International Bancshares Corporation — 1Q15 Form 10-Q Summary
Business context and reporting period
Unaudited consolidated results for the three months ended March 31, 2015, compared primarily with the three months ended March 31, 2014 and the December 31, 2014 balance sheet. Headquartered in Laredo, Texas, the company provides commercial, consumer and international banking services across South, Central and Southeast Texas and Oklahoma, with significant U.S.–Mexico border activity. The company reported one operating segment and operated 212 facilities and 325 ATMs.
Key financial metrics
| Metric | 1Q15 / March 31, 2015 | Comparable / Prior period |
|---|---|---|
| Total assets | $12.374 billion | $12.197 billion at December 31, 2014 |
| Loans | $5.779 billion gross; $5.712 billion net | $5.679 billion gross; $5.614 billion net at December 31, 2014 |
| Deposits | $8.649 billion | $8.439 billion at December 31, 2014 |
| Net interest income | $87.891 million | $85.764 million in 1Q14 |
| Provision for loan losses | $2.377 million | $2.078 million in 1Q14 |
| Non-interest income | $36.834 million | $58.186 million in 1Q14 |
| Non-interest expense | $67.623 million | $77.696 million in 1Q14 |
| Net income | $35.862 million | $43.646 million in 1Q14 |
| Basic and diluted EPS | $0.54 | $0.65 in 1Q14 |
| Cash and cash equivalents | $278.396 million | $255.146 million at December 31, 2014; $351.287 million at March 31, 2014 |
| Shareholders’ equity | $1.618 billion | $1.581 billion at December 31, 2014 |
Net interest income increased 2.5% year over year as loan interest income rose 6.7% and total interest expense declined 5.3%. The filing does not provide a clear consolidated net interest margin percentage. Net income declined 17.8%, and basic and diluted EPS declined 16.9%.
Operating cash flow was $66.783 million, compared with $61.215 million in 1Q14. Investing activities used $135.206 million, principally reflecting purchases of available-for-sale securities and net loan growth. Financing activities provided $91.673 million, driven by increases in demand and savings deposits and repurchase agreements, partly offset by reduced other borrowings. Cash increased $23.250 million during the quarter.
Other borrowed funds declined 12.3% to $941.457 million from $1.074 billion at year-end 2014. Securities sold under repurchase agreements were $873.405 million, and junior subordinated deferrable interest debentures were $175.416 million. Available-for-sale securities totaled $4.988 billion and represented a substantial liquidity resource. Management stated that the company maintains unused FHLB lines and can use unpledged securities to address funding needs.
Material changes versus prior comparable periods
- Net income fell $7.784 million year over year despite higher net interest income.
- Non-interest income fell $21.352 million, primarily because 1Q14 included nonrecurring gains and proceeds, including securities gains, a merchant-banking investment sale, insurance proceeds, a property sale and a discount on a trust-preferred securities repurchase.
- Non-interest expense declined $10.073 million, largely because 1Q14 included an $11.0 million early termination fee on repurchase agreements.
- Loans increased 1.7% and deposits increased 2.5% from December 31, 2014. Construction and land-development loans increased to $1.523 billion from $1.415 billion.
- The allowance for probable loan losses increased 2.2% to $66.251 million, remaining 1.14% of total loans. Non-accrual loans declined to $61.318 million from $63.559 million at year-end.
- Accumulated other comprehensive income increased to $33.377 million from $11.397 million, primarily reflecting unrealized gains on available-for-sale securities.
- The company repurchased 54,000 shares during January 2015 at an average price of $23.05 per share. The board authorized up to $40 million of additional repurchases through April 9, 2016.
Outlook, risks, contingencies and unusual items
No quantitative earnings or revenue guidance was provided. Management attributed loan growth to improved lending opportunities and stated that it was managing interest-rate sensitivity, liquidity and funding costs. The company was liability-sensitive in the earliest repricing periods and asset-sensitive over longer periods.
- Credit risks include economic weakness, declining real-estate collateral values, unemployment, lower oil prices, border-related risks and potential increases in loan-loss provisions. Impaired loans totaled $73.750 million, and commercial collateral-dependent impaired loans totaled $64.891 million.
- Available-for-sale securities included $4.661 billion of residential mortgage-backed securities. The portfolio had $29.615 million of gross unrealized losses and $227,000 of credit-related impairment charges in 1Q15. Non-agency mortgage-backed securities valued using Level 3 assumptions totaled $23.422 million.
- Liquidity depends materially on deposits, FHLB borrowings, repurchase agreements and securities financing. Competition for deposits at higher-than-market rates was noted.
- Material risks include interest-rate changes, financial-market volatility, regulatory and capital changes, U.S.–Mexico trade and immigration developments, cyber and systems risks, competition, acquisitions, litigation and possible goodwill or securities impairments.
- Various lender-liability lawsuits are pending; management considers a material loss remote, although developments could change that assessment.
- The company reported strong regulatory capital: CET1 ratio 15.60%, Tier 1 leverage ratio 12.27%, risk-weighted Tier 1 ratio 17.83% and total risk-weighted capital ratio 18.67% at March 31, 2015. Management stated that the company and its subsidiary banks were well capitalized.
- Management reported effective disclosure controls, no material weaknesses and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether recurring non-interest income can stabilize after the unusually strong 1Q14 comparison.
- Future trends in construction and commercial real-estate lending, impaired loans, non-accrual loans and the allowance coverage ratio.
- The composition, valuation sensitivity and credit performance of the large mortgage-backed securities portfolio, particularly Level 3 securities.
- Deposit pricing pressure, reliance on FHLB and repurchase-agreement funding, and the availability of unused liquidity lines.
- Exposure to U.S.–Mexico trade, nonresident-alien deposits, border-market conditions and changes in oil prices.
- The effect of Basel III phase-in requirements on dividends, repurchases, compensation and capital flexibility.
- The amount and timing of future share repurchases and the effect of the outstanding Treasury warrant, which expires December 23, 2018.