UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended March 31, 2011
Commission File Number 000-25193
EOS PREFERRED CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts
(State or other jurisdiction of incorporation or organization)
04-3439366
(I.R.S. Employer Identification Number)
1271 Avenue of the Americas, 46
th
Floor, New York, New York
(Address of principal executive offices)
10020
(212) 377-1503
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
þ
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The number of shares outstanding of the registrants sole class of common stock was 100 shares,
$.01 par value per share, as of May 12, 2011. No common stock was held by non-affiliates of the
issuer.
EOS Preferred Corporation
Table of Contents
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Page
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1
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2
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24
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25
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EX-31.1
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EX-31.2
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EX-32
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PART I
Item 1. Condensed Financial Statements
EOS Preferred Corporation
Balance Sheets
(Unaudited)
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March 31,
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December 31,
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2011
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2010
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(In Thousands)
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ASSETS
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Cash account with parent
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$
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$
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184
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Interest-bearing deposits with parent
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64,232
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62,385
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Total cash and cash equivalents
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64,232
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62,569
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Loans at fair value
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15,573
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16,505
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Loans at lower of accreted cost or market value
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7,203
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7,935
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Loans
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22,776
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24,440
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Accrued interest receivable
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203
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213
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Total assets
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$
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87,211
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$
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87,222
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LIABILITIES AND STOCKHOLDERS EQUITY
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Accrued expenses and other liabilities
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$
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151
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$
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957
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Accounts payable to parent
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333
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989
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Total liabilities
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484
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1,946
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Stockholders equity:
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Preferred stock, Series B, 8% cumulative, non-convertible;
$.01 par value; $1,000 liquidation value per share plus
accrued dividends; 1,000 shares authorized, 937 shares
issued and outstanding
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Preferred stock, Series D, 8.50% non-cumulative, exchangeable;
$.01 par value; $25 liquidation value per share; 1,725,000 shares
authorized, 1,500,000 shares issued and outstanding
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15
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15
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Common stock, $.01 par value, 100 shares authorized,
issued and outstanding
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Additional paid-in capital
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95,320
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95,320
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Accumulated deficit
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(8,608
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(10,059
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Total stockholders equity
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86,727
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85,276
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Total liabilities and stockholders equity
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$
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87,211
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$
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87,222
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See accompanying notes to condensed financial statements.
1
EOS Preferred Corporation
Statements of Operations
(Unaudited)
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Three Months Ended
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March 31,
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2011
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2010
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(In Thousands)
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Interest income:
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Interest and fees on loans
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$
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362
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$
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637
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Interest on interest-bearing deposits
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46
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39
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Total interest income
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408
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676
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Realized and unrealized gains on loans
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1,311
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1,764
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Revenue
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1,719
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2,440
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Operating expenses:
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Loan servicing and advisory services
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109
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132
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Other general and administrative
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159
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142
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Total operating expenses
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268
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274
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Net income
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1,451
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2,166
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Preferred stock dividends declared
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Net income available to common stockholder
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$
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1,451
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$
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2,166
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See accompanying notes to condensed financial statements.
2
EOS Preferred Corporation
Statements of Changes in Stockholders Equity
(Unaudited)
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Three Months ended March 31, 2011
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Retained
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Preferred Stock
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Preferred Stock
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Additional
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Earnings /
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Total
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Series B
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Series D
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Common Stock
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Paid-in
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(Accumulated
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Stockholders
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Capital
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Deficit)
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Equity
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(In Thousands)
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Balance at December 31, 2010
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1
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$
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1,500
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$
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15
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$
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$
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95,320
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$
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(10,059
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$
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85,276
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Net income
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1,451
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1,451
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Cumulative dividends
declared on preferred
stock, Series B
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Dividends declared on
preferred stock, Series D
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Balance at March 31, 2011
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1
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$
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1,500
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$
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15
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$
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$
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95,320
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$
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(8,608
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$
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86,727
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Three Months ended March 31, 2010
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Retained
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Preferred Stock
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Preferred Stock
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Additional
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Earnings /
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Total
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Series B
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Series D
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Common Stock
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Paid-in
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(Accumulated
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Stockholders
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Shares
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Amount
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Shares
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Amount
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Deficit)
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Amount
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Capital
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Deficit)
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Equity
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(In Thousands)
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Balance at December 31, 2009
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1
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$
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1,500
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$
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15
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$
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$
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95,320
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$
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(13,640
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$
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81,695
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Net income
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2,166
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2,166
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Cumulative dividends
declared on preferred
stock, Series B
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Dividends declared on
preferred stock, Series D
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Balance at March 31, 2010
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1
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$
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1,500
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$
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15
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$
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$
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95,320
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$
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(11,474
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$
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83,861
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See accompanying notes to condensed financial statements.
3
EOS Preferred Corporation
Statements of Cash Flows
(Unaudited)
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Three Months Ended
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March 31,
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2011
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2010
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(In Thousands)
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Cash flows from operating activities:
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Net income
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$
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1,451
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$
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2,166
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Adjustments to reconcile net income to net cash provided by operating activities:
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Realized and unrealized gains on loans
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(1,311
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(1,764
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Decrease (increase) in accrued interest and other receivables
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10
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(1,636
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Increase (decrease) in accrued expenses and other liabilities and accounts
payable to parent
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238
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(111
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Loan repayments for loans at fair value
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1,968
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3,047
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Net cash provided by operating activities
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2,356
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1,702
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Cash flows from investing activities:
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Loan repayments from loans at lower of accreted cost or market value
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1,007
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379
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Cash provided by investing activities
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1,007
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379
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Cash flows from financing activities:
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Payment of common stock dividends (declared on December 31, 2010)
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(884
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Payment of preferred stock dividends (declared on December 31, 2010)
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(816
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Cash used in financing activities
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(1,700
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)
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Net change in cash and cash equivalents
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1,663
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2,081
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Cash and cash equivalents at beginning of period
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62,569
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51,823
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Cash and cash equivalents at end of period
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$
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64,232
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$
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53,904
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See accompanying notes to condensed financial statements.
4
EOS Preferred Corporation
Notes to Condensed Financial Statements
Three Months Ended March 31, 2011 and 2010
NOTE 1. ORGANIZATION
EOS Preferred Corporation (referred to hereafter as the Company, EOS, we, us or our)
is a Massachusetts corporation organized on March 20, 1998, to
acquire and hold mortgage assets.
Our principal business objective is to hold mortgage assets that will generate net income for
distribution to stockholders. Aurora Bank, FSB (Aurora Bank), a wholly-owned subsidiary of Lehman
Brothers Bancorp (LB Bancorp) and an indirect wholly-owned subsidiary of Lehman Brothers Holdings
Inc. (LBHI), owns all of our common stock. Prior to the merger with Aurora Bank (discussed
below), we were a subsidiary of Capital Crossing Bank (Capital Crossing), a federally insured
Massachusetts trust company, our corporate name was Capital Crossing Preferred Corporation, and
Capital Crossing owned all of our common stock. Effective June 21, 2010, we changed our corporate
name to EOS Preferred Corporation.
We operate in a manner intended to allow us to be taxed as a real estate investment trust, or
a REIT, under the Internal Revenue Code of 1986, as amended (the IRC). As a REIT, EOS will not
be required to pay federal or state income tax if we distribute our earnings to our shareholders
and continue to meet a number of other requirements.
On March 31, 1998, Capital Crossing Bank capitalized the Company by transferring mortgage
loans valued at $140.7 million in exchange for 1,000 shares of 8% Cumulative Non-Convertible
Preferred Stock, Series B, valued at $1.0 million and 100 shares of our common stock valued at
$139.7 million. The carrying value of these loans approximated their fair values at the date of
contribution.
On May 11, 2004, we closed our public offering of 1,500,000 shares of 8.50% Non-Cumulative
Exchangeable Preferred Stock, Series D. Our net proceeds from the sale of Series D preferred stock
was $35.3 million. As of July 15, 2009, the Series D became redeemable at our option with the prior
consent of the Office of Thrift Supervision (the OTS) and/or the Federal Deposit Insurance
Corporation (the FDIC).
On February 14, 2007, Capital Crossing was acquired by Aurora Bank through a two-step merger
transaction. An interim thrift subsidiary of Aurora Bank was merged into Capital Crossing.
Immediately following such merger, Capital Crossing was merged into Aurora Bank.
The Series B preferred stock and Series D preferred stock remain outstanding and remain
subject to their existing terms and conditions, including the call feature with respect to the
Series D preferred stock. The OTS may direct in writing the automatic exchange of the Series D
preferred stock for preferred shares of Aurora Bank at a ratio of one Series D preferred share for
one hundredth of one preferred share of Aurora Bank if Aurora Bank becomes undercapitalized under
prompt corrective action regulations, if Aurora Bank is placed into reorganization, conservatorship
or receivership, or if the OTS, in its sole discretion, anticipates Aurora Bank will become
undercapitalized in the near term (Exchange Event).
Business
Our principal business objective is to hold mortgage assets that will generate net income for
distribution to stockholders. We hold loans in various cities in the United States with 39.9% of
the carrying value of our mortgage loans secured by properties located in California. All of the
mortgage assets in our loan portfolio at March 31, 2011 were acquired from Capital Crossing Bank or
Aurora Bank and it is anticipated that substantially all additional mortgage assets, if any are
acquired in the future, will be acquired from Aurora Bank. Aurora Bank administers our day-to-day
activities in its roles as servicer under the Master Service Agreement (MSA) entered into between
Aurora Bank and EOS and as advisor under the Advisory Agreement (AA) entered into between Aurora
Bank and EOS.
5
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These condensed financial statements are unaudited and have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission (SEC) relating to interim
financial statements and in conformity with accounting principles generally accepted in the United
States of America (GAAP). Certain information and note disclosures normally included in annual
financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to
these rules and regulations, although we believe that the disclosures made are adequate to make the
information not misleading. It is the opinion of management that these condensed financial
statements reflect all adjustments that are normal and recurring and that are necessary for a fair
presentation of the results for the interim periods presented. These condensed financial statements
included in this Form 10-Q should be read in conjunction with the financial statements and notes
thereto included in our Annual Report on Form 10-K as of, and for the year ended December 31, 2010.
Interim results are not necessarily indicative of results to be expected for the entire year.
Use of estimates
In preparing financial statements in conformity with GAAP, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date
of the balance sheet and reported amounts of revenues and expenses during the reporting period.
Material estimates that are particularly susceptible to significant change in the near term relate
to the determination of the fair value of loans. For a more detailed discussion of the basis for
the estimates of the fair value of our loan portfolio, please see Note 5 below.
Cash and Cash Equivalents
Cash and cash equivalents include cash and interest bearing deposits held at Aurora Bank with
original maturities of ninety days or less. The cash is held in a money market account that bears
interest at rates determined by Aurora Bank which generally follow federal funds rates. The money
market account has a limitation on the number of monthly withdrawals, but there is no limit on the
amount of the withdrawals either individually or in the aggregate.
Loans
On February 5, 2009, EOS and Aurora Bank entered into an Asset Exchange Agreement (the
February Asset Exchange) pursuant to which we agreed to transfer the entire loan portfolio
secured primarily by commercial real estate and multi-family residential real estate to Aurora Bank
in exchange for loans secured primarily by residential real estate. As a result, during the first
quarter of 2009 we reclassified all of our loan assets as held for sale, recorded a fair value
adjustment, and reported these loans at the lower of their accreted cost or market value. The
February Asset Exchange was terminated prior to its consummation.
Effective November 1, 2009, EOS and Aurora Bank entered into and consummated an Asset Exchange
Agreement (the November Asset Exchange) pursuant to which we agreed to an exchange of loans with
Aurora Bank. We continue to report the portion of the loan assets that were retained after the
November Asset Exchange at the lower of their accreted cost or market value. For these retained
loans, the carrying value of the loans will be recognized only up to the cost on the date they were
classified as held for sale. We have elected the fair value option for the loans that were received
from the November Asset Exchange as we believe it provides the best measurement of asset value for
each reporting date. For these acquired loans, the carrying value of the loans will be equivalent
to fair value which may reflect an unrealized gain or loss relative to the cost of the loans.
The fair value of our loan portfolio is estimated based upon information, to the extent
available, about then current sale prices, bids, credit quality, liquidity, and other available
information for loans with similar characteristics as our loan portfolio. The geographical location
and geographical concentration of the loans in our portfolio is considered in the analysis. The
valuation of the loan portfolio involves some level of management estimation and judgment, the
degree of which is dependent on the terms of the loans and the availability of market prices and
inputs.
Loans are generally placed on non-accrual status and the accrual of interest is generally
discontinued when the collectability of principal and interest is not probable or estimable which
generally occurs when the loan is ninety days or more past due as to either principal or interest.
Unpaid interest income previously accrued on such loans is reversed against current period interest
income. Interest payments received on non-accrual loans are recorded as interest income. A loan is
returned to accrual status when it is brought current. Loans are charged off when they are
determined to be uncollectible.
6
Revenue Recognition
We recognize interest income on loans as revenue as it is earned. This revenue is included in
Interest and fees on loans on the Statements of Operations. Any discount relating to the purchase
of the loans by us is recognized when the related loan is paid in full or sold.
Taxes
We have elected, for federal income tax purposes, to be treated as a REIT and intend to comply
with the provisions of the IRC. Accordingly, we will not be subject to corporate income taxes to
the extent we distribute at least 90% of our REIT taxable income to stockholders and as long as
certain assets, income, distribution, and stock ownership tests are met in accordance with the IRC.
As such, no provision for income taxes is included in the accompanying financial statements.
As of March 31, 2011, management evaluated the quantitative and qualitative requirements for
REIT status and believes that we qualify as a REIT for federal and state income tax purposes.
Accordingly, we have not recorded any uncertain tax positions. As of March 31, 2011, we do not have
any unrecognized tax positions. We do not anticipate any material changes in the existing
unrecognized benefits during the next 12 months. We are subject to examination by the respective
taxing authorities for the tax years 2007 to 2010. Our policy is to include interest and penalties
related to income taxes in Other general and administrative expense if applicable and there was no
expense for 2011 or 2010.
Significant Concentration of Credit Risk
We had cash and cash equivalents of $64.2 million as of March 31, 2011. These funds were held
in an interest bearing account with Aurora Bank. FDIC coverage on these accounts as of March 31,
2011 was limited to $250,000. Cash in excess of FDIC coverage limitations is subject to credit
risk.
Concentration of credit risk generally arises with respect to our loan portfolio when a number
of borrowers engage in similar business activities, or activities in the same geographical region.
Concentration of credit risk indicates the relative sensitivity of our performance to both positive
and negative developments affecting a particular industry or geographic region. Our balance sheet
exposure to geographic concentrations directly affects the credit risk of the loans within our loan
portfolio.
At March 31, 2011, 39.9% of our net real estate loan portfolio consisted of loans
collateralized by properties located in California. Consequently, the portfolio may experience a
higher default rate in the event of adverse economic, political or business developments or natural
hazards in California that may affect the ability of property owners to make payments of principal
and interest on the underlying mortgages. The housing and real estate sectors in California have
been particularly impacted by the recession with higher overall foreclosure rates than the national
average. If California experiences further adverse economic, political or business conditions, or
natural hazards, we will likely experience higher rates of loss and delinquency on our mortgage
loans than if our loans were more geographically diverse.
Subsequent Events
On May 9, 2011,
Thomas OSullivan submitted his resignation as a management director, effective May 15, 2011. Mr. OSullivan also submitted a
resignation as President effective May 15, 2011. Mr. OSullivan will remain a senior officer of Aurora Bank FSB.
In connection with the resignation of Mr. OSullivan, on May 9, 2011, our Board elected Brian Kuelbs as a
management director, effective May 15, 2011. Mr. Kuelbs was also appointed as President effective May 15, 2011.
Mr. Kuelbs has significant financial services industry experience, and was recently appointed Chief Financial Officer
of Aurora Bank FSB, our parent company.
On May 9, 2011, our Board elected Nancy Kuenster as a director, effective May 15, 2011. The
Board determined that Ms. Kuenstner qualifies as an independent director under the applicable
rules of The Nasdaq Stock Market, Inc. Ms. Kuenstner has significant financial services industry
experience, including REITs. In connection with the appointment of Ms. Kuenstner to the Board
effective May 15, 2011, Lana Harber submitted her resignation as director, effective May 15,
2011.
Recent Accounting Pronouncements
In July 2010, the FASB issued a standards update requiring additional disclosures about the
allowance for credit losses and the credit quality of the loan portfolio. The additional
disclosures include a roll-forward of the allowance for credit losses on a disaggregated basis and
more information, by type of receivable, on credit quality indicators including aging and troubled
debt restructurings as well as significant purchases and sales. This update to the standards was
effective for our fiscal year ending December 31, 2010 and interim reports thereafter. As our loan
portfolio is either recorded at fair value or the lower of accreted cost or
7
market value, we do not utilize an allowance for credit losses and this new guidance had no
impact on our results of operations or financial position.
In January 2011, the FASB issued a temporary deferral of the effective date of disclosures
about troubled debt restructurings. This delays the effective date until our interim period ending
June 30, 2011. As our loan portfolio is either recorded at fair value or the lower of accreted
cost or market value, this new guidance will have no impact on our results of operations or
financial position.
8
NOTE 3. BANKRUPTCY OF LBHI AND REGULATORY ACTIONS INVOLVING AURORA BANK
Bankruptcy of Lehman Brothers Holding Inc.
On September 15, 2008, LBHI, the indirect parent company of Aurora Bank, filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy filing has led to increased
regulatory constraints being placed on Aurora Bank by its bank regulatory authorities, primarily
the OTS. These constraints apply to Aurora Banks subsidiaries, including EOS.
Pursuant to a Settlement Agreement (Settlement Agreement) approved by the bankruptcy court
and executed on November 30, 2010 (Execution Date), Aurora Bank, LBHI, LB Bancorp, and the OTS
entered into a Capital Maintenance Agreement (CMA) in which, among other things, LBHI agreed that
it will seek to sell Aurora Bank within eighteen (18) months from the Execution Date. If after a
period of fifteen (15) months following the Execution Date, the OTS concludes a sale of Aurora Bank
will not be consummated by the end of the eighteen (18) month period, Aurora Bank will prepare and
submit to the OTS a plan for dissolution. The bankruptcy court will have the final review and
approval of any proposed agreement for the sale of Aurora Bank.
There can be no assurance that the sale of Aurora Bank will be consummated within the defined
time frame. There can be no assurance that a potential buyer of Aurora Bank will come forward and
tender an offer acceptable to the bankruptcy court, that the bankruptcy court will approve such
offer, or that a potential buyer will meet all other conditions necessary to consummate the
purchase.
Further, there is uncertainty with regards to any and all aspects of a potential sale. The
business strategies of the new owner may not include continued operation of EOS or other business
lines of Aurora Bank.
Both the bankruptcy filing of LBHI and the increased regulatory constraints placed on Aurora
Bank have negatively impacted the ability of EOS to conduct business according to our business
objectives. Following the execution of the Settlement Agreement, the OTS modified, but did not
remove all of the regulatory constraints on Aurora Bank.
Regulatory Actions Involving Aurora Bank
On January 26, 2009, the OTS entered a cease and desist order against Aurora Bank (the
Original Order). The Original Order required Aurora Bank to ensure that each of its subsidiaries,
including EOS, was in compliance with the Original Order, including the operating restrictions
contained therein. In addition, on February 4, 2009, the OTS issued a prompt corrective action
directive to Aurora Bank (the PCA). The PCA required Aurora Bank to, among other things; raise
its capital ratios such that it would be deemed to be adequately capitalized and placed
additional constraints on Aurora Bank and its subsidiaries, including EOS.
Following execution of the Settlement Agreement, on November 30, 2010, Aurora Bank entered
into a Stipulation and Consent to Issuance of Amended Order to Cease and Desist with the OTS
whereby Aurora Bank consented to the issuance of an Amended Order to Cease and Desist (the Amended
Order) issued by the OTS, which amended the Original Order (together the Original Order and the
Amended Order are the Order). The Amended Order amended certain requirements for Aurora Bank
contained in the Original Order. The provisions in the Original Order that require Aurora Bank to
ensure that each of its subsidiaries, including EOS, comply with the Original Order were not
amended. These operating restrictions, among other things, restrict transactions with affiliates,
capital distributions to shareholders (including redemptions), contracts outside the ordinary
course of business, and changes in senior executive officers, board members or their employment
arrangements without prior written notice to the OTS.
Under the Order, EOS must continue to seek and receive approval or non-objection from the OTS
for the declaration and payment of dividends to our preferred and common shareholders. There is no
assurance that the OTS will approve any future request for the declaration or payment of dividends.
As an operating subsidiary of Aurora Bank, EOS remains subject to all of the terms and conditions
of the Order which apply to such operating subsidiaries. The Order was still effective as of the
date of issuance of this interim report.
On November 30, 2010, and effective on the same date, the OTS issued an order terminating the
PCA.
More detailed information can be found in the Original Order, the Amended Order, the PCA, and
the termination of the PCA themselves, copies of which are available on the OTS website
(www.ots.treas.gov).
Under the CMA, LBHI agreed for the duration of LBHIs ownership of Aurora Bank to maintain
Aurora Banks tier 1 and risk based capital ratios at levels greater than the thresholds required
to achieve the well-capitalized designation under OTS regulations.
9
As of March 31, 2011, as set forth in a public filing with the OTS, Aurora Banks capital
ratios were above the thresholds required under the CMA.
Dividend Payments
On June 26, 2009, the OTS notified Aurora Bank that, as a result of the Order and the PCA, the
approval or non-objection of the OTS would be required prior to declaration and payment of
dividends by EOS. The OTS required Aurora Bank to submit a formal request for non-objection
determination to permit the payment of dividends by EOS. As a result of the notice from the OTS,
our Board of Directors (the Board of Directors) did not declare or pay the Series B and Series D
preferred stock dividends that would have been payable for the second, third, and fourth quarter of
2009 and the first and second quarters of 2010. The Board of Directors also did not declare or pay
dividends on the common stock that would have been payable for 2009.
On September 9, 2010, the OTS provided a non-objection determination for the declaration of
dividends by September 14, 2010 and the payment of these dividends between December 15, 2010 and
December 31, 2010 in an amount sufficient to maintain qualification as a REIT for the 2009 tax
year. The Board of Directors of EOS declared such dividends on September 13, 2010, for the quarter
ended September 30, 2010, consistent with the OTS non-objection determination. The dividends were
payable to shareholders of record as of October 29, 2010 and include cumulative dividends on the
Series B preferred stock of $120.00 per share, non-cumulative dividends on the Series D preferred
stock of $0.53125 per share and dividends on our common stock of $1,467,000.
An additional formal request to declare dividends was submitted to the OTS and on December 30,
2010, the OTS provided a non-objection determination for the declaration of dividends in an amount
sufficient to maintain qualification as a REIT and avoid excise tax for the 2010 tax year. The
Board of Directors of EOS declared such dividends on December 31, 2010, for the quarter ended
December 31, 2010, consistent with the OTS non-objection determination. The dividends were payable
to shareholders of record as of December 31, 2010 and include dividends on the Series B preferred
stock of $20.00 per share, non-cumulative dividends on the Series D preferred stock of $0.53125 per
share and dividends on our common stock in the amount of $884,000. The dividends declared on
December 31, 2010 were paid in 2011.
During the three months ended March 31, 2011, we submitted a formal request to the OTS to
declare dividends that would have been payable for the first quarter of 2011. The OTS has not made
a ruling on our request as of the date of issuance of this report. The request is for dividends of
$20.00 per share on the Series B preferred stock and for $0.53125 per share on the Series D
preferred stock for a total of $19,000 in dividends for Series B preferred stockholders and
$797,000 in dividends for Series D preferred stockholders. As a result, dividends were not declared
for the first quarter of 2011 and therefore, at March 31, 2011 there were dividends in arrears of
$19,000 related to our Series B preferred stock. Dividends on the Series D preferred stock are
non-cumulative and as such, there were no dividends in arrears.
There can be no assurance that such approval will be received from the OTS or when or if such
OTS approval requirement will be removed. Failure to permit the distribution of sufficient
dividends will cause EOS to fail to qualify as a REIT. If EOS no longer qualifies as a REIT, we
will be subject to federal and state income taxes in the tax year when loss of REIT status occurs
and in years thereafter. Furthermore, even if approval is received from the OTS, any future
dividends on the preferred stock will be payable only when, as and if declared by the Board of
Directors. Aurora Bank and EOS will continue to work with the OTS regarding the resumption of
normal payment of dividends.
On July 21, 2011, the OTS will be dissolved in accordance with the Dodd-Frank Wall Street
Reform and Consumer Protection Act. The primary regulator of Aurora Bank after July 21, 2011 will
be the Office of the Comptroller of the Currency (OCC). Should no determination on the request to
declare dividends be made by the OTS as of July 21, 2011, such determination will be vested in the
OCC. Likewise, any further requests for the declaration of dividends following July 21, 2011 must
be submitted to the OCC. There is no assurance that the OCC will approve any request to declare
dividends.
Failure to permit the distribution of sufficient dividends will cause EOS to fail to qualify
as a REIT. If EOS no longer qualifies as a REIT, we will be subject to federal and state income
taxes in the tax year when loss of REIT status occurs and in years thereafter. Furthermore, even if
approval is received, any future dividends on the preferred stock will be payable only when, as and
if declared by the Board of Directors. Aurora Bank and EOS will continue to work with the OTS until its dissolution and
the OCC following July 21, 2011 regarding the resumption of normal payment of dividends.
10
NOTE 4. LOANS
We use the term carrying value to reflect loans valued at the lower of their accreted cost
or market value, or at their fair value, as applicable to the individual loans valuation method as
selected by us in accordance with accounting standards.
A summary of the carrying value and unpaid principal balance (UPB) of loans by valuation
method and in total is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
|
|
|
Unpaid Principal
|
|
|
|
Carrying Value
|
|
|
Balance
|
|
|
Carrying Value
|
|
|
Balance
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Total mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate at lower of accreted cost or market value (1)
|
|
$
|
6,174
|
|
|
$
|
8,530
|
|
|
$
|
6,866
|
|
|
$
|
9,504
|
|
Multi-family residential at lower of accreted cost or market value (1)
|
|
|
827
|
|
|
|
1,006
|
|
|
|
850
|
|
|
|
1,034
|
|
One-to-four family residential at lower of accreted cost or market
value (1)
|
|
|
202
|
|
|
|
248
|
|
|
|
219
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at lower of accreted cost or market value
|
|
|
7,203
|
|
|
|
9,784
|
|
|
|
7,935
|
|
|
|
10,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential at fair value
|
|
|
15,573
|
|
|
|
20,082
|
|
|
|
16,505
|
|
|
|
22,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22,776
|
|
|
|
29,866
|
|
|
|
24,440
|
|
|
|
32,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Though the table compares the carrying value of these loans against UPB, these loans are
carried at the lower of accreted cost or market value and the carrying value cannot exceed
the cost of these loans which for all loans is less than UPB.
|
A summary of the loans on non-accrual status is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Unpaid Principal
|
|
|
|
|
|
Unpaid Principal
|
|
|
|
Carrying Value
|
|
|
Balance
|
|
|
Carrying Value
|
|
|
Balance
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Mortgage loans on non-accrual status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
597
|
|
|
$
|
666
|
|
|
$
|
692
|
|
|
$
|
802
|
|
Multi-family residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
218
|
|
|
|
337
|
|
|
|
224
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans on non-accrual status
|
|
$
|
815
|
|
|
$
|
1,003
|
|
|
$
|
916
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In Thousands)
|
|
Average carrying value of non-accrual loans
|
|
$
|
865
|
|
|
$
|
448
|
|
There were seven loans representing seven borrowers in non-accrual status and eight loans
representing eight borrowers in non-accrual status, as of March 31, 2011 and December 31, 2010,
respectively.
11
NOTE 5. FAIR VALUE MEASUREMENTS
Fair Value Measurements
Prior to February 5, 2009, our loan assets were classified as held for investment and recorded
at accreted cost, and we amortized any purchase discount and deferred fees, less a provision to the
allowance for loan losses. As a result of entering into the February Asset Exchange, our loans were
reclassified as held for sale and were reported at the lower of their accreted cost or market
value. A valuation allowance was recorded to recognize the excess of accreted cost over fair value.
The February Asset Exchange was terminated prior to consummation.
Effective November 1, 2009, EOS and Aurora Bank entered into and consummated the November
Asset Exchange pursuant to which we agreed to an exchange of loans with Aurora Bank, though with a
lesser quantity of loans than the February Asset Exchange. As of March 31, 2011, we continue to
report the portion of the loan assets that were retained after the November Asset Exchange at the
lower of their accreted cost or market value and these loans are reflected in Loans at lower of
accreted cost or market value on the Balance Sheet. For these retained loans, the carrying value of
the loans will be recognized only up to the cost on the date they were classified as held for sale.
We have elected the fair value option for the loans that were received from the November Asset
Exchange and these loans are reflected in Loans at fair value on the Balance Sheet. For these
acquired loans, the carrying value of the loans will be equivalent to fair value which may reflect
an unrealized gain or loss relative to the cost of the loans. Such recognition is included in the
determination of net income in the period in which the change occurred.
Accounting standards define fair value and establish a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The fair value is the price at which
an asset or liability could be exchanged in a current transaction between knowledgeable, willing
parties in an orderly market. Where available, fair value is based on observable market prices or
inputs or derived from such prices or inputs. Where observable prices or inputs are not available,
other valuation methodologies are applied.
At March 31, 2011 and December 31, 2010, the fair value of our loan portfolio was estimated
based upon various cash flow models to price the portfolio. These models consider significant
inputs such as loan type, loan age, loan to value ratio, payment history, and property location, as
well as significant assumptions such as estimated rates of loan delinquency, potential recovery,
discount rate, and the impact of interest rate reset. Recent trade quotes or prices are identified
in estimating the amount at which a third party might purchase the loans and their yield
requirements. Management also considers market information and quotes received from third parties,
when available. The valuation of the loan portfolio involves managements use of estimates and
judgment, the degree of which is dependent on the terms of the loans and the availability of market
prices and inputs.
Accounting standards require the categorization of financial assets and liabilities based on a
hierarchy of the inputs to the valuation techniques used to measure fair value. The hierarchy gives
the highest priority to quoted prices in active markets for identical assets or liabilities (Level
1) and the lowest priority to valuation methods using unobservable inputs (Level 3). The three
levels are described below:
Level 1 Inputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date.
Level 2 Inputs are either directly or indirectly observable for the asset or liability
through correlation with market data at the measurement date and for the duration of the
instruments anticipated life.
Level 3 Inputs reflect managements best estimate of what market participants would use
in pricing the asset or liability at the measurement date. Consideration is given to the
risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The categorization within the fair value hierarchy is based on the lowest level of significant
input to its valuation. In the fair value determination of our loans at March 31, 2011 and 2010,
all of our loans were categorized as Level 3.
12
The table presented below summarizes the change in balance sheet carrying value associated
with Level 3 loans during the three months ended March 31, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
Transfers
|
|
|
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
Payments
|
|
|
In / Out
(1)
|
|
|
Net Gains
(2)
|
|
|
2011
|
|
|
|
(In Thousands)
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
6,866
|
|
|
$
|
(954
|
)
|
|
$
|
|
|
|
$
|
262
|
|
|
$
|
6,174
|
|
Multi-family residential
|
|
|
850
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
5
|
|
|
|
827
|
|
One-to-four family
residential
|
|
|
16,724
|
|
|
|
(1,993
|
)
|
|
|
|
|
|
|
1,044
|
|
|
|
15,775
|
|
|
|
|
Total
|
|
$
|
24,440
|
|
|
$
|
(2,975
|
)
|
|
$
|
|
|
|
$
|
1,311
|
|
|
$
|
22,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Balance
|
|
|
|
December 31,
|
|
|
|
|
|
|
Transfers
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
Payments
|
|
|
In / Out
(1)
|
|
|
Net Gains
(2)
|
|
|
2010
|
|
|
|
(In Thousands)
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
6,380
|
|
|
$
|
(349
|
)
|
|
$
|
|
|
|
$
|
885
|
|
|
$
|
6,916
|
|
Multi-family residential
|
|
|
693
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
69
|
|
|
|
743
|
|
One-to-four family
residential
|
|
|
22,750
|
|
|
|
(3,058
|
)
|
|
|
|
|
|
|
810
|
|
|
|
20,502
|
|
|
|
|
Total
|
|
$
|
29,823
|
|
|
$
|
(3,426
|
)
|
|
$
|
|
|
|
$
|
1,764
|
|
|
$
|
28,161
|
|
|
|
|
(1)
|
|
Transfers are recognized on the actual date of the event or change in circumstances
that caused the transfer.
|
|
(2)
|
|
Net Gains are included in Realized and unrealized gains on
loans on the Statements of
Operations. The current period gains and losses from changes in values of Level 3 loans
represent gains/losses on loans and reflect changes in values of those loans only for the
period(s) in which the loans were classified as Level 3.
|
Fair Value of Financial Instruments
Accounting standards require disclosure of estimated fair values of all financial instruments
where it is practicable to estimate such values. In determining the fair value measurements for
financial assets and liabilities, we utilize quoted prices, when available. If quoted prices are
not available, we estimate fair value using present value or other valuation techniques that
utilize inputs that are observable for the asset or liability, either directly or indirectly, when
available. When observable inputs are not available, inputs may be used that are unobservable and,
therefore, reflect our own assumptions about the assumptions market participants would use in
pricing the asset or liability based on the best information available in the circumstances.
Accounting standards exclude certain financial instruments and all nonfinancial instruments
from disclosure requirements. Accordingly, the aggregate fair value amounts presented may not
represent the underlying value of the entire company.
In addition to the fair value of our loans, as discussed above, the following methods and
assumptions were used by us in estimating fair value of financial instruments:
Cash and cash equivalents:
The carrying value of cash and interest-bearing deposits
approximate fair value because of the short-term nature of these instruments.
Accrued interest receivable:
The carrying value of accrued interest receivable approximates
fair value because of the short-term nature of these financial instruments.
The estimated fair values, and related carrying value, of our financial instruments are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
Fair
|
|
|
|
Carrying Value
|
|
|
Value
|
|
|
Carrying Value
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
Cash and cash equivalents
|
|
$
|
64,232
|
|
|
$
|
64,232
|
|
|
$
|
62,569
|
|
|
$
|
62,569
|
|
Loans
|
|
|
22,776
|
|
|
|
22,776
|
|
|
|
24,440
|
|
|
|
24,440
|
|
Accrued interest receivable
|
|
|
203
|
|
|
|
203
|
|
|
|
213
|
|
|
|
213
|
|
13
NOTE 6. RELATED PARTY TRANSACTIONS
Aurora Bank administers our day-to-day activities in its roles as servicer under the MSA and
as advisor under the AA. Both the MSA and the AA were amended on March 29, 2010 with retroactive
effect as of January 1, 2010.
The amendment to the MSA changed the fees paid by EOS to reflect the fees payable to each
sub-servicer. The amendment of the AA changed the management fee to $25,000 per month.
Servicing and advisory fees for the quarters ended March 31, 2011 and 2010 totaled $109,000 and
$132,000, respectively, and were recorded in Loan servicing and advisory services on the Statements of
Operations and within Accounts payable to parent on the Balance Sheets. Also included within the
balances of Accounts payable to parent of $333,000 and $87,000, as of March 31, 2011 and December
31, 2010, respectively, are payables to Aurora Bank and subsidiaries as they process payments to third
parties for us.
Dividends payable to parent as of
March 31, 2011 and December 31, 2010 were $0 and $902,000, respectively, and were recorded in
Accounts payable to parent on the Balance Sheets.
All of the mortgage assets in our loan portfolio as of March 31, 2011 were purchased from
Capital Crossing or Aurora Bank. No loans were purchased or contributed from Aurora Bank in 2011 or
2010.
Our cash and cash equivalents balances of $64.2 million and $62.6 million at March 31, 2011
and December 31, 2010, respectively, consist entirely of deposits with Aurora Bank.
The following table summarizes capital transactions between us and Aurora Bank, our sole
common shareholder and parent:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars In Thousands)
|
|
Common stock dividends paid to parent
|
|
$
|
884
|
|
|
$
|
|
|
Series B preferred stock dividends paid to parent
|
|
|
18
|
|
|
|
|
|
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This report for EOS Preferred Corporation (hereafter referred to as EOS, the Company,
we, us, or our) contains certain statements that constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as
expects, anticipates, believes, estimates and other similar expressions or future or
conditional verbs such as will, should, would, and could are intended to identify such
forward-looking statements. These statements are not historical facts, but instead represent our
current expectations, plans or forecasts of our future results, growth opportunities, business
outlook, loan growth, credit losses, liquidity position and other similar matters, including, but
not limited to, the requirement that Aurora Bank FSB (Aurora Bank) be sold or dissolved through
the asset purchase of its assets by its parent within defined time frames; the ability to pay
dividends with respect to the Series B and Series D preferred stock; future bank regulatory actions
that may impact us; and the effect of the bankruptcy of Lehman Brothers Holdings Inc. (LBHI; LBHI
with its subsidiaries, Lehman Brothers) on us. These statements are not guarantees of future
results or performance and involve certain risks, uncertainties and assumptions that are difficult
to predict and often are beyond our control. Actual outcomes and results may differ materially from
those expressed in, or implied by, any forward-looking statement. You should not place undue
reliance on any forward-looking statement and should consider all uncertainties and risks,
including, among other things, the risks set forth herein and in our Annual Report on Form 10-K for
the year ended December 31, 2010, as well as those discussed in any of our other subsequent
Securities and Exchange Commission filings. Forward-looking statements speak only as of the date
they are made, and we undertake no obligation to update any forward-looking statement to reflect
the impact of circumstances or events that arise after the date the forward-looking statement was
made.
Possible events or factors could cause results or performance to differ materially from what
is expressed in our forward-looking statements. These possible events or factors include, but are
not limited to, those risk factors discussed under Item 1A Risk Factors in our Annual Report on
Form 10-K for the year ended December 31, 2010 or in Item 1A of this Quarterly Report on Form 10-Q,
and the following: limitations by regulatory authorities on our ability to implement our business
plan and restrictions on our ability to pay dividends; the requirement that Aurora Bank be sold or
dissolved within defined time frames; negative economic conditions that adversely affect the
general economy, housing prices, the job market, consumer confidence and spending habits which may
affect, among other things, the credit quality of our loan portfolios (the degree of the impact of
which is dependent upon the duration and severity of these conditions); the level and volatility of
interest rates; changes in consumer, investor and counterparty confidence in, and the related
impact on, financial markets and institutions; legislative and regulatory actions which may
adversely affect our business and economic conditions as a whole; the impact of litigation and
regulatory investigations; various monetary and fiscal policies and regulations; changes in
accounting standards, rules and interpretations and the impact on our financial statements; and
changes in the nature and quality of the types of loans held by us.
The following discussion of our financial condition, results of operations, capital resources
and liquidity should be read in conjunction with the condensed financial statements and related
notes included elsewhere in this report and the audited financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the
SEC.
Executive Level Overview
EOS is a Massachusetts corporation organized on March 20, 1998, with the principal business
objective to hold mortgage assets that will generate net income for distribution to stockholders.
Aurora Bank, an indirect wholly-owned subsidiary of LBHI and a wholly-owned subsidiary of Lehman
Brothers Bancorp (LB Bancorp), owns all of our common stock. Prior to the merger with Aurora Bank
(discussed below), we were a subsidiary of Capital Crossing Bank (Capital Crossing), a federally
insured Massachusetts trust company, our corporate name was Capital Crossing Preferred Corporation,
and Capital Crossing owned all of our common stock. Effective June 21, 2010, we changed our
corporate name to EOS Preferred Corporation. As of March 31, 2011, the Series B preferred stock and
Series D preferred stock remain outstanding and remain subject to their existing terms and
conditions, including the call feature with respect to the Series D preferred stock.
All of the mortgage assets in our loan portfolio at March 31, 2011 were acquired from Capital
Crossing or Aurora Bank and it is anticipated that substantially all additional mortgage assets, if
any are acquired in the future, will be acquired from Aurora Bank. As of March 31, 2011, our loan
portfolio had a carrying value of $22.8 million and an unpaid principal balance (UPB) of $29.9
million. There were no loans purchased or sold during the three months ended March 31, 2011.
Residential loans constituted 69.3% of the total loans in our loan portfolio at March 31,
2011. Commercial mortgage and multi-family loans constituted the remaining 30.7%. Commercial
mortgage loans are generally subject to greater risks than other types of loans. Our commercial
mortgage loans, like most commercial mortgage loans, generally lack standardized terms, tend to
have shorter maturities than other mortgage loans and may not be fully amortizing. As of March 31,
2011, 96.4% of the carrying value of all loans was classified as performing.
15
Properties underlying our current loans are concentrated primarily in California and comprised
39.9% of the total carrying value of the loan portfolio as of March 31, 2011. Beginning in 2007 and
through the present time, the housing and real estate sectors in California were hit particularly
hard by the recession with higher overall foreclosure rates than the national average. If
California experiences continued or further adverse economic, political or business conditions, or
natural hazards, we will likely experience higher rates of loss and delinquency on our mortgage
loans than if our loans were more geographically diverse.
Decisions regarding the utilization of our cash are based, in large part, on our future
commitments to pay dividends. Future decisions regarding mortgage asset acquisitions and returns of
capital will be based on the level of preferred stock dividends at that time and the required level
of income necessary to generate adequate dividend coverage and other factors determined to be
relevant at that time.
Aurora Bank administers our day-to-day activities in its roles as servicer under the MSA and
as advisor under the AA. Both the MSA and the AA were amended effective January 1, 2010.
The amendment to the MSA changed the fees paid by EOS to reflect the fees payable to each
sub-servicer. The amendment of the AA changed the management fee to $25,000 per month.
Servicing and advisory fees for the quarters ended March 31, 2011 and 2010 totaled $109,000 and
$132,000, respectively, and were recorded in Loan servicing and advisory services on the Statements of
Operations and within Accounts payable to parent on the Balance Sheets. Also included within the
balances of Accounts payable to parent of $333,000 and $87,000, as of March 31, 2011 and December
31, 2010, respectively, are payables to Aurora Bank and subsidiaries as they process payments to third
parties for us.
Dividends payable to parent as of
March 31, 2011 and December 31, 2010 were $0 and $902,000, respectively, and were recorded in
Accounts payable to parent on the Balance Sheets.
Net income available to the common shareholder decreased $0.7 million to $1.5 million for the
three months ended March 31, 2011, compared to a net income of $2.2 million for the same period in
2010. The decrease between the two quarterly periods in net income available to the common
shareholder was primarily the result of the following:
|
|
|
A decrease in the realized and unrealized gains on loans of $0.5 million. In the first
quarter of 2011 there were realized and unrealized gains on loans of $1.3 million as
compared to realized and unrealized gains of $1.8 million in the first quarter of 2010.
|
|
|
|
|
A decrease in interest income of $268,000 resulting mainly from a decrease in average
loan balance and a decrease in the yield of loans.
|
Impact of Economic Recession
The U.S. economy has been in an economic downturn since 2007 which has dramatically impacted
the housing market with falling home prices and increasing foreclosures. Combined with high levels
of unemployment and underemployment, these economic forces have negatively impacted the credit
performance of mortgage loans and resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities as well as major commercial and investment
banks.
Reflecting concern about the strength of counterparties, many lenders and institutional
investors have reduced or ceased providing funding to borrowers, including to other financial
institutions. This market turmoil and tightening of credit have led to an increased level of
delinquencies, decreased consumer spending, lack of confidence, increased market volatility and
widespread reduction of business activity generally. The resulting economic pressure on borrowers
negatively impacted the credit quality of our commercial loan portfolio and our residential loan
portfolio. The depth and breadth of the downturn as well as the resulting impacts on the credit
quality of both our commercial and residential loan portfolios remain unclear. We expect, however,
continued market turbulence and economic uncertainty to continue well into 2011.
Bankruptcy of Lehman Brothers Holdings Inc.
On September 15, 2008, LBHI, the indirect parent company of Aurora Bank, filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy filing led to increased
regulatory constraints being placed on Aurora Bank by its bank regulatory authorities, primarily
the Office of Thrift Supervision (OTS). These constraints apply to Aurora Banks subsidiaries,
including EOS.
Pursuant to a Settlement Agreement (Settlement Agreement) approved by the bankruptcy court
and executed on November 30, 2010 (Execution Date), Aurora Bank, LBHI, LB Bancorp, and the OTS
entered into a Capital Maintenance Agreement (CMA) in which, among other things, LBHI agreed that
it will seek to sell Aurora Bank within eighteen (18) months from the Execution Date. If after a
period of fifteen (15) months following the Execution Date, the OTS concludes a sale of Aurora Bank
will not be consummated by the end of the eighteen (18) month period; Aurora Bank will prepare and
submit to the OTS a plan for dissolution. The bankruptcy court will have the final review and
approval of any proposed agreement for the sale of Aurora Bank.
16
There can be no assurance that the sale of Aurora Bank will be consummated within the
defined time frame. There can be no assurance that a potential buyer of Aurora Bank will come
forward and tender an offer acceptable to the bankruptcy court, that the bankruptcy court will
approve such offer, or that a potential buyer will meet all other conditions necessary to
consummate the purchase.
Further, there is uncertainty with regards to any and all aspects of a potential sale. The
business strategies of the new owner may not include continued operation of EOS or other business
lines of Aurora Bank.
Both the bankruptcy filing of LBHI and the increased regulatory constraints placed on Aurora
Bank have negatively impacted the ability of EOS to conduct business according to our business
objectives. Following the execution of the Settlement Agreement, the OTS modified, but did not
remove all of the regulatory constraints on Aurora Bank.
Regulatory Actions Involving Aurora Bank
On January 26, 2009, the OTS entered a cease and desist order against Aurora Bank (the
Original Order). The Original Order required Aurora Bank to ensure that each of its subsidiaries,
including EOS, was in compliance with the Original Order, including the operating restrictions
contained therein. In addition, on February 4, 2009, the OTS issued a prompt corrective action
directive to Aurora Bank (the PCA). The PCA required Aurora Bank to, among other things; raise
its capital ratios such that it would be deemed to be adequately capitalized and placed
additional constraints on Aurora Bank and its subsidiaries, including EOS.
Following execution of the Settlement Agreement, on November 30, 2010, Aurora Bank entered
into a Stipulation and Consent to Issuance of Amended Order to Cease and Desist with the OTS
whereby Aurora Bank consented to the issuance of an Amended Order to Cease and Desist (the Amended
Order) issued by the OTS, which amended the Original Order (together the Original Order and the
Amended Order are the Order). The Amended Order amended certain requirements for Aurora Bank
contained in the Original Order. The provisions in the Original Order that require Aurora Bank to
ensure that each of its subsidiaries, including EOS, comply with the Original Order were not
amended. These operating restrictions, among other things, restrict transactions with affiliates,
capital distributions to shareholders (including redemptions), contracts outside the ordinary
course of business, and changes in senior executive officers, board members or their employment
arrangements without prior written notice to the OTS.
Under the Order, EOS must continue to seek and receive approval or non-objection from the OTS
for the declaration and payment of dividends to our preferred and common shareholders. There is no
assurance that the OTS will approve any future request for the declaration or payment of dividends.
As an operating subsidiary of Aurora Bank, EOS remains subject to all of the terms and conditions
of the Order which apply to such operating subsidiaries. The Order was still effective as of the
date of issuance of this interim report.
On November 30, 2010, and effective on the same date, the OTS issued an order terminating the
PCA.
More detailed information can be found in the Original Order, the Amended Order, the PCA, and
the termination of the PCA themselves, copies of which are available on the OTS website
(www.ots.treas.gov).
Under the CMA, LBHI agreed for the duration of LBHIs ownership of Aurora Bank to maintain
Aurora Banks tier 1 and risk based capital ratios at levels greater than the thresholds required
to achieve the well-capitalized designation under OTS regulations.
As of March 31, 2011, as set forth in a public filing with the OTS, Aurora Banks capital
ratios were above the thresholds required under the CMA.
Application of Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon
our condensed financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles, or GAAP. The preparation of these condensed financial statements in
conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the condensed financial statements and the reported amount
of revenues and expenses in the reporting period. Our actual results may differ from these
estimates. We describe those accounting policies that require material subjective or complex
judgments and that have the most significant impact on our financial condition and results of
operations. Our management evaluates these estimates on an ongoing basis, based upon information
currently available and on various assumptions management believes are reasonable as of the date on
the front cover of this report. We have provided a comprehensive summary of our significant
accounting policies in Note 2 to our financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2010. We have provided a summary of relevant recent accounting
pronouncements in Note 2 of this interim report.
17
Results of Operations for the Three Months Ended March 31, 2011 and 2010
Interest income
The yields on our interest-earning assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Loans, net (1)
|
|
$
|
29,979
|
|
|
$
|
362
|
|
|
|
4.82
|
%
|
|
$
|
43,256
|
|
|
$
|
637
|
|
|
|
5.89
|
%
|
Interest-bearing deposits
|
|
|
63,058
|
|
|
|
46
|
|
|
|
0.29
|
|
|
|
52,237
|
|
|
|
39
|
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
93,037
|
|
|
$
|
408
|
|
|
|
1.75
|
%
|
|
$
|
95,493
|
|
|
$
|
676
|
|
|
|
2.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For purposes of providing a meaningful yield comparison, the foregoing table reflects
the UPB for loans and not the fair value of the loan portfolio. Non-accrual loans are
excluded from average balance calculations.
|
The decline in interest income from the three months ended March 31, 2011 compared to the
three months ended March 31, 2010 was the combined result of the decrease in the average balance
and yield on loans.
The average balance of the loans for the three months ended March 31, 2011 totaled $30.0
million compared to $43.3 million for the corresponding period in 2010. This decrease is primarily
attributable to loan payoffs. The yield on the loan portfolio decreased 1.1% in the three months
ended March 31, 2011 compared to the corresponding period in 2010. For the three months ended March
31, 2011, interest and fee income recognized on loan payoffs decreased $100,000, or 83.3%, to
$20,000 from $120,000 for the corresponding period in 2010. The level of interest and fee income
recognized on loan payoffs varies for numerous reasons, as further discussed below. The yield from
regularly scheduled interest and accretion income decreased to 4.56% for the three months ended
March 31, 2011 from 4.78% for the same period in 2010 primarily due to decreases in market interest
rates.
For interest-bearing deposits, the increase in the average balance was mainly due to cash
flows from loan repayments slightly offset by operating expenses and dividends. The rate earned on
interest-bearing deposits has remained unchanged since its decrease in July 2009 from 1.75% to
0.30%.
When a loan is paid off, the excess of any cash received over the carrying value is considered
in the assessment of the gain or loss on loans. The following table sets forth, for the periods
indicated, the components of interest and fees on loans. There can be no assurance regarding future
interest income, including the yields and related level of such income, or the relative portion
attributable to loan payoffs as compared to other sources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Interest
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Income
|
|
|
Yield
|
|
|
Income
|
|
|
Yield
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Regularly scheduled interest and accretion income
|
|
$
|
342
|
|
|
|
4.56
|
%
|
|
$
|
517
|
|
|
|
4.78
|
%
|
Interest and fee income recognized on loan pay-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable discount
|
|
|
20
|
|
|
|
0.26
|
|
|
|
112
|
|
|
|
1.04
|
|
Other interest and fee income
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
0.26
|
|
|
|
120
|
|
|
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest from loans
|
|
$
|
362
|
|
|
|
4.82
|
%
|
|
$
|
637
|
|
|
|
5.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of loan pay-offs and related discount income is influenced by several factors,
including the interest rate environment, the real estate market in particular areas, the timing of
transactions, and circumstances related to individual borrowers and loans. The amount of individual
loan payoffs can be result of negotiations between us and the borrower. Based upon credit risk
analysis and other factors, we will, in certain instances, accept less than the full amount
contractually due in accordance with the loan terms.
18
Operating expenses
Loan servicing and advisory expenses decreased $23,000, or 17.4%, to $109,000 for the three
months ended March 31, 2011 from $132,000 in the same period in 2010. The decrease in 2011 was
primarily due to decreases in the UPB of the loan portfolio.
Other general and administrative expenses increased $17,000, or 12.0% to $159,000 for the
three months ended March 31, 2011 from $142,000 in the same period in 2010. The net increase in
2011 was primarily attributable to an increase in legal fees. The service agreement with our
external legal counsel executed in 2010 was structured with higher fees in the first quarter,
beginning in 2011, corresponding to the additional efforts required in connection with the
preparation of our Annual Report on Form 10-K.
Dividend Payments
On June 26, 2009, the OTS notified Aurora Bank that, as a result of the Order and the PCA, the
approval or non-objection of the OTS would be required prior to declaration and payment of
dividends by EOS. The OTS required Aurora Bank to submit a formal request for non-objection
determination to permit the payment of dividends by EOS. As a result of the notice from the OTS,
our Board of Directors (the Board of Directors) did not declare or pay the Series B and Series D
preferred stock dividends that would have been payable for the second, third, and fourth quarter of
2009 and the first and second quarters of 2010. The Board of Directors also did not declare or pay
dividends on the common stock that would have been payable for 2009.
On September 9, 2010, the OTS provided a non-objection determination for the declaration of
dividends by September 14, 2010 and the payment of these dividends between December 15, 2010 and
December 31, 2010 in an amount sufficient to maintain qualification as a real estate investment
trust (REIT) for the 2009 tax year. The Board of Directors of EOS declared such dividends on
September 13, 2010, for the quarter ended September 30, 2010, consistent with the OTS non-objection
determination. The dividends were payable to shareholders of record as of October 29, 2010 and
include cumulative dividends on the Series B preferred stock of $120.00 per share, non-cumulative
dividends on the Series D preferred stock of $0.53125 per share and dividends on our common stock
of $1,467,000.
An additional formal request to declare dividends was submitted to the OTS and on December 30,
2010, the OTS provided a non-objection determination for the declaration of dividends in an amount
sufficient to maintain qualification as a REIT and avoid excise tax for the 2010 tax year. The
Board of Directors of EOS declared such dividends on December 31, 2010, for the quarter ended
December 31, 2010, consistent with the OTS non-objection determination. The dividends were payable
to shareholders of record as of December 31, 2010 and include dividends on the Series B preferred
stock of $20.00 per share, non-cumulative dividends on the Series D preferred stock of $0.53125 per
share and dividends on our common stock in the amount of $884,000. Included in these transactions
were dividends of $18,000 for the Series B preferred stock and $884,000 for the common stock that
were to Aurora Bank. These dividends were accrued as of December 31, 2010 and were paid in the
quarter ended March 31, 2011.
During the three months ended March 31, 2011, we submitted a formal request to declare
dividends to the OTS that would have been payable for the first quarter of 2011. The OTS has not
made a ruling on our request as of the date of issuance of this report. The request is for
dividends of $20.00 per share on the Series B preferred stock and for $0.53125 per share on the
Series D preferred stock for a total of $19,000 in dividends for Series B preferred stockholders
and $797,000 in dividends for Series D preferred stockholders. As a result, dividends were not
declared for the first quarter of 2011 and therefore, at March 31, 2011 there were dividends in
arrears of $19,000 related to our Series B preferred stock. Dividends on the Series D preferred
stock are non-cumulative and as such, there were no dividends in arrears.
The OTS has not approved or provided a non-objection to any further dividend distributions.
There can be no assurance that such approval will be received from the OTS or when or if such OTS
approval requirement will be removed. Failure to permit the distribution of sufficient dividends
will cause EOS to fail to qualify as a REIT. If EOS no longer qualifies as a REIT, we will be
subject to federal and state income taxes in the tax year when loss of REIT status occurs and in
years thereafter. Furthermore, even if approval is received from the OTS, any future dividends on
the preferred stock will be payable only when, as and if declared by the Board of Directors. Aurora
Bank and EOS will continue to work with the OTS regarding the resumption of normal payment of
dividends.
On July 21, 2011, the OTS will be dissolved in accordance with the Dodd-Frank Wall Street
Reform and Consumer Protection Act. The primary regulator of Aurora Bank after July 21, 2011 will
be the Office of the Comptroller of the Currency (OCC). Should no determination on the request to
declare dividends be made by the OTS as of July 21, 2011, such determination will be vested in the
OCC. Likewise; any further requests for the declaration of dividends following July 21, 2011 must
be submitted to the OCC. There is no assurance that the OCC will approve any request to declare
dividends.
Failure to permit the distribution of sufficient dividends will cause EOS to fail to qualify
as a REIT. If EOS no longer qualifies as a REIT, we will be subject to federal and state income
taxes in the tax year when loss of REIT status occurs and in years thereafter. Furthermore, even if
approval is received, any future dividends on the preferred stock will be payable only when, as and
if
19
declared by the Board of Directors. Aurora Bank and
EOS will continue to work with the OTS until its dissolution and
the OCC following July 21, 2011 regarding the resumption of normal payment of dividends.
Financial Condition
Interest-bearing Deposits with Parent
Interest-bearing deposits with parent consist entirely of money market accounts. The balance
of interest-bearing deposits increased $1.8 million to $64.2 million as of March 31, 2011 compared
to $62.4 million as of December 31, 2010. The increase in the balance of interest-bearing deposits
is the result of cash flows from loan repayments.
Loan Portfolio
The loan portfolio is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying
|
|
|
Percentage
|
|
|
Carrying
|
|
|
Percentage
|
|
|
|
Value
|
|
|
of Total
|
|
|
Value
|
|
|
of Total
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
6,174
|
|
|
|
27.1
|
%
|
|
$
|
6,866
|
|
|
|
28.1
|
%
|
Multi-family residential
|
|
|
827
|
|
|
|
3.6
|
|
|
|
850
|
|
|
|
3.5
|
|
One-to-four family residential
|
|
|
15,775
|
|
|
|
69.3
|
|
|
|
16,724
|
|
|
|
68.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,776
|
|
|
|
100.0
|
%
|
|
$
|
24,440
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have historically acquired primarily performing commercial real estate and multi-family
residential mortgage loans in accrual status. During 2011 and 2010, EOS did not acquire any loans
from Aurora Bank.
Non-accrual loans, net of discount, totaled $815,000 as of March 31, 2011, representing seven
loans and seven borrowers. Non-accrual loans, net of discount, totaled $916,000 as of December 31,
2010, representing eight loans and eight borrowers. Loans generally are placed on non-accrual
status and the accrual of interest is generally discontinued when the collectability of principal
and interest is not probable or estimable and generally occurs when the loan is ninety days or more
past due as to either principal or interest. Unpaid interest income previously accrued on such
loans is reversed against current period interest income. Interest payments received on non-accrual
loans are recorded as interest income. A loan is returned to accrual status when it is brought
current. Loans are charged off when they are determined to be uncollectible.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars In Thousands)
|
|
Net cash provided by operating activities
|
|
$
|
2,356
|
|
|
$
|
1,702
|
|
Net cash provided by investing activities
|
|
|
1,007
|
|
|
|
379
|
|
Net cash used in financing activities
|
|
|
(1,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
1,663
|
|
|
$
|
2,081
|
|
|
|
|
|
|
|
|
Cash provided by operating activities increased by $0.7 million for the three months ended
March 31, 2011 as compared to the three months ended March 31, 2010, primarily attributable to
payments of other receivables made in the three months ended March 31, 2010 that were not received
in the three months ended March 31, 2011. This was partially offset by lower loan repayments for
loans at fair value and lower interest income in the three months ended March 31, 2011 as compared
to the three months ended March 31, 2010.
Cash provided by investing activities increased by $0.6 million for the three months ended
March 31, 2011 as compared to the three months ended March 31, 2010, primarily attributable to
increased loan repayments from loans at lower of accreted cost or market.
Cash used in financing activities increased $1.7 million for the three months ended March 31,
2011 as compared to the three months ended March 31, 2010, due to payment of common stock dividends
and preferred stock dividends that occurred in the three months ended March 31, 2011 that did not
occur in the three months ended March 31, 2010.
20
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures, or capital resources that are
material to investors.
Interest Rate Risk
The majority of our loan portfolio consists of variable rate loans with contractual interest
rates that are affected by changes in market interest rates. Falling interest rates would tend to
reduce the amount of interest earned on our interest bearing cash deposits, which could negatively
impact the amount of cash available to pay dividends on preferred stock and common stock. We are
not able to precisely quantify the potential impact on operating results or funds available for
distribution to stockholders from material changes in interest rates.
Significant Concentration of Credit Risk
We had cash and cash equivalents of $64.2 million as of March 31, 2011. These funds were held
in interest bearing accounts with Aurora Bank. The Federal Deposit Insurance Corporation (FDIC)
provides coverage on these accounts which as of March 31, 2011 was limited to $250,000. Cash in
excess of FDIC coverage limitations is subject to credit risk.
Concentration of credit risk primarily arises with respect to the geographical distribution of
our loan portfolio. Our balance sheet exposure to geographic concentration directly affects the
credit risk of the loans within our loan portfolio. At March 31, 2011, 39.9% of the carrying value
of our mortgage loans consisted of loans collateralized by properties located in California.
Consequently, the portfolio may experience a higher default rate in the event of adverse economic,
political or business developments or natural hazards in California that may affect the ability of
property owners to make payments of principal and interest on the underlying mortgages. The housing
and real estate sectors in California have been particularly impacted by the recession with higher
overall foreclosure rates than the national average. If California experiences further adverse
economic, political or business conditions, or natural hazards, we will likely experience higher
rates of loss and delinquency on our mortgage loans than if our loans were more geographically
diverse.
Liquidity Risk Management
The objective of liquidity management is to ensure the availability of sufficient cash flows
to meet all of our financial commitments. Our principal liquidity need is to pay dividends on our
preferred shares and common shares; however, our payment of dividends is currently subject to OTS
approval.
If and to the extent that any additional assets are acquired in the future, such acquisitions
are intended to be funded primarily through repayment of UPB of loans by individual borrowers and
cash on hand. We do not have and do not anticipate having any material capital expenditures. To the
extent that the Board of Directors determines that additional funding is required, we may raise
such funds through additional equity offerings, debt financing or retention of cash flow (after
consideration of provisions of the Internal Revenue Code requiring the distribution by a REIT of at
least 90% of our net taxable income, excluding net capital gains, and taking into account taxes
that would be imposed on undistributed income), or a combination of these methods. We do not
currently intend to incur any indebtedness. Our organizational documents limit the amount of
indebtedness which we are permitted to incur without the approval of the Series D preferred
stockholders to no more than 100% of the total stockholders equity of EOS. Any such debt may
include intercompany advances made by Aurora Bank to us.
We may also issue additional series of preferred stock, subject to OTS approval. However, we
may not issue additional shares of preferred stock ranking senior to the Series D preferred stock
without the consent of holders of at least two-thirds of the Series D preferred stock outstanding
at that time. Although our charter does not prohibit or otherwise restrict Aurora Bank or its
affiliates from holding and voting shares of Series D preferred stock, to our knowledge, there were
no shares of Series D preferred stock held by Aurora Bank or its affiliates as of March 31, 2011.
Additional shares of preferred stock ranking on parity with the Series D preferred stock may not be
issued without the approval of a majority of our independent directors (as defined in our charter).
Impact of Inflation and Changing Prices
Our asset and liability structure is substantially different from that of an industrial
company in that virtually all of our assets are monetary in nature. Management believes the impact
of inflation on financial results depends upon our ability to react to changes in interest rates
and by such reaction, reduce the inflationary impact on performance. Interest rates do not
necessarily move in the same direction, or at the same magnitude, as the prices of other goods and
services.
21
Various information shown elsewhere in this interim report will assist the reader in
understanding how EOS is positioned to react to changing interest rates and inflationary trends. In
particular, the discussion of market risk and other maturity and repricing information of our
assets is contained in Item 3. Quantitative and Qualitative Disclosures About Market Risk below.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and interest rates. It
is our objective to attempt to manage risks associated with interest rate movements. Our market
risk arises primarily from interest rate risk inherent in holding loans and interest-earning
deposits. A period of rising interest rates would tend to result in an increase in net interest
income and conversely, a period of falling interest rates would tend to adversely affect net
interest income.
Aurora Bank actively monitors our interest rate risk exposure pursuant to the AA. Aurora Bank
reviews, among other things, the sensitivity of our assets to interest rate changes, the book and
market values of assets, purchase and sale activity, and anticipated loan pay-offs. Aurora Banks
senior management also approves and establishes pricing and funding decisions with respect to our
overall asset and liability composition.
Our methods for evaluating interest rate risk include an analysis of our interest-earning
assets maturing or repricing within a given time period. As of March 31, 2011, only
interest-earning assets were evaluated as we have no interest-bearing liabilities.
The following table sets forth our interest-rate-sensitive assets categorized by repricing or
maturity dates and weighted average yields at March 31, 2011. For fixed rate instruments, the
repricing date is the maturity date. For adjustable-rate instruments, the repricing date is deemed
to be the earliest possible interest rate adjustment date. Assets that are subject to immediate
repricing are placed in the overnight column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
Over One
|
|
|
Over Two
|
|
|
Over Three
|
|
|
Over Four
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
to Two
|
|
|
to Three
|
|
|
to Four
|
|
|
to Five
|
|
|
Over Five
|
|
|
|
|
|
|
|
|
|
Overnight
|
|
|
One Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
Fair Value
|
|
|
|
(In Thousands)
|
|
Interest-bearing deposits
|
|
$
|
64,232
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
64,232
|
|
|
$
|
64,232
|
|
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate loans (1)
|
|
|
|
|
|
|
1,066
|
|
|
|
973
|
|
|
|
882
|
|
|
|
350
|
|
|
|
712
|
|
|
|
4,740
|
|
|
|
8,723
|
|
|
|
6,311
|
|
|
|
|
|
|
|
|
4.64
|
%
|
|
|
4.41
|
%
|
|
|
4.67
|
%
|
|
|
5.72
|
%
|
|
|
4.57
|
%
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate loans (1)
|
|
|
|
|
|
|
20,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,140
|
|
|
|
15,650
|
|
|
|
|
|
|
|
|
4.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate-sensitive assets
|
|
$
|
64,232
|
|
|
$
|
21,206
|
|
|
$
|
973
|
|
|
$
|
882
|
|
|
$
|
350
|
|
|
$
|
712
|
|
|
$
|
4,740
|
|
|
$
|
93,095
|
|
|
$
|
86,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Loans are presented at UPB and exclude non-accrual loans.
|
At March 31, 2011, the fair value of net loans was $22.8 million with a UPB of $29.9 million
and 71.3% of the fair value of loans in accrual status of our portfolio were floating rate loans
with contractual interest rates that may fluctuate based on changes in market interest rates. Based
on our experience, management applies the assumption that, on average, 33.8% and 11.5% of
residential and commercial loans, respectively, will prepay annually. The fair value of
interest-bearing deposits approximates carrying value.
Item 4. Controls and Procedures
Our management, with the participation of our President and Chief Financial Officer, evaluated
the effectiveness of EOS disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of March
31, 2011. Based on this evaluation, our President and Chief Financial Officer concluded that, as of
March 31, 2011, our disclosure controls and procedures were (1) designed to ensure that material
information relating to EOS is made known to the President and Chief Financial Officer by others
within the entity, particularly during the period in which this report was being prepared, and (2)
effective, in that they provide reasonable assurance that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the SECs rules and forms.
No change to our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2011 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
22
PART II
Item 1. Legal Proceedings
From time to time, we may be involved in routine litigation incidental to our business,
including a variety of legal proceedings with borrowers, which would contribute to our expenses,
including the costs of carrying non-accrual loans. We are currently not a party to any material
pending legal proceedings.
Item 1A. Risk Factors
A number of risk factors, including, without limitation, the risk factors found in Item 1A of
our Annual Report on
Form 10-K
for the annual period ended December 31, 2010, may cause our actual
results to differ materially from anticipated future results, performance or achievements expressed
or implied in any forward-looking statements contained in this Quarterly Report on
Form 10-Q
or any
other report filed by us with the SEC. All of these factors should be carefully reviewed, and the
reader of this Quarterly Report on
Form 10-Q
should be aware that there may be other factors that
could cause difference in future results, performance or achievements.
Item 2. Unregistered Sales of Equity Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
On May 9, 2011, Thomas
OSullivan submitted his resignation as a management director, effective May 15, 2011.
Mr. OSullivan also submitted a resignation as President effective May 15, 2011.
Mr. OSullivan will remain a senior officer of Aurora Bank FSB. In connection with the resignation of
Mr. OSullivan, on May 9, 2011, our Board elected Brian Kuelbs as a management director, effective
May 15, 2011. Mr. Kuelbs was also appointed as President effective May 15, 2011. Mr. Kuelbs, 47, has significant
financial services industry experience. He is a former Executive Vice President and Chief Financial Officer of
GMAC Bank, servicing in that capacity from 2003-2005. He is a former Managing Director of Countrywide Financial
Corporation serving from 2005-2008. Most recently he was the President of BPK Advisors, Inc. In 2011, was
appointed Chief Financial Officer of Aurora Bank FSB, our parent company. Until his appointment as Chief Financial
Officer of Aurora Bank FSB, none of the corporations or organizations that have employed Mr. Kuelbs during the past
five years was a parent, subsidiary, or other affiliate of EOS. Mr. Kuelbs has an M.B.A. from the University of
Notre Dame and a B.B.A. from the University of Wisconsin-Madison.
On May 9, 2011, our Board elected Nancy Jo Kuenstner as a director, effective May 15, 2011. Ms.
Kuenstner, age 57, has more than 30 years of experience in banking and finance. Since September 2009 she
has served on the board of directors of CreXus, a real estate investment trust. Ms. Kuenstner is the former
President, Chief Executive Officer, and a director of The Law Debenture Trust Company of New York
serving from March 2001 through December 2008. Ms. Kuenstner serves as a trustee of Lafayette College,
Secretary of the board, and is an ex oficio member of its investment committee. None of the corporations or
organizations that have employed Ms. Kuenstner during the past five years is a parent, subsidiary or other
affiliate of ours. Ms. Kuenstner has an M.B.A. from the University of North Carolina and a Bachelor of
Arts in Spanish from Lafayette College. The Board has determined that Ms. Kuenstner qualifies as an
independent director under the applicable rules of The Nasdaq Stock Market. In connection with the
appointment of Ms. Kuenstner to the Board effective May 15, 2011, Lana Harber submitted a resignation as
a director, effective May 15, 2011.
Item 6. Exhibits
|
3.1
|
|
Restated Articles of Organization of EOS Preferred Corporation*
|
|
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3.2
|
|
Amended and Restated By-Laws of EOS Preferred Corporation*
|
|
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31.1
|
|
Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the President.
|
|
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31.2
|
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Certification pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) of the Chief Financial Officer.
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350 of the President and Chief Financial Officer.
|
|
|
|
*
|
|
Incorporated by herein from the exhibit of the same description filed on August
13, 2010 on Form 10-Q.
|
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, EOS Preferred Corporation
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EOS PREFERRED CORPORATION
|
|
|
|
|
|
|
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Date: May 13, 2011
|
By:
|
/s/ Thomas OSullivan
|
|
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Thomas OSullivan
|
|
|
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President (Principal Executive Officer)
|
|
|
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|
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Date: May 13, 2011
|
By:
|
/s/ Robert J. Leist, Jr.
|
|
|
|
Robert J. Leist, Jr.
|
|
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
24
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
Item
|
|
|
3.1
|
|
Restated Articles of Organization of EOS
Preferred Corporation *
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Amended and Restated By-Laws of EOS
Preferred Corporation *
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e) of the President.
|
|
|
|
|
|
|
|
|
|
|
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31.2
|
|
Certification pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e) of the Chief
Financial Officer.
|
|
|
|
|
|
|
|
|
|
|
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32
|
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Certification pursuant to 18 U.S.C. Section
1350 of the President and Chief Financial
Officer.
|
|
|
|
|
|
|
|
*
|
|
Incorporated by herein from the exhibit of the same description filed on August
13, 2010 on Form 10-Q.
|
25
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