International Bancshares Corporation — 2Q 2013 Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based 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 unaudited report covers the quarter and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods. Amounts are in thousands except per-share data.
Financial performance and condition
- Second-quarter revenue and earnings: Interest income was $86.3 million, non-interest income was $46.7 million and total reported revenue was approximately $133.0 million. Net income available to common shareholders was $27.5 million, or $0.41 basic and diluted earnings per share, compared with $21.2 million and $0.32 basic EPS in 2Q 2012.
- Six-month performance: Interest income was $173.4 million, non-interest income was $100.0 million and total reported revenue was approximately $273.4 million. Net income available to common shareholders was $55.6 million, or $0.83 per basic and diluted share, compared with $49.5 million and $0.74 per share in the prior-year period.
- Margins and efficiency: Net interest income was $72.6 million in the quarter and $145.3 million year to date. Based on reported net interest income plus non-interest income, the approximate efficiency ratio was 61.8% for the quarter and 63.0% year to date. The filing does not provide a clearly stated net interest margin in the supplied text.
- Balance sheet: Total assets were $11.60 billion, down 2.4% from December 31, 2012. Net loans were $4.85 billion, up 2.8%; total deposits were $8.19 billion, down 1.1%; and shareholders’ equity was $1.40 billion, down 2.7%.
- Credit quality and allowance: The allowance for probable loan losses was $65.1 million, or 1.3% of total loans, versus $58.2 million, or 1.2%, at year-end 2012. Non-accrual loans were $74.6 million, compared with $71.8 million at December 31, 2012. Total past-due loans were $125.7 million, compared with $90.2 million at year-end.
- Liquidity and funding: Cash and due from banks were $238.9 million. Funding included $1.03 billion of repurchase agreements, $752.5 million of other borrowings and $190.7 million of junior subordinated debentures. Cash and cash equivalents decreased $44.2 million during the first six months to $238.9 million.
- Cash flow: Six-month operating cash flow was $92.8 million and investing cash flow was $71.1 million. Financing activities used $208.0 million, primarily due to reductions in time deposits and repurchase agreements and common dividends of $13.4 million.
- Capital: At June 30, 2013, the leverage ratio was 11.65%, risk-weighted Tier 1 capital was 19.58% and total risk-weighted capital was 20.59%. Management stated that the bank subsidiaries remained well capitalized.
Material changes versus prior comparable periods
- Second-quarter net income available to common shareholders increased 29.8%, while six-month net income increased 12.2%. The improvement benefited from the elimination of TARP preferred dividends after repayment of the TARP funds in 2012.
- Net interest income declined 1.4% in the quarter and 2.4% year to date as interest income fell faster than interest expense. Lower loan and taxable investment-security yields and weak loan demand pressured earnings, although funding costs declined substantially.
- Non-interest income increased 14.4% in the quarter and 19.0% year to date. Six-month results included $9.6 million of net investment-securities gains and $5.5 million of income from the sale of assets in a partnership.
- Non-interest expense increased 2.3% in the quarter and 10.2% year to date. Results included a $12.3 million early-termination fee related to long-term repurchase agreements, including $2.4 million in the second quarter.
- Loan balances grew, but credit indicators weakened in certain areas. The allowance increased principally because of an approximately $10 million specific reserve on a previously identified impaired commercial loan that deteriorated during the period.
- Accumulated other comprehensive income declined to a loss of $15.2 million from income of $65.7 million at year-end, primarily due to higher unrealized losses on available-for-sale securities. Comprehensive income was a loss of $37.7 million in the quarter and a loss of $25.3 million for the first six months.
Outlook, commentary, risks and unusual items
- Management cited improving loan opportunities and believed Texas and Oklahoma markets were better positioned for recovery than many other regions, but continued to identify economic weakness, real-estate collateral values and unemployment as credit risks.
- Deposit competition remained intense, including competition offering rates above market levels. Management allowed certain deposits to leave rather than match aggressive pricing.
- The company described its near-term interest-rate position as liability sensitive, with a cumulative repricing gap of negative $795.5 million through one year and positive $1.57 billion through five years. Management stated that it believed the company was properly positioned for interest-rate changes.
- Key risks include narrowing interest margins, financial-market volatility, dependence on external funding, regulatory and compliance costs, Dodd-Frank and Basel-related changes, U.S.-Mexico trade and immigration developments, nonresident-alien deposit reporting requirements, cybersecurity, litigation, goodwill impairment and additional securities or loan impairments.
- Available-for-sale securities totaled $5.19 billion, including $4.92 billion of residential mortgage-backed securities. Gross unrealized losses were $103.2 million, and six-month credit-related impairment charges were $727,000.
- The company maintained a $40 million stock-repurchase authorization through April 9, 2014, but made no repurchases during the second quarter. As of July 31, 2013, cumulative repurchases under all programs totaled 7,843,293 shares at a cost of $237.5 million.
- Legal proceedings were ongoing, but management assessed any material loss as remote. The filing reported no material changes to previously disclosed risk factors, no material subsequent events and no material weaknesses in disclosure controls.
Important facts for investors to verify
- Whether the increase in past-due and non-accrual loans leads to additional provisions or charge-offs, particularly in commercial and real-estate portfolios.
- The sustainability of non-recurring or potentially volatile income, including securities gains and the $5.5 million partnership-asset sale gain.
- The effect of the $12.3 million repurchase-agreement termination charge and the company’s future funding costs.
- Trends in deposit balances, deposit pricing, liquidity sources and reliance on repurchase agreements and FHLB borrowings.
- Changes in unrealized securities losses, non-agency mortgage-backed securities valuations and related impairment assumptions.
- Future effects of regulatory requirements on interchange, overdraft revenue, compliance expense and required capital.
- The filing’s warning that six-month results are not necessarily indicative of full-year 2013 results.