International Bancshares Corporation 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 three and nine months ended September 30, 2021. Financial statements are unaudited.
Key financial metrics
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 |
|---|
| Total interest income | $101.2 million | $100.0 million | $297.0 million | $330.2 million |
| Net interest income | $94.5 million | $91.8 million | $276.8 million | $298.5 million |
| Provision for credit losses | $2.8 million | $8.8 million | $5.1 million | $36.6 million |
| Non-interest income | $47.2 million | $40.1 million | $181.4 million | $108.8 million |
| Non-interest expense | $69.7 million | $70.1 million | $201.9 million | $220.9 million |
| Net income | $54.6 million | $42.7 million | $197.4 million | $119.1 million |
| Basic earnings per share | $0.86 | $0.68 | $3.12 | $1.86 |
| Diluted earnings per share | $0.86 | $0.67 | $3.11 | $1.86 |
- Third-quarter net income increased 27.7%; nine-month net income increased 65.8%.
- Net interest income increased 2.9% in the third quarter but decreased 7.3% for the nine-month period.
- The approximate net income margin based on net interest income plus non-interest income was 38.5% for the third quarter and 43.1% for the nine-month period. The nine-month figure was materially affected by an unusual investment gain.
- Other investment income included a $42.8 million after-tax gain from the sale of an equity interest in a merchant banking investment during the second quarter of 2021.
Balance sheet, liquidity and capital
| Balance-sheet metric | September 30, 2021 | December 31, 2020 | Change |
|---|
| Total assets | $15.68 billion | $14.03 billion | +11.7% |
| Cash and cash equivalents | $2.29 billion | $2.00 billion | +14.5% |
| Total loans | $7.40 billion | $7.54 billion | -1.8% |
| Net loans | $7.29 billion | $7.43 billion | -1.9% |
| Total investment securities | $4.56 billion | $3.09 billion | +47.6% |
| Total deposits | $12.24 billion | $10.72 billion | +14.2% |
| Shareholders’ equity | $2.29 billion | $2.18 billion | +5.3% |
- Liquidity remained strong, supported by $2.29 billion of cash, a sizable available-for-sale securities portfolio, deposit growth and access to Federal Home Loan Bank funding and repurchase markets.
- Other borrowed funds were $436.2 million, securities sold under repurchase agreements were $424.4 million, and junior subordinated deferrable interest debentures were $134.6 million.
- Capital ratios exceeded fully phased-in requirements: CET1 ratio was 19.64%, Tier 1 leverage ratio was 13.89%, risk-weighted Tier 1 capital ratio was 20.76%, and total risk-weighted capital ratio was 21.86%.
- The allowance for credit losses was $109.3 million, or 1.48% of total loans, compared with 1.45% at December 31, 2020.
Cash flow and operating changes
- For the nine months ended September 30, 2021, operating activities provided $224.4 million of cash, compared with $214.8 million in the prior-year period.
- Investing activities used $1.38 billion, primarily reflecting $2.86 billion of purchases of available-for-sale securities, partly offset by mortgage-backed security principal collections and a $116.4 million decrease in loans.
- Financing activities provided $1.45 billion, primarily from increases in non-interest-bearing and interest-bearing demand deposits.
- Cash and cash equivalents increased $290.1 million during the nine months to $2.29 billion.
- Management attributed deposit growth to customer liquidity from government stimulus and PPP programs and increased customer savings. Loan balances declined modestly while the securities portfolio expanded substantially.
Material changes versus prior comparable periods
- Profitability improved primarily because credit-loss provisions declined sharply as economic conditions stabilized or improved in certain loan segments. The provision declined 68.1% in the third quarter and 86.0% year to date.
- Non-interest income increased 17.7% in the third quarter and 66.6% year to date. The year-to-date comparison includes the $42.8 million after-tax merchant-banking investment gain and is not representative of recurring operating performance.
- Non-interest expense decreased 0.5% in the third quarter and 8.6% year to date, reflecting lower employee compensation, occupancy, depreciation and professional fees.
- Interest income and net interest income remained pressured by the low-rate environment, lower loan yields, mortgage-backed security paydowns and changes in the securities portfolio. Nine-month interest income fell 10.1%.
- Credit quality improved materially: non-accrual loans declined to $1.9 million from $19.8 million at December 31, 2020, and total past-due loans increased to $49.6 million from $38.3 million, primarily reflecting current-period aging changes.
Guidance, outlook, risks and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management states that period results are not necessarily indicative of full-year or future results.
- Management expects continued monitoring of costs, liquidity, deposit trends and interest-rate sensitivity. The company reported an asset-sensitive position, with a cumulative repricing gap of $4.32 billion and cumulative interest-sensitive assets-to-liabilities ratio of 1.57.
- COVID-19 remains a material uncertainty. As of November 1, 2021, approximately $226.8 million of loans had some degree of payment deferral, concentrated primarily in hospitality, special-use facilities and retail developments.
- As of November 1, 2021, 2,634 PPP loans totaling approximately $169.5 million remained outstanding and were fully guaranteed by the SBA.
- Key risks include credit losses, economic and real-estate conditions, interest-rate changes, reliance on deposits and wholesale funding, U.S.-Mexico trade and political conditions, regulatory changes, cybersecurity and technology failures, litigation, natural disasters and pandemic effects.
- The company repurchased 16,713 shares during the third quarter at an average price of $39.29. The board had authorized up to $50 million of repurchases through March 17, 2022, although the company is not obligated to purchase shares outside its Rule 10b5-1 plan.
- Management reported no material weaknesses in disclosure controls and no material changes affecting internal control over financial reporting. Legal proceedings were assessed as unlikely to result in material losses.
Most important facts for investors to verify
- Separate recurring earnings from the $42.8 million after-tax merchant-banking investment gain included in nine-month 2021 results.
- Assess whether lower credit-loss provisions and improved non-accrual trends persist as COVID-19 deferrals expire and economic conditions change.
- Monitor net interest margin and net interest income sensitivity to prolonged low rates, future rate increases, mortgage-backed security prepayments and the company’s asset-sensitive position.
- Review the composition and duration of the $4.56 billion securities portfolio, including unrealized losses and exposure to mortgage-backed securities.
- Track deposit concentration, including deposits from Mexico-related customers, and the availability and cost of FHLB and other funding sources.
- Confirm future PPP forgiveness activity, remaining loan deferrals and credit performance in hospitality, retail and other pandemic-sensitive sectors.
