International Bancshares Corporation — 2016 Q1 Form 10-Q
Business context and reporting period
International Bancshares Corporation is a Texas-based bank holding company serving commercial, consumer and international customers across South, Central and Southeast Texas and Oklahoma, with significant cross-border business involving Mexico. The unaudited report covers the three months ended March 31, 2016, with balance-sheet comparisons to December 31, 2015 and operating comparisons to the three months ended March 31, 2015.
Key financial metrics
| Metric | Q1 2016 | Comparable / prior period | Change |
|---|---|---|---|
| Total assets | $11.879 billion | $11.773 billion at Dec. 31, 2015 | +0.9% |
| Total deposits | $8.614 billion | $8.536 billion at Dec. 31, 2015 | +0.9% |
| Net loans | $5.874 billion | $5.884 billion at Dec. 31, 2015 | -0.2% |
| Interest income | $97.1 million | $99.1 million | -2.1% |
| Net interest income | $86.2 million | $87.9 million | -1.9% |
| Provision for loan losses | $9.1 million | $2.4 million | +284.3% |
| Non-interest income | $40.9 million | $36.8 million | +11.1% |
| Non-interest expense | $67.9 million | $67.6 million | +0.4% |
| Net income | $33.0 million | $35.9 million | -8.0% |
| Basic and diluted EPS | $0.50 | $0.54 | -7.4% |
| Operating cash flow | $66.4 million | $66.8 million | -0.6% |
Net income margin based on interest income plus non-interest income was approximately 25.9%, compared with approximately 26.4% in the prior-year quarter. The reported efficiency ratio, calculated from non-interest expense divided by net interest income plus non-interest income, was approximately 53.4%.
Cash and cash equivalents were $258.5 million at March 31, 2016, down from $273.1 million at year-end. Investing activities used $101.0 million, principally reflecting purchases of available-for-sale securities, while financing activities provided $20.0 million. The company held $4.340 billion of investment securities, primarily mortgage-backed securities.
Borrowings included $784.3 million of repurchase agreements, $499.7 million of other borrowed funds and $161.4 million of junior subordinated deferrable interest debentures. Shareholders’ equity was $1.700 billion, up 2.1% from year-end. Regulatory capital remained strong: CET1 was 16.78%, Tier 1 risk-based capital was 18.64%, total risk-based capital was 19.43%, and the leverage ratio was 13.39%. Management stated that the company and its subsidiary banks were well-capitalized.
Material changes versus comparable periods
- Net income declined primarily because the provision for probable loan losses increased by $6.8 million year over year.
- The higher provision reflected increased historical loss experience in commercial loans and a further charge-down of approximately $16.8 million on a previously identified relationship secured mainly by transportation equipment. Litigation against the borrower’s management created a going-concern concern and reduced expected collateral values.
- Non-interest income increased, helped by approximately $2.4 million of gains from the sale of two investments by a merchant-banking entity in which the company holds an equity interest.
- Loan balances were broadly stable, while deposits increased because of greater availability in the banking market. Management noted continued competition for deposits at above-market rates.
- The allowance for probable loan losses declined to $61.8 million from $67.0 million, and represented 1.04% of total loans versus 1.13% at year-end. Non-accrual loans declined to $30.9 million from $47.7 million.
- Available-for-sale securities increased to $4.338 billion from $4.199 billion. Unrealized losses declined substantially to $14.3 million from $46.8 million, primarily reflecting interest-rate movements.
- The company repurchased 348,870 shares during the quarter at an average price of $22.81 per share, including 348,332 shares under its publicly announced program. The remaining authorized repurchase capacity was $26.6 million at March 31, 2016.
Outlook, risks, contingencies and unusual items
The filing provides no formal earnings or financial guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year or future results. Management stated that it believes the company is appropriately positioned for interest-rate changes and will adjust rate-sensitive assets and liabilities as market conditions require.
- Credit risk remains material, particularly in commercial and real-estate lending. Management cited prolonged economic weakness, collateral values, unemployment, lower oil prices and border-related economic conditions as potential drivers of future losses.
- The company has substantial exposure to mortgage-backed securities, including securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. A small non-agency mortgage-backed securities portfolio remains subject to credit and valuation risk; first-quarter credit-related impairment charges were $124,000.
- Liquidity depends substantially on deposits, FHLB borrowings and repurchase agreements. Management stated that the company maintains unused FHLB lines and a sizable investment portfolio that can provide liquidity, but loss or repricing of funding sources could adversely affect operations.
- The company is exposed to U.S.-Mexico trade, cross-border deposits, regulatory changes, interest-rate volatility, competition, cybersecurity and technology risks, goodwill impairment, litigation, and changes in capital and liquidity requirements.
- Various lender-liability lawsuits are pending. Management believes a material loss is remote, although further developments could change that assessment.
- Disclosure controls were evaluated as effective, with no material weaknesses reported and no material changes to internal control over financial reporting.
Investor verification points
- Verify whether the transportation-equipment credit deterioration and related $16.8 million charge-down represent an isolated event or indicate broader commercial-credit stress.
- Review subsequent allowance levels, charge-offs, non-accrual loans, past-due loans and criticized-credit balances.
- Assess the sustainability of the $2.4 million investment-sale contribution to non-interest income.
- Monitor deposit pricing, funding costs, FHLB and repurchase-agreement availability, and the effect of interest-rate changes on net interest margin.
- Evaluate the valuation and credit performance of the mortgage-backed securities portfolio, including the Level 3 non-agency securities.
- Confirm continued compliance with Basel III capital requirements and the capacity for dividends and share repurchases.
- Track developments in pending litigation, U.S.-Mexico trade and border activity, regulatory requirements, cybersecurity, and any potential goodwill or securities impairment.