International Bancshares Corporation — 2011 Q1 Form 10-Q
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company headquartered in Laredo. Through its banking subsidiaries, it serves commercial, consumer and international customers across South, Central and Southeast Texas and Oklahoma, with significant activity supporting U.S.-Mexico border trade. The filing covers the unaudited quarter ended March 31, 2011, compared primarily with the quarter ended March 31, 2010 and the December 31, 2010 balance sheet.
Key financial metrics
| Metric | Q1 2011 | Comparable period | Change |
|---|---|---|---|
| Total interest income | $107.1 million | $119.8 million | (10.6%) |
| Net interest income | $81.8 million | $89.9 million | (9.0%) |
| Provision for loan losses | $4.1 million | $7.2 million | (43.6%) |
| Non-interest income | $48.4 million | $71.6 million | (32.4%) |
| Non-interest expense | $75.5 million | $105.6 million | (28.5%) |
| Net income | $33.5 million | $32.0 million | +4.6% |
| Net income available to common shareholders | $30.2 million | $28.8 million | +5.0% |
| Basic and diluted EPS | $0.45 | $0.42 | +7.1% |
| Operating efficiency ratio | Approximately 58.0% | Approximately 65.4% | Improved |
The calculated efficiency ratio is non-interest expense divided by net interest income plus non-interest income. The filing does not provide a clear net interest margin, return on assets or return on equity.
- Total assets were $12.20 billion at March 31, 2011, up 2.1% from December 31, 2010.
- Net loans were $5.32 billion, essentially flat sequentially. Loan demand remained weak.
- Deposits increased 3.4% sequentially to $7.86 billion, including a 9.8% increase in non-interest-bearing demand deposits.
- Available-for-sale investment securities increased to $5.26 billion from $5.09 billion, reflecting purchases and portfolio repositioning.
- Cash and cash equivalents increased to $302.9 million from $197.8 million.
- The allowance for probable loan losses was $85.4 million, or 1.6% of total loans, compared with $84.5 million at year-end.
- Non-accrual loans were $108.8 million, compared with $108.0 million at December 31, 2010. Total past-due loans declined to $108.6 million from $114.8 million.
- Shareholders’ equity was $1.48 billion, up 1.4% sequentially.
- Capital ratios at March 31, 2011 were 11.56% leverage, 20.07% risk-weighted Tier 1 capital and 21.33% risk-weighted total capital.
- Operating cash flow was $60.1 million, compared with $75.5 million in Q1 2010. Investing activities provided $60.8 million, while financing activities used $15.8 million. Cash increased by $105.1 million during the quarter.
- Other borrowed funds declined 24.8% to $772.0 million, primarily through the use of proceeds from mortgage-backed securities sales.
Material changes versus the prior comparable period
- Profitability improved despite lower recurring revenue. The reduction in the loan-loss provision and substantially lower non-interest expense more than offset declines in net interest income and non-interest income.
- Non-interest income fell principally because Q1 2010 included $28.3 million of net investment securities gains; Q1 2011 included only $1.4 million.
- Q1 2010 included $21.8 million of litigation expense related to the LFIN tax dispute; no litigation expense was recorded in Q1 2011.
- Other-than-temporary impairment charges on non-agency mortgage-backed securities declined to $249,000 from $7.2 million.
- Interest expense declined 15.4%, led by lower time-deposit costs, while interest income declined 10.6%, led by lower loan and taxable securities income.
- Loan composition shifted modestly: commercial loans increased, while mortgage, construction and consumer loans declined. Total loans remained nearly unchanged.
- Credit quality indicators were mixed. Non-accrual loans increased modestly, while total past-due loans declined; impaired loans measured at fair value increased to $46.2 million from $19.0 million at year-end.
Outlook, risks, contingencies and unusual items
Management stated that Texas and Oklahoma markets appeared better positioned for recovery than many other regions, but continued to cite the prolonged economic downturn, weak loan demand, real estate collateral values, unemployment and border-related risks. The company expects regulatory compliance costs associated with Dodd-Frank and other regulatory changes to pressure expenses and potentially its efficiency ratio. No specific earnings or revenue guidance was provided.
- The company remained subject to the TARP Capital Purchase Program. It had $216.0 million of Series A preferred stock outstanding, carrying a 5% dividend rate for the first five years and 9% thereafter, plus an unexercised warrant for 1.3 million common shares.
- The Treasury consented to the repurchase of $10.4 million of trust preferred securities, subject to limits on aggregate dividends, common stock repurchases and redemptions. The company’s trust preferred securities totaled $201.1 million.
- A judgment of approximately $24.25 million in the inherited LFIN tax dispute was on appeal. The company had deposited $24.4 million with the court in December 2010.
- The company faced a purported class-action lawsuit concerning ATM and debit-card overdraft fees and posting order. No class had been certified, and the company could not estimate the potential exposure.
- Approximately $5.02 billion of available-for-sale securities were residential mortgage-backed securities. Non-agency mortgage-backed securities were valued using Level 3 discounted cash flow assumptions, including estimated prepayment, default and loss-severity rates.
- Common dividends were subject to Treasury consent and program limitations. The board extended authorization to repurchase up to $40 million of common stock through April 9, 2012; no shares were repurchased during Q1 2011.
- Management identified economic conditions, interest rates, funding availability, regulatory changes, litigation, U.S.-Mexico trade, credit losses, securities impairment, cybersecurity and operational disruptions as material risks.
Investor verification priorities
- Verify the sustainability of earnings excluding the unusually low loan-loss provision and the absence of the prior-year LFIN litigation charge.
- Monitor non-accrual, impaired, past-due and classified loans, particularly construction, land-development and commercial real estate exposures.
- Assess the valuation and credit performance of the large mortgage-backed securities portfolio, including Level 3 non-agency holdings.
- Review deposit pricing, funding mix and the effect of interest-rate changes on net interest income, as the company was liability-sensitive in the near-term repricing periods.
- Track the LFIN tax judgment, overdraft litigation and any related reserves or cash requirements.
- Confirm the continuing impact of TARP restrictions on dividends, share repurchases and trust preferred security redemptions.
- Reconcile reported capital ratios after goodwill and intangible deductions and monitor the treatment of trust preferred securities under evolving regulations.