Isabella Bank Corporation 2020 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 30 banking offices across seven mid-Michigan counties. The business provides commercial, agricultural, residential real estate, consumer, deposit, mortgage, and wealth management services. This Form 10-K covers the fiscal year ended December 31, 2020, including fourth-quarter results.
The company had 340 full-time equivalent employees, 7,997,247 shares outstanding at year-end, and trades over the counter on OTCQX under the symbol ISBA.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net income | $10.885 million | $13.024 million | Down 16.4% |
| Basic earnings per share | $1.37 | $1.65 | Down $0.28 |
| Diluted earnings per share | $1.34 | $1.61 | Down $0.27 |
| Net interest income | $50.347 million | $49.445 million | Up $0.902 million |
| Provision for loan losses | $1.665 million | $0.030 million | Up $1.635 million |
| Noninterest income | $14.423 million | $8.039 million | Up 79.4% |
| Noninterest expense | $51.233 million | $43.050 million | Up 19.0% |
| Return on average assets | 0.57% | 0.72% | Down 15 basis points |
| Return on average equity | 4.93% | 6.25% | Down 132 basis points |
| Net interest margin yield, FTE | 2.96% | 3.07% | Down 11 basis points |
Fourth-quarter 2020 net loss was $723,000, or $(0.10) diluted earnings per share, compared with fourth-quarter 2019 net income of $898,000. The fourth-quarter loss primarily reflected a $7.643 million loss on extinguishment of $100 million of FHLB advances.
Balance sheet, cash flow, debt, and liquidity
| Metric at December 31 | 2020 | 2019 | Change |
|---|---|---|---|
| Total assets | $1.957 billion | $1.813 billion | Up 8.0% |
| Gross loans | $1.238 billion | $1.187 billion | Up 4.4% |
| Deposits | $1.566 billion | $1.314 billion | Up 19.2% |
| Borrowed funds | $158.747 million | $275.999 million | Down 42.5% |
| Shareholders’ equity | $218.588 million | $210.182 million | Up 4.0% |
| Cash and cash equivalents | $246.640 million | $60.572 million | Up $186.068 million |
- Commercial loans increased $55.745 million, largely from $99.459 million of SBA PPP loans originated during 2020. Agricultural loans declined $16.459 million.
- Available-for-sale securities declined $90.611 million to $339.228 million, primarily because of prepayments and payoffs. Unrealized gains on these securities increased shareholders’ equity.
- Net cash provided by operating, investing, and financing activities was $21.997 million, $45.133 million, and $118.938 million, respectively. Cash increased by $186.068 million during the year.
- Primary liquidity, consisting of cash and unencumbered available-for-sale securities, totaled $444.051 million, or 22.69% of assets, at year-end.
- Available lines of credit totaled $214.625 million. Management reported total cash and liquidity of $621.265 million, including estimated unencumbered lendable collateral of $160 million.
- FHLB advances declined to $90 million. Securities sold under repurchase agreements increased to $68.747 million and were expected to decline in the first half of 2021.
Material changes versus the prior comparable period
- Net income declined $2.139 million as lower interest income, higher credit-loss provisioning, and higher operating expenses more than offset the increase in net interest and noninterest income.
- Interest income decreased $3.134 million because of the lower interest-rate environment, while interest expense decreased $4.036 million because of lower rates and reduced higher-cost borrowings.
- Noninterest income increased $6.384 million, driven primarily by a $2.066 million increase in mortgage loan sale gains, an $891,000 gain from corporate-owned life insurance redemptions, and the absence of the $3.566 million CSS impairment recorded in 2019.
- Noninterest expense increased $8.183 million, primarily because of the $7.643 million FHLB debt extinguishment cost.
- The allowance for loan and lease losses increased to $9.744 million from $7.939 million, or from 0.67% to 0.79% of gross loans. Net charge-offs were a net recovery of $140,000 in 2020.
- Nonperforming loans declined to $5.313 million from $6.535 million, and nonperforming assets declined to $6.070 million from $7.221 million. Active COVID-19 payment deferrals declined to $6.048 million, or 0.5% of gross loans, at year-end from $306.103 million, or 23.8%, at June 30, 2020.
- The company sold its membership interest in Corporate Settlement Solutions during the fourth quarter, receiving $1 million in cash, recording a $3.227 million receivable, and recognizing a $394,000 loss.
- The company repurchased 144,950 shares for $2.702 million and paid $8.524 million in cash dividends. The quarterly dividend increased to $0.27 per share, compared with $1.08 per share for the full year.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects continued loan growth in 2021, although PPP loan forgiveness is expected during the year. Residential real estate and consumer loan growth is expected to continue, while agricultural lending remains challenged by competition.
- Management expects 2021 mortgage loan sale gains not to exceed 2020 levels, wealth management fees may not exceed 2020 levels, and deposit-account service fees are expected to approximate 2020 levels.
- Management expects deposit growth to continue, with continued reductions in higher-cost brokered deposits and other funding. Payments on maturing borrowings are expected to continue in 2021.
- The COVID-19 pandemic remains the principal uncertainty. Potential effects include borrower credit deterioration, delayed recognition of loan problems because of payment relief and PPP support, deposit volatility, cybersecurity incidents, operational disruption, and changes in interest-rate and liquidity risk.
- The company operates in concentrated central Michigan markets; local agricultural, manufacturing, retail, gaming, tourism, higher education, employment, and real estate conditions materially affect loan demand, collateral values, and repayment performance.
- Interest-rate risk remains significant because of the low-rate environment and repricing mismatches. Management stated that future margin improvement may be gradual.
- The company had $274.540 million of off-balance-sheet credit commitments, including $241.637 million of unfunded lines of credit, $5.964 million of letters of credit, and $26.939 million of commitments to grant loans.
- The company adopted a restricted stock plan and an executive cash incentive plan in 2020. The restricted stock plan had 4,658 nonvested shares outstanding at year-end and $68,000 of remaining unrecognized compensation expense.
- A quantitative third-party goodwill analysis found no impairment at December 31, 2020. Goodwill was $48.282 million.
- The company expects to adopt the CECL credit-loss standard on January 1, 2023; the filing states that the eventual impact may be significant, but does not provide a quantified estimate.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The allowance for loan losses was identified as the critical audit matter.
Most important facts for investors to verify
- Whether COVID-19-related credit deterioration emerges after the sharp decline in active payment deferrals and whether the $9.744 million allowance remains adequate.
- The sustainability of 2020’s elevated mortgage gain income and the effect of PPP loan forgiveness on loan balances, interest income, and fee revenue.
- Whether the lower funding costs and reduced borrowings offset continued pressure on loan and securities yields and the 2.96% net interest margin.
- The timing and economic impact of the $100 million FHLB debt extinguishment, including the $7.643 million one-time charge.
- The quality and duration of the $444.051 million primary liquidity position and the availability of the reported $214.625 million of credit lines.
- Whether the company maintains its well-capitalized status; year-end consolidated ratios included 12.97% common equity Tier 1, 13.75% total risk-based capital, and 8.37% Tier 1 leverage.
- The collectability of the $3.227 million receivable arising from the CSS sale and the ongoing performance of $24.930 million of troubled debt restructurings.
- Future CECL implementation effects, including changes to the allowance, capital, earnings, and disclosures.