International Bancshares Corporation — Q3 2023 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 wholly owned banks, it provides commercial, consumer and international banking services across Texas and Oklahoma, with significant activity involving customers domiciled in Mexico. The filing covers the unaudited three and nine months ended September 30, 2023, compared primarily with the same periods of 2022 and, for balance-sheet items, December 31, 2022.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Total interest income | $204.2 million | $145.1 million | +40.7% |
| Net interest income | $167.3 million | $135.2 million | +23.7% |
| Credit loss expense | $10.5 million | $8.5 million | +22.9% |
| Non-interest income | $45.4 million | $54.6 million | -16.9% |
| Non-interest expense | $71.2 million | $75.2 million | -5.3% |
| Net income | $103.3 million | $83.4 million | +23.9% |
| Diluted EPS | $1.66 | $1.34 | +23.9% |
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|---|---|---|
| Net interest income | $499.0 million | $328.2 million | +52.0% |
| Credit loss expense | $27.9 million | $13.7 million | +102.9% |
| Non-interest income | $123.4 million | $141.4 million | -12.7% |
| Non-interest expense | $206.8 million | $208.0 million | -0.6% |
| Net income | $305.4 million | $194.8 million | +56.8% |
| Diluted EPS | $4.91 | $3.09 | +58.9% |
The filing does not provide a clear net interest margin, return on assets or return on equity for the periods presented. Net income as a percentage of net interest income plus non-interest income was approximately 48.5% in Q3 2023, compared with approximately 43.9% in Q3 2022; this is not a reported GAAP margin.
Balance Sheet, Liquidity and Capital
- Total assets were $14.91 billion at September 30, 2023, down 3.8% from December 31, 2022.
- Total loans were $7.90 billion, up 6.3%; net loans were $7.75 billion, up 6.1%. Commercial and commercial real estate loans represented the largest exposures.
- Deposits were $11.92 billion, down 5.9%. Non-interest-bearing demand deposits declined to $5.22 billion from $5.85 billion, while time deposits increased to $2.34 billion from $2.07 billion.
- Cash and cash equivalents declined to $698.6 million from $2.09 billion at year-end 2022. Nine-month cash flow was negative $1.39 billion, driven principally by securities purchases, loan growth and deposit outflows.
- Operating cash flow was $341.7 million; investing cash flow was negative $952.5 million; financing cash flow was negative $778.3 million.
- Securities sold under repurchase agreements increased 17.0% to $504.3 million. Other borrowed funds were $10.8 million, and junior subordinated deferrable interest debentures were $108.9 million, down from $134.6 million after a $25 million redemption in April 2023.
- Shareholders’ equity increased 7.3% to $2.19 billion, primarily from retained earnings, despite accumulated other comprehensive loss of $545.2 million, largely reflecting unrealized available-for-sale securities losses.
- Reported September 30, 2023 capital ratios were strong: CET1 ratio 20.97%, Tier 1 leverage ratio 16.75%, risk-weighted Tier 1 capital ratio 21.65% and total risk-based capital ratio 22.89%. Management stated that the company and subsidiary banks exceeded applicable capital requirements.
Material Changes Versus Prior Period
- Higher interest rates and larger loan and investment portfolios drove substantial growth in interest income and net interest income.
- Interest expense increased sharply as the company paid more on savings and time deposits and repurchase agreements. Q3 interest expense rose 273.3%; nine-month interest expense rose 298.8%.
- Non-interest income declined because of a loss on a merchant banking investment and the absence of certain property-sale gains recognized in 2022.
- Non-interest expense decreased modestly through cost controls, lower occupancy expense and lower other expenses, partly offset by higher employee compensation, professional fees, deposit insurance assessments and software costs.
- The allowance for credit losses increased 18.3% to $149.0 million, or 1.89% of total loans versus 1.70% at year-end 2022. Management increased certain qualitative loss factors because of economic uncertainty and recession concerns.
- Non-accrual loans decreased to $42.0 million from $51.6 million at year-end 2022, but past-due loans increased to $67.4 million from $18.0 million. The increase in loans past due 90 days or more was attributed principally to oil-and-gas-related collateral and a commercial property loan, both on non-accrual.
- Available-for-sale securities increased to $4.69 billion in fair value from $4.42 billion at year-end, while unrealized losses increased to $696.3 million from $605.3 million.
Outlook, Commentary, Risks and Unusual Items
- Management expects economic conditions to remain uncertain and continues to monitor deposit pricing, liquidity, interest-rate sensitivity, efficiency and overhead burden.
- The company reported an asset-sensitive interest-rate position. Management believes this supports net interest income in a rising-rate environment, but net interest income could contract if rates decline or deposit costs rise faster than asset yields.
- Management cited elevated risks from inflation, higher interest rates, potential recession, increasing capitalization rates, elevated office vacancies, rising apartment vacancies and borrower debt-service pressure, particularly for large loans and commercial real estate.
- Deposit competition and customer activity caused deposit runoff. Management may allow some deposits to leave when competitor pricing exceeds levels it is willing to pay, while relying on significant liquidity, securities collateral and unused FHLB capacity.
- Banking-industry failures and reduced depositor confidence could increase deposit outflows, liquidity needs, funding costs and regulatory scrutiny. Additional legislation or regulatory requirements could increase operating and capital costs.
- Other disclosed risks include U.S.-Mexico trade and political conditions, foreign-customer deposit changes, credit losses, securities impairments, cybersecurity, technology failures, regulatory examinations, litigation, goodwill impairment and changes in accounting or capital rules.
- The board authorized up to $124 million of repurchases through March 15, 2024. The company repurchased 2,000 shares in Q3 at an average price of $42.05. Total repurchases under all programs were 13.7 million shares costing $414.3 million as of October 30, 2023.
- Management stated that material loss from existing legal proceedings is remote, although proceedings remain subject to further developments. No material subsequent events were identified through issuance of the financial statements.
- The company adopted ASU 2022-02 effective January 1, 2023; management reported no significant financial-statement impact and no qualifying borrower modifications during the first nine months of 2023.
Most Important Facts for Investors to Verify
- Whether deposit declines and the shift toward higher-cost time deposits persist, and how they affect liquidity, funding costs and net interest margin.
- Whether the elevated allowance for credit losses adequately covers risks in commercial, construction, commercial real estate and oil-and-gas-related loans.
- Trends in past-due, non-accrual, watch-list and collateral-dependent loans, including the adequacy and recency of collateral valuations.
- The duration, unrealized losses and liquidity value of the available-for-sale securities portfolio, particularly mortgage-backed securities.
- Cash availability, unused FHLB and other funding capacity, pledged securities, repurchase-agreement exposure and sensitivity to further deposit outflows.
- The effect of future interest-rate changes on asset yields, deposit pricing, net interest income and the company’s asset-sensitive position.
- Whether strong regulatory capital ratios remain above required buffers after credit losses, securities losses, dividends and share repurchases.
- Potential changes in banking regulation, deposit insurance assessments, capital standards and supervisory requirements following 2023 banking-sector stress.