Business Context and Reporting Period
International Bancshares Corporation is a Texas-based bank holding company headquartered in Laredo, Texas. Through its bank subsidiaries, it provides commercial, consumer and international banking services across Texas and Oklahoma, with significant business tied to trade along the U.S.-Mexico border. The company reported one operating segment and had 191 facilities and 288 ATMs.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with balance-sheet comparisons to December 31, 2017 and income-statement comparisons to the corresponding 2017 periods. The financial statements were prepared under U.S. GAAP and include normal recurring adjustments.
Key Financial Metrics
| Metric | Three months ended September 30, 2018 | Year-over-year change | Nine months ended September 30, 2018 | Year-over-year change |
|---|---|---|---|---|
| Total interest income | $118.4 million | 10.7% | $344.8 million | 12.3% |
| Net interest income | $104.9 million | 8.2% | $306.4 million | 9.8% |
| Provision for probable loan losses | $4.3 million | Down 35.1% | $3.2 million | Down 64.7% |
| Non-interest income | $42.5 million | 2.7% | $123.8 million | 9.5% |
| Non-interest expense | $78.1 million | 8.9% | $227.6 million | 3.0% |
| Net income | $51.1 million | 28.9% | $157.4 million | 40.3% |
| Basic earnings per share | $0.77 | 28.3% | $2.38 | 40.0% |
| Diluted earnings per share | $0.77 | 30.5% | $2.36 | 40.5% |
For the third quarter, net income represented approximately 31.8% of total reported interest and non-interest income. The filing does not provide a clear net interest margin, return on assets, return on equity or efficiency ratio for the periods presented.
Financial Condition, Liquidity and Capital
- Total assets were $11.85 billion at September 30, 2018, down 2.8% from December 31, 2017.
- Total loans were $6.48 billion, up 2.0% from year-end; net loans were $6.41 billion, up 2.1%.
- Deposits were $8.65 billion, up 1.2%. Non-interest-bearing demand deposits increased $188.5 million during the first nine months, while time deposits declined $73.9 million.
- Cash and cash equivalents were $285.7 million, compared with $265.4 million at year-end.
- Available-for-sale debt securities were $3.51 billion, down from $4.12 billion at year-end. The portfolio included $3.32 billion of residential mortgage-backed securities and $189.2 million of state and political-subdivision securities.
- Other borrowed funds were $674.9 million, down 43.5% from $1.20 billion at year-end. The reduction was attributed to cash generated from securities principal paydowns and deposits.
- Junior subordinated deferrable interest debentures remained $160.4 million. Shareholders’ equity was $1.86 billion, up 1.1% from year-end.
- Capital ratios remained well above applicable minimums: CET1 was 17.37%, Tier 1 leverage was 15.53%, risk-weighted Tier 1 capital was 18.91% and total risk-weighted capital was 19.59% at September 30, 2018.
Cash Flow and Other Key Items
| Nine months ended September 30 | 2018 | 2017 |
|---|---|---|
| Net cash provided by operating activities | $178.7 million | $174.5 million |
| Net cash provided by or used in investing activities | $330.9 million provided | $343.0 million used |
| Net cash used in or provided by financing activities | $489.3 million used | $189.9 million provided |
| Increase in cash and cash equivalents | $20.3 million | $21.4 million |
Investing cash flow benefited from mortgage-backed securities principal collections of $530.0 million and was partly offset by a $168.8 million increase in loans. Financing cash flow included a $520.3 million reduction in other borrowed funds, $29.0 million spent to repurchase the outstanding common stock warrant and $21.8 million of common dividends.
Material Changes Versus Prior Comparable Period
- Net income increased materially, primarily due to higher net interest income, lower loan-loss provisions and the lower corporate tax rate resulting from the Tax Cuts and Jobs Act.
- Loan interest income increased 14.9% in the quarter and 15.7% year to date, reflecting higher loan balances and improved portfolio yields.
- Interest expense increased 35.1% in the quarter and 37.1% year to date, driven by higher borrowing costs and increased rates paid on savings and time deposits as market interest rates rose.
- Non-interest expense increased, with higher employee compensation, occupancy, technology costs and other expenses. The company also recorded higher costs associated with other real estate owned.
- The allowance for probable loan losses declined to $60.7 million from $67.7 million at year-end, and the allowance ratio declined to 0.94% of total loans from 1.07%.
- Non-accrual loans declined to $24.3 million from $54.7 million at year-end, primarily following foreclosure of a relationship secured by a water park. Total past-due loans increased to $84.2 million from $77.1 million.
- Accumulated other comprehensive loss increased to $95.2 million from $28.4 million, principally reflecting unrealized losses on available-for-sale securities as interest rates increased.
- The company adopted accounting updates for equity securities, revenue recognition and certain tax effects in accumulated other comprehensive income. The ASU 2018-02 adoption resulted in a one-time $6.0 million reclassification from accumulated other comprehensive loss to retained earnings.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal earnings or financial guidance. Management stated that current-period results are not necessarily indicative of full-year or future results and described its interest-rate position as generally appropriate. The company was liability-sensitive over shorter repricing periods and asset-sensitive over longer periods, creating exposure to changes in interest rates and funding costs.
- Management expects continued competition for deposits and has allowed some deposits to leave where competitors offered more aggressive pricing.
- Key risks include borrower credit deterioration, collateral-value changes, economic and financial-market volatility, rising funding costs, reduced FHLB or other funding availability, and changes in interest rates.
- Border-related risks include changes in U.S.-Mexico trade, tariffs, immigration policy, border crossings and potential reductions in deposits from nonresident alien individuals due to IRS reporting rules.
- Credit risk remains concentrated in commercial and commercial real estate lending. Management stated that the allowance was adequate, but acknowledged that future provisions depend on economic conditions, interest rates, portfolio performance, regulatory classifications and management estimates.
- The company reported $129.8 million of gross unrealized losses on available-for-sale debt securities at September 30, 2018, primarily due to interest-rate changes. Management stated it did not intend, and was not likely, to be required, to sell the affected securities before recovery or maturity.
- The company repurchased a TARP-related warrant for $29.0 million in the third quarter, eliminating related restrictions on certain shareholder distributions. No common shares were repurchased under the public program during the quarter.
- Legal proceedings were described as not expected to result in material losses, although management noted that developments could change its assessment. No material changes to previously disclosed risk factors were reported.
- Disclosure controls and procedures were judged effective, with no material weaknesses identified and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the strong earnings growth persists after the benefit from the 21% corporate tax rate and lower loan-loss provisions is normalized.
- The sustainability of loan growth and portfolio yields relative to rising deposit and borrowing costs.
- Trends in commercial real estate, commercial and foreign credit exposures, including past-due, impaired, watch-list and non-accrual loans.
- The adequacy of the $60.7 million loan-loss allowance as historical charge-offs roll out of the company’s three-year loss experience.
- The effect of rising interest rates on net interest income, deposit pricing, funding availability and the unrealized loss position in the securities portfolio.
- Whether deposit competition or U.S.-Mexico trade and regulatory developments affect the company’s funding base.
- The company’s continued capital strength and the treatment of trust-preferred securities and other regulatory-capital components under evolving banking rules.