International Bancshares Corporation: Q3 2019 Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company operating through five subsidiary banks. It provides commercial, consumer and international banking services across Texas and Oklahoma, with substantial activity involving customers domiciled in Mexico. The filing covers the three and nine months ended September 30, 2019; financial statements are unaudited and presented in thousands of dollars, except per-share data.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Change |
|---|
| Total interest income | $124.1 million | $118.4 million | 4.9% |
| Net interest income | $109.2 million | $104.9 million | 4.1% |
| Provision for loan losses | $5.3 million | $4.3 million | 23.3% |
| Non-interest income | $42.7 million | $42.5 million | 0.5% |
| Non-interest expense | $81.1 million | $78.1 million | 3.8% |
| Net income | $51.4 million | $51.1 million | 0.7% |
| Basic EPS | $0.79 | $0.77 | 2.6% |
| Diluted EPS | $0.78 | $0.77 | 1.3% |
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|
| Net interest income | $330.4 million | $306.4 million | 7.8% |
| Provision for loan losses | $15.4 million | $3.2 million | 378.3% |
| Non-interest income | $113.2 million | $123.8 million | (8.5%) |
| Non-interest expense | $233.6 million | $227.6 million | 2.7% |
| Net income | $153.4 million | $157.4 million | (2.6%) |
| Basic EPS | $2.34 | $2.38 | (1.7%) |
| Diluted EPS | $2.33 | $2.36 | (1.3%) |
- Q3 net margin, calculated as net income divided by total interest income plus non-interest income, was approximately 30.8%; the comparable 2018 figure was approximately 31.8%.
- Total assets were $12.0 billion at September 30, 2019, up 0.8% from December 31, 2018.
- Total loans were $6.9 billion, up 5.1% from year-end 2018; net loans were $6.8 billion, up 5.2%.
- Deposits were $8.8 billion, up 1.3%. Non-interest-bearing demand deposits increased to $3.6 billion from $3.5 billion.
- Cash and cash equivalents were $286.5 million, compared with $316.8 million at December 31, 2018.
- Available-for-sale debt securities totaled $3.2 billion at fair value, primarily residential mortgage-backed securities.
- Shareholders’ equity was $2.1 billion, up 6.6% from year-end 2018. Accumulated other comprehensive income improved to $4.6 million from a $54.6 million loss, primarily due to unrealized gains on available-for-sale securities.
- Q3 efficiency ratio, calculated from reported non-interest expense divided by net interest income plus non-interest income, was approximately 53.4%, compared with 53.0% in Q3 2018.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $211.2 million, compared with $178.7 million in the prior-year period.
- Investing activities used $92.3 million, primarily reflecting a $372.1 million increase in loans and $380.1 million of purchases of available-for-sale securities, partly offset by mortgage-backed-security principal collections of $566.5 million.
- Financing activities used $149.1 million. The principal uses were a $249.1 million reduction in other borrowed funds, $25.8 million of debt redemption, $32.8 million of common dividends and $17.8 million of treasury-stock purchases.
- Other borrowed funds declined 35.3% to $456.6 million, and junior subordinated debentures declined 16.1% to $134.6 million following redemption of $25.0 million of debentures in May 2019.
- Management stated that liquidity is supported by deposits, Federal Home Loan Bank borrowing capacity, repurchase agreements and a sizable investment portfolio. The filing does not provide a specific unused borrowing capacity.
- Regulatory capital remained strong: CET1 ratio was 17.98%, Tier 1 leverage ratio was 16.06%, risk-weighted Tier 1 capital ratio was 19.20% and total capital ratio was 19.85% at September 30, 2019.
Material changes versus comparable periods
- Loan growth increased interest income and net interest income, but higher funding costs increased interest expense 10.4% in Q3 and 16.1% year to date. Savings and time-deposit expense rose materially as the company increased deposit rates following Federal Reserve rate increases and competitive pressure.
- Year-to-date earnings declined despite higher net interest income because the loan-loss provision increased by $12.2 million and non-interest income decreased by $10.5 million.
- Non-interest income was affected by a $3.7 million after-tax impairment of an equity investment and the absence of prior-year income from a real estate development partnership.
- The allowance for probable loan losses decreased to $59.9 million from $61.4 million, or 0.87% of total loans versus 0.94% at year-end 2018. Non-accrual loans declined to $12.2 million from $15.8 million.
- Past-due loans increased to $116.6 million from $75.8 million at year-end 2018, driven primarily by certain commercial real estate and construction relationships, although loans 90 days or more past due and still accruing declined.
- The company repurchased 516,973 shares during Q3 for $17.7 million at an average price of $34.22 per share. The remaining authorization under the program was approximately $32.2 million at September 30, 2019.
Guidance, outlook, commentary, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management cautioned that quarterly and year-to-date results are not necessarily indicative of full-year or future results.
- Management reported that it was asset-sensitive to interest-rate changes and believed its interest-rate position was appropriate, but noted that repricing assumptions and customer behavior can change quickly.
- A significant credit event involved a car-dealership relationship affected by alleged insider fraud, bankruptcy and deterioration of a debtor-in-possession plan. The relationship was placed on non-accrual status, a $9.5 million specific reserve was recorded, and approximately $9.5 million was charged off after foreclosure. This was the principal driver of the year-to-date increase in provision expense.
- Management expects the January 1, 2020 adoption of the current expected credit loss standard, ASC 326, but had not estimated its effect. The impact may depend materially on loan mix, portfolio quality, economic conditions and forecasts at adoption.
- Key disclosed risks include economic and credit deterioration, collateral-value declines, interest-rate and funding-cost changes, competition for deposits, U.S.-Mexico trade and border activity, regulatory and capital changes, cybersecurity and system failures, litigation, goodwill impairment and changes in reserve requirements.
- Management stated that material legal losses were considered remote and that disclosure controls were effective with no material weaknesses. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the elevated past-due-loan balance and commercial real estate concentrations lead to additional charge-offs or provisions.
- The final cumulative effect of CECL adoption on January 1, 2020, including any effect on retained earnings and regulatory capital.
- The sustainability of loan growth and net interest income as deposit pricing remains competitive and interest rates change.
- The extent to which reduced non-interest income, investment impairments and higher operating costs affect full-year earnings.
- Liquidity capacity and reliance on deposits, FHLB funding and pledged securities, including the amount of unused borrowing capacity.
- Future share repurchases, dividend payments and their effect on capital and per-share results.
