Loans Receivable

Categories of loans include:



	December 31,
	2015			2014
Commercial loans
Commercial and industrial	$	102,000		$	77,232
Owner-occupied commercial real estate	44,462			34,295
Investor commercial real estate	16,184			22,069
Construction	45,898			24,883
Single tenant lease financing	374,344			192,608
Total commercial loans	582,888			351,087
Consumer loans
Residential mortgage	214,559			220,612
Home equity	43,279			58,434
Other consumer	108,312			97,094
Total consumer loans	366,150			376,140
Total commercial and consumer loans	949,038			727,227
Deferred loan origination costs and premiums and discounts on purchased loans	4,821			5,199
Total loans receivable	953,859			732,426
Allowance for loan losses	(8,351		)	(5,800		)
Net loans receivable	$	945,508		$	726,626

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

Commercial and Industrial: Commercial and industrial loans’ source of repayment is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Loans are made for working capital, equipment purchases, or other purposes. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee.

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

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

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

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

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

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

Other Consumer: These loans primarily consist of consumer loans and credit cards. Consumer loans may be secured by consumer assets such as horse trailers or recreational vehicles. Some consumer loans are unsecured, such as small installment loans 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.

The following tables present changes in the balance of the allowance for loan losses during the twelve months ended December 31, 2015, 2014, and 2013.



	Twelve Months Ended December 31, 2015
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate			Construction		Single tenant lease financing		Residential mortgage			Home equity			Other consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	920	$	345	$	261		$	330	$	2,061	$	985		$	207		$	691		$	5,800
Provision (credit) charged to expense	447		131		(549		)	170		1,870		(311		)	(83		)	271			1,946
Losses charged off	—		—		—			—		—		(185		)	—			(451		)	(636		)
Recoveries	—		—		500			—		—		407			1			333			1,241
Balance, end of period	$	1,367	$	476	$	212		$	500	$	3,931	$	896		$	125		$	844		$	8,351



	Twelve Months Ended December 31, 2014
	Commercial and industrial			Owner-occupied commercial real estate		Investor commercial real estate			Construction		Single tenant lease financing		Residential mortgage			Home equity			Other consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	819		$	290	$	219		$	277	$	1,731	$	1,008		$	211		$	871		$	5,426
Provision (credit) charged to expense	115			55		(418		)	53		330		186			(4		)	32			349
Losses charged off	(14		)	—		—			—		—		(247		)	—			(596		)	(857		)
Recoveries	—			—		460			—		—		38			—			384			882
Balance, end of period	$	920		$	345	$	261		$	330	$	2,061	$	985		$	207		$	691		$	5,800



	Twelve Months Ended December 31, 2013
	Commercial and industrial		Owner-occupied commercial real estate			Investor commercial real estate			Construction			Single tenant lease financing			Residential mortgage			Home equity		Other consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	371	$	352		$	266		$	336		$	2,153		$	946		$	203	$	1,206		$	5,833
Provision (credit) charged to expense	378		(62		)	191			(59		)	(422		)	128			8		162			324
Losses charged off	—		—			(238		)	—			—			(164		)	—		(810		)	(1,212		)
Recoveries	70		—			—			—			—			98			—		313			481
Balance, end of period	$	819	$	290		$	219		$	277		$	1,731		$	1,008		$	211	$	871		$	5,426

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2015 and 2014.



	December 31, 2015
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate		Construction		Single tenant lease financing		Residential mortgage		Home equity		Other consumer		Total
Loans:
Ending balance: collectively evaluated for impairment	$	102,000	$	44,462	$	16,184	$	45,898	$	374,344	$	213,426	$	43,279	$	108,163	$	947,756
Ending balance: individually evaluated for impairment	—		—		—		—		—		1,133		—		149		1,282
Ending balance	$	102,000	$	44,462	$	16,184	$	45,898	$	374,344	$	214,559	$	43,279	$	108,312	$	949,038
Allowance for loan losses:
Ending balance: collectively evaluated for impairment	$	1,367	$	476	$	212	$	500	$	3,931	$	896	$	125	$	844	$	8,351
Ending balance: individually evaluated for impairment	—		—		—		—		—		—		—		—		—
Ending balance	$	1,367	$	476	$	212	$	500	$	3,931	$	896	$	125	$	844	$	8,351



	December 31, 2014
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate		Construction		Single tenant lease financing		Residential mortgage		Home equity		Other consumer		Total
Loans:
Ending balance: collectively evaluated for impairment	$	77,232	$	34,295	$	21,982	$	24,883	$	192,608	$	219,473	$	58,434	$	96,789	$	725,696
Ending balance: individually evaluated for impairment	—		—		87		—		—		1,139		—		305		1,531
Ending balance	$	77,232	$	34,295	$	22,069	$	24,883	$	192,608	$	220,612	$	58,434	$	97,094	$	727,227
Allowance for loan losses:
Ending balance: collectively evaluated for impairment	$	920	$	345	$	261	$	330	$	2,061	$	985	$	207	$	676	$	5,785
Ending balance: individually evaluated for impairment	—		—		—		—		—		—		—		15		15
Ending balance	$	920	$	345	$	261	$	330	$	2,061	$	985	$	207	$	691	$	5,800

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the nine risk grades is as follows:


•	“Pass” (Grades 1-5) - Higher quality loans that do not fit any of the other categories described below.


•	“Special Mention” (Grade 6) - Loans that possess some credit deficiency or potential weakness which deserve close attention.


•	“Substandard” (Grade 7) - Loans that possess a defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

•

“Doubtful” (Grade 8) - Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.


•	“Loss” (Grade 9) - Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.

The following tables present the credit risk profile of the Company’s commercial loan portfolio based on rating category and payment activity as of December 31, 2015 and 2014.



	December 31, 2015
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate		Construction		Single tenant lease financing		Total
Rating:
1-5 Pass	$	95,589	$	43,913	$	14,746	$	45,599	$	374,344	$	574,191
6 Special Mention	2,006		535		—		299		—		2,840
7 Substandard	4,405		14		1,438		—		—		5,857
8 Doubtful	—		—		—		—		—		—
Total	$	102,000	$	44,462	$	16,184	$	45,898	$	374,344	$	582,888



	December 31, 2015
	Residential mortgage		Home equity		Other consumer		Total
Performing	$	214,456	$	43,279	$	108,248	$	365,983
Nonaccrual	103		—		64		167
Total	$	214,559	$	43,279	$	108,312	$	366,150



	December 31, 2014
	Commercial and industrial		Owner-occupied commercial real estate		Investor commercial real estate		Construction		Single tenant lease financing		Total
Rating:
1-5 Pass	$	77,232	$	34,278	$	20,478	$	24,504	$	192,608	$	349,100
6 Special Mention	—		—		—		379		—		379
7 Substandard	—		17		1,591		—		—		1,608
8 Doubtful	—		—		—		—		—		—
Total	$	77,232	$	34,295	$	22,069	$	24,883	$	192,608	$	351,087



	December 31, 2014
	Residential mortgage		Home equity		Other consumer		Total
Performing	$	220,587	$	58,434	$	96,971	$	375,992
Nonaccrual	25		—		123		148
Total	$	220,612	$	58,434	$	97,094	$	376,140

The following tables present the Company’s loan portfolio delinquencies analysis as of December 31, 2015 and 2014.



	December 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total commercial and consumer loans		Nonaccrual Loans		Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial	$	29	$	—	$	—	$	29	$	101,971	$	102,000	$	—	$	—
Owner-occupied commercial real estate	—		—		—		—		44,462		44,462		—		—
Investor commercial real estate	—		—		—		—		16,184		16,184		—		—
Construction	—		—		—		—		45,898		45,898		—		—
Single tenant lease financing	—		—		—		—		374,344		374,344		—		—
Residential mortgage	300		23		45		368		214,191		214,559		103		—
Home equity	20		—		—		20		43,259		43,279		—		—
Other consumer	116		12		—		128		108,184		108,312		64		—
Total	$	465	$	35	$	45	$	545	$	948,493	$	949,038	$	167	$	—



	December 31, 2014
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total commercial and consumer loans		Nonaccrual Loans		Total Loans 90 Days or More Past Due and Accruing
Commercial and industrial	$	—	$	—	$	—	$	—	$	77,232	$	77,232	$	—	$	—
Owner-occupied commercial real estate	—		—		—		—		34,295		34,295		—		—
Investor commercial real estate	—		—		—		—		22,069		22,069		87		—
Construction	—		—		—		—		24,883		24,883		—		—
Single tenant lease financing	—		—		—		—		192,608		192,608		—		—
Residential mortgage	161		—		57		218		220,394		220,612		25		57
Home equity	—		—		—		—		58,434		58,434		—		—
Other consumer	249		56		53		358		96,736		97,094		123		4
Total	$	410	$	56	$	110	$	576	$	726,651	$	727,227	$	235	$	61

The following tables present the Company’s impaired loans as of December 31, 2015 and 2014.



	December 31, 2015						December 31, 2014
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a specific valuation allowance
Investor commercial real estate	$	—	$	—	$	—	$	87	$	87	$	—
Residential mortgage	1,133		1,154		—		1,139		1,146		—
Other consumer	149		178		—		268		338		—
Total	1,282		1,332		—		1,494		1,571		—
Loans with a specific valuation allowance
Residential mortgage	—		—		—		—		—		—
Other consumer	—		—		—		37		51		15
Total	—		—		—		37		51		15
Total impaired loans	$	1,282	$	1,332	$	—	$	1,531	$	1,622	$	15

The table below presents average balances and interest income recognized for impaired loans during the twelve months ended December 31, 2015, 2014, and 2013.



	Twelve Months Ended
	December 31, 2015				December 31, 2014				December 31, 2013
	Average Balance		Interest Income		Average Balance		Interest Income		Average Balance		Interest Income
Loans without a specific valuation allowance
Investor commercial real estate	$	21	$	2	$	666	$	5	$	239	$	—
Residential mortgage	1,112		8		1,266		32		1,894		29
Other consumer	193		16		380		37		315		28
Total	1,326		26		2,312		74		2,448		57
Loans with a specific valuation allowance
Investor commercial real estate	—		—		—		—		1,617		5
Residential mortgage	15		—		—		—		66		3
Other consumer	13		1		40		4		78		2
Total	28		1		40		4		1,761		10
Total impaired loans	$	1,354	$	27	$	2,352	$	78	$	4,209	$	67