International Bancshares Corporation (NASDAQ: IBOC) — Q3 2020 Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company operating through five wholly owned subsidiary banks. It provides commercial, consumer and international banking services across North, South, Central and Southeast Texas and Oklahoma, with significant cross-border activity involving Mexico. The filing covers the three and nine months ended September 30, 2020; financial statements are unaudited.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Interest income | $100.0 million | $124.1 million | Down 19.4% |
| Net interest income | $91.8 million | $109.2 million | Down 15.9% |
| Provision for credit losses | $8.8 million | $5.3 million | Up 66.2% |
| Non-interest income | $40.1 million | $42.7 million | Down 6.0% |
| Non-interest expense | $70.1 million | $81.1 million | Down 13.6% |
| Net income | $42.7 million | $51.4 million | Down 16.9% |
| Basic earnings per share | $0.68 | $0.79 | Down 13.9% |
| Diluted earnings per share | $0.67 | $0.78 | Down 14.1% |
| Metric | Nine months 2020 | Nine months 2019 | Change |
|---|---|---|---|
| Net interest income | $298.5 million | $330.4 million | Down 9.7% |
| Provision for credit losses | $36.6 million | $15.4 million | Up 138.2% |
| Non-interest income | $108.8 million | $113.2 million | Down 3.9% |
| Non-interest expense | $220.9 million | $233.6 million | Down 5.4% |
| Net income | $119.1 million | $153.4 million | Down 22.4% |
| Basic earnings per share | $1.86 | $2.34 | Down 20.5% |
The filing does not provide a clear consolidated net interest margin, return on assets or return on equity for the periods presented. Based on reported figures, Q3 net income represented approximately 32.4% of net interest income plus non-interest income, compared with approximately 33.9% in the prior-year quarter; this is not a reported GAAP margin.
Balance sheet, liquidity and capital
- Total assets were $13.59 billion at September 30, 2020, up 12.2% from December 31, 2019.
- Net loans were $7.49 billion, up 9.5%. Total loans were $7.59 billion, including $4.43 billion of commercial, financial and agricultural loans and $1.94 billion of real estate construction loans.
- Deposits were $10.31 billion, up 16.8%, primarily reflecting CARES Act and PPP proceeds and customer cash preservation. Non-interest-bearing demand deposits increased to $4.52 billion from $3.55 billion.
- Cash and cash equivalents were $1.25 billion, compared with $256.8 million at year-end 2019.
- Other borrowed funds declined 30.3% to $436.4 million. Repurchase agreements increased 58.9% to $375.8 million. Junior subordinated debentures remained $134.6 million.
- Shareholders’ equity was $2.14 billion, up 1.1%. The company paid a quarterly dividend of $0.55 per share and repurchased 5,016 shares during the quarter at an average price of $28.04.
- Regulatory capital remained strong: CET1 ratio was 18.57%, Tier 1 risk-based capital ratio was 19.77%, total risk-based capital ratio was 20.96%, and Tier 1 leverage ratio was 14.74% at September 30, 2020. Management stated that the company and subsidiary banks met applicable capital requirements.
- Liquidity was supported by increased deposits, cash, a high-quality securities portfolio and access to FHLB, Federal Reserve and repurchase-agreement funding. Management stated that open unused FHLB lines were maintained.
Cash flow and credit quality
- Nine-month operating cash flow was $214.8 million, compared with $211.2 million in 2019.
- Investing activities used $568.5 million, primarily reflecting a $684.5 million net increase in loans and purchases of available-for-sale securities.
- Financing activities provided $1.35 billion, driven principally by deposit growth and increased repurchase agreements.
- Cash and cash equivalents increased by $992.6 million during the first nine months, compared with a $30.3 million decrease in the prior-year period.
- The allowance for credit losses was $102.2 million, or 1.35% of total loans, versus $60.3 million, or 0.87%, at December 31, 2019. Non-accrual loans were $3.8 million, down from $4.9 million at year-end.
- Past-due loans totaled $39.2 million, compared with $84.5 million at December 31, 2019, although 60-to-89-day past-due loans increased to $19.2 million from $4.9 million.
Material changes versus the prior comparable period
- Net income declined because lower interest rates reduced loan and securities yields and COVID-19 increased expected credit loss provisions.
- The Federal Reserve’s March 2020 rate reductions contributed to lower interest income. Lower funding costs partially offset the decline: interest expense fell 45.2% in Q3 and 28.9% year to date.
- Service charges on deposit accounts declined 19.7% in Q3 and 15.0% year to date as customer activity decreased.
- Non-interest expense declined through lower employee compensation and benefits, reflecting workforce and cost-control measures.
- The company adopted CECL on January 1, 2020. The adoption increased the allowance by approximately 17.2% and reduced retained earnings by approximately $8.3 million after tax.
- Accumulated other comprehensive income increased substantially because of unrealized gains on available-for-sale securities, although Q3 unrealized securities gains reversed partially, producing an $8.9 million after-tax reduction in other comprehensive income.
Guidance, outlook, risks and unusual items
- No formal earnings or financial guidance is provided. Management stated that future economic conditions and their effects on the business remain uncertain.
- As of November 3, 2020, approximately $1.80 billion of loans had some degree of payment deferral. Management expected approximately 83% to resume regular payments when deferrals ended and estimated that approximately 17% would request additional relief, particularly in hospitality, oil and gas, and retail development.
- As of November 3, 2020, the company had 4,944 PPP loans totaling approximately $455.3 million outstanding. These loans are fully guaranteed by the SBA, carry a 1% interest rate and may be forgiven subject to program requirements.
- COVID-19 could impair borrower repayment capacity, collateral values, deposit activity, fee income, staffing and third-party operations. The Federal Reserve’s low-rate environment may continue to pressure margins.
- Other material risks include economic and financial-market volatility, U.S.-Mexico trade and border activity, interest-rate changes, regulatory and capital changes, funding availability, credit-loss estimation, cybersecurity, operational failures, litigation and potential goodwill impairment.
- Management determined that existing legal proceedings were unlikely to result in a material loss, although developments could change that assessment. The company reported no material subsequent events and no material weaknesses in disclosure controls.
Most important facts for investors to verify
- Whether deferred loans resume payment as expected and the extent of additional deferrals, charge-offs and future CECL provisions.
- Credit exposure to hospitality, oil and gas, retail development, construction and commercial real estate, including movements in watch-list classifications.
- The sustainability of deposit growth, elevated cash balances and liquidity as PPP proceeds and pandemic-related customer balances normalize.
- The effect of prolonged low interest rates on loan yields, securities income and net interest margins.
- PPP loan forgiveness timing, fee recognition and the continued effectiveness of the SBA guarantee.
- Regulatory capital ratios, dividend and share-repurchase activity, and any future changes to capital requirements or CECL regulatory treatment.