Isabella Bank Corporation 2018 Q3 Form 10-Q Summary
Business context and reporting period
Isabella Bank Corporation is a Michigan-based bank holding company operating primarily through Isabella Bank. The filing covers the unaudited three and nine months ended September 30, 2018, compared principally with the corresponding 2017 periods. Dollar amounts are in thousands except per-share data. The company reported 7,848,174 common shares outstanding as of November 7, 2018.
Key financial metrics
| Metric | Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 |
|---|---|---|---|---|
| Interest income | $16,419 | $14,976 | $47,253 | $43,335 |
| Net interest income | $12,188 | $11,776 | $35,880 | $34,276 |
| Provision for loan losses | $(76) | $49 | $636 | $85 |
| Noninterest income | $2,863 | $2,698 | $8,086 | $8,102 |
| Noninterest expenses | $11,072 | $10,139 | $31,952 | $29,597 |
| Net income | $3,696 | $3,536 | $10,491 | $10,516 |
| Diluted EPS | $0.46 | $0.44 | $1.30 | $1.31 |
| Cash dividends per share | $0.26 | $0.26 | $0.78 | $0.76 |
- Net interest margin yield on a fully taxable equivalent basis was 2.95% for both the quarter and nine months, down from 3.08% and 3.03%, respectively, in the comparable 2017 periods.
- Total assets were $1.834 billion at September 30, 2018, up 1.1% from December 31, 2017. Gross loans were $1.140 billion, up 4.4%, led by commercial and consumer lending.
- Total deposits were $1.277 billion, up 0.9% from year-end 2017. Borrowed funds increased 4.3% to $359.8 million.
- The allowance for loan and lease losses was $8.1 million, or 0.71% of gross loans, compared with $7.7 million, or 0.71%, at year-end 2017.
- Cash and cash equivalents were $48.6 million. Primary liquidity, consisting of cash and unencumbered available-for-sale securities, was $262.0 million, or 14.29% of assets. Additional borrowing capacity was $128.6 million.
- Nine-month operating cash flow was $12.2 million. Investing activities used $13.4 million, financing activities provided $18.9 million, and cash increased by $17.7 million to $48.6 million.
- Regulatory capital ratios exceeded minimum requirements for a well-capitalized institution. The September 30, 2018 ratios included 8.49% Tier 1 leverage, 12.18% common equity Tier 1, and 12.83% total risk-based capital.
Material changes versus prior comparable periods
- Third-quarter net income increased 4.5%, while nine-month net income declined slightly by 0.2%. The quarterly improvement reflected higher net interest income, noninterest income, and lower federal income tax expense.
- Nine-month interest income increased $3.9 million, primarily from strong loan growth. Net interest income increased $1.6 million, but interest expense rose $2.3 million as deposit and borrowing costs increased.
- Nine-month provision expense increased $551,000 to $636,000, reflecting loan growth and increased charge-offs. Net charge-offs were $236,000, compared with net recoveries of $215,000 in 2017.
- Nine-month noninterest expenses increased 8.0%, driven by higher employee benefits, technology and network-security costs, consulting fees, and marketing expenses. The 2017 period benefited from a $525,000 insurance-claim settlement.
- Available-for-sale securities declined 8.7% to $501.1 million. Unrealized after-tax losses in the portfolio contributed $9.9 million of other comprehensive loss for the first nine months, primarily due to higher intermediate- and long-term interest rates rather than credit issues.
- Nonperforming loans increased to $7.4 million, or 0.65% of gross loans, from $3.4 million, or 0.31%, at December 31, 2017. Nonperforming assets increased to $7.7 million, or 0.42% of assets, from $3.7 million, or 0.20%.
- Past-due and nonaccrual loans totaled $12.0 million, or 1.05% of gross loans, compared with $9.8 million, or 0.90%, at year-end 2017. Management stated that credit quality remained strong and attributed recent deterioration primarily to commercial and agricultural activity.
- Troubled debt restructurings increased to $28.0 million from $26.2 million at year-end 2017. No principal or accrued interest was forgiven during the reported periods.
- The company repurchased 215,427 shares for $6.2 million during the first nine months and had authorization to repurchase an additional 200,244 shares at September 30. Separately, the discontinued ESOP was dissolved, resulting in the repurchase of 154,613 shares at $29.50 per share during the third quarter.
Guidance, outlook, risks, contingencies, and unusual items
- Management anticipated an additional Federal Reserve short-term interest-rate increase in the fourth quarter of 2018 and expected gradual improvement in net yield over the next several years from rising short-term rates, a greater loan mix, and strategic loan growth.
- Management expected modest agricultural and residential real estate loan growth and continued consumer loan growth. It also expected higher mortgage origination and sale activity, continued growth in investment and trust-services fees, and higher Corporate Settlement Solutions income.
- Management expected 2018 expenses to remain above 2017 levels because of health-care costs, technology and network-security upgrades, income-tax strategy consulting, and marketing initiatives.
- The company identified interest rates, economic conditions, tax policy, loan and investment portfolio quality, collateral values, deposit flows, competition, cybersecurity, demand for financial services, and accounting changes as principal forward-looking risks.
- Interest-rate sensitivity analysis showed projected 12-month net interest income changes ranging from a 2.68% decline under an immediate 100-basis-point decrease to a 6.55% increase under a 400-basis-point increase. Results were within board-approved limits.
- Off-balance-sheet credit commitments totaled $217.4 million, including $187.7 million of unfunded lines of credit, $28.1 million of loan commitments, and $1.6 million of commercial and standby letters of credit. Management anticipated no significant losses from these commitments.
- The company had no material legal proceedings and reported no material changes to previously disclosed risk factors. Disclosure controls were evaluated as effective, with no material changes to internal control over financial reporting.
- Adoption of new revenue-recognition and equity-investment guidance did not have a significant effect. The company was preparing for the current expected credit loss standard, expected to become effective after December 15, 2019, and noted that it could materially affect operations and disclosures.
Important facts for investors to verify
- Whether the recent increase in nonperforming and past-due loans, particularly in commercial and agricultural portfolios, persists or requires higher provisions and charge-offs.
- Whether rising deposit and borrowing costs continue to compress the net interest margin.
- The duration, credit quality, and recovery profile of the available-for-sale securities portfolio, including the $13.1 million of gross unrealized losses at September 30, 2018.
- Funding and liquidity trends as loan growth outpaces deposit growth and the company relies more heavily on FHLB advances and other borrowings.
- The effect of the CECL implementation on the allowance for credit losses, capital, and reported earnings when adopted.
- The sustainability of loan growth, trust and investment-services fees, mortgage-sale gains, and management’s projected improvement in net interest yield.
- The effect of share repurchases and the ESOP dissolution on share count, capital allocation, and per-share results.