Isabella Bank Corporation — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; includes fourth-quarter results. Amounts are in thousands except per-share data unless stated otherwise. Isabella Bank Corporation is a Michigan community-bank holding company whose sole subsidiary operates 29 banking offices and a loan-production office in central Michigan.
Business Context and Reporting Period
- Core activities include commercial, agricultural, residential real estate and consumer lending; deposit services; mortgage banking; and trust and brokerage services.
- The company operates as one reportable segment because retail banking represents approximately 90% or more of consolidated assets and operating results.
- As of December 31, 2017, the company had 376 full-time-equivalent employees and total assets of $1.813 billion.
Financial Results and Key Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Interest income | $58,413 | $53,666 | +$4,747 |
| Net interest income | $45,919 | $42,801 | +7.3% |
| Provision for loan losses | $253 | $(135) | Increase of $388 |
| Noninterest income | $10,812 | $11,108 | −2.7% |
| Noninterest expenses | $40,225 | $37,897 | +6.1% |
| Net income | $13,237 | $13,799 | −4.1% |
| Basic EPS | $1.69 | $1.77 | −4.5% |
| Diluted EPS | $1.65 | $1.73 | −4.6% |
| Net interest margin, FTE | 3.03% | 3.00% | +3 bps |
| Return on average assets | 0.75% | 0.82% | Down 7 bps |
| Return on average equity | 6.75% | 7.12% | Down 37 bps |
Fourth quarter: Net income was $2,721, or $0.35 basic EPS and $0.34 diluted EPS, compared with $3,782, or $0.48 basic EPS and $0.47 diluted EPS, in the fourth quarter of 2016. Fourth-quarter net interest income was $11,643, provision expense was $168, noninterest income was $2,710, and noninterest expense was $10,628.
Balance Sheet, Liquidity and Capital
- Total assets increased 4.7% to $1.813 billion. Gross loans increased 8.0% to $1.092 billion, led by commercial loans, which rose 10.3% to $634.8 million, and consumer loans, which rose 32.3% to $56.1 million.
- Deposits increased 5.9% to $1.265 billion. Borrowed funds increased 2.1% to $344.9 million, including $290.0 million of FHLB advances.
- Shareholders’ equity increased 3.7% to $194.9 million. Gross loans-to-deposits rose to 86.27% from 84.57%.
- Cash and cash equivalents were $30.8 million. Primary liquidity, consisting of cash and unencumbered available-for-sale securities, totaled $293.2 million, or 16.17% of assets. Available borrowing capacity was $139.4 million.
- 2017 cash flows were $17.0 million provided by operating activities, $79.0 million used in investing activities and $70.0 million provided by financing activities, resulting in a $8.0 million increase in cash and cash equivalents.
- The consolidated Tier 1 leverage ratio was 8.54%, common equity Tier 1 ratio was 12.23% and total risk-based capital ratio was 12.86%. The company and bank were categorized as well capitalized.
- Cash dividends increased to $1.02 per share from $0.98. The company repurchased 184,286 shares for $5.2 million during 2017 and had authorization to repurchase an additional 215,671 shares at year-end.
Asset Quality and Credit Risk
| Metric | 2017 | 2016 |
|---|---|---|
| Allowance for loan losses | $7,700 | $7,400 |
| Allowance as percentage of gross loans | 0.71% | 0.73% |
| Net loan charge-offs/(recoveries) | $(47) | $(135) |
| Nonperforming loans | $3,422 | $1,693 |
| Nonperforming loans as percentage of loans | 0.31% | 0.17% |
| Nonperforming assets | $3,713 | $1,924 |
| Nonperforming assets as percentage of assets | 0.20% | 0.11% |
| Troubled debt restructurings | $26,197 | $21,382 |
Credit quality remained at historically low nonperforming levels, but nonperforming loans, nonperforming assets and TDR balances increased year over year. Management stated that the allowance was appropriate at December 31, 2017. The allowance and credit-loss estimates remain sensitive to local economic conditions, collateral values and borrower performance.
Material Changes Versus the Prior Comparable Period
- Net interest income increased primarily because of significant loan growth, while interest expense rose as deposit and borrowing costs increased.
- Net income declined despite higher net interest income because compensation and benefits increased $2.4 million, primarily from new positions, merit increases, lending-compliance costs and defined-benefit-plan costs.
- Noninterest income declined $0.3 million. Lower trust and brokerage fees, Corporate Settlement Solutions income and gains on AFS securities more than offset higher service charges and fees.
- The 2016 results included a $770 thousand other-than-temporary impairment charge on an AFS municipal bond and a $469 thousand gain on redemption of a bank-owned life insurance policy; neither item recurred in 2017.
- The Tax Cuts and Jobs Act resulted in a $319 thousand deferred-tax remeasurement charge in 2017. The company also early adopted guidance permitting a $367 thousand reclassification from accumulated other comprehensive income to retained earnings.
- Comprehensive income increased to $13.8 million from $10.8 million, primarily because AFS securities produced a small net gain in other comprehensive income in 2017 compared with a significant loss in 2016.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued loan growth in 2018, particularly in commercial, residential real estate and consumer lending, and anticipates marginal improvement in net interest income as assets reprice faster than liabilities and the asset mix shifts toward loans.
- Management expects ATM and debit-card fees, trust and brokerage advisory fees and mortgage-originations activity to increase or improve in 2018, while NSF and overdraft fees are expected to approximate 2017 levels.
- Employee salaries and benefits are expected to increase in 2018 because of staffing and compensation growth. Management expects certain consulting expenses to normalize.
- The company’s primary market risks are interest-rate risk and liquidity risk. At December 31, 2017, modeled net interest income increased 2.36% over 12 months under an immediate 100-basis-point rate increase and declined 2.43% under a 100-basis-point decrease.
- Liquidity and funding risks include reliance on deposits, brokered certificates of deposit, FHLB advances and repurchase agreements. Contractual obligations totaled $1.610 billion, including $344.9 million of borrowed funds, and unfunded loan commitments totaled $210.7 million.
- The company is concentrated in central Michigan markets, exposing it to local economic, agricultural, manufacturing, real estate and employment conditions. Other principal risks include credit deterioration, interest-rate changes, deposit outflows, competition, regulatory changes, cybersecurity events, operational disruptions, goodwill impairment and mortgage-loan repurchase claims.
- Management reported no material legal proceedings and no regulatory actions as of March 14, 2018. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether rapid loan growth can continue without a further increase in nonperforming loans, TDRs or provision expense.
- The sensitivity of net interest margin and deposit costs to additional Federal Reserve rate increases and competitive funding pressures.
- Whether expected 2018 operating improvements offset higher compensation, compliance and benefit-plan costs.
- The quality and liquidity of the $552.3 million AFS securities portfolio, including unrealized losses and exposure to mortgage-backed securities, collateralized mortgage obligations and preferred securities.
- The sustainability of dividends and share repurchases given the company’s reliance on dividends from the bank subsidiary and applicable regulatory limits.
- The eventual effect of CECL implementation, which management expects to have a significant impact on banking-industry credit-loss measurements and disclosures.