International Bancshares Corporation — Q3 2022 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 cross-border activity involving Mexico. The filing covers the three and nine months ended September 30, 2022; financial statements are unaudited and presented in thousands of dollars except per-share data.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Total interest income | $145.1 million | $101.2 million | +43.4% |
| Net interest income | $135.2 million | $94.5 million | +43.1% |
| Provision for credit losses | $8.5 million | $2.8 million | +204.4% |
| Non-interest income | $54.6 million | $47.2 million | +15.7% |
| Non-interest expense | $75.2 million | $69.7 million | +7.8% |
| Net income | $83.4 million | $54.6 million | +52.7% |
| Diluted EPS | $1.34 | $0.86 | +55.8% |
| Metric | Nine months 2022 | Nine months 2021 | Change |
|---|---|---|---|
| Net interest income | $328.2 million | $276.8 million | +18.5% |
| Provision for credit losses | $13.7 million | $5.1 million | +167.5% |
| Non-interest income | $141.4 million | $181.4 million | -22.1% |
| Non-interest expense | $208.0 million | $201.9 million | +3.1% |
| Net income | $194.8 million | $197.4 million | -1.3% |
| Diluted EPS | $3.09 | $3.11 | -0.6% |
Q3 net income increased primarily because of higher interest income from securities, Federal Reserve funds and loans following Federal Reserve rate increases. The filing does not provide a clear GAAP net profit margin or net interest margin.
Balance sheet, liquidity and capital
- Total assets were $16.095 billion, up 0.3% from December 31, 2021.
- Total loans were $7.051 billion, down 2.2%; net loans were $6.932 billion, down 2.4%. Commercial, financial and agricultural loans declined, while construction and land development loans increased.
- Deposits were $12.881 billion, up 2.1%, led by increases in non-interest-bearing demand and savings or interest-bearing demand deposits. Time deposits declined 2.7%.
- Cash and cash equivalents were $3.244 billion, compared with $3.209 billion at year-end 2021.
- Securities sold under repurchase agreements increased 15.3% to $507.1 million. Other borrowed funds were $436.0 million and junior subordinated debentures were $134.6 million.
- Shareholders’ equity declined 15.3% to $1.954 billion, primarily because of $422.8 million of after-tax unrealized losses on available-for-sale securities and $51.9 million of treasury-stock purchases.
- Regulatory capital remained strong: CET1 ratio was 20.11%, leverage ratio 13.65%, Tier 1 risk-based capital ratio 20.99% and total risk-based capital ratio 22.15% at September 30, 2022. Management stated that the company and subsidiary banks exceeded applicable capital requirements.
Cash flow and credit quality
- For the first nine months, operating activities provided $288.5 million of cash, investing activities used $457.3 million and financing activities provided $203.4 million, resulting in a $34.6 million increase in cash.
- The allowance for credit losses increased to $119.2 million from $110.4 million, equal to 1.69% of total loans versus 1.53% at year-end 2021.
- Non-accrual loans declined to $1.6 million from $1.9 million at year-end 2021. Total past-due loans declined to $20.9 million from $37.5 million.
- As of October 31, 2022, approximately $54.4 million of loans had some degree of payment deferral, primarily in hospitality. Outstanding PPP loans totaled approximately $9.3 million across 223 loans and were fully SBA-guaranteed.
Material changes, outlook and risks
- Nine-month net income was slightly below the prior year because 2021 included a $42.8 million after-tax gain from the sale of a merchant-banking equity interest. Excluding that item, management stated that nine-month 2022 net income increased 26.0% from the comparable 2021 amount.
- Management attributed the quarter’s improvement to rising interest rates, a larger investment securities portfolio, higher earnings on Federal Reserve funds, recovering customer activity and expense-control initiatives. Loan demand remained slow, limiting the benefit of higher rates on floating-rate loans.
- The investment portfolio had $581.2 million of unrealized losses at September 30, 2022, primarily from interest-rate changes. Management stated that the securities were not credit-impaired and that it did not expect to be required to sell them before recovery or maturity.
- The company described itself as asset-sensitive over longer repricing periods, but had a $318.9 million negative repricing gap for assets and liabilities repricing within three months. Interest-rate changes, deposit pricing and funding costs could therefore affect future margins.
- Key risks include economic and collateral deterioration, higher credit losses, interest-rate and market volatility, deposit attrition, reduced availability of FHLB or other funding, U.S.-Mexico trade and political conditions, inflation, cybersecurity and technology failures, regulatory changes, litigation, labor costs, pandemics and potential securities or goodwill impairments.
- The board authorized up to $150 million of repurchases through March 15, 2023. During Q3, the company repurchased 283,270 shares for $11.4 million at an average price of $40.21. As of October 31, 2022, cumulative repurchases totaled 13.6 million shares costing $409.7 million.
- Management reported no material changes to previously disclosed market-risk factors, no material weaknesses in disclosure controls and no material legal proceedings; it assessed material litigation losses as remote.
Important facts for investors to verify
- Whether continued Federal Reserve rate increases offset higher deposit and wholesale funding costs and sustain net interest income growth.
- Whether loan demand recovers and whether commercial real estate, construction, hospitality and border-related exposures generate higher delinquencies or charge-offs.
- The duration, liquidity impact and capital implications of the $581.2 million unrealized available-for-sale securities loss.
- The adequacy of the $119.2 million allowance for credit losses under changing economic, interest-rate and collateral assumptions.
- The sustainability of earnings after excluding the non-recurring 2021 merchant-banking gain and considering higher credit provisions.
- The pace of share repurchases, dividend payments and the resulting effect on tangible equity and regulatory capital.