International Bancshares Corporation — 2Q 2019 Form 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 activity involving customers and deposits domiciled in Mexico. The filing covers the three and six months ended June 30, 2019; financial statements are unaudited and presented in thousands of dollars except per-share data.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Interest income | $126.9 million | $115.1 million | $250.9 million | $226.5 million |
| Net interest income | $111.8 million | $102.3 million | $221.2 million | $201.5 million |
| Provision for probable loan losses | $2.7 million | Credit of $2.7 million | $10.1 million | Credit of $1.1 million |
| Non-interest income | $34.4 million | $42.3 million | $70.5 million | $81.3 million |
| Non-interest expense | $79.6 million | $80.6 million | $152.6 million | $149.5 million |
| Net income | $50.0 million | $52.9 million | $101.9 million | $106.3 million |
| Basic diluted EPS | $0.76 / $0.76 | $0.80 / $0.79 | $1.55 / $1.55 | $1.61 / $1.59 |
Net income declined 5.4% in the quarter and 4.1% year to date. Net interest income increased 9.3% and 9.7%, respectively, supported by loan growth and higher loan yields, but was more than offset by higher credit-loss provisions and lower non-interest income. The reported efficiency ratio was approximately 54.5% for the quarter and 52.3% year to date, based on non-interest expense divided by net interest income plus non-interest income.
| Balance-sheet metric | June 30, 2019 | December 31, 2018 | Change |
|---|---|---|---|
| Total assets | $12.227 billion | $11.872 billion | +3.0% |
| Net loans | $6.784 billion | $6.500 billion | +4.4% |
| Total deposits | $8.829 billion | $8.697 billion | +1.5% |
| Other borrowed funds | $808.4 million | $705.7 million | +14.6% |
| Junior subordinated debentures | $134.6 million | $160.4 million | -16.1% |
| Shareholders’ equity | $2.060 billion | $1.940 billion | +6.2% |
Cash and cash equivalents were $321.1 million at June 30, 2019, compared with $316.8 million at year-end 2018. Six-month operating cash flow was $125.4 million, while investing activities used $309.3 million, primarily due to purchases of available-for-sale securities and loan growth. Financing activities provided $188.2 million, including deposit and borrowing increases. The company paid $32.8 million in common dividends, or $0.50 per share, during the first six months.
The allowance for probable loan losses was $58.2 million, or 0.85% of total loans, versus $61.4 million, or 0.94%, at December 31, 2018. Non-accrual loans were $15.7 million, essentially unchanged from $15.8 million at year-end. Past-due loans totaled $36.1 million, down from $75.8 million at year-end, largely because of foreclosure activity on a troubled relationship.
Regulatory capital remained strong: the CET1 ratio was 17.82%, the Tier 1 leverage ratio was 16.03%, the risk-weighted Tier 1 ratio was 19.04%, and the total risk-based capital ratio was 19.67%. Management stated that the company and its subsidiary banks met all applicable capital requirements.
Material changes versus the prior comparable period
- Loan interest income increased 14.6% in the quarter and 15.8% year to date, reflecting higher loan balances and yields.
- Interest expense increased 17.9% in the quarter and 19.3% year to date, primarily due to higher deposit and borrowing costs following Federal Reserve rate increases.
- Non-interest income decreased 18.6% in the quarter and 13.2% year to date. The 2019 results included a $3.7 million after-tax impairment of an equity investment, while 2018 benefited from income from a real estate development partnership.
- The company recorded a $9.5 million charge-off related to a commercial relationship secured by car-dealership real estate. The relationship deteriorated after alleged significant insider fraud led to dealership bankruptcies and the failure of a debtor-in-possession plan sponsor to assume accrued interest obligations.
- Management foreclosed on the related real estate during the second quarter. The event contributed materially to the higher loan-loss provision, although the allowance declined overall after the charge-off.
- On May 7, 2019, the company redeemed $25.0 million of junior subordinated debentures.
- Effective January 1, 2019, the company adopted lease accounting guidance and recorded approximately $6.4 million of right-of-use assets and lease liabilities; management stated that the adoption did not materially affect the financial statements.
- The board authorized repurchases of up to $50 million of common stock through April 9, 2020. Only 1,953 shares were repurchased during the second quarter, and approximately $49.9 million remained available under the program at June 30, 2019.
Guidance, outlook, management commentary and risks
The filing does not provide quantitative earnings or revenue guidance. Management stated that operating results for the quarter and six months are not necessarily indicative of full-year results. Management views the company as asset-sensitive to interest-rate changes and stated that it is monitoring funding costs, deposit competition, loan growth and repricing characteristics.
Liquidity is supported by deposits, FHLB borrowings, repurchase agreements, a sizable investment portfolio and unused FHLB credit lines. Management noted that deposit competition is intense and that certain deposits have left because of competitors’ aggressive pricing. FHLB borrowings are primarily short term and are renewed at maturity; if unavailable, management expects unpledged available-for-sale securities could provide repayment liquidity.
Key risks include economic and collateral-value deterioration, interest-rate and financial-market volatility, deposit pricing and funding availability, U.S.-Mexico trade and border activity, regulatory and capital changes, cybersecurity and technology failures, legal and regulatory proceedings, goodwill impairment, and changes in loan-loss estimates. The company reported no material changes to previously disclosed risk factors, no material weaknesses in disclosure controls, and no legal matter for which a material loss was considered probable.
Important facts for investors to verify
- Assess whether the $9.5 million car-dealership-related charge-off represents a contained event or signals broader commercial real-estate and commercial-credit risk.
- Monitor future provisions, charge-offs, non-accrual loans, past-due loans and allowance coverage as the loan portfolio continues to grow.
- Verify the sustainability of net interest income growth against rising deposit and wholesale funding costs.
- Review the $3.7 million equity-investment impairment and determine whether additional investment or partnership losses are possible.
- Evaluate reliance on FHLB borrowings and deposit pricing, including the concentration of deposits from customers domiciled in Mexico.
- Confirm that strong reported regulatory capital ratios remain above applicable requirements after future accounting, credit and regulatory changes.
- Consider the effect of the authorized share-repurchase program and $0.50-per-share dividend on capital deployment and liquidity.