International Bancshares Corporation 2018 Form 10-K Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based financial holding company reporting for the fiscal year ended December 31, 2018. It owns five subsidiary banks operating across Texas and Oklahoma, with commercial, retail, mortgage, international banking and related financial services. The company operated 189 facilities and 287 ATMs in 89 communities and employed approximately 2,816 full-time and 574 part-time employees.
The filing is an annual report rather than a standalone fourth-quarter filing. Detailed financial statements and management’s discussion are incorporated by reference from the 2018 Annual Report to Shareholders; the supplied filing text does not provide a clear consolidated income statement, balance sheet or cash flow statement.
Financial metrics, liquidity and capital
- Deposits from persons and entities domiciled in Mexico represented approximately 29% of subsidiary-bank deposits in 2018, compared with 27% in 2017 and 28% in 2016.
- The holding company’s leverage ratio was 15.87% at December 31, 2018. The company and each subsidiary bank were classified as well capitalized under applicable regulations.
- Approximately $768.9 million was available for dividends from the subsidiary banks to the holding company under applicable capital rules, assuming the banks remained well capitalized.
- FDIC deposit insurance expense was $3.742 million in 2018, compared with $3.294 million in 2017 and $5.777 million in 2016.
- The company relied on deposits, repurchase agreements, Federal Home Loan Bank advances and other borrowings for liquidity. The filing does not provide clear year-end liquidity balances, loan balances, net interest income, revenue, net income, cash flow, margins, nonperforming assets or allowance coverage in the supplied text.
- Approximately $160 million of junior subordinated debentures remained outstanding at December 31, 2018. These obligations rank senior to common stock and must be serviced before common-stock dividends; deferred interest payments would also restrict common-stock dividends.
Material changes versus the prior comparable period
- The company repurchased the outstanding TARP-related warrant in the third quarter of 2018 for an aggregate purchase price of $29.005 million. The warrant expired on December 23, 2018, and its repurchase eliminated related restrictions on certain shareholder distributions and dividends.
- Mexican-domiciled deposits increased as a percentage of total subsidiary-bank deposits from 27% in 2017 to 29% in 2018.
- FDIC deposit insurance expense increased by $448,000 from 2017 to 2018.
- The filing states that goodwill was not impaired based on the October 1, 2018 assessment.
- The company continued to report effective disclosure controls and effective internal control over financial reporting. RSM US LLP issued an unqualified opinion on internal control effectiveness and the consolidated financial statements.
Outlook, risks, contingencies and unusual items
- Management identified credit losses, real-estate collateral values, local economic conditions, energy-sector weakness, interest-rate changes, liquidity access and competition as significant business risks.
- The company has meaningful exposure to Texas, Oklahoma and Mexico, including deposits from Mexican customers and lending exposure to energy-related markets. Prolonged low crude-oil prices could adversely affect borrowers, collateral values and results.
- The transition away from LIBOR could affect loans, derivatives, borrowings and other financial instruments. The company stated that the ultimate impact could not yet be assessed.
- CECL accounting under ASU 2016-13 was scheduled to become effective for the company on January 1, 2020. The company could not estimate the impact on earnings, capital or allowances and noted that a three-year regulatory-capital phase-in was available.
- Banking regulation, consumer-protection requirements, cybersecurity incidents, data breaches, severe weather, natural disasters and dependence on external funding could materially affect operations and financial condition.
- Legal proceedings were pending, but management concluded that material loss was remote or that potential damages were not material based on the information available at filing. Further developments could change that assessment.
- The company had no material seasonal portion of its business and no unresolved SEC staff comments were reported.
Important facts for investors to verify
- Review the incorporated 2018 Annual Report for consolidated revenue, net income, earnings per share, net interest margin, provision for credit losses, loan and deposit growth, cash flows and quarterly results.
- Verify year-end asset quality, including nonperforming loans, charge-offs, delinquency trends, allowance coverage and concentrations in real estate, energy and international exposures.
- Confirm the full regulatory capital ratios, liquidity profile, borrowing capacity and maturity schedule of the approximately $160 million of junior subordinated debentures.
- Assess the sustainability of common-stock dividends, including dependence on subsidiary-bank dividends and the effect of regulatory capital requirements.
- Evaluate the concentration and stability of Mexican-domiciled deposits and the potential effects of changes in cross-border banking, tax, anti-money-laundering and foreign-exchange requirements.
- Review management’s preparation for CECL implementation and the LIBOR transition, including expected effects on reserves, capital, pricing and contracts.
- Consider succession risk associated with Chairman, President and CEO Dennis E. Nixon, whom the company identified as a key executive without an employment agreement.