International Bancshares Corporation — Q2 2020 Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company operating five wholly owned subsidiary banks, 187 facilities and 282 ATMs across Texas and Oklahoma. Its business focuses on commercial, consumer and international banking, including substantial cross-border activity with Mexico. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to June 30, 2019 and December 31, 2019 balance-sheet amounts.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Interest income | $113.7 million | $126.9 million | (10.4%) |
| Interest expense | $9.8 million | $15.1 million | (35.0%) |
| Net interest income | $103.9 million | $111.8 million | (7.1%) |
| Provision for credit losses | $11.0 million | $2.7 million | +312.3% |
| Non-interest income | $33.6 million | $34.4 million | (2.4%) |
| Non-interest expense | $73.9 million | $79.6 million | (7.2%) |
| Net income | $41.5 million | $50.0 million | (17.0%) |
| Basic diluted EPS | $0.66 / $0.65 | $0.76 / $0.76 | Decline |
For the six months ended June 30, 2020, net income was $76.3 million versus $101.9 million in the prior-year period, a 25.1% decrease. Net interest income declined 6.6% to $206.7 million, while provision expense increased 175.9% to $27.8 million. The filing does not provide a clear reported net interest margin or efficiency ratio for the period.
| Balance-sheet metric | June 30, 2020 | December 31, 2019 | Change |
|---|---|---|---|
| Total assets | $13.325 billion | $12.113 billion | +10.0% |
| Loans | $7.502 billion | $6.895 billion | +8.8% |
| Net loans | $7.407 billion | $6.835 billion | +8.4% |
| Total deposits | $10.036 billion | $8.826 billion | +13.7% |
| Cash and cash equivalents | $1.198 billion | $256.8 million | +366.8% |
| Shareholders’ equity | $2.142 billion | $2.118 billion | +1.1% |
| Other borrowed funds | $436.4 million | $626.5 million | (30.3%) |
The allowance for credit losses was $94.6 million, or 1.26% of loans, compared with $60.3 million, or 0.87%, at year-end 2019. Non-accrual loans were $4.1 million at June 30, 2020 versus $4.9 million at December 31, 2019. Past-due loans totaled $109.4 million, including $56.2 million that were 90 days or more past due and still accruing.
Six-month operating cash flow was $136.5 million, compared with $125.4 million in the prior-year period. Investing activities used $281.7 million, primarily reflecting a $598.2 million net increase in loans and purchases of available-for-sale securities. Financing activities provided $1.087 billion, principally from deposit growth and increased repurchase-agreement funding. Cash increased by $941.4 million to $1.198 billion.
At June 30, 2020, regulatory capital ratios remained strong: CET1 to risk-weighted assets was 18.56%, Tier 1 leverage was 15.20%, risk-weighted Tier 1 capital was 19.78% and total risk-based capital was 20.78%. Management stated that the company and its subsidiary banks met applicable capital requirements.
Material changes versus the prior comparable periods
- Profitability weakened as lower interest rates reduced interest income and net interest income, while COVID-19-related economic deterioration increased credit-loss provisions.
- Interest expense fell substantially because of lower funding costs and reduced FHLB borrowings.
- Deposits rose sharply, particularly non-interest-bearing demand deposits, as customers received stimulus and PPP proceeds and preserved liquidity.
- Loans increased, led by commercial, financial and agricultural loans, while available-for-sale securities declined from year-end.
- Non-interest income decreased modestly, principally because lower customer activity reduced deposit service charges.
- Non-interest expense declined, primarily from lower employee compensation and occupancy costs, although other real estate owned expense increased.
- The company adopted CECL, ASU 2016-13, on January 1, 2020. Adoption increased the allowance by approximately 17.2% and reduced retained earnings by approximately $8.3 million net of tax.
- Accumulated other comprehensive income increased to $41.3 million from $2.3 million at year-end, largely because of unrealized gains on available-for-sale securities.
Guidance, outlook, commentary and risks
The filing provides no formal earnings or financial guidance. Management stated that future economic conditions remain uncertain and that COVID-19 may continue to affect customer activity, fee income, loan performance, collateral values, staffing and operating costs.
The company had approximately $1.854 billion of loans with some degree of payment deferral. As of August 5, 2020, it had approved and closed 4,914 PPP loans totaling approximately $454.3 million. PPP loans were fully guaranteed by the SBA, subject to applicable program terms and forgiveness provisions.
Management described liquidity and capital as strong. It maintains cash, a sizable investment portfolio, access to FHLB funding and unused borrowing lines. The company was asset-sensitive across the disclosed repricing periods, creating potential exposure to further declines in interest rates and pressure on future net interest income.
Key risks include prolonged COVID-19 effects, borrower defaults, deterioration in commercial real estate and industry exposures, lower interest rates, reduced cross-border trade and Mexico-related activity, funding availability, regulatory and capital changes, cybersecurity and technology failures, legal proceedings, and changes in the allowance for credit losses. Management stated that material losses from current legal proceedings were remote. Disclosure controls were evaluated as effective, with no material weaknesses reported.
Important facts for investors to verify
- Whether COVID-19 payment deferrals of approximately $1.854 billion convert into higher delinquencies, non-accrual loans, charge-offs or additional CECL provisions.
- The performance and forgiveness economics of the approximately $454.3 million PPP portfolio, including fee recognition and SBA reimbursement timing.
- Whether the $94.6 million allowance for credit losses remains adequate as forecasts, collateral values and borrower conditions change.
- Future net interest income and margin sensitivity to sustained low interest rates and the company’s asset-sensitive repricing position.
- Concentration and credit trends in commercial, construction, real estate, oil and gas, vehicle floor-plan, hospitality, retail and border-related lending.
- The sustainability of the sharp deposit and cash increase, including balances associated with stimulus payments and PPP proceeds.
- Capital impacts from CECL, share repurchases and dividends; the company repurchased 740,598 shares in the second quarter for approximately $19.4 million and had $20.452 million remaining under the disclosed program at June 30.
- Any subsequent changes in regulatory capital requirements, FHLB funding availability, legal contingencies or pandemic-related operating disruptions.