International Bancshares Corporation — Q1 2022 Form 10-Q
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company operating five subsidiary banks and one reportable segment. 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 months ended March 31, 2022, compared with the three months ended March 31, 2021; balance-sheet comparisons are primarily with December 31, 2021. Dollar amounts are in thousands unless otherwise stated.
Financial performance and condition
| Metric | Q1 2022 | Q1 2021 or prior period | Change |
|---|---|---|---|
| Total interest income | $96,432 | $97,874 | (1.5%) |
| Interest expense | $6,386 | $6,865 | (7.0%) |
| Net interest income | $90,046 | $91,009 | (1.1%) |
| Provision for credit losses | $1,481 | $1,192 | 24.2% |
| Non-interest income | $43,512 | $36,237 | 20.1% |
| Non-interest expense | $64,118 | $62,185 | 3.1% |
| Income before taxes | $67,959 | $63,869 | 6.4% |
| Net income | $53,493 | $50,771 | 5.4% |
| Basic and diluted EPS | $0.84 | $0.80 | 5.0% |
| Net cash provided by operating activities | $79,097 | $95,505 | (16.1%) |
At March 31, 2022, total assets were $16.137 billion, up 0.6% from December 31, 2021. Total loans were $7.048 billion, down 2.2%, while net loans were $6.938 billion, down 2.3%. Deposits increased 1.4% to $12.795 billion. Cash and cash equivalents increased to $3.448 billion from $3.209 billion.
Shareholders’ equity declined 7.0% to $2.148 billion, primarily because accumulated other comprehensive loss increased to $205.136 million from $31.980 million. The principal driver was a $173.156 million after-tax unrealized loss on available-for-sale securities, largely reflecting higher market interest rates rather than credit deterioration.
The allowance for credit losses was $110.227 million, or 1.56% of total loans, compared with $110.374 million, or 1.53%, at year-end 2021. Non-accrual loans were $1.930 million, compared with $1.921 million at December 31, 2021. Total past-due loans were $20.840 million, down from $37.463 million.
Available-for-sale debt securities totaled $4.142 billion at fair value, including $4.050 billion of residential mortgage-backed securities. Gross unrealized losses on available-for-sale debt securities were $265.529 million. Management concluded that the losses were primarily interest-rate-related and not credit-related.
Funding included $490.091 million of securities sold under repurchase agreements, $436.090 million of other borrowed funds, and $134.642 million of junior subordinated debentures. Regulatory capital remained strong: CET1 to risk-weighted assets was 20.06%, Tier 1 leverage was 13.87%, risk-weighted Tier 1 capital was 21.12%, and total risk-based capital was 22.24% at March 31, 2022.
Material changes versus comparable periods
- Net income increased 5.4%, supported primarily by higher fee income and property-sale gains.
- Non-interest income increased $7.275 million, led by a 15.8% increase in deposit service charges and a 150.5% increase in other income.
- Loan interest income declined 11.5%, reflecting the smaller loan portfolio. Taxable investment-security income increased 170.6%.
- Net interest income decreased modestly despite lower funding costs, as the decline in loan interest income exceeded the benefit from lower interest expense.
- Non-interest expense increased 3.1%, primarily from inflation-related wage and other expense pressures; occupancy expense increased 11.7% and employee compensation increased 3.2%.
- Operating cash flow declined to $79.097 million from $95.505 million. Investing activities used $26.710 million, principally due to $362.746 million of available-for-sale security purchases, partly offset by mortgage-backed-security principal collections and a decrease in loans. Financing activities provided $186.570 million.
- Deposits grew while loans contracted, increasing liquidity but reducing loan deployment. The company remained asset-sensitive over longer repricing periods and reported a cumulative repricing gap of $3.379 billion.
Guidance, outlook, commentary, risks and unusual items
The filing provides no quantitative earnings or revenue guidance. Management stated that future economic conditions remain uncertain and that Q1 results are not necessarily indicative of full-year 2022 results. Management expects to continue monitoring interest-rate sensitivity, funding costs, operating efficiency, liquidity and credit quality.
COVID-19, inflation, supply-chain disruption, changing interest rates and economic conditions remain relevant risks. As of May 2, 2022, approximately $114.705 million of loans had some degree of payment deferral, primarily in hospitality and special-use facilities. The company had 590 outstanding PPP loans totaling approximately $35.793 million, fully guaranteed by the SBA.
The company reported strong liquidity supported by deposits, a sizable investment portfolio, FHLB access and unused borrowing capacity. It stated that it could use unpledged available-for-sale securities to address repayment of FHLB borrowings if renewal were unavailable.
The board increased the stock-repurchase authorization to $150 million for the period beginning March 15, 2022 and ending March 15, 2023. First-quarter repurchases totaled 83,066 shares for $3.380 million. The company paid a quarterly dividend of $0.60 per share.
Legal proceedings were considered unlikely to result in material losses, although management noted that developments could change its assessment. Disclosure controls were effective, no material weaknesses were identified, and no material changes to internal control over financial reporting were reported.
Most important facts for investors to verify
- Whether the significant unrealized loss on the securities portfolio remains primarily interest-rate-related and does not develop into credit impairment or materially constrain liquidity.
- Whether loan balances stabilize or continue declining, particularly in commercial and real-estate categories, and whether loan growth resumes as rates rise.
- Whether deposit growth persists and remains sufficient to fund operations without increased reliance on FHLB borrowings or repurchase agreements.
- Whether inflation and labor costs continue to outpace growth in fee income and net interest income.
- Whether non-interest income gains from branch-property sales are recurring or primarily one-time items.
- Whether deferred-payment loans, PPP exposures and pandemic-sensitive borrowers lead to higher non-accrual loans, charge-offs or allowance requirements.
- The effect of future interest-rate increases on the company’s asset-sensitive balance sheet, securities valuations, net interest income and accumulated other comprehensive loss.
- Whether capital ratios remain well above regulatory minimums while dividends and stock repurchases continue.