			—			—
Total commercial loans	13,213			8,954			8,655			7,045			6,288
Consumer loans:
Residential mortgage	1,120			1,183			1,085			1,042			991
Home equity	15			—			—			—			—
Other consumer	23			46			34			108			39
Total consumer loans	1,158			1,229			1,119			1,150			1,030
Total nonaccrual loans	14,371			10,183			9,774			8,195			7,318

Past Due 90 days and accruing loans
Commercial loans:
Commercial and industrial	278			—			—			—			73




Total commercial loans	278			—			—			—			73
Consumer loans:
Residential mortgage	—			—			—			—			51

Other consumer	—			—			—			—			1
Total consumer loans	—			—			—			—			52
Total past due 90 days and accruing loans	278			—			—			—			125

Total nonperforming loans	14,649			10,183			9,774			8,195			7,443

Other real estate owned
Investor commercial real estate	—			—			—			2,065			2,065

Total other real estate owned	—			—			—			2,065			2,065

Other nonperforming assets	29			35			8			44			114

Total nonperforming assets	$	14,678		$	10,218		$	9,782		$	10,304		$	9,622

Total nonperforming loans to total loans (2)	0.48		%	0.33		%	0.32		%	0.28		%	0.26		%
Total nonperforming assets to total assets (2)	0.35		%	0.24		%	0.23		%	0.24		%	0.23		%
Allowance for loan losses to total loans	1.00		%	0.96		%	0.89		%	0.82		%	0.79		%
Allowance for loan losses to total loans, excluding PPP loans (3)	1.02		%	0.98		%	0.91		%	0.84		%	0.79		%
Allowance for loan losses to nonperforming loans (2)	209.2		%	289.5		%	275.4		%	298.5		%	307.1		%

1 Entire balance is guaranteed by the U.S. government.

2 Includes the impact of nonperforming small business lending loans, which are 100% guaranteed by the U.S. government.

3 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)	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Troubled debt restructurings – nonaccrual	$	2,606	$	2,637	$	811	$	854	$	94
Troubled debt restructurings – performing	1,187		367		365		372		378
Total troubled debt restructurings	$	3,793	$	3,004	$	1,176	$	1,226	$	472

The increase in nonperforming loans of $4.5 million, or 43.9%, to $14.6 million as of March 31, 2021 compared to $10.2 million as of December 31, 2020 was due primarily to an increase in nonperforming owner-occupied commercial real estate and commercial and industrial loans. This increase is the result of a single commercial relationship that was placed on nonaccrual status during the quarter. Total nonperforming assets increased $4.5 million, or 43.4%, as of March 31, 2021 compared to December 31, 2020, due primarily to the increase in nonperforming loans discussed above. The ratio of nonperforming loans to total loans increased to 0.48% as of March 31, 2021 compared to 0.33% as of December 31, 2020 and the ratio of nonperforming assets to total assets increased to 0.35% as of March 31, 2021 compared to 0.24% as of December 31, 2020, also due primarily to the loans mentioned above.

Total TDRs as of March 31, 2021 were $3.8 million, up $0.8 million from December 31, 2020. The increase was driven by one residential mortgage loan that became a TDR during the first quarter 2021.

The Company did not have any OREO as of March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021, our financial results have reflected little impact on asset quality as a result of COVID-19. We are optimistic that the combination of the vaccine rollout, government stimulus programs and relief programs we have provided to our clients will continue to mitigate the impact of the pandemic on the Company’s business. However, if economic conditions return to levels experienced during 2020, our nonperforming loans and assets could be adversely affected.

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 January 1, 2022, 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. As of March 31, 2021, the Company had 37 loans totaling $14.3 million in non-TDR loan modifications due to COVID-19.

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. In 2020, 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 originated in 2020 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 2020 and it will be deferred over the life of the PPP loans and recognized as interest income.

On December 27, 2020, $285 billion in additional funding was allocated to the PPP through the passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. The additional funding can be used by small

businesses who have yet to receive a PPP loan, as well as certain small businesses who may be eligible to receive a second PPP loan. The Company began offering PPP loans again in the first quarter 2021. These loans also may be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. In the first quarter 2021, we assisted our clients in participating in this next round of PPP to help them continue to recover from the economic damage created by the COVID-19 pandemic. The loans originated during the first quarter 2021 bear an interest rate of 1.00% and we received weighted average origination fees of 6.60% of the amount funded, or approximately $1.3 million in total. The Company received this fee revenue from the SBA in February and March 2021 and it will be deferred over the life of the PPP loans and recognized as interest income. During the first quarter 2021, we originated 244 PPP loans totaling $26.1 million outstanding. In total, the Company has 416 PPP loans with an outstanding principal balance of $53.4 million. The Company expects to begin processing applications for forgiveness from this round beginning in May 2021.

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 March 31, 2021, the Company processed 274 applications for forgiveness from PPP borrowers. Management anticipates that loan forgiveness applications will continue throughout 2021.

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
	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Balance, beginning of period	$	29,484		$	26,917		$	24,465		$	22,857		$	21,840
Provision charged to expense	1,276			2,865			2,509			2,491			1,461
Losses charged off	(311)			(408)			(241)			(1,016)			(498)
Recoveries	193			110			184			133			54
Balance, end of period	$	30,642		$	29,484		$	26,917		$	24,465		$	22,857

Net charge-offs to average loans	0.02		%	0.04		%	0.01		%	0.12		%	0.06		%

The allowance for loan losses was $30.6 million as of March 31, 2021, compared to $29.5 million as of December 31, 2020. While total loan balances were consistent with December 31, 2020, the Company made additional adjustments to qualitative factors in its allowance model, as well as recorded specific reserves on two commercial relationships totaling $1.1 million in the aggregate. These items were partially offset by loan portfolio composition changes, which included reductions in certain portfolios with higher reserve coverage ratios, as well as growth in portfolios with lower reserve coverage ratios. As a result, both the allowance for loan losses and the allowance as a percentage of total loans increased compared to December 31, 2020.

The allowance for loan losses as a percentage of total loans was 1.00% at March 31, 2021, or 1.02%, when excluding PPP loans, compared to 0.96%, or 0.98%, when excluding PPP loans, at December 31, 2020. The allowance for loan losses as a percentage of nonperforming loans decreased to 209.2% as of March 31, 2021, compared to 289.5% as of December 31, 2020, due to an increase in nonperforming loans primarily related to a single commercial relationship that was placed on nonaccrual during the first quarter 2021. The provision for loan losses in the first quarter 2021 was $1.3 million, compared to $1.5 million for the first quarter 2020. During the first quarter 2021, the Company recorded net charge-offs of $0.1 million, compared to net charge-offs of $0.4 million for the first quarter 2020.

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	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Securities available-for-sale
U.S. Government-sponsored agencies	$	60,815	$	61,765	$	65,007	$	68,203	$	71,387
Municipal securities	79,168		82,757		87,365		91,906		94,981
Agency mortgage-backed securities	229,981		241,795		250,755		275,433		279,458
Private label mortgage-backed securities	40,550		57,268		71,519		101,110		114,363
Asset-backed securities	5,000		5,000		5,000		5,000		5,000
Corporate securities	48,433		48,419		48,406		48,394		43,378

Total available-for-sale	463,947		497,004		528,052		590,046		608,567
Securities held-to-maturity
Municipal securities	14,560		14,571		14,582		14,603		14,617
Corporate securities	53,630		53,652		53,672		53,692		51,714
Total held-to-maturity	68,190		68,223		68,254		68,295		66,331
Total securities	$	532,137	$	565,227	$	596,306	$	658,341	$	674,898


(in thousands)
Approximate Fair Value	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Securities available-for-sale
U.S. Government-sponsored agencies	$	59,478	$	60,545	$	63,682	$	66,544	$	70,004
Municipal securities	79,208		82,489		86,421		90,562		94,819
Agency mortgage-backed securities	228,818		243,921		253,292		278,530		282,632
Private label mortgage-backed securities	41,106		58,116		72,626		101,925		115,024
Asset-backed securities	5,006		4,961		4,921		4,837		4,713
Corporate securities	48,760		47,596		47,369		46,619		41,490

Total available-for-sale	462,376		497,628		528,311		589,017		608,682
Securities held-to-maturity
Municipal securities	15,109		15,317		15,328		15,274		15,678
Corporate securities	54,274		54,135		53,848		53,878		53,790
Total held-to-maturity	69,383		69,452		69,176		69,152		69,468
Total securities	$	531,759	$	567,080	$	597,487	$	658,169	$	678,150

The approximate fair value of available-for-sale investment securities decreased $35.3 million, or 7.1%, to $462.4 million as of March 31, 2021, compared to $497.6 million as of December 31, 2020. The decrease was due primarily to decreases of $17.0 million in private label mortgage-backed securities, $15.1 million in agency mortgage-backed securities and $3.3 million in municipal securities. These decreases were driven primarily by prepayments and maturities in private label mortgage-backed securities and agency mortgage-backed securities, as well as early redemptions and maturities in municipal securities. These decreases were partially offset by purchases of agency mortgage-backed securities during the first quarter 2021.

Accrued Income and Other Assets

Accrued income and other assets decreased $11.9 million, or 18.6%, to $52.4 million at March 31, 2021 compared to $64.3 million at December 31, 2020. The decrease was primarily related to a $7.2 million decrease in cash pledged as collateral, as well as a decrease of $3.3 million in deferred tax assets. As of these dates, the Company pledged $23.4 million and $30.6 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.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities were $40.3 million at March 31, 2021 compared to $48.4 million at December 31, 2020. The decrease of $8.1 million, or 16.74%, was due primarily to a $10.0 million decrease in derivative liabilities due to an increase in the fair value of these contracts.

Deposits

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


(dollars in thousands)	March 31, 2021				December 31, 2020				September 30, 2020				June 30, 2020				March 31, 2020
Noninterest-bearing deposits	$	100,700	3.1	%	$	96,753	3.0	%	$	86,088	2.6	%	$	82,864	2.5	%	$	70,562	2.2	%
Interest-bearing demand deposits	186,015		5.8	%	188,645		5.8	%	155,054		4.6	%	152,391		4.5	%	123,233		3.9	%
Savings accounts	51,251		1.6	%	43,200		1.3	%	49,890		1.5	%	43,366		1.3	%	32,485		1.0	%
Money market accounts	1,397,449		43.4	%	1,350,566		41.3	%	1,359,178		40.3	%	1,241,874		36.7	%	930,698		29.3	%
Certificates of deposits	1,174,764		36.5	%	1,289,319		39.4	%	1,360,575		40.3	%	1,470,905		43.5	%	1,493,644		47.0	%
Brokered deposits	307,424		9.6	%	302,402		9.2	%	361,606		10.7	%	389,389		11.5	%	527,884		16.6	%
Total deposits	$	3,217,603	100.0	%	$	3,270,885	100.0	%	$	3,372,391	100.0	%	$	3,380,789	100.0	%	$	3,178,506	100.0	%

Total deposits decreased $53.3 million, or 1.6%, to $3.2 billion as of March 31, 2021, compared to $3.3 billion as of December 31, 2020. This decrease was due primarily to declines of $114.6 million, or 8.9%, in certificates of deposits and $2.6 million, or 1.4%, in interest-bearing demand deposits, partially offset by increases of $46.9 million, or 3.5%, in money market accounts, $8.1 million, or 18.6%, in savings accounts, $5.0 million, or 1.7%, in brokered deposits and $3.9 million, or 4.1% in non-interest bearing deposits. The company experienced strong growth in money market deposit accounts due to targeted digital marketing efforts to grow small business accounts, as well as consumers, small business and commercial clients increasing their cash balances in part due to the economic uncertainty resulting from the COVID-19 pandemic. The decrease in certificates of 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

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. The net proceeds were used to redeem the 2025 Note in January 2021.

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 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 March 31, 2021 and December 31, 2020 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 March 31, 2021 and December 31, 2020 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 March 31, 2021:
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	352,100	11.81	%		$	208,716	7.00	%	N/A		N/A
Bank	389,810		13.08	%		208,566		7.00	%	$	193,669	6.50	%
Tier 1 capital to risk-weighted assets
Consolidated	352,100		11.81	%		253,441		8.50	%	N/A		N/A
Bank	389,810		13.08	%		253,259		8.50	%	238,362		8.00	%
Total capital to risk-weighted assets
Consolidated	452,536		15.18	%		313,074		10.50	%	N/A		N/A
Bank	420,452		14.11	%		312,849		10.50	%	297,952		10.00	%
Leverage ratio
Consolidated	352,100		8.46	%		166,449		4.00	%	N/A		N/A
Bank	389,810		9.37	%		166,356		4.00	%	207,945		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, 2020:
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	342,159	11.31	%		$	211,828	7.00	%	N/A		N/A
Bank	377,678		12.49	%		211,612		7.00	%	$	196,497	6.50	%
Tier 1 capital to risk-weighted assets
Consolidated	342,159		11.31	%		257,220		8.50	%	N/A		N/A
Bank	377,678		12.49	%		256,957		8.50	%	241,842		8.00	%
Total capital to risk-weighted assets
Consolidated	451,246		14.91	%		317,742		10.50	%	N/A		N/A
Bank	407,162		13.47	%		317,418		10.50	%	302,303		10.00	%
Leverage ratio
Consolidated	342,159		7.95	%		172,154		4.00	%	N/A		N/A
Bank	377,678		8.78	%		172,036		4.00	%	215,045		5.00	%

Shareholders’ Dividends

The Company’s Board of Directors declared a cash dividend of $0.06 per share of common stock payable April 15, 2021 to shareholders of record as of March 31, 2021. 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 March 31, 2021, the Company had $72.0 million principal amount of subordinated debt outstanding evidenced by its 6.0% Fixed-to-Floating Rate Subordinated Notes due 2026, the 2029 Notes and the 2030 Notes. The agreements that govern our outstanding subordinated debt prohibit the Company from paying any dividends on its common stock or making any other distributions to shareholders at any time when there shall have occurred, and be continuing to occur, an event of default under the applicable agreement. If an event of default were to occur and the Company did not cure it, the Company would be prohibited from paying any dividends or making any other distributions to shareholders or from redeeming or repurchasing any common stock.

Capital Resources

The Company believes it has sufficient liquidity and capital resources to meet its cash and capital expenditure requirements for at least the next twelve months. 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.

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. Given the uncertainty regarding the duration 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 March 31, 2021, on a consolidated basis, the Company had $878.6 million in cash and cash equivalents and investment securities available-for-sale and $30.2 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 March 31, 2021, the Bank had the ability to borrow an additional $451.1 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 March 31, 2021, the Company, on an unconsolidated basis, had $28.1 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 March 31, 2021, approved outstanding loan commitments, including unused lines of credit and standby letters of credit, amounted to $261.2 million. Certificates of deposits and brokered deposits scheduled to mature in one year or less at March 31, 2021 totaled $807.0 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 and allowance for loan losses to loans, excluding PPP loans 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.


(dollars in thousands, except share and per share data)	Three Months Ended
	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Total equity - GAAP	$	344,566		$	330,944		$	318,102		$	307,711		$	305,127
Adjustments:
Goodwill	(4,687)			(4,687)			(4,687)			(4,687)			(4,687)
Tangible common equity	$	339,879		$	326,257		$	313,415		$	303,024		$	300,440

Total assets - GAAP	$	4,188,570		$	4,246,156		$	4,333,624		$	4,324,600		$	4,168,146
Adjustments:
Goodwill	(4,687)			(4,687)			(4,687)			(4,687)			(4,687)
Tangible assets	$	4,183,883		$	4,241,469		$	4,328,937		$	4,319,913		$	4,163,459

Total common shares outstanding	9,823,831			9,800,569			9,800,569			9,799,047			9,801,825

Book value per common share	$	35.07		$	33.77		$	32.46		$	31.40		$	31.13
Effect of goodwill	(0.47)			(0.48)			(0.48)			(0.48)			(0.48)
Tangible book value per common share	$	34.60		$	33.29		$	31.98		$	30.92		$	30.65

Total shareholders’ equity to assets	8.23		%	7.79		%	7.34		%	7.12		%	7.32		%
Effect of goodwill	(0.11)		%	(0.10)		%	(0.10)		%	(0.11)		%	(0.10)		%
Tangible common equity to tangible assets ratio	8.12		%	7.69		%	7.24		%	7.01		%	7.22		%

Total average equity - GAAP	$	335,968		$	323,464		$	313,611		$	306,868		$	311,005
Adjustments:
Average goodwill	(4,687)			(4,687)			(4,687)			(4,687)			(4,687)
Average tangible common equity	$	331,281		$	318,777		$	308,924		$	302,181		$	306,318

Return on average shareholders’ equity	12.61		%	13.64		%	10.67		%	5.15		%	7.78		%
Effect of goodwill	0.18		%	0.20		%	0.16		%	0.08		%	0.12		%
Return on average tangible common equity	12.79		%	13.84		%	10.83		%	5.23		%	7.90		%


(dollars in thousands, except share and per share data)	Three Months Ended
	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Total interest income	$	33,280		$	33,643		$	32,750		$	34,222		$	36,244
Adjustments:
Fully-taxable equivalent adjustments 1	1,356			1,400			1,424			1,437			1,535
Total interest income - FTE	$	34,636		$	35,043		$	34,174		$	35,659		$	37,779

Net interest income	$	20,525		$	18,865		$	16,232		$	14,426		$	15,018
Adjustments:
Fully-taxable equivalent adjustments 1	1,356			1,400			1,424			1,437			1,535
Net interest income - FTE	$	21,881		$	20,265		$	17,656		$	15,863		$	16,553

Net interest margin	2.04		%	1.78		%	1.53		%	1.37		%	1.50		%
Effect of fully-taxable equivalent adjustments 1	0.14		%	0.13		%	0.14		%	0.13		%	0.15		%
Net interest margin - FTE	2.18		%	1.91		%	1.67		%	1.50		%	1.65		%

Allowance for loan losses	$	30,642		$	29,484		$	26,917		$	24,465		$	22,857

Loans	$	3,058,694		$	3,059,231		$	3,012,914		$	2,973,674		$	2,892,093
Adjustments:
PPP loans	(53,365)			(50,554)			(58,337)			(58,948)			—
Loans, excluding PPP loans	$	3,005,329		$	3,008,677		$	2,954,577		$	2,914,726		$	2,892,093

Allowance for loan losses to loans	1.00		%	0.96		%	0.89		%	0.82		%	0.79		%
Effect of PPP loans	0.02		%	0.02		%	0.02		%	0.02		%	0.00		%
Allowance for loan losses to loans, excluding PPP loans	1.02		%	0.98		%	0.91		%	0.84		%	0.79		%

1 Assuming a 21% tax rate

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, 2020.

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 March 31, 2021 and December 31, 2020, the Company had interest rate swaps with notional amounts of $260.0 million and $298.2 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 March 31, 2021 and December 31, 2020, the Company had commitments to sell residential real estate loans of $81.5 million and $107.5 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 March 31, 2021, 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	(1.62)	%	(0.24)	%	(1.79)	%	(5.69)	%
NII - Year 2	8.29	%	10.22	%	8.37	%	2.75	%
EVE	1.55	%	0.96	%	(4.81)	%	(12.45)	%

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 March 31, 2021.

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 March 31, 2021 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, 2020.

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

10.1

Form of Management Incentive Award Agreement - Restricted Stock Units (time based) under 2013 Equity Incentive Plan*

Filed Electronically

10.2

Form of Management Incentive Award Agreement - Restricted Stock units (performance based) under 2013 Equity Incentive Plan *

Filed Electronically

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

___________________________________

*Management contract, compensatory plan or arrangement required to be filed as an exhibit.

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

5/10/2021	By	/s/ David B. Becker
		David B. Becker, Chairman, President and Chief Executive Officer (on behalf of Registrant)

5/10/2021	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 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 10.1 Form of Management Incentive Award Agreement - Restricted Stock Units (time based) under 2013 Equity Incentive Plan* Filed Electronically 10.2 Form of Management Incentive Award Agreement - Restricted Stock units (performance based) under 2013 Equity Incentive Plan* Filed Electronically 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 March 31, 2021

Exhibits