International Bancshares Corporation: 2Q 2011 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 bank subsidiaries, it serves commercial, consumer and international customers across South, Central and Southeast Texas and Oklahoma, with substantial cross-border activity involving Mexico. The filing covers the quarter and six months ended June 30, 2011; financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Interest income | $107.8 million | $215.0 million |
| Net interest income | $83.4 million | $165.2 million |
| Provision for loan losses | Credit of $1.9 million | $2.2 million |
| Non-interest income | $47.9 million | $96.2 million |
| Non-interest expense | $83.9 million | $159.4 million |
| Net income | $32.6 million | $66.1 million |
| Net income available to common shareholders | $29.3 million | $59.5 million |
| Basic and diluted EPS | $0.43 | $0.88 |
| Comprehensive income | $87.3 million | $123.8 million |
At June 30, 2011, total assets were $11.82 billion, net loans were $5.18 billion, investment securities were $5.07 billion, deposits were $7.79 billion, total liabilities were $10.26 billion and shareholders’ equity was $1.56 billion. Cash and cash equivalents were $221.9 million.
The allowance for probable loan losses was $78.5 million, or 1.5% of total loans, compared with $84.5 million, or 1.6%, at December 31, 2010. Non-accrual loans were $61.5 million, down from $108.0 million at year-end. Other real estate owned generated $9.3 million of expense during the first six months, including $7.6 million of fair-value write-downs.
Six-month operating cash flow was $94.5 million. Investing activities provided $49.2 million, while financing activities used $119.5 million, resulting in a $24.1 million increase in cash and cash equivalents from year-end. Capital ratios remained strong: leverage ratio 11.79%, risk-weighted Tier 1 ratio 21.23% and total risk-weighted capital ratio 22.48%.
Material changes versus prior comparable periods
- Second-quarter net income available to common shareholders declined 4.6% to $29.3 million, and EPS declined to $0.43 from $0.45.
- Six-month net income available to common shareholders was essentially unchanged at $59.5 million; EPS increased to $0.88 from $0.87.
- Six-month net interest income decreased 4.7% to $165.2 million as interest income fell 7.7%, partially offset by a 16.5% reduction in interest expense.
- Six-month non-interest income declined 20.5%, primarily because the prior-year period included approximately $30.8 million of investment-security gains associated with portfolio repositioning.
- Six-month non-interest expense decreased 13.9%, despite a substantial increase in other real estate owned expense. The prior-year period included a $21.8 million litigation reserve related to the LFIN tax dispute.
- Net loans decreased 2.8% from year-end, reflecting weak loan demand. Deposits increased 2.5%, while other borrowed funds declined 26.4% to $755.9 million.
- Shareholders’ equity increased 7.0%, primarily from retained earnings and higher accumulated other comprehensive income related to the securities portfolio.
- Past-due loans declined to $84.1 million from $114.8 million at December 31, 2010, and impaired loans declined to $92.2 million from $125.2 million.
Outlook, commentary, risks and unusual items
- Management stated that Texas and Oklahoma economies appeared to be recovering faster than many other regions, but continued economic weakness, unemployment and lower real-estate values remained risks to credit quality.
- Management believed the allowance for probable loan losses was adequate, while acknowledging that future provisions depend on economic conditions, collateral values, interest rates, regulatory classifications and loan performance.
- The securities portfolio included $4.84 billion of residential mortgage-backed securities. Unrealized losses totaled $12.3 million, and $0.4 million of credit-related other-than-temporary impairment was recorded during the first six months.
- The company remains exposed to interest-rate risk. It was liability-sensitive in the shorter repricing periods and asset-sensitive over longer periods; management reported that it believed the company was appropriately positioned.
- The company continued participating in the TARP Capital Purchase Program, with $216 million of Series A preferred stock outstanding and a 5% dividend rate for the first five years, increasing to 9% thereafter. Treasury consent limited dividends, common-stock repurchases and trust-preferred redemptions.
- One-half of Trust I trust-preferred securities were redeemed on June 8, 2011, with the remainder redeemed on July 1, 2011. Junior subordinated debentures totaled $190.7 million at June 30.
- The company was appealing an approximately $24.25 million judgment related to inherited LFIN tax matters and had deposited $24.4 million with the court. Management could not estimate potential exposure in a separate Florida overdraft-fee class action; no class had been certified.
- The company authorized up to $40 million of additional common-stock repurchases through April 9, 2012. It repurchased 179,283 shares during the second quarter for approximately $3.0 million.
- No material changes to previously reported risk factors or market-risk exposures were disclosed. Management reported effective disclosure controls and no material weaknesses.
Important facts for investors to verify
- Whether weak loan demand and the 2.8% decline in net loans persist, particularly in construction, land-development and other commercial real-estate portfolios.
- Whether reductions in non-accrual, past-due and impaired loans continue and whether the $78.5 million allowance remains adequate as collateral values and regional economic conditions change.
- The future effect of other real estate owned, including additional valuation allowances or disposition losses.
- The sustainability of net interest income as low rates, deposit pricing competition and the company’s repricing gaps affect margins.
- The impact of reduced securities gains, mortgage-backed-security valuations and potential future impairment charges.
- The status and ultimate cost of the LFIN tax judgment appeal and the Florida overdraft litigation.
- The company’s ability to redeem TARP preferred stock and trust-preferred securities while maintaining capital, liquidity and dividend capacity.