First Internet Bancorp 10-Q

ITEM 1. FINANCIAL STATEMENTS First Internet Bancorp Condensed Consolidated Balance Sheets (Amounts in thousands except share data) June 30, 2021 December 31, 2020 (Unaudited) Assets Cash and due from banks $ 4,347 $ 7,367 Interest-bearing deposits 324,450 412,439 Total cash and cash equivalents 328,797 419,806 Securities available-for-sale, at fair value (amortized cost of $663,693 and $497,004 in 2021 and 2020, respectively) 663,519 497,628 Securities held-to-maturity, at amortized cost (fair value of $68,058 and $69,452 in 2021 and 2020, respectively) 65,659 68,223 Loans held-for-sale (includes $16,870 and $26,341 at fair value in 2021 and 2020, respectively) 27,587 39,584 Loans 2,957,608 3,059,231 Allowance for loan losses ( 28,066 ) ( 29,484 ) Net loans 2,929,542 3,029,747 Accrued interest receivable 16,345 17,416 Federal Home Loan Bank of Indianapolis stock 25,650 25,650 Cash surrender value of bank-owned life insurance 38,421 37,952 Premises and equipment, net 44,249 37,590 Goodwill 4,687 4,687 Servicing asset, at fair value 4,120 3,569 Other real estate owned 1,300 — Accrued income and other assets 54,766 64,304 Total assets $ 4,204,642 $ 4,246,156 Liabilities and Shareholders’ Equity Liabilities Noninterest-bearing deposits $ 113,996 $ 96,753 Interest-bearing deposits 3,092,151 3,174,132 Total deposits 3,206,147 3,270,885 Advances from Federal Home Loan Bank 514,919 514,916 Subordinated debt, net of unamortized debt issuance costs of $2,129 and $2,397 in 2021 and 2020, respectively 69,871 79,603 Accrued interest payable 1,132 1,439 Accrued expenses and other liabilities 53,932 48,369 Total liabilities 3,846,001 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; 9,854,153 and 9,800,569 shares issued and outstanding in 2021 and 2020, respectively 222,486 221,408 Nonvoting common stock, no par value; 86,221 shares authorized; issued and outstanding - none — — Retained earnings 149,066 126,732 Accumulated other comprehensive loss ( 12,911 ) ( 17,196 ) Total shareholders’ equity 358,641 330,944 Total liabilities and shareholders’ equity $ 4,204,642 $ 4,246,156 See Notes to Condensed Consolidated Financial Statements 1 First Internet Bancorp Condensed Consolidated Statements of Income – Unaudited (Amounts in thousands except share and per share data) Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Interest Income Loans $ 30,835 $ 29,730 $ 61,720 $ 60,138 Securities – taxable 1,921 3,276 3,700 6,895 Securities – non-taxable 259 457 540 1,029 Other earning assets 362 759 697 2,404 Total interest income 33,377 34,222 66,657 70,466 Interest Expense Deposits 7,705 15,763 16,333 32,971 Other borrowed funds 4,065 4,033 8,192 8,051 Total interest expense 11,770 19,796 24,525 41,022 Net Interest Income 21,607 14,426 42,132 29,444 Provision for Loan Losses 21 2,491 1,297 3,952 Net Interest Income After Provision for Loan Losses 21,586 11,935 40,835 25,492 Noninterest Income Service charges and fees 280 182 546 394 Loan servicing revenue 457 255 879 506 Loan servicing asset revaluation ( 240 ) ( 90 ) ( 395 ) ( 269 ) Mortgage banking activities 2,674 3,408 8,424 7,076 Gain on sale of loans 3,019 762 4,742 2,563 Gain on sale of securities — — — 41 Gain on sale of premises and equipment 2,523 — 2,523 — Other 249 456 618 873 Total noninterest income 8,962 4,973 17,337 11,184 Noninterest Expense Salaries and employee benefits 9,232 7,789 18,724 15,563 Marketing, advertising and promotion 872 411 1,552 786 Consulting and professional services 1,078 932 2,064 2,109 Data processing 382 339 844 714 Loan expenses 541 399 1,075 998 Premises and equipment 1,587 1,602 3,188 3,227 Deposit insurance premium 275 435 700 920 Other 1,108 1,337 2,245 2,413 Total noninterest expense 15,075 13,244 30,392 26,730 Income Before Income Taxes 15,473 3,664 27,780 9,946 Income Tax Provision (Benefit) 2,377 ( 268 ) 4,234 ( 5 ) Net Income $ 13,096 $ 3,932 $ 23,546 $ 9,951 Income Per Share of Common Stock Basic $ 1.32 $ 0.40 $ 2.37 $ 1.02 Diluted $ 1.31 $ 0.40 $ 2.36 $ 1.02 Weighted-Average Number of Common Shares Outstanding Basic 9,932,761 9,768,227 9,916,087 9,798,528 Diluted 9,981,422 9,768,227 9,970,147 9,802,427 Dividends Declared Per Share $ 0.06 $ 0.06 $ 0.12 $ 0.12 See Notes to Condensed Consolidated Financial Statements 2 First Internet Bancorp Condensed Consolidated Statements of Comprehensive Income – Unaudited (Amounts in thousands) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net income $ 13,096 $ 3,932 $ 23,546 $ 9,951 Other comprehensive income (loss) Net unrealized holding gains (losses) on securities available-for-sale recorded within other comprehensive income (loss) before income tax 1,388 ( 1,498 ) ( 807 ) 4,801 Reclassification adjustment for gains realized — — — ( 41 ) Net unrealized holding (losses) gains on cash flow hedging derivatives recorded within other comprehensive income (loss) before income tax ( 54 ) ( 509 ) 6,226 ( 13,967 ) Other comprehensive income (loss) before income tax 1,334 ( 2,007 ) 5,419 ( 9,207 ) Income tax provision (benefit) 325 ( 735 ) 1,134 ( 2,260 ) Other comprehensive income (loss) 1,009 ( 1,272 ) 4,285 ( 6,947 ) Comprehensive income $ 14,105 $ 2,660 $ 27,831 $ 3,004 See Notes to Condensed Consolidated Financial Statements First Internet Bancorp Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited Six Months Ended June 30, 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 — 23,546 — 23,546 Other comprehensive income — — 4,285 4,285 Dividends declared ($ 0.12 per share) — ( 1,212 ) — ( 1,212 ) Recognition of the fair value of share-based compensation 1,262 — — 1,262 Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 11 — — 11 Common stock redeemed for the net settlement of share-based awards ( 195 ) — — ( 195 ) Balance, June 30, 2021 $ 222,486 $ 149,066 $ ( 12,911 ) $ 358,641 Balance, January 1, 2020 $ 219,423 $ 99,681 $ ( 14,191 ) $ 304,913 Net income — 9,951 — 9,951 Other comprehensive loss — — ( 6,947 ) ( 6,947 ) Dividends declared ($ 0.12 per share) — ( 1,201 ) — ( 1,201 ) Recognition of the fair value of share-based compensation 1,073 — — 1,073 Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 15 — — 15 Common stock redeemed for the net settlement of share-based awards ( 93 ) — — ( 93 ) Balance, June 30, 2020 $ 220,418 $ 108,431 $ ( 21,138 ) $ 307,711 See Notes to Condensed Consolidated Financial Statements 3 First Internet Bancorp Condensed Consolidated Statements of Changes in Shareholders’ Equity - Unaudited Three Months Ended June 30, 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, April 1, 2021 $ 221,911 $ 136,575 $ ( 13,920 ) $ 344,566 Net income — 13,096 — 13,096 Other comprehensive income — — 1,009 1,009 Dividends declared ($ 0.06 per share) — ( 605 ) — ( 605 ) Recognition of the fair value of share-based compensation 570 — — 570 Deferred stock rights and restricted stock units issued in lieu of cash dividends payable on outstanding deferred stock rights and restricted stock units 5 — — 5 Common stock redeemed for the net settlement of share-based awards — — — — Balance, June 30, 2021 $ 222,486 $ 149,066 $ ( 12,911 ) $ 358,641 Balance, April 1, 2020 $ 219,893 $ 105,100 $ ( 19,866 ) $ 305,127 Net income — 3,932 — 3,932 Other comprehensive loss — — ( 1,272 ) ( 1,272 ) Dividends declared ($ 0.06 per share) — ( 601 ) — ( 601 ) Recognition of the fair value of share-based compensation 517 — — 517 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 — — — — Balance, June 30, 2020 $ 220,418 $ 108,431 $ ( 21,138 ) $ 307,711 4 First Internet Bancorp Condensed Consolidated Statements of Cash Flows – Unaudited (Amounts in thousands) Six Months Ended June 30, 2021 2020 Operating Activities Net income $ 23,546 $ 9,951 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 4,038 3,515 Increase in cash surrender value of bank-owned life insurance ( 469 ) ( 472 ) Provision for loan losses 1,297 3,952 Share-based compensation expense 1,262 1,073 Loss on sale of available-for-sale securities — ( 41 ) Loans originated for sale ( 421,012 ) ( 427,323 ) Proceeds from sale of loans 448,093 454,737 Gain on loans sold ( 16,774 ) ( 11,069 ) Decrease in fair value of loans held-for-sale 744 939 Loss on derivatives ( 1,384 ) 377 Settlement of derivatives ( 1,859 ) ( 46,109 ) Loan servicing asset revaluation 395 ( 41 ) Amortization of operating lease right-of-use assets — 360 Net change in accrued income and other assets 1,631 ( 2,221 ) Net change in accrued expenses and other liabilities 1,984 ( 1,840 ) Net cash provided by (used in) operating activities 41,492 ( 14,212 ) Investing Activities Net loan activity, excluding purchases 120,219 ( 18,907 ) Maturities and calls of securities available-for-sale 94,643 74,828 Proceeds from sale of securities available-for-sale — 795 Purchase of securities available-for-sale ( 247,791 ) ( 116,993 ) Maturities and calls of securities held-to-maturity 2,500 — Purchase of securities held-to-maturity — ( 2,000 ) Net proceeds from sale of premises and equipment 8,116 — Purchase of premises and equipment ( 13,707 ) ( 10,580 ) Loans purchased ( 22,611 ) ( 172,250 ) Net proceeds from sale of portfolio loans — 205,023 Other investing activities 2,264 — Net cash used in investing activities ( 56,367 ) ( 40,084 ) Financing Activities Net increase (decrease) in deposits ( 64,738 ) 226,826 Cash dividends paid ( 1,201 ) ( 1,179 ) Repayment of subordinated debt ( 10,000 ) — Proceeds from advances from Federal Home Loan Bank 110,000 220,000 Repayment of advances from Federal Home Loan Bank ( 110,000 ) ( 220,000 ) Other, net ( 195 ) ( 93 ) Net cash (used in) provided by financing activities ( 76,134 ) 225,554 Net (Decrease) Increase in Cash and Cash Equivalents ( 91,009 ) 171,258 Cash and Cash Equivalents, Beginning of Period 419,806 327,361 Cash and Cash Equivalents, End of Period $ 328,797 $ 498,619 Supplemental Disclosures Cash paid during the period for interest 24,832 43,716 Cash paid during the period for taxes 2,905 91 Loans transferred to other real estate owned 1,300 — Loans transferred to held-for-sale from portfolio — 204,258 Cash dividends declared, paid in subsequent period 592 588 Securities purchased during the period, settled in subsequent period 13,590 — Transfer of available-for-sale municipal securities to held-to-maturity municipal securities — 4,479 See Notes to Condensed Consolidated Financial Statements 5 First Internet Bancorp Notes to Condensed Consolidated Financial Statements – Unaudited (Table amounts in thousands except share and per share data) Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity, or cash flows in accordance with GAAP. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021 or any other period. The June 30, 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. 6 Note 2: Earnings Per Share Earnings per share of common stock are based on the weighted-average number of basic shares and dilutive shares outstanding during the period. The following is a reconciliation of the weighted-average common shares for the basic and diluted earnings per share computations for the three and six months ended June 30, 2021 and 2020. (dollars in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Basic earnings per share Net income $ 13,096 $ 3,932 $ 23,546 $ 9,951 Weighted-average common shares 9,932,761 9,768,227 9,916,087 9,798,528 Basic earnings per common share $ 1.32 $ 0.40 $ 2.37 $ 1.02 Diluted earnings per share Net income $ 13,096 $ 3,932 $ 23,546 $ 9,951 Weighted-average common shares 9,932,761 9,768,227 9,916,087 9,798,528 Dilutive effect of equity compensation 48,661 — 54,060 3,899 Weighted-average common and incremental shares 9,981,422 9,768,227 9,970,147 9,802,427 Diluted earnings per common share (1) $ 1.31 $ 0.40 $ 2.36 $ 1.02 (1) Potential dilutive common shares are excluded from the computation of diluted EPS in the periods where the effect would be antidilutive. Excluded from the computation of diluted EPS were weighted-average antidilutive shares totaling 6 and 3 for the three and six months ended June 30, 2021, respectively, and 79,893 and 29,606 for the three and six months ended June 30, 2020, respectively. Note 3: Securities The following tables summarize securities available-for-sale and securities held-to-maturity as of June 30, 2021 and December 31, 2020. June 30, 2021 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities available-for-sale U.S. Government-sponsored agencies $ 57,984 $ 337 $ ( 1,186 ) $ 57,135 Municipal securities 77,364 1,229 ( 155 ) 78,438 Agency mortgage-backed securities 445,895 2,734 ( 4,135 ) 444,494 Private label mortgage-backed securities 29,003 360 — 29,363 Asset-backed securities 5,000 5 — 5,005 Corporate securities 48,447 855 ( 218 ) 49,084 Total available-for-sale $ 663,693 $ 5,520 $ ( 5,694 ) $ 663,519 June 30, 2021 Amortized Gross Unrealized Fair (in thousands) Cost Gains Losses Value Securities held-to-maturity Municipal securities $ 14,549 $ 824 $ — $ 15,373 Corporate securities 51,110 1,575 — 52,685 Total held-to-maturity $ 65,659 $ 2,399 $ — $ 68,058 7 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 June 30, 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 $ — $ — One to five years 29,686 27,234 Five to ten years 72,226 72,380 After ten years 81,883 85,043 183,795 184,657 Agency mortgage-backed securities 445,895 444,494 Private label mortgage-backed securities 29,003 29,363 Asset-backed securities 5,000 5,005 Total $ 663,693 $ 663,519 Held-to-Maturity (in thousands) Amortized Cost Fair Value One to five years $ 3,375 $ 3,556 Five to ten years 50,096 51,908 After ten years 12,188 12,594 Total $ 65,659 $ 68,058 There were no gross gains or losses resulting from sale of available-for-sale securities during the three and six months ended June 30, 2021. There were no gross gains or losses resulting from sale of available-for-sale securities during the three months ended June 30, 2020 and gross gains of less than $0.1 million resulting from sales of available-for-sale securities during the six months ended June 30, 2020. 8 Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. The total fair value of these investments at June 30, 2021 and December 31, 2020 was $ 451.8 million and $ 226.5 million, which was approximately 62 % and 40 %, respectively, of the Company’s AFS and HTM securities portfolios. As of June 30, 2021, the Company’s security portfolio consisted of 448 securities, of which 152 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 June 30, 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 June 30, 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 June 30, 2021 and December 31, 2020. June 30, 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 $ 2,969 $ ( 31 ) $ 47,281 $ ( 1,155 ) $ 50,250 $ ( 1,186 ) Municipal securities 61,658 ( 155 ) — — 61,658 ( 155 ) Agency mortgage-backed securities 316,123 ( 3,543 ) 8,956 ( 592 ) 325,079 ( 4,135 ) Corporate securities 4,984 ( 16 ) 9,799 ( 202 ) 14,783 ( 218 ) Total $ 385,734 $ ( 3,745 ) $ 66,036 $ ( 1,949 ) $ 451,770 $ ( 5,694 ) There were no securities held-to-maturity with gross unrealized losses at June 30, 2021. 9 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 from accumulated other comprehensive loss to the condensed consolidated statements of income during the three and six months ended June 30, 2021. Amounts reclassified from accumulated other comprehensive loss and the affected line items in the condensed consolidated statements of income during the three and six months ended June 30, 2020 were as follows: (in thousands) Details About Accumulated Other Comprehensive Loss Components Affected Line Item in the Statements of Income Three Months Ended June 30, 2021 Six Months Ended June 30, 2021 Three Months Ended June 30, 2020 Six Months Ended June 30, 2020 Realized gains on securities available-for-sale Gain realized in earnings $ — $ — $ — $ 41 Gain on sale of securities Total reclassified amount before tax — — — 41 Income Before Income Taxes Tax expense — — 11 Income Tax Provision Total reclassifications out of accumulated other comprehensive loss $ — $ — $ — $ 30 Net Income 10 Note 4: Loans Loan balances as of June 30, 2021 and December 31, 2020 are summarized in the table below. Categories of loans include: (in thousands) June 30, 2021 December 31, 2020 Commercial loans Commercial and industrial $ 96,203 $ 75,387 Owner-occupied commercial real estate 87,136 89,785 Investor commercial real estate 28,871 13,902 Construction 117,970 110,385 Single tenant lease financing 913,115 950,172 Public finance 612,138 622,257 Healthcare finance 455,890 528,154 Small business lending 123,293 125,589 Total commercial loans 2,434,616 2,515,631 Consumer loans Residential mortgage 177,148 186,787 Home equity 17,510 19,857 Other consumer 271,796 275,692 Total consumer loans 466,454 482,336 Total commercial and consumer loans 2,901,070 2,997,967 Net deferred loan origination fees/costs and premiums/discounts on purchased loans and other (1) 56,538 61,264 Total loans 2,957,608 3,059,231 Allowance for loan losses ( 28,066 ) ( 29,484 ) Net loans $ 2,929,542 $ 3,029,747 (1) Includes carrying value adjustments of $ 40.4 million and $ 42.7 million related to terminated interest rate swaps associated with public finance loans as of June 30, 2021 and December 31, 2020, respectively. 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. 11 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, and 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 since expanded throughout the rest of the country. 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. 12 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. 13 The following tables present changes in the balance of the ALLL during the three and six months ended June 30, 2021 and 2020. (in thousands) Three Months Ended June 30, 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 $ 1,662 $ 267 $ ( 28 ) $ 2 $ 1,903 Owner-occupied commercial real estate 1,029 ( 8 ) — — 1,021 Investor commercial real estate 169 160 — — 329 Construction 1,420 ( 63 ) — — 1,357 Single tenant lease financing 13,178 418 ( 2,391 ) — 11,205 Public finance 1,748 ( 48 ) — — 1,700 Healthcare finance 7,755 ( 817 ) — — 6,938 Small business lending 700 214 ( 133 ) 2 783 Residential mortgage 601 ( 5 ) ( 6 ) 4 594 Home equity 57 4 — 2 63 Other consumer 2,323 ( 101 ) ( 131 ) 82 2,173 Total $ 30,642 $ 21 $ ( 2,689 ) $ 92 $ 28,066 Six Months Ended June 30, 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 $ 701 $ ( 28 ) $ 84 $ 1,903 Owner-occupied commercial real estate 1,082 ( 61 ) — — 1,021 Investor commercial real estate 155 174 — — 329 Construction 1,192 165 — — 1,357 Single tenant lease financing 12,990 606 ( 2,391 ) — 11,205 Public finance 1,732 ( 32 ) — — 1,700 Healthcare finance 7,485 ( 547 ) — — 6,938 Small business lending 628 361 ( 212 ) 6 783 Residential mortgage 519 72 ( 6 ) 9 594 Home equity 48 63 ( 51 ) 3 63 Other consumer 2,507 ( 205 ) ( 313 ) 184 2,173 Total $ 29,484 $ 1,297 $ ( 3,001 ) $ 286 $ 28,066 14 Three Months Ended June 30, 2020 Allowance for loan losses: Balance, Beginning of Period Provision (Credit) Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,670 $ ( 141 ) $ ( 57 ) $ 5 $ 1,477 Owner-occupied commercial real estate 645 201 — — 846 Investor commercial real estate 128 2 — — 130 Construction 460 261 — — 721 Single tenant lease financing 10,755 563 — — 11,318 Public finance 1,483 59 — — 1,542 Healthcare finance 4,318 1,187 ( 743 ) — 4,762 Small business lending 265 ( 20 ) — 6 251 Residential mortgage 500 36 — 3 539 Home equity 53 ( 4 ) — 2 51 Other consumer 2,580 347 ( 216 ) 117 2,828 Total $ 22,857 $ 2,491 $ ( 1,016 ) $ 133 $ 24,465 Six Months Ended June 30, 2020 Allowance for loan losses: Balance, Beginning of Period Provision (Credit) Charged to Expense Losses Charged Off Recoveries Balance, End of Period Commercial and industrial $ 1,521 $ 205 $ ( 254 ) $ 5 $ 1,477 Owner-occupied commercial real estate 561 285 — — 846 Investor commercial real estate 109 21 — — 130 Construction 380 341 — — 721 Single tenant lease financing 11,175 143 — — 11,318 Public finance 1,580 ( 38 ) — — 1,542 Healthcare finance 3,247 2,258 ( 743 ) — 4,762 Small business lending 54 183 — 14 251 Residential mortgage 657 ( 107 ) ( 15 ) 4 539 Home equity 46 — — 5 51 Other consumer 2,510 661 ( 502 ) 159 2,828 Total $ 21,840 $ 3,952 $ ( 1,514 ) $ 187 $ 24,465 15 The following tables present the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2021 and December 31, 2020. (in thousands) Loans Allowance for Loan Losses June 30, 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 $ 95,511 $ 692 $ 96,203 $ 1,453 $ 450 $ 1,903 Owner-occupied commercial real estate 83,649 3,487 87,136 1,021 — 1,021 Investor commercial real estate 28,871 — 28,871 329 — 329 Construction 117,970 — 117,970 1,357 — 1,357 Single tenant lease financing 910,742 2,373 913,115 10,838 367 11,205 Public finance 612,138 — 612,138 1,700 — 1,700 Healthcare finance 454,919 971 455,890 6,415 523 6,938 Small business lending (1) 122,084 1,209 123,293 783 — 783 Residential mortgage 174,717 2,431 177,148 594 — 594 Home equity 17,496 14 17,510 63 — 63 Other consumer 271,786 10 271,796 2,173 — 2,173 Total $ 2,889,883 $ 11,187 $ 2,901,070 $ 26,726 $ 1,340 $ 28,066 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 16 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. 17 The following tables present the credit risk profile of the Company’s commercial and consumer loan portfolios based on rating category and payment activity as of June 30, 2021 and December 31, 2020. June 30, 2021 (in thousands) Pass Special Mention Substandard Total Commercial and industrial $ 79,928 $ 15,563 $ 712 $ 96,203 Owner-occupied commercial real estate 79,730 3,919 3,487 87,136 Investor commercial real estate 28,871 — — 28,871 Construction 117,970 — — 117,970 Single tenant lease financing 901,505 9,237 2,373 913,115 Public finance 612,138 — — 612,138 Healthcare finance 454,312 615 963 455,890 Small business lending (1) 112,864 8,718 1,711 123,293 Total commercial loans $ 2,387,318 $ 38,052 $ 9,246 $ 2,434,616 1 Balance in “Substandard” is guaranteed by the U.S. government. June 30, 2021 (in thousands) Performing Nonaccrual Total Residential mortgage $ 175,895 $ 1,253 $ 177,148 Home equity 17,496 14 17,510 Other consumer 271,786 10 271,796 Total consumer loans $ 465,177 $ 1,277 $ 466,454 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 18 The following tables present the Company’s loan portfolio delinquency analysis as of June 30, 2021 and December 31, 2020. June 30, 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 $ 2 $ — $ — $ 2 $ 96,201 $ 96,203 $ 692 $ — Owner-occupied commercial real estate — — — — 87,136 87,136 — — Investor commercial real estate — — — — 28,871 28,871 3,487 — Construction — — — — 117,970 117,970 — — Single tenant lease financing — — — — 913,115 913,115 2,373 — Public finance — — — — 612,138 612,138 — — Healthcare finance — — — — 455,890 455,890 — — Small business lending (1) — — 1,209 1,209 122,084 123,293 1,209 — Residential mortgage — — 364 364 176,784 177,148 1,253 — Home equity — — — — 17,510 17,510 14 — Other consumer 89 9 — 98 271,698 271,796 10 — Total $ 91 $ 9 $ 1,573 $ 1,673 $ 2,899,397 $ 2,901,070 $ 9,038 $ — 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. 19 Impaired loans include nonperforming loans as well as loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. ASC Topic 310, Receivables , requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral, less costs to sell, and allows existing methods for recognizing interest income. The following table presents the Company’s impaired loans as of June 30, 2021 and December 31, 2020. June 30, 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 $ 3,487 $ 3,513 $ — $ 517 $ 517 $ — Owner-occupied commercial real estate — — — 1,838 1,850 — Single tenant lease financing — — — 1,315 1,334 — Healthcare finance — — — 1,010 1,010 — Small business lending (1) 1,209 1,209 — — — — Residential mortgage 2,431 2,566 — 1,546 1,652 — Home equity 14 15 — — — — Other consumer 10 47 — 50 120 — Total 7,151 7,350 — 6,276 6,483 — Loans with a specific valuation allowance Commercial and industrial 692 723 450 — — — Single tenant lease financing 2,373 2,463 367 6,009 6,036 3,090 Healthcare Finance 971 971 523 — — — Total 4,036 4,157 1,340 6,009 6,036 3,090 Total impaired loans $ 11,187 $ 11,507 $ 1,340 $ 12,285 $ 12,519 $ 3,090 1 Entire balance is guaranteed by the U.S. government. 20 The table below presents average balances and interest income recognized for impaired loans during the three and six months ended June 30, 2021 and 2020. Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 (in thousands) Average Balance Interest Income Average Balance Interest Income Average Balance Interest Income Average Balance Interest Income Loans without a specific valuation allowance Commercial and industrial $ 259 $ — $ 594 $ 18 $ 259 $ 9 $ 1,330 237 $ 36 Owner-occupied commercial real estate 3,994 — 3,923 29 3,307 — 4,573 145 31 Single tenant lease financing 148 — — — 100 5 — — Healthcare finance — — — — 336 — — — Small business lending (1) 1,123 — — — 970 — — — Residential mortgage 2,410 9 1,352 — 2,192 13 1,313 — Home equity 15 — — — 13 — — — Other consumer 21 — 75 — 23 — 60 — Total 7,970 9 5,944 47 7,200 27 7,276 67 Loans with a specific valuation allowance Commercial and industrial 839 — 204 — 677 — 204 — Owner-occupied commercial real estate 1,420 — — — 473 — — — Single tenant lease financing 5,430 — 4,680 — 4,984 — 4,680 — Healthcare Finance 979 24 — — 815 36 — — Total 8,668 24 4,884 — 6,949 36 4,884 — Total impaired loans $ 16,638 $ 33 $ 10,828 $ 47 $ 14,149 $ 63 $ 12,160 $ 67 1 Entire balance is guaranteed by the U.S. government. The Company had $ 1.3 million in other real estate owned (“OREO”) as of June 30, 2021, which consisted of one commercial property with a carrying value of $ 1.2 million and one residential mortgage with a carrying value of $ 0.1 million. The Company did not have any OREO as of December 31, 2020. There were two loans totaling $ 0.4 million and no loans in the process of foreclosure at June 30, 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 portfolio residential mortgage loan classified as a new TDR during the three and six months ended June 30, 2021 with a pre-modification and post-modification outstanding recorded investment of $ 0.8 million. The Company 21 did not allocate a specific allowance for that loan as of June 30, 2021. The modifications consisted of interest-only payments for a period of time. There was one portfolio residential mortgage loan classified as a new TDR during the three and six months ended June 30, 2020, with a pre-modification and post-modification outstanding recorded investment of $ 0.8 million. The Company did not allocate a specific allowance for that loan as of June 30, 2020. The modification consisted of an extension of the maturity date. There were no performing TDRs that had payment defaults within the twelve months following modification during the three and six months ended June 30, 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 June 30, 2021, the Company had eight loans totaling $ 7.9 million in non-TDR loan modifications due to COVID-19. Note 5: Premises and Equipment The following table summarizes premises and equipment at June 30, 2021 and December 31, 2020. (in thousands) June 30, 2021 December 31, 2020 Land $ — $ 2,500 Right of use leased asset 304 819 Construction in process 42,106 28,754 Building and improvements 439 5,819 Furniture and equipment 7,636 10,671 Less: accumulated depreciation ( 6,236 ) ( 10,973 ) Total $ 44,249 $ 37,590 In December 2018, the Bank’s subsidiary, SPF15, Inc., entered into a project agreement with the City of Fishers, Indiana (the “City”), and its Redevelopment Commission, among others, to construct an office building to include the Company’s future headquarters and associated parking garage on property the Bank had acquired in 2018. Construction began on the project in the fourth quarter 2019 and is expected to be substantially complete in the fourth quarter 2021. The Company anticipates fully occupying the new headquarters building by the end of 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. The sale was completed on April 16, 2021 and as a part of the sale agreement, the buyer 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 Company is expected to continue to lease substantially all of the office space for the duration of the primary leaseback period. 22 Note 6: Goodwill As of June 30, 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 and six months ended June 30, 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 7: Servicing Asset Activity for the servicing asset and the related changes in fair value for the three and six months ended June 30, 2021 and 2020 are shown in the table below. (in thousands) Three Months Ended June 30, 2021 June 30, 2020 Balance, beginning of period $ 3,817 $ 2,415 Additions Originated and purchased servicing 543 197 Subtractions Paydowns ( 154 ) ( 90 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model ( 86 ) — Balance, end of period $ 4,120 $ 2,522 (in thousands) Six Months Ended June 30, 2021 June 30, 2020 Balance, beginning of period $ 3,569 $ 2,481 Additions Originated and purchased servicing 946 310 Subtractions Paydowns ( 324 ) ( 269 ) Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model ( 71 ) — Balance, end of period $ 4,120 $ 2,522 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 June 30, 2021 and December 31, 2020 are shown in the table below. (in thousands) June 30, 2021 December 31, 2020 Loan portfolios serviced for: SBA guaranteed loans $ 196,869 $ 165,961 Total $ 196,869 $ 165,961 Loan servicing revenue totaled $ 0.5 million and $ 0.9 million for the three and six months ended June 30, 2021 and $ 0.3 million and $ 0.5 million for the three and six months ended June 30, 2020, respectively. Loan servicing asset revaluation, which represents the change in fair value of the servicing asset, resulted in a $ 0.2 million and $ 0.4 million 23 downward valuation for the three and six months ended June 30, 2021, respectively, and a $ 0.1 and $ 0.3 million downward valuation for the three and six months ended June 30, 2020, respectively. 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 11 - Fair Value of Financial Instruments for further details. Note 8: Subordinated Debt In October 2015, the Company entered into a term loan in the principal amount of $ 10.0 million, evidenced by a term note due 2025 (the “2025 Note”). The 2025 Note 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 June 30, 2021 and December 31, 2020. June 30, 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 ( 652 ) 25,000 ( 715 ) 2029 Notes 37,000 ( 1,258 ) 37,000 ( 1,337 ) 2030 Notes $ 10,000 $ ( 219 ) $ 10,000 $ ( 231 ) Total $ 72,000 $ ( 2,129 ) $ 82,000 $ ( 2,397 ) 24 Note 9: Benefit Plans Employment Agreement The Company is party to an employment agreement with its Chief Executive Officer that provides for an annual base salary and an annual bonus, if any, as determined from time to time by the Compensation Committee of our Board of Directors. The annual bonus is to be determined with reference to the achievement of annual performance objectives established by the Compensation Committee for the Chief Executive Officer and other senior officers. The agreement also provides that the Chief Executive Officer may be awarded additional compensation, benefits, or consideration as the Compensation Committee may determine. The agreement provides for the continuation of salary and certain other benefits for a specified period of time upon termination of his employment under certain circumstances, including his resignation for “good reason” or termination by the Company without “cause” at any time or any termination of his employment for any reason within twelve months following a “change in control,” along with other specific conditions. 2013 Equity Incentive Plan The 2013 Equity Incentive Plan (the “2013 Plan”) authorizes the issuance of 750,000 shares of the Company’s common stock in the form of equity-based awards to employees, directors, and other eligible persons. Under the terms of the 2013 Plan, the pool of shares available for issuance may be used for available types of equity awards under the 2013 Plan, which includes stock options, stock appreciation rights, restricted stock awards, stock unit awards, and other share-based awards. All employees, consultants, and advisors of the Company or any subsidiary, as well as all non-employee directors of the Company, are eligible to receive awards under the 2013 Plan. The Company recorded $ 0.6 million and $ 1.3 million of share-based compensation expense for the three and six months ended June 30, 2021, respectively, related to awards made under th e 2013 Plan. The Company recorded $ 0.5 million and $ 1.1 million of share-based compensation expense for the three and six months ended June 30, 2020, respectively, related to awards made under the 2013 Plan. The following table summarizes the status of the 2013 Plan awards as of June 30, 2021 , and activity for the six months ended June 30, 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 60,111 30.42 13,878 30.27 4 32.53 Cancelled/Forfeited — — (1,057) 30.13 — — Vested ( 35,745 ) 30.12 ( 6,479 ) 30.20 ( 4 ) 32.53 Nonvested at June 30, 2021 137,351 $ 28.32 6,342 $ 30.36 — $ — At June 30, 2021, the total unrecognized compensation cost related to nonvested awards was $ 3.1 million with a weighted-average expense recognition period of 1.8 years. 25 Directors Deferred Stock Plan Until January 1, 2014, the Company had a practice of granting awards under a stock compensation plan for members of the Board of Directors (“Directors Deferred Stock Plan”). The Company reserved 180,000 shares of common stock that could have been issued pursuant to the Directors Deferred Stock Plan. The Directors Deferred Stock Plan provided directors the option to elect to receive up to 100 % of their annual retainer in either common stock or deferred stock rights. Deferred stock rights were to be settled in common stock following the end of the deferral period payable on the basis of one share of common stock for each deferred stock right. The following table summarizes the status of deferred stock rights related to the Directors Deferred Stock Plan for the six months ended June 30, 2021. Deferred Stock Rights Outstanding, beginning of period 83,835 Granted 350 Exercised — Outstanding, end of period 84,185 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 10: 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 June 30, 2021 and December 31, 2020, the Company had outstanding loan commitments totaling approximately $ 293.1 million and $ 263.9 million, respectively. In addition, the Company had unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $ 4.8 million as of June 30, 2021. The Company is also a limited partner in a Small Business Investment Company fund (the “SBIC Fund”). As of June 30, 2021, the Company has committed to contribute up to $ 1.1 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 $ 66.4 million. As of June 30, 2021, $ 25.4 million of such contract commitments had not yet been incurred. These commitments are due within twelve months . Note 11: 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 26 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 June 30, 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). 27 The following tables present the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2021 and December 31, 2020. June 30, 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 $ 57,135 $ — $ 57,135 $ — Municipal securities 78,438 — 78,438 — Agency mortgage-backed securities 444,494 — 444,494 — Private label mortgage-backed securities 29,363 29,363 — Asset-backed securities 5,005 — 5,005 — Corporate securities 49,084 — 49,084 — Total available-for-sale securities 663,519 — 663,519 — Loans held-for-sale (mandatory pricing agreements) 16,870 — 16,870 — Servicing asset 4,120 — — 4,120 Interest rate swap agreements ( 20,286 ) — ( 20,286 ) — Forward contracts ( 17 ) ( 17 ) — — IRLCs 818 — — 818 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 and six months ended June 30, 2021 and 2020. 28 Three Months Ended (in thousands) Servicing Asset Interest Rate Lock Commitments Balance, April 1, 2021 $ 3,817 $ 1,110 Total realized gains Additions 543 — Paydowns ( 154 ) — Change in fair value ( 86 ) ( 292 ) Balance, June 30, 2021 4,120 818 Balance as of April 1, 2020 $ 2,415 $ 2,064 Total realized gains Additions 197 — Paydowns — — Change in fair value ( 90 ) ( 1,782 ) Balance, June 30, 2020 $ 2,522 $ 282 Six Months Ended (in thousands) Servicing Asset Interest Rate Lock Commitments Balance, January 1, 2021 $ 3,569 $ 3,361 Total realized gains Additions 946 — Paydowns ( 324 ) — Change in fair value ( 71 ) ( 2,543 ) Balance, June 30, 2021 4,120 818 Balance as of January 1, 2020 $ 2,481 $ 910 Total realized gains Additions 310 — Paydowns — — Change in fair value ( 269 ) ( 628 ) Balance, June 30, 2020 $ 2,522 $ 282 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. 29 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 June 30, 2021 and December 31, 2020. June 30, 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 4,035 — — 4,035 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 June 30, 2021 Valuation Technique Significant Unobservable Inputs Range Weighted-Average Range Impaired loans $ 4,035 Fair value of collateral Discount for type of property and current market conditions 10 % 10 % IRLCs 818 Discounted cash flow Loan closing rates 63 % - 100 % 92 % Servicing asset 3,817 Discounted cash flow Prepayment speeds Discount rate 0 % - 25 % 10 % 12.6 % 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 % 30 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 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 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. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair values are calculated using discounted cash flows. Discounted cash flows are calculated based off of the anticipated future cash flows updated to incorporate loss severities. Rating agency and industry research reports as well as default and deferral activity are reviewed and incorporated into the calculation. The Company did not own any securities classified within Level 3 of the hierarchy as of June 30, 2021 or December 31, 2020. 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. 31 Accrued Interest Payable The fair value of these financial instruments approximates carrying value. Commitments The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements with similar maturities and interest rates. The Company determined that the fair value of commitments was zero based on the contractual value of outstanding commitments at each of June 30, 2021 and December 31, 2020. The following tables present the carrying value and estimated fair value of all financial assets and liabilities at June 30, 2021 and December 31, 2020. June 30, 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 $ 328,797 $ 328,797 $ 328,797 $ — $ — Securities held-to-maturity 65,659 68,058 — 68,058 — Loans held-for-sale (best efforts pricing agreements) 10,717 10,717 — 10,717 — Net loans 2,929,542 2,975,406 — — 2,975,406 Accrued interest receivable 16,345 16,345 16,345 — — Federal Home Loan Bank of Indianapolis stock 25,650 25,650 — 25,650 — Deposits 3,206,147 3,229,241 1,799,490 — 1,429,751 Advances from Federal Home Loan Bank 514,919 533,237 — 533,237 — Subordinated debt 69,871 75,456 65,294 10,162 — Accrued interest payable 1,132 1,132 1,132 — — 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 12: 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 32 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 13 for further information on derivative financial instruments. During the three months ended June 30, 2021 and 2020, the Company originated mortgage loans held-for-sale of $ 163.3 million and $ 211.9 million, respectively, and sold $ 151.5 million and $ 229.2 million of mortgage loans, respectively, into the secondary market. During the six months ended June 30, 2021 and 2020, the Company originated mortgage loans held-for-sale of $ 387.2 million and $ 427.3 million, respectively, and sold $ 393.1 million and $ 454.7 million of mortgage loans, respectively, into the secondary market. The following table presents the components of income from mortgage banking activities for the three and six months ended June 30, 2021 and 2020. Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 2020 Gain on loans sold $ 3,587 $ 4,164 $ 11,086 $ 8,507 (Loss) gain resulting from the change in fair value of loans held-for-sale 118 ( 1,255 ) ( 744 ) ( 939 ) (Loss) gain resulting from the change in fair value of derivatives ( 1,031 ) 499 ( 1,918 ) ( 492 ) Net revenue from mortgage banking activities $ 2,674 $ 3,408 $ 8,424 $ 7,076 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 13: 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, in the condensed consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. For derivative instruments that are designated and qualify as cash flow hedges, any gains or losses related to changes in fair value are recorded in accumulated other comprehensive loss, net of tax. The fair value of interest rate swaps with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The IRLCs and forward contracts are not designated as accounting hedges and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in accrued income and other assets in the condensed consolidated balance sheets, while derivative instruments with a negative fair value are reported in accrued expenses and other liabilities in the condensed consolidated balance sheets. The following table presents amounts that were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of June 30, 2021 and December 31, 2020. 33 (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 June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 Securities available-for-sale (1) 77,363 124,210 2,834 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 June 30, 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 June 30, 2021 and December 31, 2020, identified by the underlying interest rate-sensitive instruments. (dollars in thousands) June 30, 2021 Notional Value Weighted- Average Remaining Maturity (years) Weighted-Average Ratio Instruments Associated With Fair Value Receive Pay Securities available-for-sale $ 50,000 3.3 $ ( 2,835 ) 3-month LIBOR 2.33 % Total at June 30, 2021 $ 50,000 3.3 $ ( 2,835 ) 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 12.61 years as of June 30, 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 June 30, 2021 and December 31, 2020. (dollars in thousands) June 30, 2021 Notional Weighted- Average Remaining Maturity Weighted-Average Ratio Cash Flow Hedges Value (years) Fair Value Receive Pay Interest rate swaps $ 110,000 5.6 $ ( 11,349 ) 3-month LIBOR 2.88 % Interest rate swaps 100,000 2.5 ( 6,103 ) 1-month LIBOR 2.88 % 34 (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 3.0 ( 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 $ 21.0 million and $ 30.6 million of cash collateral to counterparties as security for its obligations related to these interest rate swap transactions at June 30, 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 June 30, 2021 and December 31, 2020. June 30, 2021 December 31, 2020 (in thousands) Notional Amount Fair Value Notional Amount Fair Value Asset Derivatives Derivatives not designated as hedging instruments IRLCs $ 47,493 $ 818 $ 108,095 $ 3,361 Total contracts $ 47,493 $ 818 $ 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 ( 2,835 ) 88,200 ( 6,072 ) Interest rate swaps associated with liabilities 210,000 ( 17,451 ) 210,000 ( 23,678 ) Derivatives not designated as hedging instruments Forward contracts 46,750 ( 17 ) 107,500 ( 640 ) Total contracts $ 306,750 $ ( 20,303 ) $ 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 and six months ended June 30, 2021 and 2020. Amount of Gain (Loss )Recognized in Other Comprehensive Income Loss in The Three Months Ended Amount of Loss Recognized in Other Comprehensive Income Gain (Loss) in The Six Months Ended (in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Interest rate swap agreements $ ( 54 ) $ ( 509 ) $ 6,226 $ ( 13,967 ) The following table summarizes the periodic changes in the fair value of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three and six months ended June 30, 2021 and 2020. 35 Amount of Gain / (Loss) Recognized in the Three Months Ended Amount of Gain / (Loss) Recognized in the Six Months Ended (in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Asset Derivatives Derivatives not designated as hedging instruments IRLCs $ ( 292 ) $ ( 1,781 ) $ ( 2,541 ) $ ( 628 ) Liability Derivatives Derivatives not designated as hedging instruments IRLCs — — — — Forward contracts $ ( 738 ) $ 2,281 $ 623 $ 136 The following table presents the effects of the Company’s interest rate swap agreements on the condensed consolidated statements of income during the three and six months ended June 30, 2021 and 2020. (in thousands) Line item in the condensed consolidated statements of income Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Interest income Loans $ — $ ( 1,221 ) $ — $ ( 2,445 ) Securities - taxable — ( 159 ) ( 253 ) ( 250 ) Securities - non-taxable ( 271 ) ( 164 ) ( 537 ) ( 230 ) Total interest income ( 271 ) ( 1,544 ) ( 790 ) ( 2,925 ) Interest expense Deposits 692 593 1,370 899 Other borrowed funds 753 589 1,483 911 Total interest expense 1,445 1,182 2,853 1,810 Net interest income $ ( 1,716 ) $ ( 2,726 ) $ ( 3,643 ) $ ( 4,735 ) 36 Note 14: Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss, included in stockholders' equity, for the six months ended June 30, 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 ( 807 ) 6,226 5,419 Other comprehensive (loss) gain before tax ( 807 ) 6,226 5,419 Income tax (benefit) provision ( 175 ) 1,309 1,134 Other comprehensive (loss) income - net of tax $ ( 632 ) $ 4,917 $ 4,285 Balance, June 30, 2021 $ ( 164 ) $ ( 12,747 ) $ ( 12,911 ) Balance, January 1, 2020 $ ( 4,388 ) $ ( 9,803 ) $ ( 14,191 ) Net unrealized holding gains (losses) recorded within other comprehensive income before income tax 4,801 ( 13,967 ) ( 9,166 ) Reclassification of net loss realized and included in earnings ( 41 ) — ( 41 ) Other comprehensive income (loss) before tax 4,760 ( 13,967 ) ( 9,207 ) Income tax provision (benefit) 1,760 ( 4,020 ) ( 2,260 ) Other comprehensive income (loss) - net of tax 3,000 ( 9,947 ) ( 6,947 ) Balance, June 30, 2020 $ ( 1,388 ) $ ( 19,750 ) $ ( 21,138 ) The components of accumulated other comprehensive loss, included in stockholders' equity, for the three months ended June 30, 2021 and 2020, respectively, are presented in the table below. (in thousands) Available-For-Sale Securities Cash Flow Hedges Total Balance, April 1, 2021 $ ( 1,219 ) $ ( 12,701 ) $ ( 13,920 ) Net unrealized holding gains (losses) recorded within other comprehensive income before income tax 1,388 ( 54 ) 1,334 Other comprehensive gain (loss) before tax 1,388 ( 54 ) 1,334 Income tax (benefit) provision ( 333 ) 8 ( 325 ) Other comprehensive (loss) income - net of tax $ 1,055 $ ( 46 ) $ 1,009 Balance, June 30, 2021 $ ( 164 ) $ ( 12,747 ) $ ( 12,911 ) Balance, April 1, 2020 $ ( 239 ) $ ( 19,627 ) $ ( 19,866 ) Net change in unrealized loss ( 1,498 ) ( 509 ) ( 2,007 ) Other comprehensive loss before tax ( 1,498 ) ( 509 ) ( 2,007 ) Income tax benefit ( 349 ) ( 386 ) ( 735 ) Other comprehensive income (loss) - net of tax ( 1,149 ) ( 123 ) ( 1,272 ) Balance, June 30, 2020 $ ( 1,388 ) $ ( 19,750 ) $ ( 21,138 ) 37 Note 15: 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. 38 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. 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.