International Bancshares Corporation — Q1 2012 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 substantial activity involving U.S.-Mexico trade and customers domiciled in Mexico. The company reported unaudited consolidated results for the three months ended March 31, 2012, compared with the same period in 2011; balance-sheet amounts are compared with December 31, 2011.
Key financial metrics
| Metric | Q1 2012 / March 31, 2012 | Comparable / Prior period | Change |
|---|---|---|---|
| Total assets | $11.812 billion | $11.740 billion at Dec. 31, 2011 | 0.6% |
| Net loans | $4.857 billion | $4.969 billion at Dec. 31, 2011 | (2.3%) |
| Deposits | $8.318 billion | $7.946 billion at Dec. 31, 2011 | 4.7% |
| Cash and cash equivalents | $551.0 million | $261.9 million at Dec. 31, 2011 | Increase of $289.2 million |
| Interest income | $95.8 million | $107.1 million | (10.6%) |
| Interest expense | $20.7 million | $25.3 million | (18.3%) |
| Net interest income | $75.1 million | $81.8 million | (8.2%) |
| Provision for loan losses | $5.3 million | $4.1 million | 29.5% |
| Non-interest income | $43.2 million | $48.4 million | (10.7%) |
| Non-interest expense | $68.1 million | $75.5 million | (9.7%) |
| Net income | $31.7 million | $33.5 million | (5.5%) |
| Net income available to common shareholders | $28.3 million | $30.2 million | (6.2%) |
| Basic and diluted EPS | $0.42 | $0.45 | (6.7%) |
| Shareholders’ equity | $1.607 billion | $1.600 billion at Dec. 31, 2011 | 0.4% |
Net income was approximately 33.1% of total interest and non-interest income. The reported efficiency ratio, calculated as non-interest expense divided by net interest income plus non-interest income, was approximately 57.6%; the filing does not present this ratio directly. The filing does not provide a clear consolidated net interest margin.
Cash flow, debt and capital
- Operating activities generated $60.0 million of cash, compared with $59.6 million in Q1 2011.
- Investing activities generated $142.9 million, primarily reflecting mortgage-backed security principal collections, a net decrease in loans and securities activity.
- Financing activities generated $86.2 million, driven by deposit growth and partly offset by a $296.0 million reduction in other borrowed funds.
- Cash and cash equivalents increased to $551.0 million from $261.9 million at year-end 2011.
- Other borrowed funds declined 59.9% to $198.1 million. Junior subordinated deferrable interest debentures remained $190.7 million.
- Capital ratios remained strong: leverage ratio 12.62%, risk-weighted Tier 1 capital ratio 23.08% and risk-weighted total capital ratio 24.33% at March 31, 2012.
- Common stock dividends of $0.20 per share were paid on April 20, 2012. The company paid $2.7 million of dividends on its TARP-related preferred stock during the quarter and expected to pay another $2.7 million on May 15, 2012.
Material changes versus prior comparable periods
- Earnings declined as lower interest income and lower fee income outweighed reduced interest expense and operating costs.
- Loan demand remained weak; total loans decreased 2.3% from year-end 2011. The allowance for probable loan losses declined to $78.8 million, or 1.6% of total loans, from $84.2 million, or 1.7%.
- The quarterly provision for loan losses increased to $5.3 million from $4.1 million. Non-accrual loans were $117.0 million, modestly below $118.5 million at year-end 2011.
- Deposits increased 4.7%, while management noted continued competition requiring higher deposit pricing and allowing certain deposits to leave when pricing was considered aggressive.
- Non-interest income declined primarily because of regulatory changes affecting interchange fees and overdraft programs. The company had closed 55 in-store branches by December 31, 2011 to align expenses with lower revenue.
- Non-interest expense decreased 9.7%, reflecting lower employee compensation, depreciation, professional fees, deposit insurance assessments and other costs.
- Available-for-sale securities totaled $5.097 billion at fair value, including $4.838 billion of residential mortgage-backed securities. Accumulated other comprehensive income declined by $8.0 million during the quarter, principally from unrealized securities losses.
- The company paid $24.4 million in February 2012 to satisfy the final judgment in the inherited LFIN tax dispute; the matter was concluded upon filing of a release and satisfaction of judgment.
Outlook, management commentary, risks and unusual items
Management stated that first-quarter results are not necessarily indicative of full-year or future results and did not provide quantitative earnings or revenue guidance. Management believed the loan-loss allowance was adequate and viewed Texas and Oklahoma markets as improving, but continued to identify economic weakness, real-estate collateral values and unemployment as credit risks.
- Credit risk remains concentrated in commercial and real-estate lending. Construction and land-development loans, other commercial real estate and collateral values warrant continued monitoring.
- Non-agency mortgage-backed securities are valued using Level 3 discounted-cash-flow assumptions, including prepayment, default, loss-severity and discount-rate estimates. Changes in collateral performance could affect fair values and impairment charges.
- The company recorded $186,000 of credit-related other-than-temporary impairment charges on available-for-sale securities during the quarter.
- Interest-rate exposure was liability-sensitive in the near term and asset-sensitive over longer periods. A sustained low-rate environment could pressure net interest income and margins.
- Other risks include economic and financial-market volatility, regulatory changes including Dodd-Frank and interchange-fee restrictions, competition for deposits, reliance on external financing, U.S.-Mexico trade conditions, litigation, technology and cybersecurity events, and potential goodwill or securities impairment.
- The company extended its common-stock repurchase authorization for up to $40 million through April 9, 2013. It repurchased 29,466 shares during March at an average price of $18.96.
- 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 loan demand, non-accrual loans, past-due loans and commercial real-estate credit quality improve or deteriorate.
- Whether the $78.8 million allowance remains adequate as economic conditions, collateral values and regulatory classifications change.
- The sustainability of deposit growth and the cost of competing for deposits at higher rates.
- The effect of interchange-fee and overdraft regulations on recurring non-interest income and the benefits of the branch-closure program.
- Changes in fair values, impairment charges and Level 3 assumptions for mortgage-backed securities.
- The company’s ability to maintain strong regulatory capital and liquidity while paying preferred and common dividends and repurchasing shares.
- Future obligations, redemption requirements and regulatory treatment of the $190.7 million of junior subordinated debentures and the TARP-related preferred stock.