International Bancshares Corporation — Q1 2019 Form 10-Q
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company operating five subsidiary banks, 189 facilities and 286 ATMs across Texas and Oklahoma. The company serves commercial, consumer and international customers, with significant activity involving U.S.-Mexico border commerce and deposits from Mexico-domiciled customers. The filing covers the three months ended March 31, 2019; financial statements are unaudited.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 or prior period | Change |
|---|---|---|---|
| Total assets | $12.028 billion | $11.872 billion at December 31, 2018 | Up 1.3% |
| Loans | $6.707 billion | $6.561 billion at December 31, 2018 | Up 2.2% |
| Deposits | $8.896 billion | $8.697 billion at December 31, 2018 | Up 2.3% |
| Net interest income | $109.4 million | $99.3 million | Up 10.2% |
| Provision for loan losses | $7.4 million | $1.7 million | Up 346.5% |
| Non-interest income | $36.1 million | $39.0 million | Down 7.3% |
| Non-interest expense | $73.0 million | $68.9 million | Up 5.9% |
| Net income | $51.9 million | $53.4 million | Down 2.8% |
| Basic diluted EPS | $0.79 / $0.79 | $0.81 / $0.80 | Basic down 2.5%; diluted down 1.3% |
- Net interest income benefited from higher loan balances and increased loan yields. Interest income rose 11.4% to $124.1 million, while interest expense rose 20.8% to $14.7 million as deposit and borrowing costs increased.
- The reported efficiency ratio, calculated from the filing’s components as non-interest expense divided by net interest income plus non-interest income, was approximately 50.1% in Q1 2019 versus approximately 49.8% in Q1 2018.
- Allowance for probable loan losses increased to $67.0 million from $61.4 million at year-end, equal to 1.00% of total loans versus 0.94% at December 31, 2018.
- Cash and cash equivalents were $349.2 million, compared with $316.8 million at December 31, 2018.
- Shareholders’ equity increased 2.3% to $1.985 billion. Reported regulatory ratios were strong: CET1 18.17%, Tier 1 leverage 16.06%, risk-based Tier 1 capital 19.71% and total capital 20.46% at March 31, 2019.
- Other borrowed funds declined 27.6% to $510.9 million, while securities sold under repurchase agreements increased 21.1% to $278.6 million. Junior subordinated deferrable interest debentures remained $160.4 million.
Cash flow and liquidity
- Operating activities generated $67.7 million of cash, compared with $53.2 million in Q1 2018.
- Investing activities used $89.1 million, primarily reflecting a $147.1 million net increase in loans and $146.0 million of purchases of available-for-sale securities.
- Financing activities provided $53.8 million, led by deposit growth and increased repurchase agreements, partially offset by a $194.8 million reduction in other borrowed funds.
- Cash and cash equivalents increased by $32.4 million during the quarter. Management stated that liquidity is supported by deposits, FHLB access, repurchase agreements, large certificates of deposit and a sizable investment securities portfolio.
Material changes versus comparable periods
- Net income declined despite 10.2% growth in net interest income because the loan-loss provision increased by $5.8 million, non-interest income declined and operating expenses increased.
- The higher loan-loss provision primarily reflected a $9.5 million specific reserve on a relationship secured by car dealership real estate. Fraud by a dealership insider led to bankruptcy, and subsequent deterioration caused the credit to be placed on impaired, non-accrual status.
- Non-accrual loans increased to $48.0 million from $15.8 million at December 31, 2018. Total impaired loans increased materially, with impaired loan balances reported at $56.0 million versus $23.9 million at year-end.
- Past-due loans increased to $94.9 million from $75.8 million at December 31, 2018, although loans 90 days or more past due and still accruing declined to $8.3 million from $40.7 million after the dealership relationship was placed on non-accrual status.
- Non-interest income decreased primarily because Q1 2018 included non-recurring income from a real estate development partnership. Non-interest expense increased due to compensation, professional fees, depreciation, software costs and other real-estate-owned expenses.
- Accumulated other comprehensive loss improved to $29.4 million from $54.6 million, primarily because of a $25.2 million after-tax increase in unrealized gains on available-for-sale securities.
- The company adopted the new lease accounting standard on January 1, 2019, recording approximately $6.4 million of right-of-use assets and lease liabilities; management reported no significant consolidated financial statement impact.
Outlook, commentary, risks and unusual items
The filing provides no quantitative earnings or revenue guidance. Management stated that quarterly results are not necessarily indicative of full-year results and that it believes the company is appropriately positioned for interest-rate changes. The company described itself as asset-sensitive in both short- and long-term repricing scenarios.
- Key risks include economic weakness, borrower repayment and collateral deterioration, interest-rate changes, deposit pricing pressure, volatility in financial markets, changes in U.S.-Mexico trade and border activity, regulatory and capital changes, cybersecurity incidents, litigation, funding availability and future changes in loan-loss estimates.
- Management noted substantial competition for deposits at higher rates and allowed some deposits to leave because of aggressive competitor pricing.
- Available-for-sale securities included approximately $3.263 billion of residential mortgage-backed securities, with $49.6 million of gross unrealized losses. Management attributed the losses primarily to interest-rate movements and stated that it did not intend, and was not likely required, to sell the securities before recovery or maturity.
- The company extended its share repurchase authorization on March 11, 2019 to permit up to $50 million of additional purchases through April 9, 2020. Only 1,305 shares were repurchased during Q1 2019 for $54,000.
- Legal proceedings were described as unlikely to result in material losses based on current assessments, although management noted that developments could change those assessments. No material changes to previously disclosed risk factors were reported.
Investor verification checklist
- Verify the credit performance and collateral value of the impaired car dealership relationship and the adequacy of the $9.5 million specific reserve.
- Monitor non-accrual, impaired, past-due and classified loans, particularly commercial and commercial real estate exposures.
- Assess whether deposit-rate competition continues to compress funding costs and net interest margins.
- Review the composition, duration, unrealized losses and liquidity value of the mortgage-backed securities portfolio.
- Confirm the sustainability of loan growth, deposit growth and the reduced reliance on FHLB borrowings.
- Track regulatory capital ratios, the expected implementation of CECL in 2020 and any effects on reserves or capital.
- Evaluate the company’s exposure to U.S.-Mexico trade, border activity and foreign-domiciled customers.