International Bancshares Corporation — Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company operating through banking and non-banking subsidiaries. It provides commercial, consumer and international banking services across South, Central and Southeast Texas and Oklahoma, with significant cross-border business involving Mexico. The filing covers the quarter and six months ended June 30, 2012; financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Total interest income | $93.7 million | $189.5 million |
| Net interest income | $73.6 million | $148.8 million |
| Non-interest income | $40.8 million | $84.0 million |
| Non-interest expense | $72.1 million | $140.2 million |
| Provision for probable loan losses | $6.1 million | $11.4 million |
| Net income | $24.6 million | $56.2 million |
| Net income available to common shareholders | $21.2 million | $49.5 million |
| Basic diluted earnings per common share | $0.32 / $0.31 | $0.74 / $0.74 |
- Total assets were $11.56 billion at June 30, 2012, down 1.6% from December 31, 2011.
- Net loans were $4.81 billion, down 3.2%; management attributed the decline to weak loan demand.
- Deposits were $8.16 billion, up 2.7%, while other borrowed funds declined 71.2% to $142.1 million.
- Shareholders’ equity was $1.64 billion, up 2.3% from year-end 2011.
- The allowance for probable loan losses was $70.4 million, or 1.4% of total loans, compared with $84.2 million, or 1.7%, at December 31, 2011.
- Non-accrual loans declined to $71.4 million from $118.5 million at year-end 2011. Total past-due loans declined to $82.4 million from $139.7 million.
- Regulatory capital remained strong: leverage ratio 12.83%, risk-weighted Tier 1 ratio 23.12% and total risk-weighted capital ratio 24.29% at June 30, 2012.
- Cash and cash equivalents were $219.9 million at June 30, 2012.
Cash flow and liquidity
- Six-month operating cash flow was $94.8 million, compared with $129.3 million in the prior-year period.
- Investing activities provided $40.2 million, including proceeds from mortgage-backed securities, loan collections and sales of other real estate owned.
- Financing activities used $177.0 million, primarily due to a $352.1 million reduction in other borrowed funds, dividends and the net change in deposits and repurchase agreements.
- Cash decreased by $42.0 million during the first six months, ending at $219.9 million.
- Liquidity sources include deposits, Federal Home Loan Bank borrowings, repurchase agreements, large certificates of deposit and investment securities. Management stated that liquidity remained adequate.
Material changes versus prior comparable periods
- Second-quarter net income available to common shareholders declined 27.7%, and six-month income declined 16.8%, compared with the same periods in 2011.
- Six-month net interest income decreased 10.0%, primarily reflecting lower loan demand and declining investment-security yields. Interest expense fell 18.2%.
- Six-month non-interest income decreased 12.7%, largely because of lower banking service charges, interchange-fee income and overdraft-program revenue following regulatory changes.
- Six-month non-interest expense declined 12.0%, reflecting cost reductions including the closure of 55 in-store branches in 2011. Other real estate owned expense decreased substantially.
- The six-month loan-loss provision increased to $11.4 million from $2.2 million in 2011, although the allowance balance declined because of charge-offs and the smaller loan portfolio.
- Commercial real estate and construction exposures remained key credit concentrations, but impaired and non-accrual loans declined following charge-offs and transfers to other real estate owned.
- Available-for-sale investment securities totaled $5.21 billion, with $15.7 million of gross unrealized losses at June 30, 2012. Credit-related impairment charges were $0.4 million for the six months.
Outlook, commentary, risks and unusual items
- Management expects continued pressure from weak loan demand, low interest rates, reduced interchange and overdraft revenue, and elevated regulatory compliance costs.
- Management stated that Texas and Oklahoma markets appeared better positioned for recovery than many other regions and that the loan-loss allowance was adequate; however, loan-loss estimates remain sensitive to economic conditions, collateral values, unemployment, interest rates and regulatory classifications.
- The company is liability-sensitive in the earliest repricing periods and asset-sensitive over longer periods. Changes in interest rates could affect net interest income and asset values.
- The company has substantial exposure to residential mortgage-backed securities, including agency securities and a smaller non-agency portfolio valued using Level 3 assumptions. Changes in prepayment, default or loss-severity assumptions could affect fair values and earnings.
- On July 11, 2012, after the reporting date, the company repurchased 40,000 shares of Treasury-held preferred stock for $40 million plus approximately $0.3 million of accrued dividends. The remaining preferred stock liquidation preference was $176 million.
- The company paid a $0.20 per-share common dividend in April 2012 and maintained a program authorizing up to $40 million of common-stock repurchases through April 2013. It repurchased 23,106 shares during June 2012.
- A previously disclosed LFIN-related tax judgment was paid in February 2012, concluding that matter. Other legal proceedings were assessed as unlikely to result in material losses, although developments could change that assessment.
- Principal risks include economic weakness, credit losses, collateral declines, financial-market volatility, funding availability, interest-rate changes, regulatory and legislative developments, U.S.-Mexico trade conditions, cybersecurity, litigation and potential goodwill or securities impairment.
Most important facts to verify
- Whether the decline in loan demand and net interest income persists and further compresses earnings.
- The sustainability of deposit growth and the cost of retaining deposits amid increased competition.
- Credit trends in commercial real estate, construction and land-development portfolios, including future transfers to other real estate owned.
- The adequacy of the $70.4 million loan-loss allowance under changing collateral values and economic conditions.
- Valuation and impairment risk in the non-agency mortgage-backed securities portfolio and the assumptions used in Level 3 models.
- The effect of regulatory changes on interchange, overdraft and other fee income and on compliance expenses.
- The impact of the July 2012 preferred-stock repurchase on capital, dividends and future funding flexibility.