International Bancshares Corporation — Q3 2010 Form 10-Q Summary
Business Context and Reporting Period
International Bancshares Corporation is a Texas-based bank holding company operating through banking and non-bank subsidiaries in South, Central and Southeast Texas and Oklahoma. Its activities include commercial, consumer and international banking, with significant cross-border business involving Mexico. The filing covers the unaudited quarter and nine months ended September 30, 2010, compared primarily with the corresponding 2009 periods and December 31, 2009 balance-sheet data.
Financial Performance and Position
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total interest income | $114.3 million | $126.7 million | $347.2 million | $401.1 million |
| Net interest income | $86.4 million | $94.4 million | $259.7 million | $292.1 million |
| Provision for loan losses | $6.8 million | $10.3 million | $15.5 million | $45.4 million |
| Non-interest income | $46.9 million | $50.9 million | $167.9 million | $149.1 million |
| Non-interest expense | $79.4 million | $78.7 million | $264.4 million | $234.2 million |
| Net income | $33.5 million | $37.0 million | $99.6 million | $105.6 million |
| Net income available to common shareholders | $30.3 million | $33.7 million | $89.8 million | $95.9 million |
| Basic and diluted EPS | $0.45 | $0.49 | $1.32 | $1.40 |
Q3 net income available to common shareholders declined 10.3%, while nine-month results declined 6.4%. The filing does not provide a clear net interest margin or return-on-assets figure. The reported effective tax rates were 28.7% for the quarter and 32.5% for the nine months, affected by an IRS tax and interest refund.
| Balance-sheet metric | September 30, 2010 | December 31, 2009 | Change |
|---|---|---|---|
| Total assets | $12.114 billion | $11.763 billion | +3.0% |
| Net loans | $5.415 billion | $5.572 billion | -2.8% |
| Investment securities | $5.167 billion | $4.647 billion | +11.2% |
| Total deposits | $7.462 billion | $7.178 billion | +4.0% |
| Other borrowed funds | $922.3 million | $1.348 billion | -31.6% |
| Shareholders’ equity | $1.472 billion | $1.407 billion | +4.6% |
Cash and cash equivalents were $213.9 million at September 30, 2010, compared with $224.6 million at year-end 2009. Nine-month operating cash flow was $5.9 million, down from $66.3 million in 2009. Investing activities provided $112.5 million, while financing activities used $129.2 million, resulting in a $10.8 million decrease in cash.
Debt and funding included $1.478 billion of repurchase agreements, $922.3 million of other borrowed funds and $201.1 million of junior subordinated debentures. Regulatory capital remained strong: leverage ratio was 12.02%, risk-weighted Tier 1 capital ratio was 18.79% and total risk-weighted capital ratio was 20.02% at September 30, 2010.
Material Changes Versus Comparable Periods
- Net interest income declined 8.6% in Q3 and 11.1% for the nine months, reflecting lower interest income, securities sales, increased liquidity and a return of net interest margin toward more traditional levels.
- Interest expense declined 13.5% in Q3 and 19.7% for the nine months, primarily from lower deposit and borrowing costs.
- The loan-loss provision declined 33.9% in Q3 and 65.9% for the nine months. The allowance decreased to $82.9 million, or 1.5% of total loans, from $95.4 million, or 1.7%, at year-end 2009.
- Nine-month non-interest income increased 12.6%, primarily because of $30.9 million of net investment-securities transaction gains, compared with $11.9 million in 2009. Management stated that these sales repositioned the investment portfolio.
- Nine-month non-interest expense increased 12.9%, including $21.8 million of litigation expense related to the LFIN tax dispute and $8.0 million of impairment charges on non-agency mortgage-backed securities.
- Loans declined because of weak demand, while deposits increased through internal sales efforts and demand for conventional deposit products. Management also noted continued competition for deposits at above-market rates.
- Total impaired loans declined to $92.8 million from $118.3 million at December 31, 2009, although $39.7 million of impaired loans had no related allowance at September 30, 2010.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that the allowance for probable loan losses was adequate, but acknowledged continued effects from the recession and economic weakness in its markets. The company reported no direct exposure to sub-prime loans.
- The investment portfolio was concentrated in residential mortgage-backed securities, including Fannie Mae, Freddie Mac and Ginnie Mae securities. The company recorded $7.992 million of credit-related other-than-temporary impairment during the first nine months, including $531,000 in Q3.
- An LFIN-related tax dispute resulted in a March 2010 judgment against the company. The company recorded a $21.8 million reserve, believes it has grounds for appeal and stated that the reserve remained appropriate at September 30, 2010.
- In October 2010, the company was named in two purported class actions challenging overdraft-fee and transaction-posting practices. No class had been certified, and the company could not estimate the probability or amount of any loss.
- The company received approximately $1.8 million of tax and $1.5 million of interest from the IRS during Q3, which benefited other interest income and reduced the effective tax rate.
- Dodd-Frank could affect interchange fees, consumer-service revenue, deposit-insurance costs and capital requirements. The ultimate effects were uncertain because implementing rules remained pending.
- The company’s interest-rate position was liability-sensitive in the near term and asset-sensitive over longer periods. Management stated that it was appropriately positioned but noted that changing rates could affect margins and earnings.
- The company continued to participate in TARP through $216 million of Series A preferred stock held by the U.S. Treasury. Preferred dividends were 5% annually during the first five years and 9% thereafter; Treasury also held an unexercised warrant for 1,326,238 common shares.
- The company repurchased 237,272 common shares during Q3 at an average price of $16.14. Approximately $33.5 million remained available under the authorized repurchase program at September 30, 2010.
- Management reported effective disclosure controls and procedures, with no material weaknesses and no material changes to internal control over financial reporting.
Investor Verification Items
- Verify the sustainability of earnings excluding the $30.9 million of nine-month securities gains, the IRS refund and other unusual items.
- Assess future credit losses, charge-offs, impaired loans and the adequacy of the $82.9 million allowance as economic conditions evolve.
- Review the composition, credit performance, unrealized losses and valuation assumptions for the $5.16 billion available-for-sale securities portfolio, particularly non-agency mortgage-backed securities.
- Monitor the LFIN tax litigation reserve, appeals and any potential additional liability.
- Track the overdraft class actions and the effects of regulatory changes on overdraft practices, interchange revenue and consumer-service fees.
- Evaluate liquidity and funding dependence, including deposits, repurchase agreements, FHLB borrowings and the company’s reduced operating cash flow.
- Confirm the terms and future cost of TARP preferred stock, restrictions on capital actions and the treatment of trust preferred securities in regulatory capital.