ISABELLA BANK CORP annual report, FY2023

Isabella Bank Corporation 2023 Form 10-K Summary

Business context and reporting period

Isabella Bank Corporation is a Michigan financial services holding company whose wholly owned subsidiary, Isabella Bank, operates 31 offices across eight mid-Michigan counties. The company provides commercial, agricultural, residential real estate, consumer, deposit, wealth management, trust and estate services. This Form 10-K covers the fiscal year ended December 31, 2023, including fourth-quarter results. The company’s common stock trades on OTCQX under the symbol ISBA.

Financial performance and key metrics

Metric	2023	2022	Change
Net income	$18.167 million	$22.238 million	Down 18.3%
Basic earnings per share	$2.42	$2.95	Down 18.0%
Diluted earnings per share	$2.40	$2.91	Down 17.5%
Net interest income	$57.944 million	$60.481 million	Down 4.2%
Provision for credit losses	$629 thousand	$483 thousand	Up $146 thousand
Noninterest income	$13.827 million	$13.666 million	Up 1.2%
Noninterest expenses	$49.310 million	$46.820 million	Up 5.3%
Return on average assets	0.89%	1.08%	Down 19 basis points
Return on average equity	9.52%	11.41%	Down 189 basis points
Net interest margin, FTE	3.05%	3.18%	Down 13 basis points

Fourth-quarter 2023 net income was $3.803 million, or $0.51 diluted earnings per share, compared with $6.322 million, or $0.83 diluted earnings per share, in the fourth quarter of 2022. Fourth-quarter net interest income declined to $13.612 million from $16.272 million, while interest expense increased to $7.444 million from $1.643 million.

Balance sheet, liquidity and capital

Total assets increased 1.4% to $2.059 billion.
Gross loans increased 6.8% to $1.349 billion, led by commercial and industrial, residential real estate and consumer lending.
Total deposits declined 1.2% to $1.724 billion. Noninterest-bearing and interest-bearing demand deposits declined, while certificates of deposit increased 37.6%.
Borrowed funds increased 33.5% to $116.1 million, including $40.0 million of short-term FHLB advances.
Cash and cash equivalents were $33.7 million. Primary liquidity, consisting of cash and unencumbered available-for-sale securities, was $381.4 million, or 18.5% of assets, compared with 24.1% at year-end 2022.
Total available lines of credit were $338.1 million, and management estimated total cash and liquidity of $691.8 million, including available borrowing capacity and lendable collateral.
Shareholders’ equity increased 8.7% to $202.4 million, while tangible book value per share increased to $20.59 from $18.25.
The Bank remained well capitalized. Consolidated common equity tier 1, tier 1 leverage and total risk-based capital ratios were 12.54%, 8.76% and 15.52%, respectively.
The company paid $1.12 per share in dividends during 2023, compared with $1.09 in 2022, and repurchased 149,020 shares for $3.415 million. An additional 270,806 shares remained authorized for repurchase at year-end.

Credit quality and securities

Total past-due and nonaccrual loans were $4.964 million, or 0.37% of gross loans, compared with $11.130 million, or 0.88%, at year-end 2022.
Nonperforming assets were $1.487 million, or 0.07% of total assets, compared with $0.973 million, or 0.05%, in 2022.
The allowance for credit losses on loans increased to $13.108 million, or 0.97% of gross loans, from $9.850 million, or 0.78%.
The company adopted CECL on January 1, 2023, increasing loan and unfunded-commitment allowances by a combined $3.059 million and reducing retained earnings by $2.417 million after tax.
Net loan charge-offs were $115 thousand, or 0.01% of average loans, compared with net recoveries of $264 thousand in 2022.
Available-for-sale securities declined 9.0% to $528.1 million. Unrealized losses improved to $31.8 million from $45.1 million, primarily due to changes in interest rates. Management stated it did not expect to sell securities to realize these losses and recorded no credit-loss allowance on the securities portfolio.

Material changes versus the prior comparable period

Profitability weakened as the 21.0% increase in gross interest income was more than offset by a 307.9% increase in interest expense, principally from higher deposit rates and increased borrowings.
Net interest margin declined as funding costs rose faster than asset yields. The fourth-quarter margin was 2.85%, compared with 3.43% in the fourth quarter of 2022.
Noninterest income was broadly stable. Wealth management fees increased 18.4%, but net mortgage servicing rights income declined to a $137 thousand loss from $435 thousand of income, and mortgage-loan sale gains fell 49.8%.
Noninterest expenses rose $2.490 million, driven mainly by compensation, equipment expense, FDIC insurance premiums and other losses. Other losses included a $871 thousand charge, largely related to settlement of a business matter; management expects no further losses from that matter.
Demand deposits shifted toward higher-cost certificates of deposit, increasing funding pressure. Estimated uninsured deposits rose to $600.4 million from $585.9 million.
Accumulated other comprehensive loss improved to $25.9 million from $37.2 million, primarily due to recovery in the fair value of available-for-sale securities.

Guidance, outlook, risks and unusual items

Management expects deposit rates and competitive funding pressure to remain elevated in 2024, with continued migration toward higher-yielding products. This is expected to constrain net interest margin improvement.
Residential loan growth is expected to continue at a slower pace, while consumer lending is expected to continue growing. Mortgage-loan sale gains are not expected to exceed 2023 levels.
Management expects wealth management fees to exceed 2023 levels because of new business activity. Mortgage servicing rights income may remain volatile.
Compensation and benefits expense is expected to increase in 2024. FDIC insurance premiums are expected to remain near 2023 levels, while other losses are expected to decline.
Primary risks include interest-rate and liquidity pressure, deposit outflows, local economic conditions, commercial and real estate credit exposure, collateral values, cybersecurity incidents, regulatory changes, competition and potential changes in the allowance for credit losses.
Off-balance-sheet credit commitments totaled $321.7 million, supported by a $315 thousand allowance for credit losses. Management stated that no significant losses were anticipated from these commitments.
The company reported no material legal proceedings, no material cybersecurity incident affecting operations or financial results, no subsequent events requiring recognition or disclosure, and no known regulatory actions through March 6, 2024.
Independent auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The allowance for credit losses was identified as the critical audit matter because of its subjective assumptions and modeling complexity.

Important facts for investors to verify

Whether deposit pricing and increased reliance on borrowings continue to compress net interest margin and earnings.
Whether loan growth remains strong without a material deterioration in commercial real estate, residential or consumer credit quality.
The sensitivity of tangible book value and capital to further changes in interest rates and unrealized securities losses.
The adequacy of the CECL allowance, including the assumptions, qualitative adjustments and economic forecasts used in the models.
The composition, maturity and renewal risk of the $600.4 million of estimated uninsured deposits and the $346.4 million of time deposits.
Liquidity availability after considering pledged collateral, short-term FHLB advances and potential deposit withdrawals.
The sustainability of the $1.12 annual dividend and share-repurchase activity relative to earnings, regulatory requirements and holding-company cash needs.
Future volatility in wealth management fees, mortgage servicing rights income and mortgage-loan sale gains.