International Bancshares Corporation — 2017 Q3 Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company headquartered in Laredo, Texas. Through its banking subsidiaries, it provides commercial, consumer and international banking services across South, Central and Southeast Texas and Oklahoma, with significant cross-border activity involving Mexico. The company reported one operating segment and had 193 facilities and 296 ATMs.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2017. Balance-sheet comparisons are against December 31, 2016; income and cash-flow comparisons are against the corresponding 2016 periods.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Total interest income | $106.945 million | $96.624 million | 10.7% |
| Net interest income | $96.952 million | $85.449 million | 13.5% |
| Provision for probable loan losses | $6.591 million | $(1.347) million | Higher expense |
| Non-interest income | $41.366 million | $40.530 million | 2.1% |
| Non-interest expense | $71.711 million | $76.667 million | (6.5%) |
| Income before taxes | $60.016 million | $50.659 million | 18.5% |
| Net income | $39.628 million | $35.787 million | 10.7% |
| Basic earnings per share | $0.60 | $0.54 | 11.1% |
| Diluted earnings per share | $0.59 | $0.54 | 9.3% |
| Metric | Nine months 2017 | Nine months 2016 | Change |
|---|---|---|---|
| Net interest income | $279.064 million | $258.561 million | 7.9% |
| Provision for probable loan losses | $9.096 million | $14.884 million | (38.9%) |
| Non-interest income | $113.044 million | $118.072 million | (4.3%) |
| Non-interest expense | $221.050 million | $216.569 million | 2.1% |
| Net income | $112.201 million | $98.459 million | 14.0% |
| Basic earnings per share | $1.70 | $1.49 | 14.1% |
| Diluted earnings per share | $1.68 | $1.49 | 12.8% |
Q3 net income represented approximately 26.3% of total revenue as defined by net interest income plus non-interest income, compared with approximately 28.4% in Q3 2016, reflecting the higher loan-loss provision. The filing does not present a GAAP net interest margin or efficiency ratio value in the provided text.
- Total assets were $12.174 billion at September 30, 2017, up 3.1% from year-end 2016.
- Net loans were $6.134 billion, up 4.0%; total loans were $6.202 billion.
- Deposits were essentially unchanged at $8.614 billion. Non-interest-bearing demand deposits increased to $3.245 billion, while time deposits declined to $2.115 billion.
- Investment securities totaled $4.283 billion, including $4.280 billion of available-for-sale securities, primarily residential mortgage-backed securities.
- Shareholders’ equity increased 5.2% to $1.815 billion, supported primarily by retained earnings and reduced accumulated other comprehensive loss.
- Cash and cash equivalents were $290.6 million at September 30, 2017, compared with $269.2 million at December 31, 2016.
- The allowance for probable loan losses was $67.9 million, or 1.09% of total loans, compared with $64.7 million, or 1.08%, at year-end 2016.
- Non-accrual loans declined to $29.6 million from $37.2 million at December 31, 2016. Total past-due loans increased to $83.5 million from $61.4 million.
Cash flow, debt and liquidity
- For the first nine months of 2017, operating activities provided $174.5 million of cash, compared with $156.7 million in 2016.
- Investing activities used $343.0 million, primarily reflecting a $245.0 million net increase in loans and purchases of available-for-sale securities.
- Financing activities provided $189.9 million, including a $334.1 million increase in other borrowed funds, partly offset by decreases in time deposits and repurchase agreements.
- Cash and cash equivalents increased $21.4 million during the first nine months of 2017.
- Other borrowed funds, principally Federal Home Loan Bank borrowings, increased 45.6% to $1.068 billion. Management attributed the increase to operating liquidity needs, securities purchases and the termination of certain long-term repurchase agreements.
- Securities sold under repurchase agreements declined 25.1% to $378.0 million. Junior subordinated deferrable interest debentures remained $160.4 million.
- Management stated that the company maintains unused FHLB lines, a sizable high-quality securities portfolio and access to financial markets to support liquidity. FHLB borrowings are primarily short-term and are renewed at maturity.
- Regulatory capital remained strong: CET1 ratio was 16.93%, leverage ratio 14.32%, Tier 1 risk-based ratio 18.57% and total risk-based capital ratio 19.37%. Management stated that the company and its bank subsidiaries exceeded applicable Basel III requirements and qualified as well-capitalized.
Material changes versus prior comparable periods
- Net interest income increased due to higher loan balances, repositioning of the available-for-sale securities portfolio and lower interest expense on repurchase agreements.
- Loan interest income increased 12.1% in Q3 and 6.7% year to date, while total interest expense declined 10.6% in Q3 and 15.1% year to date.
- Q3 loan-loss provision increased materially from a $1.3 million credit in 2016 to a $6.6 million provision in 2017. Management attributed the comparison partly to an approximately $6 million recovery recorded in Q3 2016 and increased qualitative factors in 2017.
- Year-to-date loan-loss provision declined because historical commercial charge-off experience improved as older losses rolled out of the company’s three-year loss calculation.
- Year-to-date non-interest income declined because 2016 included approximately $2.4 million of gains from the sale of two merchant-banking investments.
- Year-to-date non-interest expense included a $5.8 million early termination fee for $200 million of long-term repurchase agreements, reducing net income by approximately $3.7 million after tax. No comparable fee was recorded in Q3 2017.
- Net income benefited from a $4.9 million tax refund received in Q2 2017 related to the company’s amended 2012 federal tax return.
- Accumulated other comprehensive loss improved to $6.5 million from $26.7 million at year-end 2016, largely reflecting changes in unrealized securities values.
- The company sold its remaining non-agency mortgage-backed securities in Q1 2017; no credit-related impairment charge was recorded in 2017, compared with $281,000 during the first nine months of 2016.
Guidance, outlook, commentary and risks
The filing provides no formal earnings or revenue guidance. Management stated that 2017 interim results are not necessarily indicative of full-year or future results and that it believes the company is appropriately positioned for interest-rate changes. The company was liability-sensitive over the first year of repricing and asset-sensitive over longer periods, creating potential exposure to changes in interest rates and funding costs.
- Hurricane Harvey affected areas served by the company. Management concluded that a specific reserve was not warranted at September 30, 2017, but included potential storm-related losses in qualitative allowance factors and continued evaluating the impact.
- Credit risks include lower real estate values, prolonged economic weakness, unemployment, lower oil prices, deterioration in commercial and transportation-related credits, and changes in collateral values.
- Past-due loans rose during the year, primarily due to relationships secured by a retail building and a water park. Several relationships involving oil and gas production, water parks and construction equipment were reclassified to substandard or otherwise placed under closer monitoring.
- Management identified competition for deposits at above-market rates and reliance on external funding sources, including FHLB borrowings, as liquidity considerations.
- Other disclosed risks include U.S.-Mexico trade and border activity, regulatory and capital changes, cybersecurity and systems risks, litigation, natural disasters, market volatility, goodwill impairment and changes in accounting or tax rules.
- Various legal proceedings remain outstanding, but management believes material losses are remote or would not be material. The filing states that no material changes occurred in previously disclosed risk factors.
- Disclosure controls were deemed effective, with no material weaknesses identified and no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether loan growth and higher interest income remain sustainable as funding costs rise and deposits face competitive pricing.
- Whether past-due, substandard and impaired loans stabilize, particularly in commercial real estate, oil and gas, transportation equipment and other collateral-sensitive exposures.
- The ultimate credit impact of Hurricane Harvey and whether qualitative reserve adjustments prove sufficient.
- The sustainability of earnings excluding the $4.9 million tax refund, the 2016 recovery comparison and other unusual items.
- The effect of increased FHLB borrowings and other external funding on liquidity, leverage and net interest margins.
- Future realized or unrealized losses in the large available-for-sale mortgage-backed securities portfolio as interest rates change.
- Execution and cost implications of the company’s technology investments, regulatory compliance requirements and stock repurchase program.
- The continuing availability and cost of FHLB financing, repurchase-agreement funding and other liquidity sources.