International Bancshares Corporation — Q2 2021 Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company headquartered in Laredo, Texas. Through five subsidiary banks, it provides commercial, consumer and international banking services across Texas and Oklahoma, with significant cross-border activity involving Mexico. The filing covers the unaudited three and six months ended June 30, 2021, compared with the corresponding 2020 periods; balance-sheet comparisons are primarily with December 31, 2020.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Net interest income | $91.3 million | $103.9 million | Down 12.1% |
| Provision for credit losses | $1.1 million | $11.0 million | Down 89.6% |
| Non-interest income | $97.9 million | $33.6 million | Up 191.4% |
| Non-interest expense | $70.0 million | $73.9 million | Down 5.3% |
| Net income | $92.0 million | $41.5 million | Up 121.7% |
| Basic and diluted EPS | $1.45 | $0.66 basic; $0.65 diluted | Up 119.7% basic |
| Metric | Six months ended June 30, 2021 | Six months ended June 30, 2020 | Change |
|---|---|---|---|
| Net interest income | $182.3 million | $206.7 million | Down 11.8% |
| Provision for credit losses | $2.3 million | $27.8 million | Down 91.6% |
| Non-interest income | $134.1 million | $68.7 million | Up 95.2% |
| Non-interest expense | $132.1 million | $150.9 million | Down 12.4% |
| Net income | $142.8 million | $76.3 million | Up 87.0% |
| Basic and diluted EPS | $2.25 | $1.19 | Up 89.1% |
Net interest income was pressured by lower interest rates, lower loan and securities yields, a smaller available-for-sale securities portfolio and accelerated mortgage-backed securities paydowns. Interest expense declined faster than interest income, reflecting lower deposit and borrowing costs. The filing does not provide a clear net interest margin or return-on-assets figure.
Balance sheet, liquidity and capital
- Total assets were $15.31 billion at June 30, 2021, up 9.1% from year-end 2020.
- Total loans were $7.39 billion, down approximately 2.0%; net loans were $7.28 billion, down 2.1%.
- Investment securities increased to $4.18 billion from $3.09 billion, primarily due to purchases of available-for-sale securities.
- Cash and cash equivalents were $2.33 billion, up from $2.00 billion at December 31, 2020.
- Deposits increased 10.8% to $11.88 billion, driven partly by stimulus payments, PPP proceeds and customer cash preservation.
- Other borrowed funds were $436.2 million, securities sold under repurchase agreements were $430.5 million, and junior subordinated deferrable interest debentures were $134.6 million.
- Shareholders’ equity increased 4.9% to $2.29 billion. The company paid a $0.55-per-share cash dividend during the first quarter of 2021.
- Six-month operating cash flow was $166.0 million, compared with $136.5 million in 2020. Investing activities used $960.7 million, primarily reflecting purchases of available-for-sale securities; financing activities provided $1.12 billion, primarily from deposit growth. Cash increased $329.6 million to $2.33 billion.
- Regulatory capital remained strong: CET1 ratio was 19.53%, leverage ratio 14.15%, Tier 1 risk-based capital ratio 20.66% and total risk-based capital ratio 21.75% at June 30, 2021. Management stated that the company and subsidiary banks exceeded applicable capital requirements.
Material changes and unusual items
- The largest earnings driver was a $42.8 million after-tax gain from the sale of an equity interest in a merchant banking investment. This materially increased other investment income and is not representative of recurring banking revenue.
- Credit-loss provisions declined sharply as management reported that economic conditions had stabilized or slightly improved from 2020 COVID-19 conditions. The allowance for credit losses was $108.3 million, or 1.47% of total loans, compared with $109.1 million, or 1.45%, at year-end 2020.
- Credit quality improved in several measures: non-accrual loans declined to $2.2 million from $19.8 million, troubled debt restructurings declined to $3.3 million from $5.8 million, and total past-due loans declined to $35.6 million from $38.3 million.
- As of August 1, 2021, approximately $364.3 million of loans had some degree of payment deferral, concentrated primarily in hospitality, oil and gas, and retail development. Management stated that these short-term deferrals were not classified as troubled debt restructurings under applicable regulatory guidance.
- As of August 1, 2021, 4,015 PPP loans totaling approximately $272.8 million remained outstanding and were fully guaranteed by the SBA.
- The company’s $50 million stock repurchase authorization was extended through March 17, 2022, but no shares were repurchased during the second quarter. As of August 2, 2021, cumulative repurchases totaled 12.3 million shares at a cost of $357.1 million.
Outlook, commentary and risks
Management expects continued uncertainty from COVID-19, interest rates, customer activity and economic conditions. It emphasized strong liquidity and capital, expense control, monitoring of efficiency and overhead ratios, and continued assistance for affected borrowers. The company is asset-sensitive to interest-rate changes, so falling rates can pressure net interest income; management stated that it monitors and adjusts its interest-rate position.
Key risks include borrower repayment and collateral performance, commercial real estate and construction exposure, pandemic-related deterioration, interest-rate and financial-market volatility, funding availability, U.S.-Mexico trade and border activity, deposit trends involving Mexican customers, regulatory and capital changes, cybersecurity and technology failures, legal proceedings, goodwill impairment and changes in the allowance for credit losses. Management reported that material litigation losses were considered remote and that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Separate recurring operating performance from the $42.8 million after-tax merchant-banking investment gain.
- Monitor whether the decline in net interest income persists under the prevailing low-rate environment and as mortgage-backed securities continue to pay down.
- Track deferred loans, PPP loan forgiveness and credit quality after government support programs diminish.
- Review commercial real estate, construction and land-development concentrations and the adequacy of the $108.3 million allowance for credit losses.
- Assess the sustainability of the 10.8% deposit increase and the company’s ability to maintain excess liquidity if deposits normalize.
- Confirm regulatory capital ratios and the impact of any future changes to capital, CECL, LIBOR replacement or banking regulations.