International Bancshares Corporation — Form 10-Q Summary
Business context and reporting period
International Bancshares Corporation, headquartered in Laredo, Texas, is a commercial bank holding company serving commercial, consumer and international customers in South, Central and Southeast Texas and Oklahoma. The company operates 217 facilities and more than 320 ATMs, with significant business and deposits connected to U.S.–Mexico border trade. This unaudited filing covers the quarter and nine months ended September 30, 2014, compared primarily with the same periods of 2013 and December 31, 2013 balance-sheet data.
Key financial metrics
| Metric | Three months ended September 30, 2014 | Nine months ended September 30, 2014 |
|---|---|---|
| Interest income | $98.0 million | $294.9 million |
| Interest expense | $11.6 million | $35.1 million |
| Net interest income | $86.4 million | $259.9 million |
| Provision for probable loan losses | $2.8 million | $8.5 million |
| Non-interest income | $36.5 million | $136.1 million |
| Non-interest expense | $70.2 million | $216.5 million |
| Net income | $33.2 million | $114.6 million |
| Basic and diluted EPS | $0.50 | $1.71 |
- Net income increased 4.4% year over year in the quarter and 31.1% for the first nine months. EPS increased 6.4% and 31.5%, respectively.
- Net interest income increased 9.8% in the quarter and 16.1% year to date, driven by higher loan balances, repositioning of the investment portfolio and lower repurchase-agreement funding costs.
- Non-interest income declined 18.0% in the quarter and 5.8% year to date. The third quarter included a $6.4 million net loss on available-for-sale securities sales undertaken to reposition the balance sheet.
- Non-interest expense was essentially flat in the quarter and declined 3.7% year to date. The filing reports no clear consolidated efficiency-ratio value.
- Total assets were $12.08 billion at September 30, 2014, essentially unchanged from December 31, 2013.
- Gross loans increased 8.9% to $5.66 billion, while net loans increased to $5.59 billion from $5.13 billion.
- Deposits increased 2.1% to $8.41 billion. Non-interest-bearing demand deposits increased to $2.89 billion, while time deposits declined to $2.52 billion.
- Other borrowed funds declined 19.3% to $987.2 million, and junior subordinated debentures declined to $180.4 million following the retirement of $10.3 million of related securities.
- Cash and cash equivalents totaled $303.6 million, compared with $274.8 million at December 31, 2013. Nine-month operating cash flow was $149.7 million; investing activities provided $71.5 million, while financing activities used $192.5 million.
- Shareholders’ equity increased 7.9% to $1.54 billion, helped by retained earnings and a substantial improvement in accumulated other comprehensive income.
- Regulatory capital remained strong: leverage ratio 12.16%, risk-weighted Tier 1 ratio 19.11% and risk-weighted total capital ratio 20.11% at September 30, 2014.
Material changes versus comparable periods
- The provision for probable loan losses fell 51.4% to $8.5 million for the first nine months, primarily because the prior-year period included an approximately $10 million specific reserve on a transportation-equipment loan relationship.
- The allowance for probable loan losses increased 2.2% to $71.7 million, equal to approximately 1.3% of total loans.
- Non-accrual loans increased to $65.3 million from $62.8 million at December 31, 2013. Total past-due loans increased to $113.4 million from $85.8 million.
- Impaired loans increased modestly to $77.97 million from $75.89 million. Watch-list substandard loans increased to $167.8 million from $72.3 million, primarily because one loan relationship deteriorated and moved from special review.
- Available-for-sale securities declined to $4.80 billion from $5.30 billion. Gross unrealized losses decreased to $66.5 million from $133.1 million, largely reflecting interest-rate-related valuation changes and portfolio activity.
- Year-to-date non-interest expense included an $11.0 million early termination fee related to certain long-term repurchase agreements; the comparable 2013 amount was $12.3 million.
- Comprehensive income was $158.5 million for the first nine months versus $8.1 million in 2013, principally because available-for-sale securities produced a $43.9 million net other comprehensive gain compared with a $79.3 million loss in the prior-year period.
- The company repurchased 151,196 shares during the third quarter at an average price of $25.50. Approximately $38.1 million remained available under the $40 million repurchase authorization at September 30, 2014.
Outlook, commentary, risks and unusual items
- Management stated that improved opportunities supported loan growth and that Texas and Oklahoma markets were continuing to improve, while acknowledging ongoing economic weakness and risks to real-estate collateral values.
- Management believes the allowance for probable loan losses is adequate, but emphasizes that reserve estimates depend on economic conditions, interest rates, collateral values, credit quality, regulatory classifications and other factors.
- The company maintains a large investment portfolio and access to FHLB funding, repurchase agreements and other sources to support liquidity. Management reported unused FHLB lines and expects securities sales could provide additional liquidity if borrowings were not renewed.
- Interest-rate exposure is liability-sensitive in the earliest repricing periods and asset-sensitive over longer periods. The company reported a cumulative repricing gap of negative $1.12 billion through one year and positive $2.84 billion across all periods.
- Material risks include economic and financial-market volatility, changing interest rates, deposit competition and funding availability, U.S.–Mexico trade and border activity, regulatory and capital changes, cybersecurity and technology failures, litigation, loan losses, securities impairment, goodwill impairment and possible reductions in fee income.
- Available-for-sale securities included $4.50 billion of residential mortgage-backed securities, with $24.95 million classified as Level 3. Valuations depend on assumptions regarding prepayments, defaults, loss severity and discount rates.
- The company recorded $552,000 of credit-related impairment charges on available-for-sale securities during the first nine months. Management stated that it did not intend, and was not expected, to sell certain securities before recovery or maturity.
- Management reported no material subsequent events, no material changes in market-risk disclosures and no material weaknesses in disclosure controls. Legal proceedings were considered unlikely to result in material losses, although developments could change that assessment.
- No specific full-year earnings or financial guidance was provided. Management cautioned that nine-month results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether loan growth and increased past-due, non-accrual and watch-list substandard loans lead to higher future provisions or charge-offs.
- The adequacy of the $71.7 million loan-loss allowance under changing real-estate values, economic conditions and regulatory classifications.
- The sustainability of net interest income gains given deposit pricing competition, the repricing gap and potential changes in interest rates.
- The valuation and credit performance of the $4.80 billion available-for-sale securities portfolio, including Level 3 mortgage-backed securities and unrealized losses.
- The effect of the third-quarter securities-sale loss, recurring regulatory costs and other unusual items on future non-interest income and expenses.
- Continued access to FHLB, repurchase and other funding sources, and the liquidity impact of deposit outflows or higher funding costs.
- The company’s capacity to continue dividends and share repurchases while maintaining regulatory capital and supporting loan growth.