International Bancshares: The Best Operated Bank, Or a Bank with Something to Hide?

Citron reviews some amazing facts about regional bank International Bancshares (NASDAQ:IBOC).

On Wednesday IBOC announced a “strong quarter” in a Press Release that came out right in the middle of a strong day for the market without any prior notice. If you were looking for the conference call…look again. They seem to be the only public bank in their region that will not talk to investors. If you were looking for a balance sheet….look again. They are the only bank in their region who gives you just a headline without a balance sheet in the PR. Instead, management offers the blanket statement, “We are confident in the strength of our balance sheet and especially the quality of our loan portfolio”

You’d have to be a hermit not to know that banks from coast to coast are under stress. Why? Because they all got caught up in making very bad loans during the “bumper crop” of bad paper originated during 2005 to 2007. If many wrote down the value of the loans on their books to reflect current market realities, they would be insolvent.

Citron reminds readers that IBOC’s book of commercial and construction loans, the two largest sources of pending delinquencies, doubled during the go-go period of 2005 to 2007. With nearly 1.4 billion in real estate and construction loans classified as “maturing within one year”, Citron marvels at how IBOC’s glowing report yesterday can possibly square with reality.

Influential banking analyst Meredith Whitney commented last week, “Commercial real estate will decline ‘hard and fast,’" on Bloomberg Television.

For a lot of the regional banks that have so much commercial real estate exposure as a percentage of their core capital levels, it’s going to be more difficult.

But according to IBOC management, they’ve got an immunity card.

While every other bank who accepted TARP money is selling stock to repay the government and beef up its balance sheet, IBOC has decided to buy stock to combat short sellers while still holding TARP money. Funny, if they are so pleased with their construction loans from the boom years, they why not return the public’s TARP money — after all it does stand for Troubled Assets Relief Program.

The Competition

While IBOC’s PR gives short shrift to its loan losses, here’s what competitors are saying about the Texas market:

From Zion Bank this week:

The Company recognized an impairment loss on goodwill during the first quarter of 2009 of $634.0 million or $5.55 per diluted share compared to $353.8 million during the fourth quarter of 2008. The first quarter impairment loss was at Amegy Bank of Texas, which has $616 million of goodwill remaining after this impairment. This loss primarily reflects declines in market values of peer banks in Texas and a weaker economic outlook in that state.

And ….

The most significant driver of the loss we experienced this quarter was the non-cash impairment of goodwill of nearly $634 million. All of this relates to our 2005 acquisition of Amegy Bank of Texas. The impairment charge primarily reflects declines in market values of peer banks in Texas and the weak economic outlook in that state with the decline in energy prices that we’ve seen in recent months.

From Cullen/Frost: (who refused TARP money)

As expected, Texas is not immune to the effects of the broader U.S. recession. The state’s overall economy is slowing, impacted by weaknesses in the job market, lowered rig counts and reduced exports linked to Mexico’s economic problems. Although our non-performing asset levels have been impacted by the recent slowdown in the Texas economy, we remain confident in our ability to manage credit quality. Cullen/Frost is well positioned to navigate through difficult times, as our executive team was with the company during the 1980s.

The other Texas regional banks Cullen/Frost Bank, First Financial, Sterling, and Texas Capital all reported this week, accompanied by consistently cautious conference call comments from management, and analyst downgrades. Oh, but we forgot …. IBOC doesn’t have analyst coverage, and doesn’t do conference calls.

What’s under the covers? Citron reviews IBOC’s loans of record

Citron cannot fathom how IBOC expects investors to believe its current bad loan reserves are sufficient to match the scope of its problem loans. Specifically, from 2007 to 2008, non-accrual loans and 90 day past due loans increased 213% from $54 million to $170 million. During the same period the allowance only rose 19% from $61.7 million to $73.5 million. The allowance as a percent of non-accrual and past due declined from 114% to 43%, and astounding decline. If the allowance had stayed at 114%, pretax earnings would have been 60% lower.

To try to gain more clarity on its loan portfolio, Citron looked at some of IBOC’s largest financing chunks, as much as we were able to gather from public sources.

The Spring — $ 70 million financing by IBOC, nearing construction completion.
Current status: Our best estimate, only 50% sold with 10% deposits.

One of Austin’s first luxury high-rise condo projects is nearing completion.

How’s the market now? Citron notes that next week Austin will see an auction of condos in a luxury project now estimated to fetch 40% of their planned sales price through auction.

To the Dallas Fed, the Austin market looks like this:

“Conditions in the Austin real estate market remain weak, as they do across the state,” said D’Ann Petersen, an economist with the Federal Reserve Bank of Dallasin a recent Statesman article. “The national recession has trickled down to Texas and the state, and its major metros are seeing job losses. The credit situation has also impacted the real estate sector in Austin, especially the higher-priced segment.”

But not to IBOC.

Barton Place (.pdf):
This one, due for completion in early 2010, is just 40% sold with 10% deposits.

This loan, to redevelop a 104 acre site formerly a Six Flags amusement park site next to the Houston Astrodome, was proudly announced as a “major” deal for IBOC. The purchase price was $77 million, presumably mostly with money borrowed from IBOC. Two years later, its just a vacant site with weeds growing up through the pavement.

This South Padre Island project, just opened, we can not figure out occupancy here but we have to imagine with the devaluation of the peso along with the violence in Mexico, any border town might suffering, unless its an IBOC financed-project, of course.

Citron estimates these 4 projects alone account for perhaps 20% to 25% of IBOC’s construction loan book. If the company would host a conference call and field questions openly, perhaps some genuine transparency on this troubled book of business could be established. Meanwhile, it appears to Citron that IBOC’s $70 million loan loss reserve is insufficient to cover the liability of these 4 imperiled projects. That’s before we even begin to consider the overhang of the rest of their $1.8 billion real estate / construction portfolio, which itself is just an outsize portion of its $5 billion plus loan portfolio.


There is a complete disconnect between IBOC management’s rosy portrayal of conditions and objective data points about IBOC’s financings outstanding. While its competitors all speak cautiously about the slowing Texas economy, IBOC insists everything is great, but offers no transparency whatsoever into its loan portfolio.

Citron notes IBOC’s exposure to construction loans is more than twice its competitors, its gross yield from loans is well higher than its competitors (indicating riskier loans when originated) and its reserves are the lowest of its peers.

Meanwhile, the company threatens to buy back stock from “different” pools of money than the TARP dollars it has taken.

It is Citron’s opinion that the day of reckoning for this bank is only a matter of time.
Cautious investing to all.

Disclosure: short IBOC