International Bancshares Corporation — 2018 Q1 Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company operating through banking subsidiaries in South, Central and Southeast Texas and Oklahoma. It provides commercial, consumer and international banking services, with significant activity supporting trade along the U.S.-Mexico border. The unaudited filing covers the three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017 and December 31, 2017 balance-sheet amounts.
Key financial metrics
| Metric | Q1 2018 | Comparable period / prior date | Change |
|---|---|---|---|
| Interest income | $111.4 million | $97.0 million | 14.9% |
| Interest expense | $12.1 million | $9.2 million | 31.2% |
| Net interest income | $99.3 million | $87.7 million | 13.1% |
| Provision for probable loan losses | $1.7 million | $1.7 million | (2.2%) |
| Non-interest income | $39.0 million | $37.7 million | 3.3% |
| Non-interest expense | $68.9 million | $75.6 million | (8.9%) |
| Income before taxes | $67.7 million | $48.1 million | 40.6% |
| Net income | $53.4 million | $32.0 million | 66.9% |
| Basic / diluted EPS | $0.81 / $0.80 | $0.48 / $0.48 | 68.8% / 66.7% |
| Cash flow from operating activities | $53.2 million | $64.4 million | Decrease |
| Cash and cash equivalents | $254.6 million | $265.4 million at Dec. 31, 2017 | Decrease |
| Total assets | $12.07 billion | $12.18 billion at Dec. 31, 2017 | (0.9%) |
| Net loans | $6.39 billion | $6.28 billion at Dec. 31, 2017 | 1.7% |
| Total deposits | $8.85 billion | $8.54 billion at Dec. 31, 2017 | 3.6% |
| Shareholders’ equity | $1.83 billion | $1.84 billion at Dec. 31, 2017 | (0.4%) |
Net income benefited from higher loan balances and loan yields, reduced non-interest expense, and a lower effective tax rate following the Tax Cuts and Jobs Act. The filing states that income tax expense declined by approximately $9.5 million because the federal corporate tax rate decreased from 35% to 21%. The filing does not provide a clearly stated net interest margin or return on average assets.
Material changes versus prior comparable period
- Loan interest income increased 16.5%, reflecting higher loan volume and overall loan portfolio yields.
- Interest expense increased 31.2%, primarily because Federal Reserve rate increases raised the cost of other borrowings, particularly FHLB borrowings.
- Non-interest expense declined largely because Q1 2017 included a $5.8 million early termination fee related to long-term repurchase agreements. Q1 2018 also benefited from lower other-real-estate-owned expenses and professional fees.
- Non-interest income rose modestly. Banking service charges increased, while securities transaction income fell to zero from $0.9 million in Q1 2017.
- Investment securities declined to $3.90 billion from $4.15 billion at year-end 2017, while deposits increased by $310.0 million.
- Other borrowed funds declined 30.4% to $831.6 million, and repurchase agreements declined 26.8% to $259.0 million.
- The allowance for probable loan losses declined to $67.2 million from $67.7 million, equal to 1.04% of total loans versus 1.07% at year-end.
- Accumulated other comprehensive loss increased to $68.4 million from $28.4 million, primarily reflecting unrealized losses on available-for-sale securities. Comprehensive income was $13.5 million versus $44.8 million in Q1 2017.
Liquidity, capital, credit quality and unusual items
- Operating cash flow was $53.2 million. Investing activities provided $84.1 million, primarily because of securities cash flows, while financing activities used $148.0 million due mainly to reductions in other borrowings and repurchase agreements.
- Liquidity sources include deposits, FHLB borrowings, repurchase agreements, large certificates of deposit and the sizable available-for-sale securities portfolio. Management stated that the banks maintain unused FHLB lines and could use unpledged securities if FHLB borrowings were not renewed.
- The company reported strong regulatory capital: CET1 ratio of 17.16%, Tier 1 leverage ratio of 14.68%, risk-weighted Tier 1 ratio of 18.74%, and total risk-weighted capital ratio of 19.51%. Management stated that the company and its bank subsidiaries exceeded applicable Basel III requirements and were well-capitalized.
- Total non-accrual loans increased to $58.6 million from $54.7 million at December 31, 2017. Total impaired loans were $66.8 million, and troubled debt restructurings were $16.3 million.
- Management identified a specific reserve related to an impaired water-park relationship classified as Watch-List Substandard. Credit performance remains exposed to real-estate collateral values, economic conditions, unemployment and border-related risks.
- The company adopted ASU 2016-01, causing changes in equity securities to be recorded in net income rather than other comprehensive income. It also adopted ASC 606, which did not have a significant reported impact.
- The company paid a $0.33-per-share dividend on April 16, 2018. No common-stock repurchases occurred during Q1 2018, although the board renewed authorization to purchase up to $40 million through April 9, 2019.
- The company had no material recognizable or non-recognizable subsequent events reported through issuance of the financial statements. Legal proceedings were considered unlikely to result in a material loss, although developments could change management’s assessment.
Guidance, outlook and risks
The filing provides no formal quantitative earnings, revenue or margin guidance. Management stated that Q1 results are not necessarily indicative of full-year or future results and that it believes the company is appropriately positioned for interest-rate changes. The company was liability-sensitive in the earliest repricing period and asset-sensitive over longer periods.
Principal risks include economic weakness affecting borrowers and collateral values, interest-rate and funding-cost volatility, competition for deposits, reduced FHLB or other funding availability, U.S.-Mexico trade and immigration developments, changes in banking and tax regulation, cybersecurity and system risks, potential goodwill impairment, regulatory examinations, changes in reserve estimates, litigation, natural disasters and political instability in the United States or Mexico.
Most important facts for investors to verify
- Whether loan growth and higher loan yields can offset rising deposit and wholesale funding costs.
- Trends in non-accrual, impaired, past-due and Watch-List Substandard loans, especially commercial real-estate exposures and the water-park relationship.
- Whether the allowance for probable loan losses remains adequate as economic, interest-rate and collateral conditions change.
- The sustainability of the lower tax rate and the extent to which Q1 2018 earnings benefited from the 2017 tax-law change and the absence of the prior-year repurchase-agreement termination fee.
- The composition, duration and unrealized-loss exposure of the available-for-sale securities portfolio.
- Deposit pricing pressure and continued reliance on FHLB borrowings and other wholesale funding.
- The company’s ability to maintain its reported capital ratios while paying dividends and potentially repurchasing shares.