International Bancshares' profit rose. One income line explains why.

International Bancshares earned $114.5 million in the third quarter, up 5.6% from a year earlier. But the source of that growth matters: the Texas bank's increase in investment earnings was almost as large as its entire increase in profit before tax.

Its ordinary interest business grew much more slowly. Meanwhile, the balance of loans on which it no longer counts unpaid interest as income rose again after an affordable-housing lending problem disclosed earlier this year.

One income line explains most of the increase

Research by Ticker Byline shows that other-investment income increased by $8.10 million from a year earlier, compared with an $8.14 million increase in total pretax profit. Those two changes were almost equal.

The bank reported $11.7 million of other-investment income, up from $3.6 million. It attributes the improvement to earnings on merchant banking investments, which are ownership stakes outside its ordinary lending business.

Net interest income, the income from loans and securities after funding costs, rose 1.3% to $174.5 million. Lower interest expense more than offset a small decline in total interest income. Operating expenses also rose, absorbing some of the benefit from better interest and fee income.

The result was higher earnings, but with much of the improvement coming from investments rather than faster-growing ordinary interest income. Diluted earnings per share increased to $1.84 from $1.74.

The earlier loan problem has not gone away

Non-accrual loans, where unpaid interest is no longer counted as income, reached $337.1 million at September 30. That was up from $297.1 million in June and $140.3 million at the end of last year. The latest quarterly increase was $39.9 million, or 13.4%.

The bank had already disclosed in its June report that a relationship involving several loans secured by interests in affordable-housing projects moved to non-accrual status in the second quarter. The latest report continues to identify that relationship as the main reason for the increase this year.

Management says the loans are secured and it will monitor collateral values, adding specific reserves if those values fall. It expects a positive outcome because demand for affordable housing continues.

There are encouraging credit figures alongside the larger problem-loan balance. The quarterly expense for expected credit losses fell to $1.6 million from $1.8 million a year earlier. Actual loan write-offs after recoveries were also lower over the first nine months. The overall loan-loss allowance stayed near $170 million from June to September.

Strong capital gives the bank room

Deposits rose to $12.88 billion from $12.74 billion in June. Its main regulatory common-equity capital ratio increased to 24.41% from 23.56%, leaving a substantial cushion.

Book equity did fall during the quarter, largely because of unrealized marks on securities. Those marks are mostly excluded from this bank's regulatory capital calculation, which explains why the two measures moved in different directions.

The next results will show whether interest earnings can contribute more to profit growth and whether the non-accrual loan balance stabilizes. The International Bancshares company profile tracks earnings, credit quality, funding and shareholder returns through the year.