Isabella Bank Corporation 10-Q Summary
Business Context and Reporting Period
Isabella Bank Corporation, a Michigan-based bank holding company, reported unaudited consolidated results for the three months ended March 31, 2019, compared primarily with the three months ended March 31, 2018. The company’s banking subsidiary represented approximately 90% or more of consolidated assets and operating results. The company had 7,907,167 common shares outstanding as of May 1, 2019.
Financial Results and Key Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net income | $3.496 million | $3.462 million | +$34 thousand |
| Basic diluted EPS | $0.44 / $0.43 | $0.44 / $0.43 | Flat |
| Net interest income | $12.189 million | $11.720 million | +$469 thousand |
| Provision for loan losses | $34 thousand | $384 thousand | -$350 thousand |
| Noninterest income | $2.479 million | $2.487 million | -$8 thousand |
| Noninterest expenses | $10.789 million | $10.096 million | +$693 thousand |
| Net interest margin yield, FTE | 3.01% | 2.95% | +6 basis points |
| Return on average assets | 0.77% | 0.77% | Flat |
| Return on average equity | 7.00% | 7.11% | Down 11 basis points |
- Interest income increased $1.360 million, driven by loan growth and improved loan yields. Interest expense increased $891 thousand as deposit and borrowing costs rose.
- Income before taxes was $3.845 million, and federal income tax expense was $349 thousand.
- Cash dividends remained $0.26 per common share.
- Comprehensive income was $8.191 million, including $4.695 million of other comprehensive income, primarily from improved unrealized gains on available-for-sale securities.
Balance Sheet, Credit, Debt, and Liquidity
- Total assets were $1.807 billion, down $36.1 million, or 2.0%, from December 31, 2018. The decline primarily reflected a $52.8 million reduction in cash and cash equivalents.
- Gross loans increased $16.1 million, or 1.4%, to $1.145 billion. Commercial loans increased $18.0 million, while agricultural loans declined $3.8 million.
- Deposits declined $14.7 million, or 1.1%, to $1.278 billion, primarily due to a $11.9 million reduction in brokered certificates of deposit.
- Borrowed funds declined $28.6 million, or 8.4%, to $311.7 million, including $280.0 million of Federal Home Loan Bank advances.
- Shareholders’ equity increased $6.9 million, or 3.5%, to $202.4 million. The equity-to-assets ratio was 11.20%.
- Cash and cash equivalents were $20.7 million. Primary liquidity, consisting of cash and unencumbered available-for-sale securities, totaled $256.1 million, or 14.17% of assets. The company reported additional borrowing capacity of $169.1 million.
- The allowance for loan and lease losses was $8.4 million, or 0.73% of gross loans, compared with 0.75% at March 31, 2018.
- Nonperforming loans were $7.3 million, or 0.64% of gross loans. Nonperforming assets were $7.7 million, or 0.43% of total assets.
- Total past-due and nonaccrual loans increased to $18.4 million, or 1.60% of gross loans, from $11.4 million at December 31, 2018. Management stated that delinquency levels returned to more recent levels shortly after quarter-end.
- All regulatory capital ratios exceeded the thresholds for a “well capitalized” institution. The March 31, 2019 common equity tier 1, tier 1, and total risk-based capital ratios were 12.45%, 12.45%, and 13.12%, respectively.
Cash Flow and Capital Actions
- Operating activities provided $3.1 million of cash, compared with $6.2 million in Q1 2018.
- Investing activities used $11.1 million, primarily because net loan originations exceeded collections.
- Financing activities used $44.8 million, reflecting deposit and borrowing reductions, dividends, and share repurchases.
- Cash and cash equivalents decreased $52.8 million during the quarter, ending at $20.7 million.
- The company issued 61,405 common shares for $1.4 million and repurchased 26,296 shares for $632 thousand. Up to 141,358 additional shares remained authorized for repurchase at March 31, 2019.
Material Changes Versus Comparable Period
- Net income increased only modestly despite higher net interest income because noninterest expenses rose 6.9%, including higher compensation, occupancy, and loan underwriting costs.
- Loan growth and improved loan pricing increased interest income, but higher funding costs limited the benefit to earnings.
- The loan portfolio grew 4.7% from March 31, 2018, while available-for-sale securities declined 9.7% over the same period as management shifted assets toward loans.
- Cash flow from financing activities became substantially more negative because the company paid down borrowings and experienced a decline in deposits.
- Other comprehensive income improved from a $6.277 million loss in Q1 2018 to a $4.695 million gain in Q1 2019, reducing accumulated other comprehensive losses to $3.0 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expects continued improvement in the overall loan portfolio yield and continued growth in commercial, residential real estate, and consumer loans. Agricultural loans are expected to change modestly.
- Management expects investment and trust fee income to increase and exceed 2018 levels, while mortgage servicing income may fluctuate and may not exceed 2018 levels.
- Compensation and benefits expenses are expected to exceed 2018 levels because of new positions, merit increases, and benefit costs. Occupancy expenses are also expected to remain above 2018 levels.
- The flat yield curve, rising deposit costs, competition, and the yield on available-for-sale securities are pressuring net interest margin. Management is using excess funds to reduce high-cost borrowings rather than materially increasing securities investments.
- Interest-rate sensitivity analysis estimated that net interest income would change by negative 3.01% under an immediate 100-basis-point decline in rates and positive 2.74% under an immediate 100-basis-point increase over the next 12 months. Results were within board-approved limits.
- Credit quality indicators deteriorated somewhat during the quarter, particularly for commercial and residential real estate delinquencies, although management characterized overall credit quality as strong.
- The company had $219.2 million of off-balance-sheet credit commitments, including $190.7 million of unfunded lines of credit, $26.8 million of loan commitments, and $1.7 million of letters of credit.
- Adoption of the new lease standard resulted in recognition of a $72 thousand operating lease asset and liability. The company is preparing for the Current Expected Credit Losses standard, which becomes effective for it after December 15, 2019 and may materially affect operations and disclosures.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2019.
Important Facts for Investors to Verify
- Whether loan growth and improved loan yields can offset continued increases in deposit and borrowing costs.
- Whether the increase in past-due loans is temporary, as management indicated, or develops into a sustained credit-quality trend.
- The expected balance-sheet and earnings impact of CECL adoption after December 15, 2019.
- Liquidity coverage and funding needs as cash balances decline and loan growth continues, including use of the $169.1 million available borrowing capacity.
- Whether management’s expectations for commercial lending, investment and trust fee income, expense growth, and mortgage servicing income are achieved.
- The remaining share-repurchase authorization and its effect on capital, book value, and shares outstanding.