INTERNATIONAL BANCSHARES CORP quarterly report, Q2 FY2022

International Bancshares Corporation — 2022 Second-Quarter Form 10-Q

Business context and reporting period

International Bancshares Corporation is a Texas-based bank holding company operating five subsidiary banks, 167 facilities and 259 ATMs across Texas and Oklahoma. The company serves commercial, consumer and international customers, with significant cross-border activity involving Mexico. This unaudited Form 10-Q covers the three and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021 and income-statement comparisons are to the comparable 2021 periods.

Key financial metrics

Metric	Three months ended June 30, 2022	Six months ended June 30, 2022	Comparable change
Interest income	$109.6 million	$206.0 million	+11.8% / +5.2%
Net interest income	$102.9 million	$192.9 million	+12.7% / +5.8%
Provision for credit losses	$3.7 million	$5.2 million	+226.5% / +123.3%
Non-interest income	$43.2 million	$86.8 million	-55.8% / -35.3%
Non-interest expense	$68.8 million	$132.9 million	-1.7% / +0.6%
Net income	$58.0 million	$111.5 million	-37.0% / -21.9%
Basic earnings per share	$0.92	$1.77	-36.6% / -21.3%

Net income margins based on reported income were approximately 37.9% for the quarter and 38.5% for the six-month period, calculated as net income divided by total interest income plus non-interest income. These figures are not management-defined profitability measures.

Total assets were $16.27 billion, up 1.4% from year-end 2021.
Total loans were $7.03 billion, down 2.5%; net loans were $6.91 billion, down 2.6%.
Deposits were $12.94 billion, up 2.6%. Non-interest-bearing demand deposits increased to $6.10 billion.
Cash and cash equivalents were $3.42 billion, compared with $3.21 billion at December 31, 2021.
Available-for-sale debt securities were $4.29 billion at fair value, including $4.20 billion of residential mortgage-backed securities.
The allowance for credit losses was $112.6 million, or 1.60% of total loans, compared with 1.53% at year-end 2021.
Shareholders’ equity declined 9.2% to $2.10 billion, primarily because of accumulated unrealized losses on available-for-sale securities and treasury-stock purchases.
Total debt-like funding included $513.4 million of repurchase agreements, $436.0 million of other borrowed funds and $134.6 million of junior subordinated debentures.
Regulatory capital remained strong: CET1 ratio was 19.96%, Tier 1 leverage ratio was 13.51%, risk-based Tier 1 capital ratio was 20.86% and total capital ratio was 21.97% at June 30, 2022.

Cash flow and liquidity

Net cash provided by operating activities was $167.4 million for the six months ended June 30, 2022, compared with $166.0 million in 2021.
Investing activities used $280.7 million, principally reflecting purchases of available-for-sale securities of $819.0 million, partly offset by mortgage-backed-security principal collections and a $177.7 million net decrease in loans.
Financing activities provided $320.8 million, including deposit growth and increased repurchase agreements, partly offset by $40.5 million of treasury-stock purchases and $38.0 million of dividends.
Cash and cash equivalents increased $207.5 million during the six months to $3.42 billion.
Management reported access to FHLB funding, repurchase agreements and a sizable high-quality securities portfolio as liquidity sources. The filing does not provide a clear unused FHLB borrowing capacity.

Material changes versus prior periods

Net interest income increased despite lower loan balances, driven by a larger investment-securities portfolio, higher interest earned on Federal Reserve funds and rising interest rates.
Loan interest income declined 4.6% in the quarter and 8.1% year to date because of lower loan demand and portfolio balances.
Non-interest income fell sharply because second-quarter 2021 included a non-recurring merchant-banking investment gain. Management stated that 2021 net income excluding the after-tax $42.8 million transaction was approximately $100.0 million, versus $111.5 million in the first six months of 2022, an 11.5% increase.
Service charges on deposit accounts increased 15.7% in both the quarter and first six months as customer activity recovered from pandemic-related reductions.
Unrealized losses on available-for-sale securities increased accumulated other comprehensive loss to $276.7 million from $32.0 million at year-end, primarily due to changes in market interest rates. Management determined that the losses were not credit-related and recorded no related securities allowance.
The company repurchased 930,762 shares during the quarter for $37.2 million, at an average price of $39.93 per share. The board authorized up to $150 million of repurchases through March 15, 2023.
Past-due loans increased to $64.6 million from $37.5 million at December 31, 2021, while non-accrual loans declined to $1.6 million from $1.9 million.

Guidance, outlook, risks and unusual items

Management provided no quantitative earnings or revenue guidance. It expects economic conditions to remain uncertain and intends to continue monitoring interest rates, funding costs, liquidity, expense efficiency and credit quality. Management described the company as asset-sensitive over both short- and long-term repricing periods, which may support net interest income in a rising-rate environment but also creates exposure if conditions change.

COVID-19 effects, inflation, supply-chain disruption and changing customer behavior remain potential sources of uncertainty. As of August 2, 2022, approximately $113.3 million of loans had some degree of payment deferral, primarily in hospitality and special-use facilities.
PPP exposure had declined to 393 loans totaling approximately $20.9 million as of August 1, 2022; these loans were fully guaranteed by the SBA.
Credit risks include deterioration in commercial real estate, construction and land-development loans, borrower performance, collateral values, higher interest rates and economic weakness.
Interest-rate risk, deposit outflows, reduced access to FHLB or other funding, and volatility in securities values could affect liquidity and earnings.
Additional risks include U.S.-Mexico trade and political conditions, regulatory changes, cybersecurity incidents, operational failures, litigation, natural disasters and potential goodwill impairment.
Management stated that material losses from existing legal proceedings were remote, although proceedings remain subject to further developments.
Disclosure controls were considered effective, with no material weaknesses or material changes in internal control over financial reporting reported.

Important facts for investors to verify

Whether higher interest rates continue to expand net interest income faster than deposit and funding costs increase.
The sustainability of deposit growth and the company’s actual available borrowing capacity and unencumbered securities liquidity.
Trends in past-due, classified, non-accrual and deferred-payment loans, particularly commercial real estate and construction exposures.
Whether the $112.6 million allowance for credit losses remains adequate as economic forecasts, collateral values and interest rates change.
The potential earnings and capital effects of the $354.4 million gross unrealized loss in the available-for-sale securities portfolio.
The effect of the non-recurring 2021 merchant-banking gain on year-over-year comparisons.
The pace and price of share repurchases under the $150 million authorization and their effect on capital and per-share results.
Future changes in cross-border deposits, U.S.-Mexico trade activity, regulatory capital rules and funding-market access.