Business Context and Reporting Period
International Bancshares Corporation filed its Form 10-K for the fiscal year ended December 31, 2020; the filing is not a standalone 2020 fourth-quarter report. The company is a Texas-based multibank financial holding company with five wholly owned subsidiary banks serving 88 communities through 187 facilities and 282 ATMs in Texas and Oklahoma. Its principal activities include commercial, retail, mortgage, real estate, consumer and international banking, including services for customers domiciled in Mexico.
The company employed approximately 2,254 full-time and 202 part-time employees at year-end. Deposits from persons and entities domiciled in Mexico represented approximately 27% of subsidiary-bank deposits in 2020, compared with 29% in each of 2019 and 2018.
Financial Metrics and Capital
- Revenue, net income, margins and cash flow: The filing incorporates the 2020 Annual Report by reference, but the supplied text does not include the related income statement, balance sheet, cash-flow statement or selected financial data. Clear values for revenue, net income, net interest margin, noninterest income, operating expenses and operating cash flow are therefore not provided.
- Capital: The holding company reported a 14.92% leverage ratio at December 31, 2020. The company and each subsidiary bank were classified as “well-capitalized.” Each subsidiary bank had a leverage ratio above 5%.
- Dividend capacity: Approximately $948 million was available for dividends from subsidiary banks to the holding company under capital rules applicable at year-end, assuming continued “well-capitalized” status.
- Debt: Approximately $134 million of junior subordinated debentures remained outstanding at December 31, 2020. These obligations rank senior to common stock and must be serviced before common-stock dividends, subject to permitted interest deferrals.
- Liquidity: The company relies on deposits, repurchase agreements, Federal Home Loan Bank advances and other borrowings. The filing does not provide clear year-end liquidity balances, borrowing capacity, debt maturities or cash-flow amounts in the supplied text.
- FDIC expense: Deposit insurance expense was $1.870 million in 2020, compared with $1.416 million in 2019 and $3.742 million in 2018.
Material Changes Versus Prior Comparable Period
- CECL adoption: On January 1, 2020, the company adopted the current expected credit loss standard. Based on the December 31, 2019 portfolio, the allowance for credit losses increased approximately 17.2%, producing an approximately $8.3 million after-tax cumulative reduction to retained earnings. The company did not elect the regulatory-capital phase-in.
- COVID-19 exposure: Management identified continued risks to borrowers, deposits, collateral values, revenue, expenses and personnel from the COVID-19 pandemic. Hospitality, restaurants and retail developments were specifically identified as affected loan-portfolio sectors.
- Deposit mix: Mexican-domiciled deposits declined to approximately 27% of subsidiary-bank deposits from 29% in each of the prior two years.
- FDIC expense: FDIC deposit insurance expense increased by approximately $454,000 from 2019, but remained below 2018 levels.
- Regulatory capital: The company remained well-capitalized despite the immediate regulatory-capital impact of CECL adoption.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantitative earnings guidance or formal financial targets. Management states that it will continue monitoring and mitigating the effects of COVID-19 and maintains pandemic and disaster-recovery plans. Branches generally remained open where permitted, while ATMs and electronic banking services remained operational.
- Key credit risks include insufficient loan-loss reserves, declining real-estate values, borrower stress from COVID-19, low crude-oil prices and weakness in Texas, Oklahoma or Mexico markets.
- Interest-rate risk could reduce net interest income if funding costs rise faster than asset yields or if asset yields decline faster than funding costs.
- The company has loans, derivatives, borrowings and other instruments linked directly or indirectly to LIBOR and warns that the transition away from LIBOR may create operational, valuation, pricing and market-risk challenges.
- Liquidity depends partly on external funding sources that may become unavailable or more expensive during market disruptions.
- Other material risks include competition from banks and fintech companies, cybersecurity and vendor disruptions, extensive regulatory requirements, dependence on dividends from subsidiary banks, dependence on Chief Executive Officer Dennis E. Nixon, environmental liabilities and potential goodwill impairment.
- The company concluded that goodwill was not impaired in its October 1, 2020 assessment.
- Management reported effective disclosure controls and internal control over financial reporting. RSM US LLP issued an unqualified opinion on internal control effectiveness and the consolidated financial statements.
- Pending legal matters were assessed as having a remote likelihood of material loss, or potential damages that would not be material to consolidated financial position or results of operations, although developments could change that assessment.
Most Important Facts for an Investor to Verify
- Obtain the incorporated 2020 Annual Report to verify consolidated revenue, net income, earnings per share, net interest margin, provision expense, allowance coverage, loan growth, deposits, assets, cash flow and profitability trends.
- Review nonperforming assets, net charge-offs, criticized loans, COVID-19 payment deferrals and the adequacy of the CECL allowance.
- Verify full regulatory capital ratios, tangible common equity, liquidity sources, borrowing availability and debt maturities.
- Assess exposure to commercial real estate, energy-related borrowers, hospitality, restaurants, retail developments and Mexican-domiciled deposits.
- Review dividend history, repurchase activity and the constraints imposed by bank capital, regulatory policy and the approximately $134 million of junior subordinated debentures.
- Evaluate the company’s LIBOR transition plan, cybersecurity controls, third-party service-provider risks and regulatory compliance status.