International Bancshares Corporation — 2015 Q2 Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based commercial bank holding company headquartered in Laredo, Texas. Through its banking subsidiaries, it serves commercial, consumer and international customers across South, Central and Southeast Texas and Oklahoma, with significant cross-border activity involving Mexico. The company reported unaudited consolidated results for the three and six months ended June 30, 2015; comparable income and cash-flow periods are the same periods in 2014, while balance-sheet comparisons are to December 31, 2014.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Net interest income | $87.8 million | $87.7 million | +0.1% |
| Provision for loan losses | $7.8 million | $3.6 million | +113.1% |
| Non-interest income | $40.1 million | $41.5 million | -3.2% |
| Non-interest expense | $68.3 million | $68.6 million | -0.5% |
| Net income | $33.9 million | $37.7 million | -10.2% |
| Basic and diluted EPS | $0.51 | $0.56 | -8.9% |
| Metric | Six months 2015 | Six months 2014 | Change |
|---|---|---|---|
| Net interest income | $175.7 million | $173.5 million | +1.3% |
| Provision for loan losses | $10.1 million | $5.7 million | +77.2% |
| Non-interest income | $77.0 million | $99.6 million | -22.7% |
| Non-interest expense | $135.9 million | $146.3 million | -7.1% |
| Net income | $69.7 million | $81.4 million | -14.3% |
| Basic and diluted EPS | $1.05 | $1.21 | -13.2% |
At June 30, 2015, total assets were $12.07 billion, net loans were $5.71 billion, deposits were $8.46 billion and shareholders’ equity was $1.63 billion. Loans increased 1.8% and deposits increased 0.3% from year-end 2014, while total assets declined 1.0%. The allowance for probable loan losses was $60.5 million, or 1.05% of total loans, compared with $64.8 million, or 1.14%, at December 31, 2014.
Six-month net cash provided by operating activities was $100.4 million, compared with $82.3 million in 2014. Investing activities provided $104.3 million, versus using $97.5 million in the prior-year period, primarily reflecting lower purchases of available-for-sale securities and mortgage-backed-security cash collections. Financing activities used $199.4 million, compared with providing $192.1 million in 2014. Cash and cash equivalents ended the period at $260.4 million, versus $451.7 million at June 30, 2014.
Interest expense declined 4.5% for the first six months, supporting modest net-interest-income growth. Based on reported figures, the approximate efficiency ratio was 53.8% for the first six months of 2015 versus 53.5% in the prior-year period. The filing does not provide a clearly stated net interest margin or return on equity.
Material changes versus prior comparable periods
- Profitability weakened primarily because loan-loss provisions increased substantially and non-interest income declined.
- Loan interest income increased 5.4% for the first six months, but taxable investment-securities income declined 18.3%.
- Six-month non-interest income was reduced by the absence of several significant 2014 items, including an investment sale, insurance proceeds, a property sale, a discount on a trust-preferred-securities buyback and approximately $5.0 million of after-tax investment gains.
- Non-interest expense benefited from the absence of the $11.0 million early-termination charge on repurchase agreements recorded in the first quarter of 2014.
- Other borrowed funds declined 23.6% to $820.3 million, primarily due to the use of cash generated from security principal paydowns. The company also repaid a $6.2 million long-term FHLB borrowing during the second quarter.
- Loan quality indicators improved in some areas: non-accrual loans declined to $46.2 million from $63.6 million at year-end 2014, and total impaired loans declined to $58.5 million from $76.2 million. However, past-due loans increased to $84.4 million from $?97.2 million? The filing reports $84.4 million at June 30, 2015 versus $97.2 million at December 31, 2014; this represents a decline.
Outlook, commentary, risks and unusual items
Management attributed loan growth to improved lending opportunities and stated that deposits benefited from greater availability in the banking market, although competition for deposits at above-market rates remains significant. Management believes the company is appropriately positioned for interest-rate changes and intends to continue adjusting the mix and maturities of rate-sensitive assets and liabilities.
Credit risk remains a key issue. The second-quarter increase in charge-offs was attributed largely to a write-down of an impaired commercial relationship secured mainly by transportation equipment, along with foreclosure of two real-estate-secured commercial loans. Management believes the allowance is adequate, but emphasizes that future provisions depend on economic conditions, collateral values, borrower performance, interest rates, regulatory classifications and other factors.
The company maintains substantial mortgage-backed-securities exposure, including $4.37 billion of residential mortgage-backed securities. Unrealized losses on available-for-sale securities totaled $47.5 million at June 30, 2015, and the company recorded $451,000 of credit-related impairment charges for the first six months. Management stated it did not intend, and was not likely, to be required, to sell the government-related securities before recovery or maturity.
Management identified risks relating to economic weakness, lower real-estate values, lower oil prices, interest-rate and funding-market changes, competition for deposits, U.S.-Mexico trade and border activity, regulatory and capital requirements, litigation, cyber risk, vendor and system failures, goodwill impairment, and potential reductions in nonresident-alien deposits. The filing provides no formal earnings or revenue guidance. Legal proceedings are ongoing, but management believes material losses are remote.
Capital remained strong. At June 30, 2015, the CET1 ratio was 16.13%, Tier 1 leverage ratio was 12.64%, risk-weighted Tier 1 capital ratio was 18.19% and total risk-weighted capital ratio was 18.96%. Management stated that the company and its subsidiary banks exceeded applicable Basel III requirements and were well capitalized.
The board extended a $40 million share-repurchase authorization through April 9, 2016 and adopted a Rule 10b5-1 plan. No shares were repurchased during the second quarter; cumulative repurchases under all programs totaled 8.7 million shares costing $257.7 million as of July 31, 2015. The company paid a $0.29-per-share dividend in April 2015.
Important facts for investors to verify
- Reconcile the sustainability of earnings after the unusually high loan-loss provision and the absence of favorable one-time items recorded in 2014.
- Monitor commercial-loan performance, transportation-equipment collateral, real-estate collateral values, charge-offs, impaired loans, non-accrual loans and allowance coverage.
- Assess sensitivity to interest rates, particularly the early-period liability-sensitive repricing gap and the substantial mortgage-backed-securities portfolio.
- Evaluate liquidity dependence on deposits, Federal Home Loan Bank funding and repurchase agreements, including the ability to renew or replace short-term borrowings.
- Review the impact of deposit-rate competition, U.S.-Mexico trade conditions and potential changes in nonresident-alien deposits.
- Confirm capital ratios, dividend capacity and the effect of future Basel III capital-conservation-buffer requirements.
- Review the fair-value assumptions for Level 3 mortgage-backed securities and impaired loans, including prepayment, default, loss-severity and discount-rate assumptions.
- Verify the status and potential exposure of pending lender-liability litigation, regulatory matters and the outstanding Treasury warrant expiring December 23, 2018.