Citron examines International Bancshares (NASDAQ:IBOC)


Citron Research Redefines “Bad Bank”

This past Friday the FDIC seized 3 more banks to bring the total for 2009 up to 20. What are the telltale signs that a bank is on the brink? Citron believes that IBOC is doing more than just giving signs; it is screaming out that something is really wrong Deep in the Heart of Texas.

Loans on the Books

When analyzing any bank you have to start with the loan portfolio. Below is the loan breakdown on IBOC.
From 2004-2008, almost all of the growth of IBOC’s book of business is construction lending, with the greatest increase occurring in 2006 and 2007, obviously the high-water mark of the real estate bubble. Commercial, mortgage, and consumer loans are actually down from 2004. What is even more alarming is that 73% of these construction loans — nearly $1.4 billion, mature in the next 12 months.

December 31,






(Dollars in Thousands)

Commercial, financial and agricultural











Real estate—mortgage






Real estate—construction


















Total loans






Unearned discount









Loans, net of unearned discount












one year

After one but
within five years

five years


(Dollars in Thousands)

Commercial, financial and agricultural









Real estate—construction



















In order to compare apples to apples we thought it would be fair to make some comparisons to another regional bank in Laredo/San Antonio region, Cullen/Frost Bankers, known as Frost Bank (NYSE:CFR)

CFR has grown their loan balances across all areas with no measurable concentration in construction loans. In stark contrast to IBOC’s exposure, which is over 250% of tangible book value, CFR’s construction loan balance is less than 100% of tangible book value. Next, note that CFR’s allowance for bad debt is 10% of its construction loans, compared to IBOC, which has reserved at a rate of only 3% on its construction loans.

Of even greater concern, Citron examined the publicly-traded institutions that took between $100 million and $500 million of TARP funds, a group of 43 companies. We found one startling statistic: . IBOC had the highest ratio of construction loans to total loan portfolio, and yet they had lowest loan loss reserve rate for that loan class.

Assessing the market

Especially in light of IBOC’s severe lack of disclosure (see below) investors are left to judge the financial health of IBOC on their own. Naturally, attention turns to the underlying conditions of the real estate construction market in the bank’s specific region. Don’t take our word for it, just last week the Texas Fed declared the state is officially in a recession.

And if you think it does not affect Laredo, just listen to the local news.

Wikipedia lists construction projects in Laredo, Texas.,_Texas Citron called the local Chamber of Commerce in Laredo — EVERY single one of the proposed/under construction projects listed in Wikipedia above has been cancelled or postponed.

Here is one project for which IBOC is lead lender that just went into foreclosure a few weeks ago:

Here is another major construction project funded by IBC that went into foreclosure also last month.

Lastly, here is a project where IBC was the largest creditor and they ended up purchasing the project themselves out of foreclosure.,_Texas)

If Citron was able to find these with a simple Google search, imagine what else is really out there? Citron suggests that IBOC management will not likely part with this information voluntarily. Company management does not host conference calls, and the detailed disclosure about its loan portfolio is seriously deficient, especially in the midst of the financial environment of 2009.


Criticisms of the company’s practices, and in particular, the extravagance of the CEO’s expenditures including Citation jet and high salary, have come from places as near as their local newspaper.

Largest shareholder and director Tony Sanchez is extremely influential in the operations of the bank. Incredibly, he was also the head of Tesoro Savings and Loan, which folded in 1988, leaving taxpayers with $160 million bill.

While the company took $216 million of taxpayer money during the last week of November, Sanchez, along with the CFO Imeldo Navarro cashed in close to $20 million worth of stock in the following 3 weeks. The insider dumping has been ruthless as recently as March 5, where Sanchez registered and began selling 800,000 shares of stock, at the low of the market. Citron is incredulous that companies accepting TARP money can allow their insiders to dump stock on the market in the same month …but we don’t make the rules.

Additional Red Flags to Consider – Disclosure Failures

  • Large amount of related party loans — $79.4 million as of IBOC’s recent 10-K
  • No disclosure of the breakdown of their loan portfolio
  • Company does not hold any conference calls
  • No Analyst Coverage

The obvious question of the day is what impact the new Treasury troubled asset program will have on IBOC’s untenable situation.  In the opinion of Citron, the new program only accelerates the day of reckoning for IBOC’s “living-in-denial” strategy.  The new program brings price discovery to bad assets, and IBOC has not even begun the process of disclosing the writedowns that would threaten its solvency.  Meanwhile, while investors look to datapoints like the status of commercial construction projects in Laredo, insiders keep stamping out stock sales.

It is unavoidable that someone at IBC has a lot of explaining to do, but if history repeats itself, don’t expect an explanation from the company. When in doubt, follow the money. It flows from the taxpayers’ of the United States, through the “black hole” of the bank’s balance sheet, and directly into the insiders’ pockets via their relentless insider stock sales. The money flow is the clearest “tell” of all — from those who really know what is happening Deep in the Heart of Texas.

Cautious investing to all.

Citron Exposes Apollo’s Big Dirty Secret – All New Docs


Needless to say our country is in a mess.  We have allowed greed to blur the lines between right and wrong and the result is the headlines that we are forced to read daily.  Unfortunately, this greed is not limited to banks and brokerage firms, but its reaches have extended to the sacred institution of education.  This year alone almost 600,000 education jobs are at risk because of state budget cuts.  Yet, the University of Phoenix (NASDAQ:APOL) continues to roll on as the #1 largest recipient of Government guaranteed student loans in the country.  When you see how they operate their business you will be appalled.

Citron believes there are many headwinds facing the company including:

  • Increasing Cohort Default Rate for loans
  • Price Competition in the industry
  • Looming restrictions on student loans

This report will focus solely on Apollo’s unsavory business practices and the tactics they use to deceive the government and their own customers.

All of the referenced documents in this report have just been made available in the public record within the past 5 weeks.

Before we go any further, let us put one thing in perspective:

The state of Arizona has already announced that they are cutting more than $133 million from public K-12 education for the coming year 2009:

That is less money than the insiders of Apollo have reaped from stock sales in the past 8 weeks alone!

Qui Tam

The ongoing Qui Tam lawsuit against Apollo has released some astounding documents over the past month.  All investors must understand that it is ILLEGAL for “for profit” education companies to financially incentivize enrollment counselors for performance.  This is the heart of the qui tam suit and challenges a practice that, if eliminated, could topple Apollo’s entire business model.  While this case has been grinding ahead for quite some time, these pieces of evidence were recently submitted into the court record.  They show UOP engaging in intentional and systematic deception of the government about its compensation scheme for enrollment recruiters.

As documented in the suit, earlier in the decade Apollo embarked on a path of becoming more of a marketing company than an educational institution.  Since the year 2000, Apollo has seen their enrollment increase in size by 200%, the faculty increase 100%, during which time the ranks of its enrollment counselors swelled by a staggering 1000%.

Expressed another way, the student to faculty ratio went up from 9:1 to 15:1 while the number of enrollment counselors per student ratio nearly tripled from 166:1 to 69:1.

Nice Case Summary (PDF)  [ See page 48 ]
And just to address skeptics who think we have cherry picked a few docs from the case, it should be noted that Plaintiffs have submitted over 25,000 documents in hard copy, and thousands more in electronic form that document their claim of performance-based compensation for enrollment counselors at UOP.

Confidential Memo!!

Below is a compensation table in which the exact number of enrollments generated by an employee is correlated to a specific salary level, pay cut, and/or cash award and/or time off.  The company has marked it “Confidential” — until now, that is.

Confidential Exhibit (PDF)

Deceiving the US Dept of Education

Below is a set of internal emails in which supervisors are specifically coached by senior staff to refrain from referring to “starts” or “enrollments” in written performance reviews of enrollment counselors, although it is obvious that that is the main evaluation criterion.  Supervisors are coached specifically to rewrite page 1 of their reviews because “The Department of Education audits these reviews”.
Exhibit G (PDF)

Trying to Fly Under the Radar

The testimony of a former employee, who testifies that a company official (Director of Enrollment Dustin Phillips) stated that the “performance matrix” (compensation schedule for EC’s) was constantly being reformulated as part of a “smoke and mirrors” effort intended so that Apollo could “fly under the radar” with regard to Department of Education audits and prohibitions on incentive compensation.
Exhibit K (PDF)

The Company Admits Wrongdoing

And lest you think this evidence is just little bits of exception and trivia culled by disgruntled employees, look at the jaw-droppingly explicit admissions from former President Brian Mueller and his crew at an analyst group meeting in 2006, now excerpted as a trial exhibit: (Mr. Mueller abruptly resigned this year with no explanation after spending 20 years at Apollo.)

“Counselor compensation is one of the biggest advantages our company has had over the years. It is our ability to incent enrollment counselors for their performances. ”

“We’ve got 3,800 sales people…that we are able to drive specific performance levels that we have not been able to drive in the past”

Apollo Admission in Analyst Day Presentation (PDF)
To which Citron comments:  “Sales people? He really said that?”

While we do not believe at this point that APOL will get put out of business by the Federal Government, we do believe there is an inherent risk to their franchise, especially with an administration that has promised to focus on accountability.

Apollo’s application for re-certification under Title IV has now been on month-to-month status for the last 19 months… we can see why.

What is chilling to Citron is the amount of insider selling of Apollo stock over the past 3 years (in the hundreds of millions), during which time they delay the inevitable court date while claiming that they do not pay their enrollment counselors incentive compensation for performance.

Glengarry Glen Ross – Phoenix Style

The boiler room mentality was revealed on the same analyst day quoted above when former President Brian Mueller stated:

“We call them six times a day for four days, 24 times in the first four days. We don’t leave messages; we want a live voice. When we get a live voice, then we want to transfer that prospective student to an enrollment counselor who’s best able to convert that student.”

Just to prove that these tactics are not a thing of the past we refer to yet another lawsuit that was re-filed in January of 2009.  Filed by a former employee, Chad McKinney, the lawsuit portrays an unmistakeable boiler room work environment.  The former employee in this lawsuit stated he was harassed because he would not commit unlawful acts in recruiting students.  The suit confirms that his salary was based on enrollment goals.

“If I met a “goal”, which in essence was quota of 4 new students per month, I was not to be reprimanded.  If I did better on the quota I was told I would get a 20% increase in salary after 6 months.”

Without even discussing the merits of the case, it is the attachments that corroborate everything Citron has discovered about Apollo.


According to the lawsuit, blitzes are designated times (by the manager), three times a day, during which enrollment counselors were expected to not leave their cubicles, even to go to the bathroom, and to make as many telephone dials as possible, and schedule as many student appointments as possible.  To show how “boiler room” this whole thing is, just look at this email from Carlyn Lindsten, associate director of enrollment.  No editorial comment is necessary once you read them.
The Blitz (PDF)

Trick Messages

Another popular tactic of Apollo Group is to use trick messages to get leads to return phone calls.  Below is an email from Barbara Keramati and Marive Wright, enrollment managers, instructing their sales force on how to trick prospects into returning phone calls:

Trick Messages (PDF)

Only Starts Count

The most damning email came from an enrollment manager who tells their staff the true spirit of their recruitment effort:

“Remember, students have to attend three nights or post three weeks in order to get START credit, which is what counts in the end.”

Starts Count (PDF)

It is not surprising that this type of recruitment pressure has led to a graduation rate of 4% according International Center for Education Statistics, an organization within the Department of Education. Now true, this number only includes those students who have never enrolled in college previously.  However, we cannot explain how bad this is without making a comparison.  Just look at Arizona State (same state) which has a graduation rate of 56%.

[ Click on “Graduation and Retention Rate” ]

Welcome Mr. Arne Duncan

In the midst of the government discussing a new era of oversight that is as far-reaching as salary limits for White House personnel as well as proposed salary limits on government-assisted financial institutions, we welcome a new Secretary of Education, Arne Duncan.  Mr. Duncan, a known reformer, has promised to reform education in the United States.  In a CNN interview given just two days ago he makes these comments regarding the proposed $150 billion education stimulus package.

Mr. Duncan states:  “Yeah, we’re going to have to keep very close track of the money, and we’re going to have to implement this impeccably. And it’s very important, as you said, that the money goes where it’s needed.”

So how will Mr. Duncan assess the value of $2.5 billion of Government guaranteed student loans being funneled through Apollo’s enrollment/recruitment boiler room sales operation next year, only to result in hundreds of millions of dollars flowing straight to company insiders as they cash out their stock?

Aren’t there more effective ways to shore up the country’s secondary education institutions than this?


So let’s get this straight.  The largest recipient of student loans in the country is a for-profit school who uses trick phone calls and boiler room tactics to get students enrolled.   They admittedly pay incentive compensation to their army of enrollment counselors, a practice which could easily jeopardize 75% of their revenue.  The school has one of the lowest graduation rates in the country …and yet the business model exists only because of US Government loan guarantees.

And we are supposed to believe that this house of cards is invulnerable to education reform?  And further, investors should march to the analysts’ drumbeat that their business is going to grow enough to justify the lofty multiple of a growth stock, as they marshal the public’s money into the face of wave after wave of insider stock sales?

Cautious investing to all.