International Bancshares Corporation — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2011, compared primarily with the same periods in 2010; balance-sheet comparisons are with December 31, 2010. The unaudited filing covers the consolidated banking operations of the company, headquartered in Laredo, Texas, serving commercial, consumer and international customers in Texas and Oklahoma.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total interest income | $103.6 million | $114.3 million | $318.6 million | $347.2 million |
| Net interest income | $80.5 million | $86.4 million | $245.8 million | $259.7 million |
| Provision for loan losses | $5.7 million | $6.8 million | $7.8 million | $15.5 million |
| Non-interest income | $51.2 million | $46.9 million | $147.4 million | $167.9 million |
| Non-interest expense | $80.3 million | $79.4 million | $239.7 million | $264.4 million |
| Net income | $30.6 million | $33.5 million | $96.8 million | $99.6 million |
| Net income available to common shareholders | $27.3 million | $30.3 million | $86.8 million | $89.8 million |
| Diluted EPS | $0.40 | $0.45 | $1.28 | $1.32 |
Margins and efficiency: The filing does not provide a clearly stated net interest margin. Based on reported figures, the implied pre-tax operating margin was approximately 34.8% in Q3 and 37.1% for the first nine months. The implied efficiency ratio, calculated as non-interest expense divided by net interest income plus non-interest income, was approximately 60.9% in both periods.
- Total assets were $11.59 billion, down 2.9% from December 31, 2010.
- Net loans were $5.04 billion, down 5.3%; loan demand remained weak.
- Deposits increased 2.0% to $7.75 billion, although management reported continued competition requiring some deposits to be priced above market.
- Cash and cash equivalents were $229.4 million, up from $197.8 million at year-end 2010.
- Other borrowed funds declined 45.7% to $557.7 million; securities sold under repurchase agreements were $1.39 billion.
- Shareholders’ equity increased 8.5% to $1.58 billion, aided by retained earnings and higher accumulated other comprehensive income.
- Capital ratios were strong: 12.15% leverage, 22.09% risk-weighted Tier 1 and 23.34% total risk-weighted capital.
Cash Flow, Liquidity and Credit Quality
- Cash provided by operating activities was $158.2 million for the first nine months, compared with $164.7 million in 2010.
- Investing activities provided $272.5 million, principally reflecting securities activity and a $228.0 million net decrease in loans.
- Financing activities used $399.0 million, including a $469.0 million reduction in other borrowed funds, dividends and $6.3 million of treasury-stock purchases.
- The allowance for probable loan losses was $78.4 million, or 1.5% of total loans, versus $84.5 million, or 1.6%, at year-end 2010.
- Non-accrual loans were $106.6 million, modestly below $108.0 million at December 31, 2010. Total past-due loans increased to $122.0 million from $114.8 million.
- Impaired loans totaled approximately $137.9 million, compared with $125.2 million at year-end; other real estate owned was subject to $8.0 million of valuation write-downs during the nine months.
- Liquidity was supported by deposits, shorter-term securities, repurchase agreements and FHLB funding. The company was liability-sensitive in the shorter repricing periods and asset-sensitive over longer periods.
Material Changes Versus Prior Comparable Period
- Q3 net income available to common shareholders fell 9.8%, while nine-month results declined 3.3%.
- Net interest income declined 6.7% in Q3 and 5.4% year to date, reflecting lower interest income despite a 17.3% and 16.8% reduction in interest expense, respectively.
- Q3 non-interest income rose 9.2%, primarily from $6.6 million of net investment-securities gains. Nine-month non-interest income fell 12.2% because the prior-year period included $30.9 million of securities gains.
- Non-interest expense increased 1.1% in Q3 but decreased 9.4% year to date. The 2010 period included a $21.8 million litigation reserve related to the LFIN tax dispute.
- The loan-loss provision declined 49.4% year to date, primarily because of lower charge-off experience and the smaller loan portfolio.
- Available-for-sale securities decreased to $4.99 billion from $5.09 billion, while accumulated other comprehensive income increased substantially, reflecting unrealized securities gains.
- The company redeemed approximately $10.4 million of trust preferred securities during 2011, reducing junior subordinated debentures to $190.7 million.
Outlook, Unusual Items and Risks
- Management did not provide quantified earnings or revenue guidance. It stated that quarterly results are not necessarily indicative of full-year or future performance.
- The company approved a restructuring plan to close 55 in-store branches by December 31, 2011, in response to lower interchange-fee revenue. Estimated pretax charges were $5.56 million, expected in the fourth quarter, but management noted that the final amount could differ significantly.
- The company continues to participate in the TARP Capital Purchase Program, with $216 million of Series A preferred stock outstanding, a 5% dividend rate for the first five years and 9% thereafter. Treasury consent limits certain dividends, stock repurchases and trust-preferred redemptions.
- A disputed LFIN tax matter involved an amended judgment of approximately $24.25 million. The company deposited $24.4 million with the court and was appealing the judgment.
- Credit risks include continued economic weakness, declining real-estate collateral values, unemployment, border-related economic conditions and potential increases in loan-loss provisions.
- Other risks include interest-rate and securities-market volatility, funding availability, regulatory changes including Dodd-Frank and interchange-fee rules, litigation, goodwill impairment, technology and cybersecurity events, and U.S.-Mexico trade or political developments.
- Non-agency mortgage-backed securities remained subject to significant valuation judgment. The company recorded $701,000 of credit-related impairment charges for the first nine months, versus $8.0 million in the prior-year period.
- Management stated that disclosure controls were effective and that no material weaknesses were identified.
Most Important Facts to Verify
- Whether the planned 55 branch closures generate the estimated $5.56 million charge or a materially different final cost.
- Trends in non-accrual, past-due and impaired loans, particularly commercial real estate and construction exposures.
- The adequacy of the $78.4 million loan-loss allowance as economic and collateral conditions evolve.
- The status and potential cash impact of the $24.25 million LFIN tax judgment appeal.
- The sustainability of earnings given lower loan balances, reduced interest income, securities-sale gains and ongoing deposit pricing pressure.
- The company’s future ability to fund dividends, repurchases and debt redemptions while remaining subject to TARP-related limitations.