International Bancshares Corporation — Q1 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 three months ended March 31, 2023; financial statements are unaudited and the company operates as one reportable segment.
Key Financial Metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable / December 31, 2022 |
|---|---|---|
| Total assets | $15.135 billion | $15.501 billion at December 31, 2022 |
| Total loans | $7.532 billion | $7.431 billion at December 31, 2022 |
| Deposits | $12.281 billion | $12.660 billion at December 31, 2022 |
| Investment securities | $4.869 billion | $4.427 billion at December 31, 2022 |
| Cash and cash equivalents | $1.195 billion | $2.088 billion at December 31, 2022 |
| Net interest income | $165.185 million | $90.046 million in Q1 2022 |
| Provision for credit losses | $8.587 million | $1.481 million in Q1 2022 |
| Non-interest income | $40.362 million | $43.512 million in Q1 2022 |
| Non-interest expense | $68.029 million | $64.118 million in Q1 2022 |
| Net income | $101.643 million | $53.493 million in Q1 2022 |
| Basic / diluted EPS | $1.64 / $1.63 | $0.84 / $0.84 in Q1 2022 |
| Shareholders’ equity | $2.156 billion | $2.045 billion at December 31, 2022 |
- Total interest income increased 95.1% year over year to $188.149 million, led by higher loan, investment-security and Federal Reserve-related interest income.
- Total interest expense increased 259.6% to $22.964 million, primarily reflecting higher costs on savings deposits, time deposits, repurchase agreements and subordinated debentures.
- Net income increased 90.0% year over year. Based on reported net income divided by total interest income plus non-interest income, the implied net-income conversion was approximately 44.5% in Q1 2023 versus approximately 38.3% in Q1 2022; the filing does not present a standard net profit margin based on a defined revenue measure.
- The allowance for credit losses was $133.557 million, or 1.77% of total loans, compared with 1.70% at year-end 2022.
- Non-accrual loans were $51.632 million at March 31, 2023, broadly unchanged from $51.648 million at December 31, 2022. Total past-due loans increased to $83.029 million from $18.018 million.
- Cash flow from operating activities was $142.690 million. Investing activities used $568.298 million, primarily because of $595.184 million of purchases of available-for-sale securities. Financing activities used $467.068 million, principally due to deposit and repurchase-agreement declines and $39.151 million of dividends. Cash and cash equivalents decreased by $892.676 million during the quarter.
- Borrowings included $383.502 million of repurchase agreements, $10.895 million of other borrowed funds and $134.642 million of junior subordinated deferrable-interest debentures. The filing does not report conventional long-term corporate debt beyond these instruments.
- Regulatory capital remained strong: CET1 ratio was 20.43%, Tier 1 leverage ratio was 15.61%, risk-weighted Tier 1 capital ratio was 21.37% and total risk-based capital ratio was 22.60% at March 31, 2023.
Material Changes Versus Prior Comparable Period
- Net interest income rose 83.4%, reflecting higher interest rates, increased investment securities and higher interest earned on Federal Reserve balances, as well as loan growth.
- Loan interest income increased 74.6% to $142.270 million, while other interest income increased to $14.492 million from $1.404 million.
- Non-interest income declined 7.2%, primarily because Q1 2022 included gains from branch-property sales; other income fell 57.7% to $3.845 million.
- Non-interest expense increased 6.1%. Deposit insurance assessments increased to $4.138 million from $1.057 million, professional fees increased 54.9%, and employee compensation and benefits increased 5.6%.
- Compared with December 31, 2022, loans increased 1.4%, deposits declined 3.0%, total assets declined 2.4%, cash declined 42.8%, and shareholders’ equity increased 5.5%. Available-for-sale securities increased to $4.860 billion from $4.418 billion.
- Accumulated other comprehensive loss improved to $420.491 million from $470.497 million, primarily due to a $50.006 million after-tax improvement in unrealized available-for-sale securities gains and losses.
Guidance, Outlook, Risks and Unusual Items
The company provided no quantitative earnings or revenue guidance. Management stated that operating results for the quarter are not necessarily indicative of full-year results and emphasized ongoing cost control, monitoring of efficiency and overhead ratios, and management of interest-rate sensitivity.
- Management increased the severity of certain qualitative credit-loss factors because of economic uncertainty and the potential for recession. The provision for credit losses increased 479.8% year over year.
- Management reported that deposits declined because of customer activity, competition from the federal government and aggressive competitor pricing. The company is monitoring deposit pricing and may allow certain deposits to run off when retention costs are excessive.
- The company described itself as asset-sensitive in both short- and long-term scenarios. Its cumulative repricing gap was $5.088 billion, and management stated that it would adjust rate-sensitive assets and liabilities as conditions change.
- Liquidity risks include deposit outflows, higher funding costs, reduced access to the Federal Home Loan Bank or Federal Reserve, market volatility and diminished depositor confidence following recent bank failures. The company cites its cash, investment portfolio, unused FHLB capacity and other funding sources as liquidity resources.
- The investment portfolio included $5.397 billion of available-for-sale debt securities at amortized cost and $4.860 billion at fair value, including $5.184 billion of residential mortgage-backed securities at amortized cost. Unrealized losses were attributed primarily to interest-rate changes, and management concluded that no credit-related allowance was required.
- Commercial and real-estate credit concentrations remain important risks. Construction and land-development loans were $2.081 billion, and commercial real-estate farmland and commercial loans were $2.563 billion.
- The company adopted ASU 2022-02 on January 1, 2023; management reported no significant impact and no borrower modifications requiring disclosure during the quarter.
- Legal proceedings are ongoing, but management believes material losses are remote. The filing states that no material subsequent events were identified through issuance of the financial statements.
- The board authorized an additional $124 million stock-repurchase capacity through March 15, 2024. The company repurchased 25,000 shares for $1.036 million during Q1 2023 at an average price of $41.40 per share.
- Disclosure controls and procedures were deemed effective, with no material weaknesses or material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether deposit declines continue and whether deposit repricing materially increases funding costs or compresses future net interest margin.
- Whether the sharp increase in past-due loans, particularly commercial and construction-related exposures, results in higher non-accrual loans, charge-offs or provisions.
- Whether unrealized losses in the available-for-sale securities portfolio create future capital, liquidity or earnings pressure if securities must be sold.
- The sustainability of Q1 net interest income growth as interest rates, Federal Reserve balances and asset-liability repricing conditions change.
- The adequacy of the $133.557 million allowance for credit losses under recessionary conditions and changing collateral values.
- The company’s actual liquidity availability, including unused FHLB and Federal Reserve capacity, collateral requirements and uninsured or nonresident deposit concentrations.
- Future regulatory changes affecting capital, liquidity, deposit insurance assessments, interest-rate risk and bank supervision.