International Bancshares Corporation — Q1 2017 Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company headquartered in Laredo, Texas. Through its bank subsidiaries, it provides commercial, consumer and international banking services in South, Central and Southeast Texas and Oklahoma, with significant activity involving customers domiciled in Mexico. The company reported unaudited consolidated results for the three months ended March 31, 2017, compared with the same period in 2016; balance-sheet comparisons are primarily with December 31, 2016.
Key financial metrics
| Metric | Q1 2017 / March 31, 2017 | Comparable period / December 31, 2016 | Change |
|---|---|---|---|
| Total assets | $11.966 billion | $11.804 billion | +1.4% |
| Loans | $6.010 billion | $5.965 billion | +0.8% |
| Net loans | $5.945 billion | $5.900 billion | +0.8% |
| Deposits | $8.864 billion | $8.610 billion | +3.0% |
| Shareholders’ equity | $1.749 billion | $1.725 billion | +1.4% |
| Interest income | $96.981 million | $97.057 million | -0.1% |
| Interest expense | $9.246 million | $10.817 million | -14.5% |
| Net interest income | $87.735 million | $86.240 million | +1.7% |
| Provision for probable loan losses | $1.700 million | $9.134 million | -81.4% |
| Non-interest income | $37.715 million | $40.931 million | -7.9% |
| Non-interest expense | $75.626 million | $67.918 million | +11.3% |
| Net income | $32.004 million | $32.984 million | -3.0% |
| Basic and diluted EPS | $0.48 | $0.50 | -4.0% |
Net interest margin and return ratios are not clearly provided in the filing text. Based on reported totals, net income represented approximately 25.5% of net interest income plus non-interest income, and the non-interest expense ratio was approximately 60.3% of that revenue base; these are simple calculations and are not necessarily the company’s reported regulatory or management measures.
Cash flow, liquidity, debt and capital
- Operating activities provided $64.4 million of cash, compared with $66.4 million in Q1 2016.
- Investing activities used $125.1 million, primarily reflecting net purchases of available-for-sale securities and a $47.0 million net increase in loans.
- Financing activities provided $89.3 million, driven by increases in non-interest-bearing demand and savings deposits, partly offset by a $195.2 million decrease in repurchase agreements.
- Cash and cash equivalents increased $28.6 million during the quarter to $297.8 million.
- Other borrowed funds totaled $763.0 million, up 4.0% from year-end 2016. Junior subordinated deferrable interest debentures were unchanged at $160.4 million.
- The company maintains a sizable investment portfolio for liquidity. Available-for-sale securities totaled $4.268 billion at March 31, 2017, primarily residential mortgage-backed securities.
- Regulatory capital remained strong: CET1 ratio was 17.05%, Tier 1 risk-based capital was 18.78%, total risk-based capital was 19.56%, and the leverage ratio was 14.15%. Management stated that the company and its bank subsidiaries exceeded applicable capital requirements and were well-capitalized.
Material changes and unusual items
- Net income declined despite lower loan-loss provisions because non-interest income decreased and expenses increased.
- Q1 2017 included a $5.765 million early termination fee related to $200 million of long-term repurchase agreements. Management stated that the termination was intended to help manage long-term funding costs; approximately $900 million of long-term repurchase agreements had been terminated since 2014.
- Non-interest income was lower largely because Q1 2016 included approximately $2.4 million of gains from the sale of two merchant-banking investments. Investment-securities transaction income improved to $927,000 from a $133,000 loss in Q1 2016, but this was more than offset by lower income from other investments.
- The loan-loss provision fell to $1.7 million as the historical commercial-loan loss experience declined. The allowance for probable loan losses was $64.2 million, or 1.06% of total loans, compared with 1.08% at year-end 2016.
- Non-accrual loans declined to $32.0 million from $37.2 million at year-end 2016. Total past-due loans declined to $53.4 million from $61.4 million.
- The company sold its remaining non-agency mortgage-backed securities during Q1 2017, eliminating the related Level 3 balance and the accumulated credit-related impairment balance. No impairment charge was recorded in Q1 2017, compared with $124,000 in Q1 2016.
- Available-for-sale securities had $52.8 million of gross unrealized losses at March 31, 2017, primarily attributable to interest-rate changes. Management stated it did not intend, and was not likely, to sell the affected securities before recovery or maturity.
- The board extended its stock repurchase authorization for up to $40 million through April 9, 2018. Only 2,530 shares were repurchased during Q1 2017, while 9,243,774 shares had been repurchased under all programs at a total cost of $271.2 million as of May 3, 2017. A cash dividend of $0.33 per share was paid in April 2017.
Outlook, management commentary and risks
Management did not provide specific earnings or revenue guidance. It stated that quarterly results are not necessarily indicative of full-year performance and that it believes the company is properly positioned for interest-rate changes. The company was liability-sensitive over the shorter repricing periods and asset-sensitive over longer periods, creating exposure to changes in funding costs and interest rates.
- Management noted continued competition for deposits at higher-than-market rates and stated that some deposits may be allowed to leave when pricing is uneconomic.
- Key credit risks include lower real-estate values, prolonged economic weakness, unemployment, lower oil prices, collateral deterioration and changes in historical loss experience used in the allowance calculation.
- The company has meaningful exposure to U.S.-Mexico trade, border activity and deposits from nonresident Mexican customers. Management identified potential effects from reduced border commerce, tariffs and IRS reporting requirements affecting nonresident-alien deposit interest.
- Liquidity depends partly on FHLB, Federal Reserve and other external funding sources. FHLB borrowings are primarily short-term and are secured by mortgage-backed securities and portions of the loan portfolio.
- Other identified risks include regulatory and capital changes, competition, cybersecurity and system failures, legal and regulatory proceedings, goodwill impairment, changes in accounting standards, political instability and natural disasters.
- Legal proceedings were considered unlikely to result in a material loss based on management’s discussions with counsel, although developments could change that assessment.
- Management reported effective disclosure controls and procedures, no material weaknesses, and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the lower loan-loss provision reflects sustainable credit improvement or primarily the fading effect of prior charge-offs in the three-year historical-loss calculation.
- The recurring effect of the $5.8 million repurchase-agreement termination fee and whether additional funding restructurings could produce similar charges.
- Trends in deposit pricing, deposit retention, FHLB funding availability and the company’s short-term liability-sensitive interest-rate position.
- Credit quality in commercial, construction, real-estate and oil-and-gas-related relationships, including collateral values and the adequacy of the $64.2 million allowance.
- The performance and interest-rate sensitivity of the $4.3 billion available-for-sale securities portfolio, including its unrealized losses.
- The sustainability of non-interest income given the absence of the prior-year merchant-banking gains.
- Future use of the $40 million stock repurchase authorization and the effect of dividends and repurchases on capital and liquidity.