EUBK Eurobancshares (MM)

SAN JUAN, Puerto Rico, Jan. 29 /PRNewswire-FirstCall/ -- EuroBancshares, Inc. (NASDAQ:EUBK) (the "Company") today reported its results for the fourth quarter and year ended December 31, 2006. Rafael Arrillaga-Torrens, Jr., Chairman, President and Chief Executive Officer of the Company said, "The year 2006 was a very difficult year for the Puerto Rico banking industry and all financial institutions in general. The interest rate environment, together with the deterioration in the Puerto Rico economy impacted our performance during the year. However, despite these difficulties, it is gratifying to see the beneficial effect of the proactive actions we started taking during the third quarter of 2005 to tighten our underwriting standards and strategically pare back our automobile leasing operations. Nonetheless, we believe we still have room for improvement. During the quarter ended December 31, 2006, we repossessed less and sold more vehicles, compared to the quarter ended September 30, 2006. Also, non- performing financing lease contracts decreased by $1.2 million when comparing the quarter ended December 31, 2006 to the quarter ended September 30, 2006. If this trend continues, we can expect an improvement in our financing leases portfolio, which could be positive looking forward to year 2007. Moreover, progress toward our strategic goals, together with investments made in our branch network, mortgage business, our centralized operations, and technology continue to provide economies of scale to facilitate gains in market share. We remain focused on identifying opportunities and intensifying our efforts to be the premier financial resource to small to mid-size commercial businesses, professionals, and consumers who work or live near our branch footprint. During 2006, we grew our commercial loans portfolio by $148.6 million, or 16.8%. We are optimistic about Puerto Rico and our growth potential." Net Income EuroBancshares' net income for the year ended December 31, 2006 was $8.0 million, or $0.37 per diluted share, compared to $16.5 million, or $0.78 per diluted share, for the year ended December 31, 2005. Net income for the quarter ended December 31, 2006 decreased to $9,000, or $(0.01) per diluted share compared to $1.7 million, or $0.07 per diluted share, for the same period in 2005. Earnings per share for those periods gives effect to: -- the repurchase of 652,027 shares between November 2005 and May 2006 in connection with a stock repurchase program approved by the Board of Directors in October 2005; -- the exercise of 150,000, 56,450, and 7,000 stock options in February, June and September 2006, respectively; and -- the recording of 1,688 shares held in treasury as a result of a payment in lieu of foreclosure from a former borrower in November 2005. In addition, during 2006, earnings per share were also impacted by the following transactions: -- a $354,000 after tax expense resulting from the write-off of $626,000 in unamortized placement costs related to the redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures on December 18, 2006, which had an interest rate of 8.99% at the time of redemption; and -- a $1.1 million after tax loss on sale of investment securities on December 21, 2006, resulting from the repositioning of the investment portfolio in an effort to improve the Company's net interest margin. Without the effect of above-mentioned transactions, the Company's earnings per share on a fully diluted basis would have been $0.07 and $0.44 for the quarter and year ended December 31, 2006, respectively. Return on Average Assets (ROAA) for the year ended December 31, 2006 was 0.33%, compared to a ROAA of 0.74% for 2005. Return on Average Common Equity (ROAE) for the year ended December 31, 2006 was 5.19%, compared to 10.70% for year 2005. ROAA for the fourth quarter of 2006 was 0.001%, compared to a ROAA of 0.29% for the same quarter in 2005. ROAE for the fourth quarter of 2006 was 0.02%, compared to 4.27% for the fourth quarter of 2005. Net Interest Income The Company reported total interest income of $42.7 million for the fourth quarter of 2006, compared to $36.8 million for the same quarter in 2005. Total interest income for year ended December 31, 2006 was $162.1 million, compared to $133.2 million for year 2005. These increases were due to a combination of increases in average interest-earning assets and increased yields resulting from higher interest rates during 2006. For the quarter and year ended December 31, 2006, the average interest-earning assets increased to $2.4 billion and $2.3 billion, respectively, compared to $2.3 billion and $2.2 billion for prior year same periods. Total interest expense was $26.9 million for the quarter ended December 31, 2006, compared to $19.1 million for the same quarter in 2005. Total interest expense for year ended December 31, 2006 was $95.4 million, compared to total interest expense of $64.9 million for prior year same period. These increases resulted also from the combination of higher interest-bearing liabilities and increased costs of funds during 2006. For the fourth quarter and year ended December 31, 2006, the average interest-bearing liabilities increased to $2.2 billion and $2.1 billion, respectively, compared to $2.0 billion and $1.9 billion for prior year same periods. Net interest margin on a fully taxable equivalent basis decreased to 2.59% and 2.86% for the quarter and year ended December 31, 2006, respectively, compared to 3.23% and 3.29% for the same periods in 2005, and 2.73% for the quarter ended September 30, 2006. Net interest spread on a fully taxable equivalent basis decreased to 2.01% and 2.33% for the quarter and year ended December 31, 2006, respectively, from 2.76% and 2.88% for prior year same periods, and 2.19% for the third quarter of 2006. These decreases in net interest margin and spread were primarily caused by the increase in the average cost of interest bearing liabilities as a result of the following: (i) the rising short-term interest rates and the inverted yield curve, which caused short term borrowing costs to increase at a faster rate than the yield on earning-assets, (ii) the increase in average deposits has been comprised substantially of brokered deposits and higher rate time deposits driven by the extremely competitive local environment; and (iii) the write-off of $626,000 in unamortized placement costs related to the redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures as previously mentioned. Without the effect of abovementioned write-off of $626,000 in unamortized placement costs, net interest margin and spread on a fully taxable equivalent basis would have been as follows: -- a net interest margin on a fully taxable equivalent basis of 2.70% and 2.89% for the quarter and year ended December 31, 2006, respectively; and -- a net interest spread on a fully taxable equivalent basis of 2.12% and 2.36% for the quarter and year ended December 31, 2006, respectively. Provision for Loan and Lease Losses The provision for loan and lease losses for the quarter ended December 31, 2006 was $5.3 million, compared to $6.4 million for the same quarter in 2005. For the year ended December 31, 2006 and 2005, the provision for loan losses was $16.9 million and $12.8 million, respectively. The provision for loan and lease losses is a direct result of the periodic evaluation of the allowance for possible loan and lease losses, considering the growth in the loan portfolio, net-charge offs, delinquencies, related loss experience, and current internal and external environmental factors. Some of these factors are discussed below in more detail. Non-Interest Income The Company's non-interest income for the fourth quarter of 2006 was $1.1 million, compared to $1.8 million for the same quarter last year. This decrease was due to the net effect of: (i) a $119,000 decrease in service charges, in part due to a decrease in trust fees, non-sufficient fund charges on deposit accounts, and fees on merchant accounts; (ii) a $115,000 increase in gain on sale of mortgage loans primarily resulting from higher yields on the mortgage loans sold during the fourth quarter of 2006 when compared to those sold during the same period in 2005; (iii) a $1.1 million loss on sale of investment securities, as previously mentioned; and (iv) a $340,000 decrease in the loss on sale of other real estate owned and repossessed assets. Non-interest income for year ended December 31, 2006 was $7.8 million, compared to $7.7 million in 2005. This increase resulted from the net effect of: (i) a $593,000 decrease in service charges, mainly trust fees and non- sufficient fund charges on deposit accounts; (ii) a $944,000 decrease in net losses on non-hedging derivatives, which reflected a $1.1 million charge to earnings in the first quarter of 2005 for net losses on non-hedging derivatives on which hedge accounting had been discontinued, and a $132,000 gain on such derivatives in the second quarter of 2005 resulting from their early termination in April 2005; (iii) a $545,000 decrease in gain on sale of loans, mainly resulting from the fact that no leases were sold during 2006, compared to $29.9 million sold with a $713,000 gain during 2005; (iv) a $791,000 increase in the loss on sale of investment securities primarily resulting from the sale of $50.1 million of FHLB and mortgage backed securities available for sale with a par value of $49.9 million in December 2006, which were sold in an effort to improve the yields of the available for sale securities portfolio; and (v) there was a $16,000 gain on sale of other real estate owned, repossessed assets, and on disposition of other assets for the year ended December 31, 2006, compared to a $1.0 million loss for year 2005. Non-Interest Expense Non-interest expense for the fourth quarter of 2006 increased to $10.3 million, compared to $10.2 million for the fourth quarter of 2005. The increase during the fourth quarter of 2006 when compared to the same period in 2005 was mainly due to the net effect of: (i) a $440,000 decrease in salaries resulting mainly from the net effect of a decrease in the bonus expense, increased staffing for our new branches and mortgage loans department restructuring, and an increase in salaries for year 2005, which were effective in January 2006; (ii) a $175,000 decrease in professional expenses; (iii) a $274,000 increase in other real estate owned and other repossessed assets expenses, primarily in repairs expenses related to repossessed vehicles (iv) a $125,000 increase in office supplies; and (v) a $211,000 increase in promotion and advertising mainly related to the restructuring of our mortgage loans department to take advantage of opportunities in this area on the Island and also to increase sales in the secondary market. Non-interest expense for year ended December 31, 2006 increased to $43.4 million, from $37.6 million for 2005. This increase was mainly caused by the combined effect of an increase of $2.8 million in salaries and employee benefits and an increase of $1.0 million in occupancy expenses, which resulted from: (i) the opening of two new branches in September and December 2005, respectively, (ii) salary increases for year 2005, which were effective in January 2006, and (iii) an increase in staffing from the opening of previously mentioned branches and from the restructuring of the mortgage loans department, and (iv) a decrease in the bonus expense as mentioned before; an increase of $1.2 million in other expenses, mainly in repairs expenses related to repossessed vehicles, as mentioned above; and an increase of $513,000 in promotion and advertising, as previously mentioned. The efficiency ratio on a fully taxable equivalent basis for the quarter ended December 31, 2006 was 61.80%, compared to 50.64% for the quarter ended December 31, 2005, and 57.89% for the year ended December 31, 2006, compared to 47.84% for year 2005. Income Tax Expense During the fourth quarter of 2006, income tax expense increased to $1.3 million, compared to $1.2 million for the same quarter in 2005. For the year ended December 31, 2006, the income tax expense decreased to $6.3 million, compared to $9.1 million for year 2005. The decrease in income tax expense during year ended December 31, 2006 resulted from the net effect of a $14.3 million pre-tax income and a 43.95% effective tax rate, compared to a $25.6 million pre-tax income and a 35.4% effective tax rate for year 2005. In addition, during 2006, the Company purchased at discount, tax credits in the amount of approximately $3.8 million recording an income tax benefit of $376,000. The increase in the effective tax rate during year ended December 31, 2006 mainly resulted from the increase in taxable income as a percentage of total income and the additional temporary taxes recently approved by the Puerto Rico Legislature, as explained below. On August 1, 2005, the governor of Puerto Rico approved and signed Law No. 41, which imposes an additional transitory tax of 2.5% on taxable income. This additional tax increases the maximum statutory tax rate from 39.0% to 41.5% and is applicable to all corporations and partnerships with taxable income in excess of $20,000 during the taxable years beginning after December 31, 2004 and ending on or before December 31, 2006. In addition, on May 13, 2006, the governor of Puerto Rico approved and signed Law No. 89, which imposes an additional transitory tax of 2% on taxable income. This tax is applicable to the Banking industry raising the maximum statutory tax rate to 43.5% for taxable years beginning after December 31, 2005 and ending on or before December 31, 2006. This law also states that for taxable years beginning after December 31, 2006, the maximum statutory tax rate will be 39%. The approval of the additional transitory taxes of 4.5% over the original maximum statutory tax rate of 39% resulted in additional income tax expense of $746,000 for the year ended December 31, 2006. In addition, on May 16, 2006, the governor of Puerto Rico approved and signed Law No. 98, the "Law of the 2006's Extraordinary Tax." This law imposes a prepaid tax of 5% over the 2005 taxable net income by for profit partnerships and corporations with gross income over $10.0 million. The Company could use the full payment as a tax credit in the income tax return for the taxable year beginning after December 31, 2005 and the portion not used, if any, could be used in equal portions for up to the next four taxable years. This prepayment of tax resulted in a disbursement of approximately $196,000. No income tax expense was recorded since such prepayment will be used as a tax credit in the 2006's income tax return. Balance Sheet Summary and Asset Quality Data Assets The Company increased its total assets to $2.501 billion as of December 31, 2006 from $2.391 billion as of December 31, 2005. The increase was primarily attributable to the net effect of an increase of $173.6 million in loans, net of unearned, and a decrease of $102.3 million in the investment portfolio, as further explained below. Loans Total loans increased to $1.751 billion as of December 31, 2006, from $1.577 billion as of December 31, 2005. Total commercial loans increased by $148.6 million, or 16.80%, to $1.033 billion as of December 31, 2006, from $884.4 million as of December 31, 2005. Construction loans increased to $127.4 million, or 54.06%, as of December 31, 2006, from $82.7 million as of December 31, 2005. Mortgage loans increased to $77.2 million, or 68.55%, as of December 31, 2006, from $45.8 million as of December 31, 2005. For year ended December 31, 2006, the aggregate balance in our leasing portfolio decreased by a total of $44.6 million, net of repayments and originations, to $443.3 million as of December 31, 2006, from $487.9 million as of December 31, 2005, as the Company has tightened its underwriting standards in order to manage delinquencies and reduce possible future losses. Asset Quality Non-performing loans to total loans increased to 2.85% as of December 31, 2006, compared to 2.30% as of December 31, 2005, but decreased compared to 3.05% as of September 30, 2006. Likewise, non-performing assets to total assets increased to 2.52% as of December 31, 2006, from 1.91% as of December 31, 2005, but decreased compared to 2.64% as of September 30, 2006. Non- performing loans as of December 31, 2006 amounted to $50.0 million, compared to $52.2 million and $36.3 million as of September 30, 2006 and December 31, 2005, respectively. The decrease in non-performing loans during the fourth quarter of 2006 when compared to the previous quarter was due to the combined effect of a $5.5 million decrease in loans over 90 days past due still accruing interest and an increase of $3.3 million in nonaccrual loans, which are explained below in more detail. The $5.5 million decrease in loans over 90 days past due still accruing interest was mainly due to the combined effect of: (i) a $4.8 million decrease in loans secured by real estate, of which $4.6 million were related to three business relationships amounting to $2.3 million, $1.2 million, and $1.1 million with loan to values of 66%, 47% and 98%, respectively, which were placed in nonaccrual status during the fourth quarter of 2006; (ii) a decrease of $623,000 in overdrawn accounts; and (iii) a decrease of $228,000 in other commercial and industrial loans. The $3.3 million increase in non-accrual loans was mainly attributable to the net effect of: (i) a $2.9 million increase in the commercial loans category, including two business relationships amounting to $1.2 million and $1.1 million with loan to values of 47% and 98%, respectively, which were placed in nonaccrual status during the fourth quarter of 2006, as previously mentioned, and a $1.0 million commercial loan with a loan to value of 80%, which was placed in nonaccrual during the fourth quarter of 2006; (ii) a $2.3 million increase in construction loans related to one loan with a loan to value of 66%, which was also placed in nonaccrual status during the fourth quarter of 2006, as previously mentioned; (iii) a decrease of $1.2 million in lease financing contracts; and (iii) a decrease of $644,000 in the marine loans category. Our historical losses through the years on commercial and construction loans secured by real estate have been low. Repossessed assets amounted to $13.0 million as of December 31, 2006, compared to $13.8 million as of September 30, 2006, and $9.5 million as of December 31, 2005. The decrease during the fourth quarter of 2006 when compared to the previous quarter was due to the combined effect of: (i) a decrease of $134,000 in other real estate owned; and (ii) a decrease of $570,000 in other repossessed assets mainly because sales of repossessed vehicles exceeded the number of units repossessed during the quarter ended December 31, 2006 and the fact that less vehicles were repossessed during the fourth quarter of 2006 when compared to the third quarter of 2006. Total repossessed and sold vehicles during the fourth quarter of 2006 were 491 and 543, respectively, compared to 540 and 456 in the third quarter of 2006. We continue monitoring this inventory very closely and taking measures to prevent further deterioration and expedite its disposition. Annualized net charge-offs as a percentage of average loans were 1.10% for the quarter ended December 31, 2006, compared to 1.22% and 0.92% for the third quarter of 2006 and the year ended December 31, 2005, respectively. Net charge-offs for the quarter ended December 31, 2006 as compared to the quarters ended September 30, 2006 and December 31, 2005 were as follows: (i) $109,000 net charge-offs on commercial loans secured by real estate for the fourth quarter of 2006, compared to $540,000 for the quarter ended September 30, 2006, while there were no net charge-offs for this category during the last quarter of 2005; (ii) $624,000 net charge-offs on other commercial and industrial loans for the fourth quarter of 2006, compared to $1.1 million and $504,000 for the quarters ended September 30, 2006 and December 31, 2005, respectively; (iii) $424,000 net charge-offs on consumer loans for the fourth quarter of 2006, compared to $326,000 and $576,000 for the quarters ended September 30, 2006 and December 31, 2005, respectively; (iv) $3.5 million net charge-offs on leases financing contracts for the fourth quarter of 2006, compared to $3.2 million and $2.4 million for the quarters ended September 30, 2006 and December 31, 2005, respectively; and (v) $47,000 net charge-offs on other loans for the fourth quarter of 2006, compared to $2,000 and $28,000 for the quarters ended September 30, 2006 and December 31, 2005, respectively. The increase in leases financing contract net charge-offs when comparing the fourth and third quarters of 2006 was primarily due to the combined effect of: (i) an increase in the initial market valuation of repossessed vehicles at the time of repossession in an effort to expedite the disposition of slow moving inventory; and (ii) the fact that there were less recoveries during the quarter ended December 31, 2006. Allowance for Loan and Lease Losses The allowance for loan and lease losses increased to $18.9 million as of December 31, 2006, from $18.4 million and $18.2 million as of September 30, 2006 and December 31, 2005, respectively. We believe that the allowance for loan and lease losses, which represents 1.08% of total loans as of December 31, 2006, is adequate. The table below presents an allocation for loan and lease losses among the various loan categories and sets forth the percentage of loans and leases in each category to gross loans or leases. The allocation of the allowance for loan and lease losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions: As of December 31, 2006 September 30, 2006 December 31,2005 Loan Loan Loan Category Category Category to to to Gross Gross Gross Amt. Loans(1) Amt. Loans(1) Amt. Loans(1) (Dollars in thousands) Allocated: Real estate - construction $610 7.23 % $563 6.14 % $714 5.25 % Real estate - secured 525 46.60 682 45.81 1,137 41.92 Commercial and industrial 4,836 17.03 4,414 17.02 4,597 17.34 Consumer 1,433 3.47 1,531 3.64 1,499 4.08 Leases 11,089 25.38 10,780 26.96 9,701 31.07 Other loans 436 .29 427 .43 212 0.34 Unallocated 8 - 3 - 328 - Total allowance for loan and lease losses $18,937 100.00% $18,400 100.00% $18,188 100.00% (1) Excludes mortgage loans held-for-sale. Investments The investment portfolio decreased by approximately $102.3 million to $577.9 million as of December 31, 2006 from $680.2 million as of December 31, 2005. The change from December 31, 2005 was primarily due to the net effect of: (i) the purchase of $30.0 million in US government agencies obligations and FHLB stocks, $55.4 million in mortgage backed securities, and $5.0 million of Puerto Rico Agency Notes; (ii) prepayments for approximately $100.4 million of mortgage backed securities; (iii) a decrease of $38.3 million in US government agencies obligations due to monthly principal prepayments and maturity of FHLB, FNMA & FHLMC obligations and the redemption of FHLB stocks; (iv) the sale of $50.1 million in available for sale FHLB and mortgage backed securities with a par value of $49.9 million and an average book yield of 3.83% on December 21, 2006, which were sold in an effort to improve the Company's net interest margin in the future and resulted in a net loss on sale of investments of $1.1 million, as previously mentioned; (v) the maturity and monthly principal prepayments of $3.4 million in Puerto Rico Agency Notes; (vi) a decrease of $2.9 million in the unrealized net loss on investment securities available for sale; and (vii) a net premium amortization of $368,000. The aforementioned net loss on the sale of investment securities was previously reflected as unrealized losses within accumulated other comprehensive loss in the stockholders' equity section of the Company's consolidated balance sheet at the time of the sale. Accordingly, the realized loss on the sale of investment securities did not impact the Company's total stockholders' equity. During the past few years, we positioned our investment portfolio for an increase in interest rates by purchasing mostly investments with maturities or estimated maturities between 1-1/2 to 4 years. During the first half of 2006, we saw higher interest in the short term of the curve and we were able to reinvest a portion of the cash flows generated by the investment portfolio at higher yields and for maturities or estimated maturities from 2 years to 7 years. We did not purchase any securities during the last six months of 2006. As of December 31, 2006, after the above-mentioned transactions, the estimated average maturity was approximately 3.16 years and the average yield increased to approximately 4.69%, compared to an estimated average maturity of 2.77 years and an estimated average yield of 4.26% as of December 31, 2005. Deposits and Borrowings Total deposits as of December 31, 2006 amounted to $1.905 billion, compared to $1.734 billion as of December 31, 2005. The $171.2 million increase was due to the net effect of: (i) a $6.3 million decrease in noninterest-bearing deposits; (ii) a $8.3 million decrease in now and money market accounts; (iii) a $67.6 million decrease in savings accounts; (iv) a $26.6 million decrease in regular time deposits and IRA's; (v) a $21.0 million increase in jumbo time deposits; and (vi) a $258.9 million increase in brokered time deposits. The continuous asset growth of financial institutions on the Island and the reduction of local funding sources, have generated a fierce competition for core deposits. During 2006, the fierce competition for local deposits made brokered deposits an attractive funding alternative, resulting in lower funding costs when compared to the unusually higher rates offered locally for time deposits. We decided to pursue the use of the brokered deposits alternative to control the continuous increase in our funding cost. Borrowings decreased by $80.7 million to $395.0 million as of December 31, 2006, compared to $475.7 million as of December 31, 2005. This decrease was in part due to the redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures on December 18, 2006, as previously mentioned. Stockholders' Equity and Initial Adoption of Staff Accounting Bulletin No. 108 The Company's stockholders' equity increased by 2.98% to $169.9 million as of December 31, 2006, representing an increase of $4.9 million from $165 million as of December 31, 2005. Besides earnings from operations, stock options exercised and stock repurchases, the Company's stockholders' equity was also impacted by accumulated other comprehensive losses of $7.6 million and $10.4 million during the years ended December 31, 2006 and 2005, respectively. In addition, during 2006, the Company's stockholders' equity was also affected by the cumulative effect of a $790,000 adjustment on the initial adoption of Staff Accounting Bulletin No. 108 ("SAB 108"), as further explained below. Explanatory Note on the Adoption of SAB 108 On September 13, 2006, the Securities and Exchange Commission (the "SEC") added Section N, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, to Topic 1, Financial Statements, of the Staff Accounting Bulletin Series. The interpretations in SAB 108 express the staff's views regarding the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the "rollover" and "iron curtain" approaches. The rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statement. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement's year(s) of origination. In SAB 108, the staff believes registrants must quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements by quantifying an error under both the rollover and iron curtain approaches and by evaluating the error measured under each approach. SAB 108 requires a registrant's financial statements to be adjusted when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. The Company adopted the provisions of SAB 108 on December 31, 2006. Prior to adopting SAB 108, the Company consistently used the rollover approach when considering the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. In August 2006, the Company's assessment of internal controls as required by the Sarbanes-Oxley Act of 2002 revealed an accounting error related to the application of the Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases ("FAS 91"), Financial Accounting Standards No. 13, Accounting for Leases ("FAS 13"), and FASB Technical Bulleting No. 85- 3, Accounting for Operating Leases with Scheduled Rent Increases ("FTB85-3"). FAS 91 establishes, among others, standards of financial accounting and reporting for purchase premiums or discounts associated with loan purchases. FAS 91 requires the difference between the initial investment in a purchased loan or group of loans and the amount paid to the seller plus any fees paid or less any fees received at the date of purchase to be recognized as an adjustment of yield over the life of the loan. Also, it establishes that if prepayments are not anticipated and they occur, a proportionate amount of the related purchase premium or discount shall be recognized in income so that the effective interest rate on the remaining portion of loans continues unchanged. In the past, the Company did not apply the provisions of FAS 91 over prepayments of loans purchased to The Bank & Trust of Puerto Rico ("BankTrust") in May 2004. As of December 31, 2005, there was $849,350 in unamortized net purchase premiums related to canceled loans previously acquired from BankTrust. FTB85-3 requires that increases in scheduled rent, which are included in minimum lease payments under FAS 13, to be recognized by lessors and lessees on a straight-line basis over the lease term unless another systematic and rational allocation basis is more representative of the time pattern in which the leased property is physically employed. The Company has several lease agreements with escalating clauses, for which related rent expense was recorded as paid instead of on a straight-line basis over the lease term. As of December 31, 2005, the deferred rent expense liability was understated by $446,500. On August 31, 2006, the Company assessed the materiality of the FAS 91 and FAS 13/FTB85-3 error correction by performing a comprehensive analysis following guidance on Staff Accounting Bulletin No. 99 ("SAB 99"). In SAB No. 99, the staff express that: exclusive reliance on certain quantitative benchmarks to assess materiality in preparing financial statements and performing audits of those financial statements is inappropriate; misstatements are not immaterial simply because they fall beneath a numerical threshold; and qualitative and quantitative factors should be considered when assessing an item's materiality. The Company accumulated and quantified the misstatements related to these accounting errors using the rollover approach. After considering all relevant quantitative and qualitative characteristics of these accounting errors, the Company concluded that, when evaluated in the aggregate, the accounting errors were immaterial, on a quantitative or qualitative basis, in relation to its previously reported financial statements. On December 31, 2006, the Company assessed the materiality of the FAS 91 and FAS 13/FTB85-3 error correction by performing a comprehensive analysis following guidance on SAB 99 and SAB 108. As required by SAB 108, the Company accumulated and quantified the misstatements related to these accounting errors using both the rollover and iron curtain approaches. After considering all relevant quantitative and qualitative characteristics of these accounting errors, the Company concluded that, when evaluated in the aggregate, the accounting errors were material, on a quantitative or qualitative basis, in relation to its financial statements for year ended December 31, 2006, and continued to be immaterial to previously reported financial statements. As permitted by the provisions of SAB 108, the Company did not correct previously reported financial statements but instead corrected the errors via a cumulative effect adjustment in its annual financial statements for year ended December 31, 2006. The Company reported the cumulative effect of the initial application of SAB 108 provisions in the carrying amounts of assets and liabilities as of the beginning of year 2006, offset by an adjustment of $790,000 from the correction of both accounting errors, net of approximately $505,000 in taxes related to the aforementioned understatement, to the opening balance of retained earnings for year 2006. The Company included the cumulative effect adjustment on the initial adoption of SAB 108 in its Statement of Changes in Stockholders' Equity for year ended December 31, 2006. About EuroBancshares, Inc. EuroBancshares, Inc. is a diversified financial holding company headquartered in San Juan, Puerto Rico, offering a broad array of financial services through its wholly owned banking subsidiary, Eurobank; EBS Overseas, an international banking entity, and its wholly owned insurance agency, EuroSeguros. Forward-Looking Statements Statements concerning future performance, events, expectations for growth and market forecasts, and any other guidance on future periods, constitute forward-looking statements that are subject to a number of risks and uncertainties that might cause actual results to differ materially from stated expectations. Specific factors include, but are not limited to, loan volumes, the ability to expand net interest margin, loan portfolio performance, the ability to continue to attract low-cost deposits, success of expansion efforts, competition in the marketplace and general economic conditions. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes included in EuroBancshares' most recent reports on Form 10-K and Form 10-Q, as filed with the Securities and Exchange Commission as they may be amended from time to time. Results of operations for the most recent quarter are not necessarily indicative of operating results for any future periods. Any projections in this release are based on limited information currently available to management, which is subject to change. Although any such projections and the factors influencing them will likely change, the Bank will not necessarily update the information, since management will only provide guidance at certain points during the year. Such information speaks only as of the date of this release. Additional information on these and other factors that could affect our financial results are included in filings by EuroBancshares with the Securities and Exchange Commission. EUROBANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) For the three months and years ended December 31, 2006 and 2005 Three Months Ended December 31, Years Ended December 31, 2006 2005 2006 2005 Interest income: Loans, including fees $34,479,299 $29,009,163 $130,003,150 $107,970,892 Investment securities: Available for sale 7,027,431 6,780,826 28,068,617 21,997,813 Held to maturity 431,367 469,321 1,777,205 1,874,044 Interest bearing deposits, securities purchased under agreements to resell, and other 761,756 573,094 2,297,448 1,389,732 Total interest income 42,699,853 36,832,404 162,146,420 133,232,481 Interest expense: Deposits 19,531,825 13,328,035 68,545,152 44,933,645 Securities sold under agreements to repurchase, notes payable, and other 7,366,361 5,815,080 26,818,196 20,002,104 Total interest expense 26,898,186 19,143,115 95,363,348 64,935,749 Net interest income 15,801,667 17,689,289 66,783,072 68,296,732 Provision for loan and lease losses 5,274,000 6,435,000 16,903,000 12,775,000 Net interest income after provision for loan and lease losses 10,527,667 11,254,289 49,880,072 55,521,732 Noninterest income: Service charges - fees and other 2,247,590 2,366,818 8,475,600 9,068,560 Net loss on non-hedging derivatives - - - (943,782) Net loss on sale of securities (1,091,627) (71,036) (1,091,627) (301,053) Net (loss) gain on sale of repossessed assets and on disposition of other assets (184,675) (524,852) 16,092 (1,040,206) Gain on sale of loans 138,019 23,283 400,489 945,613 Total noninterest income 1,109,307 1,794,213 7,800,554 7,729,132 Noninterest expense: Salaries and employee benefits 3,494,592 3,934,544 17,506,822 14,727,209 Occupancy, furniture fixture and equipment 2,477,955 2,451,047 9,565,036 8,554,524 Professional services 949,633 1,124,572 4,104,442 3,911,659 Insurance 258,496 287,250 1,052,922 1,095,193 Promotional 358,980 148,179 1,199,574 686,080 Other 2,740,898 2,229,129 9,956,935 8,668,608 Total noninterest expense 10,280,554 10,174,721 43,385,731 37,643,273 Income before income taxes 1,356,420 2,873,781 14,294,895 25,607,591 Provision for income taxes 1,347,299 1,200,410 6,283,010 9,077,228 Net income $9,121 $1,673,371 $8,011,885 $16,530,363 Basic earnings per share $(0.01) $0.08 $0.38 $0.81 Diluted earnings per share $(0.01) $0.07 $0.37 $0.78 EUROBANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) December 31, 2006 and December 31, 2005 Assets 2006 2005 Cash and due from banks $25,527,489 $20,993,485 Interest bearing deposits 49,050,368 20,773,171 Securities purchased under agreements to resell 51,191,323 54,132,673 Investment securities available for sale: Pledged securities with creditors' right to repledge 434,690,609 399,365,589 Other securities available for sale 100,468,400 227,714,687 Investment securities held to maturity: Pledged securities with creditors' right to repledge 35,267,883 41,718,249 Other securities held to maturity 3,164,937 752,535 Other investments 4,329,200 10,652,000 Loans held for sale 879,000 936,281 Loans, net of allowance for loan and lease losses of $18,936,841 in 2006 and $18,188,130 in 2005 1,731,022,290 1,558,071,526 Accrued interest receivable 15,760,852 14,979,784 Customers' liability on acceptances 1,561,736 501,195 Premises and equipment, net 14,889,456 11,167,981 Other assets 33,116,690 29,523,653 Total assets $2,500,920,233 $2,391,282,809 Liabilities and Stockholders' Equity Deposits: Noninterest bearing $140,321,373 $146,637,966 Interest bearing 1,765,034,834 1,587,490,180 Total deposits 1,905,356,207 1,734,128,146 Securities sold under agreements to repurchase 365,664,250 419,859,750 Acceptances outstanding 1,561,736 501,195 Advances from Federal Home Loan Bank 8,707,420 8,758,626 Notes payable to Statutory Trusts 20,619,000 46,393,000 Other borrowings - 700,175 Accrued interest payable 18,047,074 9,263,493 Accrued expenses and other liabilities 11,086,705 6,711,389 2,331,042,392 2,226,315,774 Stockholders' equity: Preferred stock: Preferred stock Series A, $0.01 par value. Authorized 20,000,000 shares; issued and outstanding 430,537 in 2006 and 2005 4,305 4,305 Capital paid in excess of par value 10,759,120 10,759,120 Common stock: Common stock, $0.01 par value. Authorized 150,000,000 shares; issued: 19,777,536 shares in 2006 and 19,564,086 shares in 2005; outstanding: 19,123,821 shares in 2006 and 19,398,848 in 2005 197,775 195,641 Capital paid in excess of par value 106,539,383 105,508,402 Retained earnings: Reserve fund 7,553,381 6,528,519 Undivided profits 59,800,495 54,348,750 Treasury stock, 653,715 shares at cost in 2006 and 165,238 shares at cost in 2005 (7,410,711) (1,946,052) Accumulated other comprehensive loss (7,565,907) (10,431,650) Total stockholders' equity 169,877,841 164,967,035 Total liabilities and stockholders' equity $2,500,920,233 $2,391,282,809 EUROBANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) Years ended December 31, 2006 and 2005 2006 2005 Preferred stock: Balance at beginning of period $4,305 $4,305 Balance at end of period 4,305 4,305 Capital paid in excess of par value - preferred stock: Balance at beginning of period 10,759,120 10,759,120 Balance at end of period 10,759,120 10,759,120 Common stock: Balance at beginning of period 195,641 195,641 Issuance of common stock after stock split 2,134 - Balance at end of period 197,775 195,641 Capital paid in excess of par value - common stock: Balance at beginning of period 105,508,402 105,408,402 Issuance of common stock after stock split 877,630 Compensation expense - stock options 153,351 Reversal of initial public offering expenses - 100,000 Balance at end of period 106,539,383 105,508,402 Reserve fund: Balance at beginning of period 6,528,519 4,721,756 Transfer from undivided profits 1,024,862 1,806,763 Balance at end of period 7,553,381 6,528,519 Undivided profits: Balance at beginning of period 54,348,750 40,369,955 Cumulative effect on initial adoption of SAB 108 (790,473) - Net income 8,011,885 16,530,363 Preferred stock dividends (744,805) (744,805) Transfer to reserve fund (1,024,862) (1,806,763) Balance at end of period 59,800,495 54,348,750 Treasury stock: Balance at beginning of period (1,946,052) - Purchase of common stock (5,464,659) (1,924,192) Common stock received as payment in lieu of a debt obligation - (21,860) Balance at end of period (7,410,711) (1,946,052) Accumulated other comprehensive income (loss), net of taxes: Balance at beginning of period (10,431,650) (3,157,491) Unrealized net gain (loss) on investment securities available for sale and cash flow hedges 2,865,743 (7,274,159) Balance at end of period (7,565,907) (10,431,650) Total stockholders' equity $169,877,841 $164,967,035 EUROBANCSHARES, INC. AND SUBSIDIARIES OPERATING RATIOS AND OTHER SELECTED DATA (Dollars in thousands, except share data) Unaudited Quarter Ended December 31, September 30, 2006 2005 2006 Average shares outstanding - basic 19,123,821 19,474,653 19,118,191 Average shares outstanding - assuming dilution 19,458,014 20,133,103 19,467,678 Number of shares outstanding at end of period 19,123,821 19,398,848 19,123,821 Book value per common share $8.32 $7.95 $8.34 Average Balances Total assets 2,483,677 2,345,256 2,462,169 Loans and leases, net of unearned 1,729,273 1,541,561 1,687,896 Interest-earning assets (1) 2,401,221 2,267,537 2,378,352 Interest-bearing deposits 1,671,009 1,490,294 1,597,529 Interest-bearing liabilities 484,525 533,590 544,248 Preferred stock 10,763 10,763 10,763 Shareholders' equity 169,913 167,666 164,297 Loan Mix Commercial & industrial secured by real estate 736,555 612,376 708,658 Other commercial & industrial 296,391 272,005 288,499 Construction secured by real estate 126,241 82,468 104,538 Other construction 1,120 200 956 Mortgage 76,277 44,841 69,884 Consumer secured by real estate 782 906 800 Other consumer 60,682 63,980 61,903 Lease financing contracts 443,311 487,863 458,683 Overdrafts 5,015 5,336 7,335 Total 1,746,374 1,569,975 1,701,256 Deposit Mix Noninterest-bearing deposits 140,321 146,638 128,406 Now and money market 62,673 70,962 70,124 Savings 156,069 223,665 165,532 Broker deposits 1,226,156 967,205 1,066,828 Regular CD's & IRAS 95,396 121,950 104,123 Jumbo CD's 224,741 203,708 210,237 Total 1,905,356 1,734,128 1,745,250 Financial Data Total assets 2,500,920 2,391,283 2,500,978 Loans and leases, net of unearned 1,750,838 1,577,196 1,707,075 Allowance for loan and lease losses 18,937 18,188 18,400 Total deposits 1,905,356 1,734,128 1,745,249 Total borrowings 394,991 475,712 556,214 Preferred stock 10,763 10,763 10,763 Dividends on preferred stock 188 188 188 Shareholders' equity 169,878 164,967 170,274 Net income 9 1,673 1,447 Total interest income 42,700 36,832 41,849 Total interest expense 26,898 19,143 25,315 Provision for loan and lease losses 5,274 6,435 4,849 Non-interest income 2,248 2,367 2,156 Net gain (loss) on non-hedge derivatives - - - Net gain (loss) on sale of loans and other assets (1,139) (573) (378) Non-interest expense 10,281 10,175 11,521 Income taxes 1,347 1,200 495 Net income before extraordinary item 9 1,673 1,447 Nonperforming assets 63,026 45,780 65,903 Nonperforming loans 49,978 36,263 52,151 Net charge-offs 4,737 3,513 5,131 Performance Ratios Return on average assets (2) 0.001 % 0.29 % 0.24 Return on average common equity (3) 0.02 4.27 3.77 Net interest spread (4) 2.01 2.76 2.19 Net interest margin (5) 2.59 3.23 2.73 Efficiency ratio (6) 61.80 50.64 63.83 Earnings per common share - basic $(0.01) $0.08 $0.07 Earnings per common share - diluted (0.01) 0.07 0.06 Asset Quality Ratios Nonperforming assets to total assets 2.52 % 1.91 % 2.64 Nonperforming loans to total loans 2.85 2.30 3.05 Allowance for loan and lease losses to total loans 1.08 1.15 1.08 Net loan and lease charge-offs to average loans 1.10 0.91 1.22 Provision for loan and lease losses to net loan and lease charge-offs 111.34 183.18 94.50 Years Ended December 31, 2006 2005 Average shares outstanding - basic 19,217,178 19,541,544 Average shares outstanding - assuming dilution 19,657,559 20,277,799 Number of shares outstanding at end of period 19,123,821 19,398,848 Book value per common share $8.32 $7.95 Average Balances Total assets 2,428,814 2,234,987 Loans and leases, net of unearned 1,663,330 1,487,850 Interest-earning assets (1) 2,348,079 2,157,375 Interest-bearing deposits 1,610,124 1,374,972 Interest-bearing liabilities 499,275 548,141 Preferred stock 10,763 10,763 Shareholders' equity 165,034 165,236 Loan Mix Commercial & industrial secured by real estate 736,555 612,376 Other commercial & industrial 296,391 272,005 Construction secured by real estate 126,241 82,468 Other construction 1,120 200 Mortgage 76,277 44,841 Consumer secured by real estate 782 906 Other consumer 60,682 63,980 Lease financing contracts 443,311 487,863 Overdrafts 5,015 5,336 Total 1,746,374 1,569,975 Deposit Mix Noninterest-bearing deposits 140,321 146,638 Now and money market 62,673 70,962 Savings 156,069 223,665 Broker deposits 1,226,156 967,205 Regular CD's & IRAS 95,396 121,950 Jumbo CD's 224,741 203,708 Total 1,905,356 1,734,128 Financial Data Total assets 2,500,920 2,391,283 Loans and leases, net of unearned 1,750,838 1,577,196 Allowance for loan and lease losses 18,937 18,188 Total deposits 1,905,356 1,734,128 Total borrowings 394,991 475,712 Preferred stock 10,763 10,763 Dividends on preferred stock 745 745 Shareholders' equity 169,878 164,967 Net income 8,012 16,530 Total interest income 162,146 133,232 Total interest expense 95,363 64,936 Provision for loan and lease losses 16,903 12,775 Non-interest income 8,476 9,069 Net gain (loss) on non-hedge derivatives - (944) Net gain (loss) on sale of loans and other assets (675) (396) Non-interest expense 43,386 37,643 Income taxes 6,283 9,077 Net income before extraordinary item 8,012 16,530 Nonperforming assets 63,026 45,780 Nonperforming loans 49,978 36,263 Net charge-offs 16,154 13,626 Performance Ratios Return on average assets (2) 0.33 % 0.74 Return on average common equity (3) 5.19 10.70 Net interest spread (4) 2.33 2.88 Net interest margin (5) 2.86 3.29 Efficiency ratio (6) 57.89 47.84 Earnings per common share - basic $0.38 $0.81 Earnings per common share - diluted 0.37 0.78 Asset Quality Ratios Nonperforming assets to total assets 2.52 % 1.91 Nonperforming loans to total loans 2.85 2.30 Allowance for loan and lease losses to total loans 1.08 1.15 Net loan and lease charge-offs to average loans 0.97 0.92 Provision for loan and lease losses to net loan and lease charge-offs 104.64 93.75 (1) Includes nonaccrual loans, which balance as of the periods ended December 31, 2006 and 2005, and September 30, 2006 was $37.3 million, $27.7 million and $33.9 million, respectively. (2) Return on average assets (ROAA) is determined by dividing net income before extraordinary gain by average assets. (3) Return on average common equity (ROAE) is determined by dividing net income before extraordinary gain by average common equity. (4) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities, both on fully taxable equivalent basis. (5) Represents net interest income on fully taxable equivalent basis as a percentage of average interest-earning assets. (6) The efficiency ratio is determined by dividing total noninterest expense by an amount equal to net interest income (fully taxable equivalent) plus noninterest income. EUROBANCSHARES, INC. AND SUBSIDIARIES NONPERFORMING ASSETS (Dollars in thousands) Unaudited For the periods ended December September December 31, 2006 30, 2006 31, 2005 Loans contractually past due 90 days or more but still accruing interest: $12,723 $18,224 $8,560 Nonaccrual loans: 37,255 33,927 27,703 Total nonperforming loans 49,978 52,151 36,263 Repossessed property: Other real estate 3,629 3,763 1,542 Other repossessed assets 9,419 9,989 7,975 Total repossessed property 13,048 13,752 9,517 Total nonperforming assets $63,026 $65,903 $45,780 Nonperforming loans to total loans 2.85 % 3.05 % 2.30 % Nonperforming assets to total loans plus repossessed property 3.57 3.83 2.89 Nonperforming assets to total assets 2.52 2.64 1.91 EUROBANCSHARES, INC. AND SUBSIDIARIES NET CHARGE-OFFS (Dollars in thousands) Unaudited Quarter Ended Dec. Sept. June March Dec. 31, 30, 30, 31, 31, 2006 2006 2006 2006 2005 Charge-offs: Real estate secured $109 $551 $2 $23 $- Commercial and industrial 657 1,179 462 752 544 Consumer 571 423 619 365 639 Leases financing contracts 3,827 3,610 2,587 2,903 2,993 Other 52 5 65 27 28 Total charge-offs 5,216 5,768 3,735 4,070 4,204 Recoveries: Real estate secured $- $11 $- $- $- Commercial and industrial 33 92 184 225 40 Consumer 147 97 156 65 63 Leases financing contracts 294 434 276 600 588 Other 5 3 1 12 - Total recoveries 479 637 617 902 691 Net charge-offs: Real estate secured $109 $540 $2 $23 $- Commercial and industrial 624 1,087 278 527 504 Consumer 424 326 463 300 576 Leases financing contracts 3,533 3,176 2,311 2,303 2,405 Other 47 2 64 15 28 Total net charge-offs $4,737 $5,131 $3,118 $3,168 $3,513 Year Ended December 31, December 31, 2006 2005 Charge-offs: Real estate secured $685 $- Commercial and industrial 3,050 4,848 Consumer 1,978 2,600 Leases financing contracts 12,927 8,991 Other 149 150 Total charge-offs 18,789 16,589 Recoveries: Real estate secured $11 $- Commercial and industrial 534 486 Consumer 465 256 Leases financing contracts 1,604 2,210 Other 21 11 Total recoveries 2,635 2,963 Net charge-offs: Real estate secured $674 $- Commercial and industrial 2,516 4,362 Consumer 1,513 2,344 Leases financing contracts 11,323 6,781 Other 128 139 Total net charge-offs $16,154 $13,626 DATASOURCE: EuroBancshares, Inc. CONTACT: Rafael Arrillaga-Torrens, Jr., Chairman, President and CEO, or Yadira R. Mercado, Executive Vice-President, CFO, both of EuroBancshares, Inc., +1-787-751-7340; or Julie Tu - Investor Inquiries, +1-212-827-3776, or Marilynn Meek - General Inquiries, +1-212-827-3773, both of Financial Relations Board

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