Isabella Bank Corporation — FY2019 Form 10-K Summary
Business context and reporting period
Isabella Bank Corporation is a Michigan community-bank holding company operating through Isabella Bank, with 30 banking offices across seven mid-Michigan counties. Services include commercial, agricultural, residential real estate and consumer lending; deposit products; investment management; trust and estate services. This Form 10-K covers the fiscal year ended December 31, 2019. Fourth-quarter figures cited below are unaudited quarterly data included in the filing. Amounts are in thousands except per-share data.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net income | $13,024 | $14,021 | (7.1%) |
| Basic / diluted EPS | $1.65 / $1.61 | $1.78 / $1.74 | Down |
| Net interest income | $49,445 | $48,233 | +2.5% |
| Provision for loan losses | $30 | $978 | Down $948 |
| Noninterest income | $8,039 | $10,981 | (26.8%) |
| Noninterest expense | $43,050 | $42,852 | +0.5% |
| Net interest margin yield, FTE | 3.07% | 2.98% | +9 bps |
| Return on average assets | 0.72% | 0.77% | Down |
| Return on average equity | 6.25% | 7.26% | Down |
Fourth-quarter 2019 net income was $898, or $0.12 basic EPS and $0.11 diluted EPS, compared with $3,530, or $0.45 basic EPS and $0.44 diluted EPS, in fourth-quarter 2018. Fourth-quarter results included a $3,566 reduction in income related to the impairment of the Corporation’s investment in Corporate Settlement Solutions, LLC.
Balance sheet, liquidity and capital
| Metric at December 31 | 2019 | 2018 | Change |
|---|---|---|---|
| Total assets | $1,814,198 | $1,842,502 | (1.5%) |
| Gross loans | $1,186,570 | $1,128,707 | +5.1% |
| Deposits | $1,313,851 | $1,292,693 | +1.6% |
| Borrowed funds | $275,999 | $340,299 | (18.9%) |
| Shareholders’ equity | $210,182 | $195,519 | +7.5% |
| AFS securities | $429,839 | $494,834 | (13.1%) |
- Primary liquidity, consisting of cash and unencumbered AFS securities, was $291,190, or 16.05% of assets, versus 13.93% in 2018.
- Available borrowing capacity was $132,897 at year-end.
- Cash flow from operating, investing and financing activities was $23,303, $15,480 and $(51,682), respectively. Cash and cash equivalents declined by $12,899 to $60,572.
- The Bank remained well capitalized. Consolidated CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 12.56%, 12.56%, 13.18% and 9.01%, respectively.
- Annual cash dividends increased to $1.05 per share from $1.04. The Corporation repurchased 169,748 shares for $4,003 and had authorization to repurchase 247,906 additional shares at year-end.
Material changes versus the prior comparable period
- Loan growth, led by commercial loans, increased interest income by $3,442. Higher deposit and borrowing rates increased interest expense by $2,230, partially offsetting the benefit.
- Noninterest income fell $2,942, principally because of the $3,566 CSS investment impairment. Excluding this item, fee and other income generally improved, including debit-card fees, mortgage-loan sale gains and gains on foreclosed assets.
- Credit costs improved materially: the provision declined to $30 from $978, while the allowance for loan losses declined to $7,939, or 0.67% of gross loans, from $8,375, or 0.74%.
- Nonperforming loans declined to $6,535, or 0.55% of gross loans, from $7,373, or 0.65%. Agricultural loans remained the largest concentration of nonaccrual loans.
- The securities portfolio declined as management used cash flows and proceeds from securities sales to support loan growth and reduce higher-cost funding.
- Accumulated other comprehensive income improved to $1,971 from $(7,685), primarily from after-tax unrealized gains on AFS securities.
Guidance, outlook, commentary and risks
- Management expects continued growth in commercial, residential real estate and consumer lending in 2020, while expecting agricultural-loan declines to stabilize. It also expects growth in noninterest-bearing demand and savings deposits and continued reduction of brokered certificates of deposit and other higher-cost funding.
- Management is pursuing higher asset yields through loan growth, reduced reliance on securities and borrowings, enhanced pricing and cost controls. The flat yield curve and competitive deposit pricing may limit further margin improvement.
- Noninterest income from mortgage servicing, mortgage-loan sales, foreclosed assets and securities sales may fluctuate. FDIC insurance premiums are expected to increase in 2020 after a $440 assessment credit in 2019.
- Key risks include localized Michigan economic weakness, agricultural conditions, credit deterioration, collateral values, interest-rate and liquidity risk, competition, cybersecurity and operational disruptions, regulatory changes, litigation, goodwill impairment and estimates underlying the allowance for loan losses and fair values.
- The Current Expected Credit Losses standard was delayed for the Corporation until January 1, 2023. Management stated that adoption may materially affect operations and disclosures but had not quantified the impact.
- A subsequent event disclosed before issuance of the financial statements was anticipated proceeds of approximately $500 from redemption of a corporate-owned life insurance policy, expected to be recognized as 2020 noninterest income.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and no material changes to internal control during the fourth quarter.
Important facts for investors to verify
- Whether the CSS impairment is isolated or signals further deterioration in the joint venture or other investments.
- The sustainability of loan growth and the effect of deposit and borrowing costs on the net interest margin.
- Trends in agricultural credit quality, nonaccrual loans, troubled debt restructurings and the adequacy of the allowance for loan losses.
- The eventual balance-sheet and earnings impact of CECL adoption in 2023.
- Liquidity after continued loan growth, securities runoff, debt maturities and share repurchases.
- Future dividend capacity, including regulatory limits on upstreaming funds from Isabella Bank to the holding company.