Business Context and Reporting Period
International Bancshares Corporation, headquartered in Laredo, Texas, is a commercial bank holding company serving South, Central and Southeast Texas, Oklahoma and customers engaged in U.S.–Mexico trade. The company operates through bank and non-bank subsidiaries and reports as one segment. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013, compared primarily with the corresponding 2012 periods and December 31, 2012 balance-sheet data.
Key Financial Metrics
| Metric | Q3 2013 | 9M 2013 | Comparison |
|---|---|---|---|
| Net interest income | $78.6 million | $223.9 million | Q3: up 3.0%; 9M: down 0.5% |
| Provision for loan losses | $5.8 million | $17.6 million | Q3: up 8.4%; 9M: up 4.9% |
| Non-interest income | $44.5 million | $144.4 million | Q3: down 39.9%; 9M: down 8.6% |
| Non-interest expense | $70.2 million | $224.8 million | Q3: down 34.0%; 9M: down 8.9% |
| Net income | $31.8 million | $87.4 million | Q3: up 23.0%; 9M: up 6.4% |
| Net income available to common shareholders | $31.8 million | $87.4 million | Q3: up 44.4%; 9M: up 22.1% |
| Basic and diluted EPS | $0.47 | $1.30 | Q3 2012: $0.33; 9M 2012: $1.06 |
| Net cash from operating activities | Not separately reported | $160.4 million | 2012: $118.6 million |
Q3 net margin on net income was approximately 10.5% of total revenue, defined as net interest income plus non-interest income. The comparable 2012 margin was approximately 17.2%, reflecting the prior-year $32.9 million securities-gains benefit. The filing does not provide a clear consolidated net interest margin.
| Balance-sheet metric | September 30, 2013 | December 31, 2012 | Change |
|---|---|---|---|
| Total assets | $12.08 billion | $11.88 billion | Up 1.6% |
| Gross loans | $5.05 billion | $4.78 billion | Up 5.8% |
| Net loans | $4.98 billion | $4.72 billion | Up 5.7% |
| Total deposits | $8.11 billion | $8.29 billion | Down 2.1% |
| Available-for-sale securities | $5.45 billion | $5.53 billion | Down 1.4% |
| Other borrowed funds | $1.29 billion | $749.0 million | Up 72.2% |
| Shareholders’ equity | $1.42 billion | $1.44 billion | Down 1.4% |
| Allowance for probable loan losses | $67.8 million | $58.2 million | Up 16.6%; 1.3% of loans |
Regulatory capital remained strong: the leverage ratio was 11.53%, risk-weighted Tier 1 capital was 19.37%, and total risk-based capital was 20.40% at September 30, 2013. Cash and due from banks totaled $302.5 million, compared with $283.1 million at year-end 2012.
Material Changes Versus Comparable Periods
- Common earnings increased primarily because TARP-related preferred dividends ceased after the 2012 redemption of the senior preferred stock and because the prior-year period included substantial preferred dividends.
- Interest expense declined 29.1% for the first nine months, more than offsetting a 6.4% decline in interest income. Management attributed pressure on interest income and margins to slow loan demand and lower bond-market yields.
- Non-interest income declined because 2012 included $35.5 million of net securities-transaction gains, compared with $9.6 million in 2013. The 2013 period benefited from $5.5 million of income from the sale of assets in an investment partnership.
- Non-interest expense benefited from the absence of the $31.6 million prior-year early-termination fee on repurchase agreements. A $12.3 million 2013 charge remained related to terminating a portion of long-term repurchase agreements.
- Loans grew 5.7%, led principally by commercial lending, while deposits declined 2.1% amid competition for deposits at higher rates. The funding shortfall was partly covered by increased Federal Home Loan Bank borrowings.
- Credit indicators weakened in selected areas: non-accrual loans increased to $86.5 million from $71.8 million, impaired loans increased to $99.0 million from $83.0 million, and total past-due loans increased to $119.3 million from $90.2 million.
- Accumulated other comprehensive income declined to a $13.7 million loss from $65.7 million of income, primarily reflecting a $73.9 million after-tax unrealized loss on available-for-sale securities during the first nine months.
Cash Flow, Debt, Liquidity and Other Items
- Operating activities generated $160.4 million of cash; investing activities used $365.2 million, largely due to purchases of available-for-sale securities and loan growth; financing activities provided $224.2 million.
- Cash and cash equivalents increased $19.4 million during the first nine months, ending at $302.5 million.
- Other borrowed funds increased $540.5 million during the first nine months, primarily to fund purchases of available-for-sale securities. Securities sold under repurchase agreements totaled $1.00 billion.
- Junior subordinated deferrable interest debentures remained $190.7 million. The company may defer interest for up to 20 consecutive quarters on the related trusts, subject to default provisions.
- The company paid common dividends of $0.20 per share in April and declared a $0.23 per-share dividend payable in October. A $40 million repurchase authorization remained available through April 9, 2014; no shares were repurchased during the quarter.
- Available-for-sale securities totaled $5.45 billion, including $5.17 billion of residential mortgage-backed securities. Unrealized losses totaled $102.6 million, and $1.3 million of credit-related impairment charges was recognized during the first nine months.
Guidance, Outlook, Commentary and Risks
The filing provides no formal earnings or revenue guidance. Management reported that loan demand was slightly improving, Texas and Oklahoma markets were improving and better positioned to recover than many other areas, and the company believed its interest-rate position was appropriate. Management also stated that the allowance for probable loan losses was adequate.
- Credit risk remains material because of higher non-accrual and impaired loans, collateral-value sensitivity, prolonged economic weakness and potential losses in commercial real estate and consumer lending.
- Management’s allowance estimates depend on collateral values, borrower repayment capacity, historical loss experience, economic conditions, border risk and regulatory classifications. Changes in these assumptions could materially affect provisions and earnings.
- The company is liability-sensitive in the earliest repricing periods and asset-sensitive over longer periods. Interest-rate changes could affect net interest income, securities valuations and funding costs.
- Liquidity depends substantially on deposits, FHLB borrowings, repurchase agreements and other external funding. Deposit competition and reduced deposits from nonresident aliens could increase funding costs or reduce liquidity.
- Key stated risks include U.S.–Mexico trade conditions, regulatory and compliance costs, Dodd-Frank and Basel-related requirements, competition, litigation, cybersecurity and systems failures, goodwill impairment, political instability, natural disasters and further other-than-temporary investment impairments.
- Pending legal proceedings include lender-liability claims. Management assessed material losses as remote or immaterial, but acknowledged that developments could change that assessment.
- Disclosure controls were evaluated as effective, with no material weaknesses reported.
Important Facts for Investors to Verify
- Whether the rise in impaired and non-accrual loans continues and whether the $67.8 million allowance adequately covers expected losses.
- The sustainability of earnings excluding nonrecurring securities gains, investment-partnership income, TARP dividend savings and repurchase-agreement termination charges.
- Whether loan growth can continue while deposits decline and borrowings increase materially.
- The sensitivity of net interest income and accumulated other comprehensive income to interest rates and mortgage-backed-security valuations.
- The quality, liquidity and valuation assumptions supporting the $29.0 million of Level 3 securities and $87.9 million of impaired commercial collateral-dependent loans.
- The effect of regulatory, compliance and capital changes on expenses, dividends, repurchases and the treatment of trust-preferred securities.