ITEM
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis presents our consolidated financial condition
and results of operations for the nine-month period ended September 30, 2007
and
2006. The discussion should be read in conjunction with our financial statements
and the notes related thereto which appear elsewhere in this Quarterly Report
on
Form 10-Q.
Statements
contained in this report that are not purely historical are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act
of
1934, as amended, including our expectations, intentions, beliefs, or strategies
regarding the future.
Any
statements in this document about expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and are
forward-looking statements. These statements are often, but not always, made
through the use of words or phrases such as “may,” “should,” “could,” “predict,”
“potential,” “believe,” “will likely result,” “expect,” “will continue,”
“anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and
“outlook,” and similar expressions. Accordingly, these statements involve
estimates, assumptions and uncertainties, which could cause actual results
to
differ materially from those expressed in them. Any forward-looking statements
are qualified in their entirety by reference to the factors discussed throughout
this document.
All
forward-looking statements concerning economic conditions, rates of growth,
rates of income or values as may be included in this document are based on
information available to us on the dates noted, and we assume no obligation
to
update any such forward-looking statements. It is important to note that our
actual results may differ materially from those in such forward-looking
statements due to fluctuations in interest rates, inflation, government
regulations, economic conditions, customer disintermediation and competitive
product and pricing pressures in the geographic and business areas in which
we
conduct operations, including our plans, objectives, expectations and intentions
and other factors discussed under the section entitled “Risk Factors,” in our
most recent Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 16, 2007, including the following:
|
·
|
if
a significant number of our clients fail to perform under their loans,
our
business, profitability, and financial condition would be adversely
affected;
|
|
·
|
our
current level of interest rate spread may decline in the future,
and any
material reduction in our interest spread could have a material impact
on
our business and profitability;
|
|
·
|
the
modification of the Federal Reserve Board’s current position on the
capital treatment of our junior subordinated debt and trust preferred
securities could have a material adverse effect on our financial
condition
and results of operations;
|
|
·
|
adverse
changes in domestic or global economic conditions, especially in
the
Commonwealth of Puerto Rico, could have a material adverse effect
on our
business, growth, and
profitability;
|
|
·
|
we
could be liable for breaches of security in our online banking services,
and fear of security breaches could limit the growth of our online
services;
|
|
·
|
maintaining
or increasing our market share depends on market acceptance and regulatory
approval of new products and
services;
|
|
·
|
significant
reliance on loans secured by real estate may increase our vulnerability
to
downturns in the Puerto Rico real estate market and other variables
impacting the value of real estate;
|
|
·
|
if
we fail to retain our key employees, growth and profitability could
be
adversely affected;
|
|
·
|
we
may be unable to manage our future
growth;
|
|
·
|
we
have no current intentions of paying cash dividends on common
stock;
|
|
·
|
increases
in our allowance for loan and lease losses
could
materially adversely affect our earnings
;
|
|
·
|
our
directors and executive officers beneficially own a significant portion
of
our outstanding common stock;
|
|
·
|
the
market for our common stock is limited, and potentially subject to
volatile changes in price;
|
|
·
|
we
face substantial competition in our primary market
area;
|
|
·
|
we
are subject to significant government regulation and legislation
that
increases the cost of doing business and inhibits our ability to
compete;
|
|
·
|
we
could be negatively impacted by downturns in the Puerto Rican
economy;
|
|
·
|
the
proportion of core and non-core funding contrast sharply with that
of the
mainland and in recent quarters contributed to a sharp increase in
funding
costs; and
|
|
·
|
we
rely heavily on short-term funding sources, such as brokered deposits,
which access could be restricted if our capital ratios fall below
the
levels necessary to be considered “well-capitalized” under current
regulatory guidelines.
|
These
factors and the risk factors referred in our most recent Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 16, 2007 could
cause actual results or outcomes to differ materially from those expressed
in
any forward-looking statements made by us, and you should not place undue
reliance on any such forward-looking statements. Any forward-looking statement
speaks only as of the date on which it is made and we do not undertake any
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time
to
time, and it is not possible for us to predict which will arise. In addition,
we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
Executive
Overview
Introduction
We
are a
diversified financial holding company headquartered in San Juan, Puerto Rico,
offering a broad array of financial services through our wholly-owned banking
subsidiary, Eurobank, and our wholly-owned insurance agency subsidiary,
EuroSeguros, Inc. As of September 30, 2007, we had, on a consolidated basis,
total assets of $2.6 billion, net loans of $1.8 billion, total deposits of
$2.0
billion, and stockholders’ equity of $175.4 million. We currently operate
through a network of 24 branch offices located throughout the Island. In March
and June 2007, we opened two new branches, one in Fajardo and another in Cayey,
Puerto Rico, respectively. In July 2007, we closed the branch located at
Luquillo, Puerto Rico.
Over
the
past three years, we have experienced significant balance sheet growth. Our
management team has implemented a strategy of building our core banking
franchise by focusing on commercial loans, business transaction accounts, our
mortgage business and acquisitions. We believe that this strategy will increase
recurring revenue streams, enhance profitability, broaden our product and
service offerings and continue to build stockholder value.
Key
Performance Indicators at September 30, 2007
We
believe the
following
were key
indicators of our performance and results of operations through the third
quarter of 2007:
|
·
|
our
total assets increased to $2.561 billion, or by 3.18% on an annualized
basis, at the end of the third quarter of 2007, from $2.501 billion
at the
end of 2006;
|
|
·
|
our
net loans grew to $1.819 billion at the end of the third quarter
of 2007,
representing an increase of 6.67% on an annualized basis, from $1.732
billion at the end of 2006;
|
|
·
|
our
total deposits increased to $1.964 billion, or by 4.10% on an annualized
basis, at the end of the third quarter of 2007, from $1.905 billion
at the
end of 2006;
|
|
·
|
our
nonperforming assets increased to $79.7 million, or by 35.31% on
an
annualized basis, at the end of the third quarter of 2007, from $63.0
million at the end of 2006;
|
|
·
|
our
total revenue grew to $45.9 million in the third quarter of 2007,
representing an increase of 5.20%, from $43.7 million in the same
period
of 2006;
|
|
·
|
our
net interest margin and spread on a fully taxable equivalent basis
increased to 2.83% and 2.31% for the third quarter of 2007, respectively,
compared to 2.74% and 2.20%, respectively, for the same period in
2006;
|
|
·
|
our
provision for loan and lease losses grew to $9.6 million in the third
quarter of 2007, representing an increase of 97.86%, from $4.8 million
in
the same period of 2006;
|
|
·
|
our
total noninterest expense grew to $12.3 million in the third quarter
of
2007, representing an increase of 7.54%, from $11.5 million in the
same
period of 2006; and
|
|
·
|
for
the third quarter of 2007, we recorded an income tax benefit of $1.4
million, compared to an income tax expense of $515,000 in the same
period
of 2006.
|
These
items, as well as other factors, resulted in a net loss of $1.2 million for
the
third quarter of 2007, compared to a net income of $1.5 million for the same
period in 2006, or $(0.07) per common share for the third quarter of 2007,
compared to $0.07 per common share for the same period in 2006 on a fully
diluted basis. The net loss we experienced in the third quarter of 2007 was
mainly caused by three business relationships for which their related loans
became impaired during the quarter ended September 30, 2007 and required a
specific allowance of $4.5 million, reducing our diluted earnings per share
for
the quarter by $0.14, net of tax. Key performance indicators and other factors
are discussed in further detail throughout this
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
section
of this Quarterly Report on Form 10-Q.
Critical
Accounting Policies
This
discussion and analysis of our financial condition and results of operations
is
based upon our financial statements, which have been prepared in accordance
with
generally accepted accounting principles in the United States. The preparation
of these consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities at the date of our financial statements. Actual results may differ
from these estimates under different assumptions or conditions. The following
is
a description of our significant accounting policies used in the preparation
of
the accompanying consolidated financial statements.
Loans
and Allowance for Loan and Lease Losses
Loans
that management has the intent and ability to hold for the foreseeable future,
or until maturity or payoff, are reported at their outstanding unpaid principal
balances adjusted by any charge-offs, unearned finance charges, allowance for
loan and lease losses, and net deferred nonrefundable fees or costs on
origination. The allowance for loan and lease losses is an estimate to provide
for probable losses that may be incurred in our loan and lease portfolio. The
allowance for loan and lease losses amounted to $26.1 million, $18.9 million
and
$18.4 million as of September 30, 2007, December 31, 2006 and September 30,
2006, respectively. Losses charged to the allowance amounted to $12.9 million
for the nine-month period ended September 30, 2007, compared to $13.6 million
for the same period in 2006. Recoveries were credited to the allowance in the
amounts of $1.6 million and $2.2 million for the same periods,
respectively.
We
follow
a consistent procedural discipline and account for loan and lease loss
contingencies in accordance with Statement of Financial Accounting Standards
(SFAS) No. 5,
Accounting
for Contingencies
,
and
SFAS No. 114,
Accounting
by Creditors for Impairment of a Loan
,
as
amended by SFAS No. 118,
Accounting
by Creditors for Impairment of a Loan — Income Recognition and
Disclosures
.
To
mitigate any difference between estimates and actual results relative to the
determination of the allowance for loan and lease losses, our loan review
department is specifically charged with reviewing monthly delinquency reports
to
determine if additional allowances are necessary. Delinquency reports and
analysis of the allowance for loan and lease losses are also provided to senior
management and the Board of Directors on a monthly basis.
The
loan
review department evaluates significant changes in delinquency with regard
to a
particular loan portfolio to determine the potential for continuing trends,
and
loss projections are estimated and adjustments are made to the historical loss
factor applied to that portfolio in connection with the calculation of loss
allowances.
Portfolio
performance is also monitored through the monthly calculation of the percentage
of non-performing loans to the total portfolio outstanding. A significant change
in this percentage may trigger a review of the portfolio and eventually lead
to
additional allowances. We also track the ratio of net charge-offs to total
portfolio outstanding.
Our
methodology for the determination of the adequacy of the allowance for loan
and
lease losses for impaired loans is based on classifications of loans and leases
into various categories and the application of SFAS No. 114. For non-classified
loans, the estimated allowance is based on historical loss experiences, which
on
an annual basis, are adjusted for changes in trends and conditions.
In
addition, in evaluating the adequacy of the allowance for loan and lease losses,
management also considers the probable effect that current internal and external
environmental factors could have on the historical loss factors.
While
our
allowance for loan and lease losses is established in different portfolio
components, we maintain an allowance that we believe is sufficient to absorb
all
credit losses inherent in our portfolio.
With
the
exception of the commercial and construction loan pools
and
residential mortgages with a 60% or lower loan-to-value
,
loans
that are more than 90 days delinquent result in an additional allowance. When
commercial and construction loans become impaired, each is subjected to full
review by the loan review officer including, but not limited to, a review of
financial statements, repayment ability and collateral held. Depending on the
review results, our allowance may be increased. In connection with this review,
the loan review officer will determine what economic factors may have led to
the
change in the client’s ability to service the obligation, and this in turn may
result in an additional review of a particular sector of the economy. For
additional information relating to how each portion of the allowance for loan
and lease losses is determined, see the section of this discussion and analysis
captioned
“Allowance
for Loan and Lease Losses.”
We
believe that our allowance for loan and lease losses is adequate; however,
regulatory agencies, including the Commissioner of Financial Institutions of
Puerto Rico and the Federal Deposit Insurance Corporation, as an integral part
of their examination process, periodically review our allowance for loan and
lease losses and may from time to time require us to reclassify our loans and
leases or make additional provisions to our allowance for loan and lease
losses.
Other
Real Estate Owned and Repossessed Assets
Other
real estate owned, or OREO, and repossessed assets, normally obtained through
foreclosure or other workout situations, are initially recorded at the lower
of
net realizable value or book value at the date of foreclosure, establishing
a
new cost basis. Any resulting loss is charged to the allowance for loan and
lease losses. Appraisals of other real estate properties are made periodically
after their acquisition, as necessary. Valuations of repossessed assets are
made
quarterly after their acquisition. For OREO and repossessed assets, a comparison
between the appraised value and the carrying value is performed. Additional
declines in value after acquisition, if any, are charged to current operations.
Other real estate owned amounted to $4.3 million, $3.6 million, and $3.8 million
as of September 30, 2007, December 31, 2006 and September 30, 2006,
respectively.
Other
repossessed assets amounted to $6.2 million, $9.4 million and $10.0 million
as
of September 30, 2007, December 31, 2006 and September 30, 2006, respectively.
Other repossessed assets are mainly comprised of vehicles from our leasing
operation.
For
additional information relating to the composition of other repossessed assets,
see the section of this discussion and analysis captioned
“Nonperforming
Loans, Leases and Assets.”
We
monitor the total loss ratio on sale of repossessed assets, which is determined
by dividing the sum of declines in value, repairs, and gain or loss on sale
by
the book value of repossessed assets sold at the time of repossession. The
total
loss ratio on sale of repossessed vehicles for the quarter and nine-month period
ended September 30, 2007 was 14.31% and 13.66%, respectively, compared to 11.36%
and 6.24% for the same periods in 2006. This increase in our total loss ratio
on
the sale of repossessed vehicles was
directly
attributable to our strategy of being more aggressive in the sale of repossessed
vehicles in an attempt to expedite the disposition of slow moving inventory.
This strategy resulted in an increase of approximately 24% and 86% in the number
of repossessed vehicles in inventory over six months that were sold during
the
quarter and nine-month period ended September 30, 2007, respectively, when
compared to the same periods in 2006. During the quarter and nine-month period
ended September 30, 2007, we sold 92 and 342 units in inventory over six months,
respectively, compared to 74 and 184 units in inventory over six months sold
during the same periods in 2006.
For
the
quarter and nine-month period ended September 30, 2007, the total gain on sale
of repossessed equipment was $50,000 and $31,000, respectively, compared to
a
total loss of $5,000 and a total gain of $62,000 for the same periods in 2006.
For
the
quarter and nine-month period ended September 30, 2007, the total loss on sale
of repossessed boats was $74,000 and $251,000, respectively, compared to
$251,000 and $477,000 for the same periods in 2006. The boat financing portfolio
amounted to $37.1 million and $38.3 million as of September 30, 2007 and 2006,
respectively.
During
the quarter and nine-month period ended September 30, 2007, two OREO properties
and three OREO properties were sold resulting in a total loss of $118,000 and
$139,000, respectively, compared to four OREO properties sold during the
nine-month period ended September 30, 2006, which resulted in no loss for the
Company. No repossessed properties were sold during the third quarter of
2006.
Results
of Operations for the Quarter and Nine Months Ended September 30,
2007
Net
Interest Income and Net Interest Margin
Net
interest income is the difference between interest income, principally from
loan, lease and investment securities portfolios, and interest expense,
principally on customer deposits and borrowings. Net interest income is our
principal source of earnings. Changes in net interest income result from changes
in volume, spread and margin. Volume refers to the average dollar level of
interest-earning assets and interest-bearing liabilities. Spread refers to
the
difference between the yield on average interest-earning assets and the average
cost of interest-bearing liabilities. Margin refers to net interest income
divided by average interest-earning assets, and is influenced by the level
and
relative mix of interest-earning assets and interest-bearing
liabilities.
Net
interest income increased by 3.19%, or $530,000, and by 1.24%, or $632,000,
to
$17.1 million and $51.6 million in the quarter and nine-month period ended
September 30, 2007, respectively, from $16.6 million and $51.0 for the same
periods in 2006. This increase resulted from the combined effect of a net
increase in volumes and a net increase in rates as shown on tables on pages
24
and 25.
Total
interest income increased by 4.39% and 8.00% to $43.7 million and $129.0 million
for the quarter and nine-month period ended September 30, 2007, respectively,
compared to $41.9 million and $119.4 million for the same periods in 2006.
These
increases were driven by the combination of a slight increase in average
interest-earning assets and increased yields resulting from higher interest
rates. Our average interest-earning assets increased by $5.8 million, or by
0.24%, and by $29.3 million, or by 1.26%, to $2.383 billion and $2.359 billion
in the quarter and nine-month period ended September 30, 2007, respectively,
from $2.378 billion and $2.330 billion for the same periods in 2006. Average
net
loans increased by $135.9 million, or by 8.15%, and by $145.2 million, or by
8.96%, to $1.803 billion and $1.767 billion in the quarter and nine-month period
ended September 30, 2007, respectively, from $1.667 billion and $1.621 billion
for the same periods in 2006. The yield on average interest-earning assets
for
the quarter and nine-month period ended September 30, 2007 increased to 7.82%
and 7.78%, respectively, from 7.67% and 7.46% for the same periods in 2006.
Total
interest expense increased by 5.17% and 13.03% to $26.6 million and $77.4
million in the quarter and nine-month period ended September 30, 2007,
respectively, from $25.3 million and $68.5 million in the same periods of 2006.
This increase resulted from the combined effect of higher volumes of
interest-bearing liabilities and the higher cost of funds mainly on brokered
deposits and jumbo deposits. Average interest-bearing liabilities increased
by
0.73% and 1.63% to $2.157 billion and $2.128 billion in the quarter and
nine-month period ended September 30, 2007, respectively, from $2.142 billion
and $2.094 billion for the same periods in 2006. The rate we paid on average
interest-bearing liabilities for the quarter and nine-month period ended
September 30, 2007 increased to 5.51% and 5.44%, respectively, from 5.47% and
5.02% for the same periods in 2006.
For
the
third quarter of 2007, net interest margin and net interest spread on a fully
taxable equivalent basis was to 2.83% and 2.31%, respectively, compared to
2.92%
and 2.38% for the quarter ended June 30, 2007, and 2.74% and 2.20% for the
third
quarter of 2006. Our net interest margin and net interest spread for the third
quarter of 2007 was impacted by an increase of approximately $391,000 in
interest receivable reversed in connection to commercial loans placed in
nonaccrual status during the quarter ended September 30, 2007 in excess of
the
amount of interest receivable reversed on commercial loans during the second
quarter of 2007. Without the effect of the $391,000 in reversed interest
receivable, net interest margin and net interest spread on a fully taxable
basis
would have been 2.90% and 2.38% for the quarter ended September 30, 2007,
respectively. The increase in net interest margin and net interest spread during
the quarter ended September 30, 2007 when compared to the same period in 2006
was primarily attributable to an increase in the yields of our loans and
investments portfolios, which outpaced the increase in borrowing costs.
For
the
nine-month period ended September 30, 2007, the net interest margin and net
interest spread on a fully taxable equivalent basis decreased to 2.88% and
2.34%, respectively, from 2.95% and 2.44% for the same period in 2006. The
decline in margin and spread during the nine-month period ended September 30,
2007 when compared to the same period in 2006 was primarily caused by the
increase in the average cost of interest bearing liabilities as a result of:
(i)
the rising short-term interest rates and the flat yield curve, which caused
short-term borrowing costs to increase at a faster rate than the yield on
earning assets; and (ii) the increase in average deposits, which has been
comprised substantially of brokered deposits and higher rate time deposits
driven by the extremely competitive local operating environment.
The
following tables set forth, for the periods indicated, our average balances
of
assets, liabilities and stockholders’ equity, in addition to the major
components of net interest income and our net interest margin. Net loans and
leases shown on these tables include nonaccrual loans although interest accrued
but not collected on these loans is placed in nonaccrual status and reversed
against interest income.
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
2007
|
|
|
2006
(8)
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Balance
|
|
Interest
|
|
Rate/
Yield
(1)
|
|
|
Balance
|
|
Interest
|
|
Rate/
Yield
(1)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans and leases
(2)
|
|
$
|
1,803,002
|
|
$
|
36,677
|
|
|
8.22
|
%
|
|
$
|
1,667,054
|
|
$
|
33,649
|
|
|
8.17
|
%
|
|
Securities
of U.S. government agencies
(3)
|
|
|
453,776
|
|
|
5,345
|
|
|
6.55
|
|
|
|
607,218
|
|
|
6,919
|
|
|
6.55
|
|
|
Other
investment securities
(3)
|
|
|
60,957
|
|
|
821
|
|
|
7.49
|
|
|
|
46,667
|
|
|
581
|
|
|
7.03
|
|
|
Puerto
Rico government obligations
(3)
|
|
|
7,191
|
|
|
89
|
|
|
6.88
|
|
|
|
9,850
|
|
|
113
|
|
|
6.58
|
|
|
Securities
purchased under agreements to resell and federal funds
sold
|
|
|
36,760
|
|
|
516
|
|
|
6.44
|
|
|
|
35,444
|
|
|
482
|
|
|
5.69
|
|
|
Interest-earning
deposits
|
|
|
21,635
|
|
|
287
|
|
|
5.31
|
|
|
|
11,293
|
|
|
152
|
|
|
5.38
|
|
|
Total
interest-earning assets
|
|
$
|
2,383,321
|
|
$
|
43,735
|
|
|
7.82
|
%
|
|
$
|
2,377,526
|
|
$
|
41,896
|
|
|
7.67
|
%
|
|
Total
noninterest-earning assets
|
|
|
99,439
|
|
|
|
|
|
|
|
|
|
83,888
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
2,482,760
|
|
|
|
|
|
|
|
|
$
|
2,461,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
$
|
18,418
|
|
$
|
146
|
|
|
3.19
|
%
|
|
$
|
23,791
|
|
$
|
141
|
|
|
2.39
|
%
|
|
NOW
deposits
|
|
|
47,679
|
|
|
309
|
|
|
2.60
|
|
|
|
48,838
|
|
|
291
|
|
|
2.39
|
|
|
Savings
deposits
|
|
|
136,910
|
|
|
865
|
|
|
2.53
|
|
|
|
172,836
|
|
|
1,013
|
|
|
2.35
|
|
|
Time
certificates of deposit in denominations of $100,000 or more
(4)
|
|
|
1,490,147
|
|
|
19,231
|
|
|
5.55
|
|
|
|
1,242,217
|
|
|
15,225
|
|
|
5.33
|
|
|
Other
time deposits
|
|
|
90,154
|
|
|
1,002
|
|
|
4.46
|
|
|
|
109,847
|
|
|
1,060
|
|
|
3.87
|
|
|
Other
borrowings
|
|
|
374,091
|
|
|
5,072
|
|
|
7.21
|
|
|
|
544,248
|
|
|
7,585
|
|
|
7.53
|
|
|
Total
interest-bearing liabilities
|
|
$
|
2,157,399
|
|
$
|
26,625
|
|
|
5.51
|
%
|
|
$
|
2,141,777
|
|
$
|
25,315
|
|
|
5.47
|
%
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
|
116,748
|
|
|
|
|
|
|
|
|
|
128,918
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
33,941
|
|
|
|
|
|
|
|
|
|
27,177
|
|
|
|
|
|
|
|
|
Total
noninterest-bearing liabilities
|
|
|
150,689
|
|
|
|
|
|
|
|
|
|
156,095
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
174,672
|
|
|
|
|
|
|
|
|
|
163,542
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
2,482,760
|
|
|
|
|
|
|
|
|
$
|
2,461,414
|
|
|
|
|
|
|
|
|
Net
interest income
(5)
|
|
|
|
|
$
|
17,110
|
|
|
|
|
|
|
|
|
$
|
16,581
|
|
|
|
|
|
Net
interest spread
(6)
|
|
|
|
|
|
|
|
|
2.31
|
%
|
|
|
|
|
|
|
|
|
2.20
|
%
|
|
Net
interest margin
(7)
|
|
|
|
|
|
|
|
|
2.83
|
%
|
|
|
|
|
|
|
|
|
2.74
|
%
|
__________
(1)
Yield
and
expense is calculated on a fully taxable equivalent basis assuming a 39% and
43.5% tax rate for the quarters ended September 30, 2007 and 2006,
respectively.
(2)
The
amortization of net loan costs or fees have been included in the calculation
of
interest income. Net loan costs were approximately $524,000 and $715,000 for
the
third quarters ended September 30, 2007 and 2006, respectively.
Loans
include nonaccrual loans, which balance as of the periods ended September 30,
2007 and 2006 was $55.3 million and $33.9 million, respectively, and
are net
of the allowance for loan and lease losses, deferred fees, unearned income,
and
related direct costs.
(3)
Available-for-sale
investments are adjusted for unrealized gain or loss.
(4)
For
the
quarter ended September 30, 2007, interest expense on time certificates of
deposit in denominations of $100,000 or more was reduced by approximately
$185,000 of capitalized interest on construction in progress. This capitalized
interest was mainly related to the improvements being performed to our new
headquarters purchased in February 2007. Without the effect of the capitalized
interest of $185,000, our net interest margin and spread on a fully taxable
basis for the quarter ended September 30, 2007 would have been 2.80% and 2.27%,
respectively.
(5)
Net
interest income on a tax equivalent basis was $16.9 million and $16.3 million
for the first quarters ended September 30, 2007 and 2006,
respectively.
(6)
Represents
the rate earned on average interest-earning assets less the rate paid on average
interest-bearing liabilities on a fully taxable equivalent basis.
(7)
Represents
net interest income on a fully taxable equivalent basis as a percentage of
average interest-earning assets.
(8)
Certain
adjustments resulting from the initial adoption of SAB 108 as of December 31,
2006 were made to comparable period in 2006.
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
|
2006
(8)
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Balance
|
|
Interest
|
|
Rate/
Yield
(1)
|
|
|
Balance
|
|
Interest
|
|
Rate/
Yield
(1)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans and leases
(2)
|
|
$
|
1,766,569
|
|
$
|
107,657
|
|
|
8.21
|
%
|
|
$
|
1,621,344
|
|
$
|
95,523
|
|
|
7.95
|
%
|
|
Securities
of U.S. government agencies
(3)
|
|
|
477,360
|
|
|
16,724
|
|
|
6.49
|
|
|
|
611,881
|
|
|
20,463
|
|
|
6.40
|
|
|
Other
investment securities
(3)
|
|
|
57,712
|
|
|
2,059
|
|
|
7.38
|
|
|
|
44,921
|
|
|
1,623
|
|
|
6.82
|
|
|
Puerto
Rico government obligations
(3)
|
|
|
8,732
|
|
|
307
|
|
|
6.52
|
|
|
|
9,256
|
|
|
300
|
|
|
6.20
|
|
|
Securities
purchased under agreements to resell and federal funds
sold
|
|
|
33,974
|
|
|
1,415
|
|
|
6.36
|
|
|
|
35,458
|
|
|
1,249
|
|
|
5.15
|
|
|
Interest-earning
deposits
|
|
|
21,114
|
|
|
836
|
|
|
5.28
|
|
|
|
7,276
|
|
|
287
|
|
|
5.26
|
|
|
Total
interest-earning assets
|
|
$
|
2,359,461
|
|
$
|
128,998
|
|
|
7.78
|
%
|
|
$
|
2,330,136
|
|
$
|
119,445
|
|
|
7.46
|
%
|
|
Total
noninterest-earning assets
|
|
|
97,860
|
|
|
|
|
|
|
|
|
|
79,799
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
2,457,321
|
|
|
|
|
|
|
|
|
$
|
2,409,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
$
|
18,044
|
|
$
|
377
|
|
|
2.80
|
%
|
|
$
|
27,164
|
|
$
|
458
|
|
|
2.27
|
%
|
|
NOW
deposits
|
|
|
47,648
|
|
|
867
|
|
|
2.43
|
|
|
|
46,405
|
|
|
774
|
|
|
2.23
|
|
|
Savings
deposits
|
|
|
144,446
|
|
|
2,713
|
|
|
2.51
|
|
|
|
193,378
|
|
|
3,390
|
|
|
2.34
|
|
|
Time
certificates of deposit in denominations of $100,000 or more
(4)
|
|
|
1,442,437
|
|
|
55,063
|
|
|
5.49
|
|
|
|
1,205,427
|
|
|
41,231
|
|
|
4.97
|
|
|
Other
time deposits
|
|
|
91,797
|
|
|
2,971
|
|
|
4.32
|
|
|
|
117,232
|
|
|
3,160
|
|
|
3.60
|
|
|
Other
borrowings
|
|
|
383,712
|
|
|
15,395
|
|
|
7.10
|
|
|
|
504,246
|
|
|
19,452
|
|
|
6.90
|
|
|
Total
interest-bearing liabilities
|
|
$
|
2,128,084
|
|
$
|
77,386
|
|
|
5.44
|
%
|
|
$
|
2,093,852
|
|
$
|
68,465
|
|
|
5.02
|
%
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
|
119,737
|
|
|
|
|
|
|
|
|
|
129,046
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
35,811
|
|
|
|
|
|
|
|
|
|
23,634
|
|
|
|
|
|
|
|
|
Total
noninterest-bearing liabilities
|
|
|
155,548
|
|
|
|
|
|
|
|
|
|
152,680
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
173,689
|
|
|
|
|
|
|
|
|
|
163,403
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
2,457,321
|
|
|
|
|
|
|
|
|
$
|
2,409,935
|
|
|
|
|
|
|
|
|
Net
interest income
(5)
|
|
|
|
|
$
|
51,612
|
|
|
|
|
|
|
|
|
$
|
50,980
|
|
|
|
|
|
Net
interest spread
(6)
|
|
|
|
|
|
|
|
|
2.34
|
%
|
|
|
|
|
|
|
|
|
2.44
|
%
|
|
Net
interest margin
(7)
|
|
|
|
|
|
|
|
|
2.88
|
%
|
|
|
|
|
|
|
|
|
2.95
|
%
|
__________
(1)
Yield
and
expense is calculated on a fully taxable equivalent basis assuming a 39% and
43.5% tax rate for the nine-month period ended September 30, 2007 and 2006,
respectively.
(2)
The
amortization of net loan costs or fees have been included in the calculation
of
interest income. Net loan costs were approximately $805,000 and $1.9 million
for
the nine-month periods ended September 30, 2007 and 2006, respectively.
Loans
include nonaccrual loans, which balance as of the periods ended September 30,
2007 and 2006 was $55.3 million and $33.9 million, respectively, and
are net
of the allowance for loan and lease losses, deferred fees, unearned income,
and
related direct costs.
(3)
Available-for-sale
investments are adjusted for unrealized gain or loss.
(4)
For
the
nine months ended September 30, 2007, interest expense on time certificates
of
deposit in denominations of $100,000 or more was reduced by approximately
$475,000 of capitalized interest on construction in progress. This capitalized
interest was mainly related to the improvements being performed to our new
headquarters purchased in February 2007. Without the effect of the capitalized
interest of $475,000, our net interest margin and spread on a fully taxable
basis for the nine months ended September 30, 2007 would have been 2.85% and
2.31%, respectively.
(5)
Net
interest income on a tax equivalent basis was $51.0 million and $51.6 million
for the nine-month period ended September 30, 2007 and 2006,
respectively.
(6)
Represents
the rate earned on average interest-earning assets less the rate paid on average
interest-bearing liabilities on a fully taxable equivalent basis.
(7)
Represents
net interest income on a fully taxable equivalent basis as a percentage of
average interest-earning assets.
(8)
Certain
adjustments resulting from the initial adoption of SAB 108 as of December 31,
2006 were made to comparable period in 2006.
The
following table sets forth, for the periods indicated, the dollar amount of
changes in interest earned and paid for interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes
in
average daily balances (volume) or changes in average daily interest rates
(rate). All changes in interest owed and paid for interest-earning assets and
interest-bearing liabilities are attributable to either volume or rate. The
impact of changes in the mix of interest-earning assets and interest-bearing
liabilities is reflected in our net interest income.
|
|
|
Three
Months Ended September 30,
2007
Over 2006
(2)
Increases/(Decreases)
Due
to Change in
|
|
Nine
Months Ended September 30,
2007
Over 2006
(2)
Increases/(Decreases)
Due
to Change in
|
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
Volume
|
|
Rate
|
|
Net
|
|
|
|
|
(In
thousands)
|
|
|
INTEREST
EARNED ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
(1)
|
|
$
|
2,744
|
|
$
|
284
|
|
$
|
3,028
|
|
$
|
8,556
|
|
$
|
3,578
|
|
$
|
12,134
|
|
|
Securities
of U.S. government agencies
|
|
|
(1,748
|
)
|
|
174
|
|
|
(1,574
|
)
|
|
(4,499
|
)
|
|
760
|
|
|
(3,739
|
)
|
|
Other
investment securities
|
|
|
178
|
|
|
62
|
|
|
240
|
|
|
245
|
|
|
191
|
|
|
436
|
|
|
Puerto
Rico government obligations
|
|
|
(31
|
)
|
|
7
|
|
|
(24
|
)
|
|
(17
|
)
|
|
24
|
|
|
7
|
|
|
Securities
purchased under agreements to resell and federal funds
sold
|
|
|
18
|
|
|
16
|
|
|
34
|
|
|
(52
|
)
|
|
218
|
|
|
166
|
|
|
Interest-earning
time deposits
|
|
|
139
|
|
|
(4
|
)
|
|
135
|
|
|
546
|
|
|
3
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
$
|
1,300
|
|
$
|
539
|
|
$
|
1,839
|
|
$
|
4,779
|
|
$
|
4,774
|
|
$
|
9,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
PAID ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
|
($32
|
)
|
$
|
37
|
|
$
|
5
|
|
|
($154
|
)
|
$
|
73
|
|
|
($81
|
)
|
|
NOW
deposits
|
|
|
(7
|
)
|
|
25
|
|
|
18
|
|
|
21
|
|
|
72
|
|
|
93
|
|
|
Savings
deposits
|
|
|
(211
|
)
|
|
63
|
|
|
(148
|
)
|
|
(858
|
)
|
|
181
|
|
|
(677
|
)
|
|
Time
certificates of deposit in denominations of $100,000 or
more
|
|
|
3,039
|
|
|
967
|
|
|
4,006
|
|
|
8,107
|
|
|
5,725
|
|
|
13,832
|
|
|
Other
time deposits
|
|
|
(190
|
)
|
|
132
|
|
|
(58
|
)
|
|
(686
|
)
|
|
497
|
|
|
(189
|
)
|
|
Other
borrowings
|
|
|
(2,371
|
)
|
|
(142
|
)
|
|
(2,513
|
)
|
|
(4,650
|
)
|
|
593
|
|
|
(4,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
$
|
228
|
|
|
($1,082
|
)
|
$
|
1,310
|
|
$
|
1,780
|
|
$
|
7,141
|
|
$
|
8,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
1,072
|
|
|
($543
|
)
|
$
|
529
|
|
$
|
2,999
|
|
|
($2,367
|
)
|
$
|
632
|
|
__________
(1)
The
amortization of net loan costs or fees have been included in the calculation
of
interest income. Net loan costs were approximately $524,000 and $805,000 for
the
quarter and nine-month period ended September 30, 2007, respectively, compared
to $715,000 and $1.9 million for the same periods in 2006.
Loans
include nonaccrual loans, which balance as of the periods ended September 30,
2007 and 2006 was $55.3 million and $33.9 million, respectively, and
are net
of the allowance for loan and lease losses, deferred fees, unearned income,
and
related direct costs.
(2)
Certain
adjustments resulting from the initial adoption of SAB 108 as of December 31,
2006 were made to comparable periods in 2006.
Provision
for Loan and Lease Losses
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.
We
determine a provision for loan and lease losses that we consider sufficient
to
maintain an allowance to absorb probable losses inherent in our portfolio as
of
the balance sheet date. For additional information concerning this
determination, see the section of this discussion and analysis captioned
“Allowance
for Loan and Lease Losses.”
In
the
quarter and nine-month period ended September 30, 2007, our provision for loan
and lease losses increased to $9.6 million and $18.5 million, respectively,
from $4.8 million and $11.6 million for the same periods in 2006. For the
quarter and nine-month period ended September 30, 2007, the provision for loan
and lease losses as a percentage of net charge-offs was 241.36% and 163.82%,
respectively, compared to 94.50% and 101.86% for the same periods in 2006.
The
increase in our provision for loan and lease losses during the nine-month period
ended September 30, 2007 when compared to the same period in 2006 was mainly
caused by: (i) three business relationships, which became impaired during the
third quarter of 2007 and required a specific allowance of $4.5 million; and
(ii) the net losses experienced, mainly in our leasing portfolio, combined
with
the growth of our loan portfolio. These business relationships were comprised
of
two real estate secured commercial business relationships in the food retailing
and security systems industries, respectively, which amounted to $8.8 million
with
loan-to-values exceeding 100%
,
and
another not secured by real estate commercial business relationship in the
general freight industry, which amounted to $1.2 million. For more detail on
net
charge-offs please refer to the “Allowance for Loan and Lease Losses” section
herein.
Noninterest
Income
The
following tables set forth the various components of our noninterest income
for
the periods indicated:
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Service
charges and other fees
|
|
$
|
2,395
|
|
|
108.2
|
%
|
$
|
2,156
|
|
|
121.2
|
%
|
|
Gain
on sale of loans , net
|
|
|
77
|
|
|
3.5
|
|
|
133
|
|
|
7.5
|
|
|
Loss
on sale of repossessed assets and
on
disposition of other assets, net
|
|
|
(259
|
)
|
|
(11.7
|
)
|
|
(511
|
)
|
|
(28.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest income
|
|
$
|
2,213
|
|
|
100.0
|
%
|
$
|
1,778
|
|
|
100.0
|
%
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Service
charges and other fees
|
|
$
|
7,183
|
|
|
114.6
|
%
|
$
|
6,228
|
|
|
93.1
|
%
|
|
Gain
on sale of loans , net
|
|
|
239
|
|
|
3.8
|
|
|
262
|
|
|
3.9
|
|
|
(Loss)
gain on sale of repossessed assets and
on
disposition of other assets, net
|
|
|
(1,154
|
)
|
|
(18.4
|
)
|
|
201
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest income
|
|
$
|
6,268
|
|
|
100.0
|
%
|
$
|
6,691
|
|
|
100.0
|
%
|
Our
total
noninterest income for the quarter and nine-month period ended September 30,
2007 was $2.2 million and $6.3 million, respectively, compared to $1.8 million
and $6.7 million for the same periods in 2006. For the quarter and nine-month
period ended September 30, 2007, noninterest income represented approximately
0.09% and 0.26% of average assets, respectively, compared to 0.07% and 0.28%
for
the same periods in 2006.
Our
largest noninterest income source is service charges, primarily on deposit
accounts. The service charges and other fees increased to $2.4 million and
$7.2
million in the quarter and nine-month period ended September 30, 2007,
respectively, from $2.2 million and $6.2 million for the same periods in 2006.
This increase was primarily due to an increase
in
service charges, mainly non-sufficient fund charges on deposit accounts and
an
increase in miscellaneous income mainly related to our credit card operations.
During
the quarter and nine-month period ended September 30, 2007, we experienced
a net
loss on sale of repossessed assets of $259,000 and $1.2 million, respectively,
compared to a net loss of $511,000 and a net gain of $201,000 during the same
periods in 2006. These changes mainly resulted from our strategy of being more
aggressive in the sale of repossessed vehicles in an effort to expedite the
disposition of slow moving inventory, as previously explained, primarily during
the first and second quarter of 2007.
For
the
quarter and nine-month period ended September 30, 2007, gain on sale of loans
was $77,000 and $239,000, respectively, compared to $133,000 and $262,000 for
the same periods in 2006. This source of noninterest income was mainly derived
from the sale of residential mortgage loans.
During
the quarter and nine-month period ended September 30, 2007, we sold $3.7 million
and $11.3 million in residential mortgage loans to other financial institutions,
respectively, compared to $4.7 million and $9.6 million for the same periods
in
2006. We did not retain the servicing rights on these residential mortgage
loans
and we accounted for these transactions as sales.
Noninterest
Expense
The
following tables set forth a summary of noninterest expenses for the periods
indicated:
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
2007
|
|
2006
(1)
|
|
|
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Salaries
and employee benefits
|
|
$
|
4,950
|
|
|
40.1
|
%
|
$
|
4,536
|
|
|
39.4
|
%
|
|
Occupancy
and equipment
|
|
|
2,812
|
|
|
22.8
|
|
|
2,542
|
|
|
22.2
|
|
|
Professional
services, including directors’ fees
|
|
|
1,444
|
|
|
11.7
|
|
|
967
|
|
|
8.4
|
|
|
Office
supplies
|
|
|
319
|
|
|
2.6
|
|
|
330
|
|
|
2.9
|
|
|
Other
real estate owned and other repossessed assets expenses
|
|
|
498
|
|
|
4.0
|
|
|
1,012
|
|
|
8.8
|
|
|
Promotion
and advertising
|
|
|
375
|
|
|
3.0
|
|
|
324
|
|
|
2.8
|
|
|
Lease
expenses
|
|
|
120
|
|
|
1.0
|
|
|
157
|
|
|
1.4
|
|
|
Insurance
|
|
|
479
|
|
|
3.9
|
|
|
293
|
|
|
2.6
|
|
|
Municipal
and other taxes
|
|
|
500
|
|
|
4.1
|
|
|
420
|
|
|
3.7
|
|
|
Commissions
and service fees credit and debit cards
|
|
|
324
|
|
|
2.6
|
|
|
318
|
|
|
2.8
|
|
|
Other
noninterest expense
|
|
|
521
|
|
|
4.2
|
|
|
577
|
|
|
5.0
|
|
|
Total
noninterest expense
|
|
$
|
12,342
|
|
|
100.0
|
%
|
$
|
11,476
|
|
|
100.0
|
%
|
__________
(1)
Certain
adjustments resulting from the initial adoption of SAB 108 as of December 31,
2006 were made to comparable periods in 2006.
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
2007
|
|
2006
(1)
|
|
|
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Salaries
and employee benefits
|
|
$
|
15,849
|
|
|
43.1
|
%
|
$
|
14,012
|
|
|
42.5
|
%
|
|
Occupancy
and equipment
|
|
|
8,041
|
|
|
21.9
|
|
|
7,024
|
|
|
21.3
|
|
|
Professional
services, including directors’ fees
|
|
|
3,319
|
|
|
9.0
|
|
|
3,155
|
|
|
9.5
|
|
|
Office
supplies
|
|
|
1,018
|
|
|
2.8
|
|
|
1,023
|
|
|
3.1
|
|
|
Other
real estate owned and other repossessed assets expenses
|
|
|
1,698
|
|
|
4.6
|
|
|
1,742
|
|
|
5.3
|
|
|
Promotion
and advertising
|
|
|
1,126
|
|
|
3.1
|
|
|
841
|
|
|
2.5
|
|
|
Lease
expenses
|
|
|
399
|
|
|
1.1
|
|
|
479
|
|
|
1.4
|
|
|
Insurance
|
|
|
1,409
|
|
|
3.8
|
|
|
794
|
|
|
2.4
|
|
|
Municipal
and other taxes
|
|
|
1,342
|
|
|
3.7
|
|
|
1,237
|
|
|
3.7
|
|
|
Commissions
and service fees credit and debit cards
|
|
|
1,036
|
|
|
2.8
|
|
|
997
|
|
|
3.0
|
|
|
Other
noninterest expense
|
|
|
1,500
|
|
|
4.1
|
|
|
1,738
|
|
|
5.3
|
|
|
Total
noninterest expense
|
|
$
|
36,737
|
|
|
100.0
|
%
|
$
|
33,042
|
|
|
100.0
|
%
|
__________
(1)
Certain
adjustments resulting from the initial adoption of SAB 108 as of December 31,
2006 were made to comparable periods in 2006.
Our
total
noninterest expense increased to $12.3 million and $36.7 million in the quarter
and nine-month period ended September 30, 2007, respectively, compared to $11.5
million and $33.0 million for the same periods in 2006.
These
changes represent an increase of 7.55% and 11.18% in noninterest expense over
the same periods in 2006, respectively.
This
increase can be attributed mainly to increases in personnel and occupancy
expenses. Noninterest expenses as a percentage of average assets changed to
0.50% and 1.50% in the quarter and nine-month period ended September 30, 2007,
respectively, compared to 0.47% and 1.37% for the same periods in 2006. Our
efficiency ratio was 64.68% and 64.19% in the quarter and nine-month period
ended September 30, 2007, respectively, compared to 63.42% and 56.66% for the
same periods in 2006. The efficiency ratio is determined by dividing total
noninterest expense by an amount equal to net interest income on a fully taxable
equivalent basis plus noninterest income.
We
anticipate that the overall volume of our noninterest expense will continue
to
increase as we grow. However, we remain committed to controlling costs and
efficiency and expect to moderate these increases relative to our revenue
growth.
Salaries
and employee benefits totaled $5.0 million and $15.8 million for the quarter
and
nine-month period ended September 30, 2007, respectively, compared to $4.5
million and $14.0 million for the same periods in 2006, representing an increase
of 9.13% and 13.11% for the comparable periods, respectively. This increase
in
salaries and employee benefits resulted from the increases in personnel,
primarily in our residential mortgage and trust operations, the expansion of
our
branch network, normal salary increases and related employees’ benefits, and
$93,000 in one-time employee termination benefits in connection with an
information technology outsourcing agreement we entered with Telefónica Empresas
in August 2007. As of September 30, 2007, we had 505 full-time equivalent
employees, compared with 492 full-time equivalent employees as of September
30,
2006. Our volume of assets per employee remained at $5.1 million as of September
30, 2007, when comparing to the same period in 2006.
Occupancy
and equipment expenses totaled $2.8 million and $8.0 million for the quarter
and
nine-month period ended September 30, 2007, respectively, compared to $2.5
million and $7.0 million for the same periods in 2006, representing an increase
of 10.62% and 14.48% for the comparable periods, respectively. This increase
was
mainly attributable to increased rent, equipment maintenance, property tax
expenses, and data, communications, and security services related, in part,
to
the expansion of our branch network.
Professional
and directors’ fees were $1.4 million and $3.3 million, or 11.7% and 9.0% of
total noninterest expenses, for the quarter and nine-month period ended
September 30, 2007, respectively, compared to $967,000 and $3.2 million, or
8.4%
and 9.5% of total noninterest expenses, for the same periods in 2006. The
increase during the quarter and nine-month period ended September 30, 2007
when
compared to the same periods in 2006 was mainly due to $73,000 in one-time
fees
related to an information technology outsourcing agreement, as previously
explained, $125,000 in legal fees related to this outsourcing agreement, and
$441,000 mainly in other BSA compliance consultations services, of which
$250,000 was recorded during the third quarter of 2007, net of $300,000 related
to additional expenses billed by our former external auditor during the first
quarter of 2006.
Our
expenses related to OREO and repossessed assets were $498,000 and $1.7 million,
or 4.0% and 4.6% of total noninterest expenses, for the quarter and nine-month
period ended September 30, 2007, respectively, compared to $1.0 million and
$1.7
million, or 8.8% and 5.3% of total noninterest expenses, for the same periods
in
2006. The decrease in other real estate owned and repossessed assets expenses
during the quarter ended September 30,2007 when compared to the same quarter
in
2006 resulted from a decrease in the valuation allowance for subsequent declines
in value, mainly related to a decrease in the inventory of repossessed vehicles
over six months.
The
number of repossessed vehicles in inventory over six months as of September
30,
2007 decreased to 53 units, or by approximately 67%, from 160 units as of
September 30, 2006. We continue monitoring this inventory very closely and
taking measures to expedite its disposition. Repossessed assets are initially
recorded at the lower of net realizable value or book value upon repossession
and resulting losses are charged to the allowance for loan and lease losses.
These assets are then periodically evaluated and recorded at net realizable
value. Any subsequent decline in the net realizable value is charged to current
operations.
Promotion
and advertising increased to $375,000 and $1.1 million for the quarter and
nine-month period ended September 30, 2007, respectively, from $324,000 and
$841,000 for the same periods in 2006. This increase was mainly attributable
to
an advertising campaign, primarily related to our residential mortgage loan
department, to take advantage of opportunities on the Island.
Insurance
expenses were $479,000 and $1.4 million, or 3.9% and 3.8% of total noninterest
expenses, for the quarter and nine-month period ended September 30, 2007,
respectively, compared to $293,000 and $794,000, or 2.6% and 2.4% of total
noninterest expense, for the same periods in 2006. This increase was mainly
attributable to the FDIC’s new insurance premium assessment, which commenced in
January 2007.
Other
noninterest expenses were $521,000 and $1.5 million for the quarter and
nine-month period ended September 30, 2007, respectively, compared to $577,000
and $1.7 million for the same periods in 2006. The decrease in other noninterest
expenses for the nine-month period ended September 30, 2007 when compared to
the
same period in 2006 was mainly related to a decrease in the provision for losses
on off-balance sheet items and insurance claim receivables. Other noninterest
expenses are mainly comprised of loan processing and other miscellaneous
expenses.
Provision
for Income Taxes
Puerto
Rico income tax law does not provide for the filing of a consolidated tax
return; therefore, the income tax expense reflected in our consolidated income
statement is the sum of our income tax expense and the income tax expenses
of
our individual subsidiaries. Our revenues are generally not subject to U.S.
federal income tax.
For
the
quarter and nine-month period ended September 30, 2007, we recorded an income
tax benefit of $1.4 million and $30,000, respectively, compared to an income
tax
expense of $515,000 and $4.9 million for the same periods in 2006. Our income
tax benefit of $1.4 million and $30,000 for the quarter and nine-month period
ended September 30, 2007 was comprised of a current income tax expense of
$935,000 and $3.8 million, and a deferred tax benefit of $2.3 million and $3.8
million, respectively, as explained further below.
Our
current income tax expense for the quarter ended September 30, 2007 decreased
to
$935,000, from $1.3 million for the same quarter in 2006. For the nine-month
period ended September 2007, the current income tax expense decrease to $3.8
million, from $5.9 million for the same period in 2006. This decrease in our
current income tax expense was mainly due to the net effect of: (i) a reduction
in our income before taxes, (ii) an increase in the net exempt income during
2007; (iii) the total consumption during the quarter ended March 31, 2006 of
net
operating losses from acquired financial institutions; and (iv) the termination
on December 31, 2006 of the additional transitory taxes of 4.5% imposed by
the
Puerto Rico Legislature in 2006.
Our
deferred tax benefit for the quarter ended September 30, 2007 increased to
$2.3
million, from $528,000 for the same quarter in 2006. For the nine-month period
ended September 2007, the deferred tax benefit increased to $3.8 million, from
$613,000 for the same period in 2006. This increase was mainly due to the
combined effect of (i) an increase in deferred tax assets mainly related to
the
increase in our provision for loan and lease losses as of September 30, 2007,
primarily during the third quarter of 2007; and (ii) the total consumption
during the quarter ended March 31, 2006 of net operating losses from acquired
financial institutions, as previously mentioned.
As
of
September 30, 2007, we had net deferred tax assets of $10.1 million, compared
to
$6.3 million and $6.2 million as of December 31, 2006 and September 30, 2006,
respectively.
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities; projected future taxable income; our
compliance with the Financial Accounting Standards Board Interpretation No.
48,
Accounting
for Uncertainty in Income Taxes
;
and tax
planning strategies in making this assessment. We believe it is more likely
than
not that the benefits of these deductible differences at September 30, 2007
will
be realized.
Financial
Condition
Our
total
assets as of September 30, 2007 were $2.561 billion, compared to $2.501 billion
as of December 31, 2006. The $59.7 million increase in our total assets during
the nine-month period ended September 30, 2007 was primarily due to the net
effect of
(i)
a
$35.4 million decrease in interest bearing deposits; (ii) a $12.4 million
decrease in securities purchased under agreements to resell; (iii) a $5.6
million increase in the investment securities portfolio; (iv) a $86.6 million
increase in net loans; and (v) a $15.0 million increase in premises and
equipment, mainly from the acquisition of land and an office building to serve
as our new headquarters.
Our
total
deposits increased by $58.6 million, or by 4.10% on an annualized basis, to
$1.964 billion as of September 30, 2007, compared to $1.905 billion as
of December 31, 2006.
The
increase in deposits during the nine-month period ended September 30, 2007
was
mainly concentrated in brokered deposits, as further explained in the section
of
this discussion and analysis captioned
“Deposits.”
O
ther
borrowings decreased to $382.5 million as of September 30, 2007, from $395.0
million
as
of
December 31, 2006.
This
change in other borrowings was mainly concentrated in the securities sold under
agreements to repurchase and notes payable to the Federal Home Loan Bank, as
explained further below.
As
of
September 30, 2007, our stockholders’ equity was $175.4 million, compared to
$169.9 million as of December 31, 2006. In addition to earnings and losses
from
operations,
stock
options exercised and stock repurchases, our stockholders’ equity was also
impacted by accumulated other comprehensive losses of $2.9 million and $7.6
million as of September 30, 2007 and December 31, 2006,
respectively.
Short-Term
Investments and Interest-bearing Deposits in Other Financial
Institutions
We
sell
federal funds, purchase securities under agreements to resell, and deposit
funds
in interest-bearing accounts in other financial institutions to help meet
liquidity requirements and provide temporary holdings until the funds can be
otherwise deployed or invested. As of September 30, 2007, we had $13.6 million
in interest-bearing deposits in other financial institutions, compared to $49.1
million as of December 31, 2006. Also,
we
had
$38.8 million and $51.2 million in purchased securities under agreements to
resell as of September 30, 2007 and December 31, 2006, respectively. This
reduction in interest-bearing deposits and short-term investments
was
mainly used to fund the growth in our loan portfolio.
On
a
fully taxable equivalent basis, the yield on interest-bearing deposits and
the
purchased securities under agreements to resell was 5.95% and 5.46% for the
nine-month period ended September 30, 2007 and the year 2006, respectively.
Investment
Securities
Our
investment portfolio primarily serves as a source of interest income and,
secondarily, as a source of liquidity and a management tool for our interest
rate sensitivity. We manage our investment portfolio according to a written
investment policy implemented by our Asset/Liability Management Committee.
Our
investment policy is reviewed at least annually by our Board of Directors.
Investment balances, including cash equivalents and interest-bearing deposits
in
other financial institutions, are subject to change over time based on our
asset/liability funding needs and our interest rate risk management objectives.
Our liquidity levels take into consideration anticipated future cash flows
and
all available sources of credits and are maintained at levels management
believes are appropriate to assure future flexibility in meeting our anticipated
funding needs.
Our
investment portfolio mainly consists of securities classified as
“available-for-sale” and a small portion of securities we intend to hold until
maturity, or “held-to-maturity securities.” The carrying values of our
available-for-sale securities are adjusted for unrealized gain or loss as a
valuation allowance, and any gain or loss is reported on an after-tax basis
as a
component of other comprehensive income (loss). Held-to-maturity securities
are
presented at amortized cost.
The
following table presents the composition, book value and fair value of our
investment portfolio by major category as of the dates indicated:
|
|
|
Available-for-Sale
|
|
Held-to-Maturity
|
|
Other
Investments
|
|
Total
|
|
|
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
|
|
|
(Dollars
in thousands)
|
|
|
September
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies obligations
|
|
$
|
152,035
|
|
$
|
151,210
|
|
$
|
2,845
|
|
$
|
2,795
|
|
$
|
—
|
|
$
|
—
|
|
$
|
154,880
|
|
$
|
154,005
|
|
|
Collateralized
mortgage obligations
|
|
|
317,325
|
|
|
315,333
|
|
|
25,238
|
|
|
24,690
|
|
|
—
|
|
|
—
|
|
|
342,563
|
|
|
340,023
|
|
|
Mortgage-backed
securities
|
|
|
68,869
|
|
|
68,773
|
|
|
4,810
|
|
|
4,663
|
|
|
—
|
|
|
—
|
|
|
73,679
|
|
|
73,436
|
|
|
State
and municipal obligations
|
|
|
6,496
|
|
|
6,538
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,496
|
|
|
6,538
|
|
|
US
Corporate Notes ………………….
|
|
|
3,000
|
|
|
2,930
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,000
|
|
|
2,930
|
|
|
Other
investments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,889
|
|
|
5,889
|
|
|
5,889
|
|
|
5,889
|
|
|
Total
|
|
$
|
547,725
|
|
$
|
544,784
|
|
$
|
32,893
|
|
$
|
32,148
|
|
$
|
5,889
|
|
$
|
5,889
|
|
$
|
586,507
|
|
$
|
582,821
|
|
|
December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies obligations
|
|
$
|
178,533
|
|
$
|
176,255
|
|
$
|
3,165
|
|
$
|
3,072
|
|
$
|
—
|
|
$
|
—
|
|
$
|
181,698
|
|
$
|
179,327
|
|
|
Collateralized
mortgage obligations
|
|
|
305,044
|
|
|
300,192
|
|
|
29,878
|
|
|
29,142
|
|
|
—
|
|
|
—
|
|
|
334,922
|
|
|
329,334
|
|
|
Mortgage-backed
securities
|
|
|
49,628
|
|
|
49,149
|
|
|
5,390
|
|
|
5,260
|
|
|
—
|
|
|
—
|
|
|
55,018
|
|
|
54,409
|
|
|
State
and municipal obligations
|
|
|
9,518
|
|
|
9,563
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,518
|
|
|
9,563
|
|
|
Other
investments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,329
|
|
|
4,329
|
|
|
4,329
|
|
|
4,329
|
|
|
Total
|
|
$
|
542,723
|
|
$
|
535,159
|
|
$
|
38,433
|
|
$
|
37,474
|
|
$
|
4,329
|
|
$
|
4,329
|
|
$
|
585,485
|
|
$
|
576,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the nine-month period ended September 30, 2007, the investment portfolio
increased by approximately $5.6 million to $583.6 million as of September 30,
2007, from $577.9 million as of December 31, 2006. This increase was primarily
due to the net effect of:
|
·
|
the
purchase of $107.8 million in corporate obligations and mortgage-backed
securities;
|
|
·
|
prepayments
of approximately $77.3 million on mortgage-backed securities and
FHLB
obligations; and
|
|
·
|
the
maturity of $28.9 million in US government agencies obligations and
Puerto
Rico government obligations;
|
During
the past few years, we positioned our investment portfolio for an increase
in
interest rates by purchasing mostly investments with short term maturities
or
estimated maturities between 1½ to 4 years. During 2007, we have been
analyzing different market opportunities to reposition our investment portfolio
in an attempt to improve its average yield and to maintain an adequate average
life. During the nine-month period ended September 30, 2007, we
purchased approximately $107.8 million in collateralized mortgage obligations,
mortgage-back securities and US corporate notes with an estimated average life
of approximately 6.0 years and an estimated average yield of 5.80%. In addition,
during the fourth quarter of 2006, we sold approximately $50.1 million of FHLB
and FNMA debt securities available for sale with an average yield of 3.64%.
For
the nine-month period ended September 30, 2007, after the above-mentioned
transactions, the estimated average maturity was approximately 3.6 years and
the
average yield was approximately 4.92%, compared to an estimated average maturity
of 3.2 years and an average yield of 4.64% for the period ended December 31,
2006. As of September 30, 2007, investment securities having a carrying
value of approximately $459.1 million were pledged to secure borrowings and
deposits of public funds and to comply with other pledging
requirements.
Investment
Portfolio — Maturity and Yields
The
following table summarizes the estimated average maturity of investment
securities held in our investment portfolio and their weighted average
yields:
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
Within
One
Year
|
|
After
One but Within Five Years
|
|
After
Five but Within Ten Years
|
|
After
Ten Years
|
|
Total
|
|
|
|
|
Amount
|
|
Yield
(4)
|
|
Amount
|
|
Yield
(4)
|
|
Amount
|
|
Yield
(4)
|
|
Amount
|
|
Yield
(4)
|
|
Amount
|
|
Yield
(4)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Investments
available-for-sale:
(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies obligations
|
|
$
|
143,912
|
|
|
4.69
|
%
|
$
|
7,298
|
|
|
5.23
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
151,210
|
|
|
4.71
|
%
|
|
Mortgage-backed
securities
(3)
|
|
|
6,946
|
|
|
4.09
|
|
|
31,680
|
|
|
5.47
|
|
|
20,517
|
|
|
5.20
|
|
|
9,630
|
|
|
5.47
|
|
|
68,773
|
|
|
5.25
|
|
|
Collateral
mortgage obligations
(3)
|
|
|
32,654
|
|
|
4.09
|
|
|
202,892
|
|
|
4.81
|
|
|
79,787
|
|
|
5.54
|
|
|
—
|
|
|
—
|
|
|
315,333
|
|
|
4.92
|
|
|
State
& political subdivisions
|
|
|
1,652
|
|
|
6.14
|
|
|
4,886
|
|
|
4.72
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,538
|
|
|
5.08
|
|
|
Other
debt securities
|
|
|
2,930
|
|
|
7.49
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
2,930
|
|
|
7.49
|
|
|
Total
investments available-for-sale
|
|
$
|
188,094
|
|
|
4.62
|
%
|
$
|
246,756
|
|
|
4.90
|
%
|
$
|
100,304
|
|
|
5.47
|
%
|
$
|
9,630
|
|
|
5.47
|
%
|
$
|
544,784
|
|
|
4.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
held-to-maturity:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies obligations
|
|
$
|
—
|
|
|
—
|
%
|
$
|
2,845
|
|
|
3.95
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
2,845
|
|
|
3.95
|
%
|
|
Mortgage-backed
securities
(3)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
4,810
|
|
|
4.99
|
|
|
—
|
|
|
—
|
|
|
4,810
|
|
|
4.99
|
|
|
Collateral
mortgage obligations
(3)
|
|
|
8,638
|
|
|
3.76
|
|
|
8,175
|
|
|
4.31
|
|
|
3,811
|
|
|
5.68
|
|
|
4,614
|
|
|
5.14
|
|
|
25,238
|
|
|
4.48
|
|
|
State
& political subdivisions
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other
debt securities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
investments held-to-maturity
|
|
$
|
8,638
|
|
|
3.76
|
%
|
$
|
11,020
|
|
|
4.22
|
%
|
$
|
8,621
|
|
|
5.29
|
%
|
$
|
4,614
|
|
|
5.14
|
%
|
$
|
32,893
|
|
|
4.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
stock
|
|
$
|
5,279
|
|
|
7.50
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
$
|
5,279
|
|
|
7.50
|
%
|
|
Investment
in statutory trust
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
610
|
|
|
8.45
|
|
|
610
|
|
|
8.45
|
|
|
Total
other investments
|
|
$
|
5,279
|
|
|
7.50
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
610
|
|
|
8.45
|
%
|
$
|
5,889
|
|
|
7.60
|
%
|
|
Total
investments
|
|
$
|
202,011
|
|
|
4.66
|
%
|
$
|
257,776
|
|
|
4.87
|
%
|
$
|
108,925
|
|
|
5.45
|
%
|
$
|
14,854
|
|
|
5.49
|
%
|
$
|
583,566
|
|
|
4.92
|
%
|
__________
(1)
Based
on
estimated fair value.
(2)
Almost
all of our income from investments in securities is tax exempt because 99.64%
of
these securities are held in our IBEs. The yields shown in the above table
are
not calculated on a fully taxable equivalent basis.
(3)
Maturities
of mortgage-backed securities and collateralized mortgage obligations, or CMOs,
are based on anticipated lives of the underlying mortgages, not contractual
maturities. CMO maturities are based on cash flow (or payment) windows derived
from broker market consensus.
(4)
Represents
the present value of the expected future cash flows of each instrument
discounted at the estimated market rate offered by other instruments that are
currently being traded in the market with similar credit quality, expected
maturity and cash flows. For other investments, it represents the last dividend
received.
Other
Investments
For
various business purposes, we make investments in earning assets other than
the
interest-earning securities discussed above. As of September 30, 2007, our
investment in other earning assets included $5.3 million in FHLB stock and
$610,000 equity in our statutory trust. The following table presents the
balances of other earning assets as of the dates indicated:
|
|
|
|
As
of September 30,
|
|
|
As
of December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In
thousands)
|
|
|
Statutory
trusts
|
|
$
|
610
|
|
$
|
611
|
|
|
FHLB
stock
|
|
|
5,279
|
|
|
3,718
|
|
|
Total
|
|
$
|
5,889
|
|
$
|
4,329
|
|
Loan
and Lease Portfolio
Our
primary source of income is interest on loans and leases. The following table
presents the composition of our loan and lease portfolio by category as of
the
dates indicated, excluding loans held for sale secured by real estate amounting
to $487,000 and $879,000 as of September 30, 2007 and December 31, 2006,
respectively:
|
|
|
|
As
of September 30,
|
|
|
As
of December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In
thousands)
|
|
|
Real
estate secured
|
|
$
|
887,570
|
|
$
|
813,615
|
|
|
Leases
|
|
|
401,209
|
|
|
443,311
|
|
|
Other
commercial and industrial
|
|
|
303,430
|
|
|
297,512
|
|
|
Real
estate - construction
|
|
|
184,347
|
|
|
126,241
|
|
|
Consumer
|
|
|
59,533
|
|
|
60,682
|
|
|
Other
loans
(1)
|
|
|
6,400
|
|
|
5,015
|
|
|
Gross
loans and leases
|
|
$
|
1,842,489
|
|
$
|
1,746,376
|
|
|
Plus:
Deferred loan costs, net
|
|
|
2,735
|
|
|
4,880
|
|
|
Total
loans, including deferred loan costs, net
|
|
$
|
1,845,224
|
|
$
|
1,751,256
|
|
|
Less:
Unearned income
|
|
|
(1,072
|
)
|
|
(1,297
|
)
|
|
Total
loans, net of unearned income
|
|
$
|
1,844,152
|
|
$
|
1,749,959
|
|
|
Less:
Allowance for loan and lease losses
|
|
|
(26,131
|
)
|
|
(18,937
|
)
|
|
Loans,
net
|
|
$
|
1,818,021
|
|
$
|
1,731,022
|
|
__________
(1)
Other
loans are comprised of overdrawn deposit accounts.
As
of
September 30, 2007 and December 31, 2006, our total loans and leases, net of
unearned income, were $1.844 billion and $1.750 billion, respectively. The
$94.2
million increase in our loan and lease portfolio during the nine-month period
ended September 30, 2007 resulted from the organic growth of our operations.
Our
total loans and leases, net of unearned income, as a percentage of total assets
increased to 72.0% as of September 30, 2007, from 70.0% as of December 31,
2006.
Real
estate secured loans, the largest component of our loan and lease portfolio,
include residential mortgages but is primarily comprised of commercial real
estate loans and/or commercial lines of credit that are extended to finance
the
purchase and/or improvement of commercial real estate and/or businesses thereon
or for business working capital purposes. The properties may be either
owner-occupied or for investment purposes. Our loan policy adheres to the real
estate loan guidelines promulgated by the FDIC in 1993. The policy provides
guidelines including, among other things, review of appraised value, limitation
on loan-to-value ratio, and minimum cash flow requirements to service debt.
On
occasions, the bank grants real estate secured loans for which the
loan-to-values exceed 100%. In those instances, additional forms of collateral
or guaranties are obtained. Loans secured by real estate, excluding construction
loans secured by real estate, equaled $887.6 million and $813.6 million as
of
September 30, 2007 and December 31, 2006, respectively.
Loans
secured by real estate included residential mortgages amounting to $100.5
million as of September 30, 2007, which increased by $24.2 million, or by 42.36%
on an annualized basis, when compared to $76.3 million as of December 31, 2006.
The increase in residential mortgages during the nine-month period ended
September 2007 when compared to the year ended December 31, 2006 mainly resulted
from our strategy of expanding our residential mortgage operations to take
advantage of opportunities in this area on the Island, as previously
mentioned.
Real
estate secured loans, excluding real estate secured construction loans, as
a
percentage of gross loans and leases increased to 48.16% as of September 30,
2007, from 46.59% at the end of fiscal year 2006. Our portfolio of real estate
loans has increased as a result of our organic growth.
Lease
financing contracts, the second largest component of our loan and lease
portfolio, consist of automobile and equipment leases made to individuals and
corporate customers. In the last three years, we have deemphasized equipment
leasing and focused on automobile leasing. For the nine-month period ended
September 30, 2007, approximately 57.67% of our lease financing contracts
originations were for new automobiles, approximately 39.50% were for used
automobiles and the remaining 2.83% consisted primarily of construction and
medical equipment leases. Our portfolio of lease financing contracts decreased
to $401.2 million as of September 30, 2007, from $443.3 million as of December
31, 2006. Lease financing contracts, as a percentage of gross loans and leases
were 21.78% as of September 30, 2007 and 25.38% as of the end of 2006. This
decrease in our lease portfolio resulted from the proactive actions we continued
taking during the nine-month period ended September 30, 2007 to tightening
our
underwriting standards, enhance our collections efforts and strategically pare
back our automobile leasing operations in an attempt to reduce possible future
losses.
On
a
monthly basis, we review the existing lease portfolio to determine the repayment
performance of borrowers displaying sub-prime lending characteristics.
This analysis contemplates the segregation of the lease portfolio in two
different categories, sub-prime and prime, based on
the characteristics of each borrower. The review consists of
the segregation of the monthly delinquency report into these categories to
compare the percentage of the outstanding balance for each category in different
delinquent stratas. For the nine-month period ended September 30, 2007,
the analysis revealed there was a similar repayment performance for both
categories. This review enables us to better monitor and
control sub-prime borrowers and to reduce risk of repossessions and future
losses.
Other
commercial and industrial loans include revolving lines of credit as well as
term business loans, which are primarily collateralized by accounts receivable
and the assets being acquired, such as equipment or inventory. Other commercial
and industrial loans increased to $303.4 million as of September 30, 2007,
from
$297.5 million as of December 31, 2006. This increase was net of a $11.2 million
prepayment of various loans in a commercial business relationship, which were
canceled during the first quarter of 2007 with funds from certificates of
deposits the customer had on deposit with our banking subsidiary. Other
commercial and industrial loans as a percentage of gross loans and leases were
16.47% and 17.04% as of September 30, 2007 and December 31, 2006,
respectively.
Construction
loans secured by real estate totaled $184.3 million and $126.2 million as of
September 30, 2007 and December 31, 2006, respectively. Construction loans
as a
percentage of gross loans and leases were 10.01% and 7.23% for the same periods,
respectively. During the nine-month period ended September 30, 2007, the
increase in construction loans secured by real estate resulted from our organic
growth, which was, in part, comprised of loans for land development and the
construction of commercial real estate property, but primarily of loans for
the
construction of residential multi-family projects that, although private, are
moderately priced or of the affordable type supported by government assisted
programs.
Our
portfolio of commercial and construction loans is subject to certain risks,
including: (1) a possible downturn in the Puerto Rico economy; (2) interest
rate
increases; (3) the deterioration of a borrower’s or guarantor’s financial
capabilities; and (4) environmental risks, including natural disasters. We
attempt to reduce the exposure to such risks through: (1) reviewing each loan
request and renewal individually; (2) utilizing a centralized approval system
for all unsecured loans and secured loans in excess of $100,000; (3) strictly
adhering to written loan policies; and (4) conducting an independent credit
review. In addition, loans based on short-term asset values are monitored on
a
monthly or quarterly basis. In general, we receive and review financial
statements of borrowing customers on an ongoing basis during the term of the
relationship and respond to any deterioration noted.
Consumer
loans have historically represented a small part of our total loan and lease
portfolio. The majority of consumer loans consist of boat loans, personal
installment loans, credit cards, and consumer lines of credit. We make consumer
loans only to complement our commercial business, and these loans are not
emphasized by our branch managers. Consumer loans decreased to $59.5 million
as
of September 30, 2007, from $60.7 million as of December 31, 2006. Consumer
loans as a percentage of gross loans and leases were 3.23% and 3.47% as of
September 30, 2007 and December 31, 2006, respectively. Consumer loans as of
September 30, 2007 and December 31, 2006 included a boat portfolio of $37.1
million and $37.4 million, respectively; $13.2 million and $13.8 million,
respectively, in unsecured installment loans; and credit cards and open-end
loans for $9.2 million and $9.5 million, respectively.
Our
loan
terms vary according to loan type. Commercial term loans generally have
maturities of three to five years, while we generally limit real estate loan
maturities to five to eight years. Lines of credit, in general, are extended
on
an annual basis to businesses that need temporary working capital and/or
import/export financing.
Leases
are offered for terms up to 72 months.
The
following table shows our maturity distribution of loans and leases, including
loans held for sale of $487,000, as of September 30, 2007, and excluding
non-accrual loans amounting to $55.3 million as of the same date. A significant
part of our non-consumer loan portfolio is floating rate loans which comprise
both commercial and industrial loans and commercial real estate loans. By
contrast, residential mortgage loans originated by Eurobank are fixed rate.
Residential mortgage loans are included in the real estate - secured category
in
the following table.
|
|
|
As
of September 30, 2007
|
|
|
|
|
|
|
Over
1 Year
through
5 Years
|
|
Over
5 Years
|
|
|
|
|
|
|
One
Year
or
Less
(1)
|
|
Fixed
Rate
|
|
Floating
or
Adjustable
Rate
|
|
Fixed
Rate
|
|
Floating
or
Adjustable
Rate
|
|
Total
|
|
|
|
|
(In
thousands)
|
|
|
Real
estate — construction
|
|
$
|
217,037
|
|
$
|
286
|
|
$
|
-
|
|
$
|
539
|
|
$
|
2,470
|
|
$
|
220,332
|
|
|
Real
estate — secured
|
|
|
252,276
|
|
|
172,374
|
|
|
228,120
|
|
|
141,846
|
|
|
15,173
|
|
|
809,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
commercial and industrial
|
|
|
228,848
|
|
|
23,168
|
|
|
31,422
|
|
|
1,996
|
|
|
11,886
|
|
|
297,320
|
|
|
Consumer
|
|
|
12,191
|
|
|
11,414
|
|
|
1,215
|
|
|
33,612
|
|
|
297
|
|
|
58,729
|
|
|
Leases
|
|
|
14,123
|
|
|
351,598
|
|
|
-
|
|
|
31,223
|
|
|
-
|
|
|
396,944
|
|
|
Other
loans
|
|
|
6,250
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,250
|
|
|
Total
|
|
$
|
730,725
|
|
$
|
558,840
|
|
$
|
260,757
|
|
$
|
209,216
|
|
$
|
29,826
|
|
$
|
1,789,364
|
|
__________
(1)
Maturities
are based upon contract dates. Demand loans are included in the one year or
less
category and totaled $530.0 million as of September 30, 2007.
For
additional information relating to our loan products, see the section captioned
“Products
and Services”
on our
last Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 16, 2007.
Nonperforming
Loans, Leases and Assets
Nonperforming
assets consist of loans and leases on nonaccrual status, loans 90 days or more
past due and still accruing interest, loans that have been restructured
resulting in a reduction or deferral of interest or principal, OREO, and other
repossessed assets.
The
following table sets forth the amounts of nonperforming assets as of the dates
indicated:
|
|
|
As
of September 30,
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Loans
contractually past due 90 days or more
but
still accruing interest
|
|
$
|
13,936
|
|
$
|
12,723
|
|
|
Nonaccrual
loans
|
|
|
55,276
|
|
|
37,255
|
|
|
Total
nonperforming loans
|
|
|
69,212
|
|
|
49,978
|
|
|
Other
real estate owned
|
|
|
4,332
|
|
|
3,629
|
|
|
Other
repossessed assets
|
|
|
6,172
|
|
|
9,419
|
|
|
Total
nonperforming assets
|
|
$
|
79,716
|
|
$
|
63,026
|
|
|
Nonperforming
loans to total loans and leases
|
|
|
3.75
|
%
|
|
2.85
|
%
|
|
Nonperforming
assets to total loans and leases
plus
repossessed property
|
|
|
4.30
|
|
|
3.57
|
|
|
Nonperforming
assets to total assets
|
|
|
3.11
|
|
|
2.52
|
|
We
continually review present and estimated future performance of the loans and
leases within our portfolio and risk-rate such loans in accordance with a risk
rating system. More specifically, we attempt to reduce the exposure to risks
through: (1) reviewing each loan request and renewal individually; (2) utilizing
a centralized approval system for all unsecured loans and secured loans in
excess of $100,000; (3) strictly adhering to written loan policies; and (4)
conducting an independent credit review. In addition, loans based on short-term
asset values are monitored on a monthly or quarterly basis. In general, we
receive and review financial statements of borrowing customers on an ongoing
basis during the term of the relationship and respond to any deterioration
noted.
Loans
are
generally placed on nonaccrual status when they become 90 days past due, unless
we believe the loan is adequately collateralized and we are in the process
of
collection. For loans placed in nonaccrual status, the nonrecognition of
interest income on an accrual basis does not constitute forgiveness of the
interest, and collection efforts are continuously pursued. Loans may be
restructured by management when a borrower has experienced some change in
financial status, resulting in an inability to meet the original repayment
terms, and when we believe the borrower will eventually overcome financial
difficulties and repay the loan in full.
All
interest accrued but not collected for loans and leases that are placed on
nonaccrual status or charged-off is reversed against interest income. The
interest on these loans and leases is accounted for on a cash basis or cost
recovery method, until qualifying for return to accrual status.
Nonperforming
loans to total loans increased to 3.75% as of September 30, 2007, from 2.85%
as
of December 31, 2006. Nonperforming assets to total assets increased to 3.11%
as
of September 30, 2007, from 2.52% as of December 31, 2006. Nonperforming
loans as of September 30, 2007 amounted to $69.2 million, compared to $50.0
million as of December 31, 2006. This increase was due to the combined
effect of a $1.2 million increase in loans over 90 days past due still accruing
interest and an increase of $18.0 million in nonaccrual loans, which are
explained below in more detail.
The
$1.2
million increase in loans over 90 days still accruing interest was mainly due
to
net effect of: (i) a $1.7 million increase in loans secured by real estate;
(ii)
a $368,000 decrease in lease financing contracts; and (iii) a decrease of
$225,000 in overdrafts. The $1.7 million increase in loans secured by real
estate was mainly caused by one commercial business relationship amounting
to
$1.1 million secured by real estate.
The
$18.0
million increase in nonaccrual loans was mainly attributable to the net effect
of: (i) three commercial business relationships amounting to $7.1 million
secured by real estate, of which two amounting to $6.3 million were in the
communications and service industries and were placed in nonaccrual status
in
February and March 2007, respectively, and the third was in the commercial
trade
and construction industries and was placed in nonaccrual status during the
quarter ended September 30, 2007; (ii) three commercial business relationships
in the food retailing, security systems, and service industries, which amounted
to $9.8 million secured by real estate with loan-to-values exceeding 100%,
and
other two in the general freight and health care industries, respectively,
amounting to $2.2 million not secured by real estate, which were all placed
in
nonaccrual status during the quarter ended September 30, 2007; (iii) a decrease
of $822,000 in lease financing contracts; and (iv) a $656,000 decrease in marine
loans.
We
believe all loans and leases, with which we have serious doubts as to
collectibility, are classified within the category of nonperforming loans and
leases and are appropriately reserved.
Repossessed
assets decreased to $10.5 million as of September 30, 2007, compared to $13.0
million as of December 31, 2006. This decrease was due to the net effect
of: (i) a decrease of $3.2 million in other repossessed assets, mainly in
the inventory of repossessed vehicles; and (ii) an increase of $703,000 in
other
real estate owned resulting from the foreclosure of seven real estate
properties
with an
aggregate value of $1.2 million
and
the
sale of three real estate properties
valued
at $514,000
during
the nine-month period ended September 30, 2007.
The
$3.2
million decrease in the inventory of repossessed vehicles was directly
attributable to our strategy of being more aggressive in the sale of repossessed
vehicles to expedite their disposition and avoid the build up of our repossessed
vehicles inventory, primarily during the first and second quarter of 2007.
This
strategy resulted in a significant reduction in the number of repossessed
vehicles in inventory. During four quarters in a row, sales of repossessed
vehicles exceeded the number of units repossessed. The number of repossessed
vehicles in inventory as of September 30, 2007 decreased to 366 units, or by
approximately 35%, from 564 units as of December 31, 2006. This is the lowest
level of repossessed vehicles since August 2005. We continue monitoring this
inventory very closely and taking measures to expedite its disposition and
prevent deterioration of the vehicles.
OREO
consists of properties acquired by foreclosure or similar means and that
management intends to offer for sale. Other repossessed assets are comprised
primarily of repossessed automobiles subject to lease contracts and repossessed
boats. OREO and other repossessed assets are initially recorded at the lower
of
net realizable value or book value. Any resulting loss is charged to the
allowance for loan and lease losses. An appraisal of OREO and valuations of
other repossessed assets are made periodically after a property is acquired,
and
a comparison between the appraised value and the carrying value is performed.
Additional declines in value after acquisition, if any, are charged to current
operations. Gains or losses on disposition of OREO and other repossessed assets,
and related operating income and maintenance expenses, are included in current
operations.
As
of
September 30, 2007, our OREO consisted of 27 properties with an aggregate value
of $4.3 million, compared to 23 properties with an aggregate value of $3.6
million as of December 31, 2006.
Allowance
for Loan and Lease Losses
We
have
established an allowance for loan and lease losses to provide for loans in
our
portfolio that may not be repaid in their entirety. The allowance is based
on
our regular, monthly assessments of the probable estimated losses inherent
in
the loan and lease portfolio. Our methodology for measuring the appropriate
level of the allowance relies on several key elements, as discussed below,
and
specific allowances for identified problem loans and portfolio
segments.
When
analyzing the adequacy of our allowance, our portfolio is segmented into as
many
components as practical. Although the evaluation of the adequacy of our
allowance focuses on loans and leases and pools of similar loans and leases,
no
part of our allowance is segregated for, or allocated to, any particular asset
or group of assets. Our allowance is available to absorb all credit losses
inherent in our portfolio.
Each
component would normally have similar characteristics, such as classification,
type of loan or lease, industry or collateral. As needed, we separately analyze
the following components of our portfolio and provide for them in our
allowance:
|
·
|
sufficiency
of credit and collateral documentation;
|
|
·
|
proper
lien perfection;
|
|
·
|
appropriate
approval by the loan officer and the loan
committees;
|
|
·
|
adherence
to any loan agreement covenants; and
|
|
·
|
compliance
with internal policies and procedures and laws and
regulations.
|
The
general portion of our allowance is calculated by applying loss factors to
all
categories of loans and leases outstanding i
n
our
portfolio. We use historic loss rates determined over a period of 1 to 5 years,
which on an annual basis, are adjusted to reflect any current conditions that
are expected to result in loss recognition. Factors that we consider include,
but are not limited to:
|
·
|
effects
of any changes in lending policies and procedures, including those
for
underwriting, collection, charge-offs, and
recoveries;
|
|
·
|
changes
in the experience, ability and depth of our lending management and
staff;
|
|
·
|
concentrations
of credit that might affect loss experience across one or more components
of the portfolio;
|
|
·
|
levels
of, and trends in, delinquencies and nonaccruals; and
|
|
·
|
national
and local economic business trends and conditions.
|
The
resulting loss factors are then multiplied against the current period’s balance
of loans outstanding to derive an estimated loss. Rates for each pool are based
on those factors management believes are applicable to that pool. When applied
to a pool of loans or leases, the historical loss rate is a measure of the
total
inherent losses in the portfolio that would have been estimated if each
individual loan or lease had been reviewed.
In
addition, another component is used in the evaluation of the adequacy of the
allowance. This additional component serves as a management tool to measure
the
probable effect that current internal and external environmental factors could
have on the historical loss factors.
On
a
quarterly basis, a risk percentage is assigned to each environmental factor
based on our judgment of the implied risk over each loan category. The result
of
our assumptions is then applied to the current period’s balance of loans
outstanding to derive the probable effect these current internal and external
environmental factors could have over the general portion of our allowance.
The
net allowance resulting from this procedure is included as an additional
component in the evaluation of the adequacy of our allowance.
In
addition to our general portfolio allowances, specific allowances are
established in cases where management has identified significant conditions
or
circumstances related to a credit that management believes indicate a high
probability that a loss will be incurred. This amount is determined following
a
consistent procedural discipline in accordance with Statement of Financial
Accounting Standards (SFAS) No. 114,
Accounting
by Creditors for Impairment of a Loan (“SFAS No. 114”)
,
as
amended by SFAS No. 118,
Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures
.
Through
periodic management review at branch and executive level and utilization of
internal delinquency processes, loan portfolios and individual loans and leases
are monitored on an ongoing basis. When considered appropriate, a specific
allowance will be considered on individual loan or lease accounts. A review
is
generally conducted of all the conditions surrounding any particular account
such as the borrower’s character, existing and potential financial condition,
realizable value of collateral, prospects for additional collateral and payment
record. As a result, the loss potential is determined and specific allowances
may be established, which will vary depending on the analysis.
As
mentioned above, our methodology for the determination of the adequacy of the
allowance for loan and lease losses for impaired loans is based on
classifications of loans and leases into various categories and the application
of SFAS No. 114, as amended. For non-classified loans, the estimated allowance
is based on historical loss experiences as adjusted for changes in trends and
conditions on at least an annual basis. In addition, on a quarterly basis,
the
estimated allowance for non-classified loans is adjusted for
the
probable effect that current environmental factors could have on the historical
loss factors currently in use.
While
our allowance for loan and lease losses is established in different portfolio
components, we maintain an allowance that we believe is sufficient to absorb
all
credit losses inherent in our portfolio.
Although
management believes that the allowance for loan and lease losses is adequate
to
absorb probable losses on existing loans and leases that may become
uncollectible, there can be no assurance that our allowance will prove
sufficient to cover actual loan and lease losses in the future. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the adequacy of our allowance for loan and lease losses.
Such agencies may require us to make additional provisions to the allowance
based upon their judgments about information available to them at the time
of
their examinations.
The
table
below summarizes, for the periods indicated, loan and lease balances at the
end
of each period, the daily averages during the period, changes in the allowance
for loan and lease losses arising from loans and leases charged-off, recoveries
on loans and leases previously charged-off, and additions to the allowance,
and
certain ratios related to the allowance for loan and lease losses:
|
|
|
|
Nine
Months
Ended
September
30,
|
|
|
Year
Ended
December
31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Average
total loans and leases outstanding during period
|
|
$
|
1,788,346
|
|
$
|
1,663,330
|
|
|
Total
loans and leases outstanding at end of period, including loans held
for
sale
|
|
|
1,844,640
|
|
|
1,750,838
|
|
|
Allowance
for loan and lease losses:
|
|
|
|
|
|
|
|
|
Allowance
at beginning of period
|
|
|
18,937
|
|
|
18,188
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Real
estate — secured
|
|
|
209
|
|
|
685
|
|
|
Commercial
and industrial
|
|
|
1,614
|
|
|
3,050
|
|
|
Consumer
|
|
|
1,205
|
|
|
1,978
|
|
|
Leases
|
|
|
9,528
|
|
|
12,927
|
|
|
Other
loans
|
|
|
338
|
|
|
149
|
|
|
Total
charge-offs
|
|
|
12,894
|
|
|
18,789
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Real
estate — secured
|
|
|
48
|
|
|
11
|
|
|
Commercial
and industrial
|
|
|
257
|
|
|
534
|
|
|
Consumer
|
|
|
210
|
|
|
465
|
|
|
Leases
|
|
|
1,095
|
|
|
1,604
|
|
|
Other
loans
|
|
|
11
|
|
|
21
|
|
|
Total
recoveries
|
|
|
1,621
|
|
|
2,635
|
|
|
Net
loan and lease charge-offs
|
|
|
11,273
|
|
|
16,154
|
|
|
Provision
for loan and lease losses
|
|
|
18,467
|
|
|
16,903
|
|
|
Allowance
at end of period
|
|
$
|
26,131
|
|
$
|
18,937
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
Net
loan and lease charge-offs to average total loans
(1)
|
|
|
0.84
|
%
|
|
0.97
|
%
|
|
Allowance
for loan and lease losses to total loans at end of period
|
|
|
1.42
|
|
|
1.08
|
|
|
Net
loan and lease charge-offs to allowance for loan losses at end of
period
(1)
|
|
|
57.52
|
|
|
85.30
|
|
|
Net
loan and lease charge-offs to provision for loan and lease
losses
|
|
|
61.04
|
|
|
95.57
|
|
(1)
Annualized as of September 30, 2007.
The
allowance for loan and lease losses increased to $26.1 million at September
30,
2007, from $18.9 million at December 31, 2006. The allowance for loan and lease
losses as a percentage of total loans and leases increased to 1.42% at September
30, 2007, from 1.08% at December 31, 2006. The increase in our allowance for
loan and lease losses during the nine months ended September 30, 2007 was mainly
caused by
three
business relationships, which became impaired during the third quarter of 2007
and required a specific allowance of $4.5 million, as previously mentioned.
We
believe that the allowance for loan and lease losses is adequate to absorb
probable losses in the portfolio.
On
a
quarterly basis, we have the practice of effecting partial charge-off on all
lease finance contracts that are over 120 days past due. This is done based
on
our historical lease loss experience during the previous calendar year.
Accordingly, all lease finance contracts that are over 120 days past due at
the
end of the quarter are partially charged-off.
For each
of the periods ended September 30, 2007 and December 31, 2006, we used a
historical loss ratio in auto lease finance contracts of approximately 23%
and
20%, respectively.
For the
nine-month periods ended September 30, 2007 and 2006, $1.2 million and $1.7
million was charged-off for this purpose, respectively.
Also,
except for leases in a payment plan, bankruptcy or other legal proceedings,
we
have the practice of charging-off most of our lease finance contracts that
are
over 365 days past due. This full charge-off is made on a quarterly basis.
Accordingly, most of our lease finance contracts that are over 365 days past
due
at the end of the quarter are fully charged-off. For the nine-month periods
ended September 30, 2007 and 2006, $621,000 and $577,000 was charged-off for
this purpose, respectively.
We
monitor the ratio of net charge-offs on the leasing business to the average
balance of our leasing portfolio. The annualized total loss ratio on the leasing
business was 2.71% and 2.65% for the quarter and nine-month period ended
September 30, 2007, respectively, compared to 3.13% and 2.40% for the quarter
and year ended December 31, 2006. The increase in the ratio of total loss on
the
leasing business during the nine-month period ended September 30, 2007 was
due
to the decrease in our lease portfolio. Our lease portfolio decreased to
$401.2 million as of September 30, 2007, from $443.3 million at the
end of fiscal 2006. However, for the nine-month period ended September 30,
2007,
annualized net charge-offs in our leasing portfolio remained stable when
compared to the year ended December 31, 2006. As of September 30, 2007,
annualized net charge-offs in our leasing portfolio amounted to $11.2 million,
compared to $11.3 million for the year ended December 31, 2006. This decreases
resulted from the proactive actions we continued taking during the nine months
ended September 30, 2007 in connection to our automobile leasing operations
in
an attempt to reduce possible future losses, as previously
mentioned.
Annualized
net charge-offs as a percentage of average loans was 0.87% and 0.84% for the
quarter and nine-month period ended September 30, 2007, respectively, compared
to 0.77% for the quarter ended June 30, 2007, and 1.10% and 0.97% for the
quarter and year ended December 31, 2006, respectively. For the quarter and
nine-month period ended September 30, 2006, this ratio was 1.22% and 0.93%,
respectively. The increase in this ratio, when comparing the quarter ended
September 30, 2007 with the second quarter of 2007 was mainly attributable
to an
increase in net charge off on commercial loans not secured by real estate and
overdrafts. The decrease in this ratio, when comparing the quarter and
nine-month period ended September 30, 2007 with the quarter and year ended
December 31, 2006 and the same periods in 2006, was mainly attributable to
the
decrease in our inventory of repossessed vehicles, as previously
mentioned.
Net
charge-offs as a percentage of provision for loan and lease losses was 41.43%
and 61.04% for the quarter and nine-month period ended September 30, 2007,
respectively, compared to 95.60% for the quarter ended June 30, 2007, and 89.82%
and 95.57% for the quarter and year ended December 31, 2006, respectively.
The
decrease in this ratio for the quarter and nine-month period ended September
30,
2007
was
mainly
caused by the specific allowance required by three business relationships,
which
became impaired during the third quarter of 2007, as previously mentioned.
Nonearning
Assets
Premises,
leasehold improvements and equipment, net of accumulated depreciation and
amortization, totaled $29.9 million as of September 30, 2007 and $14.9 million
as of December 31, 2006. This increase was mainly related to the acquisition
of
land and an office building to relocate our headquarters and administrative
offices, as further explained below.
On
February 6, 2007, Eurobank, our wholly owned banking subsidiary, closed on
the
purchase of land and an office building to serve as our new headquarters. The
property, which is located in San Juan, includes a 57,187 square foot office
building that will be used to consolidate our headquarters, administrative
operations, and our leasing division. We anticipate that there may be a benefit
from certain efficiencies associated with centralizing these operations in
one
location. The purchase price for the property was $12,360,000. We are in the
process of renovating the space to conform to our needs, and expect to move
by
December 2007 or when building improvements are finished.
Except
for aforementioned acquisition,
we
have
no definitive agreements regarding acquisition or disposition of owned or leased
facilities and, for the near-term future, we do not expect significant changes
in our total occupancy expense.
Deposits
Deposits
are our primary source of funds. Average deposits amounted to $1.9 billion
for
each of the quarter and nine-month period ended September 30, 2007, compared
to
$1.739 billion for the year 2006.
This
increase in average deposits during the nine-month period ended September 30,
2007 was mainly concentrated in brokered deposits.
The
following table sets forth, for the periods indicated, the distribution of
our
average deposit account balances and average cost of funds on each category
of
deposits:
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
Average
Balance
|
|
|
Percent
of
Deposits
|
|
|
Average
Rate
|
|
|
|
Average
Balance
|
|
|
Percent
of
Deposits
|
|
|
|
Average
Rate
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Noninterest-bearing
demand deposits
|
|
$
|
119,737
|
|
|
6.42
|
%
|
|
-
|
%
|
|
$
|
128,551
|
|
|
7.39
|
%
|
|
|
-
|
%
|
|
Money
market deposits
|
|
|
18,044
|
|
|
0.97
|
|
|
2.79
|
|
|
|
25,470
|
|
|
1.46
|
|
|
|
2.29
|
|
|
NOW
deposits
|
|
|
47,648
|
|
|
2.56
|
|
|
2.43
|
|
|
|
46,330
|
|
|
2.66
|
|
|
|
2.23
|
|
|
Savings
deposits
|
|
|
144,446
|
|
|
7.75
|
|
|
2.50
|
|
|
|
184,824
|
|
|
10.63
|
|
|
|
2.37
|
|
|
Time
certificates of deposit in denominations of $100,000 or
more
|
|
|
231,961
|
|
|
12.44
|
|
|
4.99
|
|
|
|
205,510
|
|
|
11.82
|
|
|
|
4.30
|
|
|
Brokered
certificates of deposits in denominations of $100,000 or
more
|
|
|
1,210,476
|
|
|
64.94
|
|
|
5.11
|
|
|
|
1,034,893
|
|
|
59.54
|
|
|
|
4.78
|
|
|
Other
time deposits
|
|
|
91,797
|
|
|
4.92
|
|
|
4.32
|
|
|
|
113,097
|
|
|
6.50
|
|
|
|
3.70
|
|
|
Total
deposits
|
|
$
|
1,864,109
|
|
|
100.00
|
%
|
|
|
|
|
$
|
1,738,675
|
|
|
100.00
|
%
|
|
|
|
|
Total
deposits at September 30, 2007 and December 31, 2006 were $1.964 billion and
$1.905 billion, respectively, representing an increase of $58.6 million, or
4.10% on an annualized basis, during the nine-month period ended September
30,
2007. The following table presents the composition of our deposits by category
as of the dates indicated:
|
|
|
As
of September 30,
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(In
thousands)
|
|
|
Interest
bearing deposits:
|
|
|
|
|
|
|
Now
and money market
|
|
$
|
68,754
|
|
$
|
62,673
|
|
|
Savings
|
|
|
133,739
|
|
|
156,069
|
|
|
Brokered
certificates of deposits in denominations of
less
than $100,000
|
|
|
181
|
|
|
707
|
|
|
Brokered
certificates of deposits in denominations of
$100,000
or more
|
|
|
1,304,178
|
|
|
1,225,449
|
|
|
Time
certificates of deposits in denominations of
$100,000
or more
|
|
|
241,022
|
|
|
224,741
|
|
|
Other
time deposits
|
|
|
90,632
|
|
|
95,396
|
|
|
Total
interest bearing deposits
|
|
$
|
1,838,506
|
|
$
|
1,765,035
|
|
|
Plus:
non interest bearing deposits
|
|
|
125,443
|
|
|
140,321
|
|
|
Total
deposits
|
|
$
|
1,963,949
|
|
$
|
1,905,356
|
|
In
addition to the deposits we generate locally, we have also accepted brokered
deposits to augment retail deposits and to fund asset growth.
The
decrease in savings accounts, and other time deposits in denominations of less
than $100,000 was mainly attributable to the fierce competition for core
deposits on the Island due to a reduction of local funding sources. This fierce
competition for local deposits has 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 in an attempt to control the continuous
increase in our funding cost.
The
following table sets forth the amount and maturities of the time deposits of
$100,000 or more as of the dates indicated:
|
|
|
September
30,
2007
|
|
December
31,
2006
|
|
|
|
|
(In
thousands)
|
|
|
Three
months or less
|
|
$
|
370,877
|
|
$
|
547,837
|
|
|
Over
three months through six months
|
|
|
187,864
|
|
|
294,784
|
|
|
Over
six months through 12 months
|
|
|
175,050
|
|
|
188,691
|
|
|
Over
12 months
|
|
|
811,409
|
|
|
418,878
|
|
|
Total
|
|
$
|
1,545,200
|
|
$
|
1,450,190
|
|
|
|
|
|
|
|
|
|
|
Other
Sources of Funds
Securities
Sold Under Agreements to Repurchase
To
support our asset base, we sell securities subject to obligations to repurchase
to securities dealers and the FHLB. These repurchase transactions generally
have
maturities of one month to less than five years. The following table summarizes
certain information with respect to securities under agreements to repurchase
for the three months ended September 30, 2007 and the year ended December 31,
2006:
|
|
|
Three
Months Ended
September
30,
|
|
Year
Ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Balance
at period-end
|
|
$
|
361,414
|
|
$
|
365,664
|
|
|
Average
monthly balance outstanding during the period
|
|
|
352,691
|
|
|
432,459
|
|
|
Maximum
aggregate balance outstanding at any month-end
|
|
|
361,414
|
|
|
501,182
|
|
|
Weighted
average interest rate for the quarter
|
|
|
5.17
|
%
|
|
4.94
|
%
|
|
Weighted
average interest rate for the last month
|
|
|
5.06
|
%
|
|
5.27
|
%
|
FHLB
Advances
Although
deposits and repurchase agreements are the primary source of funds for our
lending and investment activities and for general business purposes, we may
obtain advances from the Federal Home Loan Bank of New York as an alternative
source of liquidity. The following table provides a summary of FHLB advances
for
the three months ended September 30, 2007 and the year ended December 31,
2006:
|
|
|
Three
Months Ended
September
30,
|
|
Year
Ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Balance
at period-end
|
|
$
|
468
|
|
$
|
8,707
|
|
|
Average
monthly balance outstanding during the period
|
|
|
565
|
|
|
19,016
|
|
|
Maximum
aggregate balance outstanding at any month-end
|
|
|
476
|
|
|
121,292
|
|
|
Weighted
average interest rate for the quarter
|
|
|
4.58
|
%
|
|
5.06
|
%
|
|
Weighted
average interest rate for the last month
|
|
|
4.38
|
%
|
|
5.51
|
%
|
Notes
Payable to Statutory Trusts
For
more
detail on notes payable to statutory trusts please refer to the
“Note
12 - Notes Payable to Statutory Trusts”
to our
condensed consolidated financial statements included herein.
Capital
Resources and Capital Adequacy Requirements
We
are
subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can trigger
regulatory actions that could have a material adverse effect on our business,
financial condition, results of operations, cash flows and/or future prospects.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, we must meet specific capital guidelines that rely on
quantitative measures of our assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Our capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
We
monitor compliance with bank regulatory capital requirements, focusing primarily
on the risk-based capital guidelines. Under the risk-based capital method of
capital measurement, the ratio computed is dependent on the amount and
composition of assets recorded on the balance sheet and the amount and
composition of off-balance sheet items, in addition to the level of capital.
Generally, Tier 1 capital includes common stockholders’ equity our Series A
Preferred Stock, our junior subordinated debentures (subject to certain
limitations) less goodwill. Total capital represents Tier 1 plus the allowance
for loan and lease losses (subject to certain limits).
In
the
past three years, our primary sources of capital have been internally generated
operating income through retained earnings and our initial public
offering.
As of
September 30, 2007 and December 31, 2006, total stockholders’ equity was $175.4
million and $169.9 million, respectively.
In
addition, the following items also impacted the Company’s stockholders’
equity:
|
·
|
the
repurchase of 488,477 shares during 2006 in connection with a stock
repurchase program approved by the Board of Directors in October
2005,
which expired in October 2006;
|
|
·
|
the
exercise of 150,000, 56,450, 7,000, 250,862 and 4,000 stock options
in
February 2006, June 2006, September 2006, February 2007 and July
2007,
respectively; and
|
|
·
|
the
repurchase of 285,368 shares during the second and third quarter
of 2007
in connection with a stock repurchase program approved by the Board
of
Directors on May 31, 2007.
|
We
are
not aware of any material trends that could materially affect our capital
resources other than those described in the section entitled “
Risk
Factors,
”
in
our
most recent Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 16, 2007.
As
of
September 30, 2007, we and Eurobank both qualified as “well-capitalized”
institutions under the regulatory framework for prompt corrective action. The
following table presents the regulatory standards for well-capitalized
institutions, compared to our capital ratios for Eurobank as of the dates
specified:
|
|
|
Actual
|
|
For
Minimum Capital
Adequacy
Purposes
|
|
To
Be Well Capitalized
Under
Prompt Corrective
Action
Provision
|
|
|
|
|
Amount
Is
|
|
Ratio
Is
|
|
Amount
Must
Be
|
|
Ratio
Must
Be
|
|
Amount
Must
Be
|
|
Ratio
Must
Be
|
|
|
|
|
(Dollars
in thousands)
|
|
|
As
of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
$
|
223,782
|
|
|
11.01
|
%
|
$
|
≥
162,615
|
|
|
≥
8.00
|
%
|
|
N/A
|
|
|
|
|
|
Eurobank
.
|
|
|
206,888
|
|
|
10.18
|
|
|
≥
162,614
|
|
|
≥
8.00
|
|
|
≥
203,268
|
|
|
≥
10.00
|
%
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
|
198,360
|
|
|
9.76
|
|
|
≥
81,307
|
|
|
≥
4.00
|
|
|
N/A
|
|
|
|
|
|
Eurobank
|
|
|
181,466
|
|
|
8.93
|
|
|
≥
81,307
|
|
|
≥
4.00
|
|
|
≥121,961
|
|
|
≥
6.00
|
|
|
Leverage
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
|
198,360
|
|
|
7.97
|
|
|
≥
99,551
|
|
|
≥
4.00
|
|
|
N/A
|
|
|
|
|
|
Eurobank..................
|
|
|
181,466
|
|
|
7.29
|
|
|
≥
99,521
|
|
|
≥
4.00
|
|
|
≥124,401
|
|
|
≥
5.00
|
|
|
As
of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
$
|
216,673
|
|
|
11.25
|
%
|
$
|
≥
154,038
|
|
|
≥
8.00
|
%
|
|
N/A
|
|
|
|
|
|
Eurobank
.
|
|
|
198,179
|
|
|
10.29
|
|
|
≥
154,045
|
|
|
≥
8.00
|
|
|
≥
192,556
|
|
|
≥
10.00
|
%
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
|
197,366
|
|
|
10.25
|
|
|
≥
77,019
|
|
|
≥
4.00
|
|
|
N/A
|
|
|
|
|
|
Eurobank
|
|
|
178,871
|
|
|
9.29
|
|
|
≥
77,023
|
|
|
≥
4.00
|
|
|
≥
115,534
|
|
|
≥
6.00
|
|
|
Leverage
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
|
197,366
|
|
|
7.92
|
|
|
≥
99,679
|
|
|
≥
4.00
|
|
|
N/A
|
|
|
|
|
|
Eurobank..................
|
|
|
178,871
|
|
|
7.18
|
|
|
≥
99,637
|
|
|
≥
4.00
|
|
|
≥
124,546
|
|
|
≥
5.00
|
|
Liquidity
Management
Maintenance
of adequate core liquidity requires that sufficient resources be available
at
all times to meet our cash flow requirements. Liquidity in a banking institution
is required primarily to provide for deposit withdrawals and the credit needs
of
customers and to take advantage of investment opportunities as they arise.
Liquidity management involves our ability to convert assets into cash or cash
equivalents without incurring significant loss, and to raise cash or maintain
funds without incurring excessive additional cost. For this purpose the bank
choose to maintain a minimum target liquidity referred as “Core Basis Surplus”
and defined as the portion of the bank’s funds maintained in short term
investments and other marketable assets, less the liabilities portions secured
by any of these assets to cover a portion of time deposits maturing in 30 days
and a portion of the non-maturity deposits, expressed as a percentage of total
assets. This Core Basis Surplus number generally should be positive, but it
may
vary as our Asset and Liability Committee decides to maintain relatively large
or small liquidity coverage, depending on its estimates of the general business
climate, its expectations regarding the future course of interest rates in
the
near term, and the bank's current financial position. Two additional factors
that will impact the magnitude of the Core Basic Surplus target are: 1) the
available borrowing capacity at the Federal Home Loan Bank (FHLB), as
represented by qualifying loans on the balance sheet, and 2) unused brokered
time deposits’ capacity relative to the bank’s related policy limit on
acceptable levels of these deposits. For this reason, current FHLB advances
and
brokered time deposits availability are part of the bank's liquidity
presentation. Our liquid assets as of September 30, 2007 and December 31, 2006
totaled approximately $208.1 million and $300.4 million, respectively. Our
Core
Basis Surplus liquidity level was 5.0% and 8.9% as of the same periods,
respectively. As of December 31, 2006, our Core Basic Surplus was impacted
by an
increase in interest bearing deposits and short-term investments in connection
with the approximately $50.1 million in FHLB and FNMA debt securities we sold
during that month. The funds generated thru this sale of securities were used
to
finance a portion of the loans origination during 2007. The decrease in our
Core
Basic Surplus liquidity level indicated above was mainly attributable to the
reduction in interest-bearing deposits and short-term investments previously
mentioned, and
the
use
of investment securities as collateral for public funds deposits
.
As
mentioned above, in addition to the normal influx of liquidity from core deposit
growth, together with repayments and maturities of loans and investments, we
utilize FHLB advances and brokered and out-of-market certificates of deposit
to
meet our liquidity needs. Other funding alternatives are borrowing lines with
brokers and the Federal Reserve Bank of New York, and unsecured lines of credit
with correspondent banks.
Advances
from the FHLB are typically secured by qualified residential and commercial
mortgage loans, and investment securities. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range
of
maturities. Depending on the program, limitations on the amount of advances
are
based either on a fixed percentage of an institution’s net worth or on the
FHLB’s assessment of the institution’s creditworthiness. As of September 30,
2007, we had FHLB borrowing capacity of $44.6 million, including FHLB advances
and securities sold under agreements to repurchase. Also, we had $357.1 million
in pre-approved repurchase agreements with major brokers and banks totaling
$357.1 million, subject to acceptable unpledged marketable securities available
for sale. In addition, Eurobank is able to borrow from the Federal Reserve
Bank
using securities as collateral. Eurobank also maintains pre-approved overnight
borrowing lines with correspondent banks, which provided additional short-term
borrowing capacity of $10.0 million at September 30, 2007.
In
order
to participate in the broker time deposits market, we must be categorized as
“well capitalized” under the regulatory framework for prompt corrective action
unless we obtain a waiver from the Federal Deposit Insurance Corporation.
Restrictions on our ability to participate in this market could place
limitations on our growth strategy or could result in our participation in
other
more expensive funding sources. In case of restrictions, our expansion
strategies would have to be reviewed to reflect the possible limitation to
funding sources and changes in cost structures. As of September 30, 2007, we
and
Eurobank both qualified as “well-capitalized” institutions under the regulatory
framework for prompt corrective action. We do not foresee any changes in our
capital ratios that would restrict our ability to participate in the brokered
deposit market.
Our
minimum target Core Basis Surplus liquidity ratio established in our
Asset/Liability Management Policy is 2.0%. Our liquidity demands are not
seasonal and all trends have been stable over the last three years. We are
not
aware of any trends or demands, commitments, events or uncertainties that will
result in or that are reasonably likely to materially impair our liquidity.
Generally, financial institutions determine their target liquidity ratios
internally, based on the composition of their liquidity assets and their ability
to participate in different funding markets that can provide the required
liquidity. In addition, the local market has characteristics, which make it
impossible to compare our liquidity needs and sources to the liquidity needs
and
sources of our peers in the rest of the nation. After careful analysis of the
diversity of liquidity sources available to us, our asset quality and the
historic stability of our core deposits, we have determined that our target
liquidity ratio is adequate.
Our
net
cash inflows from operating activities for the nine-month period ended September
30, 2007 were $36.3 million, compared to cash inflows of $56.3 million from
operating activities for the year 2006. During the nine-month period ended
September 30, 2007 and the year 2006, the net operating cash inflows resulted
primarily from
an
increase in accrued interest payable, accrued expenses and other liabilities,
and a net decrease in other assets
.
Our
net
cash outflows from investing activities for the nine-month period ended
September 30, 2007 were $86.3 million, compared to cash outflows of $137.7
million from investing activities for the year 2006.
The
net
investing cash outflows experienced during the nine-month period ended September
30, 2007 and the year 2006 were primarily due to the growth in our loan and
lease portfolio.
Our
net
cash inflows from financing activities for the nine-month period ended September
30, 2007 were $44.2 million, compared to cash inflows of $86.0 million from
financing activities for the year 2006. During the nine-month period ended
September 30, 2007 and the year 2006, the net financing cash inflows were
primarily provided by the net increase in brokered deposits.