ISABELLA BANK CORP annual report, FY2021

Isabella Bank Corporation — 2021 Form 10-K Summary

Business context and reporting period

Isabella Bank Corporation is a Michigan-based financial services holding company whose wholly owned subsidiary, Isabella Bank, operates 30 banking offices across seven mid-Michigan counties. The company provides commercial, agricultural, residential real estate, consumer, deposit, wealth management and trust services. This filing covers the fiscal year ended December 31, 2021, with quarterly information for the fourth quarter.

The company reported 330 full-time equivalent employees at year-end and its common stock trades on the OTCQX market under the symbol ISBA.

Financial performance and key metrics

Metric	2021	2020	Change
Net income	$19.499 million	$10.885 million	79.1% increase
Diluted earnings per share	$2.45	$1.34	Increase
Net interest income	$52.701 million	$50.347 million	$2.354 million increase
Provision for loan losses	$(0.518) million	$1.665 million	$2.183 million favorable change
Noninterest income	$13.822 million	$14.423 million	4.2% decrease
Noninterest expenses	$43.694 million	$51.233 million	14.7% decrease
Return on average assets	0.96%	0.57%	Increase
Return on average equity	8.83%	4.93%	Increase
Net interest margin, FTE	2.87%	2.96%	Decrease

Fourth-quarter 2021 net income was $4.794 million, or $0.63 diluted EPS, compared with a fourth-quarter 2020 net loss of $0.723 million, or $(0.10) diluted EPS.
Total assets increased 3.8% to $2.032 billion. Gross loans increased 5.1% to $1.301 billion, led by commercial and residential real estate lending.
Available-for-sale securities increased 44.6% to $490.601 million, principally reflecting purchases of U.S. Treasury securities and other investments.
Deposits increased 9.2% to $1.710 billion, primarily from demand and savings deposits. Gross loans to deposits declined to 76.07% from 79.06%.
Assets under management increased to $2.827 billion, including $516.243 million managed by Isabella Wealth and $278.844 million of loans sold with servicing retained.
Cash and cash equivalents declined to $105.330 million from $246.640 million, largely because excess funds were deployed into securities, loan growth and debt repayment.
Operating cash flow was $25.501 million. Investing activities used $229.635 million, principally because of $262.266 million of AFS securities purchases. Financing activities provided $62.824 million.
Borrowed funds declined 37.4% to $99.320 million. Year-end debt included $20.000 million of FHLB advances, $50.162 million of repurchase agreements and $29.158 million of subordinated debt, net of issuance costs.
Primary liquidity, consisting of cash and unencumbered AFS securities, totaled $495.259 million, or 24.37% of assets. Available lines of credit totaled $298.662 million, and management reported total cash and liquidity of $753.992 million.
The Bank remained well capitalized. Year-end consolidated ratios included 12.07% common equity Tier 1, 12.07% Tier 1 risk-based capital, 14.94% total risk-based capital and 7.97% Tier 1 leverage.
The company paid $1.08 per share in dividends, unchanged from 2020. Tangible book value increased to $21.61 per share from $21.29.

Material changes versus the prior comparable period

Profitability improved substantially as interest expense fell $6.413 million, noninterest expenses fell $7.539 million and the provision for loan losses shifted to a $0.518 million reversal. The 2020 period included a $7.643 million loss from extinguishing $100 million of FHLB advances.
Total interest income declined $4.059 million because of lower interest rates and reduced advances to mortgage brokers, partially offset by lower funding costs.
Noninterest income declined $0.601 million. Higher service charges, ATM and debit card fees and wealth management fees were more than offset by lower mortgage loan sale gains, the absence of 2020 joint venture income and lower life insurance redemption gains.
Credit quality improved materially. Total past-due and nonaccrual loans fell to $4.031 million, or 0.31% of gross loans, from $9.610 million, or 0.78%. Nonperforming assets declined to $1.684 million, or 0.08% of assets, from $6.070 million, or 0.31%.
The allowance for loan and lease losses declined to $9.103 million, or 0.70% of gross loans, from $9.744 million, or 0.79%. Net charge-offs were $0.123 million in 2021.
The company issued $30 million of 3.25% fixed-to-floating subordinated notes due 2031. The notes qualify as Tier 2 capital, reset to three-month SOFR plus 256 basis points after June 2026 and are callable beginning June 15, 2026.
The company repurchased 532,042 shares for $13.758 million, including 396,576.78534 shares purchased in a modified Dutch auction for approximately $10.708 million at $27 per share.
Accumulated other comprehensive income declined to $1.859 million from $7.698 million, primarily because of $6.612 million of after-tax unrealized losses on AFS securities as intermediate- and long-term interest rates increased.

Guidance, outlook, management commentary and risks

Management expects ATM and debit card fee income to increase in 2022, service charges and fees to approach pre-pandemic levels, and wealth management fees to continue increasing with new business activity.
Management does not expect mortgage loan sale gains in 2022 to exceed 2021 levels and expects mortgage servicing rights income to remain variable.
Management expects commercial loan growth to continue despite an anticipated decline in advances to mortgage brokers. Residential mortgage and consumer loan growth are also expected to continue, while agricultural lending competition is expected to remain strong.
Management stated that deposit growth, particularly in demand and savings accounts, may continue as financial markets remain unstable.
COVID-19 remains a material uncertainty affecting credit quality, deposit flows, interest-rate assumptions, cybersecurity, operations and customer demand. Active loan payment deferrals were only $0.159 million at year-end 2021.
The principal risks include local economic deterioration, inflation and unemployment, interest-rate and liquidity risk, credit losses, collateral values, securities impairment, regulatory changes, cybersecurity incidents, technology and infrastructure disruptions, competition, mortgage loan repurchase claims and goodwill impairment.
The company expects to adopt the current expected credit loss standard on January 1, 2023. Management states that the impact could be significant, but the filing does not provide a quantified estimate.
There were no material legal proceedings, no unresolved SEC staff comments and no subsequent events requiring recognition or disclosure through the financial statement issuance date. Management and the independent auditor concluded that internal control over financial reporting was effective.

Most important facts for an investor to verify

Whether the 2021 earnings improvement is sustainable after the benefit from unusually lower funding costs, the loan-loss reversal and the absence of the 2020 debt-extinguishment charge.
The sensitivity of net interest income and the 2.87% net interest margin to changes in market rates, elevated liquidity and deposit repricing.
The credit performance of the commercial and agricultural portfolios, including the $25.725 million of TDRs and the substantial unallocated portion of the ALLL.
The future fair-value impact of the AFS securities portfolio, which had $2.941 million of unrealized losses at year-end, and the effect of further rate increases on accumulated other comprehensive income.
The effect of the 2023 CECL adoption on capital, earnings and the allowance for credit losses.
The company’s ability to maintain dividend payments and share repurchases while funding loan growth and servicing the subordinated notes.
Potential drawdowns under $265.306 million of off-balance-sheet credit commitments and the estimated $548.213 million of uninsured deposits.
COVID-19-related changes in borrower performance, deposit behavior, operating costs and cybersecurity exposure.