ISABELLA BANK CORP quarterly report, Q1 FY2022

Isabella Bank Corporation — Q1 2022 Form 10-Q Summary

Business context and reporting period

Isabella Bank Corporation, a Michigan community banking organization, reported unaudited results for the three months ended March 31, 2022. The company primarily provides commercial, agricultural, residential real estate, consumer, wealth management, mortgage servicing, and related banking services in central Michigan. The filing is a smaller reporting company’s Form 10-Q.

All amounts below are in thousands, except per-share data and percentages.

Financial performance and condition

Net income: $4.734 million, down 12.3% from $5.398 million in Q1 2021.
Earnings per share: Basic EPS was $0.63 versus $0.68; diluted EPS was $0.62 versus $0.67. The quarterly dividend remained $0.27 per share.
Net interest income: $13.479 million, up 2.1% year over year, despite interest income declining to $14.762 million from $15.290 million. Lower deposit and borrowing costs reduced interest expense to $1.283 million from $2.089 million.
Net interest margin: FTE net yield on interest-earning assets was 2.86%, compared with 2.98% in Q1 2021. Management cited low rates, elevated cash, and reduced PPP fee income as pressures.
Provision and credit losses: The provision for loan losses was $37 thousand, compared with a $523 thousand provision reversal in Q1 2021. Net recoveries were $64 thousand. The allowance for loan losses was $9.204 million, or 0.76% of gross loans.
Noninterest income: $3.547 million, essentially unchanged from $3.532 million. Higher service charges and wealth management fees offset a $521 thousand decline in mortgage-loan sale gains.
Noninterest expense: $11.320 million, up 4.7%, primarily due to higher compensation, professional services, donations and community relations, and other operating costs.
Profitability: Return on average assets was 0.92%, return on average equity was 9.02%, and return on average tangible equity was 11.72%.
Total assets: $2.061 billion at March 31, 2022, up 1.4% from December 31, 2021.
Loans: Gross loans were $1.218 billion, down 6.4% from year-end, largely because advances to mortgage brokers declined by $72.001 million. Residential real estate and consumer loans increased modestly.
Deposits: $1.764 billion, up 3.2% from year-end, with growth concentrated in demand and savings deposits.
Debt and borrowed funds: Borrowed funds totaled $90.534 million, down from $99.320 million at year-end. This included $10.0 million of FHLB advances, $51.353 million of repurchase agreements, and $29.181 million of subordinated debt.
Liquidity: Cash and cash equivalents were $161.186 million. Cash plus unencumbered available-for-sale securities totaled $615.930 million, or 29.89% of assets. Available lines of credit were $326.885 million, producing reported total cash and liquidity of $838.071 million.
Cash flow: Cash and cash equivalents increased $55.856 million during the quarter, compared with a $74.927 million increase in Q1 2021. Operating, investing, and financing activities provided $5.629 million, $7.142 million, and $43.085 million, respectively.
Capital: The Bank remained well capitalized. Common equity Tier 1 and Tier 1 capital ratios were each 12.83%, total risk-based capital was 15.84%, and Tier 1 leverage was 8.12%.

Material changes versus the prior comparable period

Net income fell $664 thousand, primarily because the prior-year period benefited from a $523 thousand loan-loss provision reversal, while Q1 2022 included a $37 thousand provision.
Interest expense declined $806 thousand, reflecting lower deposit costs, reduced FHLB advances, and lower-cost funding strategies. This more than offset the $528 thousand reduction in gross interest income.
Mortgage-loan sale gains declined 69.9% to $224 thousand as mortgage originations and loan sales decreased. Service charges and fees increased 30.3% to $2.209 million.
Noninterest expenses increased $503 thousand, or 4.7%, while compensation and benefits increased $197 thousand.
Available-for-sale securities increased to $544.919 million from $490.601 million at year-end. Rising benchmark interest rates produced $22.928 million of pretax unrealized losses and reduced accumulated other comprehensive income to a deficit of $16.333 million from positive $1.859 million.
Shareholders’ equity declined 7.2% to $195.842 million, largely because of the after-tax unrealized securities losses. Tangible book value per share declined to $19.56 from $21.61 at year-end.
Credit quality improved: total past-due and nonaccrual loans declined to $2.364 million, or 0.19% of gross loans, from $4.031 million, or 0.31%, at year-end. Nonperforming assets declined to $1.065 million from $1.684 million.

Guidance, outlook, risks, contingencies, and unusual items

Management expects net interest yield to improve as interest-rate increases take effect, although improvement may be gradual and remains sensitive to rate levels, deposit pricing, loan demand, and the elevated cash position.
Management anticipates commercial loan growth during the remainder of 2022, while residential and consumer loan growth may continue at a slower pace as rates rise. Mortgage-loan sale gains are not expected to exceed 2021 levels.
Service charges are expected to continue increasing. Management expects mortgage servicing-rights gains during the remainder of 2022 as higher rates reduce prepayment speeds.
Legal, audit, and consulting expenses are expected to remain above 2021 levels, although management does not expect legal expense to continue increasing at the first-quarter rate.
COVID-19 remains an uncertainty affecting borrowers, credit quality, deposit flows, loan demand, market risk assumptions, and operating conditions. Management stated that credit quality remained strong and that there were no material first-quarter changes to the allowance methodology or credit environment.
The securities portfolio had substantial unrealized losses from higher interest rates. Management stated that it did not expect to sell securities in unrealized-loss positions and did not identify material other-than-temporary impairment, except for one previously identified municipal bond.
The company had $22.745 million of troubled debt restructurings at March 31, 2022, down from $25.725 million at year-end. One $98 thousand residential real estate modification was made during the quarter.
The company had commitments to advance $1.310 million related to impaired loans and reported ordinary-course off-balance-sheet lending commitments and standby letters of credit. Management did not anticipate significant losses from these commitments.
CECL adoption is scheduled for January 1, 2023 for the company as a smaller reporting company. Management expects adoption to have no significant impact, based on parallel calculations indicating allowance levels consistent with the existing allowance.
No material legal proceedings, subsequent events requiring disclosure, or material changes to previously disclosed risk factors were reported.

Most important facts for investors to verify

Whether rising interest rates improve the net interest margin without materially increasing deposit costs, credit losses, or securities losses.
Whether commercial loan balances recover after the decline in mortgage-broker advances and PPP-related balances.
Whether unrealized available-for-sale securities losses continue to reduce tangible book value and regulatory capital.
Whether the very low level of nonperforming loans is sustained as COVID-19 effects, inflation, economic conditions, and borrower cash flows evolve.
Whether mortgage production, loan-sale gains, mortgage servicing income, and wealth management fees perform in line with management’s outlook.
The eventual impact of CECL adoption on the allowance for credit losses, retained earnings, regulatory capital, and disclosures.
The availability and collateral requirements associated with the reported $326.885 million of credit lines and the company’s ability to maintain strong liquidity during deposit or market stress.