International Bancshares Corporation (NASDAQ:IBOC) is a diversified financial holding company headquartered in Laredo, Texas. With 166 facilities and 256 ATMs, the company provides banking services for commercial, consumer, and international customers across North, South, Central, and Southeast Texas, as well as the state of Oklahoma. As one of the largest independent commercial bank holding companies headquartered in Texas, IBOC has established itself as a prominent player in the regional banking landscape.

Business Overview

IBOC's primary business involves gathering funds from various sources and investing them to earn a return. The company, either directly or through its subsidiary banks, owns an insurance agency, a liquidating subsidiary, a 50% interest in an investment banking unit that owns a broker/dealer, a controlling interest in four merchant banking entities, and a majority ownership in a real-estate development partnership. The company's primary earnings come from the spread between the interest earned on interest-bearing assets and the interest paid on interest-bearing liabilities. Additionally, IBOC generates income from fees on products offered to commercial, consumer, and international customers.

IBOC is highly active in facilitating trade along the United States border with Mexico. The company does a large amount of business with customers domiciled in Mexico, and deposits from persons and entities domiciled in Mexico comprise a large and stable portion of the deposit base of its subsidiary banks. IBOC also serves the growing Hispanic population through its facilities located throughout South, Central, and Southeast Texas, as well as Oklahoma.

Financials

For the fiscal year ended December 31, 2023, IBOC reported annual net income of $411,768,000, annual revenue of $974,086,000, annual operating cash flow of $486,607,000, and annual free cash flow of $459,110,000. These strong financial results demonstrate the company's ability to generate consistent profitability and healthy cash flows.

In the first quarter of 2024, IBOC continued to deliver solid financial performance. Net income for the three-month period ended March 31, 2024 was $97,331,000, a decrease of 4.2% compared to the same period in 2023. This decrease was primarily due to an increase in the provision for credit losses, which was impacted by a charge-down of an impaired credit after the results of a bankruptcy-related foreclosure.

Revenue for the first quarter of 2024 increased by 12.7% to $212,089,000, compared to $188,149,000 in the same period of 2023. This increase was driven by growth in both the investment and loan portfolios, as well as the impact of the Federal Reserve's interest rate hikes in 2022 and 2023.

Operating cash flow for the first quarter of 2024 was $135,395,000, a decrease of 5.1% compared to the same period in 2023. Free cash flow for the quarter was $51,774,000, a decrease of 11.3% year-over-year. The decreases in operating and free cash flow were primarily due to the increase in the provision for credit losses.

Liquidity

IBOC maintains adequate liquidity to meet potential depositor withdrawals, provide for customer credit needs, maintain adequate statutory reserve levels, and take advantage of high-yield investment opportunities. The company's liquidity is derived largely from deposits of individuals and business entities, including a stable portion of deposits from persons and entities domiciled in Mexico. IBOC also utilizes securities sold under repurchase agreements, large certificates of deposit, and borrowings from the Federal Home Loan Bank (FHLB) to fund its liquidity needs.

As of March 31, 2024, IBOC had a Common Equity Tier 1 (CET1) capital ratio of 22.00%, a Tier 1 capital ratio of 22.65%, and a total capital ratio of 23.90%. These capital ratios exceed the regulatory requirements, demonstrating the company's strong capital position and ability to withstand potential economic challenges.

Geographic Breakdown

IBOC's operations are primarily concentrated in Texas, with a significant presence along the U.S.-Mexico border region. As of March 31, 2024, approximately 1.1% of the company's consolidated assets, or $176,453,000, were related to loans outstanding to borrowers domiciled in foreign countries, primarily Mexico. Of these foreign loans, 82.4% are directly or indirectly secured by U.S. assets, certificates of deposits, and real estate, while 7.9% are secured by foreign real estate or other assets, and 9.7% are unsecured.

Revenue Breakdown and Trends

IBOC's revenue is primarily generated from net interest income, which accounted for 79.4% of total revenue in the first quarter of 2024. The company's net interest income increased by 12.7% year-over-year, driven by growth in both the investment and loan portfolios, as well as the impact of rising interest rates.

Non-interest income, which contributed 20.6% of total revenue in the first quarter of 2024, increased by 4.7% compared to the same period in 2023. This increase was primarily due to higher service charges on deposit accounts and other service charges, commissions, and fees from banking and non-banking activities.

Risks and Challenges

IBOC, like any financial institution, faces a variety of risks and challenges that could impact its future performance. These include:

1. Economic conditions: The company's business depends on the willingness and ability of its customers to conduct banking and other financial transactions. Adverse economic conditions could negatively impact IBOC's revenue streams, including service charges on deposits and banking and non-banking service charges and fees.

2. Interest rate environment: Changes in interest rates and market prices, including federal regulations on the payment of interest on demand deposits, could affect IBOC's net interest income and margins.

3. Regulatory environment: The company is subject to various state and federal laws and regulations, including changes in accounting, tax, and regulatory treatment of trust preferred securities, as well as changes in banking, tax, securities, insurance, employment, environmental, and immigration laws and regulations.

4. Geopolitical risks: Potential changes in U.S.-Mexico trade, including reductions in border crossings and commerce, as well as political instability in the United States or Mexico, could impact IBOC's operations and financial performance.

5. Operational risks: Technological changes, system failures, or breaches of network security, as well as other cybersecurity risks, could subject IBOC to increased operating costs, litigation, and other liabilities.

Outlook

IBOC has not provided any specific financial guidance for the remainder of 2024. However, the company's management has expressed cautious optimism about the overall economic environment, noting that they will continue to closely monitor and manage the company's controllable non-interest expenses to align them with operations and revenue streams.

Conclusion

IBOC is a well-established and diversified financial institution that has demonstrated its ability to generate consistent profitability and healthy cash flows. The company's strong capital position, active involvement in facilitating cross-border trade, and focus on serving the growing Hispanic population in its markets position it well for future growth. While IBOC faces a variety of risks and challenges, the company's experienced management team and prudent risk management practices suggest that it is well-equipped to navigate the evolving financial landscape.