International Bancshares Corporation — 1Q 2020 Form 10-Q
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company operating five wholly owned banks, 187 facilities and 284 ATMs across Texas and Oklahoma. Its business is concentrated in commercial, consumer and international banking, including significant activity with customers domiciled in Mexico. The filing covers the three months ended March 31, 2020; results are unaudited and reflect the initial effects of the COVID-19 pandemic and adoption of the current expected credit loss model.
Key financial metrics
| Metric | March 31, 2020 / 1Q 2020 | Comparable period or prior year-end |
|---|---|---|
| Total assets | $12.506 billion | $12.113 billion at December 31, 2019; up 3.2% |
| Total loans | $7.024 billion | $6.895 billion at December 31, 2019; up 1.9% |
| Net loans | $6.939 billion | $6.835 billion at December 31, 2019; up 1.5% |
| Total deposits | $9.010 billion | $8.826 billion at December 31, 2019; up 2.1% |
| Available-for-sale securities | $3.595 billion | $3.379 billion at December 31, 2019 |
| Net interest income | $102.843 million | $109.409 million in 1Q 2019; down 6.0% |
| Provision for credit losses | $16.836 million | $7.420 million in 1Q 2019; up 126.9% |
| Non-interest income | $35.130 million | $36.129 million in 1Q 2019; down 2.8% |
| Non-interest expense | $76.982 million | $72.951 million in 1Q 2019; up 5.5% |
| Net income | $34.838 million | $51.906 million in 1Q 2019; down 32.9% |
| Basic/diluted EPS | $0.54 / $0.53 | $0.79 / $0.79 in 1Q 2019 |
| Cash and cash equivalents | $354.708 million | $256.820 million at December 31, 2019 |
| Shareholders’ equity | $2.143 billion | $2.118 billion at December 31, 2019; up 1.2% |
Material changes versus prior comparable period
- Interest income declined 6.0%, primarily because Federal Reserve rate cuts reduced yields on loans and securities; interest expense also declined 6.0%.
- The credit loss provision more than doubled as COVID-19-related economic deterioration increased expected lifetime losses under the newly adopted CECL model.
- The allowance for credit losses increased 41.5% to $85.273 million, or 1.21% of total loans, from $60.278 million, or 0.87%, at December 31, 2019.
- Non-interest expense increased 5.5%, driven principally by higher carrying costs for other real estate owned, which increased to $3.002 million from $0.995 million.
- Other non-interest income fell to a $0.231 million loss from $3.948 million of income, primarily reflecting losses from an equity-method investment; service charges and banking fees increased modestly.
- Accumulated other comprehensive income increased to $64.352 million from $2.345 million, largely due to $62.007 million of after-tax unrealized gains on available-for-sale securities.
Cash flow, debt and liquidity
- Operating activities generated $56.621 million of cash, compared with $67.698 million in 1Q 2019.
- Investing activities used $245.331 million, primarily reflecting $421.017 million of purchases of available-for-sale securities and a $120.789 million net increase in loans.
- Financing activities provided $286.598 million, including deposit growth and a $101.954 million increase in other borrowed funds.
- Cash and cash equivalents increased by $97.888 million to $354.708 million.
- Other borrowed funds, principally Federal Home Loan Bank borrowings, increased 16.3% to $728.465 million. Repurchase agreements increased 12.7% to $266.472 million. Junior subordinated debentures remained $134.642 million.
- Management stated that the company maintains unused FHLB borrowing capacity and a sizable high-quality securities portfolio that can be sold or pledged for liquidity.
Guidance, outlook, risks and unusual items
- No quantitative earnings guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year or future performance.
- COVID-19 caused significant uncertainty, including potential borrower defaults, collateral-value declines, deposit changes, reduced fee income, higher expenses and employee or vendor disruptions. Hospitality, restaurants and retail-related borrowers were specifically identified as exposed.
- Approximately $1.271 billion of loans had some degree of payment deferral as of the filing. Management stated that qualifying short-term deferrals under March 2020 interagency guidance were not treated as troubled debt restructurings.
- As of May 5, 2020, the company had approved and closed 4,528 PPP loans totaling approximately $461.133 million. These loans carried a 1% interest rate, were fully SBA-guaranteed and included forgiveness provisions.
- The company adopted ASU 2016-13 on January 1, 2020. The adoption increased the allowance by approximately 17.2% and reduced retained earnings by approximately $8.3 million after tax.
- Non-accrual loans declined to $3.881 million from $4.886 million at December 31, 2019, while loans with payment deferrals and broader COVID-19 credit exposure were substantially larger.
- The board authorized up to $50 million of additional repurchases through March 16, 2021. The company repurchased 1,200,614 shares in March for $29.371 million, or $24.46 per share.
- Management reported that material legal losses were remote. Disclosure controls were effective, with no material weaknesses reported.
- The filing contains inconsistent regulatory capital figures: the financial statement notes report March 31 CET1 and leverage ratios of 18.23% and 16.03%, while the MD&A reports 17.61% and 11.75%, respectively. The filing text does not provide a clear explanation for the discrepancy.
Most important facts for investors to verify
- Reconcile the inconsistent March 31, 2020 regulatory capital ratios and confirm the applicable ratios for the company and each subsidiary bank.
- Assess the credit quality and ultimate loss exposure associated with the approximately $1.271 billion of deferred-payment loans, particularly commercial real estate, construction, hospitality, restaurant and retail exposures.
- Monitor subsequent CECL provisions, non-accrual loans, charge-offs, criticized loans and allowance coverage as the pandemic’s effects develop.
- Evaluate the sustainability of net interest income and margins in the low-rate environment, including the company’s asset-sensitive repricing position.
- Verify PPP loan volumes, forgiveness-related fee recognition, government-guarantee terms and any operational or compliance costs.
- Review liquidity needs and reliance on FHLB borrowings, repurchase agreements and securities monetization if deposits or market funding conditions deteriorate.
- Confirm the impact of continued share repurchases and the $0.55-per-share dividend on capital and liquidity during the economic downturn.