ITEM
1.
Business.
Overview
EuroBancshares,
Inc. (the “Company,” “we,” “us,” “our,” or “ EuroBancshares” hereafter) is 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. As of December 31, 2007, we had, on a consolidated basis, total
assets of $2.8 billion, net loans and leases of $1.8 billion, investment
securities of $751.3 million, total deposits of $2.0 billion, and stockholders’
equity of $179.9 million.
Eurobank
is a full-service Puerto Rico commercial bank with 26 branch network. We believe
our branches are located within a convenient drive of approximately 80% of
the
population of Puerto Rico. The Bank is engaged in substantially all of the
business operations customarily conducted by independent financial institutions
in Puerto Rico and the United States, including the acceptance of checking,
savings and time deposits and the making of commercial and consumer loans,
residential mortgage loans, real estate loans, lease financing, and other
installment and term loans. Eurobank also offers trust and wealth management
services. As a traditional commercial bank, Eurobank earns interest on loans,
leases and investment securities that are funded by customer deposits,
borrowings, retained earnings and equity. The difference between the interest
received and the interest paid has historically comprised the majority of our
earnings.
We
are a
relationship-driven financial services company focused on providing personalized
banking services. We established our position in the small and middle market
business community as a secondary alternative to our larger competitors, who
we
believed were under-serving the market. Today, we compete head to head with
all
Puerto Rico commercial banks for the primary banking relationship of these
customers. Our personalized customer service and experienced and focused
management team are at the core of our strategy. While we have grown in size,
we
remain focused on providing services with a personal touch. Additionally, we
have sought to further develop our footprint throughout the entire island by
opening branches along the main vehicular arteries that circle Puerto
Rico.
Our
niche
is to provide one-on-one services to small and mid-sized commercial businesses
in Puerto Rico. Most of these businesses are involved in service industries,
wholesale and retail distribution, dairy farming, construction, manufacturing,
transportation and professional services, and have annual sales between $2.0
and
$40.0 million. However, we also provide responsive customer service and
convenient banking products to smaller companies with sales ranging from
$500,000 to $2.0 million, consisting primarily of lawyers, healthcare providers,
CPAs, engineers, small contractors and other professionals. While we do not
mass
market to the retail segment, we do provide retail banking services to the
owners and families of our targeted commercial and small business customers,
their employees and individuals who reside or work near our branch offices.
These customers are usually also depositors of Eurobank. We seek to provide
all
of our customers with quick, responsive service and foster a culture in which
customers are valued and respected.
We
target
experienced real estate developers and provide them with acquisition,
development, and construction loans. We place particular emphasis on
single-family homes, townhouses, and walk-up developments throughout the Island.
We also finance commercial real estate development and construction projects,
particularly if they are owner-occupied, ideally limiting our maximum credit
exposure between $7.5 million and $10.0 million for these types of credits.
Under the tradename “EuroMortgage,” we support these activities by providing
financing to the purchasers of these real estate units. In addition, through
a
staff of salespeople, today we also provide mortgages to our branch customers
and the general public. On a selective basis, we provide financing to
owner-occupied properties and to a lesser extent to income producing
properties.
Under
the
tradename “EuroLease,” we provide open-end lease financing to which the lessee
is responsible for the residual value, if any, of the leased asset. This short
to medium-term fixed rate financing blends well with our primarily floating
rate
commercial loan portfolio.
Long-term,
it is our objective to leverage our relationships with our primary customers
by
cross-selling a complete array of banking products and services directly or
through third-party providers. Through our trust department and EuroSeguros,
we
seek to assist our customers with a full array of wealth management products
and
services.
Our
Strategic Plan
Our
primary business objectives are to enhance our profitability and to establish
Eurobank as the premier small and middle market commercial bank in Puerto Rico.
Our core customers are small and mid-sized businesses, real estate development
companies and the owners, executives and employees of these businesses. We
specifically target customers who want to deal directly with people they know
and trust. As convenience remains an overriding factor in customer choice,
we
have continued to establish de novo branches throughout the island to provide
such convenience, and at the same time we have continued to enhance our
technology platform.
We
have
developed a strategy that focuses on providing superior service through
highly-qualified and relationship-oriented employees who are committed to their
respective communities. Through this strategy we intend to grow our business,
expand our customer base and improve profitability. The key elements of our
strategy are:
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Focus
on Our Targeted Customers.
We
focus our time and resources on the following types of customers:
small
and mid-sized businesses, real estate development companies and the
owners, executives and employees of these businesses. In this regard,
we
seek to leverage our business banking relationships by cross-selling
to
the personal financial needs of these business owners, executives
and
employees.
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Provide
Superior and Convenient Service to Our Customers.
We
strive to provide superior customer service through convenient access
to
Eurobank’s branches and personalized relationship banking. We have 26
branch offices strategically located within a convenient drive of
approximately 80% of the island’s population. Under our business model, we
provide each commercial customer with its own relationship manager
for all
its banking needs. These relationship managers and our executive
management team regularly visit customers at their places of
business.
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Hire
and Retain Well-Trained and Qualified Employees.
We
are continuing to grow our franchise by providing superior customer
service through committed, qualified and relationship-oriented employees.
We seek to hire experienced and qualified employees that prefer our
relationship banking approach. These employees are specifically incited
through our compensation program to leverage our commercial relationships
by cross-selling our products and services to the owners, executives
and
employees of our business
customers.
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Use
the Lease Financing Business to Mitigate Interest Rate
Risk.
We
use our lease financing business to mitigate our interest rate risk
by
offsetting the variable rate nature of our commercial loan portfolio
with
a short to medium-term fixed rate
product.
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De
Novo Branching and Acquisitions.
We
seek to increase our presence throughout the island through selective
acquisitions and the opening of de novo branches in attractive locations.
Our de novo expansion outside of the San Juan metropolitan market
has
followed Puerto Rico’s primary traffic arteries to areas that have been
growing.
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Maximize
Growth of our International Banking Entities (IBE).
Because EBS Overseas, Eurobank’s IBE subsidiary, and EBS International
Bank, a division of Eurobank, are generally not subject to federal
or
Puerto Rico income tax, we will seek to maximize the growth of these
IBEs
as interest rates and applicable law
permit.
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Our
De Novo Branch and Acquisition Strategy
Our
growth strategy is concentrated on increasing our banking presence throughout
the island of Puerto Rico. Our expansion has been the result of internal growth,
acquisitions and the opening of de novo branch offices. Consistent with our
operating philosophy and growth strategy, we regularly evaluate opportunities
to
acquire other banks or bank branches, expand our market coverage and share
through de novo branching and enhance our product and service offerings.
Eurobank’s expansion out of the San Juan metropolitan area has followed Puerto
Rico’s primary traffic arteries to new locations poised for growth. We believe
that the Puerto Rico banking environment, which is dominated by large banks,
has
afforded us a continuing opportunity to gain new customer relationships and
to
expand existing relationships. The growth in our branch network has expanded
our
presence throughout the Island and increased our customer base. Each branch
now
has the ability to sell not only traditional products such as commercial credit,
leasing, construction, mortgages, consumer credit and personal secured loans,
but also to cross-sell our entire product line, including insurance through
EuroSeguros, and investment products through our trust department account
representatives.
De
Novo Branches
Between
2005 and 2007, we opened six new banking offices in Aguadilla, Canóvanas,
Fajardo, Cayey, Cabo Rojo and Eurobank Plaza, located at our new
headquarters. In July 2007, we closed the branch located at Luquillo, Puerto
Rico. Our branches are located along the major vehicular arteries that encircle
the Island, within a convenient drive of approximately 80% of the population
of
Puerto Rico.
Mergers
and Acquisitions - BankTrust
On
May 3,
2004, we acquired all of the capital stock of BankTrust; a Puerto Rico chartered
commercial bank, through the merger of BankTrust with and into Eurobank. This
was our latest material acquisition. The aggregate purchase price for the
capital stock of BankTrust was $23.4 million, and consisted of the issuance
of
683,304 shares of our common stock, 430,537 shares of our Series A Preferred
Stock, and $6.5 million in cash. There were no changes in our Board of Directors
or our senior management team as a result of the BankTrust acquisition. We
funded a portion of the purchase price with proceeds we received from the
issuance of 733,316 shares of our common stock at $8.13 per share in a private
placement of our common stock to our existing stockholders and option holders.
In connection with the private placement and the acquisition of BankTrust,
our
Board of Directors engaged an independent third-party financial advisor, Feldman
Financial Advisors, Inc., to determine the fairness, from a financial point
of
view, to our stockholders of the merger consideration paid to BankTrust’s
stockholders and the terms of the private placement. The acquisition was
accounted for using the purchase method of accounting under accounting
principles generally accepted in the United States of America.
BankTrust
provided a broad range of financial products and services to its customers,
including commercial, mortgage and personal loans, financial leases, checking
and savings accounts, asset management and trust services. BankTrust operated
five branch offices - two were located in San Juan and the other three were
located in Guaynabo, Mayagüez and Ponce. BankTrust also had one loan production
office in San Juan and operated an IBE under the name “BT International.” As of
June 1, 2004, we had closed four of the five BankTrust branches, as well as
the
loan production office, and consolidated these operations into our existing
branch network. Eurobank continued to operate BT International as a division
of
Eurobank under the tradename of EBS International Bank and the Guaynabo branch
office as a branch of Eurobank. On the closing date, the estimated fair value
of
the assets acquired was $522.0 million and the estimated fair value of the
deposits and other liabilities assumed was $492.9 million.
Products
and Services
Eurobank
is engaged in substantially all of the business operations customarily conducted
by independent financial institutions in Puerto Rico, including the acceptance
of checking, savings and time deposits and the making of commercial and consumer
loans, mortgage loans, real estate loans, lease financing, and other installment
and term loans. Eurobank also offers trust and wealth management services.
We
provide our customers with internet banking, electronic funds transfers through
ACH services, cash management, vault services, and loan and deposit sweep
accounts. While we offer a wide variety of financial services to our customers,
our primary products and services are grouped in the following categories:
commercial banking, leasing (“EuroLease”), mortgage banking (“EuroMortgage”),
and trust and wealth management. In addition, we provide automobile, property
and casualty, credit life, and guaranteed auto protection insurance to customers
in our market area through our other wholly-owned subsidiary, EuroSeguros.
The
following provides a summary description of our core products and
services:
Commercial
Banking
Eurobank
markets commercial banking products and services primarily to small and
mid-sized businesses located in Puerto Rico. Commercial banking products and
services offered include commercial loans, residential construction loans and,
to a lesser extent, consumer credit and personal secured loans, as well as
a
broad range of deposit products and other non-deposit banking services,
including internet banking and cash management services tailored to meet the
needs of these businesses.
While
we
market a wide range of commercial banking products and services, emphasis is
placed on our loan products. Each commercial lending branch has senior
management with extensive lending experience. These managers exercise
substantial authority over credit presentation and pricing initiatives, subject
to centralized loan approvals for all unsecured credits and secured credits
when
exceeding individual manager’s limit, which range generally from $50,000 to
$400,000. This decentralized management approach for secured credits, coupled
with continuity of service by the same staff members, enables us to develop
long-term customer relationships, maintain high quality service and respond
quickly to customer needs. The centralized approval process, however, provides
credit control. We believe that our emphasis on local relationship banking,
together with a conservative approach to lending, are important factors in
our
success and growth.
We
centralize most credit and support functions in order to achieve credit quality
consistency and cost efficiencies in the delivery of products and services
by
each banking office. The central office provides services such as data
processing, bookkeeping, accounting, treasury management, credit approval,
loan
review, compliance, risk management and internal auditing to enhance our
delivery of quality service. We also provide overall direction in the areas
of
credit policy and administration, strategic planning, marketing, investment
portfolio management and other financial and administrative services. The branch
offices work closely with our central office to develop new products and
services needed by our customers and to introduce enhancements to existing
products and services.
Commercial
and Construction Loans
In
the
commercial banking area, Eurobank focuses on providing commercial and
construction loans to local businesses. These businesses generally have annual
sales ranging from $2.0 million to $40.0 million, and financing requirements
between $1.0 million and $10.0 million.
At
December 31, 2007, commercial loans totaled $1.1 billion, or 58.99% of our
gross
loan and lease portfolio, which included $792.3 million in commercial loans
secured by real estate, some or which were granted with
loan-to-values exceeding 100% and additional forms of collateral or guaranties
were obtained
.
Commercial loans include lines of credit and commercial term loans to finance
operations and to provide working capital for specific purposes, such as to
finance the purchase of assets, equipment or inventory. Since a borrower’s cash
flow from operations is generally the primary source of repayment, our analysis
of the credit risk focuses heavily on the borrower’s debt repayment
capacity.
Lines
of
credit are extended to businesses based on the financial strength and integrity
of the borrower, generally have a maturity of one year or less, and can be
secured or unsecured. Secured lines of credit are primarily collateralized
by
real estate, accounts receivable and inventory. Such lines of credit bear an
interest rate that floats with our base rate, the prime rate, LIBOR or another
established index.
Commercial
term loans are typically made to finance the acquisition of fixed assets,
provide permanent working capital or to finance the purchase of businesses.
Commercial term loans generally have terms from one to five years. They may
be
collateralized by the asset being acquired or other available assets and bear
interest rates that either float with Eurobank’s base rate, prime rate, LIBOR or
another established index or is fixed for the term of the loan.
At
December 31, 2007, construction loans totaled $203.3 million, or 10.96% of
our
gross loan and lease portfolio. We seek to market our construction loans to
experienced developers who develop residential units throughout the island
and
whose peak maximum credit needs for a particular project generally are between
$7.5 million and $10.0 million. Construction loans generally have terms of
18
months, with options to extend for additional periods to complete construction
and sale of the units. We usually require a 20.0% equity capital investment
by
the developer and loan-to-value ratios of not more than 80.0% of anticipated
completion value.
Over
the
last four years, our commercial and construction loans have grown 25.38% on
a
compounded basis. The following table shows end of period balances of commercial
and construction loans for the periods indicated below:
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As
of December 31,
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
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|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
$1,298,183
|
|
$
|
1,160,308
|
|
$
|
967,049
|
|
$
|
786,438
|
|
$
|
525,251
|
|
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 over
individual
manager’s limit, which range generally from $50,000 to $400,000
;
(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
Although
Eurobank focuses on marketing commercial loans to local businesses, it also
provides consumer credit and personal secured loans to the owners and employees
of these businesses. At December 31, 2007, consumer loans totaled $58.5 million,
or 3.15% of our gross loan and lease portfolio, which included a boat financing
portfolio of $35.0 million and $780,000 in consumer loans secured by real
estate. Our consumer loan portfolio is subject to certain risks, including:
(1)
amount of credit offered to consumers in the market; (2) interest rate
increases; and (3) consumer bankruptcy laws which allow consumers to discharge
certain debts. We attempt to reduce the exposure to such risks through the
direct approval of all consumer loans by: (1) reviewing each loan request and
renewal individually; (2) utilizing a centralized approval system for loans
in
excess of individual manager’s limit, which range generally from $10,000 to
$100,000; (3) strictly adhering to written credit policies; and (4) conducting
an independent credit review.
Leasing
Activities
We
entered the leasing business in order to assist us in managing our interest
rate
risk. We determined that a short to medium-term fixed rate product, such as
lease financings, was needed to mitigate our interest rate risk resulting from
our high volume of variable rate commercial loans.
Under
the
tradename “EuroLease,” Eurobank offers open-ended leases pursuant to which the
lessee is responsible for the residual value of the leased unit. At December
31,
2007, we held $385.4 million in leases, representing 20.77% of our gross loan
and lease portfolio. During 2007, approximately 97.03% of all originations
were
automobile leases. The remaining originations were primarily medical equipment
and construction equipment leases. While the granting of leases is governed
by
many aspects of our general credit policies and procedures, due to the nature
of
the exposure, additional specific parameters are applied to leases. Our
automobile leasing is done by way of finance leases, where the lessee is
responsible for any residual at the end of the lease term. Practically all
automobile leasing in Puerto Rico is done in this manner and the large majority
of banks compete in this market. Although we believe that the risk in this
product is generally higher than commercial lending, we believe the higher
risks
are acceptable due to the obligation of the lessee for the residual value and
the numerous risk mitigation parameters that we utilize in the credit
underwriting process. All lease requests are reviewed by our credit department
and are subjected to numerous credit tests. There are varying levels of credit
approval authority within the department, although none is as high as the
approval authority of the senior leasing officer, who has the authority to
approve aggregate credit extensions of up to $175,000 to any one borrower.
We
apply the same “total to one borrower” concept in the commercial lending area as
well. Additional risk mitigation is practiced through a series of parameters
and
controls, which include but are not limited to, minimum dollar amounts on new
vehicle leases, maximum amounts on residuals, maximum terms, obligatory
insurance, minimum income parameters, maximum debt service-to-income parameters,
certain credit history parameters, down payments and employment history
parameters.
On
a
monthly basis, we review the existing lease portfolio to determine the repayment
performance of borrowers displaying subprime 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 includes 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 2007, the analysis revealed there was a
similar repayment performance for both categories. This review
enables us to have a better monitoring system and control sub-prime
borrowers and to reduce risk of repossessions and future losses.
During
2007, approximately 62% of our new automobile leases were financed on a no
residual value basis because the automobiles would be transferred to the lessee
at the end of the lease term. For those that do have a residual value, the
lessee is contractually responsible for the full residual amount at the end
of
the lease term. We do not have the risk of fluctuations in automobile values
relative to residual value. Instead, our risk is a credit risk regarding whether
the lessee will perform on its obligation to purchase the automobile at the
end
of the contract at residual value. In addition, in some instances EuroLease
will
refinance the automobile purchased at the residual value.
New
automobile leases are offered for terms of up to 72 months. Leases with terms
of
72 months will be financed based on no residual value. Lessees may also choose
a
60-month lease term, in which case we offer financing with a maximum of a 35%
residual value. This higher residual value product is usually offered mostly
on
high-end European and Japanese automobiles based on historical used automobile
resale values.
Under
current Puerto Rican law, the lessee is deemed to be the title holder of a
leased automobile and therefore is responsible for all tort liability associated
with the operation and possession of the automobile.
We
have
developed procedures designed to facilitate our lease financing business. Our
account executives generate the leases at the automobile dealer level. We are
selective with respect to our customers, and are aided in this selection by
referrals from the automobile dealers. We also market this service to our
targeted customers. While most of our leases are for automobiles, in some cases
we have been willing to provide equipment lease financing for our commercial
customers.
We
believe the collection process is an integral component to a successful leasing
business. Our collection efforts with respect to leases start 10 days after
the
due date of each lease.
A
collections staff of ten internal collectors and ten outside
collectors is managed by a Collections Department Head, one Collections
Manager and two supervisors. To reinforce outside
collectors, additional resources are obtained by hiring external collection
agencies that provide support on certain accounts.
Our
internal collectors are responsible for all efforts to collect on leases under
30 days past due. If a customer cannot be reached by phone, the account is
then
assigned to the outside collector’s staff. When the account reaches 60 days past
due, repossession efforts are started. If a customer does not deliver the
automobile voluntarily, the case is referred to our outside collections lawyers.
Most of our repossessions are voluntary. Court proceedings for repossession
take
approximately 60 days. Once repossessed, vehicles and equipment are initially
recorded at the lower of net realizable value or book value at the date of
repossession, establishing a new cost basis. Any resulting loss is charged
to
the allowance for loan and lease losses. A valuation of repossessed assets
is
made quarterly after its repossession. Additional declines in value after
repossession, if any, are charged to current operations. Gains or losses on
disposition of repossessed assets and related maintenance expenses are included
in current operations.
The
following table sets forth the dollar volume of leases originated by Eurobank
and the end of period balances of leases for the periods indicated
below:
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|
|
As
of or for the Year Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
(In
thousands)
|
|
|
Originations
|
|
$
|
122,909
|
|
$
|
147,352
|
|
$
|
230,985
|
|
$
|
257,808
|
|
$
|
185,321
|
|
|
End
of period balance
|
|
$
|
385,390
|
|
$
|
443,311
|
|
$
|
487,863
|
|
$
|
459,251
|
|
$
|
315,935
|
|
Eurobank
intends to maintain its lease origination volume at current levels and focus
on
improving the overall quality of the portfolio and service to its network of
dealers. In doing so, we also intend to provide dealers, on a selective basis,
with floor plan financing. We seek to avoid an excess concentration of leases
as
a percentage of interest-earning assets. Typically, we retain the right to
service the leases we sell. During 2005, we sold approximately $29.9 million
in
leases. There was no sale of lease financing contracts during 2006 and
2007.
Mortgage
Banking
Under
the
tradename “EuroMortgage,” Eurobank offers Federal National Mortgage Association,
or FNMA, Veterans Affairs, or VA, and Federal Housing Administration, or FHA,
and Freddie Mac loans, as well as conforming and non-conforming mortgage loans.
We are an approved seller/servicer for Freddie Mac. Eurobank has continued
to
make inroads in the market by providing for the efficient and expeditious
turnaround of new loan applications and by establishing certain strategic
relationships that allow access to secondary mortgage markets on a best price
basis. At December 31, 2007, residential mortgage loans, excluding loans held
for sale, totaled $106.9 million, representing 5.76% of our gross loan and
lease
portfolio.
Our
targeted market for mortgage banking is the financing of primary residential
properties on the Island. We also provide mortgage banking services to our
retail customers and to the owners, executives and employees of our targeted
commercial customers. In addition, our salespeople engage in marketing and
direct selling efforts to the general community and the units financed by our
construction lending department. All mortgages originated by Eurobank are
fixed-rate mortgages with a maximum term of 30 years. Part of the mortgage
loans
we originate are sold to other financial institutions with servicing released.
We have been authorized by Freddie Mac to create mortgage loan pools to be
sold
in the secondary market. However, as of December 31, 2007, we had not created
any such pool. It is our intention to create such pools in the
future.
The
following table sets forth the dollar volume of residential mortgage
originations by Eurobank and the end of period balances of residential mortgages
for the periods indicated below:
|
|
|
As
of or for the Year Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
(In
thousands)
|
|
|
Originations
|
|
$
|
56,975
|
|
$
|
55,097
|
|
$
|
21,112
|
|
$
|
28,028
|
|
$
|
53,880
|
|
|
End
of period balance
|
|
$
|
106,947
|
|
$
|
76,277
|
|
$
|
44,841
|
|
$
|
51,730
|
|
$
|
15,941
|
|
Our
portfolio of mortgage loans is subject to certain risks, including: (1) a
possible downturn in the Puerto Rico economy affecting real estate values;
(2)
interest rate increase; (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 loans in excess of $500,000; (3) strictly
adhering to written loan policies; and (4) conducting an independent credit
review.
Trust
and Wealth Management
Our Trust
and Wealth Management Group, a division of Eurobank, was established to
develop and cross-sell services related to the administration of retirement
benefits plans, personal and corporate trust and wealth management services
to
the owners, executives and employees of our customer base. As of December 31,
2007, Eurobank had approximately $299.4 million in trust assets under
management.
We
offer
a full array of investment products and services guided by an experienced and
specialized team focused on serving our customers’ financial needs. This is part
of our strategy of creating financial centers in which each customer may access
a variety of integrated financial products and services. Investment products
are
offered through an association with National Financial Services, LLC, a
registered broker-dealer. Our services include financial planning, estate
planning, settlement, and investment management services to individuals and
corporate customers. During 2007, 2006 and 2005, we traded approximately $37.3
million, $17.4 million and $36.2 million, respectively, in investment securities
for our customers.
Municipal
Finance
On
September 21, 2007, Eurobank, our wholly-owned banking subsidiary, became a
registered Bank Municipal Dealer pursuant to section 15B (a)(2) of the
Securities Exchange Act of 1934. As a result of this
registration, Eurobank Municipal Finance Division, a division of Eurobank,
can
participate in the underwriting, trading and sales of municipal securities,
and
also provide financial advisory and consulting services for issuers in
connection with the issuance of municipal securities, among other related
activities.
On
January 2, 2008, Eurobank entered into a Joint Account Agreement with
Oppenheimer & Co. Inc., a New York corporation (“Oppenheimer”), for the
purpose of jointly pursuing underwriting and other types of engagements with
the
Commonwealth of Puerto Rico and its municipalities and public corporations.
This
agreement, effective until December 31, 2008 and automatically renewable for
one-year terms thereafter, calls for Eurobank and Oppenheimer to participate
in
the distribution of Puerto Rico bonds, as co-managers within the syndicate
established for these purposes by the Puerto Rico Government Development Bank.
During the term of the agreement, Eurobank and Oppenheimer will share fees
and
commissions generated from the assignments on a transaction-by-transaction
basis.
Insurance
EuroSeguros
primarily offers automobile, title, property and casualty, and guaranteed auto
protection insurance to customers in our market area. Also, it offers credit
life insurance for credit cards, residential mortgage and personal loans.
EuroSeguros represents several insurance companies in Puerto Rico and is
licensed and regulated by the Office of the Commissioner of Insurance of Puerto
Rico.
EuroSeguros’
goal for the year 2008 is to continue working closely with Eurobank’s mortgage
customers, leasing customers and branch professionals, while continuing to
enhance personalized service to all of these customers.
International
Banking Entities
We
operate EBS Overseas, Inc., an IBE subsidiary of Eurobank. We also have an
IBE
that operates as a division of Eurobank under the name EBS International Bank.
This IBE was acquired under the name of BT International in connection with
the
acquisition of BankTrust and changed to EBS International Bank on September
27,
2005. We have continued to operate EBS International Bank as a division of
Eurobank and do not have immediate plans to transfer its assets to EBS Overseas,
Inc.
IBEs
are
limited under the IBE Act with respect to the types of activities they can
undertake. In general, IBEs may accept deposits or borrow money from other
IBEs
and from “foreign persons.” For purposes of the IBE Act, a “foreign person” is
defined as anyone who is not a resident of Puerto Rico. IBEs are also permitted
to engage in any activity that is financial in nature outside of Puerto Rico
that is permissible for a bank holding company or a foreign office or subsidiary
of a United States bank under applicable United States law. Typically, we borrow
funds in the United States in the form of repurchase obligations or broker
deposits (considered foreign under the IBE Act) and invest those funds primarily
in U.S. Government Sponsored Agencies and obligations issued by U.S.
Corporations, Mortgage Back Securities issued or guaranteed by U.S. Government
Agencies, United States Treasury Obligations, U.S. Government Agencies
Obligations, or U.S. Government Sponsored Agencies Obligations. The income
earned from this activity is tax exempt. For more information regarding the
regulation of IBEs, see the section of this Annual Report on Form 10-K captioned
“Supervision
and Regulation — International Banking Center Regulatory
Act.”
EBS
Overseas, Inc. is authorized to invest in notes and bonds issued by the
U.S. government, the Commonwealth of Puerto Rico, other foreign governments
and their agencies, and U.S. and foreign corporations. As of December 31, 2007,
EBS Overseas’ investment portfolio consisted of the following: $162.0 million,
or 24.70%, in mortgage-backed securities issued or guaranteed by government
or
government sponsored agencies, $114.9 million, or 17.52%, in
U.S. government agency obligations, $371.6 million, or 56.64%, in
mortgage-backed securities issued by U.S. corporations, $4.7 million, or
0.72%, in Puerto Rico Public Authorities, and $2.7 million, or 0.42%, in other
debt securities.
We
have
structured EBS Overseas’ investment portfolio in an effort to improve our net
interest margin in the future. The maturities on debt obligations in EBS
Overseas’ investment portfolio range from 3 to 5 years with an estimated average
maturity as of December 31, 2007 of 0.8 years. Except for approximately
$4.9 million in a hybrid annual, one year LIBOR adjustable rate,
mortgage-backed security with an original estimated average maturity of 11.0
years, the original estimated average maturities of mortgage-backed securities
in the portfolio range from 2 to 7.5 years, with an average maturity as of
December 31, 2007 of approximately 5.8 years.
As
of
December 31, 2007, EBS Overseas had total assets of approximately
$687.2 million, repurchase obligations of approximately
$273.0 million, borrowings from EBS International Bank of approximately
$355.4 million and stockholders’ equity of approximately
$56.0 million. Further, as of December 31, 2007, EBS International Bank had
total assets of approximately $565.1 million, deposits of approximately
$356.7 million, and repurchase agreements of approximately
$203.4 million.
Eurobank
Statutory Trust I and II
On
November 11, 2001, Eurobank Statutory Trust I, a special purpose statutory
trust
subsidiary of EuroBancshares, was formed for the purpose of issuing $25.0
million in trust preferred securities, which were issued on December 18,
2001
with a
liquidation amount of $1,000 per security, with option to redeem in five
years
.
In an
effort to improve our net interest margin, on December 18, 2006, these trust
preferred securities were redeemed resulting in the write-off of approximately
$626,000 in unamortized placement costs.
On
December 10, 2002, Eurobank Statutory Trust II, a special purpose statutory
trust subsidiary of EuroBancshares was formed for the purpose of issuing $20.0
million in trust preferred securities, which were issued on December 19, 2002.
On
March
1, 2005 the Federal Reserve Board adopted the final rule that allows the
continued limited inclusion of trust-preferred securities in the Tier 1 capital
of bank holding companies (BHCs). Under the final rule, trust preferred
securities and other restricted core capital elements are subject to stricter
quantitative limits. The Federal Reserve Board’s final rule limits restricted
core capital elements to 25% of all core capital elements, net of goodwill
less
any associated deferred tax liability. Amounts of restricted core capital
elements in excess of these limits generally may be included in Tier 2 capital.
The final rule provides a five-year transition period, ending March 31, 2009,
for application of the quantitative limits.
For
more
detail on notes payable to statutory trusts please refer to
“Note
16 - Notes Payable to Statutory Trusts”
to our
consolidated financial statements.
Market
We
consider our primary market area to be the island of Puerto Rico. We serve
this
market through our main office and branches in the greater metropolitan area
of
San Juan and our branches strategically located within a convenient drive of
approximately 80% of the island’s population. Puerto Rico is the fourth largest
of the Caribbean Islands and is located approximately 1,100 miles southeast
of
Miami. It is approximately 100 miles long and 35 miles wide.
Puerto
Rico came under United States sovereignty in 1898 and obtained commonwealth
status in 1952. Puerto Ricans have been citizens of the United States since
1917. The United States and Puerto Rico share a common defense, market and
currency. The Commonwealth of Puerto Rico exercises virtually the same control
over its internal affairs as do the fifty states. Most federal taxes, except
those such as Social Security taxes which are imposed by mutual consent, are
not
levied in Puerto Rico. No federal income tax is collected from Puerto Rico
residents on income earned in Puerto Rico, except for certain federal employees
who are subject to taxes on their salaries. According to the
United
States Census Bureau
,
the
population of Puerto Rico was 3.8 million in 2000, compared to 3.5 million
in
1990.
As
of
2006, the population of Puerto Rico was estimated at 3.9 million, of which
approximately one third lives within the San Juan metropolitan
area.
The
economy of Puerto Rico is closely linked to that of the United States. As such,
factors affecting the United States economy usually have a significant impact
on
the performance of the Puerto Rico economy. These include exports, direct
investment, the amount of federal transfer payments, the level of interest
rates, the level of oil prices, and the rate of inflation and tourist
expenditures.
Between
May 1 and May 17, 2006, Puerto Rico experienced a partial government shutdown
caused by the inability of the Legislature and Governor to agree on a budget,
which resulted in an estimated $740 million budget shortfall. This government
shutdown forced the closure of approximately 43 public agencies, including
Puerto Rico’s public schools, leaving an estimate of 90,000 government employees
out of work. In response to this economic crisis, several bills were approved
by
the Puerto Rico legislature
to
impose additional taxes, some of which were applicable to the banking industry,
resulting in an increase in our effective tax rate. For more information
relating to the risks surrounding our economic environment and the additional
taxes imposed to the banking industry, see the sections captioned
“Risks
Relating to the Economic Environment”
and
“
Provision
for Income Taxes”
in Item
1A - Risk Factors and Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations, respectively, of this Annual Report on
Form
10-K.
The
dominant sectors of the Puerto Rico economy are manufacturing and services.
The
manufacturing sector has undergone fundamental changes over the years as a
result of increased emphasis on higher wages, high technology industries, such
as pharmaceuticals, biotechnology, electronics, computers, microprocessors,
professional and scientific instruments and certain high technology machinery
and equipment. The services sector, including finance, insurance, real estate,
wholesale and retail trade and tourism, also plays a major role in the economy.
It ranks second only to manufacturing in contribution to the gross domestic
product and leads all sectors in providing employment. The other material
sectors of the Puerto Rican economy include government, transportation and
agriculture.
As
of
December 31, 2007, there were 13 FDIC-insured commercial bank and trust
companies operating in Puerto Rico. Total assets of these institutions as of
December 31, 2007 were $98.6 billion. As of December 31, 2007, there were 35
International Banking Entities operating in Puerto Rico licensed to conduct
offshore banking transactions, with total assets of $75.8 billion. As of
December 31, 2007, Eurobank held 3.23% of the deposits held by FDIC insured
financial institutions in Puerto Rico.
Environmental
Compliance
In
addition to our obligations under environmental laws with respect to property
that we own, there are several federal and state statutes that govern the rights
and obligations of financial institutions with respect to environmental issues.
In addition to being directly liable under these statutes for its own conduct,
a
financial institution may also be held liable under certain circumstances for
the actions of borrowers or other third parties on property that collateralizes
a loan held by the institution. This potential liability may far exceed the
original amount of the loan made by the financial institution, which is secured
by the property. Currently, we are not a party to any legal proceedings
involving potential liability under applicable environmental laws.
Employees
We
had
approximately 517 full-time equivalent employees as of December 31, 2007. Our
future success will depend in part on our ability to attract, retain and
motivate highly qualified management and other personnel. We provide health,
life and disability coverage for our employees and make contributions on behalf
of eligible employees under a plan intended to qualify as a simplified employee
pension plan under the Puerto Rico Internal Revenue Code. Our employees are
not
represented by a collective bargaining agreement and we have never experienced
a
strike or similar work stoppage. We consider our relationship with our employees
to be good.
Available
Information
Our
Internet website address is
www.eurobankpr.com
.
We make
available free of charge on or through our website our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities and Exchange Act of 1934, as amended, as soon as
reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. You may also read and
copy
any materials we file with the Securities and Exchange Commission at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549-0102. You
may obtain information on the operation of the SEC’s Public Reference Room by
calling at 1-800-SEC-0220. The SEC maintains an internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC at www.sec.gov. However, the
information found on our website is not part of this or any other
report.
SUPERVISION
AND REGULATION
This
following is a summary description of the relevant laws, rules and regulations
governing banks and bank and financial holding companies. The descriptions
of,
and references to, the statutes and regulations below are brief summaries and
do
not purport to be complete. The descriptions are qualified in their entirety
by
reference to the specific statutes and regulations discussed.
General
The
supervision and regulation of bank holding companies and their subsidiaries
are
intended primarily for the protection of depositors, the deposit insurance
funds
of the FDIC and the banking system as a whole, and not for the protection of
the
bank holding company stockholders or creditors. The banking agencies have broad
enforcement power over bank holding companies and banks, including the power
to
impose substantial fines and other penalties for violations of laws and
regulations.
Legislation
is from time to time introduced in Congress and Puerto Rico’s legislature,
including proposals to overhaul the bank regulatory system, expand the powers
of
depository institutions and limit the investments that depository institutions
may make with insured funds. Such legislation may change applicable statutes
and
the operating environment of EuroBancshares and Eurobank in substantial and
unpredictable ways. We cannot determine the ultimate effect that future
legislation or implementing regulations would have upon the financial condition
and results of operations of EuroBancshares or Eurobank, or any of their
subsidiaries.
On
March
13, 2007, EuroBancshares’ subsidiary bank, Eurobank, entered into a Stipulation
and Consent Order with the FDIC agreeing to the issuance of a Cease and Desist
Order. The order was based upon examination results which indicated that the
Bank’s Bank Secrecy Act/Anti-Money Laundering Program was not fully in
compliance with the requirements of the BSA laws, regulations, and guidance.
For
additional information, see the section of this report captioned
“Anti-Terrorism
Legislation”
on page
15.
EuroBancshares
EuroBancshares
is a financial holding company registered under the Bank Holding Company Act,
and is subject to supervision, regulation and examination by the Federal Reserve
Board. The Bank Holding Company Act and other federal laws subject bank holding
companies to particular restrictions on the types of activities in which they
may engage, and to a range of supervisory requirements and activities, including
regulatory enforcement actions for violations of laws and
regulations.
Regulatory
Restrictions on Dividends; Source of Strength
EuroBancshares
is regarded as a legal entity separate and distinct from its other subsidiaries.
The principal source of our revenue is dividends received from Eurobank. Various
federal and state statutory provisions limit the amount of dividends Eurobank
can pay to EuroBancshares without regulatory approval. It is the policy of
the
Federal Reserve Board that bank holding companies should pay cash dividends
on
common stock only out of income available over the past year and only if
prospective earnings retention is consistent with the organization’s expected
future needs and financial condition. The policy provides that bank holding
companies should not maintain a level of cash dividends that undermines the
bank
holding company’s ability to serve as a source of strength to its banking
subsidiaries.
Under
Federal Reserve Board policy, a bank holding company is expected to act as a
source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required at times when, absent
this Federal Reserve Board policy, a holding company may not be inclined to
provide it. As discussed below, a bank holding company, in certain
circumstances, could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In
the
event of a bank holding company’s bankruptcy under Chapter 11 of the United
States Bankruptcy Code, the trustee will be deemed to have assumed, and is
required to cure immediately, any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured
claims.
Activities
“Closely Related” to Banking
The
Bank
Holding Company Act prohibits a bank holding company, with certain limited
exceptions, from acquiring direct or indirect ownership or control of any voting
shares of any company which is not a bank or from engaging in any activities
other than those of banking, managing or controlling banks and certain other
subsidiaries, or furnishing services to or performing services for its
subsidiaries. One principal exception to these prohibitions allows the
acquisition of interests in companies whose activities are found by the Federal
Reserve Board, by order or regulation, to be so closely related to banking
or
managing or controlling banks, as to be a proper incident thereto. These
activities include, among other things, numerous services and functions
performed in connection with lending, investing, and financial counseling and
tax planning. In approving acquisitions by bank holding companies of companies
engaged in banking-related activities, the Federal Reserve Board considers
a
number of factors, and weighs the expected benefits to the public (such as
greater convenience and increased competition or gains in efficiency) against
the risks of possible adverse effects (such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices). The Federal Reserve Board is also empowered to differentiate between
activities commenced
de
novo
and
activities commenced through acquisition of a going concern.
Gramm-Leach
Bliley Act; Financial Holding Companies
The
Gramm-Leach-Bliley Financial Modernization Act of 1999, revised and expanded
the
provisions of the Bank Holding Company Act by including a new section that
permits a bank holding company to elect to become a financial holding company
to
engage in a full range of activities that are “financial in nature.” The
qualification requirements and the process for a bank holding company that
elects to be treated as a financial holding company require that all of the
subsidiary banks controlled by the bank holding company at the time of election
to become a financial holding company must be and remain at all times
“well-capitalized” and “well managed.” EuroBancshares made an election to become
a financial holding company on September 20, 2002.
The
Gramm-Leach-Bliley Act further requires that, in the event that the bank holding
company elects to become a financial holding company, the election must be
made
by filing a written declaration with the appropriate Federal Reserve Bank
that:
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states
that the bank holding company elects to become a financial holding
company;
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provides
the name and head office address of the bank holding company and
each
depository institution controlled by the bank holding
company;
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certifies
that each depository institution controlled by the bank holding company
is
“well-capitalized” as of the date the bank holding company submits its
declaration;
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provides
the capital ratios for all relevant capital measures as of the close
of
the previous quarter for each depository institution controlled by
the
bank holding company; and
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certifies
that each depository institution controlled by the bank holding company
is
“well managed” as of the date the bank holding company submits its
declaration.
|
The
bank
holding company must have also achieved at least a rating of “satisfactory
record of meeting community credit needs” under the Community Reinvestment Act
during the institution’s most recent examination.
Financial
holding companies may engage, directly or indirectly, in any activity that
is
determined to be:
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incidental
to such financial activity; or
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complementary
to a financial activity provided it “does not pose a substantial risk to
the safety and soundness of depository institutions or the financial
system generally.”
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The
Gramm-Leach-Bliley Act specifically provides that the following activities
have
been determined to be “financial in nature”: lending, trust and other banking
activities; insurance activities; financial or economic advisory services;
securitization of assets; securities underwriting and dealing; existing bank
holding company domestic activities; existing bank holding company foreign
activities and merchant banking activities. In addition, the Gramm-Leach-Bliley
Act specifically gives the Federal Reserve Board the authority, by regulation
or
order, to expand the list of “financial” or “incidental” activities, but
requires consultation with the United States Treasury Department, and gives
the
Federal Reserve Board authority to allow a financial holding company to engage
in any activity that is “complementary” to a financial activity and does not
“pose a substantial risk to the safety and soundness of depository institutions
or the financial system generally.”
Privacy
Policies
Under
the
Gramm-Leach-Bliley Act, all financial institutions are required to adopt privacy
policies, restrict the sharing of nonpublic customer data with nonaffiliated
parties and establish procedures and practices to protect customer data from
unauthorized access. EuroBancshares and its subsidiaries have established
policies and procedures to assure our compliance with all privacy provisions
of
the Gramm-Leach-Bliley Act.
Safe
and Sound Banking Practices
Bank
holding companies are not permitted to engage in unsafe and unsound banking
practices. The Federal Reserve Board’s Regulation Y, for example, generally
requires a holding company to give the Federal Reserve Board prior notice of
any
redemption or repurchase of its own equity securities, if the consideration
to
be paid, together with the consideration paid for any repurchases or redemptions
in the preceding year, is equal to 10% or more of the company’s consolidated net
worth. The Federal Reserve Board may oppose the transaction if it believes
that
the transaction would constitute an unsafe or unsound practice or would violate
any law or regulation. Depending upon the circumstances, the Federal Reserve
Board could take the position that paying a dividend would constitute an unsafe
or unsound banking practice.
The
Federal Reserve Board has broad authority to prohibit activities of bank holding
companies and their nonbanking subsidiaries which represent unsafe and unsound
banking practices or which constitute violations of laws or regulations, and
can
assess civil money penalties for certain activities conducted on a knowing
and
reckless basis, if those activities caused a substantial loss to a depository
institution. The penalties can be as high as $1 million for each day the
activity continues.
Annual
Reporting; Examinations
We
are
required to file annual reports with the Federal Reserve Board, and such
additional information as the Federal Reserve Board may require pursuant to
the
Bank Holding Company Act. The Federal Reserve Board may examine a bank holding
company or any of its subsidiaries, and charge the company for the cost of
such
the examination.
Capital
Adequacy Requirements
The
Federal Reserve Board has adopted a system using risk-based capital guidelines
to evaluate the capital adequacy of certain large bank holding companies. Prior
to March 30, 2006, these capital guidelines were applicable to all bank holding
companies having $150 million or more in assets on a consolidated basis.
However, effective March 30, 2006, the Federal Reserve Board amended the asset
size threshold to $500 million for purposes of determining whether a bank
holding company is subject to the capital adequacy guidelines. EuroBancshares
currently has consolidated assets in excess of $500 million and is therefore
subject to the Federal Reserve Board’s capital adequacy guidelines.
Under
the
guidelines, specific categories of assets are assigned different risk weights,
based generally on the perceived credit risk of the asset. These risk weights
are multiplied by corresponding asset balances to determine a “risk-weighted”
asset base. The guidelines require a minimum total risk-based capital ratio
of
8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements).
Total capital is the sum of Tier 1 and Tier 2 capital. To be considered
“well-capitalized,” a bank holding company must maintain, on a consolidated
basis, (i) a Tier 1 risk-based capital ratio of at least 6.0%, and (ii) a total
risk-based capital ratio of 10.0% or greater. As of December 31, 2007, our
Tier
1 risk-based capital ratio was 9.54% and its total risk-based capital ratio
was
10.79%. Thus, EuroBancshares is considered “well-capitalized” for regulatory
purposes.
In
addition to the risk-based capital guidelines, the Federal Reserve Board uses
a
leverage ratio as an additional tool to evaluate the capital adequacy of bank
holding companies. The leverage ratio is a company’s Tier 1 capital divided by
its average total consolidated assets. Certain highly-rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies are required to maintain a leverage ratio of at least 4.0%. As of
December 31, 2007, our leverage ratio was 7.55%.
The
federal banking agencies’ risk-based and leverage ratios are minimum supervisory
ratios generally applicable to banking organizations that meet certain specified
criteria. The federal bank regulatory agencies may set capital requirements
for
a particular banking organization that are higher than the minimum ratios when
circumstances warrant. Federal Reserve Board guidelines also provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions, substantially above the
minimum supervisory levels, without significant reliance on intangible
assets.
Imposition
of Liability for Undercapitalized Subsidiaries
Bank
regulators are required to take “prompt corrective action” to resolve problems
associated with insured depository institutions whose capital declines below
certain levels. In the event an institution becomes “undercapitalized,” it must
submit a capital restoration plan. The capital restoration plan will not be
accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiary’s compliance with the
capital restoration plan up to a certain specified amount. Any such guarantee
from a depository institution’s holding company is entitled to a priority of
payment in bankruptcy.
The
aggregate liability of the holding company of an undercapitalized bank is
limited to the lesser of 5% of the institution’s assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
“adequately capitalized.” The bank regulators have greater power in situations
where an institution becomes “significantly” or “critically” undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
Board approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other
affiliates.
Acquisitions
by Bank Holding Companies
The
Bank
Holding Company Act requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before it may acquire all, or
substantially all, of the assets of any bank, or ownership or control of any
voting shares of any bank, if after such acquisition it would own or control,
directly or indirectly, more than 5% of the voting shares of such bank. In
approving bank acquisitions by bank holding companies, the Federal Reserve
Board
is required to consider the financial and managerial resources and future
prospects of the bank holding company and the banks concerned, the convenience
and needs of the communities to be served, and various competitive
factors.
Control
Acquisitions
The
Change in Bank Control Act prohibits a person or group of persons from acquiring
“control” of a bank holding company unless the Federal Reserve Board has been
notified and has not objected to the transaction. Under a rebuttable presumption
established by the Federal Reserve Board, the acquisition of 10% or more of
a
class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act would, under the circumstances
set forth in the presumption, constitute acquisition of control.
In
addition, any company is required to obtain the approval of the Federal Reserve
Board under the Bank Holding Company Act before acquiring 25% (5% in the case
of
an acquiror that is a bank holding company) or more of the outstanding common
stock of the company, or otherwise obtaining control or a “controlling
influence” over the company.
Cross-guarantees
Under
the
Federal Deposit Insurance Act, or FDIA, a depository institution (which
definition includes both banks and savings associations), the deposits of which
are insured by the FDIC, can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with (1) the
default of a commonly controlled FDIC-insured depository institution or (2)
any
assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution “in danger of default.” “Default” is defined generally as
the appointment of a conservator or a receiver and “in danger of default” is
defined generally as the existence of certain conditions indicating that default
is likely to occur in the absence of regulatory assistance. In some
circumstances (depending upon the amount of the loss or anticipated loss
suffered by the FDIC), cross-guarantee liability may result in the ultimate
failure or insolvency of one or more insured depository institutions in a
holding company structure. Any obligation or liability owed by a subsidiary
bank
to its parent company is subordinated to the subsidiary bank’s cross-guarantee
liability with respect to commonly controlled insured depository institutions.
Eurobank is currently the only FDIC-insured depository institution subsidiary
of
EuroBancshares.
Because
EuroBancshares is a legal entity separate and distinct from Eurobank, its right
to participate in the distribution of assets of any subsidiary upon the
subsidiary’s liquidation or reorganization will be subject to the prior claims
of the subsidiary’s creditors. In the event of a liquidation or other resolution
of Eurobank, the claims of depositors and other general or subordinated
creditors of Eurobank would be entitled to a priority of payment over the claims
of holders of any obligation of Eurobank to its shareholders, including any
depository institution holding company (such as EuroBancshares) or any
shareholder or creditor of such holding company.
Anti-Terrorism
Legislation
In
the
wake of the tragic events of September 11th, on October 26, 2001, the President
signed into law the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001. Also known
as
the “Patriot Act,” the law enhances the powers of the federal government and law
enforcement organizations to combat terrorism, organized crime, and money
laundering. The Patriot Act significantly amends and expands the application
of
the Bank Secrecy Act, including enhanced measures regarding customer identity,
new suspicious activity reporting rules, and enhanced anti-money laundering
programs.
Under
the
Patriot Act, financial institutions are subject to prohibitions against
specified financial transactions and account relationships as well as enhanced
due diligence and “know your customer” standards in their dealings with foreign
financial institutions and customers. For example, the enhanced due diligence
policies, procedures, and controls generally require financial institutions
to
take reasonable steps:
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to
conduct enhanced scrutiny of account relationships to guard against
money
laundering and report any suspicious transaction;
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to
ascertain the identity of the nominal and beneficial owners of, and
the
source of funds deposited into, each account as needed to guard against
money laundering and report any suspicious
transactions;
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to
ascertain for any foreign bank, the shares of which are not publicly
traded, the identity of the owners of the foreign bank, and the nature
and
extent of the ownership interest of each such owner; and
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to
ascertain whether any foreign bank provides correspondent accounts
to
other foreign banks and, if so, the identity of those foreign banks
and
related due diligence information.
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Under
the
Patriot Act, financial institutions must also establish anti-money laundering
programs. The Patriot Act sets forth minimum standards for these programs,
including: (i) the development of internal policies, procedures and
controls; (ii) the designation of a compliance officer; (iii) an
ongoing employee training program; and (iv) an independent audit function to
test the adequacy of such programs.
In
addition, the Patriot Act requires bank regulatory agencies to consider the
record of a bank in combating money laundering activities in their evaluation
of
bank and bank holding company merger or acquisition transactions. Regulations
proposed by the U.S. Department of the Treasury to effect certain provisions
of
the Patriot Act provide that all transaction or other correspondent accounts
held by a U.S. financial institution on behalf of any foreign bank must be
closed within 90 days after the final regulations are issued, unless the foreign
bank has provided the U.S. financial institution with a means of verification
that the institution is not a “shell bank.” Proposed regulations interpreting
other provisions of the Patriot Act continue to be issued.
Under
the
authority of the Patriot Act, the Secretary of the Treasury adopted rules on
September 26, 2002 increasing the cooperation and information sharing among
financial institutions, regulators, and law enforcement authorities regarding
individuals, entities and organizations engaged in, or reasonably suspected
based on credible evidence of engaging in, terrorist acts or money laundering
activities. Under those rules, a financial institution is required to:
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expeditiously
search its records to determine whether it maintains or has maintained
accounts, or engaged in transactions with individuals or entities,
listed
in a request submitted by the Financial Crimes Enforcement Network
(“FinCEN”);
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notify
FinCEN if an account or transaction is identified;
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designate
a contact person to receive information requests;
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limit
use of information provided by FinCEN to (i) reporting to FinCEN,
(ii)
determining whether to establish or maintain an account or engage
in a
transaction, and (iii) assisting the financial institution in complying
with the Bank Secrecy Act; and
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maintain
adequate procedures to protect the security and confidentiality of
FinCEN
requests.
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Under
the
new rules, a financial institution may also share information regarding
individuals, entities, organizations, and countries for purposes of identifying
and, as appropriate, reporting activities that it suspects may involve possible
terrorist activity or money laundering. Such information-sharing is protected
under a safe harbor if the financial institution: (i) notifies FinCEN of
its intention to share information, even when sharing with an affiliated
financial institution; (ii) takes reasonable steps to verify that, prior to
sharing, the financial institution or association of financial institutions
with
which it intends to share information has submitted a notice to FinCEN;
(iii) limits the use of shared information to identifying and reporting on
money laundering or terrorist activities, determining whether to establish
or
maintain an account or engage in a transaction, or assisting it in complying
with the Bank Security Act; and (iv) maintains adequate procedures to
protect the security and confidentiality of the information. Any financial
institution complying with these rules will not be deemed to have violated
the
privacy requirements discussed above.
The
Secretary of the Treasury also adopted a rule on September 26, 2002 intended
to
prevent money laundering and terrorist financing through correspondent accounts
maintained by U.S. financial institutions on behalf of foreign banks. Under
the
rule, financial institutions: (i) are prohibited from providing
correspondent accounts to foreign shell banks; (ii) are required to obtain
a certification from foreign banks for which they maintain a correspondent
account stating the foreign bank is not a shell bank and that it will not permit
a foreign shell bank to have access to the U.S. account; (iii) must
maintain records identifying the owner of the foreign bank for which they may
maintain a correspondent account and its agent in the United States designated
to accept services of legal process; and (iv) must terminate correspondent
accounts of foreign banks that fail to comply with or fail to contest a lawful
request of the Secretary of the Treasury or the Attorney General of the United
States, after being notified by the Secretary or Attorney General.
As
previously mentioned, on March 13, 2007, Eurobank, the wholly-owned banking
subsidiary of EuroBancshares, Inc., and the Board of Directors of Eurobank
executed and entered into, without admitting or denying the allegations, a
Stipulation and Consent Order (the “Stipulation”) with the Federal Deposit
Insurance Corp. (the “FDIC”) agreeing to the issuance of a Cease and Desist
Order. The order, which was issued by the FDIC on March 15, 2007, was based
upon
the findings of a joint examination of the Bank by the FDIC and the Commonwealth
of Puerto Rico Office of the Commissioner of Financial Institutions. There
were
no fines or civil money penalties imposed on the Bank in connection with the
examination findings. The joint examination was concluded in October 2006 and
the Bank signed the Stipulation on March 13, 2007.
The
findings set out in the joint Report of Examination concluded that the Bank
Secrecy Act/Anti-Money Laundering Program (“BSA Program”) at the Bank was
deficient based upon allegations of inadequate training for bank personnel,
an
inadequate system of independent testing for BSA compliance, failure to comply
with certain recordkeeping requirements, and failure to comply completely with
the rules of the Office of Foreign Assets Control (“OFAC”). The Order contains
several Articles, each addressing a separate issue concerning the BSA Program
and its operation. The Order lays out the specific steps the Bank needs to
take
in order to bring the BSA Program back into compliance with the laws and
regulations, including, among others, requirements that the Bank: (i) perform
a
new risk assessment of the Bank’s operations; (ii) adopt and implement new
procedures for customer due diligence; (iii) amend its policies and procedures
for identifying and monitoring high-risk accounts; (iv) amend its procedures
for
monitoring currency transactions and wire transfers; (v) amend its policies
and
procedures for detecting and reporting suspicious activity; (vi) strengthen
its
Customer Identification Program procedures; and (vii) ensure that it has the
necessary staffing, properly trained, to manage the BSA program. Each of these
requirements and the various deadlines for remediation are described in more
detail in the Order.
In
response to the requirements of the Order, management and the Board of Directors
of the Bank are in the process of developing an enhanced corrective action
plan designed to remediate the remaining deficiencies alleged in the Order
and
continue to need correction or enhancements. As part of this process, the
Bank has engaged an independent, third party consultant to assist with the
development and implementation of its corrective action plan.
Sarbanes-Oxley
Act of 2002
In
July 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002,
or the Sarbanes-Oxley Act, which implemented legislative reforms intended to
address corporate and accounting fraud. The Sarbanes-Oxley Act contains reforms
of various business practices and numerous aspects of corporate governance.
Most
of these requirements have been implemented pursuant to regulations issued
by
the SEC. The following is a summary of certain key provisions of the
Sarbanes-Oxley Act.
In
addition to the establishment of a new accounting oversight board that enforces
auditing, quality control and independence standards and is funded by fees
from
all registered public accounting firms and publicly traded companies, the
Sarbanes-Oxley Act places restrictions on the scope of services that may be
provided by accounting firms to their public company audit clients. Any
non-audit services being provided to a public company audit client requires
pre-approval by the client’s audit committee. Also, the Sarbanes-Oxley Act makes
certain changes to the requirements for partner rotation after a period of
time.
The Sarbanes-Oxley Act requires chief executive officers and chief financial
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly
or
willingly violate this certification requirement. Furthermore, counsel is
required to report evidence of a material violation of securities laws or a
breach of fiduciary duties to the company’s chief executive officer or its chief
legal officer, and, if such officer does not appropriately respond, to report
such evidence to the audit committee or other similar committee of the board
of
directors or the board itself.
Under
this law, longer prison terms apply to corporate executives who violate federal
securities laws; the period during which certain types of suits can be brought
against a company or its officers is extended and bonuses issued to top
executives prior to restatement of a company’s financial statements are now
subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
“blackout” periods, and loans to company executives (other than loans by
financial institutions permitted by federal rules or regulations) are
restricted. In addition, the legislation accelerates the time frame for
disclosures by public companies, as they must immediately disclose any material
changes in their financial condition or operations. Directors and executive
officers required to report changes in ownership in a company’s securities must
now report any such change within two business days of the change.
The
Sarbanes-Oxley Act increases responsibilities and codifies certain requirements
relating to audit committees of public companies and how they interact with
the
company’s registered public accounting firm. Audit committee members must be
independent and are barred from accepting consulting, advisory or other
compensatory fees from the company. In addition, companies are required to
disclose whether at least one member of the committee is a “financial expert”
(as such term is defined by the SEC) and if not, why not. A company’s registered
public accounting firm is prohibited from performing statutorily mandated audit
services for a company if the company’s chief executive officer, chief financial
officer, controller, chief accounting officer or any person serving in
equivalent positions had been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. The Sarbanes-Oxley Act also prohibits any officer or director of a company
or any other person acting under their direction from taking any action to
fraudulently influence, coerce, manipulate or mislead any independent public
or
certified accountant engaged in the audit of the company’s financial statements
for the purpose of rendering the financial statements materially misleading.
The
Sarbanes-Oxley Act also has provisions relating to inclusion of certain internal
control reports and assessments by management in the annual report to
stockholders. EuroBancshares is required to include an internal control report
containing management’s assertions regarding the effectiveness of its internal
control structure and procedures over financial reporting. The internal control
report must include statements regarding management’s responsibility for
establishing and maintaining adequate internal control over financial reporting;
management’s assessment as to the effectiveness of the company’s internal
control over financial reporting, based on management’s evaluation of it as of
year-end; and of the framework used as criteria for evaluating the effectiveness
of the company’s internal control over financial reporting. The law also
requires the company’s registered public accounting firm that issues the audit
report to attest to, and report on the company’s internal controls over
financial reporting in accordance with standards for attestation engagements
issued or adopted by the Public Company Accounting Oversight Board.
Eurobank
Eurobank
is subject to extensive regulation and examination by the Commissioner of
Financial Institutions of Puerto Rico and the FDIC, which insures its deposits
to the maximum extent permitted by law, and is subject to certain Federal
Reserve Board regulations of transactions with its affiliates. The federal
and
Puerto Rico laws and regulations which are applicable to Eurobank, regulate,
among other things, the scope of its business, its investments, its reserves
against deposits, the timing of the availability of deposited funds and the
nature and amount of and collateral for certain loans. In addition to the impact
of such regulations, commercial banks are affected significantly by the actions
of the Federal Reserve Board as it attempts to control the money supply and
credit availability in order to influence the economy.
Transactions
with Affiliates
There
are
various statutory and regulatory limitations, including those set forth in
sections 23A and 23B of the Federal Reserve Act and Regulation W, governing
the
extent to which Eurobank will be able to purchase assets from or securities
of
or otherwise finance or transfer funds to EuroBancshares or its nonbanking
subsidiaries. Among other restrictions, such transfers by Eurobank to
EuroBancshares or any of its nonbanking subsidiaries generally will be limited
to 10.0% of Eurobank’s capital and surplus and, with respect to EuroBancshares
and all such nonbanking subsidiaries, to an aggregate of 20.0% of Eurobank’s
subsidiary’s capital and surplus. Furthermore, loans and extensions of credit
are required to be secured in specified amounts and are required to be on terms
and conditions consistent with safe and sound banking practices.
In
addition, any transaction by a bank with an affiliate and any sale of assets
or
provision of services to an affiliate generally must be on terms that are
substantially the same, or at least as favorable, to the bank as those
prevailing at the time for comparable transactions with nonaffiliated
companies.
Loans
to Insiders
Sections
22(g) and (h) of the Federal Reserve Act and its implementing regulation,
Regulation O, place restrictions on loans by a bank to executive officers,
directors, and principal stockholders. Under Section 22(h), loans to a director,
an executive officer and to a greater than 10% stockholder of a bank and certain
of their related interests, or insiders, and insiders of affiliates, may not
exceed, together with all other outstanding loans to such person and related
interests, the bank’s loans-to-one-borrower limit (generally equal to 15% of the
institution’s unimpaired capital and surplus). Section 22(h) also requires that
loans to insiders and to insiders of affiliates be made on terms substantially
the same as offered in comparable transactions to other persons, unless the
loans are made pursuant to a benefit or compensation program that (i) is widely
available to employees of the bank and (ii) does not give preference to insiders
over other employees of the bank. Section 22(h) also requires prior Board of
Directors approval for certain loans, and the aggregate amount of extensions
of
credit by a bank to all insiders cannot exceed the institution’s unimpaired
capital and surplus. Furthermore, Section 22(g) places additional restrictions
on loans to executive officers.
Dividends
The
ability of Eurobank to pay dividends on its common stock is restricted by the
Puerto Rico Banking Act of 1933, as amended, the FDIA and FDIC regulations.
In
general terms, the Puerto Rico Banking Act provides that when the expenditures
of a bank are greater than receipts, the excess of expenditures over receipts
shall be charged against the undistributed profits of the bank and the balance,
if any, shall be charged against the required reserve fund of the bank. If
there
is no sufficient reserve fund to cover such balance in whole or in part, the
outstanding amount shall be charged against the bank’s capital account. The
Puerto Rico Banking Act provides that until said capital has been restored
to
its original amount and the reserve fund to 20% of the original capital, the
bank may not declare any dividends. In general terms, the FDIA and the FDIC
regulations restrict the payment of dividends when a bank is undercapitalized,
when a bank has failed to pay insurance assessments, or when there are safety
and soundness concerns regarding a bank.
The
payment of dividends by Eurobank may also be affected by other regulatory
requirements and policies, such as maintenance of adequate capital. If, in
the
opinion of the regulatory authority, a depository institution under its
jurisdiction is engaged in, or is about to engage in, an unsafe or unsound
practice (that, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require, after notice and hearing, that such depository institution cease and
desist from such practice. The Federal Reserve Board has issued a policy
statement that provides that insured banks and bank holding companies should
generally pay dividends only out of operating earnings for the current and
preceding two years. In addition, all insured depository institutions are
subject to the capital-based limitations required by the Federal Deposit
Insurance Corporation Improvement Act of 1991.
FDIC
Capital Requirements
Eurobank
is also subject to certain restrictions on the payment of dividends as a result
of the requirement that it maintain adequate levels of capital in accordance
with guidelines promulgated from time to time by applicable
regulators.
The
FDIC
and the Commissioner of Financial Institutions of Puerto Rico monitor the
capital adequacy of Eurobank by using a combination of risk-based guidelines
and
leverage ratios. The agencies consider the bank’s capital levels when taking
action on various types of applications and when conducting supervisory
activities related to the safety and soundness of individual banks and the
banking system.
Under
the
risk-based capital guidelines, a risk weight factor of 0% to 100% is assigned
to
each category of assets based generally on the perceived credit risk of the
asset class. The risk weights are then multiplied by the corresponding asset
balances to determine a “risk-weighted” asset base. At least half of the
risk-based capital must consist of core (Tier 1) capital, which is comprised
of:
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common
stockhol
d
ers’
equity (includes common stock and any related surplus, undivided
profits,
disclosed capital reserves that represent a segregation of undivided
profits, and foreign currency translation adjustments; less net unrealized
losses on marketable equity
securities);
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certain
noncumulative perpetual preferred stock and related surplus;
and
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minority
interests in the equity capital accounts of consolidated subsidiaries,
and
excludes goodwill and various intangible
assets.
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The
remainder, supplementary (Tier 2) capital, may consist of:
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allowance
for loan and lease losses, up to a maximum of 1.25% of risk-weighted
assets;
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certain
perpetual preferred stock and related surplus;
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hybrid
capital instruments;
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mandatory
convertible debt securities;
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term
subordinated debt;
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intermediate-term
preferred stock; and
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certain
unrealized holding gains on equity securities.
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“Total
risk-based capital” is determined by combining core capital and supplementary
capital.
Under
the
regulatory capital guidelines, Eurobank must maintain a total risk-based capital
to risk-weighted assets ratio of at least 8.0%, a Tier 1 capital to
risk-weighted assets ratio of at least 4.0%, and a Tier 1 capital to adjusted
total assets ratio of at least 4.0% (3.0% for banks receiving the highest
examination rating) to be considered adequately capitalized. See discussion
in
the section below captioned
“The
FDIC Improvement Act.”
FIRREA
The
Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA,
includes various provisions that affect or may affect Eurobank. Among other
matters, FIRREA generally permits bank holding companies to acquire healthy
thrifts as well as failed or failing thrifts. FIRREA removed certain
cross-marketing prohibitions previously applicable to thrift and bank
subsidiaries of a common holding company. Furthermore, a multi-bank holding
company may now be required to indemnify the federal deposit insurance fund
against losses it incurs with respect to such company’s affiliated banks, which
in effect makes a bank holding company’s equity investments in healthy bank
subsidiaries available to the FDIC to assist such company’s failing or failed
bank subsidiaries.
In
addition, pursuant to FIRREA, any depository institution that has been chartered
less than two years, is not in compliance with the minimum capital requirements
of its primary federal banking regulator, or is otherwise in a troubled
condition must notify its primary federal banking regulator of the proposed
addition of any person to the Board of Directors or the employment of any person
as a senior executive officer of the institution at least 30 days before such
addition or employment becomes effective. During such 30-day period, the
applicable federal banking regulatory agency may disapprove of the addition
of
employment of such director or officer. Eurobank is not subject to any such
requirements.
FIRREA
also expanded and increased civil and criminal penalties available for use
by
the appropriate regulatory agency against certain “institution-affiliated
parties” primarily including (i) management, employees and agents of a financial
institution, as well as (ii) independent contractors such as attorneys and
accountants and others who participate in the conduct of the financial
institution’s affairs and who caused or are likely to cause more than minimum
financial loss to or a significant adverse affect on the institution, who
knowingly or recklessly violate a law or regulation, breach a fiduciary duty
or
engage in unsafe or unsound practices. Such practices can include the failure
of
an institution to timely file required reports or the submission of inaccurate
reports. Furthermore, FIRREA authorizes the appropriate banking agency to issue
cease and desist orders that may, among other things, require affirmative action
to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnifications or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets or take other action as determined by the ordering agency to
be
appropriate.
The
FDIC Improvement Act
The
Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, made
a
number of reforms addressing the safety and soundness of the deposit insurance
system, supervision of domestic and foreign depository institutions, and
improvement of accounting standards. This statute also limited deposit insurance
coverage, implemented changes in consumer protection laws and provided for
least-cost resolution and prompt regulatory action with regard to troubled
institutions.
FDICIA
requires every bank with total assets in excess of $500 million to have an
annual independent audit made of the bank’s financial statements by a certified
public accountant to verify that the financial statements of the bank are
presented in accordance with generally accepted accounting principles and comply
with such other disclosure requirements as prescribed by the FDIC.
FDICIA
also places certain restrictions on activities of banks depending on their
level
of capital. FDICIA divides banks into five different categories, depending
on
their level of capital. Under regulations adopted by the FDIC, a bank is deemed
to be “well-capitalized” if it has a total Risk-Based Capital Ratio of 10.0% or
more, a Tier 1 Capital Ratio of 6.0% or more and a Leverage Ratio of 5.0% or
more, and the bank is not subject to an order or capital directive to meet
and
maintain a certain capital level. Under such regulations, a bank is deemed
to be
“adequately capitalized” if it has a total Risk-Based Capital Ratio of 8.0% or
more, a Tier 1 Capital Ratio of 4.0% or more and a Leverage Ratio of 4.0% or
more (unless it receives the highest composite rating at its most recent
examination and is not experiencing or anticipating significant growth, in
which
instance it must maintain a Leverage Ratio of 3.0% or more). Under such
regulations, a bank is deemed to be “undercapitalized” if it has a total
Risk-Based Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less
than
4.0% or a Leverage Ratio of less than 4.0%. Under such regulations, a bank
is
deemed to be “significantly undercapitalized” if it has a Risk-Based Capital
Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than 3.0% and a Leverage
Ratio of less than 3.0%. Under such regulations, a bank is deemed to be
“critically undercapitalized” if it has a Leverage Ratio of less than or equal
to 2.0%. In addition, the FDIC has the ability to downgrade a bank’s
classification (but not to “critically undercapitalized”) based on other
considerations even if the bank meets the capital guidelines. According to
these
guidelines, Eurobank was classified as “well-capitalized” as of December 31,
2007.
In
addition, if a state non-member bank is classified as undercapitalized, the
bank
is required to submit a capital restoration plan to the FDIC. Pursuant to
FDICIA, an undercapitalized bank is prohibited from increasing its assets,
engaging in a new line of business, acquiring any interest in any company or
insured depository institution, or opening or acquiring a new branch office,
except under certain circumstances, including the acceptance by the FDIC of
a
capital restoration plan for the bank.
Furthermore,
if a state non-member bank is classified as undercapitalized, the FDIC may
take
certain actions to correct the capital position of the bank; if a bank is
classified as significantly undercapitalized or critically undercapitalized,
the
FDIC would be required to take one or more prompt corrective actions. These
actions would include, among other things, requiring: sales of new securities
to
bolster capital; improvements in management; limits on interest rates paid;
prohibitions on transactions with affiliates; termination of certain risky
activities and restrictions on compensation paid to executive officers. If
a
bank is classified as critically undercapitalized, FDICIA requires the bank
to
be placed into conservatorship or receivership within ninety days, unless the
FDIC determines that other action would better achieve the purposes of FDICIA
regarding prompt corrective action with respect to undercapitalized
banks.
The
capital classification of a bank affects the frequency of examinations of the
bank and impacts the ability of the bank to engage in certain activities and
affects the deposit insurance premiums paid by such bank. Under FDICIA, the
FDIC
is required to conduct a full-scope, on-site examination of every bank at least
once every twelve months. An exception to this rule is made, however, that
provides that banks (i) with assets of less than $100 million, (ii) are
categorized as “well-capitalized,” (iii) were found to be well managed and its
composite rating was outstanding and (iv) has not been subject to a change
in
control during the last twelve months, need only be examined by the FDIC once
every eighteen months.
Broker
Deposits
Under
FDICIA, banks may be restricted in their ability to accept broker deposits,
depending on their capital classification. “Well-capitalized” banks are
permitted to accept broker deposits, but all banks that are not well-capitalized
could be restricted to accept such deposits. The FDIC may, on a case-by-case
basis, permit banks that are adequately capitalized to accept broker deposits
if
the FDIC determines that acceptance of such deposits would not constitute an
unsafe or unsound banking practice with respect to the bank. Deposits obtained
from financial intermediaries, so-called “broker deposits,” represented
approximately 67.06% of Eurobank’s total deposits as of December 31, 2007. As
previously mentioned, Eurobank is currently well-capitalized and therefore
is
not subject to any limitations with respect to its broker deposits.
Federal
Limitations on Activities and Investments
The
equity investments and activities as a principal of FDIC-insured state-chartered
banks such as Eurobank are generally limited to those that are permissible
for
national banks. Under regulations dealing with equity investments, an insured
state bank generally may not directly or indirectly acquire or retain any equity
investment of a type, or in an amount, that is not permissible for a national
bank.
FDIC
Deposit Insurance Assessments
In
addition, under FDICIA, the Federal Deposit Insurance Corporation, or FDIC,
is
authorized to assess insurance premiums on a bank’s deposits at a variable rate
depending on the probability that the deposit insurance fund will incur a loss
with respect to the bank. (Under prior law, the deposit insurance
assessment was a flat rate, regardless of the likelihood of loss.) In this
regard, the FDIC has issued regulations that provide for a transitional
risk-based deposit assessment that determines the deposit insurance assessment
rates on the basis of the bank’s capital classification and supervisory
evaluations. Each of these categories has three subcategories, resulting
in nine assessment risk classifications. The three subcategories with
respect to capital are “well-capitalized,” “adequately capitalized” and “less
than adequately capitalized” (which would include “undercapitalized,”
“significantly undercapitalized” and “critically undercapitalized” banks).
The three subcategories with respect to supervisory concerns are
“healthy,” “supervisory concern” and “substantial supervisory concern.” A
bank is deemed “healthy” if it is financially sound with only a few minor
weaknesses. A bank is deemed subject to “supervisory concern” if it has
weaknesses that, if not corrected, could result in significant deterioration
of
the bank and increased risk to the Bank Insurance Fund, or BIF. A bank is
deemed subject to “substantial supervisory concern” if it poses a substantial
probability of loss to the BIF.
On
June
30, 1996, the Deposit Insurance Funds Act of 1996, or DIFA, was enacted and
signed into law as part of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996. DIFA established the framework for the eventual merger
of
the BIF and the Savings Association Insurance Fund, or SAIF, into a single
Deposit Insurance Fund. It repealed the statutory minimum premium and, under
implementing FDIC regulations promulgated in 1997, premiums assessed by both
the
BIF and the SAIF are to be assessed using the matrix described above at a rates
between 0 cents and 27 cents per $100 of deposits.
DIFA
also
separated, effective January 1, 1997, the Financing Corporation, or FICO,
assessment to service the interest on its bond obligations from the BIF and
SAIF
assessments. The amount assessed on individual institutions by the FICO would
be
in addition to the amount, if any, paid for deposit insurance according to
the
FDIC’s risk-related assessment rate schedules. The FICO rate could be adjusted
quarterly to reflect changes in assessment bases for the BIF and the SAIF.
Accordingly, Eurobank could be subject to two separate premiums (for servicing
interest on bond obligations and for the BIF/SAIF insurance), if such premiums
were assessed. The FDIC acts as collection agent for the FICO.
In
addition, DIFA authorized the FICO to asses both BIF and SAIF insured deposits,
and required the BIF rate to equal one-fifth the SAIF rate through year-end
1999, or until insurance funds were merged, whichever occurred first. On March
31, 2006, the BIF and SAIF were merged into a newly created Deposit Insurance
Fund (DIF).
In
October 2006, as required by the Federal Deposit Insurance Reform Act of 2005,
the FDIC issued a final rule to implement the one-time deposit insurance
assessment credit. During 2007, the FDIC applied an eligible institution's
assessment credit (less any portion of the credit transferred to another
institution) against the institution's future assessments to the maximum extent
allowed by the statute. The one-time assessment credit could not be used to
reduce FICO payments. The one time assessment credit for Eurobank, our
wholly owned banking subsidiary, amounted to approximately $669,000 and was
used
to reduce the FDIC’s new insurance premium assessment during 2007, as further
explained below.
In
November 2006, the FDIC adopted a final rule amending its assessment regulations
to improve and modernize its operational systems for deposit insurance
assessments. Since 2007, the FDIC has categorized each insured institution
into one of four risk categories following a two-step process, which evaluate
first the capital ratios of the insured institution and then, other relevant
information. The FDIC’s new insurance premium rates range between 5 and 43
cents per $100 in accessible deposits. For the year ended December 31, 2007,
total FDIC insurance premiums amounted to $892,000, net of the one time
assessment credit of $669,000, as previously explained.
The
FDIC may terminate the deposit insurance of any insured depository institution,
including Eurobank, if it determines after a hearing that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC.
It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has
no
tangible capital. If insurance of accounts is terminated, the accounts at
the institution at the time of the termination, less subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as
determined by the FDIC. Management is aware of no existing circumstances
which would result in termination of Eurobank’s deposit insurance.
Check
Clearing for the 21
st
Century Act
On
October 28, 2003, President Bush signed into law the Check Clearing for the
21
st
Century
Act, also known as Check 21. The law, which was not effective until October
28,
2004, gave “substitute checks,” such as a digital image of a check and copies
made from that image, the same legal standing as the original paper check.
Some
of the major provisions include:
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allowing
check truncation without making it
mandatory;
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demanding
that every financial institution communicate to accountholders in
writing
a description of its substitute check processing program and their
rights
under the law;
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legalizing
substitutions for and replacements of paper checks without agreement
from
consumers;
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retaining
in place the previously mandated electronic collection and return
of
checks between financial institutions only when individual agreements
are
in place;
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requiring
that when accountholders request verification, financial institutions
produce the original check (or a copy that accurately represents
the
original) and demonstrate that the account debit was accurate and
valid;
and
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requiring
recrediting of funds to an individual’s account on the next business day
after a consumer proves that the financial institution has
erred.
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This
legislation will likely affect bank capital spending as many financial
institutions assess whether technological or operational changes are necessary
to stay competitive and take advantage of the new opportunities presented by
Check 21.
Community
Reinvestment Act
Under
the
Community Reinvestment Act, or CRA, as implemented by the Congress in 1977,
a
financial institution has a continuing and affirmative obligation, consistent
with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution’s discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires federal examiners, in connection
with
the examination of a financial institution, to assess the institution’s record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. The
CRA
also requires all institutions to make public disclosure of their CRA ratings.
EuroBancshares has a Compliance Committee, which oversees the planning of
products, and services offered to the community, especially those aimed to
serve
low and moderate income communities. The FDIC rated Eurobank as “satisfactory”
in meeting community credit needs under the CRA at its most recent examination
for CRA performance.
Consumer
Laws and Regulations
In
addition to the laws and regulations discussed herein, Eurobank is also subject
to certain consumer laws and regulations that are designed to protect consumers
in transactions with banks. While the list set forth herein is not exhaustive,
these laws and regulations include the Truth in Lending Act, the Truth in
Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability
Act, the Equal Credit Opportunity Act, and the Fair Housing Act, among others.
These laws and regulations mandate certain disclosure requirements and regulate
the manner in which financial institutions must deal with customers when taking
deposits or making loans to such customers. Eurobank must comply with the
applicable provisions of these consumer protection laws and regulations as
part
of its ongoing customer relations.
Interstate
Branching
Effective
June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act
of
1994 amended the FDIA and certain other statutes to permit state and national
banks with different home states to merge across state lines, with approval
of
the appropriate federal banking agency, unless the home state of a participating
bank had passed legislation prior to May 31, 1997 expressly prohibiting
interstate mergers. Under the Riegle-Neal Act amendments, once a state or
national bank has established branches in a state, that bank may establish
and
acquire additional branches at any location in the state at which any bank
involved in the interstate merger transaction could have established or acquired
branches under applicable federal or state law. If a state opts out of
interstate branching within the specified time period, no bank in any other
state may establish a branch in the state which has opted out, whether through
an acquisition or de novo.
For
purposes of the Riegle-Neal Act’s amendments to the FDIA, Eurobank is treated as
a state bank and is subject to the same restrictions on interstate branching
as
other state banks. However, for purposes of the International Banking Act of
1978, Eurobank is considered to be a foreign bank and may branch interstate
by
merger or de novo to the same extent as a domestic bank in Eurobank’s home
state. It is not yet possible to determine how these statutes will be
harmonized, with respect either to which federal agency will approve interstate
transactions or to which “home state” determination rules will
apply.
Eurobank
currently does not have any branches outside Puerto Rico.
Federal
Home Loan Bank System
The
FHLB
system, of which Eurobank is a member, consists of 12 regional FHLBs governed
and regulated by the Federal Housing Finance Board. The FHLBs serve as reserve
or credit facilities for member institutions within their assigned regions.
They
are funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB system. They make loans (
i.e.
,
advances) to members in accordance with policies and procedures established
by
the FHLB and the boards of directors of each regional FHLB.
As
a
system member, Eurobank is entitled to borrow from the FHLB of New York, or
FHLB-NY, and is required to own capital stock in the FHLB-NY in an amount equal
to the greater of 1% of the aggregate of the unpaid principal of its home
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each fiscal year, which for this purpose is deemed to be not less
than 30% of assets or 5% of the total amount of advances by the FHLB-NY to
Eurobank. Eurobank is in compliance with the stock ownership rules described
above with respect to such advances, commitments and letters of credit and
home
mortgage loans and similar obligations. All loans, advances and other extensions
of credit made by the FHLB-NY to Eurobank are secured by a portion of its
mortgage loan portfolio, certain other investments and the capital stock of
the
FHLB-NY held by Eurobank.
Mortgage
Banking Operations
Eurobank
is subject to the rules and regulations of FHA, VA, FNMA, FHLMC and GNMA with
respect to originating, processing, selling and servicing mortgage loans and
the
issuance and sale of mortgage-backed securities. Those rules and regulations,
among other things, prohibit discrimination and establish underwriting
guidelines which include provisions for inspections and appraisals, require
credit reports on prospective borrowers and fix maximum loan amounts and, with
respect to VA loans, fix maximum interest rates. Mortgage origination activities
are subject to, among others, the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which, among other things, prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs. Eurobank is also
subject to regulation by the Commissioner of Financial Institutions of Puerto
Rico, with respect to, among other things, the establishment of maximum
origination fees on certain types of mortgage loan products.
Puerto
Rico Regulation
As
a
commercial bank organized under the laws of Puerto Rico, Eurobank is subject
to
the supervision, examination and regulati
o
n
of the
Commissioner of Financial Institutions of Puerto Rico, pursuant to the Puerto
Rico Banking Act of 1933, as amended. Certain of those activities are described
in this
“Supervision
and Regulation”
section
above.
Puerto
Rico Banking Law
Section
12 of the Puerto Rico Banking Law requires the prior approval of the
Commissioner of Financial Institutions of Puerto Rico with respect to a transfer
of capital stock of a bank that results in a change of control of the bank.
Under Section 12, a change of control is presumed to occur if a person or group
of persons acting in concert, directly or indirectly, acquires more than 5.0%
of
the outstanding voting capital stock of the bank. The Commissioner of Financial
Institutions of Puerto Rico has interpreted the restrictions of Section 12
as
applying to acquisitions of voting securities of entities controlling a bank,
such as a bank holding company. Under the Puerto Rico Banking Law, the
determination of the Commissioner of Financial Institutions of Puerto Rico
whether to approve a change of control filing is final and non-
appealable.
Section
16 of the Puerto Rico Banking Law requires every bank to maintain a legal
reserve which shall not be less than 20% of its demand liabilities, except
government deposits (federal, state and municipal) which are secured by actual
collateral. The reserve is required to be composed of any of the following
securities or combination thereof: (1) legal tender of the United States; (2)
checks on banks or trust companies located in any part of Puerto Rico, to be
presented for collection during the day following that on which they are
received; (3) money deposited in other banks or depository institutions, subject
to immediate collection; (4) federal funds sold to any Federal Reserve Bank
and
securities purchased under agreement to resell executed by the bank with such
funds that are subject to be repaid to the bank on or before the close of the
next business day and (5) any other asset that the Commissioner of Financial
Institutions of Puerto Rico determines from time to time.
Section
17 of the Puerto Rico Banking Law permits Puerto Rico commercial banks to make
unsecured loans to any one person, firm, partnership or corporation, up to
an
aggregate amount of 15.0% the sum of (i) paid-in capital; (ii) reserve fund
of
the commercial bank; (iii) 50.0% of the commercial bank’s retained earnings and
(iv) any other components that the Commissioner of Financial Institutions of
Puerto Rico may determine from time to time. As of December 31, 2007, the legal
lending limit for Eurobank under this provision was approximately $17.0 million.
If such loans are secured by collateral worth at least 25.0% more than the
amount of the loan, the aggregate maximum amount may reach one-third of the
sum
of Eurobank’s paid-in capital, reserve fund, 50% of retained earnings and any
other components that the Commissioner of Financial Institutions of Puerto
Rico
may determine from time to time. As of December 31, 2007, the legal lending
limit for Eurobank under this provision was approximately $37.8 million. There
are no restrictions under Section 17 of the Puerto Rico Banking Law on the
amount of loans which are fully secured by bonds, securities and other evidences
of indebtedness of the Government of the United States, of the Commonwealth
of
Puerto Rico, or by bonds, not in default, of authorities, instrumentalities
or
dependencies of the Commonwealth of Puerto Rico or its
municipalities.
Section
17 of the Puerto Rico Banking Law also prohibits Puerto Rico commercial banks
from making loans secured by their own stock and from purchasing their own
stock, unless such purchase is necessary to prevent losses because of a debt
previously contracted in good faith. The stock so purchased by the Puerto Rico
commercial bank must be sold by the bank in a public or private sale within
one
year from the date of purchase.
Section
27 of the Puerto Rico Banking Law also requires that at least 10.0% of the
yearly net income of a Puerto Rico commercial bank be credited to a reserve
fund
until the amount deposited to the credit of the reserve fund is equal to 100.0%
of total paid-in capital (common and preferred) of the commercial bank. As
of
December 31, 2007, Eurobank had $8.0 million in its reserve fund.
Section
27 of the Puerto Rico Banking Law also provides that when the expenditures
of a
Puerto Rico commercial bank are greater than receipts, the excess of the
expenditures over receipts shall be charged against the undistributed profits
of
the bank, and the balance, if any, shall be charged against the reserve fund,
as
a reduction thereof. If there is no reserve fund sufficient to cover such
balance in whole or in part, the outstanding amount shall be charged against
the
capital account and no dividends shall be declared until said capital has been
restored to its original amount and the reserve fund to 20% of the original
capital of the bank.
Section
14 of the Puerto Rico Banking Law authorizes Eurobank to conduct certain
financial and related activities directly or through subsidiaries, including
lease financing of personal property, operating small loans companies and
mortgage loans activities. In 2004, Eurobank organized an IBE subsidiary, EBS
Overseas.
Puerto
Rico Usury Law
The
rate
of interest that Eurobank may charge on real estate and other types of loans
to
individuals in Puerto Rico is subject to Puerto Rico’s usury law. That law is
administered by the Finance Board, which consists of the Secretaries of the
Treasury, Commerce and Consumer Affairs Departments, the Commissioner of
Financial Institutions of Puerto Rico, the President of the Planning Board,
the
President of the Government Development Bank for Puerto Rico, the Secretary
of
Economic Development and Commerce Department and a representative of the private
financial industry. The Finance Board promulgates regulations which specify
maximum rates on various types of loans to individuals and revises those
regulations periodically as general interest rates change.
Among
the
most important regulations enforced on interest rates are Regulations 5722,
5782
and 6070. Pursuant to Regulation 5782, there is no limitation on interest rates
that may be charged on small personal loans. The same rule applies to retail
installment sale contracts and credit card loans as provided by Regulation
6070.
The rates on these loans are established as a result of the market and
competition.
Interest
rates that may be charged on personal loans, personal lines of credit, cash
advances on credit cards, commercial loans or commercial lines of credit and
residential and commercial mortgage loans are not restricted by Regulation
5722.
The rates on these loans are established as a result of the market and
competition. Regulation 5722 does establish restrictions on prepayment penalties
and late charges for all loans, except commercial loans.
International
Banking Center Regulatory Act
In
2004,
we transferred all of the assets and liabilities of Eurobank International,
an
IBE that operated as a division of Eurobank, to an IBE subsidiary of Eurobank,
EBS Overseas, Inc. We also have an IBE that operates as a division of Eurobank
under the name EBS International Bank. This IBE was acquired under the name
of
BT International in connection with the acquisition of BankTrust and changed
to
EBS International Bank on September 27, 2005. We have continued to operate
EBS
International as a division of Eurobank and do not have immediate plans to
transfer its assets to our subsidiary, EBS Overseas, Inc.
The
business and operations of our IBEs are subject to supervision and regulation
by
the Commissioner of Financial Institutions of Puerto Rico. Under the IBE Act,
no
sale, encumbrance, assignment, merger, exchange or transfer of shares, interest
or participation in the capital of an IBE may be initiated without the prior
approval of the Commissioner of Financial Institutions of Puerto Rico, if by
such transaction a person would acquire, directly or indirectly, control of
10%
or more of any class of stock, interest or participation in the capital of
the
IBE. The IBE Act and the regulations issued thereunder by the Commissioner
of
Financial Institutions of Puerto Rico limit the business activities that may
be
carried out by an IBE. Such activities are limited in part to persons and assets
located outside of Puerto Rico. The IBE Act provides further that every IBE
must
have not less than $300,000 of unencumbered assets or acceptable financial
guarantees.
Pursuant
to the IBE Act and the IBE regulations, our IBEs must maintain books and records
of all their transactions in the ordinary course of business. The IBEs are
also
required to submit to the Commissioner of Financial Institutions of Puerto
Rico
quarterly and annual reports of their financial condition and results of
operations, including annual audited financial statements for EBS Overseas,
Inc.
The
IBE
Act empowers the Commissioner of Financial Institutions of Puerto Rico to revoke
or suspend, after notice and hearing, a license issued thereunder if, among
other things, the IBE fails to comply with the IBE Act, the IBE regulations
or
the terms of its license, or if the Commissioner of Financial Institutions
of
Puerto Rico finds that the business or affairs of the IBE are conducted in
a
manner that is not consistent with the public interest.
IBEs
generally are exempt from taxation under United States federal law and Puerto
Rico law. The Legislature of Puerto Rico and the Governor of Puerto Rico
approved a law amending the IBE Act. This law imposes income taxes at normal
statutory rates on each IBE that operates as a unit of a bank, if the IBE’s net
income generated after December 31, 2003 exceeds 40% of the bank’s net income in
the taxable year commenced on July 1, 2003, 30% of the bank’s net income in the
taxable year commencing on July 1, 2004, and 20% of the bank’s net income in the
taxable year commencing on July 1, 2005, and thereafter. It does not impose
income taxation on an IBE that operates as a subsidiary of a bank. Thus, only
EBS International Bank, which operates as a division of Eurobank rather than
a
subsidiary, is impacted by the new law. However, we cannot give any assurance
that the IBE Act will not be modified in the future in a manner to reduce the
tax benefits available to EBS Overseas. A reduction of such tax benefits may
reduce our earnings.
EuroSeguros,
Inc.
EuroSeguros
is a wholly-owned subsidiary of EuroBancshares and is registered as a corporate
agent and general agency with the Office of the Commissioner of Insurance of
the
Commonwealth of Puerto Rico. EuroSeguros is subject to regulation by the
Commissioner of Insurance relating to, among other things, licensing of
employees, sales practices, charging of commissions and obligations to
customers.
Future
Legislation and Economic Policy
Management
of EuroBancshares and Eurobank cannot predict what other legislation or economic
and monetary policies of the various regulatory authorities might be enacted
or
adopted or what other regulations might be adopted or the effects thereof.
Future legislation and policies and the effects thereof might have a significant
influence on overall growth and distribution of loans, investments and deposits
and affect interest rates charged on loans or paid from time and savings
deposits. Such legislation and policies have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future.
ITEM
1A. Risk Factors.
Risks
Relating to Our Business
Our
decisions regarding credit risk could be inaccurate and our allowance for loan
and lease losses may be inadequate, which could materially and adversely affect
our business, financial condition, results of operations, cash flows and/or
future prospects.
Our
loan
and lease portfolio and investments in marketable securities subject us to
credit risk. Inherent risks in lending also include fluctuations in collateral
values and economic downturns. Making loans and leases is an essential element
of our business, and there is a risk that our loans and leases will not be
repaid.
We
attempt to maintain an appropriate allowance for loan and lease losses to
provide for losses inherent in our loan and lease portfolio. As of December
31,
2007, our allowance for loan and lease losses totaled $28.1 million, which
represents approximately 1.51% of our total loans and leases. There is no
precise method of predicting loan and lease losses, and therefore, we always
face the risk that charge-offs in future periods will exceed our allowance
for
loan and lease losses and that we would need to make additional provisions
to
our allowance for loan and lease losses.
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.
In
addition, the FDIC as well as the Commissioner of Financial Institutions of
Puerto Rico review our allowance for loan and lease losses and may require
us to
establish additional reserves. Additions to the allowance for loan and lease
losses will result in a decrease in our net earnings and capital and could
hinder our ability to grow our assets.
We
have a concentration of exposure to a number of individual borrowers and a
significant loss on any one of these credits could materially affect our
financial condition and results of operations.
Under
applicable law, there are quantitative limitations on the amount of loans we
can
make to one borrower or a group of related borrowers. As of December 31, 2007,
our legal lending limit was approximately $17.0 million in the unsecured
category, and approximately $37.8 million in the secured category. As of
December 31, 2007, we had 18 individual borrowers with a loan principal balance
of more than $10.0 million per borrower and another 30 individual borrowers
with a loan principal balance of more than $5.0 million per borrower. Given
the size of these current outstanding loans relative to our capital levels
and
earnings, a significant loss on any one of these credits could materially and
adversely affect our business, financial condition, results of operations,
cash
flows and/or future prospects.
A
significant portion of our leases are secured by automobiles, and the loss
of
purchasers for our leases or a downturn in automobile purchases could have
a
material adverse effect on our business, financial condition, results of
operations, cash flows and/or future prospects.
A
significant portion of our leases are secured by automobiles. As of December
31,
2007, the total amount of automobile leases was $379.2 million or 98.39% of
our total leasing portfolio. We sometimes sell our leases to other financial
institutions in order to manage our lease financing concentration. The loss
of
purchasers of our leases could cause us to reduce our lease originations,
reducing our net income. Alternatively, we may increase the portion of the
leases that we retain for our portfolio with the result that our exposure to
automobile leases will increase. In addition, a downturn in automobile purchases
could have a material adverse effect on our business, financial condition,
results of operations, cash flows and/or future prospects.
We
rely heavily on short-term funding sources to meet our liquidity needs, such
as
broker deposits and repurchase obligations, which are generally more sensitive
to changes in interest rates and can be adversely affected by local and general
economic conditions.
We
have
frequently utilized as a source of funds certificates of deposit obtained
through deposit brokers that solicit funds from their customers for deposit
with
us, or broker deposits. Broker deposits, when compared to retail deposits
attracted through a branch network, are generally more sensitive to changes
in
interest rates and volatility in the capital markets and could reduce our net
interest spread and net interest margin. In addition, broker deposit funding
sources may be more sensitive to significant changes in our financial condition.
As of December 31, 2007, broker deposits amounted to $1.3 billion, or
approximately 67.06% of our total deposits, compared to broker deposits in
the
amount of $1.2 billion and $967.2 million, or approximately 64.35% and 55.77%
of
our total deposits, for the years 2006 and 2005, respectively. As of December
31, 2007, approximately $658.9 million in broker deposits, or approximately
49.30% of our total broker deposits, mature within one year. Our ability to
continue to acquire broker deposits is subject to our ability to price these
deposits at competitive levels, which may substantially increase our funding
costs, and the confidence of the market. In addition, if our capital ratios
fall
below the levels necessary to be considered “well-capitalized” under current
regulatory guidelines, we could be restricted in using broker deposits as a
short-term funding source.
We
also
have borrowings in the form of repurchase obligations with the Federal Home
Loan
Bank, or the FHLB, and other broker-dealers. These agreements are collateralized
by some of our investment securities. As of December 31, 2007, our repurchase
obligations totaled $496.4 million, of which $217.2 million, or
approximately 43.76% of the total repurchase obligations, mature within one
year. If we are unable to borrow in the form of repurchase obligations, we
may
be required to seek higher cost funding sources, which could materially and
adversely affect our net interest income.
We
have experienced rapid growth in recent years, and we may be unable to
successfully continue to implement our growth strategy, which may adversely
affect our business, financial condition, results of operations, cash flows
and/or future prospects.
Our
assets have grown rapidly in recent years. With the ultimate goal of increasing
net income, we have grown our assets from $1.3 billion as of December 31,
2003 to $2.8 billion as of December 31, 2007. The types of assets on our
balance sheet that have experienced the largest categorical increases are
commercial loans and lease financings. We have funded this growth, in part,
with
broker deposits, FHLB advances, and other borrowings. These types of funds
are
generally more costly and volatile than traditional retail deposits.
We
may
not be able to sustain our current growth rate. Throughout our expansion, we
have been successful in attracting new customers, expanding new services to
existing customers, adding new business lines, engaging in acquisitions and
increasing our deposit base. We cannot assure you that we will be able to
continue this trend, and it will become more difficult to maintain sustained
growth as we increase in size. Our ability to implement our strategy for
continued growth depends on our ability to attract and retain customers in
a
highly competitive market, on the growth of those customers’ businesses, on
entering and expanding in lines of business in which we do not have significant
past experience or for which we have only recently added personnel with the
requisite experience, on our ability to continue to identify new acquisition
targets and on our ability to increase our deposit base. Many of these growth
prerequisites may be affected by circumstances that are beyond our control.
Our
inability to meet any of these growth prerequisites could have a material
adverse effect on our business, financial condition, results of operations,
cash
flows and/or future prospects.
We
rely heavily on our management team and the unexpected loss of key officers
could adversely affect our business, financial condition, results of operations,
cash flows and/or future prospects.
Our
success has been and will continue to be greatly influenced by our ability
to
retain the services of existing senior management and, as we expand, to attract
and retain qualified additional senior and middle management. Rafael
Arrillaga-Torréns, Jr., our President and Chief Executive Officer, has been
instrumental in managing our business affairs. Our other senior executive
officers have had, and will continue to have, a significant role in the
development and management of our business. The loss of the services of any
of
our senior executive officers could have an adverse effect on our business,
financial condition, results of operations, cash flows and/or future prospects.
We have not established a detailed management succession plan. Accordingly,
should we lose the services of any of our senior executive officers, our Board
of Directors may have to search outside of EuroBancshares for a qualified
permanent replacement. This search may be prolonged and we cannot assure you
that we will be able to locate and hire a qualified replacement. We do not
maintain key man life insurance policies on any of our senior executive
officers. We currently do not have any employment agreements with our senior
executive officers, with the exception of a Change in Control Agreement with
Rafael Arrillaga-Torréns, Jr., our Chairman of the Board, President and Chief
Executive Officer, and Yadira R. Mercado, our Executive Vice President and
Chief
Financial Officer. If any of our senior executive officers leaves his or her
respective position, our business, financial condition, results of operations,
cash flows and/or future prospects may suffer.
The
regulatory capital treatment of our junior subordinated debentures and related
trust preferred securities is uncertain.
Financial
holding companies with more than $500 million in assets, like us, must
maintain minimum capital ratios. In particular, we must maintain a leverage
ratio of Tier 1 capital to average assets of 5.0%; a Tier 1 risk-based
capital ratio of 6.0% of risk-weighted assets; and a total risk-based capital
ratio (Tier 1 and Tier 2 capital) of 10.0% of risk-weighted assets to
be considered “well-capitalized” for regulatory purposes. The Federal Reserve
Board’s current rules regarding the capital treatment of trust preferred
securities allow us to count trust preferred securities as Tier 1 capital
up to 25.0% of our total Tier 1 capital for regulatory purposes. The
remaining portion counts as Tier 2 capital.
On
March
1, 2005, the Federal Reserve Board adopted the final rule that allows the
continued limited inclusion of trust preferred securities in the Tier 1 capital
of bank holding companies (BHCs). Under the final rule, trust preferred
securities and other restricted core capital elements would be subject to
stricter quantitative limits. The Federal Reserve Board’s final rule limits
restricted core capital elements to 25% of all core capital elements, net of
goodwill less any associated deferred tax liability. Amounts of restricted
core
capital elements in excess of these limits generally may be included in Tier
2
capital. The final rule provides a five-year transition period, ending March
31,
2009, for application of the quantitative limits. As of December 31, 2007,
we
had $20.0 million in trust preferred securities of which all counted as
Tier 1 capital.
A
determination by the Federal Reserve Board not to continue to allow the
inclusion of our junior subordinated debentures or the trust preferred
securities in Tier 1 capital, or otherwise limiting the inclusion of such
debentures or securities in Tier 1 capital, could have a material and
adverse impact on our regulatory capital levels and cause our capital ratios
to
fall below the levels necessary to be considered “well-capitalized” under
current regulatory guidelines. This could impact our ability to grow our assets.
In addition, inadequate regulatory capital levels may result in the imposition
of certain operating restrictions on us and Eurobank, including restrictions
in
using broker deposits as a short-term funding source.
Eurobank
entered into a Cease and Desist Order with the FDIC regarding its compliance
with anti-money laundering laws and the Bank Secrecy Act.
On
March
13, 2007, the Board of Directors of Eurobank (the “Bank”), the wholly-owned
banking subsidiary of EuroBancshares, consented to the issuance of a Cease
and
Desist Order by the Federal Deposit Insurance Corporation based upon the
findings of the FDIC and the Commonwealth of Puerto Rico Office of the
Commissioner of Financial Institutions relating to deficiencies in the Bank’s
Bank Secrecy Act/Anti-Money Laundering Compliance Program. Under the terms
of
the FDIC order, the Bank is required to make specific improvements to its
anti-money laundering and BSA compliance activities. While Eurobank believes
that it will be able to implement effective compliance procedures necessary
to
remediate the deficiencies identified in the FDIC order, in the event that
Eurobank is unable to satisfy the requirements imposed by the FDIC order,
Eurobank may become subject to monetary fines and penalties as well as
additional restrictions on its banking operations, which could affect its
ability to execute certain aspects of its business plan. Such measures could
materially and adversely affect its business, financial condition, results
of
operations, cash flows and/or future prospects.
Risks
Relating to an Investment in Our Common Stock
Our
common stock has a short trading history and you may not be able to trade our
common stock if an active trading market does not prevail. Additionally, the
price of our common stock may fluctuate
significantly.
The
market price of our common stock may be subject to significant fluctuation
in
response to numerous factors, including variations in our annual or quarterly
financial results or those of our competitors, changes by financial research
analysts in their evaluation of our financial results or those of our
competitors, or our failure or that of our competitors to meet such estimates,
conditions in the economy in general or the banking industry in particular,
or
unfavorable publicity affecting us or the banking industry. In addition, the
equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies’ securities
and have been unrelated to the operating performance of those companies. In
addition, the sale by any of our large stockholders of a significant portion
of
that stockholder’s holdings could have a material adverse effect on the market
price of our common stock. Further, the registration of any significant amount
of additional shares of our common stock will have the immediate effect of
increasing the public float of our common stock and any such increase may cause
the market price of our common stock to decline or fluctuate significantly.
Any
such fluctuations may adversely affect the prevailing market price of the common
stock.
Our
executive officers and directors own a significant number of shares of our
common stock, allowing management significant control over our corporate
affairs.
As
of
December 31, 2007, our executive officers and directors beneficially own 50.29%
of the outstanding shares of our common stock. Accordingly, these executive
officers and directors will be able to control, to a significant extent, the
outcome of all matters required to be submitted to our stockholders for
approval, including decisions relating to the election of directors, the
determination of our day-to-day corporate and management policies and other
significant corporate transactions.
Your
share ownership may be diluted by the issuance of additional shares of our
common stock in the future.
Your
share ownership may be diluted by the issuance of additional shares of our
common stock in the future. First, we have adopted a stock option plan that
provides for the granting of stock options to our directors, executive officers
and other employees. As of December 31, 2007, 998,570 shares of our common
stock were issuable under options granted in connection with our stock option
plans. In addition, 400,130 shares of our common stock are reserved for
future issuance to directors, officers and employees under our stock option
plan. It is probable that the stock options will be exercised during their
respective terms if the fair market value of our common stock exceeds the
exercise price of the particular option. If the stock options are exercised,
your share ownership will be diluted.
In
addition, our amended and restated certificate of incorporation authorizes
the
issuance of up to 150,000,000 shares of common stock, but does not provide
for
preemptive rights to the holders of our common stock. Any authorized but
unissued shares are available for issuance by our Board of Directors. As a
result, if we issue additional shares of common stock to raise additional
capital or for other corporate purposes, you may be unable to maintain your
pro
rata ownership in EuroBancshares.
Future
sales of common stock by existing stockholders may have an adverse impact on
the
market price of our common stock.
Sales
of
a substantial number of shares of our common stock in the public market, or
the
perception that large sales could occur, could cause the market price of our
common stock to decline or limit our future ability to raise capital through
an
offering of equity securities. As of December 31, 2007, there were
19,093,315 shares of our common stock outstanding, which are freely
tradable without restriction or further registration under the federal
securities laws unless purchased or sold by our “affiliates” within the meaning
of Rule 144 under the Securities Act.
Holders
of our junior subordinated debentures have rights that are senior to those
of
our stockholders.
On
December 19, 2002, we issued $20.6 million of floating rate junior
subordinated interest debentures in connection with a $20.0 million trust
preferred securities issuance by our subsidiary, Eurobank Statutory
Trust II. The 2002 junior subordinated debentures mature in 2032. The
purpose of this transaction was to raise additional capital to fund our
continued growth.
Payments
of the principal and interest on the trust preferred securities of Eurobank
Statutory Trust II are conditionally guaranteed by us. The 2002 junior
subordinated debentures are senior to our shares of common stock. As a result,
we must make payments on the junior subordinated debentures before any dividends
can be paid on our common stock and, in the event of our bankruptcy, dissolution
or liquidation, the holders of the junior subordinated debentures must be
satisfied before any distributions can be made on our common stock. We have
the
right to defer distributions on the 2002 junior subordinated debentures (and
the
related trust preferred securities) for up to five years, during which time
no
dividends may be paid on our common stock.
Holders
of our Series A Preferred Stock have rights senior to those of our common
stockholders.
In
connection with our acquisition of BankTrust, we issued 430,537 shares in the
amount of $10.8 million of our Series A Preferred Stock to certain
stockholders of BankTrust in exchange for their shares of the Series A and
Series B preferred stock of BankTrust. Our Series A Preferred Stock
has rights and preferences that could adversely affect holders of our common
stock. For example, we generally are unable to declare and pay dividends on
our
common stock if there are any accrued and unpaid dividends on our Series A
Preferred Stock for the preceding twelve months. Additionally, upon any
voluntary or involuntary liquidation, dissolution, or winding up of our
business, the holders of our Series A Preferred Stock are entitled to
receive distributions out of our available assets before any distributions
can
be made to holders of our common stock.
Provisions
of our amended and restated certificate of incorporation and amended and
restated bylaws could delay or prevent a takeover of us by a third
party.
Our
amended and restated certificate of incorporation and amended and restated
bylaws could delay, defer or prevent a third party from acquiring us, despite
the possible benefit to our stockholders, or could otherwise adversely affect
the price of our common stock. For example, our bylaws contain advance notice
requirements for nominations for election to our Board of Directors and for
proposing matters that stockholders may act on at stockholder meetings. We
also
have a staggered board of directors, which means that only one-third of our
Board of Directors can be replaced by stockholders at any annual meeting.
We
currently do not intend to pay dividends on our common stock. In addition,
our
future ability to pay dividends is subject to restrictions. As a result, capital
appreciation, if any, of our common stock will be your sole source of gains
for
the foreseeable future.
We
have
not historically and we currently do not intend to pay any dividends on our
common stock. In addition, since we are a financial holding company with no
significant assets other than Eurobank, we have no material source of income
other than dividends that we receive from Eurobank. Therefore, our ability
to
pay dividends to our stockholders will depend on Eurobank’s ability to pay
dividends to us. Moreover, banks and bank holding companies are both subject
to
federal and Puerto Rico regulatory restrictions on the payment of cash
dividends. We intend to retain the earnings of Eurobank to support growth and
build equity capital. Accordingly, you should not expect to receive dividends
from us in the foreseeable future.
We
are
also restricted from paying dividends on our common stock if we have deferred
payments of the interest on, or an event of default has occurred with respect
to, our junior subordinated debentures. In addition, we generally are unable
to
declare and pay dividends on our common stock if there are any accrued and
unpaid dividends on our Series A Preferred Stock for the preceding
12 months.
Your
shares are not an insured deposit.
Your
investment in our common stock will not be a bank deposit and will not be
insured or guaranteed by the FDIC or any other government agency. Your
investment will be subject to investment risk, and you must be capable of
affording the loss of your entire investment.
Risks
Relating to the Economic Environment
The
ongoing economic crisis in Puerto Rico could adversely affect our business,
financial condition, results of operations, cash flows and/or future
prospects.
Between
May 1 and May 17, 2006, Puerto Rico experienced a partial government shutdown
caused by the inability of the Legislature and Governor to agree on a budget,
which resulted in an estimated $740 million budget shortfall. This government
shutdown forced the closure of approximately 43 public agencies, including
Puerto Rico’s public schools, leaving an estimated 90,000 government employees
out of work. In response to this economic crisis, several bills were approved
by
the Puerto Rico legislature
to
impose additional taxes, some of which were applicable to the banking industry,
resulting in an increase in our effective tax rate. For more information
relating to additional taxes imposed to the banking industry, see the section
captioned
“Provision
for Income Taxes”
in Item
7 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations of this Annual Report on Form 10-K.
In
July
4, 2006, the Commonwealth of Puerto Rico enacted legislation authorizing a
new
sales and use tax of up to 7%. The new sales and use tax is comprised of a
1.5% municipal tax, which some municipalities started collecting after the
approval of this law, and a 5.5% central government sales and use tax that
became effective as of November 15, 2006. This legislation also abrogated
the general excise tax on most imported and manufactured goods.
In
addition, the legislation mandates the establishment of measures to limit
spending. These measures include a significant reduction in debt service due
to
the 1% of sales tax designated for debt service and restructuring of debt
transactions, as well as a millionaire reduction in non-debt service expenses
by
planned savings in the health and education areas.
For
the
fiscal year ended June 30, 2007, the Puerto Rico Planning Board registered
a
contraction of 1.4% and estimates an additional decline of 1.8% for fiscal
year
ending June 30, 2008.
Certain
sectors believe the revenue yield of the sales tax could be lower than
previously expected because of tax exemptions included in the law. Also, these
sectors believe the government's plan to reduce expenditures heavily depends
on
debt restructuring and health and education cuts, which could be in an early
phase of development.
A
period
of reduced economic growth or recession, such as this, has had an adverse
effect on the quality of our loan and corporate bond portfolios. During an
economic downturn, affected borrowers may, among other things, be less likely
to
repay interest and principal on their loans or bonds as scheduled. Moreover,
the
value of real estate or other collateral that secures the loans and bonds could
be adversely affected by an economic downturn. This would cause the number
of
foreclosures to increase and, therefore, decrease our ability to recover losses
on such properties and assets.
If
the
economic slowdown persists, those adverse effects may continue and could result
in increased delinquency rates in the short-term until the economy regains
a
more sustainable growth.
Risks
Related to United States Taxation
If
we or any of our subsidiaries are determined to be a passive foreign investment
company, U.S. holders of our stock could be subject to adverse tax
consequences.
If
we or
any of our subsidiaries are determined to be a passive foreign investment
company, known as a “PFIC”, U.S. holders could be subject to adverse United
States federal income tax consequences. Specifically, if either we or any of
our
subsidiaries are determined to be a PFIC for any taxable year, each
U.S. holder would generally be subject to taxation under special rules,
regardless of whether we or any of our subsidiaries remains a PFIC, with respect
to (1) any “excess distribution” made by us to the U.S. holders during
that taxable year, and (2) any gain realized on the sale, pledge or other
disposition during that taxable year of our common stock or the stock of the
subsidiary that was determined to be a PFIC. These rules could, in addition
to
other consequences, cause certain income otherwise classified as capital gain
to
be taxed at ordinary income rates or the highest rate of tax for ordinary income
in the year to which it is allocated regardless of the U.S. holder’s particular
tax situation and cause the U.S. holder to be subject to an interest charge
on
the deemed deferred amount at the underpayment rate. “Excess distributions”
generally are any distributions received by the U.S. holder on the common
stock in a taxable year that exceed 125% of the average annual distributions
received by the U.S. holder in the three preceding taxable years, or the
U.S. holder’s holding period for the common stock, if shorter. We believe
that neither we nor any of our subsidiaries will be determined to be a PFIC
in
our current taxable year, and we expect to continue to conduct our affairs
in a
manner so that neither we nor any of our subsidiaries qualifies as a PFIC in
the
foreseeable future. However, we have not requested or received an opinion from
our United States tax counsel as to whether we will be determined to be a PFIC
in our current taxable year and we can give no assurance in this regard.
ITEM
2.
Properties.
Our
principal offices, including the principal offices of the Bank, are located
in
our main office building at State Road PR-1, Km. 24.5, Quebrada Arenas Ward,
in
San Juan, Puerto Rico.
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 includes a 57,187 square foot office building that consolidates our
headquarters, administrative operations, and our leasing division. The purchase
price for the property was $12,360,000. By December 2007, we had completed
moving our headquarters, our leasing division, and almost all administrative
departments to the new building.
As
of
December 31, 2007, office building improvements amounted to $2.9
million.
Currently,
in addition to the main office, we operate at 31 locations. The following is
a
list of our operating locations:
|
Location
(1)
|
|
Lease
Expiration Date
(2)
|
|
Owned
or Leased
|
|
|
|
|
|
|
|
Main
Office:
|
|
N/A
|
|
Owned
(3)
|
|
State
Road PR-1, Km. 24.5
|
|
|
|
|
|
Quebrada
Arenas Ward
|
|
|
|
|
|
San
Juan, Puerto Rico 00926
|
|
|
|
|
|
Location
(1)
|
|
Lease
Expiration Date
(2)
|
|
Owned
or Leased
|
|
|
|
|
|
|
|
Departments
|
|
|
|
|
|
Trust
and Wealth Management:
|
|
N/A
|
|
Owned
(4)
|
|
Mezzanine
|
|
|
|
|
|
270
Muñoz Rivera Avenue
|
|
|
|
|
|
San
Juan, Puerto Rico 00918
|
|
|
|
|
|
|
|
|
|
|
|
EuroMortgage:
|
|
|
|
|
|
State
Road #190
|
|
6/30/2007
(5)
|
|
Leased
(6)
|
|
Lot
#1, Km. 0.7
|
|
|
|
|
|
La
Cerámica Industrial Park
|
|
|
|
|
|
Carolina,
Puerto Rico 00983
|
|
|
|
|
|
|
|
|
|
|
|
Proof
& Transit and Checking Accounts:
|
|
|
|
|
|
Old
Corona Building
|
|
8/31/2007
(5)
|
|
Leased
|
|
Building
#5, Second Floor Local #3
|
|
|
|
|
|
Santurce,
Puerto Rico 00907
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Center:
|
|
|
|
|
|
Urb.
Villa del Rey #33
|
|
7/31/2008
|
|
Leased
|
|
Pino
2
nd
|
|
|
|
|
|
Caguas,
Puerto Rico 00725
|
|
|
|
|
|
|
|
|
|
|
|
Branches
|
|
|
|
|
|
Aguadilla
Branch
|
|
10/31/2006
(7)
|
|
Leased
|
|
State
Road No. PR2, Km. 129.3
|
|
|
|
|
|
Aguadilla,
Puerto Rico 00603
|
|
|
|
|
|
|
|
|
|
|
|
Bayamón
Branch
|
|
9/30/2017
|
|
Leased
|
|
Comerío
Avenue, corner of Sierra Bayamón
|
|
|
|
|
|
Bayamón,
Puerto Rico 00961
|
|
|
|
|
|
|
|
|
|
|
|
Cabo
Rojo Branch
|
|
6/1/2027
|
|
Leased
|
|
State
Road #100, Km. 5.5
|
|
|
|
|
|
Cabo
Rojo, Puerto Rico 00623
|
|
|
|
|
|
|
|
|
|
|
|
Caguas
I Branch
|
|
5/31/2007
(5)
|
|
Leased
|
|
A-1
Muñoz Rivera Avenue
|
|
|
|
|
|
Caguas,
Puerto Rico 00725
|
|
|
|
|
|
|
|
|
|
|
|
Caguas
II Branch
|
|
6/30/2010
|
|
Leased
|
|
32
Acosta Street, corner of Ruiz Belvis
|
|
|
|
|
|
Caguas,
Puerto Rico 00725
|
|
|
|
|
|
|
|
|
|
|
|
Canóvanas
Branch
|
|
6/30/2025
|
|
Leased
|
|
Marginal
PR-3, Km. 20.3
|
|
|
|
|
|
Canóvanas,
Puerto Rico 00729
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Branch
|
|
9/30/2007
(5)
|
|
Leased
(6)
|
|
State
Road #190
|
|
|
|
|
|
Lot
#1, Km. 0.7
|
|
|
|
|
|
La
Cerámica Industrial Park
|
|
|
|
|
|
Carolina,
Puerto Rico 00983
|
|
|
|
|
|
|
|
|
|
|
|
Cayey
Branch
|
|
2/28/2029
|
|
Leased
|
|
State
Road #1, Km. 56.2
|
|
|
|
|
|
Montellano
Ward
|
|
|
|
|
|
Cayey,
Puerto Rico 00736
|
|
|
|
|
|
Location
(1)
|
|
Lease
Expiration Date
(2)
|
|
Owned
or Leased
|
|
|
|
|
|
|
|
Cidra
Branch
|
|
4/30/2006
(5)
|
|
Leased
|
|
Luis
Muñoz Rivera Street
|
|
|
|
|
|
corner
of José de Diego
|
|
|
|
|
|
Cidra,
Puerto Rico 00739
|
|
|
|
|
|
|
|
|
|
|
|
Condado
Branch
|
|
6/30/2021
|
|
Leased
|
|
1408
Magdalena Avenue
|
|
|
|
|
|
Santurce,
Puerto Rico 00907
|
|
|
|
|
|
|
|
|
|
|
|
Eurobank
Plaza
|
|
N/A
|
|
Owned
(3)
|
|
State
Road PR-1, Km. 24.5
|
|
|
|
|
|
Quebrada
Arenas Ward
|
|
|
|
|
|
San
Juan, Puerto Rico 00926
|
|
|
|
|
|
|
|
|
|
|
|
Fajardo
Branch
|
|
12/31/2026
|
|
Leased
|
|
State
Road #3, Km. 4.5, Ramal 195
|
|
|
|
|
|
Fajardo,
Puerto Rico 00738
|
|
|
|
|
|
|
|
|
|
|
|
Hatillo
Branch
|
|
11/30/2032
|
|
Leased
|
|
State
Road No. PR2, Km. 87.0
|
|
|
|
|
|
Hatillo,
Puerto Rico 00659
|
|
|
|
|
|
|
|
|
|
|
|
Hato
Rey Branch
|
|
N/A
|
|
Owned
(4)
|
|
270
Muñoz Rivera Avenue
|
|
|
|
|
|
San
Juan, Puerto Rico 00918
|
|
|
|
|
|
|
|
|
|
|
|
Humacao
Branch
|
|
5/31/2026
|
|
Leased
|
|
Plaza
Mall Lot #3, State Road No. PR52
|
|
|
|
|
|
Corner
State Road No. PR3
|
|
|
|
|
|
Humacao,
Puerto Rico 00791
|
|
|
|
|
|
|
|
|
|
|
|
Manatí
Branch
|
|
8/31/2011
|
|
Leased
|
|
State
Road No. PR2, Km. 49.5
|
|
|
|
|
|
Manatí,
Puerto Rico 00674
|
|
|
|
|
|
|
|
|
|
|
|
Ponce
Salud Branch
|
|
5/1/2010
|
|
Leased
|
|
Thamar
Building, Salud Street #32
|
|
|
|
|
|
Ponce,
Puerto Rico 00731
|
|
|
|
|
|
|
|
|
|
|
|
Ponce
Hostos Branch
|
|
10/31/2008
|
|
Leased
|
|
26
Hostos Avenue
|
|
|
|
|
|
Ponce,
Puerto Rico 00731
|
|
|
|
|
|
|
|
|
|
|
|
Ponce
Morell Campos Branch
|
|
3/30/2011
|
|
Leased
|
|
State
Road #10, Km. 1.5
|
|
|
|
|
|
Ponce,
Puerto Rico 00731
|
|
|
|
|
|
|
|
|
|
|
|
Ponce
Marvesa Branch
|
|
12/31/2025
|
|
Leased
|
|
State
Road 14 Km. 3.4
|
|
|
|
|
|
Machuelo
Ward
|
|
|
|
|
|
Ponce,
Puerto Rico 00731
|
|
|
|
|
|
|
|
|
|
|
|
Puerto
Nuevo Branch
|
|
12/31/2011
|
|
Leased
|
|
1302
Jesús T. Piñero
|
|
|
|
|
|
Corner
de Diego Avenue
|
|
|
|
|
|
San
Juan, Puerto Rico 00921
|
|
|
|
|
|
|
|
|
|
|
|
San
Francisco Branch
|
|
4/30/2011
|
|
Leased
|
|
Villas
de San Francisco Shopping Center
|
|
|
|
|
|
85
de Diego Avenue
|
|
|
|
|
|
Río
Piedras, Puerto Rico 00927
|
|
|
|
|
|
Location
(1)
|
|
Lease
Expiration Date
(2)
|
|
Owned
or Leased
|
|
San
Lorenzo Branch
|
|
8/01/2008
|
|
Leased
|
|
155
South Luis Muñoz Rivera Street
|
|
|
|
|
|
San
Lorenzo, Puerto Rico 00754
|
|
|
|
|
|
|
|
|
|
|
|
San
Patricio Branch
|
|
4/30/2014
|
|
Leased
|
|
San
Patricio Office Center
|
|
|
|
|
|
8
Tabonuco Street
|
|
|
|
|
|
Guaynabo,
Puerto Rico 00969
|
|
|
|
|
|
|
|
|
|
|
|
Villa
Palmera Branch
|
|
12/31/2008
|
|
Leased
|
|
Eduardo
Conde Avenue
|
|
|
|
|
|
corner
of Tapia Street
|
|
|
|
|
|
Santurce,
Puerto Rico 00915
|
|
|
|
|
|
|
|
|
|
|
|
Mayagüez
Branch
|
|
11/30/2025
|
|
Leased
|
|
State
Road No. PR2, Km. 153.2
|
|
|
|
|
|
Mayagüez,
Puerto Rico 00681
|
|
|
|
|
|
(1)
|
As
of
December 31, 2007,
Eurobank had two real estate properties for future
branch development, of which one was leased from one of our
directors; and other two land lots for future expansion of our
headquarters.
|
|
(2)
|
Most of these leases have options for extensions. In addition,
several
have early termination clauses.
|
|
(3)
|
The property owned by EuroBancshares located at State Road PR-1,
Km. 24.5,
in San Juan, includes a 57,187 square foot office building that
consolidates our headquarters, administrative operations, and our
leasing
division.
|
|
(4)
|
The property owned by EuroBancshares located at 270 Muñoz Rivera Avenue is
part of a 180,000 square foot commercial office building. EuroBancshares
owns a portion of the lobby area on the ground floor where it
operates a
branch, the mezzanine where it operates its trust business, and
also owns
the first floor of this office building, which is currently vacant.
Until
December 2007, our headquarters, as well as other administrative
departments, were located on the first floor of this office
building.
|
|
(5)
|
The lease for these locations is expired, but Eurobank continues
to pay
rent to the lessor on a month-to-month basis. Eurobank believes
that the
lessor will not require Eurobank to vacate the premises in the
immediate
future.
|
|
(6)
|
These properties are leased from one of our directors.
|
|
(7)
|
T
he
Aguadilla Branch is currently under construction. Once the
construction is
finished, the lease term will be twenty years with an option
to extend the
contract for two additional terms of five years each. We
started operating
the branch in a trailer until construction is
finished.
|
ITEM
3.
Legal
Proceedings.
From
time
to time, we and our subsidiaries are engaged in legal proceedings in the
ordinary course of business, none of which are cu
r
rently
considered to have a material impact on our financial position or results
of
operation.
ITEM
4.
Submission
of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of security holders during the fourth
quarter
of 2007.
PART
II
ITEM
5.
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Market
Information
Our
common stock trades and is listed on the NASDAQ Global Select Market under
the
symbol “EUBK”. As of February 29, 2008, there were 20,082,398 shares issued
and 19,143,315 shares outstanding held by 333 stockholders of record, including
all directors and officers of EuroBancshares, Inc., and excluding beneficial
owners whose shares are held in “street” name by securities broker-dealers or
other nominees. The number of beneficial owners is unknown to us at this
time.
The
following table presents the high and low sales prices for our common stock
reported on the NASDAQ Global Select Market for the last two fiscal
years:
|
Quarter
Ended
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
$
|
15.13
|
|
$
|
11.64
|
|
|
June
30, 2006
|
|
|
12.00
|
|
|
8.35
|
|
|
September
30, 2006
|
|
|
9.90
|
|
|
8.47
|
|
|
December
31, 2006
|
|
|
9.47
|
|
|
8.50
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
|
9.06
|
|
|
8.41
|
|
|
June
30, 2007
|
|
|
9.23
|
|
|
8.50
|
|
|
September
30, 2007
|
|
|
9.07
|
|
|
7.70
|
|
|
December
31, 2007
|
|
|
8.06
|
|
|
3.61
|
|
Dividends
We
have
not paid cash dividends historically, nor do we anticipate paying any cash
dividends on our common stock in the foreseeable future. Instead, we anticipate
that all of our earnings in the foreseeable future will be used for working
capital, to support our operations and to finance the growth and development
of
our business. Any future determination relating to dividend policy will be
made
at the discretion of our Board of Directors and will depend on a number of
factors, including our future earnings, capital requirements, financial
condition, future prospects and other factors that our Board of Directors may
deem relevant.
As
a
holding company, we ultimately depend on Eurobank to provide funding for our
noninterest expenses and dividends. Various banking laws applicable to Eurobank
limit the payment of dividends, management fees and other distributions by
Eurobank to us, and may therefore limit our ability to pay dividends on our
common stock. We are also restricted from paying dividends on our common stock
if we have deferred payments of the interest, or if an event of default has
occurred, on our junior subordinated debentures. In addition, we generally
are
unable to declare and pay dividends on our common stock if there are any accrued
and unpaid dividends on our Series A Preferred Stock for the preceding 12
months. For additional information, see the sections of this report captioned
“Supervision
and Regulation — EuroBancshares — Regulatory Restrictions on Dividends; Source
of Strength” and “Supervision and Regulation — Eurobank —
Dividends.”
Securities
Authorized for Issuance Under Equity Compensation Plans
Under
the
2005 Stock Option Plan, approved at the 2005 annual meeting held at the main
office of EuroBancshares on May 12, 2005, 700,000 shares of our common stock
were reserved for issuance pursuant to the exercise of stock options granted
under the plan. As of December 31, 2007, 299,870 options to acquire shares
of
our common stock have been granted under the 2005 Stock Option Plan. Since
the
2005 Stock Options Plan was approved, no further options were permitted to
be
issued under the 2002 Stock Option Plan.
The
following table presents information regarding our equity compensation plans
at
December 31, 2007:
|
Equity
Compensation Plan Information
|
|
|
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
|
Weighted-average
exercise price of outstanding options, warrants and
rights
(b)
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
|
|
|
|
|
|
2002
Stock Option Plan
|
|
|
718,600
|
|
$
|
7.95
|
|
|
—
|
|
|
2005
Stock Option Plan
|
|
|
279,970
|
|
|
8.19
|
|
|
400,130
|
|
ITEM
6.
Selected
Financial Data.
We
derived our selected consolidated financial data as of and for each of the
years
in the five year period ended December 31, 2007 from our audited consolidated
financial statements and the notes thereto.
You
should read this information in conjunction with
“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”
and the
financial statements and the related notes included elsewhere in this Annual
Report. Results from past periods are not necessarily indicative of results
that
may be expected for any future period. Average balances have been computed
using
daily averages.
|
|
|
As
of or for the Year Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
(Dollars
in thousands, except per share data)
|
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
$
|
173,325
|
|
$
|
162,146
|
|
$
|
133,233
|
|
$
|
95,394
|
|
$
|
64,949
|
|
|
Total
interest expense
|
|
|
105,470
|
|
|
95,363
|
|
|
64,936
|
|
|
41,481
|
|
|
31,922
|
|
|
Net
interest income
|
|
|
67,855
|
|
|
66,783
|
|
|
68,297
|
|
|
53,913
|
|
|
33,027
|
|
|
Provision
for loan and lease losses
|
|
|
25,348
|
|
|
16,903
|
|
|
12,775
|
|
|
7,100
|
|
|
6,451
|
|
|
Net
interest income after provision for
loan
and lease losses
|
|
|
42,507
|
|
|
49,880
|
|
|
55,522
|
|
|
46,813
|
|
|
26,576
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and other fees
|
|
|
9,585
|
|
|
8,476
|
|
|
9,069
|
|
|
8,057
|
|
|
5,456
|
|
|
Net
loss on non-hedging derivatives
|
|
|
|
|
|
|
|
|
(944
|
)
|
|
—
|
|
|
—
|
|
|
Gain
on sale of loans and leases, net
|
|
|
380
|
|
|
401
|
|
|
945
|
|
|
1,395
|
|
|
3,547
|
|
|
(Loss)
gain on sale of securities, net
|
|
|
|
|
|
(1,092
|
)
|
|
(301
|
)
|
|
—
|
|
|
707
|
|
|
(Loss)
gain on sale of other real estate owned and
repossessed
assets, net
|
|
|
(1,286
|
)
|
|
16
|
|
|
(1,040
|
)
|
|
(359
|
)
|
|
(663
|
)
|
|
Total
noninterest income
|
|
|
8,678
|
|
|
7,801
|
|
|
7,729
|
|
|
9,093
|
|
|
9,047
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
19,890
|
|
|
17,507
|
|
|
14,727
|
|
|
11,111
|
|
|
8,867
|
|
|
Professional
fees
|
|
|
4,496
|
|
|
4,104
|
|
|
3,912
|
|
|
2,196
|
|
|
1,402
|
|
|
Other
noninterest expense
|
|
|
23,839
|
|
|
21,775
|
|
|
19,005
|
|
|
15,635
|
|
|
12,039
|
|
|
Total
noninterest expense
|
|
|
48,225
|
|
|
43,386
|
|
|
37,644
|
|
|
28,942
|
|
|
22,308
|
|
|
Income
before income taxes and extraordinary gain
|
|
|
|
|
|
14,295
|
|
|
25,607
|
|
|
26,964
|
|
|
13,315
|
|
|
Income
tax (benefit) / expense
|
|
|
(249
|
)
|
|
6,283
|
|
|
9,077
|
|
|
8,663
|
|
|
3,432
|
|
|
Extraordinary
gain
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,419
|
|
|
—
|
|
|
Net
income
|
|
$
|
3,209
|
|
$
|
8,012
|
|
$
|
16,530
|
|
$
|
22,720
|
|
$
|
9,883
|
|
|
Common
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share — basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before extraordinary gain
|
|
$
|
0.13
|
|
$
|
0.38
|
|
$
|
0.81
|
|
$
|
1.08
|
|
$
|
0.71
|
|
|
Extraordinary
gain
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.27
|
|
|
—
|
|
|
Net
income
|
|
|
0.13
|
|
|
0.38
|
|
|
0.81
|
|
|
1.35
|
|
|
0.71
|
|
|
Earnings
per common share — diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before extraordinary gain
|
|
|
0.13
|
|
|
0.37
|
|
|
0.78
|
|
|
1.04
|
|
|
0.69
|
|
|
Extraordinary
gain
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.26
|
|
|
—
|
|
|
Net
income
|
|
|
0.13
|
|
|
0.37
|
|
|
0.78
|
|
|
1.30
|
|
|
0.69
|
|
|
|
|
|
As
of or for the Year Ended December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Book
value per common share
|
|
|
8.86
|
|
|
8.32
|
|
|
7.95
|
|
|
7.54
|
|
|
4.67
|
|
|
Common
shares outstanding at end of period
|
|
|
19,093,315
|
|
|
19,123,821
|
|
|
19,398,848
|
|
|
19,564,086
|
|
|
13,947,396
|
|
|
Average
diluted shares outstanding
|
|
|
19,391,638
|
|
|
19,657,559
|
|
|
20,277,799
|
|
|
17,152,261
|
|
|
14,234,168
|
|
|
Balance
Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,751,399
|
|
$
|
2,500,920
|
|
$
|
2,391,283
|
|
$
|
2,102,789
|
|
$
|
1,320,934
|
|
|
Investment
securities available-for-sale
|
|
|
707,103
|
|
|
535,159
|
|
|
627,080
|
|
|
555,482
|
|
|
324,938
|
|
|
Investment
securities held-to-maturity
|
|
|
30,845
|
|
|
38,433
|
|
|
42,471
|
|
|
49,504
|
|
|
—
|
|
|
Total
loans and leases, net of unearned
|
|
|
1,857,219
|
|
|
1,750,838
|
|
|
1,577,196
|
|
|
1,387,613
|
|
|
899,392
|
|
|
Allowance
for loan and lease losses
|
|
|
28,137
|
|
|
18,937
|
|
|
18,188
|
|
|
19,039
|
|
|
9,394
|
|
|
Deposits
|
|
|
1,993,046
|
|
|
1,905,356
|
|
|
1,734,128
|
|
|
1,409,036
|
|
|
984,549
|
|
|
Other
borrowings
|
|
|
547,492
|
|
|
394,991
|
|
|
475,712
|
|
|
520,206
|
|
|
264,616
|
|
|
Total
stockholders’ equity
|
|
|
179,918
|
|
|
169,878
|
|
|
164,967
|
|
|
158,302
|
|
|
65,075
|
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average common stockholders’
equity
(2)
|
|
|
1.96
|
%
|
|
5.19
|
%
|
|
10.70
|
%
|
|
18.67
|
%
|
|
16.50
|
%
|
|
Return
on average assets
(3)
|
|
|
0.13
|
|
|
0.33
|
|
|
0.74
|
|
|
1.03
|
|
|
0.87
|
|
|
Net
interest margin
(4)
|
|
|
2.80
|
|
|
2.86
|
|
|
3.29
|
|
|
3.29
|
|
|
3.15
|
|
|
Efficiency
ratio
(5)
|
|
|
63.48
|
|
|
57.89
|
|
|
47.84
|
|
|
44.44
|
|
|
51.48
|
|
|
Loans
and leases to deposits
|
|
|
93.25
|
|
|
91.89
|
|
|
90.95
|
|
|
98.48
|
|
|
91.35
|
|
|
Asset
Quality Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans and
leases
|
|
$
|
98,065
|
|
$
|
49,978
|
|
$
|
36,263
|
|
$
|
40,533
|
|
$
|
26,758
|
|
|
Other
real estate owned and repossessed assets
|
|
|
13,534
|
|
|
13,048
|
|
|
9,517
|
|
|
6,441
|
|
|
6,417
|
|
|
Total
nonperforming assets
|
|
|
111,599
|
|
|
63,026
|
|
|
45,780
|
|
|
46,974
|
|
|
33,175
|
|
|
Nonperforming
assets to total assets
|
|
|
4.06
|
%
|
|
2.52
|
%
|
|
1.91
|
%
|
|
2.23
|
%
|
|
2.51
|
%
|
|
Nonperforming
loans to total loans and leases
|
|
|
5.28
|
|
|
2.85
|
|
|
2.30
|
|
|
2.92
|
|
|
2.98
|
|
|
Allowance
for loan and lease losses to nonperforming loans
|
|
|
28.69
|
|
|
37.89
|
|
|
50.16
|
|
|
46.97
|
|
|
35.11
|
|
|
Allowance
for loan and lease losses to total
loans
|
|
|
1.51
|
|
|
1.08
|
|
|
1.15
|
|
|
1.37
|
|
|
1.04
|
|
|
Net
charge-offs to average loans
|
|
|
0.90
|
|
|
0.97
|
|
|
0.92
|
|
|
0.69
|
|
|
0.47
|
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
ratio
|
|
|
7.55
|
%
|
|
7.92
|
%
|
|
9.35
|
%
|
|
9.91
|
%
|
|
6.76
|
%
|
|
Tier
1 risk-based capital
|
|
|
9.54
|
|
|
10.25
|
|
|
12.45
|
|
|
12.73
|
|
|
8.30
|
|
|
Total
risk-based capital
|
|
|
10.79
|
|
|
11.25
|
|
|
13.49
|
|
|
13.94
|
|
|
11.60
|
|
|
Tangible
common equity to tangible assets
|
|
|
6.15
|
|
|
6.44
|
|
|
6.91
|
|
|
7.54
|
|
|
4.93
|
|
|
(1)
|
Extraordinary
gain resulting from the negative goodwill on the acquisition of BankTrust
in 2004. The excess of the fair value of the assets acquired over
the
purchase price resulted in a negative goodwill of $5.7 million. The
negative goodwill of BankTrust was allocated between a $4.4 million
extraordinary gain, $670,000 of the fair value of intangible assets,
net
of their tax effect, and the $627,000 of the fair value of the acquired
furniture, fixtures and equipment.
|
|
(2)
|
Return
on average common equity is determined by dividing net income before
extraordinary gain by average common
equity.
|
|
(3)
|
Return
on average assets is determined by dividing net income before
extraordinary gain by average
assets.
|
|
(4)
|
Net
interest margin is determined by dividing net interest income (fully
taxable equivalent) by average interest-earning
assets.
|
|
(5)
|
The
efficiency ratio is determined by dividing total noninterest expense
by an
amount equal to net interest income (fully taxable equivalent) plus
noninterest income.
|
ITEM
7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.
The
following discussion and analysis presents our consolidated financial condition
and results of operations for the years ended December 31, 2007, 2006 and 2005.
This discussion should be read together with the
“Selected
Consolidated Financial Data,”
our
consolidated financial statements and the notes related thereto which appear
elsewhere in this Annual Report on Form 10-K.
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. As of December 31, 2007, we had, on a consolidated basis, total
assets of $2.8 billion, net loans and leases of $1.8 billion, investment
securities of $
751.3
million,
total
deposits of $2.0 billion, and stockholders’ equity of $179.9 million. We
currently operate through a network of 26 branch offices located throughout
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.
2007
Key Performance Indicators
We
believe the
following
were key
indicators of our performance and results of operations in 2007:
|
|
●
|
our
total assets grew to $2.751 billion at the end of 2007, representing
an
increase of 10.02%, from $2.501 billion at the end of
2006;
|
|
|
●
|
our
net loans and leases grew to $1.830 billion at the end of 2007,
representing an increase of 5.69%, from $1.732 billion at the end
of
2006;
|
|
|
●
|
our
investment securities grew to $
751.3
million at the end of 2007, representing an increase of 30.00%, from
$577.9 million at the end of 2006;
|
|
|
●
|
our
total deposits grew to $1.993 billion at the end of 2007, representing
an
increase of 4.60%, from $1.905 billion at the end of
2006;
|
|
|
●
|
our
nonperforming assets increased to $111.6 million, or by 77.07%, in
2007,
from $63.0 million at the end of
2006;
|
|
|
●
|
our
total revenue grew to $182.0 million in 2007, representing an increase
of
7.09%, from $169.9 million in 2006;
|
|
|
●
|
our
net interest margin and spread on a fully taxable equivalent basis
was
2.80% and 2.29% in 2007, respectively, compared to 2.86% and 2.33%
in
2006;
|
|
|
●
|
our
provision for loan and lease losses grew to $25.3 million in 2007,
representing an increase of 49.96%, from $16.9 million in 2006;
|
|
|
●
|
our
total noninterest expense grew to $48.2 million in 2007, representing
an
increase of 11.15%, from $43.4 million in 2006;
and
|
|
|
●
|
for
2007, we recorded a tax benefit of $249,000, compared to an income
tax
expense of $6.3 million for 2006.
|
These
items, as well as other factors, resulted in a net income for 2007 of $3.2
million, compared to $8.0 million in 2006, or $0.13 per common share for 2007,
compared to $0.37 per common share for 2006, assuming dilution, and are
discussed in further detail throughout this
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
section
of this Annual Report on Form 10-K.
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 collection losses in our loan and lease portfolio. Losses are
charged and recoveries are credited to the allowance account at the time a
loss
is incurred or a recovery is received. The allowance for loan and lease losses
amounted to $28.1 million, $18.9 million and $18.2 million as of December 31,
2007, 2006 and 2005, respectively. Losses charged to the allowance amounted
to
$18.3 million, $18.8 million and $16.6 million as of December 31, 2007, 2006
and
2005, respectively. Recoveries were credited to the allowance in the amounts
of
$2.1 million, $2.6 million and $3.0 million for those 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,
at least 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 residential mortgages with a 60% or lower loan-to-value, and the
commercial and construction loans pools, loans that are more than 90 days
delinquent result in an additional allowance. When commercial and construction
loans become 90 days delinquent, or earlier if deemed by management, 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 FDIC, as an integral part of their examination processes,
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
periodically 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 $8.1 million, $3.6 million
and
$1.5 million as of December 31, 2007, 2006 and 2005, respectively.
Other
repossessed assets amounted to $5.4 million, $9.4 million and $8.0 million
for
those same periods, 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.
Repossessed vehicles amounted to $4.3 million, $8.3 million and $6.2 million
for
the years ended December 31, 2007, 2006 and 2005, respectively. The total loss
ratio on sale of repossessed vehicles was 9.63%, 6.30% and 7.53% for those
same
years, respectively. The increase in our total loss ratio on the sale of
repossessed vehicles during 2007 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 39.18% in the number of repossessed vehicles in
inventory over six months that were sold during 2007, when compared to 2006.
During 2007, we sold 405 units in inventory over six months, compared to 291
units in inventory over six months sold during 2006. The decrease in our total
loss ratio on the sale of repossessed vehicles during 2006 when compared with
2005 was mainly due to the net effect of: (i) an increase in the sale of damaged
units previously adjusted for subsequent declines in value; (ii) the refinements
made to our methodology for estimating net realizable value of vehicles upon
repossession; and (iii) our decision to increase the valuation of repossessed
vehicles, reducing the book value of the repossessed vehicle in an effort
to expedite the disposition of slow moving inventory.
For
the
year ended December 31, 2007, the total gain on sale of repossessed equipment
was $32,000, compared to a total loss of $413,000 and $169,000 for the years
ended December 31, 2006 and 2005, respectively. Repossessed equipment amounted
to $88,000, $39,000 and $210,000 for those same years, respectively. The
decrease in the total loss on sale of repossessed equipment for year 2007 was
mainly due to a decrease in the amount of repossessed equipment sold during
2007
when compared to 2006, and the fact that, during the fourth quarter of 2007,
a
specialized equipment was sold resulting in a gain of $5,000. During 2007,
the
total amount of repossessed equipment sold decreased by 71.57%, or by $638,000,
to $253,000, from $891,000 in 2006. The increase in the total loss on sale
of
repossessed equipment for year 2006 was mainly due to the sale of damaged
equipment previously adjusted for subsequent declines in value as part our
strategy to aggressively dispose of deteriorated repossessed
equipment.
For
the
year ended December 31, 2007, the total loss on sale of repossessed boats was
$338,000, compared to $539,000 and $419,000 for the years ended December 31,
2006, and 2005, respectively. Total repossessed boats amounted to $991,000,
$1.1
million and $1.5 million for those same years, respectively. The boat financing
portfolio amounted to $35.0 million, $37.4 million and $39.7 million as of
December 31, 2007, 2006 and 2005, respectively. The change in the total loss
on
sale of repossessed boats during 2007 and 2006 were mainly due to fluctuations
in the amount of repossessed boats sold. During 2007, the total of repossessed
boats sold decrease by 57.48%, or $1.5 million, to $1.1 million, from $2.6
million in 2006, after increasing by 137.76%, or $1.5 million, from $1.1 million
in 2005. The decrease in the total loss on sale of repossessed boats during
2006
was mainly due to the sale of five high profile boats, which resulted in lower
losses.
In
2007,
the total loss on sale of OREO totaled $153,000 over seven properties sold
with
an aggregate book value of approximately $835,000, compared to a total gain
on
sale of OREO totaled $454,000 over eleven properties sold with an aggregate
book
value of approximately $4.0 million in 2006, and a total loss of $581,000 over
nine properties sold with an aggregate book value of approximately $3.9 million
in 2005. The total gain on sale of OREO in 2006 included a $362,000 gain from
the sale of a real estate property during the second quarter of
2006.
Results
of Operations for the Years Ended December 31, 2007, 2006 and
2005
Net
Interest Income and Net Interest Margin
Net
interest income, our principal source of earnings, is the difference between
interest income, principally from loan, lease and investment securities
portfolios, and interest expense, principally on customer deposits and
borrowings. 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
average yield on 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 was $67.9 million during the year ended December 31, 2007,
compared to $66.8 million during the year ended December 31, 2006 and $68.3
million during the year ended December 31, 2005, representing an increase of
$1.1 million, or 1.60%, in 2007 and a decrease of $1.5 million, or 2.22%, in
2006. The increase in net interest income during 2007 resulted from the net
effect of an increase in average interest earning assets and increased yields
from higher interest rates, and an increase in average interest-bearing
liabilities and increased cost of funds. The decrease in net interest income
during 2006 was primarily due to increased cost of funds. Our net interest
margin decreased to 2.80% for the year ended December 31, 2007, from 2.86%
and
3.29% for the years ended December 31, 2006 and 2005. Our net interest spread
decreased to 2.29% in 2007, from 2.33% in 2006 and 2.88% in 2005. These declines
in the net interest margin and spread were primarily caused by the increase
in
the average cost of interest bearing liabilities as a result of the rising
short-term interest rates and the LIBOR inverted curve, which increased at
a
faster rate than the yield on earning-assets; and to the fact that the increase
in average deposits has been comprised substantially of broker deposits, a
higher cost category, due to the fierce competitive local environment for core
deposits, making broker deposits an attractive funding alternative. In addition,
during 2007, our net interest margin and spread were also affected by decreases
in the prime rate, primarily during the fourth quarter of 2007. During 2006,
our
net interest margin and spread were also affected by the write-off of $626,000
in unamortized placement costs related to the redemption of $25.8 million of
floating rate junior subordinated deferrable interest debentures, as previously
mentioned. Without the effect of the write-off of $626,000 in unamortized
placement costs, net interest margin and spread on a fully taxable equivalent
basis would have been 2.89% and 2.36% for the year ended December 31, 2006,
respectively.
Our
average interest-earning assets were $2.4 billion in 2007, compared to $2.3
billion in 2006 and $2.2 billion in 2005, representing increases of 2.25%
in 2007 and 8.84% in 2006. Average net loans were $1.8 billion in 2007, compared
to $1.6 billion in 2006 and $1.5 billion in 2005, representing increases of
8.34% and 11.79% in 2007 and 2006, respectively. Total interest income increased
by 6.89% to $173.3 million in 2007, compared to $162.1 million in 2006, after
increasing by 21.70% from $133.2 million in 2005. These increases in our
interest income were mainly due to the organic growth of our loan portfolio.
The
average interest yield we received for interest-earning assets increased to
7.73% in 2007, from 7.53% in 2006, and from 6.69% in 2005. During 2007, the
Federal Reserve Board’s interest rate cuts negatively impacted average yields on
our commercial and construction loans since a significant portion of these
portfolios were variable rate loans. As of December 31, 2007, approximately
75.38% of our commercial and construction loans were variable rate
loans.
Average
interest-bearing liabilities also increased by 2.96% to $2.2 billion in 2007,
compared to $2.1 billion in 2006, after increasing by 9.69% from
$1.9 billion in 2005. Total interest expense increased by 10.60% to $105.5
million in 2007, compared to $95.4 million in 2006, after increasing by 46.86%
from $64.9 million in 2005.
During
2007 and 2006, the increase in average liabilities had been substantially in
broker deposits, higher rate time deposits driven by the extremely competitive
local environment for core deposits, and other borrowings, all of which are
higher cost categories resulting in increased interest expense.
The
average interest rate we paid for interest-bearing liabilities increased to
5.44% in 2007, from 5.20% in 2006, and from 3.81% in 2005.
The
following table 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.
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Average
Balance
|
|
Interest
|
|
Average
Rate/ Yield
(1)
|
|
Average
Balance
|
|
Interest
|
|
Average
Rate/ Yield
(1)
|
|
Average
Balance
|
|
Interest
|
|
Average
Rate/ Yield
(1)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans and leases
(2)
|
|
$
|
1,780,719
|
|
$
|
143,360
|
|
|
8.13
|
%
|
$
|
1,643,587
|
|
$
|
130,003
|
|
|
8.00
|
%
|
$
|
1,470,256
|
|
$
|
107,971
|
|
|
7.41
|
%
|
|
Securities
of U.S. government agencies
(3)
|
|
|
482,605
|
|
|
22,690
|
|
|
6.53
|
|
|
604,606
|
|
|
27,137
|
|
|
6.45
|
|
|
600,461
|
|
|
21,795
|
|
|
5.14
|
|
|
Other
investment securities
(3)
|
|
|
72,919
|
|
|
3,883
|
|
|
7.40
|
|
|
46,083
|
|
|
2,296
|
|
|
7.03
|
|
|
38,811
|
|
|
1,726
|
|
|
6.12
|
|
|
Puerto
Rico government obligations
(3)
|
|
|
8,149
|
|
|
385
|
|
|
6.57
|
|
|
9,397
|
|
|
412
|
|
|
6.29
|
|
|
8,783
|
|
|
352
|
|
|
5.67
|
|
|
Securities
purchased under agreements to resell and federal funds
sold
|
|
|
37,826
|
|
|
2,042
|
|
|
6.14
|
|
|
34,841
|
|
|
1,791
|
|
|
5.57
|
|
|
32,297
|
|
|
1,150
|
|
|
4.19
|
|
|
Interest-earning
deposits
|
|
|
18,579
|
|
|
964
|
|
|
5.19
|
|
|
9,565
|
|
|
507
|
|
|
5.30
|
|
|
6,767
|
|
|
239
|
|
|
3.53
|
|
|
Total
interest-earning assets
|
|
$
|
2,400,797
|
|
$
|
173,324
|
|
|
7.73
|
%
|
$
|
2,348,079
|
|
$
|
162,146
|
|
|
7.53
|
%
|
$
|
2,157,375
|
|
$
|
133,233
|
|
|
6.69
|
%
|
|
Total
noninterest-earning assets
|
|
|
100,660
|
|
|
|
|
|
|
|
|
80,735
|
|
|
|
|
|
|
|
|
77,612
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
2,501,457
|
|
|
|
|
|
|
|
$
|
2,428,814
|
|
|
|
|
|
|
|
$
|
2,234,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
$
|
18,361
|
|
$
|
532
|
|
|
2.91
|
%
|
$
|
25,470
|
|
$
|
584
|
|
|
2.31
|
%
|
$
|
51,787
|
|
$
|
1,090
|
|
|
2.13
|
%
|
|
NOW
deposits
|
|
|
47,068
|
|
|
1,169
|
|
|
2.49
|
|
|
46,330
|
|
|
1,035
|
|
|
2.24
|
|
|
46,421
|
|
|
858
|
|
|
1.85
|
|
|
Savings
deposits
|
|
|
141,120
|
|
|
3,497
|
|
|
2.48
|
|
|
184,824
|
|
|
4,386
|
|
|
2.37
|
|
|
254,923
|
|
|
5,861
|
|
|
2.30
|
|
|
Time
certificates of deposit in denominations of $100,000 or more
(4)
|
|
|
1,475,942
|
|
|
75,467
|
|
|
5.52
|
|
|
1,240,403
|
|
|
58,351
|
|
|
5.13
|
|
|
869,054
|
|
|
32,384
|
|
|
3.96
|
|
|
Other
time deposits
|
|
|
91,887
|
|
|
4,041
|
|
|
4.37
|
|
|
113,097
|
|
|
4,189
|
|
|
3.71
|
|
|
152,787
|
|
|
4,741
|
|
|
3.11
|
|
|
Other
borrowings
(5)
|
|
|
397,415
|
|
|
20,794
|
|
|
6.95
|
|
|
499,275
|
|
|
26,818
|
|
|
7.17
|
|
|
548,141
|
|
|
20,002
|
|
|
4.81
|
|
|
Total
interest-bearing liabilities
|
|
$
|
2,171,893
|
|
$
|
105,470
|
|
|
5.44
|
%
|
$
|
2,109,399
|
|
$
|
95,363
|
|
|
5.20
|
%
|
$
|
1,923,113
|
|
$
|
64,936
|
|
|
3.81
|
%
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
|
119,004
|
|
|
|
|
|
|
|
|
128,551
|
|
|
|
|
|
|
|
|
129,676
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
35,735
|
|
|
|
|
|
|
|
|
25,830
|
|
|
|
|
|
|
|
|
16,962
|
|
|
|
|
|
|
|
|
Total
noninterest-bearing liabilities
|
|
|
154,739
|
|
|
|
|
|
|
|
|
154,381
|
|
|
|
|
|
|
|
|
146,638
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
174,825
|
|
|
|
|
|
|
|
|
165,034
|
|
|
|
|
|
|
|
|
165,236
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
2,501,457
|
|
|
|
|
|
|
|
$
|
2,428,814
|
|
|
|
|
|
|
|
$
|
2,234,987
|
|
|
|
|
|
|
|
|
Net
interest income
(6)
|
|
|
|
|
$
|
67,854
|
|
|
|
|
|
|
|
$
|
66,783
|
|
|
|
|
|
|
|
$
|
68,297
|
|
|
|
|
|
Net
interest spread
(7)
|
|
|
|
|
|
|
|
|
2.29
|
%
|
|
|
|
|
|
|
|
2.33
|
%
|
|
|
|
|
|
|
|
2.88
|
%
|
|
Net
interest margin
(8)
|
|
|
|
|
|
|
|
|
2.80
|
%
|
|
|
|
|
|
|
|
2.86
|
%
|
|
|
|
|
|
|
|
3.29
|
%
|
|
(1)
|
Interest
yield and expense is calculated on a fully taxable equivalent basis
assuming a 39% tax rate for the year ended December 31, 2007, a
43.5% tax
rate for 2006, and a 41.5% tax rate for
2005.
|
|
(2)
|
The
amortization of loan costs (fees) has been included in the calculation
of
interest income. Net loan costs were approximately $838,000, $539,000
and
$780,000 for the years ended December 31, 2007, 2006 and 2005,
respectively. Loans includes nonaccrual loans, which balance as of
the
periods ended December 31, 2007, 2006 and 2005 was $69.0 million,
$37.3
million and $27.7 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
2007, interest expense on time certificates of deposit in denominations
of
$100,000 or more was reduced by approximately $616,000 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 $616,000, our net interest margin and spread on a fully taxable
basis
for the year ended December 31, 2007 would have been 2.78% and 2.26%,
respectively.
|
|
(5)
|
For
2006, interest expense on other borrowings includes the write-off
of
approximately $626,000 in unamortized placement costs related to
the
redemption of $25.8 million of floating rate junior subordinated
deferrable interest debentures on December 18, 2006, as previously
mentioned.
|
|
(6)
|
Net
interest income on a tax equivalent basis was $67.3 million, $67.2
million
and $71.0 million for the years ended December 31, 2007, 2006 and
2005,
respectively.
|
|
(7)
|
Represents
the average rate earned on interest-earning assets less the average
rate
paid on interest-bearing liabilities on a fully taxable equivalent
basis.
|
|
(8)
|
Represents
net interest income on a fully taxable equivalent basis as a percentage
of
average interest-earning assets.
|
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.
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
Over 2006
Increases/(Decreases)
Due
to Change in
|
|
2006
Over 2005
Increases/(Decreases)
Due
to Change in
|
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
Volume
|
|
Rate
|
|
Net
|
|
|
|
|
(In
thousands)
|
|
|
INTEREST
EARNED ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
(1)
|
|
$
|
10,847
|
|
$
|
2,510
|
|
$
|
13,357
|
|
$
|
12,729
|
|
$
|
9,303
|
|
$
|
22,032
|
|
|
Securities
of U.S. government agencies
|
|
|
(5,476
|
)
|
|
1,029
|
|
|
(4,447
|
)
|
|
150
|
|
|
5,192
|
|
|
5,342
|
|
|
Other
investment securities
|
|
|
1,337
|
|
|
250
|
|
|
1,587
|
|
|
323
|
|
|
247
|
|
|
570
|
|
|
Puerto
Rico government obligations
|
|
|
(55
|
)
|
|
28
|
|
|
(27
|
)
|
|
25
|
|
|
35
|
|
|
60
|
|
|
Securities
purchased under agreements to resell and federal funds
sold
|
|
|
153
|
|
|
98
|
|
|
251
|
|
|
91
|
|
|
550
|
|
|
641
|
|
|
Interest-earning
deposits
|
|
|
478
|
|
|
(21
|
)
|
|
457
|
|
|
99
|
|
|
169
|
|
|
268
|
|
|
Total
interest-earning assets
|
|
$
|
7,284
|
|
$
|
3,894
|
|
$
|
11,178
|
|
$
|
13,417
|
|
$
|
15,496
|
|
$
|
28,913
|
|
|
INTEREST
PAID ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
$
|
(163
|
)
|
$
|
111
|
|
$
|
(52
|
)
|
$
|
(554
|
)
|
$
|
48
|
|
$
|
(506
|
)
|
|
NOW
deposits
|
|
|
16
|
|
|
118
|
|
|
134
|
|
|
(2
|
)
|
|
179
|
|
|
177
|
|
|
Savings
deposits
|
|
|
(1,037
|
)
|
|
148
|
|
|
(889
|
)
|
|
(1,612
|
)
|
|
137
|
|
|
(1,475
|
)
|
|
Time
certificates of deposit in denominations of $100,000 or more
(2)
|
|
|
11,080
|
|
|
6,036
|
|
|
17,116
|
|
|
13,838
|
|
|
12,129
|
|
|
25,967
|
|
|
Other
time deposits
|
|
|
(786
|
)
|
|
608
|
|
|
(178
|
)
|
|
(1,232
|
)
|
|
680
|
|
|
(552
|
)
|
|
Other
borrowings
(3)
|
|
|
(5,466
|
)
|
|
(558
|
)
|
|
(6,204
|
)
|
|
(1,783
|
)
|
|
8,599
|
|
|
6,816
|
|
|
Total
interest-bearing liabilities
|
|
$
|
3,644
|
|
$
|
6,463
|
|
$
|
10,107
|
|
$
|
8,655
|
|
$
|
21,772
|
|
$
|
30,427
|
|
|
Net
interest income
|
|
$
|
3,640
|
|
$
|
(2,569
|
)
|
$
|
1,071
|
|
$
|
4,762
|
|
$
|
(6,276
|
)
|
$
|
(1,514
|
)
|
|
(1)
|
The
amortization of loan costs (fees) has been included in the calculation
of
interest income. Net loan costs were approximately $838,000, $539,000
and
$780,000 for the years ended December 31, 2007, 2006 and 2005,
respectively. Loans includes nonaccrual loans, which balance as of
the
periods ended December 31, 2007, 2006 and 2005 was $69.0 million,
$37.3
million and $27.7 million, respectively, and are net of the allowance
for
loan and lease losses, deferred fees, unearned income, and related
direct
costs.
|
|
(2)
|
For
2007, interest expense on time certificates of deposit in denominations
of
$100,000 or more was reduced by approximately $616,000 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.
|
|
(3)
|
For
2006, interest expense on other borrowings includes the write-off
of
approximately $626,000 in unamortized placement costs related to
the
redemption of $25.8 million of floating rate junior subordinated
deferrable interest debentures on December 18, 2006, as previously
mentioned.
|
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, current internal and external environmental factors, and overall
economic conditions. 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, please see the section of this discussion and
analysis captioned
“Allowance
for Loan and Lease Losses.”
Our
provision for loan and lease losses increased to $25.3 million in 2007, or
141.18% of net charge-offs, from $16.9 million in 2006, or 104.64% of net
charge-offs, and from $12.8 million in 2005, or 93.75% of net charge-offs.
The increase in our provision for loan and lease losses during 2007 when
compared to the previous year 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; ii) the increase in our loan
portfolio; and iii) the overall economic conditions. T
he
increase in the provision during 2006 when compared to 2005 resulted from the
growth in our commercial and construction loan portfolio,
but
primarily from the deterioration of our leasing portfolio
.
Net
charge-offs were $16.1 million in 2007, compared to $16.2 million in 2006,
and
to $13.6 million in 2005.
For more
detail on net charge-offs, please refer to the
“Allowance
for Loan and Lease Losses”
section
herein.
We
believe existing allowance levels are appropriate. 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. Because we do not have any major industry concentrations,
the
determination of our provision for loan and lease losses is not impacted by
such
industry concentrations.
Noninterest
Income
The
following tables set forth the various components of our noninterest income
for
the periods indicated:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Service
charges and other fees
|
|
$
|
9,584
|
|
|
110.4
|
%
|
$
|
8,476
|
|
|
108.7
|
%
|
$
|
9,069
|
|
|
117.4
|
%
|
|
Loss
on sale of non-hedging derivatives, net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(944
|
)
|
|
(12.2
|
)
|
|
Gain
on sale of loans and leases, net
|
|
|
380
|
|
|
4.4
|
|
|
401
|
|
|
5.1
|
|
|
945
|
|
|
12.2
|
|
|
Loss
on sale of securities, net
|
|
|
-
|
|
|
-
|
|
|
(1,092
|
)
|
|
(14.0
|
)
|
|
(301
|
)
|
|
(3.9
|
)
|
|
(Loss)
gain on sale of other real estate owned, repossessed assets, and
on
disposition of other assets, net
|
|
|
(1,286
|
)
|
|
(14.8
|
)
|
|
16
|
|
|
0.2
|
|
|
(1,040
|
)
|
|
(13.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest income
|
|
$
|
8,678
|
|
|
100.0
|
%
|
$
|
7,801
|
|
|
100.0
|
%
|
$
|
7,729
|
|
|
100.0
|
%
|
Our
total
noninterest income was $8.7 million in 2007, compared to $7.8 million in 2006
and $7.7 million in 2005, representing an increase of 11.24% in 2007, 0.93%
in
2007 and 2006, respectively. Noninterest income represented approximately 0.4%,
0.3% and 0.4% of average assets in 2007, 2006 and 2005,
respectively.
Our
largest noninterest income source is service charges, primarily on deposit
accounts, representing 110.4%, 108.7% and 117.4% of total noninterest income
in
2007, 2006 and 2005, respectively. This income source for 2007 amounted to
$9.6
million, compared to $8.5 million in 2006 and $9.1 million in 2005. The increase
in 2007 was mainly due to an increase in non-sufficient fund charges on deposit
accounts, ATM merchant fees, trust fees, other fees on loan accounts, leasing
license commissions, and an increase in miscellaneous income mainly related
to
our credit card operations. The decrease in 2006 was mainly due to a decrease
in
trust fees and non-sufficient fund charges on deposit accounts.
Another
component of noninterest income for 2005 is the net loss on sale of non-hedging
derivatives. During year ended December 31, 2005, n
et
noninterest income reflected a $944,000 net loss on non-hedging derivatives
on
which hedge accounting had been discontinued. The net loss during 2005 reflected
a $1.1 million charge to earnings in the first quarter of 2005 for net losses
on
non-hedging derivatives on which hedge accounting had been discontinued and
a
$132,000 gain on the termination of such derivatives in the second quarter
of
2005. The derivatives were assumed in connection with the acquisition of
BankTrust in May 2004.
During
2007, gain on sale of loans and leases amounted to $380,000, compared to
$401,000 in 2006 and to $945,000 in 2005. Income from gain on sale of loans
and
leases as a percentage of total noninterest income was 4.4%, 5.1% and 12.2%
in
2007, 2006 and 2005, respectively. This source of noninterest income is derived
primarily from the sale of mortgage loans and lease financing contracts. During
2007, we sold $16.9 million in mortgage loans to other financial institutions,
compared to $13.8 million in 2006 and $21.5 million in 2005. In addition, during
the third quarter 2007, we sold $298,000 in individual residential construction
loans to other financial institution. We did not retain the servicing rights
on
these loans and we accounted for this transaction as a sale, resulting in a
gain
of approximately $380,000, $401,000 and $232,000 for those same periods. In
June
2006, we became a Government National Mortgage Association issuer. In order
to
take
advantage of this designation,
we are
increasing our volume of mortgage loans originations and have
restructured
the mortgage loans department to increase our sales in the secondary market.
During
2007,
our mortgage loan portfolio grew by $31.2 million, or by 40.37%, from $31.4
million, after increasing by 70.10% from $44.8 million in 2005.
In
addition, in September 2005 and March 2005, we sold lease financing contracts
on
a limited recourse basis to a third party with carrying values of $15.0 million
and $14.9 million, respectively. We surrendered control of the lease financing
receivables, as defined by SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, and accounted
for these transactions as sales, recognizing net gains of approximately $348,000
for the September 2005 sale and $365,000 for the March 2005 sale. We did not
sell lease financing contracts during 2007 and 2006.
We
retained servicing responsibilities for the lease financing contracts
sold.
During
2006, we recognized a $1.1 million loss on sale of $50.1 million in FHLB and
mortgage backed securities, compared to a $301,000 loss on sale of $85.0 million
in U.S. Treasury obligations available for sale in 2005. These investments
were
sold in an effort to improve the yields of the available for sale securities
portfolio
.
There
was no sale of investments in 2007.
Our
final
component of net noninterest income is the net gain or loss on the sale of
other
real estate owned, repossessed assets and other assets. During 2007, we
experienced a net loss in this component of $1.3 million, compared to a net
gain
of $16,000 in 2006, and net losses of $1.0 million for the year ended December
31, 2005. The net loss on sale of other real estate owned, repossessed assets
and other assets during 2007 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,
primary during the first and second quarter of 2007. This strategy resulted
in a
significant reduction in the number of repossessed vehicles in inventory. During
five quarters in a row, sales of repossessed vehicles exceeded the number of
units repossessed. The number of repossessed vehicles in inventory as of
December 31, 2007 decreased to 325 units, or by approximately 42%, from 564
units as of December 31, 2006, after increasing by 27.0% from 444 units as
of
December 31, 2005. This is the lowest level of repossessed vehicles in inventory
since August 2005.
During
2006, the decrease in the net loss on sale of other real estate owned,
repossessed assets and other assets was in part due to the sale of a real estate
property during the second quarter of 2006, which resulted in a gain of
approximately $362,000, but primarily to the refinements we made to our
methodology for estimating the net realizable value of vehicles upon
repossession and to our decision of increasing the valuation allowance of
repossessed vehicles in an effort to expedite the disposition of slow moving
inventory, as previously mentioned. We continue monitoring the repossessed
vehicles inventory very closely and taking measures to expedite its disposition.
For more details on repossessed assets please refer to the
section
of this discussion and analysis captioned
“Nonperforming
Loans, Leases and Assets.”
Noninterest
Expense
The
following table set forth a summary of noninterest expenses for the periods
indicated:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Amount%
|
|
|
|
Amount%
|
|
|
|
Amount%
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Salaries
and employee benefits
|
|
$
|
19,890
|
|
|
41.1
|
%
|
$
|
17,507
|
|
|
40.3
|
%
|
$
|
14,727
|
|
|
39.2
|
%
|
|
Occupancy
and equipment
|
|
|
10,899
|
|
|
22.6
|
|
|
9,565
|
|
|
22.0
|
|
|
8,555
|
|
|
22.7
|
|
|
Professional
services, including directors’ fees
|
|
|
4,496
|
|
|
9.3
|
|
|
4,104
|
|
|
9.5
|
|
|
3,912
|
|
|
10.4
|
|
|
Office
supplies
|
|
|
1,375
|
|
|
2.9
|
|
|
1,394
|
|
|
3.2
|
|
|
1,163
|
|
|
3.1
|
|
|
Other
real estate owned and other repossessed assets expenses
|
|
|
2,340
|
|
|
4.9
|
|
|
2,290
|
|
|
5.3
|
|
|
1,096
|
|
|
2.9
|
|
|
Promotion
and advertising
|
|
|
1,492
|
|
|
3.1
|
|
|
1,200
|
|
|
2.8
|
|
|
686
|
|
|
1.8
|
|
|
Lease
expenses
|
|
|
507
|
|
|
1.1
|
|
|
776
|
|
|
1.8
|
|
|
862
|
|
|
2.3
|
|
|
Insurance
|
|
|
1,865
|
|
|
3.9
|
|
|
1,053
|
|
|
2.4
|
|
|
1,095
|
|
|
2.9
|
|
|
Municipal
and other taxes
|
|
|
1,837
|
|
|
3.8
|
|
|
1,657
|
|
|
3.8
|
|
|
1,674
|
|
|
4.4
|
|
|
Commissions
and service fees credit and debit cards
|
|
|
1,445
|
|
|
3.0
|
|
|
1,324
|
|
|
3.1
|
|
|
1,364
|
|
|
3.6
|
|
|
Other
noninterest expense
|
|
|
2,079
|
|
|
4.3
|
|
|
2,516
|
|
|
5.8
|
|
|
2,509
|
|
|
6.7
|
|
|
Total
noninterest expense
|
|
$
|
48,225
|
|
|
100.0
|
%
|
$
|
43,386
|
|
|
100.0
|
%
|
$
|
37,643
|
|
|
100.0
|
%
|
Our
total
noninterest expense increased to $48.2 million in 2007, from $43.4 million
in
2006 and $37.6 million in 2005. This represents a year over year increase in
noninterest expense of 11.15% for 2007 and 15.26% for 2006. These increases
are
primarily attributable to increases in personnel and occupancy costs,
professional services, and insurance expense, mainly related to the FDIC’s new
insurance premium assessment. Noninterest expenses as a percentage of average
assets increased to 1.93% in 2007, from 1.79% in 2006 and 1.68% in 2005. Our
efficiency ratio was 63.48% in 2007, 57.9% in 2006 and 47.8% in 2005. 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 benefit expenses increased to $19.9 million in 2007, from $17.5
million in 2006. This increase was mainly attributable to an increase of
approximately $2.0 million in salary adjustments and expanded personnel for
business growth, after considering a decrease of $1.1 million in costs deferred
upon a reduction in leasing originations; a $202,000 increase related to the
opening of four branches during 2007; and an increase of approximately $217,000
related to employees’ benefits, mainly related to an increase in the medical
plan expense.
Salaries
and employee benefit expenses increased to $17.5 million in 2006, from $14.7
million in 2005. This increase was mainly attributable to an increase of
approximately $1.9 million in salary adjustments and expanded personnel for
business growth; and an increase of approximately $870,000 related to employees’
benefits, mainly related to an increase in: social security payroll taxes,
the
stock based compensation expense, and the medical plan expense.
Occupancy
and equipment expenses increased to $10.9 million in 2007 from $9.6 million
in
2006. This increase was mainly attributable to an increase of approximately
$350,000 related to the opening of our most four recent branches throughout
2007, an increase of approximately by $91,000 related to the growth of our
residential mortgage business, and a increase of approximately $893,000
primarily related to an increase in utilities, equipment maintenance, property
tax expenses, and data communications, and security services, of which
approximately $157,000 was related to our new headquarters.
Occupancy
and equipment expenses increased to $9.6 million in 2006, from $8.6 million
in
2005. This increase was mainly attributable to an increase of approximately
$410,000 related to our lease financing and trust businesses, an increase of
approximately $342,000 related to the opening of our most two recent branches
in
September and December 2005, respectively, and an increase of approximately
$164,000 related to our data processing systems.
Professional
and directors’ fees were $4.5 million, $4.1 million and $3.9 million, or 9.3%,
9.5% and 10.4% of total noninterest expenses, in 2007, 2006 and 2005,
respectively. During 2007, the increase in professional and directors’ fees was
mainly due to $580,000 in fees related to the information technology outsourcing
agreement we entered with Telefónica Empresas in August 2007, which include one
time fees of $73,000; $125,000 in legal fees related to this outsourcing
agreement; $441,000 in other compliance consulting services, primarily in
connection with the Cease and Desist Order, as previously mentioned; $61,000
in
internal audit consulting services; and $14,000 in other legal fees in
connection with our trust operations; net of $300,000 related to additional
expenses billed during the first quarter of 2006 by our former external auditors
in connection with year 2005 audit and compliance with the Sarbanes Oxley
Act.
Our
expenses related to OREO and repossessed assets remained at $2.3 million, or
4.9% and 5.3% of total interest expense in 2007 and 2006, respectively, compared
to $1.1 million, or 2.9% of total noninterest expense in 2005. The increase
in
these expenses during 2006 was attributable primarily to
the
combined effect of an increase in the average number of repossessed vehicles
in
inventory, which resulted in increased repairs and maintenance expenses, and
an
increase in the valuation allowance of repossessed vehicles in an effort to
expedite their disposition in the future. During 2006, the average number of
repossessed vehicles in inventory increased by 56.98% to 540 units, when
compared to 344 vehicles for 2005.
Promotion
and advertising increased to $1.5 million in 2007, from $1.2 million and
$686,000 in 2006 and 2005, respectively. These increases were mainly
attributable to an advertising campaign, primarily related to our residential
mortgage loan department, to take advantage of opportunities on the
Island.
Insurance
expenses increased to $1.9 million in 2007, from $1.1 million for each of the
years ended December 31, 2006 and 2005, respectively. The increase in insurance
expense during 2007 was mainly related to the FDIC’s new insurance premium
assessment, which commenced in January 2007.
For the
year ended December 31, 2007, total FDIC insurance premiums amounted to
$892,000, net of the one time assessment credit of $669,000, as previously
explained, compared to $212,000 and $194,000 for years 2006 and 2005,
respectively.
Lease
expenses decreased by 34.66% to $507,000 in 2007, after decreasing by 9.98%
to
$776,000 in 2006, from $862,000 in 2005. These expenses are primarily comprised
of registration costs on leased vehicles and license renewal expenses on
repossessed vehicles. The decrease in leases expenses during 2007 and 2006
was
mainly attributable to a reduction of 16.59% and
36.21%
in
lease portfolio originations for 2007 and 2006, respectively.
Other
noninterest expenses decrease to $2.1 million for the year ended December 31,
2007, from $2.5 million for each of the years ended December 31, 2006 and 2005,
respectively. During 2007, the decrease in other non-interest expenses was
mainly associated with the provision for losses on off-balance sheet items
and
insurance claim receivables.
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.
Income
tax expense is the sum of two components: current tax expense and deferred
tax expense (benefit). Current tax expense is calculated by applying our
current tax rate to taxable income. The deferred tax expense (benefit)
reflects the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Deferred income tax assets and
liabilities represent the tax effects, based on current tax law, of future
deductible or taxable amounts attributable to events that have been recognized
in our financial statements.
For
the
year ended December 31, 2007, we recorded an income tax benefit of $249,000
compared to an income tax expense of $6.3 million in 2006, and $9.1 million
in
2005. Our income tax provision for year ended December 31, 2007, 2006 and 2005
was comprised of a current income tax expense of $4.4 million, $7.3 million
and
$1.8 million, respectively, and a deferred tax benefit of $4.6 million and
$684,000 for 2007 and 2006, respectively, compared to a deferred tax expense
of
$7.3 million in 2005.
Our
current income tax expense for the year ended December 31, 2007 decreased to
$4.4 million, from $7.3 million in 2006, after increasing from $1.8 million
in
2005. During 2007, the 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 (“NOLs”) 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. The increase in our current income tax expense during
2006
was mainly due to the total consumption of NOLs from acquired institutions,
which was substantially lesser than the amount consumed in 2005.
Our
deferred tax benefit for the year ended December 31, 2007 increased to $4.6
million, from a deferred tax benefit of $684,000 in 2006, compared to a deferred
tax expense of $7.3 million in 2005. During 2007, the increase in the deferred
tax benefit was mainly due an increase in deferred tax assets mainly due to
an
increase in our provision for loan and lease losses as of December 31, 2007,
primarily during the third quarter of 2007. The change in the deferred tax
provision during 2006 was mainly due to the combined effect of: (i) a
substantially lesser amount of NOLs from acquired institutions consumed during
2006 when compared to 2005; and (ii) a decrease in deferred loan and leases
net
origination costs.
As
of
December 31, 2007, 2006 and 2005 we had net deferred tax assets of $10.9
million, $6.3 million and $5.1 million, 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. In making this assessment, 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. We believe it is more likely than not that the benefits
of
these deductible differences at December 31, 2007 will be realized.
On
December 14, 2007, the governor of Puerto Rico approved and signed Law No.
197,
which offers tax credits to financial institutions on the financing of qualified
residential mortgages. These tax credits vary based on whether the property
to
be financed is an existing dwelling or a new construction and whether it will
be
occupied by the buyer or is acquired for investment purposes. The tax credits
are limited, subject to certain restrictions, to a maximum of a 20% of the
property’s selling price, or $25,000, whichever is lower. This law expires on
June 30, 2008 or when the tax credits granted reach the total allotted amount
of
$220.0 million, whichever occurs first. The tax credit will become available
to
us for the taxable years beginning after December 31, 2007 up to taxable
year ended December 31, 2011 and it will not impact our net income tax
provision.
On
May
16, 2006, the governor of Puerto Rico approved and signed Law No. 98, the “Law
of the 2006’s Extraordinary Tax.” This law imposed a prepaid tax of 5% over the
2005 taxable net income by for profit partnerships and corporations with gross
income over $10.0 million. The Company could use the payment in equal portions
as a tax credit in the income tax return for the taxable years beginning after
December 31, 2006. No income tax expense was recorded in 2006 related to this
law since such prepayment was to be used as a tax credit in the income tax
return of taxable years beginning after December 31, 2006.
On
May
13, 2006, the governor of Puerto Rico approved and signed Law No. 89, which
imposed an additional transitory tax of 2% on taxable income. This tax was
applicable to the Banking industry raising the maximum statutory tax rate to
43.5% for taxable years beginning after December 31, 2005 and ending on or
before December 31, 2006. This law also stated that for taxable years beginning
after December 31, 2006, the maximum statutory tax rate will be
39%.
On
August
1, 2005, the governor of Puerto Rico approved and signed Law No. 41, which
imposed an additional transitory tax of 2.5% on taxable income. This additional
tax increased the maximum statutory tax rate from 39.0% to 41.5% and is
applicable to all corporations and partnerships with taxable income in excess
of
$20,000 during the taxable years beginning after December 31, 2004 and ending
on
or before December 31, 2006.
The
approval of the additional transitory taxes of over the original maximum
statutory tax rate of 39% as mentioned above, resulted in additional income
tax
expense of $755,000 and $27,000 for the years ended December 31, 2006 and 2005,
respectively.
Financial
Condition
Our
total
assets as of December 31, 2007 were $2.8 billion, compared to $2.5 billion
and
$2.4 billion as of December 31, 2006 and 2005, respectively. The increase
in our total assets during 2007 was primarily the net result of a decrease
in
securities purchased under agreements to resell, an increase in our investment
securities portfolio, the organic growth of our loan portfolio, and an increase
in premises and equipment. During 2006, the increase was primarily the net
result of organic growth in our loan portfolio and a decrease in our investment
portfolio.
Our
total
deposits increased by 4.60% to $2.0 billion in 2007, after increasing by 9.87%
to $1.9 billion as of December 31, 2006, from $1.7 billion as of December
31, 2005.
The
increase in deposits during 2007 and 2006 was concentrated in broker deposits,
as further explained below.
O
ther
borrowings increased to $547.5 million in 2007, after decreasing to $395.0
million as of December 31, 2006, from $475.7 million as of December 31,
2005.
The
increase in broker deposits and other borrowings during 2007 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 broker deposits and other borrowings 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 broker
deposits and other borrowings’ alternative in an attempt to control the
continuous increase in our funding cost. In 2006, the decrease in other
borrowings was mainly related to a decrease in securities sold under agreements
to repurchase and the redemption of trust preferred securities, as previously
mentioned.
Stockholders’
equity increased by 5.91% to $179.9 million as of December 31, 2007,
representing an increase of $10.0 million from $169.9 million as of December
31,
2006. As of December 31, 2006, our stockholders’ equity was $169.9 million,
representing an increase of 2.8% from $165.0 million as of December 31, 2005.
Besides earnings and losses from operations, stock options exercised, a private
placement, and stock repurchases, our stockholders’ equity was also impacted by
accumulated an other comprehensive gain of $1.1 million during 2007 and other
comprehensive losses of $7.6 million and $10.4 million during the years ended
December 31, 2006 and 2005, respectively. In addition, during 2006, the
Company’s stockholders’ equity was also affected by the cumulative effect of a
$791,000 adjustment on the initial adoption of
Staff
Accounting Bulletin No. 108
(“SAB
108”).
For more
detail on the initial adoption of SAB 108, please refer to
“Note
2(z) - Recently Issued Accounting Standards”
to our
consolidated financial statements.
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 December 31, 2007, 2006 and 2005, we
had
$32.3 million, $49.1 million and $20.8 million, respectively, in
interest-bearing deposits in other financial institutions. Also, we had $19.9
million, $51.2 million and $54.1 million in securities purchased under
agreements to resell as of those same dates, respectively. On a fully taxable
equivalent basis, the yield on interest-bearing deposits and the purchased
securities under agreements to resell was 5.83%, 5.46% and 4.80% for the years
ended December 31, 2007, 2006 and 2005, 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)
|
|
|
December
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies obligations
|
|
$
|
129,020
|
|
$
|
129,398
|
|
$
|
2,775
|
|
$
|
2,762
|
|
$
|
—
|
|
$
|
—
|
|
$
|
131,795
|
|
$
|
132,160
|
|
|
Collateralized
mortgage obligations
|
|
|
404,804
|
|
|
404,856
|
|
|
23,421
|
|
|
23,092
|
|
|
—
|
|
|
—
|
|
|
428,225
|
|
|
427,948
|
|
|
Mortgage-backed
securities
|
|
|
163,552
|
|
|
164,390
|
|
|
4,649
|
|
|
4,598
|
|
|
—
|
|
|
—
|
|
|
168,201
|
|
|
168,988
|
|
|
State
and municipal obligations
|
|
|
5,616
|
|
|
5,716
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,616
|
|
|
5,716
|
|
|
US
Corporate Notes
|
|
|
3,000
|
|
|
2,744
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,000
|
|
|
2,744
|
|
|
Other
investments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,354
|
|
|
13,354
|
|
|
13,354
|
|
|
13,354
|
|
|
Total
|
|
$
|
705,992
|
|
$
|
707,104
|
|
$
|
30,845
|
|
$
|
30,452
|
|
$
|
13,354
|
|
$
|
13,354
|
|
$
|
750,191
|
|
$
|
750,910
|
|
|
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
|
|
|
329,333
|
|
|
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
|
|
|
December
31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies obligations
|
|
$
|
230,892
|
|
$
|
227,081
|
|
$
|
3,763
|
|
$
|
3,663
|
|
$
|
—
|
|
$
|
—
|
|
$
|
234,655
|
|
$
|
230,744
|
|
|
Collateralized
mortgage obligations
|
|
|
333,154
|
|
|
327,399
|
|
|
32,386
|
|
|
31,590
|
|
|
—
|
|
|
—
|
|
|
365,540
|
|
|
358,989
|
|
|
Mortgage-backed
securities
|
|
|
65,560
|
|
|
64,779
|
|
|
6,322
|
|
|
6,158
|
|
|
—
|
|
|
—
|
|
|
71,882
|
|
|
70,937
|
|
|
State
and municipal obligations
|
|
|
7,902
|
|
|
7,821
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,902
|
|
|
7,821
|
|
|
Other
investments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,652
|
|
|
10,652
|
|
|
10,652
|
|
|
10,652
|
|
|
Total
|
|
$
|
637,508
|
|
$
|
627,080
|
|
$
|
42,471
|
|
$
|
41,411
|
|
$
|
10,652
|
|
$
|
10,652
|
|
$
|
690,631
|
|
$
|
679,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
2007, the investment portfolio increased by approximately $173.4 million to
$751.3 million as of December 31, 2007, from $577.9 million as of December
31,
2006. The increase during 2007 was primarily due to the net effect
of:
|
|
·
|
the
purchase of $315.2 million in mortgage-backed securities and $3.0
million
in corporate debt;
|
|
|
·
|
prepayments
of approximately $104.7 million on mortgage-backed securities and
FHLB
obligations; and
|
|
|
·
|
$52.7
million in a FNMA note and various US and Puerto Rico government
agencies
obligations that matured or were called-back during the
year;
|
During
2006, the investment portfolio decreased by approximately $102.3 million to
$577.9 million as of December 31, 2006, from $680.2 million as of December
31,
2005. The decrease during 2006 was primarily due to the net effect
of:
|
|
·
|
prepayments
for approximately $100.4 million of mortgage backed
securities;
|
|
|
·
|
the
purchase of $55.4 million in mortgage backed securities, $30.0 million
in
US government agencies obligations and FHLB stocks, and $5.0 million
of
Puerto Rico Agency Notes;
|
|
|
·
|
a
$50.1 million sale of FHLB and mortgage backed securities available
for
sale with an average book yield of 3.64% at the time of sale,
which
were sold in December 2006 in an effort to improve our net interest
margin
resulting in a net loss on sale of investments of $1.1 million, as
previously mentioned
;
and
|
|
|
·
|
a
decrease of $38.3 million in US government agencies obligations due
to
monthly principal prepayments and maturity of FHLB, FNMA & FHLMC
obligations and the redemption of FHLB
stocks.
|
Before
2007, we were positioning 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. As part of this positioning, in the
fourth quarter of 2006, we sold approximately $50.1 million of FHLB and
mortgage-backed securities available for sale with an average yield of 3.64%
since we expected an improvement in the yield curve during 2007.
During
2007, we continued analyzing different market opportunities in an attempt to
improve the investment portfolio’s average yield and to maintain an adequate
average life. During the second half of 2007, the market presented some good
investment opportunities as a result of the liquidity crises faced by some
banks
and brokers in the mainland, which made them sell part of their investment
securities portfolios at wider spreads to reduce their total assets. We
were able to acquire securities that improved our average yield and extended
the
average maturity of the portfolio. For the year ended December 31, 2007, we
purchased approximately $318.2 million in mortgage-backed securities and
corporate debt with an estimated average life of approximately 7.8 years and
an
estimated average yield of 6.02%. Purchased mortgage-backed securities included
approximately $172.0 million in US agency obligations guaranteed by the US
government sponsored enterprises and $142.2 million in private label collateral
mortgage obligations with FICO scores and loan-to-values similar to FNMA and
FHLMC underwriting standards and characteristics.
For
the
year ended December 31, 2007, after the above-mentioned transactions, the
estimated average maturity was approximately 4.8 years and the average yield
was
approximately 5.06%, compared to an estimated average maturity of 3.2 years
and
an average yield of 4.64% for the year ended December 31, 2006.
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:
|
|
|
Year
ended December 31, 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
|
|
$
|
122,233
|
|
|
4.68
|
%
|
$
|
7,165
|
|
|
5.23
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
129,398
|
|
|
4.71
|
%
|
|
Mortgage
backed securities
(3)
|
|
|
2,554
|
|
|
4.33
|
|
|
23,759
|
|
|
4.92
|
|
|
116,668
|
|
|
5.22
|
|
|
21,408
|
|
|
6.08
|
|
|
164,390
|
|
|
5.28
|
|
|
Collateral
mortgage obligations
(3)
|
|
|
25,411
|
|
|
4.02
|
|
|
246,576
|
|
|
4.97
|
|
|
132,869
|
|
|
5.58
|
|
|
—
|
|
|
—
|
|
|
404,856
|
|
|
5.11
|
|
|
State
& political subdivisions
|
|
|
795
|
|
|
6.11
|
|
|
4,921
|
|
|
4.72
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,716
|
|
|
4.91
|
|
|
US
Corporate Notes
|
|
|
2,744
|
|
|
6.79
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,744
|
|
|
6.79
|
|
|
Total
investments available-for-sale
|
|
$
|
153,737
|
|
|
4.61
|
%
|
$
|
282,421
|
|
|
4.97
|
%
|
$
|
249,537
|
|
|
5.41
|
%
|
$
|
21,408
|
|
|
6.08
|
%
|
$
|
707,104
|
|
|
5.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
held-to-maturity:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies obligations
|
|
$
|
—
|
|
|
—
|
%
|
$
|
2,775
|
|
|
3.95
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
2,775
|
|
|
3.95
|
%
|
|
Mortgage
backed securities
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,649
|
|
|
5.03
|
|
|
—
|
|
|
—
|
|
|
4,649
|
|
|
5.03
|
%
|
|
Collateral
mortgage obligations
(3)
|
|
|
7,284
|
|
|
4.00
|
|
|
2,806
|
|
|
4.29
|
|
|
13,391
|
|
|
5.05
|
|
|
—
|
|
|
—
|
|
|
23,421
|
|
|
4.63
|
|
|
Total
investments held-to-maturity
|
|
$
|
7,284
|
|
|
4.00
|
%
|
$
|
5,581
|
|
|
4.12
|
%
|
$
|
17,980
|
|
|
5.04
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
30,845
|
|
|
4.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
stock
|
|
|
12,744
|
|
|
8.05
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
12,744
|
|
|
8.05
|
%
|
|
Investment
in statutory trust
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
610
|
|
|
8.11
|
|
|
610
|
|
|
8.11
|
|
|
Total
other investments
|
|
$
|
12,744
|
|
|
8.05
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
—
|
|
|
—
|
%
|
$
|
610
|
|
|
8.11
|
%
|
$
|
13,354
|
|
|
8.05
|
%
|
|
Total
investments
|
|
$
|
173,765
|
|
|
4.83
|
%
|
$
|
288,002
|
|
|
4.95
|
%
|
$
|
267,517
|
|
|
5.39
|
%
|
$
|
22,018
|
|
|
6.14
|
%
|
$
|
751,303
|
|
|
5.11
|
%
|
|
(1)
|
Based
on estimated fair value.
|
|
(2)
|
Almost
all of our income from investments in securities is tax exempt because
99.83% 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 December 31, 2007, our
investment in other earning assets included $12.7 million in FHLB stock and
$610,000 equity in our statutory trusts. The following table presents the
balances of other earning assets as of the dates indicated:
|
|
|
Year
Ended December 31,
|
|
|
Type
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
(In
thousands)
|
|
|
Statutory
trusts
|
|
$
|
610
|
|
$
|
611
|
|
$
|
1,382
|
|
|
FHLB
stock
|
|
|
12,744
|
|
|
3,718
|
|
|
9,270
|
|
|
Total
|
|
$
|
13,354
|
|
$
|
4,329
|
|
$
|
10,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on FHLB stock amounted to $393,000, $528,000 and $380,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
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 $1.4 million, $879,000, $936,000, $2.7 million and $6.8 million as of
December 31, 2007, 2006, 2005 2004 and 2003, respectively:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
(In
thousands)
|
|
|
Real
estate secured
|
|
$
|
900,036
|
|
$
|
813,615
|
|
$
|
658,123
|
|
$
|
516,542
|
|
$
|
317,491
|
|
|
Leases
|
|
|
385,390
|
|
|
443,311
|
|
|
487,863
|
|
|
459,251
|
|
|
315,935
|
|
|
Other
commercial and industrial
|
|
|
302,530
|
|
|
297,512
|
|
|
272,205
|
|
|
243,603
|
|
|
177,989
|
|
|
Consumer
|
|
|
57,745
|
|
|
60,682
|
|
|
63,980
|
|
|
74,755
|
|
|
26,592
|
|
|
Real
estate - construction
|
|
|
203,344
|
|
|
126,241
|
|
|
82,468
|
|
|
79,334
|
|
|
47,370
|
|
|
Other
loans
(1)
|
|
|
6,850
|
|
|
5,015
|
|
|
5,336
|
|
|
6,134
|
|
|
4,236
|
|
|
Gross
loans and leases
|
|
$
|
1,855,895
|
|
$
|
1,746,376
|
|
$
|
1,569,975
|
|
$
|
1,379,619
|
|
$
|
889,613
|
|
|
Plus:
Deferred loan costs, net
|
|
|
2,366
|
|
|
4,880
|
|
|
7,442
|
|
|
6,480
|
|
|
4,707
|
|
|
Total
loans, including deferred loan costs, net
|
|
$
|
1,858,261
|
|
$
|
1,751,256
|
|
$
|
1,577,417
|
|
$
|
1,386,099
|
|
$
|
894,320
|
|
|
Less:
Unearned income
|
|
|
(1,042
|
)
|
|
(1,297
|
)
|
|
(1,157
|
)
|
|
(1,170
|
)
|
|
(1,774
|
)
|
|
Total
loans, net of unearned income
|
|
$
|
1,857,219
|
|
$
|
1,749,959
|
|
$
|
1,576,260
|
|
$
|
1,384,929
|
|
$
|
892,546
|
|
|
Less:
Allowance for loan and lease losses
|
|
|
(28,137
|
)
|
|
(18,937
|
)
|
|
(18,188
|
)
|
|
(19,039
|
)
|
|
(9,394
|
)
|
|
Loans,
net
|
|
$
|
1,829,082
|
|
$
|
1,731,022
|
|
$
|
1,558,072
|
|
$
|
1,365,890
|
|
$
|
883,152
|
|
|
(1)
|
Other
loans are comprised of overdrawn deposit accounts.
|
As
of
December 31, 2007, 2006 and 2005, our total loans and leases, net of unearned
income, were $1.9 billion, $1.7 billion and $1.6 billion, respectively. The
increase in our loan and lease volume in 2007 and 2006 resulted from the organic
growth of our operations. Our total loans and leases, net of unearned income
as
a percentage of total assets was 67.6%, 70.0% and 66.0% as of December 31,
2007,
2006 and 2005, respectively.
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, equaled $900.0 million, $813.6 million and $658.1 million as of December
31, 2007, 2006 and 2005, respectively. The volume of our real estate loans
has
increased significantly as a result of our organic growth. Real estate secured
loans, excluding real estate secured construction loans, as a percentage of
total loans and leases increased to 48.4% in 2007, from 46.6% in 2006, and
from
41.9% in 2005.
Loans
secured by real estate included residential mortgages amounting to $106.9
million as of December 31, 2007, which increased by $30.7 million, or by 40.21%,
when compared to $76.3 million as of December 31, 2006, after increasing by
70.10% from $44.8 million as of December 31, 2005. These increases in
residential mortgages 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.
Lease
financing contracts, the second largest component of our loan portfolio, consist
of automobile and equipment leases made to individuals and corporate customers.
We continue emphasizing on automobile leasing. For 2007, approximately 58.31%
of
our lease financing contracts originations were for new automobiles,
approximately 38.72% were for used automobiles and the remaining 2.97% consisted
primarily of construction and medical equipment leases. The volume of our lease
financing contracts decreased to $385.4 million as of December 31, 2007, from
$443.3 million and $487.9 million as of December 31, 2006 and 2005,
respectively. Lease financing contracts, as a percentage of total loans and
leases were 20.8%, 25.4% and 31.0% at the end of 2007, 2006 and 2005,
respectively. The decrease in our lease portfolio during 2007 and 2006 resulted
from
the
proactive actions we started taking during the third quarter of 2005
to
tightening our underwriting standards, enhance our collections efforts
and
strategically pare back our automobile leasing operations upon the deterioration
of our lease portfolio, mainly during the last quarter of 2005.
During
September 2005 and March 2005, we sold lease financing contracts on a limited
recourse basis to a third party with carrying values of $15.0 million and $14.9
million, respectively. We did not sell lease financing contracts during 2007
and
2006.
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, and other forms
of collaterals or guaranties. Other commercial and industrial loans increased
to
$302.5 million as of December 31, 2007, from $297.5 million in 2006 and $272.2
million in 2005. The increase in other commercial and industrial loans in 2007
and 2006 was due to our organic growth. Other commercial and industrial loans
as
a percentage of total loans were 16.3%, 17.0%, and 17.3% at the end of 2007,
2006 and 2005, respectively.
Construction
loans secured by real estate totaled $203.3 million, $126.2 million and $82.5
million as of December 31, 2007, 2006 and 2005, respectively. Construction
loans
secured by real estate as a percentage of total loans and leases were 10.96%,
7.2% and 5.3% for those same periods, respectively. During 2007 and 2006, the
increase in construction loans secured by real estate resulted from of our
organic growth, which was primarily comprised 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, and other
loans for land development and the construction of commercial real estate
property.
Consumer
loans have historically represented a small part of our total loan and lease
portfolio. The majority of consumer loans consist of personal installment loans,
credit cards, boat loans, 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. As a result, repayment on this portfolio has generally
exceeded or equaled origination, except for 2004, when we acquired consumer
loans in connection with our acquisition of former BankTrust. Consumer loans
as
a percentage of total loans and leases were 3.15%, 3.5% and 4.1% at the end
of
2007, 2006 and 2005, respectively. Consumer loans as of December 31, 2007,
2006
and 2005 included a boat portfolio of $35.0 million, $37.4 million and $39.7
million, respectively; $13.4 million, $13.8 million and $15.3 million,
respectively, in unsecured installment loans; and credit cards and open-end
loans for $9.3 million, $9.5 million and $9.0 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 commercial loans
secured by real estate 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 $1.4 million, as of December 31, 2007, excluding
non-accrual loans amounting to $69.0 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 December 31, 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
|
|
$
|
228,765
|
|
$
|
283
|
|
$
|
2,470
|
|
$
|
532
|
|
$
|
-
|
|
$
|
232,050
|
|
|
Real
estate — secured
|
|
|
246,775
|
|
|
198,878
|
|
|
224,188
|
|
|
132,240
|
|
|
14,158
|
|
|
816,239
|
|
|
Other
commercial and industrial
|
|
|
229,046
|
|
|
24,229
|
|
|
31,199
|
|
|
1,970
|
|
|
11,301
|
|
|
297,715
|
|
|
Consumer
|
|
|
7,314
|
|
|
15,398
|
|
|
1,719
|
|
|
32,378
|
|
|
152
|
|
|
56,961
|
|
|
Leases
|
|
|
16,487
|
|
|
335,496
|
|
|
-
|
|
|
28,914
|
|
|
-
|
|
|
380,897
|
|
|
Other
loans
|
|
|
5,727
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,727
|
|
|
Total
|
|
$
|
734,114
|
|
$
|
574,284
|
|
$
|
259,576
|
|
$
|
196,004
|
|
$
|
25,611
|
|
$
|
1,789,589
|
|
|
(1)
|
Maturities
are based upon contract dates. Demand loans are included in the one
year
or less category and totaled $539.7 million as of December 31,
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 (net of the
portion guaranteed by the United States government) as of the dates
indicated:
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Loans
contractually past due 90 days or more but still accruing
interest
|
|
$
|
29,075
|
|
$
|
12,723
|
|
$
|
8,560
|
|
$
|
8,365
|
|
$
|
9,700
|
|
|
Nonaccrual
loans
|
|
|
68,990
|
|
|
37,255
|
|
|
27,703
|
|
|
32,168
|
|
|
17,058
|
|
|
Total
nonperforming loans
|
|
|
98,065
|
|
|
49,978
|
|
|
36,263
|
|
|
40,533
|
|
|
26,758
|
|
|
Other
real estate owned
|
|
|
8,125
|
|
|
3,629
|
|
|
1,542
|
|
|
2,875
|
|
|
2,774
|
|
|
Other
repossessed assets
|
|
|
5,409
|
|
|
9,419
|
|
|
7,975
|
|
|
3,566
|
|
|
3,643
|
|
|
Total
nonperforming assets
|
|
$
|
111,599
|
|
$
|
63,026
|
|
$
|
45,780
|
|
$
|
46,974
|
|
$
|
33,175
|
|
|
Nonperforming
loans to total loans and leases, net of unearned
|
|
|
5.28
|
%
|
|
2.85
|
%
|
|
2.30
|
%
|
|
2.92
|
%
|
|
2.98
|
%
|
|
Nonperforming
assets to total loans and leases, net of unearned, plus repossessed
property
|
|
|
5.96
|
|
|
3.57
|
|
|
2.89
|
|
|
3.37
|
|
|
3.66
|
|
|
Nonperforming
assets to total assets
|
|
|
4.06
|
|
|
2.52
|
|
|
1.91
|
|
|
2.23
|
|
|
2.51
|
|
|
Allowance
for loan and lease losses to nonperforming loans
|
|
|
28.69
|
|
|
37.89
|
|
|
50.16
|
|
|
46.97
|
|
|
35.11
|
|
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 over
individual managers’ limit; (3) strictly adhering to written loan policies; and
(4) conducting an independent credit review. 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 is accounted for on a cost recovery method, until
qualifying for return to accrual status.
Nonperforming
assets consist of loans 90 days or more past due still accruing interest, loans
and leases on non accrual status, OREO, and other repossessed assets. Non
performing assets increased to $111.6 million as of December 31, 2007, from
$63.0 million and $45.8 million as of December 31, 2006 and 2005, respectively.
Nonperforming assets to total assets increased to 4.06% as of December 31,
2007,
from 2.52% and 1.91% as of December 31, 2006 and 2005, respectively.
Non-performing
loans are comprised of loans 90 days or more past due and still accruing
interest, and loans and leases on nonaccrual status. The nonperforming loans
increased to $98.1 million as of December 31, 2007, from $50.0 million as of
December 31, 2006, after increasing by $13.7 million from $36.3 million as
of
December 31, 2005, as further explained below. Nonperforming loans to total
loans increased to 5.28% as of December 31, 2007, from 2.85% and 2.30% as of
December 31, 2006 and 2005, respectively.
The
increase in nonperforming loans during 2007 was mainly due to combined effect
of
a $16.4 million increase in loans 90 days or more past due still accruing
interest and an increase of $31.7 million nonaccrual loans. During 2007, the
increase in loans 90 days or more past due still accruing interest was mainly
due to the combined effect of: a $14.9 million increase in loans secured by
real
estate; a $747,000 increase in other commercial and industrial loans; a $381,000
increase in lease financing contracts; and a $195,000 increase in overdraft.
Our
historical losses on commercial and construction loans secured by real estate
have been low. The $14.9 million increase in loans secured by real estate was
mainly caused by two commercial business relationships of which one was in
the
construction industry amounting to $11.0 million and the other was in the dairy
business amounting to $2.6 million, which was partially secured by real estate,
and also had milk production quotas among other assets serving as collateral.
The
$31.7
million increase in nonaccrual loans during 2007 was mainly due to the net
effect of a $28.7 million increase in loans secured by real estate; a $4.5
million increase related to one construction business relationship, which was
partially secured by real estate and also had other corporate guaranties; a
$935,000 decrease in lease financing contracts; and a $513,000 decrease in
marine loans. The $28.7 million increase loans secured by real estate was mainly
caused by: (i) six commercial business relationships amounting to $11.9 million
secured by real estate of which two amounting to $6.3 million were in the
communication and service industries, respectively, three were in the commercial
trade and/or construction industries amounting to $2.6 million, and another
was
in the elective health services industry amounting to $3.0 million; (ii) five
commercial business relationships amounting to $14.4 million partially secured
by real estate, of which two were in the dairy farm business amounting to $4.6
million and had milk production quotas servicing as collateral, and the other
three were in the food retailing, security systems, and service industry; and
(iii) other two in the general freight and health care industries, respectively,
amounting to $2.2 million not secured by real estate.
The
increase in nonperforming loans during 2006 was mainly due to the combined
effect of a $4.2 million increase in loans 90 days or more past due still
accruing interest and an increase of $9.6 million in nonaccrual loans. During
2006, the increase in loans 90 or more days still accruing interest was mainly
concentrated in one business relationship secured by real estate for $4.3
million. The increase in nonaccrual loans during 2006 was mainly attributable
to
the combined effect of: an increase of $9.0 million in commercial and
construction loans; and an increase of $843,000 in marine loans. The $9.0
million increase in nonaccrual commercial and construction loans included:
five
business relationships secured by real estate amounting to $6.2 million; and
other three loans amounting to $1.5 million granted to a construction company,
for which real estate collateral was held for approximately 50% of the total
debt and proceeds from specific assignments of construction contracts were
sufficient to repay the remaining balance. As of December 31, 2007, all
nonperforming loans mentioned above remained in nonaccrual status.
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.
OREO
consists of properties acquired by foreclosure or similar means and that
management intends to offer for sale. Other repossessed assets are comprised
of
repossessed automobiles, boats and equipment subject to lease contracts. OREO
and 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 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 repossessed assets, and related operating
income and maintenance expenses, are included in current operations.
As
of
December 31, 2007, our OREO consisted of 45 properties with an aggregate value
of $8.1 million, compared to 18 properties with an aggregate value of $3.6
million as of December 31, 2006, and 13 properties with an aggregate value
of
$1.5 million as of December 31, 2005.
During
2007, we repossessed 29 properties with an aggregate value of $5.4 million,
of
which eighteen were land lots in the amount of $1.1 million belonging to one
commercial customer, and sold 7 properties with an aggregate value of $835,000.
During 2006, we repossessed 22 properties with an aggregate value of $6.1
million and sold 12 properties with an aggregate value of $4.0 million.
Other
repossessed assets as of December 31, 2007 were $5.4 million, compared to $9.4
million and $8.0 million as of December 31, 2006 and 2005, respectively. As
of
December 31, 2007, 2006 and 2005, other repossessed assets were comprised of:
repossessed vehicles amounting to $4.3 million, $8.3 million and $6.2 million,
respectively; repossessed boats amounting to $991,000, $1.1 million and $1.5
million, respectively; and repossessed equipment amounting to $88,000, $39,000
and $210,000, respectively. During 2007, the decrease in repossessed
assets
was
mainly due to the net effect of: a decrease of $4.0 million in repossessed
vehicles, a decrease of $94,000 in repossessed boats, and an increase of $49,000
in repossessed equipment.
The
decrease in repossessed vehicles during 2007 was mainly attributable to our
strategy of being more aggressive in the sale of repossessed vehicles, primary
during the first and second quarter of 2007. As previously mentioned, this
strategy resulted in a significant reduction in the number of repossessed
vehicles in inventory. This is the fifth quarter in a row in which the number
of
repossessed vehicles sold exceeded the number of units repossessed. The number
of repossessed vehicles in inventory as of December 31, 2007 decreased to 325
units, or by approximately 42%, from 564 units as of December 31, 2006, after
increasing by 27.02%, from 444 units as of December 31, 2005.
Total
repossessed and sold vehicles during 2007 were 1,616 and 1,855, respectively,
compared to 1,865 and 1,708 in 2006, and to 1,397 and 1,121 in
2005.
During
2006, the increase in repossessed assets
was
mainly due to the net effect of: an increase of $2.1 million in repossessed
vehicles, and a decrease of $444,000 and $171,000 in repossessed boats and
equipment, respectively.
The
increase in repossessed assets during 2006 was mainly due to the deterioration
of our lease portfolio. However,
even
though the number of repossessed vehicles in 2006 increased when compared to
2005, the net increase during 2006, in term of units, was lower as sales of
repossessed assets also increased for 2006 as compared to 2005, as previously
mentioned.
We
continue monitoring the inventory of repossessed vehicles very closely and
taking measures to expedite its disposition.
The
ratio
of nonperforming assets as a percentage of total loans and leases plus
repossessed property (OREO and other repossessed assets) increased to 5.96%
as
of December 31, 2007, from 3.57% and 2.89% as of December 31, 2006 and 2005,
respectively.
Allowance
for Loan and Lease Losses
We
have
established an allowance for loan and lease losses to provide for loans and
leases 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 major
loan categories. 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, at least on an annual basis, are adjusted to reflect any current
conditions that are expected to result in loss recognition.
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 adjusted 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 currently in use. 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.
|
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, both 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. As explained before, 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
our 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 average balances 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:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Average
total loans and leases outstanding during period
|
|
$
|
1,804,099
|
|
$
|
1,663,330
|
|
$
|
1,487,850
|
|
$
|
1,217,723
|
|
$
|
842,033
|
|
|
Total
loans and leases outstanding at end of period, including loans held
for
sale
|
|
|
1,858,579
|
|
|
1,750,838
|
|
|
1,577,196
|
|
|
1,387,613
|
|
|
899,392
|
|
|
Allowance
for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
at beginning of period
|
|
|
18,937
|
|
|
18,188
|
|
|
19,039
|
|
|
9,394
|
|
|
6,918
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate — secured
|
|
|
372
|
|
|
685
|
|
|
-
|
|
|
5
|
|
|
-
|
|
|
Commercial
and industrial
|
|
|
3,122
|
|
|
3,050
|
|
|
4,848
|
|
|
3,329
|
|
|
966
|
|
|
Consumer
|
|
|
1,699
|
|
|
1,978
|
|
|
2,600
|
|
|
1,196
|
|
|
1,347
|
|
|
Leases
|
|
|
12,680
|
|
|
12,927
|
|
|
8,991
|
|
|
5,806
|
|
|
2,715
|
|
|
Other
loans
|
|
|
398
|
|
|
149
|
|
|
150
|
|
|
164
|
|
|
37
|
|
|
Total
charge-offs
|
|
|
18,271
|
|
|
18,789
|
|
|
16,589
|
|
|
10,500
|
|
|
5,065
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate — secured
|
|
|
52
|
|
|
11
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Commercial
and industrial
|
|
|
319
|
|
|
534
|
|
|
486
|
|
|
154
|
|
|
160
|
|
|
Consumer
|
|
|
319
|
|
|
465
|
|
|
256
|
|
|
233
|
|
|
254
|
|
|
Leases
|
|
|
1,410
|
|
|
1,604
|
|
|
2,210
|
|
|
1,741
|
|
|
675
|
|
|
Other
loans
|
|
|
23
|
|
|
21
|
|
|
11
|
|
|
15
|
|
|
1
|
|
|
Total
recoveries
|
|
|
2,123
|
|
|
2,635
|
|
|
2,963
|
|
|
2,143
|
|
|
1,090
|
|
|
Net
loan and lease charge-offs
|
|
|
16,148
|
|
|
16,154
|
|
|
13,626
|
|
|
8,357
|
|
|
3,975
|
|
|
Provision
for loan and lease losses
|
|
|
25,348
|
|
|
16,903
|
|
|
12,775
|
|
|
7,100
|
|
|
6,451
|
|
|
Allowance
of acquired bank — BankTrust (2004)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,902
|
|
|
-
|
|
|
Allowance
at end of period
|
|
$
|
28,137
|
|
$
|
18,937
|
|
$
|
18,188
|
|
$
|
19,039
|
|
$
|
9,394
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loan and lease charge-offs to average total loans
|
|
|
.90
|
%
|
|
0.97
|
%
|
|
0.92
|
%
|
|
0.69
|
%
|
|
0.47
|
%
|
|
Allowance
for loan and lease losses to total loans at end of period
|
|
|
1.51
|
|
|
1.08
|
|
|
1.15
|
|
|
1.37
|
|
|
1.04
|
|
|
Net
loan and lease charge-offs to allowance for loan losses at end of
period
|
|
|
57.39
|
|
|
85.30
|
|
|
74.92
|
|
|
43.89
|
|
|
42.31
|
|
|
Net
loan and lease charge-offs to provision for loan and lease
losses
|
|
|
63.71
|
|
|
95.57
|
|
|
106.66
|
|
|
117.70
|
|
|
61.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
allowance for loan and lease losses increased by 48.6%, or $9.2 million, to
$28.1 million as of December 31, 2007, after increasing by 4.1%, or $749,000,
to
$18.9 million in 2006, from $18.2 million in 2005. The allowance for loan and
lease losses as a percentage of total loans and leases increased to 1.51% at
the
end of year 2007, from 1.08% in 2006, and 1.15% in 2005. The allowance for
loan
and lease losses is affected by net charge-offs, loan portfolio growth, and
also
by the provision for loan and lease losses for each related period, which,
during 2007, was certainly impacted by the overall economic conditions. The
increase in the allowance for loan and lease losses during 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. During 2006, the increase in the allowance for loans and lease losses
was mainly related the loss trends in our leasing portfolio, as explained
further below, and the growth in our loan portfolio. The loan portfolio growth
during 2007 and 2006 was mostly concentrated in commercial loans secured by
real
estate, on which the loss of risk is lesser than in the other loan categories.
We consider 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-offs 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 each quarter are partially charged-off. For each of the years ended
December 31, 2007, 2006 and 2005, we used a historical loss ratio in lease
finance contracts of approximately 23%, 20% and 15%, respectively. For the
years
ended December 31, 2007, 2006 and 2005, approximately $1.8 million, $2.5 million
and $1.6 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
were
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 each quarter are fully charged-off. For the years ended December
31, 2007, 2006 and 2005, approximately $838,000, $781,000 and $1.3 million
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 net charge-off ratio on the leasing
business was 2.71%, 2.40% and 1.81% for the years ended December 31, 2007,
2006
and 2005, respectively. The increase in the net charge-off ratio on the leases
business during 2007 was mainly due to the decrease in our lease portfolio.
However, for 2007, the amount of net charge-offs in our leasing portfolio
remained stable when compared to the year ended December 31, 2006. During 2006,
the increase in the net charge-off ratio on the leases business was mainly
due
to the combined effect of portfolio deterioration and a decrease in our lease
portfolio. Our lease portfolio decreased to $385.4 million as of December 31,
2007, from $443.3 million as of December 31,2006, and from $487.9 million at
the
end of fiscal year 2005. Net charge-offs in our leasing portfolio remaining
at
$11.3 million for the year ended December 31, 2007 when compared to the year
ended December 31, 2006, after increasing from $6.8 million for the year ended
December 31, 2005. We have been closely monitoring the lease portfolio and
have
tightened underwriting standards in an attempt to reduce possible future losses,
as previously mentioned.
Net
charge-offs as a percentage of average loans was 0.90%, 0.97% and 0.92% for
the
years 2007, 2006 and 2005, respectively. The decrease in this ratio during
2007
was mainly attributable to the decrease in our inventory of repossessed
vehicles, as previously mentioned. During 2006, the increase in this ratio
was
mainly due to an increase in net charge-offs from our leasing portfolio, as
further explained below.
Net
charge-offs as a percentage of provision for loan and lease losses decreased
to
63.7% as of December 31, 2007, from 95.6% in 2006, and from 106.7% in 2005.
The
decrease in this ratio during 2007 was mainly attributable to the increase
in
our provision for loan and lease losses to account for: i) the specific
allowance required by three commercial business relationships, which became
impaired during the third quarter of 2007, as previously mentioned; and ii)
a
deterioration in the overall economic conditions, as previously mentioned.
During 2006, the decrease in this ratio
was
mainly a result of the
increase
in our provision for loan and lease losses to account for the loss trends in
our
leasing portfolio.
Net
charge-offs were $16.1 million for the year ended December 31, 2007, compared
to
$16.2 million in 2006, and $13.6 million in 2005.
The
change in net charge-offs for the year ended December 31, 2007, when compared
to
year ended December 31, 2006, resulted from: (i) a $354,000 decrease in net
charge-offs from loans secured by real estate; (ii) $287,000 increase in net
charge-offs from other commercial and industrial loans; (iii) $133,000 decrease
in net charge-offs from consumer loans; (iv) a $53,000 decrease in net
charge-offs from our leasing portfolio; and (v) a $247,000 increase in net
charge-offs from overdrafts.
The
increase in net charge-offs for the year ended December 31, 2006, when compared
to year ended December 31, 2005, resulted mainly from: (i) a $4.5 million
increase in net charge-offs from our leasing portfolio; (ii) a $1.8 million
decrease in net charge-offs from other commercial and industrial loans; (iii)
a
$831,000 decrease in net charge-offs from consumer loans; and (iv) a $674,000
increase in net charge-offs from real estate secured loans. The increase in
net
charge-offs from our leasing portfolio was mainly attributable to the increase
in the volume of repossessed assets, as explained before, and also to an
increase in the initial market valuation of repossessed vehicles at the time
of
repossession, reducing the book value of repossessed vehicles.
Net
charge offs as a percentage of our year end portfolio balance, or “net loss
experience,” has averaged 1.03% for our commercial loan portfolio that is not
secured by real estate over the past five years. As previously mentioned, our
historical losses through the years from our commercial loan portfolio secured
by real estate have been low. However, because a significant portion of our
business is focused on commercial lending, we have generally maintained a
conservative allowance for our commercial loan portfolio. For the portion of
our
commercial loan portfolio adequately secured with real estate collateral, we
maintain an allowance equal to 0.12% of the outstanding balance of such
portfolio. The allowance for commercial loans that are not secured by real
estate is equal to 4.22% of the outstanding portfolio balance.
Our
consumer loan portfolio, excluding boat financing, has averaged a 3.55% net
loss
experience over the past five years. This is partially attributable to the
fact
that, in connection with our acquisitions of other banks, additional charge-offs
have been recorded and additional allowances have been built into the
transaction pricing to compensate for future losses. For our consumer loan
portfolio, excluding boat financing, we maintain an allowance equal to 3.24%
of
the outstanding balance of such portfolio.
Our
five-year old construction loan portfolio has no loss experience. Nevertheless,
we maintain an allowance for this portfolio equal to 0.62% of the portfolio
balance.
Our
leasing portfolio has a 2.92% net loss experience over the last year. We
maintain an allowance equal to 2.86% of the balance of this
portfolio.
Our
boat
financing portfolio has a 1.76% net loss experience over the past four years.
We
maintain an allowance equal to 2.17% of the balance of this
portfolio.
Although
our mortgage portfolio has no loss experience, we maintain an allowance equal
to
0.29% of this portfolio.
The
table
below presents an allocation for the allowance for loan and lease losses among
the various loan categories and sets forth the percentage of loans and leases
in
each category to gross loans or leases. The allocation of the allowance for
loan
and lease losses as shown in the table should neither be interpreted as an
indication of future charge-offs, nor as an indication that charge-offs in
future periods will necessarily occur in these amounts or in the indicated
proportions:
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
Amt.
|
|
Loan
Category to Gross
Loans
(1)
|
|
Amt.
|
|
Loan
Category to Gross
Loans
(1)
|
|
Amt.
|
|
Loan
Category to Gross
Loans
(1)
|
|
Amt.
|
|
Loan
Category to Gross
Loans
(1)
|
|
Amt.
|
|
Loan
Category to Gross
Loans
(1)
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Allocated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate — construction
|
|
$
|
1,263
|
|
|
10.96
|
%
|
$
|
610
|
|
|
7.23
|
%
|
$
|
714
|
|
|
5.25
|
%
|
$
|
1,200
|
|
|
5.75
|
%
|
$
|
464
|
|
|
5.32
|
%
|
|
Real
estate — secured
|
|
|
1,301
|
|
|
48.49
|
|
|
525
|
|
|
46.60
|
|
|
1,137
|
|
|
41.92
|
|
|
1,997
|
|
|
37.44
|
|
|
1,212
|
|
|
35.69
|
|
|
Commercial
and industrial
|
|
|
12,760
|
|
|
16.30
|
|
|
4,836
|
|
|
17.03
|
|
|
4,597
|
|
|
17.34
|
|
|
6,470
|
|
|
17.66
|
|
|
4,067
|
|
|
20.01
|
|
|
Consumer
|
|
|
1,520
|
|
|
3.11
|
|
|
1,433
|
|
|
3.47
|
|
|
1,499
|
|
|
4.08
|
|
|
3,239
|
|
|
5.42
|
|
|
750
|
|
|
2.99
|
|
|
Leases
|
|
|
11,041
|
|
|
20.77
|
|
|
11,089
|
|
|
25.38
|
|
|
9,701
|
|
|
31.07
|
|
|
3,815
|
|
|
33.29
|
|
|
1,950
|
|
|
35.51
|
|
|
Other
loans
|
|
|
252
|
|
|
0.37
|
|
|
436
|
|
|
0.29
|
|
|
212
|
|
|
0.34
|
|
|
134
|
|
|
0.44
|
|
|
21
|
|
|
0.48
|
|
|
Unallocated
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
328
|
|
|
—
|
|
|
2,184
|
|
|
—
|
|
|
930
|
|
|
—
|
|
|
Total
allowance for loan and lease losses
|
|
$
|
28,137
|
|
|
100.00
|
%
|
$
|
18,937
|
|
|
100.00
|
%
|
$
|
18,188
|
|
|
100.00
|
%
|
$
|
19,039
|
|
|
100.00
|
%
|
$
|
9,394
|
|
|
100.00
|
%
|
(1)
Excludes
mortgage loans held-for-sale.
Nonearning
Assets
Premises,
leasehold improvements and equipment, net of accumulated depreciation and
amortization, totaled $33.1 million as of December 31, 2007, compared to $14.9
million and $11.2 million at the end of year 2006 and 2005, respectively. The
increase in nonearning assets during 2007 was primarily attributable to the
purchase
of land and an office building to serve as our new headquarters, as explained
further 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 consolidates our headquarters, administrative operations, and
our
leasing division. The purchase price for the property was $12,360,000. By
December 2007, we had completed moving our headquarters, our leasing division,
and almost all administrative departments to the new building. As of December
31, 2007, office building improvements amounted to $2.9 million. We anticipate
that there may be a benefit from certain efficiencies associated with
centralizing these operations in one location.
In
addition, as of December 31, 2007, Eurobank had three land lots amounting to
$1.4 million, of which one lot valued at $851,000 was purchased in April 2006
for future branch development, and the other two had an aggregate value of
$549,000 and were purchased in December 2007 for future expansion of our
headquarters.
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 for the years ended December
31, 2007, 2006 and 2005 were $1.893 billion, $1.739 billion and $1.505 billion,
respectively. Average deposits grew by $154.7 million, or by 8.9%, in 2007,
and
by $234.0 million, or 15.6%, in 2006. The increase in average deposits for
2007
and 2006 was mainly concentrated in broker 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:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Average
Balance
|
|
Percent
of Deposits
|
|
Average
Rate
|
|
Average
Balance
|
|
Percent
of Deposits
|
|
Average
Rate
|
|
Average
Balance
|
|
Percent
of Deposits
|
|
Average
Rate
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Noninterest-bearing
demand deposits
|
|
$
|
119,004
|
|
|
6.29
|
%
|
|
-
|
%
|
$
|
128,551
|
|
|
7.39
|
%
|
|
-
|
%
|
$
|
129,676
|
|
|
8.62
|
%
|
|
-
|
%
|
|
Money
market deposits
|
|
|
18,361
|
|
|
0.97
|
|
|
2.90
|
|
|
25,470
|
|
|
1.46
|
|
|
2.29
|
|
|
51,787
|
|
|
3.44
|
|
|
2.10
|
|
|
NOW
deposits
|
|
|
47,068
|
|
|
2.49
|
|
|
2.23
|
|
|
46,330
|
|
|
2.66
|
|
|
2.23
|
|
|
46,421
|
|
|
3.09
|
|
|
1.85
|
|
|
Savings
deposits
|
|
|
141,120
|
|
|
7.45
|
|
|
2.48
|
|
|
184,824
|
|
|
10.63
|
|
|
2.37
|
|
|
254,923
|
|
|
16.94
|
|
|
2.30
|
|
|
Time
certificates of deposit in denominations of $100,000 or
more
|
|
|
236,057
|
|
|
12.47
|
|
|
5.01
|
|
|
205,510
|
|
|
11.82
|
|
|
4.30
|
|
|
202,099
|
|
|
13.43
|
|
|
3.24
|
|
|
Broker
certificates of deposits in denominations of $100,000 or
more
|
|
|
1,239,885
|
|
|
65.49
|
|
|
5.13
|
|
|
1,034,893
|
|
|
59.54
|
|
|
4.78
|
|
|
666,955
|
|
|
44.33
|
|
|
3.87
|
|
|
Other
time deposits
|
|
|
91,887
|
|
|
4.85
|
|
|
4.37
|
|
|
113,097
|
|
|
6.50
|
|
|
3.70
|
|
|
152,787
|
|
|
10.15
|
|
|
3.10
|
|
|
Total
deposits
|
|
$
|
1,836,382
|
|
|
100.00
|
%
|
|
|
|
$
|
1,738,675
|
|
|
100.00
|
%
|
|
|
|
$
|
1,504,648
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits as of December 31, 2007, 2006 and 2005 were $1.993 billion, $1.905
billion and $1.734 billion, respectively, representing an increase of $87.7
million, or 4.60%, in 2007 and $171.2 million, or 9.87%, in 2006.
The
following table presents the composition of our deposits by category as of
the
dates indicated:
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
(In
thousands)
|
|
|
Interest
bearing deposits:
|
|
|
|
|
|
|
|
|
Now
and money market
|
|
$
|
60,893
|
|
$
|
62,673
|
|
$
|
70,962
|
|
|
Savings
|
|
|
131,604
|
|
|
156,069
|
|
|
223,665
|
|
|
Broker
certificates of deposits in denominations of
less
than $100,000
|
|
|
104
|
|
|
707
|
|
|
2,972
|
|
|
Broker
certificates of deposits in denominations of
$100,000
or more
|
|
|
1,336,456
|
|
|
1,225,449
|
|
|
964,233
|
|
|
Time
certificates of deposits in denominations of
$100,000
or more
|
|
|
251,361
|
|
|
224,741
|
|
|
203,708
|
|
|
Other
time deposits in denominations of
less
than $100,000 and IRAs
|
|
|
92,545
|
|
|
95,396
|
|
|
121,950
|
|
|
Total
interest bearing deposits
|
|
$
|
1,872,963
|
|
$
|
1,765,035
|
|
$
|
1,587,490
|
|
|
Plus:
non interest bearing deposits
|
|
|
120,083
|
|
|
140,321
|
|
|
146,638
|
|
|
Total
deposits
|
|
$
|
1,993,046
|
|
$
|
1,905,356
|
|
$
|
1,734,128
|
|
As
mentioned before, in addition to the deposits we generate locally, we have
also
accepted broker deposits to augment retail deposits and to fund asset growth.
The
decrease in now and money market accounts, savings accounts, and other time
deposits in denominations of less than $100,000 was mainly due 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 broker deposits
an
attractive alternative, resulting in lower funding costs when compared to the
usually higher rates offered locally for time deposits. Also, as previously
mentioned, we decided to pursue the use of broker deposits alternative in an
attempt to control the continuous increase in our funding cost.
Because
broker deposits are generally more volatile and interest rate sensitive than
other sources of funds, management closely monitors growth in this
category.
The
following table sets forth the amount and maturities of the time deposits of
$100,000 or more as of the dates indicated, excluding individual retirement
accounts:
|
|
|
As
of December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
(In
thousands)
|
|
|
Three
months or less
|
|
$
|
360,168
|
|
$
|
547,837
|
|
$
|
421,582
|
|
|
Over
three months through six months
|
|
|
318,440
|
|
|
294,784
|
|
|
250,982
|
|
|
Over
six months through 12 months
|
|
|
195,976
|
|
|
188,691
|
|
|
184,880
|
|
|
Over
12 months
|
|
|
713,233
|
|
|
418,878
|
|
|
310,497
|
|
|
Total
|
|
$
|
1,587,817
|
|
$
|
1,450,190
|
|
$
|
1,167,941
|
|
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 fiscal years ended December 31, 2007, 2006 and 2005:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Balance
at period-end
|
|
$
|
496,419
|
|
$
|
365,664
|
|
$
|
419,860
|
|
|
Average
monthly aggregate balance outstanding during the period
|
|
|
372,935
|
|
|
432,459
|
|
|
489,110
|
|
|
Maximum
aggregate balance outstanding at any month-end
|
|
|
496,419
|
|
|
501,182
|
|
|
614,650
|
|
|
Weighted
average interest rate for the year
|
|
|
5.04
|
%
|
|
4.94
|
%
|
|
3.33
|
%
|
|
Weighted
average interest rate for the last month of the year
|
|
|
4.60
|
%
|
|
5.27
|
%
|
|
4.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
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
fiscal years ended December 31, 2007, 2006 and 2005:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Balance
at period-end
|
|
$
|
30,454
|
|
$
|
8,707
|
|
$
|
8,759
|
|
|
Average
balance during the period
|
|
|
3,668
|
|
|
19,016
|
|
|
10,059
|
|
|
Maximum
amount outstanding at any month-end
|
|
|
30,454
|
|
|
121,292
|
|
|
10,404
|
|
|
Weighted
average interest rate for the year
|
|
|
5.26
|
%
|
|
5.06
|
%
|
|
4.93
|
%
|
|
Weighted
average interest rate for the last month of the year
|
|
|
4.64
|
%
|
|
5.51
|
%
|
|
5.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
Payable to Statutory Trusts
For
more
detail on notes payable to statutory trusts please refer to the business section
of this Annual Report on Form 10-K captioned
“
Eurobank
Statutory Trust I and II
”
and the
“Note
16 - Notes Payable to Statutory Trusts”
to our
consolidated financial statements.
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 source of capital have been internally generated
operating income through retained earnings. As of December 31, 2007, 2006 and
2005, total stockholders’ equity was $179.9 million, $169.9 million and $165.5
million, respectively. In addition, the following items also impacted our
stockholders’ equity:
|
|
·
|
During
2007, a total of 254,862 stock options were exercised for the aggregate
exercise price of $1.1 million, as follows: 250,862 on February 23,
2007
at an aggregate exercise price of $1.1 million; and 4,000 stock options
on
July 10, 2007 at an aggregate exercise price of
$20,000.
|
|
|
·
|
Between
the second and third quarter of 2007, we repurchased 285,368 shares
for
$2.5 million in connection with a stock repurchase program approved
by the
Board of Directors in May 2007, which was completed in September
2007.
|
|
|
·
|
In
an effort to improve our net interest margin, on December 18, 2006,
we
redeemed $25.8 million of floating rate junior subordinated deferrable
interest debentures bearing an interest rate of 8.99% at the time
of
redemption,
upon which Eurobank Statutory Trust I, one of our non-banking
subsidiaries, redeemed $25.0 million in trust preferred securities.
Up to
December 18, 2006, we
included
these trust-preferred securities as part of our tier 1
capital.
We
believe that remaining supplemental capital raised in connection
with the
issuance of trust preferred securities from Eurobank Statutory Trust
II
will allow us to achieve and maintain our status as a well-capitalized
institution and to sustain our continued loan growth.
For
more detail on notes payable to statutory trusts please refer to
“Note
16 - Notes Payable to Statutory Trusts”
to
our consolidated financial
statements.
|
|
|
·
|
During
2006, a total of 213,450 options were exercised for the aggregate
exercise
price of $879,765, as follows: 7,000 options on September 13, 2006
at an
aggregate exercise price of $44,390; 56,450 options on June 30, 2006
at an
aggregate exercise price of $336,625; and 150,000 options on February
27,
2006 at an aggregate exercise price of $498,750.
|
|
|
·
|
During
2006 and 2005, we repurchased 488,477 shares for $5.5 million and
163,550
shares for $1.9 million, respectively, upon a stock repurchase program
approved by our board of directors in October 2005, respectively,
which
expired in October 2006.
|
|
|
·
|
On
November, 18, 2005, we recorded 1,688 for $22,000 shares as treasury
stock
as a result of a payment in lieu of foreclosure from a former
borrower.
|
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
this
Annual Report on Form 10-K.
As
of
December 31, 2007, we and Eurobank both qualified as “well-capitalized”
institutions under the regulatory framework for prompt corrective action.
However,
if our capital ratios fall below the levels necessary to be considered
“well-capitalized” under current regulatory guidelines, we could be restricted
in using broker deposits as a short-term funding source.
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 December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
$
|
224,873
|
|
|
10.79
|
%
|
$
|
≥
166,720
|
|
|
≥
8.00
|
%
|
|
N/A
|
|
|
|
|
|
Eurobank
|
|
|
224,137
|
|
|
10.76
|
|
|
≥
166,719
|
|
|
≥
8.00
|
|
|
≥
208,399
|
|
|
≥
10.00
|
%
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
|
198,793
|
|
|
9.54
|
|
|
≥
83,360
|
|
|
≥
4.00
|
|
|
N/A
|
|
|
|
|
|
Eurobank
|
|
|
198,057
|
|
|
9.50
|
|
|
≥
83,360
|
|
|
≥
4.00
|
|
|
≥
125,039
|
|
|
≥
6.00
|
|
|
Leverage
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
|
198,793
|
|
|
7.55
|
|
|
≥
105,308
|
|
|
≥
4.00
|
|
|
N/A
|
|
|
|
|
|
Eurobank
|
|
|
198,057
|
|
|
7.52
|
|
|
≥
105,282
|
|
|
≥
4.00
|
|
|
≥
131,603
|
|
|
≥
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
|
|
|
As
of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
$
|
238,570
|
|
|
13.49
|
%
|
$
|
≥
141,479
|
|
|
≥
8.00
|
%
|
|
N/A
|
|
|
|
|
|
Eurobank
|
|
|
190,070
|
|
|
10.72
|
|
|
≥
141,836
|
|
|
≥
8.00
|
|
|
≥
177,295
|
|
|
≥
10.00
|
%
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
|
220,157
|
|
|
12.45
|
|
|
≥
70,740
|
|
|
≥
4.00
|
|
|
N/A
|
|
|
|
|
|
Eurobank
|
|
|
151,657
|
|
|
8.55
|
|
|
≥
70,918
|
|
|
≥
4.00
|
|
|
≥
106,377
|
|
|
≥
6.00
|
|
|
Leverage
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
|
220,157
|
|
|
9.35
|
|
|
≥
94,199
|
|
|
≥
4.00
|
|
|
N/A
|
|
|
|
|
|
Eurobank
|
|
|
151,657
|
|
|
6.44
|
|
|
≥
94,172
|
|
|
≥
4.00
|
|
|
≥
117,714
|
|
|
≥
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
chose 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
broker time deposits availability are part of the bank's liquidity presentation.
Our liquid assets at December 31, 2007, 2006 and 2005 totaled approximately
$239.8 million, $300.4 million and $318.5 million, respectively. Our Core Basis
Surplus liquidity level was 5.7%, 8.9% and 10.1% 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 through 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 that the growth in the investment portfolio was funded mostly
with repurchase agreements and other collateralized borrowings reducing the
portion of unpledged securities to total assets compared to December 31, 2006.
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 broker 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 December 31,
2007, we had FHLB borrowing capacity of $21.4 million, including FHLB advances
and securities sold under agreements to repurchase. Also, as of the same date,
we had $376.0 million in pre-approved repurchase agreements with major brokers
and banks, subject to acceptable unpledged marketable securities available
for
sale. In addition, Eurobank is able to borrow up to $10.0 million from the
Federal Reserve Bank using securities currently pledge 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
December 31, 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 December 31, 2007, we
and
Eurobank both qualified as “well-capitalized” institutions under the regulatory
framework for prompt corrective action.
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 unique characteristics, which
make
it very difficult 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 2007 were $34.0 million, compared
to
cash inflows of $56.3 million and $44.1 million from operating activities for
the year 2006 and 2005, respectively. The net operating cash inflows during
2007
and 2005 resulted primarily from
the net
effect of: i) proceeds from sale of loans held for sale; ii) an increase in
accrued interest receivable; iii) an increase in accrued interest payable,
accrued expenses and other liabilities; and iv) a net increase in other
assets
.
During
2006, the net operating cash inflows resulted primarily from
the net
effect of: i) proceeds from sale of loans held for sale; ii) an increase in
accrued interest receivable; iii) an increase in accrued interest payable,
accrued expenses and other liabilities; and iv) a net decrease in other
assets
.
Our
net
cash outflows from investing activities for the years 2007, 2006 and 2005 were
$281.7 million, $137.7 million and $319.6 million, respectively. The net
investing cash outflows experienced in 2007 were primarily used for the growth
in our investment and loan portfolios. During 2006, the net investing cash
outflows experienced were primarily used for the growth in our loan portfolio.
The higher net investing cash outflows experienced in 2005 were primarily due
to
growth in the investment securities portfolio, which provided additional
collateral in that year to support wholesale funding increases and a growth
in
our loan and lease portfolio.
Our
net
cash inflows from financing activities for the years 2007, 2006 and 2005 were
$238.1 million, $86.0 million and $277.9 million, respectively.
The
net
financing cash inflows experienced in 2007 were primarily provided by a net
increase in deposits and securities sold under agreement to repurchase and
other
borrowing. During 2006 and 2005, the net financing cash inflows were primarily
provided by a net increase in deposits.
Impact
of Inflation and Changing Prices
The
financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States
of
America which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike
most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have
a
more significant impact on a financial institution’s performance than the
effects of general levels of inflation. Interest rates do not necessary move
in
the same direction or with the same magnitude as the prices of goods and
services since such prices are affected by inflation.
Quantitative
and Qualitative Disclosure About Market Risk
Interest
rate risk is the most significant market risk affecting us. Other types of
market risk, such as foreign currency risk and commodity price risk, do not
arise in the normal course of our business activities. Interest rate risk can
be
defined as the exposure to a movement in interest rates that could have an
adverse effect on our net interest income or the market value of our financial
instruments. The ongoing monitoring and management of this risk is an important
component of our asset and liability management process, which is governed
by
policies established by Eurobank’s Board of Directors and carried out by
Eurobank’s Asset/Liability Management Committee. The Asset/Liability Management
Committee’s objectives are to manage our exposure to interest rate risk over
both the one year planning cycle and the longer term strategic horizon and,
at
the same time, to provide a stable and steadily increasing flow of net interest
income. Interest rate risk management activities include establishing guidelines
for tenor and repricing characteristics of new business flow, the maturity
ladder of wholesale funding, investment security purchase and sale strategies
and mortgage loan sales, as well as derivative financial instruments. Eurobank
may enter into interest rate swap agreements, in which it exchanges the periodic
payments, based on a notional amount and agreed-upon fixed and variable interest
rates. Also, Eurobank may use contracts to transform the interest rate
characteristics of specifically identified assets or liabilities to which the
contract is tied. At December 31, 2007, the Bank had interest rate swap
agreements which converted $28.4 million of fixed rate time deposits to variable
rate time deposits of which $10.3 million will mature in 2010 and 2013 and
$18.1
million with maturity between 2018 and 2023 but with semi-annual call options
which match call options on the swaps. In addition, as of December 31, 2007,
Eurobank had $4.0 million related to an option and equity-based return
derivative, which was purchased in January 2007 to fix the interest rate expense
on a $25.0 million certificate of deposit. For more detail on derivative
financial instruments please refer to
“Note
15 - Derivative Financial Instruments”
to our
condensed consolidated financial statements included herein.
Our
primary measurement of interest rate risk is earnings at risk, which is
determined through computerized simulation modeling. The primary simulation
model assumes a static balance sheet, using the balances, rates, maturities
and
repricing characteristics of all of the bank’s existing assets and liabilities,
including off-balance sheet financial instruments. Net interest income is
computed by the model assuming market rates remaining unchanged and compares
those results to other interest rate scenarios with changes in the magnitude,
timing and relationship between various interest rates. At December 31, 2007,
we
modeled rising ramp and declining interest rate simulations in 100 basis point
increments over two years. The impact of embedded options in such products
as
callable and mortgage-backed securities, real estate mortgage loans and callable
borrowings were considered. Changes in net interest income in the rising and
declining rate scenarios are then measured against the net interest income
in
the rates unchanged scenario. The Asset/Liability Management Committee utilizes
the results of the model to quantify the estimated exposure of net interest
income to sustained interest rate changes
and to
understand the level of risk/volatility given a range of reasonable and
plausible interest rate scenarios. In this context, the core interest rate
risk
analysis examines the balance sheet under rates up/down scenarios that are
neither too modest nor too extreme. All rate changes are “ramped” over a 12
month horizon based upon a parallel yield curve shift and maintained at those
levels over the remainder of the simulation horizon. Using this approach, we
are
able to obtain results that illustrate the effect that both a gradual change
of
rates (year 1) and a rate shock (year 2 and beyond) has on margin
expectations
.
In
the
December 31, 2007 simulation, our model indicated no material exposure in the
level of net interest income to gradual rising rates “ramped” for the first
12-month period, and no exposure in the level of net interest income to a rate
shock of rising rates for the second 12-month period. This is caused by the
effect of the volume of our commercial and industrial loans variable rate
portfolio and the maturity distribution of the repurchase agreements and broker
deposits, our primary funding source, from 30 days to approximately 2 years.
The
hypothetical rate scenarios consider a change of 100 and 200 basis points during
two years. The decreasing rate scenarios have a floor of 200 basis points.
At
December 31, 2007, the net interest income at risk for year one in the 100
basis
point falling rate scenario was calculated at $609,000 , or 0.82% lower than
the
net interest income in the rates unchanged scenario, and $2.1 million, or 2.77%
lower than the net interest income in the rates unchanged scenario at the
December 31, 2007 simulation with a 200 basis point decrease. The net interest
income at risk for year two in the 100 basis point falling rate scenario was
calculated at $4.6 million, or 6.24% higher than the net interest income in
the
rates unchanged scenario, and $744,000, or 1.00%, higher than the net interest
income in the rates unchanged scenario at the December 31, 2007 simulation
with
a 200 basis point decrease. At December 31, 2007, the net interest income at
risk for year one in the 100 basis point rising rate scenario was calculated
to
be $503,000, or 0.68% higher than the net interest income in the rates unchanged
scenario, and $292,000, or 0.39% higher than the net interest income in the
rate
unchanged scenario at the December 31, 2007 simulation with a 200 basis point
increase. The net interest income at risk for year two in the 100 basis point
rising rate scenario was calculated at $3.1 million, or 4.13% higher than the
net interest income in the rates unchanged scenario, and $1.4 million, or 1.86%
higher than the net interest income in the rates unchanged scenario at the
December 31, 2007 simulation with a 200 basis point increase. These exposures
are well within our policy guidelines of 15.0% and 25.0% for 100 and 200 basis
points changes in rate scenarios, respectively. Computation of prospective
effects of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, loan and security
prepayments, deposit run-offs and pricing and reinvestment strategies and should
not be relied upon as indicative of actual results. Further, the computations
do
not contemplate any actions we may take in response to changes in interest
rates. We cannot assure you that our actual net interest income would increase
or decrease by the amounts computed by the simulations.
The
following table indicates the estimated impact on net interest income under
various interest rate scenarios as of December 31, 2007:
|
|
|
Change
in Future
Net
Interest Income Gradual
Raising
Rate Scenario - Year 1
|
|
|
|
|
At
December 31, 2007
|
|
|
Change
in Interest Rates
|
|
Dollar
Change
|
|
Percentage
Change
|
|
|
|
|
(Dollars
in thousands)
|
|
|
+200
basis points over year 1
|
|
$
|
292
|
|
|
0.39
|
%
|
|
+100
basis points over year 1
|
|
|
503
|
|
|
0.68
|
|
|
-
100 basis points over year 1
|
|
|
(609
|
)
|
|
(0.82
|
)
|
|
-
200 basis points over year 1
|
|
|
(2,059
|
)
|
|
(2.77
|
)
|
|
|
|
Change
in Future
Net
Interest Income Rate
Shock
Scenario - Year 2
|
|
|
|
|
At
December 31, 2007
|
|
|
Change
in Interest Rates
|
|
Dollar
Change
|
|
Percentage
Change
|
|
|
|
|
(Dollars
in thousands)
|
|
|
+200
basis points over year 2
|
|
$
|
1,382
|
|
|
1.86
|
%
|
|
+100
basis points over year 2
|
|
|
3,072
|
|
|
4.13
|
|
|
-
100 basis points over year 2
|
|
|
4,640
|
|
|
6.24
|
|
|
-
200 basis points over year 2
|
|
|
744
|
|
|
1.00
|
|
We
also
monitor core funding utilization in each interest rate scenario as well as
market value of equity. These measures are used to evaluate long-term interest
rate risk beyond the two-year planning horizon.
Aggregate
Contractual Obligations
The
following table represents our on and off-balance sheet aggregate contractual
obligations, other than deposit liabilities, to make future payments to third
parties as of the date specified:
|
|
|
As
of December 31, 2007
|
|
|
|
|
Less
than
One
Year
|
|
Over
One Year to
Three
Years
|
|
Over
Three Years
to
Five Years
|
|
Over
Five Years
|
|
|
|
|
(In
thousands)
|
|
|
FHLB
advances
|
|
$
|
30,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
454
|
|
|
Notes
payable to statutory trusts
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,619
|
|
|
Operating
leases
|
|
|
1,742
|
|
|
3,138
|
|
|
2,779
|
|
|
16,145
|
|
|
Total
|
|
$
|
31,742
|
|
$
|
3,138
|
|
$
|
2,779
|
|
$
|
37,218
|
|
In
addition, 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 purchase price for the property was $12,360,000.
Off-Balance
Sheet Arrangements
During
the ordinary course of business, we provide various forms of credit lines to
meet the financing needs of our customers. These commitments, which have a
term
of less than one year, represent a credit risk and are not represented in any
form on our balance sheets.
As
of
December 31, 2007, 2006 and 2005, we had commitments to extend credit of $265.3
million, $308.5 million and $265.3 million, respectively. These commitments
included standby letters of credit of $13.6 million, $8.4 million and $7.0
million as of December 31, 2007, 2006 and 2005, respectively, and commercial
letters of credit of $1.5 million, $916,000 and $1.3 million for those same
periods, respectively.
The
effect on our revenues, expenses, cash flows and liquidity of the unused
portions of these commitments cannot reasonably be predicted because there
is no
guarantee that the lines of credit will be used. For more information regarding
our off-balance sheet arrangements, see
“Note
26 — Financial Instruments with Off-Balance-Sheet Risk”
to
our
consolidated financial statements.
Recent
Accounting Pronouncements
For
more
detail on recent accounting pronouncements please refer to
“Note
2(z) - Recently Issued Accounting Standards”
to our
consolidated financial statements.
ITEM
7A. Quantitative and Qualitative Disclosures About Market
Risk.
The
information contained in the section captioned
“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”
as set
forth in Part II, Item 7 of this Annual Report on Form 10-K is incorporated
herein by reference.
ITEM
8.
Financial
Statements and Supplementary Data.
Quarterly
Selected Financial Data (Unaudited)
The
following tables summarize unaudited quarterly results of operations for years
ended December 31, 2007, 2006 and 2005.
|
|
|
Year
ended December 31, 2007
|
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
|
quarter
|
|
quarter
|
|
quarter
|
|
quarter
|
|
|
Interest
income
|
|
$
|
44,327,194
|
|
$
|
43,734,653
|
|
$
|
42,949,603
|
|
$
|
42,313,742
|
|
|
Interest
exp ense
|
|
|
28,084,689
|
|
|
26,624,695
|
|
|
25,507,208
|
|
|
25,253,744
|
|
|
Net
interest income
|
|
|
16,242,505
|
|
|
17,109,958
|
|
|
17,442,395
|
|
|
17,059,998
|
|
|
Provision
for loan and lease losses
|
|
|
6,881,000
|
|
|
9,594,000
|
|
|
3,594,000
|
|
|
5,279,000
|
|
|
Net
interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after
provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan and lease losses
|
|
|
9,361,505
|
|
|
7,515,958
|
|
|
13,848,395
|
|
|
11,780,998
|
|
|
Total
other income
|
|
|
2,410,272
|
|
|
2,212,540
|
|
|
2,132,675
|
|
|
1,922,710
|
|
|
Total
other exp enses
|
|
|
11,488,227
|
|
|
12,341,740
|
|
|
12,265,054
|
|
|
12,129,823
|
|
|
Income
before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
283,550
|
|
|
(2,613,242
|
)
|
|
3,716,016
|
|
|
1,573,885
|
|
|
Income
(benefit) tax
|
|
|
(218,428
|
)
|
|
(1,378,559
|
)
|
|
1,088,265
|
|
|
259,848
|
|
|
Net
income (loss)
|
|
$
|
501,978
|
|
$
|
(1,234,683
|
)
|
$
|
2,627,751
|
|
$
|
1,314,037
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
(0.07
|
)
|
$
|
0.13
|
|
$
|
0.06
|
|
|
Diluted
|
|
$
|
0.02
|
|
$
|
(0.07
|
)
|
$
|
0.12
|
|
$
|
0.06
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
|
quarter
|
|
quarter
|
|
quarter
|
|
quarter
|
|
|
Interest
income
|
|
$
|
42,699,853
|
|
$
|
41,895,851
|
|
$
|
39,767,141
|
|
$
|
37,782,974
|
|
|
Interest
expense
|
|
|
26,898,186
|
|
|
25,315,546
|
|
|
22,750,837
|
|
|
20,398,777
|
|
|
Net
interest income
|
|
|
15,801,667
|
|
|
16,580,305
|
|
|
17,016,304
|
|
|
17,384,197
|
|
|
Provision
for loan and lease losses
|
|
|
5,274,000
|
|
|
4,849,000
|
|
|
3,390,000
|
|
|
3,390,000
|
|
|
Net
interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after
provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan and lease losses
|
|
|
10,527,667
|
|
|
11,731,305
|
|
|
13,626,304
|
|
|
13,994,197
|
|
|
Total
other income
|
|
|
1,109,307
|
|
|
1,778,375
|
|
|
2,546,822
|
|
|
2,366,049
|
|
|
Total
other expenses
|
|
|
10,280,554
|
|
|
11,476,456
|
|
|
10,506,820
|
|
|
11,058,573
|
|
|
Income
before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
1,356,420
|
|
|
2,033,224
|
|
|
5,666,306
|
|
|
5,301,673
|
|
|
Income
tax
|
|
|
1,347,299
|
|
|
514,732
|
|
|
2,386,467
|
|
|
2,035,487
|
|
|
Net
income
|
|
$
|
9,121
|
|
$
|
1,518,492
|
|
$
|
3,279,839
|
|
$
|
3,266,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
$
|
0.07
|
|
$
|
0.16
|
|
$
|
0.16
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
$
|
0.07
|
|
$
|
0.16
|
|
$
|
0.15
|
|
|
|
|
Year
ended December 31, 2005
|
|
|
|
|
Fourth
|
|
Third
|
|
S
econd
|
|
First
|
|
|
|
|
quarter
|
|
quarter
|
|
quarter
|
|
quarter
|
|
|
Interest
income
|
|
$
|
36,832,404
|
|
$
|
34,713,785
|
|
$
|
31,889,460
|
|
$
|
29,796,832
|
|
|
Interest
expense
|
|
|
19,143,116
|
|
|
17,622,676
|
|
|
14,684,896
|
|
|
13,485,061
|
|
|
Net
interest income
|
|
|
17,689,288
|
|
|
17,091,109
|
|
|
17,204,564
|
|
|
16,311,771
|
|
|
Provision
for loan and lease losses
|
|
|
6,435,000
|
|
|
3,015,000
|
|
|
2,075,000
|
|
|
1,250,000
|
|
|
Net
interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after
provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
loan and lease losses
|
|
|
11,254,288
|
|
|
14,076,109
|
|
|
15,129,564
|
|
|
15,061,771
|
|
|
Total
other income
|
|
|
1,794,212
|
|
|
2,467,971
|
|
|
2,566,147
|
|
|
900,802
|
|
|
Total
other expenses
|
|
|
10,174,718
|
|
|
9,329,967
|
|
|
9,274,042
|
|
|
8,864,546
|
|
|
Income
before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
2,873,782
|
|
|
7,214,113
|
|
|
8,421,669
|
|
|
7,098,027
|
|
|
Income
tax
|
|
|
1,200,410
|
|
|
2,417,003
|
|
|
3,127,004
|
|
|
2,332,811
|
|
|
Net
income
|
|
$
|
1,673,372
|
|
$
|
4,797,110
|
|
$
|
5,294,665
|
|
$
|
4,765,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.08
|
|
$
|
0.24
|
|
$
|
0.26
|
|
$
|
0.23
|
|
|
Diluted
|
|
$
|
0.07
|
|
$
|
0.23
|
|
$
|
0.25
|
|
$
|
0.23
|
|
The
consolidated financial statements, the reports thereon, the notes thereto and
supplementary data commence at page F-1 of this Annual Report on Form
10-K.
On
December 19, 2007, the SEC issued final rules amending and streamlining
reporting requirements for smaller reporting companies. These rules eliminate
Regulation S-B for small reporting companies and integrations those provisions
into Regulation S-K and Regulation S-X. Among other things, these new rules,
which became effective on February 4, 2008, (i) created a new category of filer,
the “smaller reporting company,” which replaces the current “small business
issuer” category; (ii) expanded the availability of scaled disclosure
requirements to filers with a public float of less than $75 million (or where
no
public float or market price exists, less than $50 million in annual revenue);
and (iii) moved the Regulation S-B reporting requirements to Regulation S-K
and
eliminate Regulation S-B and its various reporting forms, for example Form
SB-2.
In addition, these new rules allowed small reporting companies to choose the
scaled reporting requirements on an à la carte basis, thereby permitting the
company to choose its disclosure requirements on an item-by-item basis. While
the Company has generally opted to continue its larger company disclosures
consistent with past practices, in order to minimize the time, costs and
expenses associated with obtaining the consent of its former auditors, the
Company has elected to include two years of prior audited financial statement
information consistent with the smaller reporting company requirements.
ITEM
9.
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
None.
ITEM
9A. Controls and Procedures.
a)
Disclosure Controls and Procedures
.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to management, including
the Company’s Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As
of
December 31, 2007, we carried out an evaluation, under the supervision and
with
the participation of our management, including our chief executive officer
and
chief financial officer, of the effectiveness of the design and operation of
our
"disclosure controls and procedures," as such term is defined under Exchange
Act
Rule 13a-15(e). Based on this evaluation, our chief executive officer and chief
financial officer concluded that, as of December 31, 2007, such disclosure
controls and procedures were effective to ensure that information required
to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission, and
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
(b)
Management’s Report on Internal Control Over Financial
Reporting
.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting
is
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended,
as a process designed by, or under the supervision of, EuroBancshares’ principal
executives and principal financial officers and effected by EuroBancshares’
Board of Directors, management and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures
that:
|
|
·
|
Pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of
EuroBancshares;
|
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of
EuroBancshares are being made only in accordance with authorizations
of
management and directors of EuroBancshares;
and
|
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of EuroBancshares’ assets
that could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As
of
December 31, 2007, our management assessed the effectiveness of the design
and
operation of EuroBancshares’ internal control over financial reporting. Based on
this assessment, our management concluded that such internal control over
financial reporting was effective. In making our assessment of internal control
over financial reporting, management used the criteria established in “Internal
Control — Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
EuroBancshares’
independent registered public accounting firm that audited the financial
statements included in this Annual Report on Form 10-K has issued an audit
report on management’s assessment of EuroBancshares’ internal control over
financial reporting.
(c)
Changes in Internal Control Over Financial Reporting
.
There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2007 that materially affected, or were reasonably
likely to materially affect, our internal control over financial
reporting.
(d)
Report of Independent Registered Public Accounting Firm.
The
independent registered public accounting firm’s attestation report on our
internal control over financial reporting is included as part of the Report
of
Independent Registered Public Accounting Firm to our consolidated financial
statements, commencing at page F-1 of this Annual Report on Form
10-K.
ITEM
9B. Other Information.
Not
applicable.
PART
III
ITEM
10.
Directors
and Executive Officers of the Registrant.
The
information under the captions “Proposal Regarding Election of Directors” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive
proxy statement for our 2008 annual meeting of stockholders to be filed with
the
SEC pursuant to Regulation 14A under the Securities and Exchange Act of 1934,
as
amended, is incorporated herein by reference.
We
have
adopted a Code of Business Conduct and Ethics that applies to our directors,
officers and employees. Our Code of Business Conduct and Ethics is publicly
available on our website at
http://investor.eurobankpr.com
.
If we
make any substantive amendments to our Code of Business Conduct and Ethics
or
grant any waiver, including any implicit waiver, from a provision of the code
to
our principal executive officer, principal financial officer, principal
accounting officer or controller, we will disclose the nature of such amendment
or waiver on that website or in a report on Form 8-K.
ITEM
11.
Executive
Compensation.
The
information under the caption “Executive Compensation” in our definitive proxy
statement for our 2008 annual meeting of stockholders to be filed with the
SEC
pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as
amended, is incorporated herein by reference.
ITEM
12.
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The
information under the caption “Security Ownership of Certain Beneficial Owners
and Management” in our definitive proxy statement for our 2008 annual meeting of
stockholders to be filed with the SEC pursuant to Regulation 14A under the
Securities and Exchange Act of 1934, as amended, is incorporated herein by
reference.
ITEM
13.
Certain
Relationships and Related Transactions.
The
information under the caption “Certain Relationships and Related Transactions”
in our definitive proxy statement for our 2008 annual meeting of stockholders
to
be filed with the SEC pursuant to Regulation 14A under the Securities and
Exchange Act of 1934, as amended, is incorporated herein by
reference.
ITEM
14.
Principal
Accountant Fees and Services.
The
information under the caption “Principal Auditor Fees and Services” in our
definitive proxy statement for our 2008 annual meeting of stockholders to be
filed with the SEC pursuant to Regulation 14A under the Securities and Exchange
Act of 1934, as amended, is incorporated herein by reference.
PART
IV
ITEM
15.
Exhibits
and Financial Statement Schedules.
Financial
Statements
Reference
is made to the consolidated financial statements, the reports thereon, the
notes
thereto and supplementary data commencing at page F-1 of this Annual Report
on
Form 10-K. Set forth below is a list of such financial statements:
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2007 and 2006
Consolidated
Statements of Income for each of the years in the two-year period ended December
31, 2007
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive Income for each
of the years in the two-year period ended December 31, 2007
Consolidated
Statements of Cash Flows for each of the years in the two-year period ended
December 31, 2007
Notes
to
Consolidated Financial Statements
Financial
Statement Schedules
All
supplemental schedules are omitted as inapplicable or because the required
information is included in the consolidated financial statements or related
notes.
Exhibits
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of EuroBancshares, Inc.
(incorporated herein by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (File No. 333-115510) previously filed by
EuroBancshares, Inc. on May 5, 2004)
|
|
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of EuroBancshares, Inc. (incorporated herein
by
reference to Exhibit 3.2 to the Registration Statement on Form S-1
(File
No. 333-115510) previously filed by EuroBancshares, Inc. on May 5,
2004)
|
|
|
|
|
|
3.3
|
|
Certificate
of Designation of EuroBancshares, Inc. Noncumulative Preferred Stock,
Series A (incorporated herein by reference to Exhibit 3.3 to the
Registration Statement on Form S-1 (File No. 333-115510) previously
filed
by EuroBancshares, Inc. on May 5, 2004)
|
|
|
|
|
|
4.1
|
|
Specimen
stock certificate representing EuroBancshares, Inc. Common Stock
(incorporated herein by reference to Exhibit 4.1 to the Registration
Statement on Form S-1 (File No. 333-115510) previously filed by
EuroBancshares, Inc. on August 2, 2004)
|
|
|
|
|
|
4.2
|
|
Specimen
stock certificate representing EuroBancshares, Inc. Preferred Stock
(incorporated herein by reference to Exhibit 4.2 to the Annual Report
on
Form 10-K (File No. 000-50872) previously filed by EuroBancshares,
Inc. on March 31, 2005
|
|
|
|
|
|
4.3
|
|
Indenture,
dated as of December 19, 2002, between EuroBancshares, Inc. and U.S.
Bank
National Association (f/k/a State Street Bank & Trust Company of
Connecticut, National Association) (incorporated herein by reference
to
Exhibit 4.5 to the Registration Statement on Form S-1 (File No.
333-115510) previously filed by EuroBancshares, Inc. on May 5,
2004)
|
|
|
|
|
|
4.4
|
|
Amended
and Restated Declaration of Trust, dated as of December 19, 2002,
by and
among EuroBancshares, Inc. and U.S. Bank National Association (f/k/a
State
Street Bank & Trust Company of Connecticut, National Association), and
Jose Martinez Recondo, Isabella Arrillaga, as Administrators (incorporated
herein by reference to Exhibit 4.6 to the Registration Statement
on Form
S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc.
on May
5, 2004)
|
|
|
|
|
|
4.5
|
|
Guarantee
Agreement, dated as of December 19, 2002, between EuroBancshares,
Inc. and
U.S. Bank National Association (f/k/a State Street Bank & Trust
Company of Connecticut, National Association) (incorporated herein
by
reference to Exhibit 4.7 to the Registration Statement on Form S-1
(File
No. 333-115510) previously filed by EuroBancshares, Inc. on May 5,
2004)
|
|
|
|
|
|
10.1†
|
|
EuroBancshares,
Inc. 2002 Stock Option Plan (incorporated herein by reference to
Exhibit
10.1 to the Registration Statement on Form S-1 (File No. 333-115510)
previously filed by EuroBancshares, Inc. on May 5,
2004)
|
|
|
|
|
|
10.2†
|
|
Form
of EuroBancshares, Inc. Incentive Stock Option Award Agreement
(incorporated herein by reference to Exhibit 10.2 to the Registration
Statement on Form S-1 (File No. 333-115510) previously filed by
EuroBancshares, Inc. on May 5, 2004)
|
|
|
|
|
|
10.3†
|
|
Form
of EuroBancshares, Inc. Non-Qualified Stock Option Award Agreement
(incorporated herein by reference to Exhibit 10.3 to the Registration
Statement on Form S-1 (File No. 333-115510) previously filed by
EuroBancshares, Inc. on May 5,
2004)
|
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
10.4†
|
|
2005
Stock Option Plan for EuroBancshares, Inc., dated May 12, 2005
(incorporated herein by reference to Exhibit 10.1 to the Current
Report on Form 8-K (File No. 000-50872) previously filed by
EuroBancshares, Inc. on June 2, 2005)
|
|
|
|
|
|
10.5†
|
|
Change
in Control Agreement, dated as of March 14, 2007, between EuroBancshares,
Inc., Eurobank and Mr. Rafael Arrillaga-Torréns, Jr. (incorporated herein
by reference to Exhibit 10.3 to the Current Report on Form 8-K (File
No.
000-50872) previously filed by EuroBancshares, Inc. on March 16,
2007)
|
|
|
|
|
|
10.6†
|
|
Change
in Control Agreement, dated as of March 14, 2007, between EuroBancshares,
Inc., Eurobank and Ms. Yadira R. Mercado (incorporated herein by
reference
to Exhibit 10.4 to the Current Report on Form 8-K (File No. 000-50872)
previously filed by EuroBancshares, Inc. on March 16,
2007)
|
|
|
|
|
|
10.7†
|
|
Eurobank
Master Trust Retirement Plan Program (incorporated herein by reference
to
Exhibit 10.5 to the Registration Statement on Form S-1 (File No.
333-115510) previously filed by EuroBancshares, Inc. on May 5,
2004)
|
|
|
|
|
|
10.8†
|
|
Form
of EuroBancshares, Inc. Restricted Stock Purchase Agreement (incorporated
herein by reference to Exhibit 10.6 to the Registration Statement
on Form
S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc.
on May
5, 2004)
|
|
|
|
|
|
10.9†
|
|
Agreement
and Plan of Merger, dated as of September 6, 2002, by and among
EuroBancshares, Inc. and Banco Financiero de Puerto Rico (incorporated
herein by reference to Exhibit 10.7 to the Registration Statement
on Form
S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc.
on May
5, 2004)
|
|
|
|
|
|
10.10
|
|
Agreement
and Plan of Merger, dated as of February 24, 2004, by and among
EuroBancshares, Inc., Eurobank, and The Bank & Trust of Puerto Rico
(incorporated herein by reference to Exhibit 2 to the Registration
Statement on Form S-1 (File No. 333-115510) previously filed by
EuroBancshares, Inc. on May 5, 2004)
|
|
|
|
|
|
10.11
|
|
Stipulation
and Consent to the Issuance of a Cease and Desist Order dated as
of March
13, 2007, Eurobank, the Board of Directors of Eurobank and the FDIC
(incorporated by reference to Exhibit 10.1 to the Current Report
on Form
8-K (File No. 000-50872) previously filed by EuroBancshares, Inc.
on March
16, 2007)
|
|
|
|
|
|
10.12
|
|
Order
to Cease and Desist Order dated as of March 15, 2007 (incorporated
by
reference to Exhibit 10.2 to the Current Report on Form 8-K (File
No.
000-50872) previously filed by EuroBancshares, Inc. on March 16,
2007)
|
|
|
|
|
|
10.13
|
|
Master
Servicing Agreement, dated as of August 6, 2007, by and among
EuroBancshares, Inc. and Telefónica Empresas (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 000-50872)
previously filed by EuroBancshares, Inc. on November 9,
2007)
|
|
|
|
|
|
10.14
|
|
Joint
Account Agreement, dated as of January 2, 2008, by and among Eurobank
and
Oppenheimer & Co., Inc. (incorporated by reference to Exhibit 1.1 to
the Current Report on Form 8-K (File No. 000-50872) previously filed
by
EuroBancshares, Inc. on January 7, 2008)
|
|
|
|
|
|
21
|
|
List
of Subsidiaries of EuroBancshares, Inc. (incorporated herein by reference
to Exhibit 21 to the Registration Statement on Form S-1 (File No.
333-115510) previously filed by EuroBancshares, Inc. on May 5,
2004)
|
|
|
|
|
|
23.1*
|
|
Consent
of Crowe Chizek and Company LLP, independent registered public accounting
firm
|
|
|
|
|
|
31.1*
|
|
Rule
13a-14(a) Certification of Chief Executive
Officer.
|
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
31.2*
|
|
Rule
13a-14(a) Certification of Chief Financial Officer.
|
|
|
|
|
|
32.1*
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
32.2*
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
___________________
*
Filed
with this Annual Report on Form 10-K.
†
Constitutes a management contract or compensatory plan or
arrangement.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
|
EUROBANCSHARES, INC.
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/ Rafael
Arrillaga-Torréns, Jr.
|
|
|
Rafael
Arrillaga Torréns, Jr.
Chairman
of the Board, President and Chief
Executive
Officer
|
Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/ Rafael
Arrillaga-Torréns, Jr.
|
|
|
Rafael
Arrillaga Torréns, Jr.
Chairman
of the Board, President and Chief
Executive
Officer (principal executive
officer)
|
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/ Yadira
R.
Mercado
|
|
|
Yadira
R. Mercado
Executive
Vice President and Chief Financial Officer
(principal
financial officer and principal accounting
officer)
|
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/ Pedro
Feliciano Benítez
|
|
|
Pedro
Feliciano Benítez
Director
|
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/ Juan
Ramón Gómez-Cuétara Aguilar
|
|
|
Juan
Ramón Gómez-Cuétara Aguilar
Director
|
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/
Antonio
R. Pavía Bibiloni
|
|
|
Antonio
R. Pavía Bibiloni
Director
|
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/ Plácido
González Córdova
|
|
|
Plácido
González Córdova
Director
|
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/ Luis
F.
Hernández Santana
|
|
|
Luis
F. Hernández Santana
Director
|
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/ Ricardo
Levy Echeandía
|
|
|
Ricardo
Levy Echeandía
Director
|
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/ Jaime
Sifre Rodríguez
|
|
|
Jaime
Sifre Rodríguez
Director
|
|
|
|
|
|
Date: March 13, 2008
|
By:
|
/s/ William
Torres Torres
|
|
|
William
Torres Torres
Director
|
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Consolidated
Financial Statements
December 31,
2007 and 2006
(With
Report of Independent Registered Public Accounting Firm Thereon)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
|
INDEX
|
|
|
|
|
|
|
PAGE
|
|
|
|
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
|
|
|
F-1
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2006
|
|
|
F-2
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF INCOME FOR EACH OF THE YEARS IN
THE
TWO-YEAR
PERIOD ENDED DECEMBER 31, 2007
|
|
|
F-3
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE
INCOME FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED
DECEMBER
31, 2007
|
|
|
F-4
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN THE
TWO-YEAR
PERIOD ENDED DECEMBER 31, 2007
|
|
|
F-5
|
|
|
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
F-6
|
|
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Stockholders
EuroBancshares,
Inc. and Subsidiaries
San
Juan,
Puerto Rico
We
have
audited the accompanying consolidated balance sheets of EuroBancshares, Inc.
and
Subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
years
in the two-year period ended December 31, 2007. We also have audited
EuroBancshares, Inc. and Subsidiaries internal control over financial reporting
as of December 31, 2007, based on criteria established in Internal Control
-
Integrated Framework issued by the Committee of Sponsoring Organizations of
the
Treadway Commission (COSO). EuroBancshares, Inc. and Subsidiaries management
is
responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness
of
internal control over financial reporting, included in the accompanying
Management Report on Internal Control Over Financial Reporting in Item 9A.(b)
of
the accompanying Form 10-K. Our responsibility is to express an opinion on
these
financial statements and an opinion on the company's internal control over
financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis
for
our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of EuroBancshares,
Inc. and Subsidiaries as of December 31, 2007 and 2006, and the results of
its
operations and its cash flows for each of the years in the two-year period
ended
December 31, 2007 in conformity with accounting principles generally accepted
in
the United States of America. Also in our opinion, EuroBancshares, Inc. and
Subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
/s/
Crowe
Chizek and Company LLP
Fort
Lauderdale, Florida
March
11,
2008
Stamp
No.
2205192 of the Puerto Rico
Society
of Certified Public Accountants
Was
affixed to the record copy of this report.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
December
31, 2007 and 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
15,866,221
|
|
$
|
25,527,489
|
|
|
Interest
bearing deposits
|
|
|
32,306,909
|
|
|
49,050,368
|
|
|
Securities
purchased under agreements to resell
|
|
|
19,879,008
|
|
|
51,191,323
|
|
|
Investment
securities available for sale
|
|
|
707,103,432
|
|
|
535,159,009
|
|
|
Investment
securities held to maturity
|
|
|
30,845,218
|
|
|
38,432,820
|
|
|
Other
investments
|
|
|
13,354,300
|
|
|
4,329,200
|
|
|
Loans
held for sale
|
|
|
1,359,494
|
|
|
879,000
|
|
|
Loans,
net of allowance for loan and lease losses
|
|
|
|
|
|
|
|
|
of
$28,137,104 in 2007 and $18,936,841 in 2006
|
|
|
1,829,082,008
|
|
|
1,731,022,290
|
|
|
Accrued
interest receivable
|
|
|
18,136,489
|
|
|
15,760,852
|
|
|
Customers’
liability on acceptances
|
|
|
430,767
|
|
|
1,561,736
|
|
|
Premises
and equipment, net
|
|
|
33,083,169
|
|
|
14,889,456
|
|
|
Other
assets
|
|
|
49,951,898
|
|
|
33,116,690
|
|
|
Total
assets
|
|
$
|
2,751,398,913
|
|
$
|
2,500,920,233
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$
|
120,082,912
|
|
$
|
140,321,373
|
|
|
Interest
bearing
|
|
|
1,872,963,402
|
|
|
1,765,034,834
|
|
|
Total
deposits
|
|
|
1,993,046,314
|
|
|
1,905,356,207
|
|
|
Securities
sold under agreements to repurchase
|
|
|
496,419,250
|
|
|
365,664,250
|
|
|
Acceptances
outstanding
|
|
|
430,767
|
|
|
1,561,736
|
|
|
Advances
from Federal Home Loan Bank
|
|
|
30,453,926
|
|
|
8,707,420
|
|
|
Note
payable to Statutory Trust
|
|
|
20,619,000
|
|
|
20,619,000
|
|
|
Accrued
interest payable
|
|
|
17,371,698
|
|
|
18,047,074
|
|
|
Accrued
expenses and other liabilities
|
|
|
13,139,809
|
|
|
11,086,705
|
|
|
|
|
|
2,571,480,764
|
|
|
2,331,042,392
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
Preferred
stock Series A, $0.01 par value. Authorized 20,000,000
|
|
|
|
|
|
|
|
|
shares;
issued and outstanding 430,537 in 2007 and 2006
|
|
|
4,305
|
|
|
4,305
|
|
|
Capital
paid in excess of par value
|
|
|
10,759,120
|
|
|
10,759,120
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value. Authorized 150,000,000
|
|
|
|
|
|
|
|
|
shares;
issued: 20,032,398 shares in 2007 and 19,777,536 shares in
|
|
|
|
|
|
|
|
|
2006;
outstanding: 19,093,315 shares in 2007 and 19,123,821 in
2006
|
|
|
200,324
|
|
|
197,775
|
|
|
Capital
paid in excess of par value
|
|
|
107,936,531
|
|
|
106,539,383
|
|
|
Retained
earnings:
|
|
|
|
|
|
|
|
|
Reserve
fund
|
|
|
8,029,106
|
|
|
7,553,381
|
|
|
Undivided
profits
|
|
|
61,789,048
|
|
|
59,800,495
|
|
|
Treasury
stock, 939,083 shares in 2007
|
|
|
|
|
|
|
|
|
and
653,715 shares in 2006, at cost
|
|
|
(9,910,458
|
)
|
|
(7,410,711
|
)
|
|
Accumulated
other comprehensive gain (loss)
|
|
|
1,110,173
|
|
|
(7,565,907
|
)
|
|
Total
stockholders’ equity
|
|
|
179,918,149
|
|
|
169,877,841
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
2,751,398,913
|
|
$
|
2,500,920,233
|
|
See
accompanying notes to condensed consolidated financial statements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Consolidated
Statements of Income
For
the
years ended December 31, 2007 and 2006
|
|
|
2007
|
|
2006
|
|
|
Interest
income:
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
143,360,450
|
|
$
|
130,003,150
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
12,152
|
|
|
371,546
|
|
|
Exempt
|
|
|
26,946,714
|
|
|
29,474,276
|
|
|
Interest-bearing
deposits, securities purchased
|
|
|
|
|
|
|
|
|
under
agreements to resell, and other
|
|
|
3,005,875
|
|
|
2,297,448
|
|
|
Total
interest income
|
|
|
173,325,191
|
|
|
162,146,420
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
84,675,999
|
|
|
68,545,152
|
|
|
Securities
sold under agreements to repurchase,
|
|
|
|
|
|
|
|
|
notes
payable, and other
|
|
|
20,794,338
|
|
|
26,818,196
|
|
|
Total
interest expense
|
|
|
105,470,337
|
|
|
95,363,348
|
|
|
Net
interest income
|
|
|
67,854,854
|
|
|
66,783,072
|
|
|
Provision
for loan and lease losses
|
|
|
25,348,000
|
|
|
16,903,000
|
|
|
Net
interest income after provision for loan
|
|
|
|
|
|
|
|
|
and
lease losses
|
|
|
42,506,854
|
|
|
49,880,072
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
Service
charges - fees and other
|
|
|
9,584,533
|
|
|
8,475,600
|
|
|
Net
loss on sale of securities
|
|
|
—
|
|
|
(1,091,627
|
)
|
|
Net
(loss) gain on sale of other real estate owned,
repossessed
|
|
|
|
|
|
|
|
|
assets,
and on disposition of other assets
|
|
|
(1,285,958
|
)
|
|
16,092
|
|
|
Net
gain on sale of loans
|
|
|
379,622
|
|
|
400,489
|
|
|
Total
noninterest income
|
|
|
8,678,197
|
|
|
7,800,554
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
19,890,373
|
|
|
17,506,822
|
|
|
Occupancy
|
|
|
7,827,087
|
|
|
6,999,087
|
|
|
Furniture,
fixtures and equipment
|
|
|
3,071,901
|
|
|
2,565,949
|
|
|
Professional
services
|
|
|
4,496,283
|
|
|
4,104,442
|
|
|
Municipal
and other taxes
|
|
|
1,836,783
|
|
|
1,657,111
|
|
|
Commissions
and service fees
|
|
|
1,444,949
|
|
|
1,324,487
|
|
|
Office
supplies
|
|
|
1,375,022
|
|
|
1,393,948
|
|
|
Insurance
|
|
|
1,865,353
|
|
|
1,052,922
|
|
|
Promotional
|
|
|
1,492,240
|
|
|
1,199,574
|
|
|
Other
|
|
|
4,924,851
|
|
|
5,581,389
|
|
|
Total
noninterest expense
|
|
|
48,224,842
|
|
|
43,385,731
|
|
|
Income
before income taxes
|
|
|
2,960,209
|
|
|
14,294,895
|
|
|
Provision
for income taxes
|
|
|
(248,874
|
)
|
|
6,283,010
|
|
|
Net
income
|
|
$
|
3,209,083
|
|
$
|
8,011,885
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
0.13
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$
|
0.13
|
|
$
|
0.37
|
|
See
accompanying notes to consolidated financial statements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders’ Equity
and
Comprehensive Income
Years
Ended December 31, 2007 and 2006
|
|
|
2007
|
|
2006
|
|
|
Preferred
stock:
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
4,305
|
|
$
|
4,305
|
|
|
Issuance
of preferred stock
|
|
|
—
|
|
|
—
|
|
|
Balance
at end of period
|
|
|
4,305
|
|
|
4,305
|
|
|
Capital
paid in excess of par value - preferred stock:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
10,759,120
|
|
|
10,759,120
|
|
|
Issuance
of preferred stock
|
|
|
—
|
|
|
—
|
|
|
Balance
at end of period
|
|
|
10,759,120
|
|
|
10,759,120
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
197,775
|
|
|
195,641
|
|
|
Issuance
of common stock and exercised stock options
|
|
|
2,549
|
|
|
2,134
|
|
|
Balance
at end of period
|
|
|
200,324
|
|
|
197,775
|
|
|
Capital
paid in excess of par value - common stock:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
106,539,383
|
|
|
105,508,402
|
|
|
Issuance
of common stock and exercised stock options
|
|
|
1,146,330
|
|
|
877,630
|
|
|
Stock
based compensation
|
|
|
250,818
|
|
|
153,351
|
|
|
Balance
at end of period
|
|
|
107,936,531
|
|
|
106,539,383
|
|
|
Reserve
fund:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
7,553,381
|
|
|
6,528,519
|
|
|
Transfer
from undivided profits
|
|
|
475,725
|
|
|
1,024,862
|
|
|
Balance
at end of period
|
|
|
8,029,106
|
|
|
7,553,381
|
|
|
Undivided
profits:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
59,800,495
|
|
|
54,348,750
|
|
|
Cumulative
effect on initial adoption of SAB 108
|
|
|
—
|
|
|
(790,473
|
)
|
|
Net
income
|
|
|
3,209,083
|
|
|
8,011,885
|
|
|
Preferred
stock dividends ($1.73 in 2007 and 2006 per share)
|
|
|
(744,805
|
)
|
|
(744,805
|
)
|
|
Transfer
to reserve fund
|
|
|
(475,725
|
)
|
|
(1,024,862
|
)
|
|
Balance
at end of period
|
|
|
61,789,048
|
|
|
59,800,495
|
|
|
Treasury
stock
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
(7,410,711
|
)
|
|
(1,946,052
|
)
|
|
Purchase
of common stock
|
|
|
(2,499,747
|
)
|
|
(5,464,659
|
)
|
|
Balance
at end of period
|
|
|
(9,910,458
|
)
|
|
(7,410,711
|
)
|
|
Accumulated
other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
(7,565,907
|
)
|
|
(10,431,650
|
)
|
|
Unrealized
net gain (loss) on investment securities available for
sale
|
|
|
8,676,080
|
|
|
2,865,743
|
|
|
Balance
at end of period
|
|
|
1,110,173
|
|
|
(7,565,907
|
)
|
|
Total
stockholders’ equity
|
|
$
|
179,918,149
|
|
$
|
169,877,841
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,209,083
|
|
$
|
8,011,885
|
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Unrealized
net gain on investment securities available for sale
|
|
|
8,676,080
|
|
|
1,774,116
|
|
|
Reclassification
adjustment for realized loss included in net income
|
|
|
—
|
|
|
1,091,627
|
|
|
Unrealized
net gain on investments securities
|
|
|
|
|
|
|
|
|
available
for sale
|
|
|
8,676,080
|
|
|
2,865,743
|
|
|
Comprehensive
income
|
|
$
|
11,885,163
|
|
$
|
10,877,628
|
|
See
accompanying notes to consolidated financial statements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
ended December 31, 2007 and 2006
|
|
|
2007
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,209,083
|
|
$
|
8,011,885
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,020,286
|
|
|
3,762,194
|
|
|
Provision
for loan and lease losses
|
|
|
25,348,000
|
|
|
16,903,000
|
|
|
Stock-based
employee compensation
|
|
|
250,817
|
|
|
153,351
|
|
|
Deferred
tax and purchase of tax credits (benefit) provision
|
|
|
(4,636,938
|
)
|
|
(1,059,470
|
)
|
|
Net
loss on sale of securities
|
|
|
—
|
|
|
1,091,627
|
|
|
Net
gain on sale of loans
|
|
|
(379,622
|
)
|
|
(400,489
|
)
|
|
Net
loss (gain) on sale of repossessed assets and on disposition of other
assets
|
|
|
1,285,958
|
|
|
(16,092
|
)
|
|
Net
amortization of premiums and accretion of discount on investment
securities
|
|
|
5,197,465
|
|
|
2,556,010
|
|
|
Valuation
expense of repossesed assets
|
|
|
1,349,112
|
|
|
1,295,771
|
|
|
Decrease
in deferred loan costs
|
|
|
2,513,927
|
|
|
2,561,702
|
|
|
Net
effect of adjustment by SAB 108
|
|
|
—
|
|
|
(790,473
|
)
|
|
Write-off
notes payable to statutory trust placement costs
|
|
|
—
|
|
|
625,842
|
|
|
Origination
of loans held for sale
|
|
|
(17,003,663
|
)
|
|
(13,836,775
|
)
|
|
Proceeds
from sale of loans held for sale
|
|
|
17,387,492
|
|
|
14,237,263
|
|
|
Increase
in accrued interest receivable
|
|
|
(2,375,637
|
)
|
|
(781,068
|
)
|
|
Net
decrease (increase) in other assets
|
|
|
(1,941,420
|
)
|
|
8,354,522
|
|
|
Increase
in accrued interest payable, accrued expenses, and other
liabilities
|
|
|
1,377,672
|
|
|
13,584,441
|
|
|
Net
cash provided by operating activities
|
|
|
34,602,533
|
|
|
56,253,241
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing actitivies:
|
|
|
|
|
|
|
|
|
Net
decrease in securities purchased under agreements to
resell
|
|
|
31,312,315
|
|
|
2,941,350
|
|
|
Net
decrease (increase) in interest-bearing deposits
|
|
|
16,743,459
|
|
|
(28,277,197
|
)
|
|
Proceeds
from sale of investment securities available for sale
|
|
|
—
|
|
|
48,992,897
|
|
|
Purchases
of investment securities available for sale
|
|
|
(318,188,058
|
)
|
|
(89,194,907
|
)
|
|
Proceeds
from principal payments and maturities of investment securities available
for sale
|
|
|
149,866,240
|
|
|
131,490,329
|
|
|
Proceeds
from principal payments, maturities, and calls of investment securities
held to maturity
|
|
|
7,443,335
|
|
|
3,887,363
|
|
|
Purchase
of Federal Home Loan Bank Stocks
|
|
|
(14,802,500
|
)
|
|
(1,175,200
|
)
|
Proceeds
from principal payments and maturities of Federal Home Loan Bank
Stocks
|
|
|
5,775,900
|
|
|
6,727,000
|
|
|
Net
increase in loans
|
|
|
(140,543,978
|
)
|
|
(207,802,256
|
)
|
|
Proceeds
from sale of other assets
|
|
|
782,944
|
|
|
761,740
|
|
|
Capital
expenditures
|
|
|
(20,749,454
|
)
|
|
(6,020,879
|
)
|
|
Net
cash used in investing activities
|
|
|
(282,359,797
|
)
|
|
(137,669,760
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
87,690,107
|
|
|
171,228,061
|
|
|
Increase
(decrease) in securities sold under agreements to repurchase and
other
borrowings
|
|
|
130,755,000
|
|
|
(54,895,675
|
)
|
|
Net
increase (decrease) in Federal Home Loan Bank Advances
|
|
|
21,746,506
|
|
|
(51,206
|
)
|
|
Repayment
of note payable to trust
|
|
|
—
|
|
|
(25,000,000
|
)
|
|
Dividends
paid to preferred stockholders
|
|
|
(744,750
|
)
|
|
(745,762
|
)
|
|
Net
proceeds from issuance of common stock
|
|
|
1,148,880
|
|
|
879,764
|
|
|
Purchase
of common stock
|
|
|
(2,499,747
|
)
|
|
(5,464,659
|
)
|
|
Net
cash provided by financing activities
|
|
|
238,095,996
|
|
|
85,950,523
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and due from banks
|
|
|
(9,661,268
|
)
|
|
4,534,004
|
|
|
Cash
and cash due from banks beginning balance
|
|
|
25,527,489
|
|
|
20,993,485
|
|
|
Cash
and due from banks ending balance
|
|
$
|
15,866,221
|
|
$
|
25,527,489
|
|
See
accompanying notes to consolidated financial statements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
EuroBancshares,
Inc. (the Company or EuroBancshares) was incorporated on November 21,
2001, under the laws of the Commonwealth of Puerto Rico to engage, for profit,
in any lawful acts or businesses and serve as the holding company for Eurobank
(the Bank). The Bank is a full service commercial bank with a delivery
system of 26 branches in Puerto Rico. As a financial holding company, the
Company is subject to the provisions of the Bank Holding Company Act, and to
the
supervision and regulation by the board of governors of the Federal Reserve
System.
The
consolidated financial statements of the Company include the accounts of its
wholly owned subsidiaries: the Bank (including two international banking
entities) and Euroseguros, Inc. (Euroseguros or the Agency), a company
acting as an agent to sell life, property, and casualty insurance products
in
Puerto Rico, principally to customers of the Bank.
|
(2)
|
Summary
of Significant Accounting
Policies
|
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amount of revenue and expenses during the reporting periods. These
estimates are based on information available as of the date of the consolidated
financial statements. Significant items subject to such estimates and
assumptions include the allowance for loan and lease losses, fair value of
financial instruments, derivatives, valuation of repossessed assets and deferred
income tax. Therefore, actual results could differ from those estimates.
Following is a description of significant accounting policies followed by the
Company in the preparation of the accompanying consolidated financial
statements:
|
|
(a)
|
Principles
of
Consolidation
|
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
|
|
(b)
|
Due
from banks and Cash Flow
|
For
purposes of the presentation in the statements of cash flows, cash and due
from
banks are defined as those amounts included in the balance sheets caption cash
and due from banks. For customer loan and deposits transactions, interest
bearing deposits in other institutions, and federal funds purchased and
repurchased agreements, net cash flows are reported.
|
|
(c)
|
Securities
Purchased under Agreements to
Resell
|
The
Company enters into purchases of securities under agreements to resell. The
amounts advanced under these agreements represent short-term investment
transactions.
|
|
(d)
|
Investment
Securities Available for
Sale
|
Investment
securities available for sale consist of bonds, notes, other debt securities,
and certain equity securities not classified as trading or held-to-maturity
securities. Investment securities available for sale are recorded at fair value
and their unrealized gains and losses, net of tax, are reflected as a separate
component of stockholders’ equity in accumulated other comprehensive income
until realized. Realized gains or losses on sales of investment securities
available-for-sale are recognized when realized and are computed on the
specific-identification basis.
Declines
in fair value of securities below their cost that are deemed to be other than
temporary result in an impairment that is charged to earnings and a new cost
basis for the security is established. To determine whether an impairment is
other than temporary, the Company considers whether it has the ability and
intent to hold the investment until a market price recovery or maturity and
considers whether evidence indicating the cost of the investment is recoverable
outweighs evidence to the contrary. Evidence considered in this assessment
includes the reasons for the impairment, the severity and duration of the
impairment, changes in value subsequent to year-end and forecasted performance
of the investee.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
Premiums
and discounts are amortized over the estimated average life of the related
investment security available for sale as an adjustment to yield using a method
that approximates the interest method. Additionally, the Company anticipates
estimated prepayments on mortgage-backed securities in the amortization of
premiums and accretion of discounts on such securities. Dividend and interest
income are recognized when earned.
|
|
(e)
|
Investment
Securities Held to
Maturity
|
Investment
securities held to maturity are carried at cost, adjusted for premium
amortization and discount accretion. The amortization of premiums is deducted
and the accretion of discounts is added to interest income based on a method
that approximates the interest method over the outstanding period of the related
investment securities. The Company classifies investments as held to maturity
when it has the intent and the ability to hold the investment until
maturity.
A
decline
in the fair value of the securities below their cost that is deemed to be other
than temporary results in an impairment that is charged against earnings and
a
new cost basis for the security is established. To determine whether impairment
is other than temporary, the Company considers whether evidence indicating
that
the cost of the investment is recoverable out weighs evidence to the contrary.
Evidence considered in this assessment includes the reasons for the impairment,
the severity and duration of the impairment, changes in value subsequent to
year-end and forecasted performance of the investee.
Other
investments include Federal Home Loan Bank (FHLB) stock and the equity
investment in the unconsolidated statutory trusts. The FHLB stock is carried
at
cost, representing the amount for which the FHLB would redeem the stock.
Investment in statutory trust is carried on the equity method of
accounting.
Mortgage
loans originated and intended for sale in the secondary market are carried
at
the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
|
|
(h)
|
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
Company determines delinquency status based on contractual terms and generally
classifies loans as nonperforming when they become 90 days past due,
unless
the loan is adequately collateralized and the Company is in the process of
collection
.
All
interest accrued but not collected for loans and leases that are placed on
nonaccrual status is reversed against interest income. The interest on these
loans is accounted for on a cost recovery method, until qualifying for return
to
accrual status.
The
allowance for loan and lease losses is an estimate to provide for probable
collection losses in the loan and lease portfolio. Losses are charged and
recoveries are credited to the allowance account at the time a loss is incurred
or a recovery is received.
On
a
quarterly basis, the Company effects partial charge-offs on all lease finance
contracts that are over 120 days past due. Also, except for leases in a payment
plan, bankruptcy or other legal proceedings, the Company charges-off most of
our
lease finance contracts that are over 365 days past due. This full charge-off
is
made on a quarterly basis. Closed-ends consumer loans are charged-off when
120
days in arrears. Revolving credit consumer loans are charged-off when 180 days
in arrears.
The
Company follows a consistent procedural discipline and accounts for loan 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
.
The
following is a description of how each portion of the allowance for loan and
lease losses is determined.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
When
analyzing the adequacy of the allowance for loan and lease losses, the portfolio
is segmented into major loan categories. Although the evaluation of the adequacy
of the allowance for loan and lease losses focuses on loans and pools of similar
loans and leases, no part of the allowance is segregated for, or allocated
to,
any particular asset or group of assets. The allowance is available to absorb
all credit losses inherent in the portfolio.
Each
component would normally have similar characteristics, such as classification,
type of loan or lease, industry or collateral. As needed, the Company separately
analyzes the following components of the portfolio and provides for them in
the
allowance for loan and lease losses: credit quality; sufficiency of credit
and
collateral documentation; proper lien perfection; appropriate approval by the
loan officer and the credit committees; adherence to any loan agreement
covenants; and compliance with internal policies and procedures and laws and
regulations.
The
general portion of the allowance for loan and lease losses is determined by
applying historic loss factors to all categories of loans and leases outstanding
in the portfolio. The Company uses historic loss factors determined over a
period from 1 through 5 years, depending on the nature of the loan portfolio.
At
least on an annual basis, the historical loss factor is adjusted for each pool
of loans to reflect any current conditions that are expected to result in loss
recognition. Factors considered include, but are not limited to: effects of
any
changes in lending policies and procedures, including those for underwriting,
collection, charged-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 unclassified loans 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 adjusted 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.
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 allowance, specific allowances are provided in the
event
that the specific analysis on each classified loan indicates that it is probable
that the Company will be unable to collect all amounts due, both principal
and
interest, according to the contractual terms of the loan agreement. When a
loan
is impaired, the Company measures impairment based on either (a) the
present value of the expected future cash flows of the impaired loan discounted
at the loan’s original effective rate, (b) the observable market price of
the impaired loans, or (c) the fair value of the collateral of a
collateral-dependent loan. The Company selects the measurement method on a
loan-by-loan basis, except for collateral-dependent loans with a probable
foreclosure, which must be measured at the fair value of the collateral. If
impairment exists it is recorded through a valuation allowance. In a troubled
debt restructuring involving a restructured loan, the Company measures
impairment by discounting the total expected future cash flows at the loan’s
original effective rate of interest. The provision for loan and lease losses
is
adjusted in order to state the allowance for loan and lease losses to the
required level as determined above.
The
Company leases vehicles and equipment to individual and corporate customers.
The
finance method of accounting is used to recognize revenue on lease contracts
that meet the criteria specified by SFAS No. 13,
Accounting
for Leases
,
as
amended. Aggregate rentals due over the term of the leases, less unearned
income, are included in net loans. Unearned income is amortized using a method
that results in approximate level rates of return on the principal amounts
outstanding. Finance lease origination fees and costs are deferred and amortized
over the average life of the portfolio as an adjustment to yield.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
|
|
(j)
|
Transfer
of Financial Assets
|
Transfers
of financial assets are accounted for as sales when control over the assets
has
been surrendered. Control over transferred assets is deemed to be surrendered
when: (a) the assets have been isolated from the Company; (b) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets; and
(c) the Company does not maintain effective control over the transferred
assets through an agreement to repurchase them before their
maturity.
Upon
completion of a transfer of assets that satisfies the conditions described
above
to be accounted for as a sale, the Company:
|
|
·
|
Derecognizes
all assets sold;
|
|
|
·
|
Recognizes
all assets obtained and liabilities incurred in consideration as
proceeds
of the sale;
|
|
|
·
|
Initially
measures, at fair value, assets obtained and liabilities incurred
in a
sale; and
|
|
|
·
|
Recognizes
in earnings any gain or loss on the
sale.
|
|
|
(k)
|
Premises
and Equipment
|
Premises
and equipment are stated at cost, less accumulated depreciation and
amortization, which are calculated utilizing the straight-line method over
the
estimated useful lives of the depreciable assets. Leasehold improvements are
stated at cost and are amortized using the straight-line method over the
estimated useful lives of the assets or the term of the lease, whichever is
shorter. Expenditures for major improvements and remodeling are capitalized
while maintenance and repairs are charged to expense. Gains or losses on
disposition of premises and equipment and related operating income and
maintenance expenses are included in current operations.
|
|
(l)
|
Other
Real Estate and Repossessed
Assets
|
Other
real estate and repossessed assets, normally obtained through foreclosure or
other workout situations, are initially recorded at the lower of fair 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. An
appraisal of other real estate properties and valuation of repossessed assets
is
made periodically after its acquisition and 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 other real estate and repossessed assets and related operating
income and maintenance expenses are included in current operations.
Trust
fees are recorded on accrual basis at the time services are rendered. In
connection with its trust activities, the Company administers and is custodian
of assets, which amounted to approximately $299,445,000 and $235,263,000 at
December 31, 2007 and 2006, respectively.
|
|
(n)
|
Securities
Sold under Agreements to
Repurchase
|
The
Company sells securities under agreements to repurchase the same or similar
securities. Amounts received under these agreements represent short-term
financing transactions.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
The
Company uses the asset and liability method for the recognition of deferred
tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company’s financial statements or tax returns.
Deferred income tax assets and liabilities are determined for differences
between financial statement and tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future as well as net operating
losses carryforwards. The computation is based on enacted tax laws and rates
applicable to periods in which the temporary differences are expected to be
recovered or settled.
The
Banking Law of Puerto Rico requires that a reserve fund be created and that
annual transfers of at least 10% of annual net income of the Bank be made,
until
such fund equals total paid-in capital. Such transfers restrict the retained
earnings, which would otherwise be available for dividends. On the other hand,
if net losses are experienced, such losses will be initially charged to retained
earnings before reducing the reserve fund.
Interest
income on loans and investment securities is recognized on a basis which
produces a constant yield over the term of the loan or security. Accrual of
interest income is discontinued when collectibility of the related loan appears
doubtful or after 90 days of delinquency, unless the credit is well secured
and in process of collection. All interest accrued but not collected for loans
that are placed on nonaccrual or charged off is reversed against interest
income. The interest on these loans is accounted on the cash basis or cost
recovery method, until qualifying for return to accrual. Loans are returned
to
accrual status when all the principal and interest amounts contractually due
are
brought current and future payments are reasonably assured.
|
|
(r)
|
Loan
Origination and Commitment
Fees
|
Loan
fees
and certain direct loan origination costs are deferred, and the net amount
is
recognized in interest income using the interest method over the contractual
life of the loans. Commitment fees and costs relating to commitments whose
likelihood of exercise is remote are recognized over the commitment period
on a
straight-line basis. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the life of the loan as an adjustment to
yield.
Basic
earnings per share represent income available to common stockholders divided
by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share reflect additional common shares that would have
been
outstanding if dilutive potential common shares had been issued, as well as
any
adjustment to income that would result from the assumed issuance. Potential
common shares that may be issued by the Company relate solely to outstanding
stock options and are determined using the treasury stock method. Any stock
splits and stock dividend are retroactively recognized in all periods presented
in the consolidated financial statements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
|
|
(t)
|
Supplementary
Cash Flow Information
|
Supplemental
disclosures of cash flow information are as follows:
|
|
|
2007
|
|
2006
|
|
|
Cash
paid during the years for:
|
|
|
|
|
|
|
Interest
|
|
$
|
106,146,000
|
|
$
|
86,580,000
|
|
|
Income
taxes
|
|
|
4,335,000
|
|
|
4,067,000
|
|
|
Noncash
transactions:
|
|
|
|
|
|
|
|
|
Repossessed
assets acquired
|
|
|
|
|
|
|
|
|
through
foreclosure of loans
|
|
$
|
36,366,000
|
|
$
|
48,650,000
|
|
|
Financing
of repossessed assets
|
|
|
25,186,000
|
|
|
29,460,000
|
|
Effective
January 1, 2006 the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-based Payment, using the modified prospective transition
method. Accordingly, the Company has recorded stock based employee compensation
cost using the fair value method starting in 2006. Please refer to note 22
Stock
Option Plan for details.
Comprehensive
income consists of net income and other Comprehensive Income. In addition to
net
income, the Company recognizes unrealized holding gains and losses, net of
taxes, from available-for-sale securities and the change in fair value of the
cash-flow hedges as components of comprehensive income.
|
|
(w)
|
Impairment
of Long-Lived Assets
|
In
accordance with SFAS No. 144, long-lived assets, such as property, plant, and
equipment and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to
be held and used is measured by a comparison between the carrying amount of
an
asset and the estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to
be
disposed of are not longer depreciated and are separately presented in the
balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell. The assets and liabilities of a disposed group classified
as
held for sale would be presented separately in the appropriate asset and
liability sections of the consolidated balance sheet.
There
were no impairment losses in 2007 and 2006.
|
|
(x)
|
Derivative
Instruments and Hedging
Activities
|
The
Company follows the provisions of SFAS No. 133,
Accounting
for Derivative Instruments and Certain Hedging Activities
,
as
amended, which requires that all derivative instruments be recorded on the
balance sheet at their respective fair values.
On
the
date a derivative contract is entered into, the Company designates the
derivative as either a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment (fair-value hedge), or a hedge
of a forecasted transaction or the variability of cash flows to be received
or
paid related to a recognized asset or liability (cash-flow hedge). For all
hedging relationships the Company formally documents the hedging relationship
and its risk-management objective and strategy for undertaking the hedge, the
hedging instrument, the hedged item, the nature of the risk being hedged, how
the hedging instrument’s effectiveness in offsetting the hedged risk will be
assessed prospectively and retrospectively, and a description of the method
of
measuring ineffectiveness. This process includes linking all derivatives that
are designated as fair-value and cash-flow hedges to specific assets and
liabilities on the balance sheet or to specific firm commitments or forecasted
transactions. The Company also formally assesses, both at the hedge’s inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
Changes
in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair-value hedge, along with the loss or gain
on
the hedged asset or liability or unrecognized firm commitment of the hedged
item
that is attributable to the hedged risk, are recorded in earnings. Changes
in
the fair value of a derivative that is highly effective and that is designated
and qualifies as a cash-flow hedge are recorded in other comprehensive income
(loss) to the extent that the derivative is effective as a hedge, until earnings
are affected by the variability in cash flows of the designated hedged item.
The
ineffective portion of the change in fair value of a derivative instrument,
that
qualifies as either a fair-value or a cash-flow hedge is reported in earnings.
Changes in the fair value of derivative not designated as hedges are reported
in
current period earnings.
The
Company discontinues hedge accounting prospectively when it is determined that
the derivative is no longer effective in offsetting changes in the fair value
or
cash flows of the hedged item, the derivative expires or is sold, terminated,
or
exercised, the derivative is re-designated as a hedging instrument, because
it
is unlikely that a forecasted transaction will occur, a hedged firm commitment
no longer meets the definition of a firm commitment, or management determines
that designation of the derivative as a hedging instrument is no longer
appropriate.
In
all
situations in which hedge accounting is discontinued and the derivative is
retained, the Company continues to carry the derivative at its fair value on
the
balance sheet and recognizes any subsequent changes in its fair value in
earnings. When hedge accounting is discontinued because it is determined that
the derivative no longer qualifies as an effective fair-value-hedge, the Company
no longer adjusts the hedged asset or liability for changes in fair value.
The
adjustment of the carrying amount of the hedged asset or liability is accounted
for in the same manner as other components of the carrying amount of that asset
or liability. When hedge accounting is discontinued because the hedged item
no
longer meets the definition of a firm commitment, the Company removes any asset
or liability that was recorded pursuant to recognition of the firm commitment
from the balance sheet, and recognizes any gain or loss in earnings. When it
is
probable that a forecasted transaction will not occur, the Company discontinues
hedge accounting if not already done and recognizes immediately in earnings
gains and losses that were accumulated in other comprehensive
income.
An
operating segment is a component of a business for which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and evaluate performance.
Presently, the Company’s decisions are generally based on specific market areas
and/or product offerings. Accordingly, based on the financial information that
is regularly evaluated by the Company’s chief operating decision-maker, the
Company has determined that it operates as a single business
segment.
|
|
(z)
|
Recently
Issued Accounting
Standards
|
The
Financial Accounting Standard Board Interpretation (FIN) No. 48, “
Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
109
”
was
issued in June 2006. This Interpretation provides guidance for the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109 (FAS 109),
“
Accounting
for Income Taxes
.”
This Interpretation revises FAS 109 to prescribe a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 addresses the diversity that exists in the practice by
defining a criterion that an individual tax position is recognized as a benefit
only if it meet the “more likely than not” test, which is set at 50%, presuming
the occurrence of a tax examination. This interpretation is effective for fiscal
years beginning after December 15, 2006. During the first quarter of 2007,
the
Company adopted the provisions of FIN No. 48, which did not have an impact
on
the Company’s financial condition or results of operations.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
The
Company and its subsidiaries are subject to the Puerto Rico tax law but
generally are not subject to US federal income tax. The Company and its
subsidiaries are only subject to examination for taxable years beginning after
2002. Prior to adopting FIN 48, the Company had recognized approximately
$765,000 in contingent liabilities for uncertain tax positions under the
Statement of Financial Accounting Standards No. 5, “
Accounting
for Contingencies
.”
Upon
the adoption of FIN 48, the Company reevaluated this contingency and concluded
that it was adequate under FIN 48. The Company does not expect the total amount
of unrecognized tax benefits to significantly increase in the next twelve
months. The company recognizes interest related to income tax matters as
interest expense and penalties related to income tax matters as other expense.
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
157,
“
Fair
Value Measurements
.”
This statement provides the generally accepted accounting principles (GAAP)
definition for fair value, the framework for measurements and additional
disclosures. The main focus of SFAS 157 is to revise the definition of
fair value and to provide guidance for applying the GAAP definition. This
statement applies under other accounting pronouncements that require fair value
measurements; however this statement does not require any new fair value
measurements. The definition provided in this statement clarifies that the
price to be used is the price that would be received by selling the asset or
paid to transfer liability instead of the price to acquire the asset or received
to assume the liability. This statement applies prospectively and is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
Company believes that the impact of adopting SFAS 157 will not be material
to
the financial statements.
In
September 2006, the Securities and Exchange Commission (the "SEC") issued Staff
Accounting Bulletin No. 108 ("SAB 108"). This bulletin addresses the
methodologies used by registrants to consider the effects of prior year’s
misstatements when quantifying misstatements in the current year financial
statements. SAB 108 compares the diversity in practice among registrants
and expresses SEC staff views regarding the process by which misstatements
in
financial statements are evaluated for purposes of determining whether financial
statement restatement is necessary. SAB108 is effective for fiscal years ending
after November 15, 2006, and early application is encouraged. I
n
December 2006, the Company adopted the provisions of SAB 108. Prior to adopting
SAB 108, the Company consistently used the rollover approach when considering
the effects of prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment.
As
a
result of the adoption of SAB 108, the Company reported a cumulative adjustment
to the beginning retained earnings associated with an accounting error related
to the application of the Financial Accounting Standards No. 91,
Accounting
for Nonrefundable Fees and Costs Associated with originating or Acquiring Loans
and Initial Direct Costs of Leases
(“FAS
91”),
Financial
Accounting Standards No. 13
,
Accounting
for Leases
(“FAS
13”), and FASB Technical Bulleting No. 85-3,
Accounting
for Operating Leases with Scheduled Rent Increases
(“FTB85-3”).
FAS
91
establishes, among others, standards of financial accounting and reporting
for
purchase premiums or discounts associated with loan purchases. FAS 91 requires
the difference between the initial investment in a purchased loan or group
of
loans and the amount paid to the seller plus any fees paid or less any fees
received at the date of purchase to be recognized as an adjustment of yield
over
the life of the loan. Also, it establishes that if prepayments are not
anticipated and they occur, a proportionate amount of the related purchase
premium or discount shall be recognized in income so that the effective interest
rate on the remaining portion of loans continues unchanged. In the past the
Company did not apply the provisions of FAS 91 over prepayments of loans
purchased from The Bank & Trust of Puerto Rico (“BankTrust”) in May 2004. As
of December 31, 2005, there was $849,350 in unamortized net purchase premiums
related to canceled loans previously acquired from BankTrust. This difference
net of taxes of $331,247 represented an adjustment of $518,103 to the earnings
in prior periods, as of December 31, 2006.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
FTB85-3
requires that increases in scheduled rent, which are included in minimum lease
payments under FAS 13, to be recognized by lessors and lessees on a
straight-line basis over the lease term unless another systematic and rational
allocation basis is more representative of the time pattern in which the leased
property is physically employed. The Company has several lease agreements with
escalating clauses, for which related rent expense was recorded as paid instead
of on a straight-line basis over the lease term. As of December 31, 2005, the
deferred rent expense liability was understated by $446,506. This difference
net
of taxes of $174,138 represented an adjustment of $272,368 to earnings in prior
periods, as of December 31, 2006.
The
Company, as permitted by the provision of SAB 108, adjusted the Statements
of
Change in Stockholders Equity by $790,741 to the beginning balance of retained
earnings for year 2006 to report the cumulative effect of its initial
application.
The
Financial Accounting Standard Board (FASB) issued SFAS 159, “
The
Fair Value Option for Financial Assets and Financial
Liabilities
”
in
February 2007. This statement includes an amendment to SFAS 115, “
Accounting
for Certain Investments in Debt and Equity Securities
”,
to
allow entities to choose to measure at fair value many financial instruments
that are not required to be measured at fair value under existing SFAS. The
main
focus of SFAS 159 is to improve the use of fair value measurement providing
the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. This statement does not affect the provisions of any
other SFAS that requires fair value measurement for certain assets or
liabilities. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Early adoption is permitted
as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FASB Statement No.
157, Fair Value Measurements. The Company did not elect the early adoption
of
this statement.
In
December 2007, the Securities and Exchange Commission (the "SEC") issued Staff
Accounting Bulletin No. 110 ("SAB 110"). This bulletin addresses the staff
view
regarding the use of a simplified method by registrants when estimating the
expected term of “plain vanilla” share options in accordance with Statement of
Financial Accounting Standards No. 123, (revised 2004)
Share
Based Payment
.
The SEC
previously issued SAB 107, which stated that the staff would not expect a
company to use the simplified method for share options grants after December
31,
2007. In SAB 110, the SEC expressed that the employee exercise behavior may
not
be available by December 31, 2007 and will continue to accept the use of the
simplified method when estimating the expected term of “plain vanilla” share
options if the entity is unable to rely on historical exercise data. However,
entities applying the simplified method after the effective date of this
bulletin should disclose the reasons why the method is used. This Staff
Accounting Bulleting is effective January 1, 2008. The Company used the
simplified method when estimating expected term for the options granted in
2007
and 2006.
On
December 19, 2007, the SEC issued final rules amending and streamlining
reporting requirements for smaller reporting companies. These rules eliminate
Regulation S-B for small reporting companies and integrations those provisions
into Regulation S-K and Regulation S-X. Among other things, these new rules,
which became effective on February 4, 2008, (i) created a new category of
filer,
the “smaller reporting company,” which replaces the current “small business
issuer” category; (ii) expanded the availability of scaled disclosure
requirements to filers with a public float of less than $75 million (or where
no
public float or market price exists, less than $50 million in annual revenue);
and (iii) moved the Regulation S-B reporting requirements to Regulation S-K
and
eliminate Regulation S-B and its various reporting forms, for example Form
SB-2.
In addition, these new rules allowed small reporting companies to choose
the
scaled reporting requirements on an à la carte basis, thereby permitting the
company to choose its disclosure requirements on an item-by-item basis. While
the Company has generally opted to continue its larger company disclosures
consistent with past practices, in order to minimize the time, costs and
expenses associated with obtaining the consent of its former auditors, the
Company has elected to include two years of prior audited financial statement
information consistent with the smaller reporting company requirements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
|
(3)
|
Securities
Purchased Under Agreements to
Resell
|
Securities
purchased under agreements to resell at December 31, 2007 and 2006 consist
of short-term investments, usually overnight transactions. The following table
summarizes certain information on securities purchased under agreements to
resell:
|
|
|
2007
|
|
2006
|
|
|
Amount
outstanding at year-end
|
|
$
|
19,879,008
|
|
$
|
51,191,323
|
|
|
Maximum
aggregate balance outstanding
|
|
|
|
|
|
|
|
|
at
any month-end
|
|
|
61,649,614
|
|
|
51,191,323
|
|
|
Average
monthly aggregate balance
|
|
|
|
|
|
|
|
|
outstanding
during the year
|
|
|
32,870,163
|
|
|
30,904,690
|
|
|
Weighted
average interest rate for the year
|
|
|
5.49
|
%
|
|
5.29
|
%
|
|
Weighted
average interest rate at year-end
|
|
|
5.22
|
%
|
|
5.58
|
%
|
The
amounts advanced under those agreements are reflected as assets in the balance
sheets. It is the Company’s policy to take possession of securities purchased
under agreements to resell. Agreements with third parties specify the Company’s
rights to request additional collateral, based on its monitoring of the fair
value of the underlying securities on a daily basis. The securities are
segregated by the broker or dealer custodian bank account designated under
a
written custodial agreement that explicitly recognizes the Company’s interest in
the securities.
The
fair
value of the collateral securities held by the Company on these transactions
as
of December 31, 2007 and 2006 was approximately $20,352,000 and
$52,216,000, respectively. It is the Company’s policy to request collateral
securities with fair value of at least 102% of the transaction
amount.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
|
(4)
|
Investment
Securities Available for
Sale
|
Investment
securities available for sale and related contractual maturities as of
December 31, 2007 and 2006 are as follows:
|
|
|
2007
|
|
|
|
|
Amortized
|
|
Gross
unrealized
|
|
Gross
unrealized
|
|
Fair
|
|
|
|
|
cost
|
|
gains
|
|
losses
|
|
value
|
|
|
Commonwealth
of Puerto
|
|
|
|
|
|
|
|
|
|
|
Rico
obligations:
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
$
|
775,336
|
|
$
|
20,068
|
|
$
|
(140
|
)
|
$
|
795,264
|
|
|
One
through five years
|
|
|
4,840,524
|
|
|
79,974
|
|
|
-
|
|
|
4,920,498
|
|
|
Federal
Farm Credit Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
|
27,454,067
|
|
|
251,882
|
|
|
-
|
|
|
27,705,949
|
|
|
Federal
Home Loan Bank notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
|
84,447,295
|
|
|
32,284
|
|
|
(19,739
|
)
|
|
84,459,840
|
|
|
One
through five years
|
|
|
7,119,149
|
|
|
46,537
|
|
|
-
|
|
|
7,165,686
|
|
|
Federal
National Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Association
notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
through five years
|
|
|
10,000,000
|
|
|
66,900
|
|
|
-
|
|
|
10,066,900
|
|
|
US
Corporate Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
through five years
|
|
|
3,000,000
|
|
|
-
|
|
|
(256,500
|
)
|
|
2,743,500
|
|
|
Mortgage-backed
securities
|
|
|
568,355,302
|
|
|
3,349,482
|
|
|
(2,458,989
|
)
|
|
569,245,795
|
|
|
Total
|
|
$
|
705,991,673
|
|
$
|
3,847,127
|
|
$
|
(2,735,368
|
)
|
$
|
707,103,432
|
|
|
|
|
2006
|
|
|
|
|
Amortized
|
|
Gross
unrealized
|
|
Gross
unrealized
|
|
Fair
|
|
|
|
|
cost
|
|
gains
|
|
losses
|
|
value
|
|
|
Commonwealth
of Puerto
|
|
|
|
|
|
|
|
|
|
|
Rico
obligations:
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
$
|
4,116,192
|
|
$
|
14,056
|
|
$
|
(39,760
|
)
|
$
|
4,090,488
|
|
|
One
through five years
|
|
|
5,401,713
|
|
|
71,851
|
|
|
(1,110
|
)
|
|
5,472,454
|
|
|
Federal
Farm Credit Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
|
30,319,617
|
|
|
-
|
|
|
(383,179
|
)
|
|
29,936,438
|
|
|
One
through five years
|
|
|
19,994,263
|
|
|
-
|
|
|
(311,883
|
)
|
|
19,682,380
|
|
|
Federal
Home Loan Bank notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
|
20,885,000
|
|
|
-
|
|
|
(218,738
|
)
|
|
20,666,262
|
|
|
One
through five years
|
|
|
79,419,623
|
|
|
-
|
|
|
(1,375,610
|
)
|
|
78,044,013
|
|
|
Five
to ten years
|
|
|
7,922,971
|
|
|
-
|
|
|
(71,985
|
)
|
|
7,850,986
|
|
|
Federal
National Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Association
notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
through five years
|
|
|
19,991,659
|
|
|
83,491
|
|
|
-
|
|
|
20,075,150
|
|
|
Mortgage-backed
securities
|
|
|
354,672,013
|
|
|
412,557
|
|
|
(5,743,732
|
)
|
|
349,340,838
|
|
|
Total
|
|
$
|
542,723,051
|
|
$
|
581,955
|
|
$
|
(8,145,997
|
)
|
$
|
535,159,009
|
|
Contractual
maturities on certain investment securities available for sale could differ
from
actual maturities since certain issuers have the right to call or prepay these
securities.
At
December 31, 2007 and 2006, no investments that are payable from and secured
by
the same source of revenue or taxing authority, other than the U.S. government
and U.S. agencies exceed 10% of stockholders’ equity.
During
the year ended December 31, 2007, there were no sales of investment
securities. During the year ended December 31, 2006, proceeds from sales of
investment securities were approximately $48,993,000, resulting in a gross
loss
of approximately $1,092,000.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
For
the
years ended December 31, 2007 and 2006, gross unrealized losses on investment
securities available for sale and the fair value of the related securities,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position were as follows:
|
|
|
2007
|
|
|
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|
|
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
|
|
|
losses
|
|
value
|
|
losses
|
|
value
|
|
losses
|
|
value
|
|
|
U.S.
agency debt securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(19,739
|
)
|
$
|
13,240,261
|
|
$
|
(19,739
|
)
|
$
|
13,240,261
|
|
|
State
and municipal obligations
|
|
|
(140
|
)
|
|
200,196
|
|
|
-
|
|
|
-
|
|
|
(140
|
)
|
|
200,196
|
|
|
US
Corporate Note
|
|
|
(256,500
|
)
|
|
2,743,500
|
|
|
-
|
|
|
-
|
|
|
(256,500
|
)
|
|
2,743,500
|
|
|
Mortgage-backed
securities
|
|
|
(804,224
|
)
|
|
78,237,438
|
|
|
(1,654,765
|
)
|
|
136,618,716
|
|
|
(2,458,989
|
)
|
|
214,856,154
|
|
|
|
|
$
|
(1,060,864
|
)
|
$
|
81,181,134
|
|
$
|
(1,674,504
|
)
|
$
|
149,858,977
|
|
$
|
(2,735,368
|
)
|
$
|
231,040,111
|
|
|
|
|
2006
|
|
|
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|
|
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
|
|
|
losses
|
|
value
|
|
losses
|
|
value
|
|
losses
|
|
value
|
|
|
U.S.
agency debt securities
|
|
$
|
(71,985
|
)
|
$
|
7,850,986
|
|
$
|
(2,289,410
|
)
|
$
|
148,329,093
|
|
$
|
(2,361,395
|
)
|
$
|
156,180,079
|
|
|
State
and municipal obligations
|
|
|
(10,563
|
)
|
|
770,325
|
|
|
(30,307
|
)
|
|
2,480,885
|
|
|
(40,870
|
)
|
|
3,251,210
|
|
|
Mortgage-backed
securities
|
|
|
(243,756
|
)
|
|
50,655,419
|
|
|
(5,499,976
|
)
|
|
250,971,704
|
|
|
(5,743,732
|
)
|
|
301,627,123
|
|
|
|
|
$
|
(326,304
|
)
|
$
|
59,276,730
|
|
$
|
(7,819,693
|
)
|
$
|
401,781,682
|
|
$
|
(8,145,997
|
)
|
$
|
461,058,412
|
|
|
|
·
|
U.S.
Agency Debt Securities
-
The unrealized losses on investments in U.S. agency debt securities
were caused by interest rate increases. The contractual terms of
these
investments do not permit the issuer to settle the securities at
a price
less than the par value of the investment. Because the Company has
the
ability and intent to hold these investments until a market price
recovery
or maturity, these investments are not considered other-than-temporarily
impaired.
|
|
|
·
|
Mortgage-Backed
Securities
-
The unrealized losses on investments in mortgage-backed securities
were
caused by interest rate increases. The company has mortgage-backed
securities that were issued by private corporations and by U.S. government
enterprise. The contractual cash flows of the securities issued by
a U.S.
government enterprise are guaranteed by the U.S. government sponsored
enterprise issuing the securities. It is expected that the securities
would not be settled at a price less than the par value of the investment.
Because the decline in fair value is attributable to changes in interest
rates and not credit quality, and because the Company has the ability
and
intent to hold these investments until a market price recovery or
maturity, these investments are not considered other-than-temporarily
impaired.
|
|
|
·
|
US
Corporate Notes
-
The unrealized losses on investments in U.S. corporate notes were
caused
primarily by changes in interest rate expectations. It is expected
that
the securities would not settle at a price less than the par value
of the
investment. Because the decline in fair value is attributable to
changes
in interest rates and not credit quality, and because the Company
has the
ability and intent to hold these investments until a market price
recovery
or maturity, these investments are not considered other-than-temporary
impaired.
|
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
|
(5)
|
Investment
Securities Held to
Maturity
|
Investment
securities held to maturity as of December 31, 2007 and 2006 were as
follows:
|
|
|
2007
|
|
|
|
|
Amortized
|
|
Gross
unrealized
|
|
Gross
unrealized
|
|
Fair
|
|
|
|
|
cost
|
|
gains
|
|
losses
|
|
value
|
|
|
U.S.
agency debt securities
|
|
$
|
2,774,712
|
|
$
|
-
|
|
$
|
(12,717
|
)
|
$
|
2,761,995
|
|
|
Mortgage-backed
securities
|
|
|
28,070,506
|
|
|
16,983
|
|
|
(397,558
|
)
|
|
27,689,931
|
|
|
Total
|
|
$
|
30,845,218
|
|
$
|
16,983
|
|
$
|
(410,275
|
)
|
$
|
30,451,926
|
|
|
|
|
2006
|
|
|
|
|
Amortized
|
|
Gross
unrealized
|
|
Gross
unrealized
|
|
Fair
|
|
|
|
|
cost
|
|
gains
|
|
losses
|
|
value
|
|
|
U.S.
agency debt securities
|
|
$
|
3,164,937
|
|
$
|
-
|
|
$
|
(93,402
|
)
|
$
|
3,071,535
|
|
|
Mortgage-backed
securities
|
|
|
35,267,883
|
|
|
-
|
|
|
(865,645
|
)
|
|
34,402,238
|
|
|
Total
|
|
$
|
38,432,820
|
|
$
|
-
|
|
$
|
(959,047
|
)
|
$
|
37,473,773
|
|
During
the years ended December 31, 2007 and 2006, there were no sales or transfer
of investment securities held to maturity.
For
the
years ended December 31, 2007 and 2006, gross unrealized losses on investment
securities held to maturity and the fair value of the related securities,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, were as
follows:
|
|
|
2007
|
|
|
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|
|
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
|
|
|
losses
|
|
value
|
|
losses
|
|
value
|
|
losses
|
|
value
|
|
|
U.S.
agency debt securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(12,717
|
)
|
$
|
2,761,995
|
|
$
|
(12,717
|
)
|
$
|
2,761,995
|
|
|
Mortgage-backed
securities
|
|
|
-
|
|
|
-
|
|
|
(397,558
|
)
|
|
23,477,416
|
|
|
(397,558
|
)
|
|
23,477,416
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(410,275
|
)
|
$
|
26,239,411
|
|
$
|
(410,275
|
)
|
$
|
26,239,411
|
|
|
|
|
2006
|
|
|
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|
|
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
|
|
|
losses
|
|
value
|
|
losses
|
|
value
|
|
losses
|
|
value
|
|
|
U.S.
agency debt securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(93,402
|
)
|
$
|
3,071,535
|
|
$
|
(93,402
|
)
|
$
|
3,071,535
|
|
|
Mortgage-backed
securities
|
|
|
-
|
|
|
-
|
|
|
(865,645
|
)
|
|
34,402,238
|
|
|
(865,645
|
)
|
|
34,402,238
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(959,047
|
)
|
$
|
37,473,773
|
|
$
|
(959,047
|
)
|
$
|
37,473,773
|
|
|
|
·
|
U.S.
Agency Debt Securities
-
The unrealized losses on investments in U.S. agency debt securities
were caused by interest rate increases. The contractual terms of
these
investments do not permit the issuer to settle the securities at
a price
less than the par value of the investment. Because the Company has
the
ability and intent to hold these investments until a market price
recovery
or maturity, these investments are not considered other-than-temporarily
impaired.
|
|
|
·
|
Mortgage-Backed
Securities -
The
unrealized losses on investments in mortgage-backed securities were
caused
by interest rate increases. The company has mortgage-backed securities
that were issued by private corporations and by U.S. government
enterprise. The contractual cash flows of the securities issued by
a U.S.
government enterprise are guaranteed by the U.S. government sponsored
enterprise issuing the securities. It is expected that the securities
would not be settled at a price less than the par value of the investment.
Because the decline in fair value is attributable to changes in interest
rates and not credit quality, and because the Company has the ability
and
intent to hold these investments until a market price recovery or
maturity, these investments are not considered other-than-temporarily
impaired.
|
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated
Financial Statements
Decemner
31, 2007 and 2006
Other
investments at December 31, 2007 and 2006 consisted of the
following:
|
|
|
2007
|
|
2006
|
|
|
FHLB
stock, at cost
|
|
$
|
12,744,300
|
|
$
|
3,717,700
|
|
|
Investment
in statutory trust (note 16)
|
|
|
610,000
|
|
|
611,500
|
|
|
Other
investments
|
|
$
|
13,354,300
|
|
$
|
4,329,200
|
|
At
December 31, 2007, various securities and loans were pledged to secure the
following:
|
Asset
pledged
|
|
Carrying
value
|
|
Items
secured/collateralized
|
|
|
Securities
|
|
$
|
54,366,946
|
|
|
Deposits
of public funds
|
|
|
Commercial
loans
|
|
|
|
|
|
|
|
|
guaranteed
by the Small
|
|
|
|
|
|
|
|
|
Business
Administration
|
|
|
593,003
|
|
|
Deposits
of public funds
|
|
|
Residential
mortgage loans
|
|
|
43,605,510
|
|
|
Advances
from Federal Home Loan Bank
|
|
|
Securities
|
|
|
119,548
|
|
|
Assets
pledged with Commissioner of Financial Institutions of the Commonwealth
of
Puerto Rico for IRA Trust
|
|
|
Securities
|
|
|
897,346
|
|
|
Assets
pledged with Commissioner of Financial Institutions of the Commonwealth
of
Puerto Rico for the Trust and the International Banking Entity
operations
|
|
|
Securities
|
|
|
277,471
|
|
|
Assets
pledged with the Federal Reserve Bank for Treasury, tax, and
loan
account
|
|
|
Securities
|
|
|
12,149,259
|
|
|
Assets
pledged with the Federal Reserve Bank for Discount Window
|
|
|
Securities
|
|
|
3,881,284
|
|
|
Assets
pledged for derivatives contracts
|
|
|
Securities
|
|
|
530,865,654
|
|
|
Securities
sold under agreements to repurchase
|
|
At
December 31, 2007, certain securities were pledged to secure assets sold under
agreement to repurchase. These securities with creditor’s right to repledge were
classified as available-for-sale and held-to-maturity investments securities
and
had a carrying amount of $510,640,734 and $20,224,920, respectively.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
A
summary
of the Company’s loan portfolio at December 31 were as
follows:
|
|
|
2007
|
|
2006
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
Commercial
and industrial
|
|
$
|
792,308,856
|
|
$
|
736,555,175
|
|
|
Construction
|
|
|
203,344,272
|
|
|
126,241,190
|
|
|
Residential
mortgage
|
|
|
106,947,204
|
|
|
76,277,339
|
|
|
Consumer
|
|
|
779,610
|
|
|
782,456
|
|
|
|
|
|
1,103,379,942
|
|
|
939,856,160
|
|
|
Commercial
and industrial
|
|
|
302,530,197
|
|
|
297,511,599
|
|
|
Consumer
|
|
|
57,745,127
|
|
|
60,682,410
|
|
|
Lease
financing contracts
|
|
|
385,390,263
|
|
|
443,310,627
|
|
|
Overdrafts
|
|
|
6,849,655
|
|
|
5,015,183
|
|
|
|
|
|
1,855,895,184
|
|
|
1,746,375,979
|
|
|
Deferred
loan origination costs, net
|
|
|
2,365,896
|
|
|
4,879,823
|
|
|
Unearned
finance charges
|
|
|
(1,041,968
|
)
|
|
(1,296,671
|
)
|
|
Allowance
for loan and lease losses
|
|
|
(28,137,104
|
)
|
|
(18,936,841
|
)
|
|
|
|
|
|
|
|
|
|
|
Loans,
net
|
|
$
|
1,829,082,008
|
|
$
|
1,731,022,290
|
|
The
components of the net lease financing at December 31 were as
follows:
|
|
|
2007
|
|
2006
|
|
|
Installments
lease payments
|
|
$
|
319,370,361
|
|
$
|
374,415,877
|
|
|
Contractual
residual payments
|
|
|
66,019,902
|
|
|
68,894,750
|
|
|
Minimum
lease payments
|
|
|
385,390,263
|
|
|
443,310,627
|
|
|
Deferred
origination costs, net
|
|
|
3,463,530
|
|
|
5,609,852
|
|
|
Less
unearned income (equipment leases)
|
|
|
(1,041,968
|
)
|
|
(1,296,671
|
)
|
|
|
|
$
|
387,811,825
|
|
$
|
447,623,808
|
|
Contractual
residual payments apply to leases where there is a more than nominal final
payment for transfer of the unit to lessee. Such amounts are obligations of
the
lessee, which are generally established at amounts not to exceed the unit’s
estimated value at the end of the lease term.
At
December 31, 2007, future minimum lease payments are expected to be
received as follows:
|
Years
ending December 31:
|
|
|
|
|
2008
|
|
$
|
106,289,049
|
|
|
2009
|
|
|
105,285,442
|
|
|
2010
|
|
|
87,833,919
|
|
|
2011
|
|
|
53,466,271
|
|
|
2012
|
|
|
28,979,293
|
|
|
Thereafter
|
|
|
3,536,289
|
|
|
|
|
$
|
385,390,263
|
|
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
The
following is a summary of information pertaining to impaired loans:
|
|
|
2007
|
|
2006
|
|
|
Impaired
loans with related allowance
|
|
$
|
32,147,000
|
|
$
|
11,878,000
|
|
|
Impaired
loans that did not require allowance
|
|
|
52,283,000
|
|
|
27,319,000
|
|
|
Total
impaired loans
|
|
$
|
84,430,000
|
|
$
|
39,197,000
|
|
|
Allowance
for impaired loans
|
|
$
|
9,538,000
|
|
$
|
2,219,000
|
|
|
|
|
2007
|
|
2006
|
|
|
Average
investment in impaired loans
|
|
$
|
61,234,000
|
|
$
|
27,640,000
|
|
|
Interest
income recognized on
|
|
|
|
|
|
|
|
|
impaired
loans
|
|
|
1,961,000
|
|
|
1,041,000
|
|
The
following is the information pertaining to nonperforming loans as of December
31:
|
|
|
2007
|
|
2006
|
|
|
Loans
contractually past due 90 days or
|
|
|
|
|
|
|
more
but still accruing interest
|
|
$
|
29,075,000
|
|
$
|
12,723,000
|
|
|
Non
accrual loans
|
|
|
68,990,000
|
|
|
37,255,000
|
|
|
Total
non perfoming loans
|
|
$
|
98,065,000
|
|
$
|
49,978,000
|
|
No
additional funds are committed to be advanced in connection with impaired
loans.
As
of
December 31, 2007 and 2006, loans on which the accrual of interest had been
discontinued amounted to approximately $69,425,000 and $37,255,000,
respectively. If these loans would had been accruing interest, the additional
interest income realized would have been amounted to approximately $5,523,000
and $3,265,000 for 2007 and 2006, respectively.
Commercial
and industrial loans with principal outstanding balances amounting to
approximately $1,605,000 and $2,174,000 in 2007 and 2006, respectively, were
guaranteed by the U.S. government through the Small Business Administration
at percentages varying from 75% to 90%. As of December 31, 2007 and 2006,
industrial loans with a principal outstanding balance of approximately $653,000
and $1,503,000, respectively, were guaranteed by the U.S. government through
the
U.S. Department of Agriculture.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
|
(9)
|
Allowance
for Loan and Lease
Losses
|
The
following analysis summarizes the changes in the allowance for loan and lease
losses for the years ended December 31:
|
|
|
2007
|
|
2006
|
|
|
Balance
at beginning of year
|
|
$
|
18,936,841
|
|
$
|
18,188,130
|
|
|
Provision
for loan and lease losses
|
|
|
25,348,000
|
|
|
16,903,000
|
|
|
Loans
and leases charged-off
|
|
|
(18,270,875
|
)
|
|
(18,789,323
|
)
|
|
Recoveries
|
|
|
2,123,139
|
|
|
2,635,034
|
|
|
Balance
at end of year
|
|
$
|
28,137,104
|
|
$
|
18,936,841
|
|
|
(10)
|
Premises
and Equipment, Net
|
Premises
and equipment at December 31 are as follows:
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
useful
lives
|
|
|
|
|
|
|
|
|
(years)
|
|
2007
|
|
2006
|
|
|
Land
|
|
|
|
|
$
|
4,899,328
|
|
$
|
850,738
|
|
|
Building
|
|
|
40
|
|
|
18,930,167
|
|
|
6,498,507
|
|
|
Leasehold
improvements
|
|
|
5
to 20
|
|
|
9,015,413
|
|
|
7,646,256
|
|
|
Furniture,
fixtures, and equipment
|
|
|
2
to 5
|
|
|
13,835,040
|
|
|
11,074,966
|
|
|
Construction
in progress
|
|
|
|
|
|
193,848
|
|
|
616,131
|
|
|
|
|
|
|
|
|
46,873,796
|
|
|
26,686,598
|
|
|
Accumulated
depreciation and amortization
|
|
|
|
|
|
(13,790,627
|
)
|
|
(11,797,142
|
)
|
|
|
|
|
|
|
$
|
33,083,169
|
|
$
|
14,889,456
|
|
Depreciation
and amortization expense for the years ended December 31, 2007 and 2006 amounted
to $2,391,119 and $2,042,839, respectively.
On
February 6, 2007, Eurobank, the wholly owned banking subsidiary of
Eurobancshares, Inc., closed on the purchase of land and an office building
to
serve as the new headquarters of Eurobancshares and Eurobank. The property,
which is located in San Juan, includes a 57,187 square foot office building
consolidates the Company’s and the Bank’s headquarters, administrative
operations and leasing division. The purchase price for the property was
$12,360,000. In addition, as of December 31, 2007, building improvements
amounted to approximately $2,948,000.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
Other
assets at December 31 consist of the following:
|
|
|
2007
|
|
2006
|
|
|
Deferred
tax assets, net (note 19)
|
|
$
|
10,898,071
|
|
$
|
6,260,855
|
|
|
Merchant
credit card items in process of collection
|
|
|
2,416,934
|
|
|
1,854,919
|
|
|
Auto
insurance claims receivable on repossessed vehicles
|
|
|
1,148,782
|
|
|
1,864,326
|
|
|
Accounts
receivable
|
|
|
8,828,058
|
|
|
1,146,465
|
|
|
Other
real estate, net of valuation allowance of $120,857 and
|
|
|
|
|
|
|
|
|
$41,894
in 2007 and 2006, respectively
|
|
|
8,124,572
|
|
|
3,628,971
|
|
|
Other
repossessed assets, net of valuation allowance of
|
|
|
|
|
|
|
|
|
$565,767
and $799,104 in 2007 and 2006, respectively
|
|
|
5,409,451
|
|
|
9,418,811
|
|
|
Prepaid
expenses and deposits
|
|
|
6,766,081
|
|
|
7,772,760
|
|
|
Fair
value option
|
|
|
3,950,000
|
|
|
—
|
|
|
Other
|
|
|
2,409,951
|
|
|
1,169,583
|
|
|
|
|
$
|
49,951,898
|
|
$
|
33,116,690
|
|
Other
repossessed assets are presented net of valuation allowance for losses. The
following analysis summarizes the changes in the allowance for losses for the
years ended December 31:
|
|
|
2007
|
|
2006
|
|
|
Balance,
beginning of year
|
|
$
|
799,104
|
|
$
|
1,216,087
|
|
|
Provision
for losses
|
|
|
1,252,576
|
|
|
1,262,726
|
|
|
Net
charge-offs
|
|
|
(1,485,913
|
)
|
|
(1,679,709
|
)
|
|
Balance,
end of year
|
|
$
|
565,767
|
|
$
|
799,104
|
|
Total
deposits as of December 31 consisted of:
|
|
|
2007
|
|
2006
|
|
|
Noninterest
bearing deposits
|
|
$
|
120,082,912
|
|
$
|
140,321,373
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
NOW
& Money Market
|
|
|
60,893,298
|
|
|
62,672,648
|
|
|
Savings
|
|
|
131,604,327
|
|
|
156,069,357
|
|
|
Regular
CD's & IRAS
|
|
|
92,544,566
|
|
|
95,396,084
|
|
|
Jumbo
CD's
|
|
|
251,360,899
|
|
|
224,741,161
|
|
|
Brokered
deposits
|
|
|
1,336,560,312
|
|
|
1,226,155,584
|
|
|
|
|
|
1,872,963,402
|
|
|
1,765,034,834
|
|
|
Total
Deposits
|
|
$
|
1,993,046,314
|
|
$
|
1,905,356,207
|
|
Broker
deposits do not represent concentration risk for the Company, they are
large-denomination CDs sold by a bank to a brokerage firm, which divides them
into smaller pieces for sale to its customers. The Company currently uses
more than twelve brokers in the United States.
Interest
expense on time deposits over $100,000 amounted to approximately $75,467,000
and
$58,352,000 for the years ended December 31, 2007 and 2006,
respectively.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
At
December 31, 2007, the scheduled maturities of time deposits are as
follows:
|
|
|
Under
$100,000
|
|
Over
$100,000
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
76,302,504
|
|
$
|
874,583,870
|
|
$
|
950,886,374
|
|
|
2009
|
|
|
6,962,622
|
|
|
400,877,163
|
|
|
407,839,785
|
|
|
2010
|
|
|
4,072,158
|
|
|
174,825,947
|
|
|
178,898,105
|
|
|
2011
|
|
|
1,573,113
|
|
|
73,797,110
|
|
|
75,370,223
|
|
|
2012
|
|
|
1,805,826
|
|
|
36,029,377
|
|
|
37,835,203
|
|
|
Thereafter
|
|
|
1,620,561
|
|
|
31,925,000
|
|
|
33,545,561
|
|
|
|
|
|
92,336,785
|
|
|
1,592,038,467
|
|
|
1,684,375,252
|
|
|
Net
premium (discount)
|
|
|
144,700
|
|
|
(4,221,330
|
)
|
|
(4,076,630
|
)
|
|
|
|
$
|
92,481,485
|
|
$
|
1,587,817,137
|
|
$
|
1,680,298,622
|
|
|
(13)
|
Securities
Sold Under Agreements to
Repurchase
|
Securities
sold under agreements to repurchase represent short-term financing transactions
with securities dealers and the Federal Home Loan Bank. The following table
summarizes certain information on securities sold under agreements to
repurchase:
|
|
|
2007
|
|
2006
|
|
|
Amount
outstanding at year-end
|
|
$
|
496,419,250
|
|
$
|
365,664,250
|
|
|
Maximum
aggregate balance outstanding
|
|
|
|
|
|
|
|
|
at
any month-end
|
|
|
496,419,250
|
|
|
501,182,250
|
|
|
Average
aggregate balance outstanding
|
|
|
|
|
|
|
|
|
during
the year
|
|
|
372,934,957
|
|
|
432,458,830
|
|
|
Weighted
average interest rate for the year
|
|
|
5.04
|
%
|
|
4.94
|
%
|
|
Weighted
average interest rate at year-end
|
|
|
4.60
|
%
|
|
5.27
|
%
|
The
investment securities underlying such agreements were delivered to the dealer
executing the agreement. These securities are included in the balance sheet
since the dealers may have sold, loaned, or otherwise disposed of such
securities in the normal course of business operations, but have agreed to
resell to the Company substantially the same securities on the maturity dates
of
the agreements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
The
following table presents the borrowings associated with the repurchase
transactions, their maturities, and weighted average interest rates. Also,
it
includes the amortized cost and approximate fair value of the underlying
collateral as of December 31, 2007 and 2006:
|
|
|
2007
|
|
|
|
|
|
|
Amortized
|
|
|
|
Weighted
|
|
|
|
|
Borrowing
|
|
cost
of
|
|
Fair
value
|
|
average
|
|
|
|
|
balance
|
|
collateral
|
|
of
collateral
|
|
interest
rate
|
|
|
Obligation
of U.S. government
|
|
|
|
|
|
|
|
|
|
|
agencies
and corporations:
|
|
|
|
|
|
|
|
|
|
|
Within
30 days
|
|
$
|
87,402,044
|
|
$
|
88,676,804
|
|
$
|
88,809,268
|
|
|
4.76
|
%
|
|
After
90 days
|
|
|
18,390,328
|
|
|
29,846,444
|
|
|
29,884,030
|
|
|
4.37
|
%
|
|
|
|
|
105,792,372
|
|
|
118,523,248
|
|
|
118,693,298
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
30 days
|
|
|
64,700,750
|
|
|
61,687,720
|
|
|
61,767,766
|
|
|
4.54
|
%
|
|
After
90 days
|
|
|
54,351,699
|
|
|
60,795,878
|
|
|
61,010,975
|
|
|
3.88
|
%
|
|
|
|
|
119,052,449
|
|
|
122,483,598
|
|
|
122,778,741
|
|
|
|
|
|
Collateralized
mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
30 days
|
|
|
57,616,456
|
|
|
50,649,887
|
|
|
50,730,968
|
|
|
4.89
|
%
|
|
After
90 days
|
|
|
213,957,973
|
|
|
236,277,295
|
|
|
235,986,355
|
|
|
4.20
|
%
|
|
|
|
|
271,574,429
|
|
|
286,927,182
|
|
|
286,717,323
|
|
|
|
|
|
|
|
$
|
496,419,250
|
|
$
|
527,934,028
|
|
$
|
528,189,362
|
|
|
4.40
|
%
|
|
|
|
2006
|
|
|
|
|
|
|
Amortized
|
|
|
|
Weighted
|
|
|
|
|
Borrowing
|
|
cost
of
|
|
Fair
value
|
|
average
|
|
|
|
|
balance
|
|
collateral
|
|
of
collateral
|
|
interest
rate
|
|
|
Obligation
of U.S. government
|
|
|
|
|
|
|
|
|
|
|
agencies
and corporations:
|
|
|
|
|
|
|
|
|
|
|
Within
30 days
|
|
$
|
62,538,705
|
|
$
|
67,514,240
|
|
$
|
66,521,653
|
|
|
5.33
|
%
|
|
After
30 to 90 days
|
|
|
68,506,987
|
|
|
69,989,635
|
|
|
69,196,170
|
|
|
5.33
|
%
|
|
After
90 days
|
|
|
12,875,612
|
|
|
15,242,634
|
|
|
15,146,484
|
|
|
5.12
|
%
|
|
|
|
|
143,921,304
|
|
|
152,746,509
|
|
|
150,864,307
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
30 to 90 days
|
|
|
525,565
|
|
|
593,748
|
|
|
591,138
|
|
|
5.44
|
%
|
|
After
90 days
|
|
|
28,440,074
|
|
|
37,579,646
|
|
|
37,190,244
|
|
|
4.91
|
%
|
|
|
|
|
28,965,639
|
|
|
38,173,395
|
|
|
37,781,383
|
|
|
|
|
|
Collateralized
mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
30 days
|
|
|
35,930,545
|
|
|
68,512,290
|
|
|
67,425,239
|
|
|
5.33
|
%
|
|
After
30 to 90 days
|
|
|
28,362,448
|
|
|
40,259,058
|
|
|
39,784,285
|
|
|
5.41
|
%
|
|
After
90 days
|
|
|
128,484,314
|
|
|
176,606,918
|
|
|
173,219,241
|
|
|
4.79
|
%
|
|
|
|
|
192,777,307
|
|
|
285,378,266
|
|
|
280,428,764
|
|
|
|
|
|
|
|
$
|
365,664,250
|
|
$
|
476,298,169
|
|
$
|
469,074,454
|
|
|
5.11
|
%
|
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
|
(14)
|
Advances
from Federal Home Loan Bank
(FHLB)
|
At
December 31, the Company owed several advances to the FHLB as
follows:
|
Maturity
|
|
Interest
rate range
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
5.20%
to 5.45
%
|
|
$
|
—
|
|
$
|
8,200,000
|
|
|
2008
|
|
|
4.51
%
|
|
|
30,000,000
|
|
|
—
|
|
|
2014
|
|
|
4.38
%
|
|
|
453,926
|
|
|
507,420
|
|
|
|
|
|
|
|
$
|
30,453,926
|
|
$
|
8,707,420
|
|
Interest
rates are fixed for the term of each advance and are payable on the first
business day of the following month when the original maturity of the note
exceeds six months. In notes with original terms of six months or less, interest
is paid at maturity. Interest payments during 2007 and 2006, amounted
approximately to $217,000 and $963,000, respectively. Advances are secured
by
mortgage loans and securities pledged at the FHLB. As of December 31,
2007, based on the collateral pledged at the FHLB our borrowing potential of
advances was approximately $17,065,000.
|
(15)
|
Derivative
Financial Instruments
|
Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
As required by SFAS 133, the Company records all derivatives on the balance
sheet at fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative and the resulting
designation. Derivatives used to hedge the exposure to the variation of the
fair
value of an asset or a liability imputable to a particular risk that has effects
on the net profit are considered fair value hedges. Derivatives used to hedge
the exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges.
The
Company’s objective in using derivatives is to manage interest rate risk
exposure of the variable commercial loan portfolio and other identified risks.
To accomplish this objective, the Company primarily uses interest rate
swaps as part of its fair value hedging strategy. Interest rate swaps designated
as fair value hedges protect the Company against the changes in fair value
of
the hedged item over the life of the agreements without exchange of the
underlying principal amount. The Company uses fair value hedges to protect
against adverse changes in fair value of certain brokered certificates of
deposit (CDs). The Company also uses options to mitigate certain financial
risks
as further described below. The Company’s objective in using option contracts is
to offset the risk characteristics of the specifically identified assets or
liabilities to which the contract is tied.
Fair
value hedges result in the immediate recognition in earnings of gains or losses
on the derivative instrument, as well as corresponding losses or gains on the
hedged item, to the extent they are attributable to the hedged risk. The
ineffective portion of the gain or loss, if any, is recognized in current
earnings.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
As
of
December 31, 2007 and 2006, the Company had the following derivative financial
instruments outstanding:
|
|
|
2007
|
|
2006
|
|
|
|
|
Notional
|
|
|
|
Notional
|
|
|
|
|
|
|
amount
|
|
Fair
value
|
|
amount
|
|
Fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Libor-Rate
interest rate swaps
|
|
$
|
30,800,000
|
|
$
|
(415,176
|
)
|
$
|
30,800,000
|
|
$
|
(1,236,093
|
)
|
|
|
|
$
|
30,800,000
|
|
$
|
(415,176
|
)
|
$
|
30,800,000
|
|
$
|
(1,236,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
Option
|
|
$
|
25,000,000
|
|
$
|
3,950,000
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
$
|
25,000,000
|
|
$
|
3,950,000
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
Option
|
|
$
|
25,000,000
|
|
$
|
(3,950,000
|
)
|
$
|
-
|
|
$
|
-
|
|
|
|
|
$
|
25,000,000
|
|
$
|
(3,950,000
|
)
|
$
|
-
|
|
$
|
-
|
|
In
February of 2007, the Corporation for the State Insurance Fund (FSE) for the
Government of the Commonwealth of Puerto Rico invested approximately $25,000,000
in a CD indexed to a global equity basket. The return on the CD equals 100%
appreciation of the equity basket at maturity, approximately 5 years. To protect
against adverse changes in fair value of the CD, the Company purchased an option
that offsets changes in fair value of the global equity basket. Consistent
with
the guidance in SFAS 133, the equity-based return on the CD represents a written
option and is bifurcated and accounted for separately from the debt host as
a
derivative. Both the embedded equity-based return derivative and the purchased
option are adjusted to their respective fair values through earnings. As the
values of the two derivatives are equal and offset each other, the net effect
on
earnings is zero. At December 31, 2007, $3,950,000 was included in other assets
and other liabilities related to the purchased option and equity-based return
derivative.
As
of
December 31, 2007, the Company had four interest rate swap agreements,
designated as fair value hedges, which converted $28,382,000 of fixed rate
time
deposits to variable rate time deposits, of which $10,316,000 will mature
between 2010 and 2013 and $18,066,000 will mature between 2018 and 2023 with
semi-annual call options that match the call options on the swaps.
As
of
December 31, 2006, the Company had four interest rate swap agreements
outstanding, which synthetically convert $28,903,000 of fixed-rate time deposits
to variable-rate (LIBOR-based) time deposits, of which $10,371,000 will mature
between 2010 and 2013 and $18,532,000 will mature between 2018 and 2023. The
time deposits have semi-annual call options, which match the call options on
the
swaps.
These
interest rate swap agreements have been effective in achieving the economic
objectives explained above. During the years ended December 31, 2007 and 2006,
the net loss from fair value hedging ineffectiveness was considered
inconsequential and reported within other non-interest income.
|
(16)
|
Note
Payable to Statutory Trust
|
On
December 18, 2001, Eurobank Statutory Trust (the Trust) issued $25,000,000
of floating rate Trust Preferred Capital Securities Series 1 due in 2031
with a liquidation amount of $1,000 per security; with an option to redeem
in
five years. Distributions payable on each capital security was payable at an
annual rate equal to 5.60% beginning on (and including) the date of original
issuance and ending on (but excluding) March 18, 2002, and at an annual
rate for each successive period equal to the three-month LIBOR, plus 3.60%
with
a ceiling rate of 12.50%. The capital securities of the Trust were fully and
unconditionally guaranteed by EuroBancshares. EuroBancshares then issued
$25,774,000 of floating rate junior subordinated deferrable interest debentures
to the Trust due in 2031. The terms of the debentures, which comprise
substantially all of the assets of the Trust, were the same as the terms of
the
capital securities issued by the Trust. These debentures were fully and
unconditionally guaranteed by the Bank. The Bank subsequently issued an
unsecured promissory note to EuroBancshares for the issued amount and at an
annual rate equal to that being paid on the Trust Preferred Capital Securities
Series 1 due in 2031. On December 18, 2006 the Trust fully redeemed the
Trust Preferred Capital Securities and in the same manner, Eurobancshares
redeemed the floating rate junior subordinated deferrable interest debentures
in
the Trust with the inflows from the repayment of a note payable from the Bank.
On the redemption date, the Company charged to interest expense the write-off
of
approximately $626,000 in unamortized placement costs.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
On
December 19, 2002, Eurobank Statutory Trust II (the Trust II) issued
$20,000,000 of floating rate Trust Preferred Capital Securities due in 2032
with
a liquidation amount of $1,000 per security; with an option to redeem in five
years. Distributions payable on each capital security is payable at an annual
rate equal to 4.66% beginning on (and including) the date of original issuance
and ending on (but excluding) March 26, 2003, and at an annual rate for
each successive period equal to the three-month LIBOR plus 3.25% with a ceiling
rate of 11.75%. The capital securities of the Trust II are fully and
unconditionally guaranteed by EuroBancshares. The Company then issued
$20,619,000 of floating rate junior subordinated deferrable interest debentures
to the Trust II due in 2032. The terms of the debentures, which comprise
substantially all of the assets of the Trust II, are the same as the terms
of the capital securities issued by the Trust II. These debentures are
fully and unconditionally guaranteed by the Bank. The Bank subsequently issued
an unsecured promissory note to EuroBancshares for the issued amount and at
an
annual rate equal to that being paid on the Trust Preferred Capital Securities
due in 2032.
Interest
expense on notes payable to statutory trusts amounted to approximately
$1,794,000 and $3,924,000 for the years ended December 31, 2007 and 2006,
respectively.
|
(17)
|
Commitments
and Contingencies
|
The
Company leases certain premises used in its operations under non-callable
operating lease agreements expiring at various dates through 2032. The total
future minimum lease payments and the related minimum future lease income,
respectively, under the agreements (with initial or remaining lease terms in
excess of one year), including rentals based upon increases in taxes and other
costs, are approximately as follows:
|
|
|
Minimum
|
|
Estimated
|
|
|
|
|
|
|
lease
|
|
lease
|
|
|
|
|
|
|
payments
|
|
income
|
|
Net
|
|
|
Years
ending December 31:
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
1,742,000
|
|
$
|
235,000
|
|
$
|
1,507,000
|
|
|
2009
|
|
|
1,592,000
|
|
|
255,000
|
|
|
1,337,000
|
|
|
2010
|
|
|
1,547,000
|
|
|
255,000
|
|
|
1,292,000
|
|
|
2011
|
|
|
1,456,000
|
|
|
276,000
|
|
|
1,180,000
|
|
|
2012
|
|
|
1,322,000
|
|
|
—
|
|
|
1,322,000
|
|
|
Thereafter
|
|
|
16,145,000
|
|
|
—
|
|
|
16,145,000
|
|
|
|
|
$
|
23,804,000
|
|
$
|
1,021,000
|
|
$
|
22,783,000
|
|
Rent
expense, net of rent income, for the years ended December 31, 2007 and 2006
was approximately $2,468,000 and $2,357,000, respectively.
The
Company is involved as plaintiff or defendant in a variety of routine litigation
incidental to the normal course of business. Management believes based on the
opinion of legal counsels, that it has adequate defense or insurance protection
with respect to such litigations and that any losses there from, whether or
not
insured, would not have a material adverse effect on the results of operations
or financial position of the Company.
During
the years 2007 and 2006 the Company sold approximately $16,706,000 and
$13,837,000 of mortgage loans, respectively. In addition, during the third
quarter 2007, the Company sold $298,000 in individual residential construction
loans to other financial institution. The Company surrendered control of the
mortgage loans receivables, including servicing rights, as defined by SFAS
No. 140, and accounted for these transactions as a sale. The net proceeds
from the sale of such loans amounted to approximately $17,387,000 and
$14,237,000 during 2007 and 2006, respectively, resulting in a gain of
approximately $380,000 and $400,000, respectively.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
Puerto
Rico income tax law does not provide for filing a consolidated income tax
return; therefore, the income tax expense reflected in the accompanying
consolidated statements of income represents the sum of the income tax expense
of the individual companies. At December 31, 2007 and 2006, the Company’s
tax provision and related accounts are substantially those of its subsidiary
Bank.
The
Bank
is subject to Puerto Rico income tax at statutory rates. Under the provisions
of
the Puerto Rico Internal Revenue Code of 1994, as amended, the Bank is subject
to regular tax or the alternative minimum tax, whichever is higher. The excess
of the alternative minimum tax over the regular income tax paid in any year
is
available to offset the regular income tax determined in future years, subject
to certain limitations. Customarily, the effective tax rate could differ from
the statutory rate primarily because interest income on certain U.S. and Puerto
Rico securities is exempt from Puerto Rico income taxes.
The
Bank
is also subject to federal income tax on its U.S. source income. However, the
Bank had no taxable U.S. income for the years ended December 31, 2007 and
2006. The Bank is not subject to federal income tax on U.S. treasury securities
that qualify as portfolio interest, nor to the branch profit tax and the
branch-level interest tax on such income.
The
Company operates EBS Overseas, Inc., an international banking entity (IBE)
subsidiary of the Bank that engage in investment securities, deposits, and
other
funding transactions outside Puerto Rico. The Company also has an IBE that
operates as a division of the Bank under the name EBS International Bank. EBS
International Bank was acquired under the name of BT international in connection
with the acquisition of BankTrust and changed to EBS International Bank on
September 27, 2005. The Company has continued to operate EBS International
Bank
as a division of Eurobank and does not have immediate plans to transfer its
assets to our subsidiary, EBS Overseas, Inc. The revenues generated by these
entities, net of related interest costs and operating expenses, are exempt
from
Puerto Rico taxes.
On
May
13, 2006, the governor of Puerto Rico approved and signed Law No. 89, which
imposes an additional transitory tax of 4.5% on taxable income. This tax is
applicable to the Banking industry raising the maximum statutory tax rate to
43.5% for taxable years beginning after December 31, 2005 and ending on or
before December 31, 2006. This law also states that for taxable years beginning
after December 31, 2006, the maximum statutory tax rate will be
39%.
The
approval of the additional transitory taxes of over the original maximum
statutory tax rate of 39% as mentioned above, resulted in additional income
tax
expense of $755,000 for the year ended December 31, 2006.
In
addition, on May 16, 2006, the governor of Puerto Rico approved and signed
Law
No. 98, the “Law of the 2006’s Extraordinary Tax.” This law imposes a prepaid
tax of 5% over the 2005 taxable net income by for profit partnerships and
corporations with gross income over $10.0 million. The Company could use the
payment in equal portions as a tax credit in the income tax return for the
taxable years beginning after December 31, 2006. No income tax expense was
recorded in 2006 related to this law since such prepayment will be used as
a tax
credit in the income tax return of taxable years beginning after December 31,
2006.
On
December 14, 2007, the governor of Puerto Rico approved and signed Law No.
197,
which offers tax credits to financial institutions on the financing of qualified
residential mortgages. These tax credits vary based on whether the property
to
be financed is an existing dwelling or a new construction and whether it will
be
occupied by the buyer or is acquired for investment purposes. The tax credits
are limited, subject to certain restrictions, to a maximum of a 20% of the
property’s selling price, or $25,000, whichever is lower. This law expires on
June 30, 2008 or when the tax credits granted reach the total allotted amount
of
$220.0 million, whichever occurs first.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
Total
income taxes for the years ended December 31, were as follows:
|
|
|
2007
|
|
2006
|
|
|
Income
tax (benefit) expense from operations
|
|
$
|
(248,874
|
)
|
$
|
6,283,010
|
|
|
Stockholders'
equity for unrealized gain
|
|
|
|
|
|
|
|
|
on
investment securities
|
|
|
278
|
|
|
1,654
|
|
|
|
|
$
|
(248,596
|
)
|
$
|
6,284,664
|
|
During
2006, the Company purchased tax credits in connection to “Reinvestment in urban
centers and historic zones” and “Recycling” laws. The tax credits of
approximately $3,757,000 were purchased at 10% discount resulting in a net
disbursement of approximately $3,382,000 and a tax benefit of approximately
$376,000.
The
components of the income tax provision for the years ended December 31,
were as follows:
|
|
|
2007
|
|
2006
|
|
|
Current
tax provision
|
|
$
|
4,388,064
|
|
$
|
7,342,480
|
|
|
Deferred
tax provision
|
|
|
(4,636,938
|
)
|
|
(683,744
|
)
|
|
Benefit
from purchased tax credit
|
|
|
—
|
|
|
(375,726
|
)
|
|
Total
income tax provision
|
|
$
|
(248,874
|
)
|
$
|
6,283,010
|
|
The
difference between the income tax provision and the amount computed using the
statutory rate at December 31, was due to the following:
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Income
tax at statutory rate
|
|
$
|
1,154,482
|
|
|
39.00%
|
|
$
|
6,218,279
|
|
|
43.50
|
%
|
|
Net
(benefit) expense of tax-exempt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
income, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
banking entities
|
|
|
(1,543,510
|
)
|
|
(52.14
|
)
|
|
156,713
|
|
|
1.10
|
|
|
Benefits
from purchase of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
credits
at discount
|
|
|
-
|
|
|
-
|
|
|
(375,726
|
)
|
|
(2.63
|
)
|
|
Non
deductible Stock based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
95,940
|
|
|
3.24
|
|
|
66,708
|
|
|
0.47
|
|
|
(Allowance)
disallowance of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
certain
expenses for tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purposes
and other items
|
|
|
44,214
|
|
|
1.49
|
|
|
217,036
|
|
|
1.51
|
|
|
|
|
$
|
(248,874
|
)
|
|
(8.41)%
$
|
|
|
6,283,010
|
|
|
43.95
|
%
|
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. Significant components of the Bank’s
deferred tax assets and liabilities at December 31, were as
follows:
|
|
|
2007
|
|
2006
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
$
|
10,973,471
|
|
$
|
7,385,368
|
|
|
Unrealized
loss on securities available for sale
|
|
|
1,586
|
|
|
1,864
|
|
|
Other
temporary differences
|
|
|
1,061,016
|
|
|
1,283,014
|
|
|
Deferred
tax assets
|
|
|
12,036,073
|
|
|
8,670,246
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred
loan origination costs, net
|
|
|
(922,699
|
)
|
|
(1,903,131
|
)
|
|
Servicing
assets
|
|
|
(47,203
|
)
|
|
(196,711
|
)
|
|
Fair
value adjustments on loans
|
|
|
(168,100
|
)
|
|
(309,549
|
)
|
|
Deferred
tax liabilities
|
|
|
(1,138,002
|
)
|
|
(2,409,391
|
)
|
|
Net
deferred tax asset
|
|
$
|
10,898,071
|
|
$
|
6,260,855
|
|
In
assessing the viability 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. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. The significant component of the deferred income tax
benefits was the increase in the allowance for loan and lease losses. The
following table summarizes the changes in the deferred tax asset for the years
ended December 31:
|
|
|
2007
|
|
2006
|
|
|
Balance
at the beginning of year
|
|
$
|
6,260,855
|
|
$
|
5,070,074
|
|
|
Deferred
tax benefit
|
|
|
4,636,938
|
|
|
683,744
|
|
|
Amount
charged to retained
|
|
|
|
|
|
|
|
|
earnings
- SAB 108
|
|
|
-
|
|
|
505,383
|
|
|
Effect
of FAS 115 in other
|
|
|
|
|
|
|
|
|
comprehensive
income
|
|
|
278
|
|
|
1,654
|
|
|
Balance
at the end of year
|
|
$
|
10,898,071
|
|
$
|
6,260,855
|
|
Unrecognized
Tax Benefits
During
the year ended December 31, 2007, the Company did not recorded any additions
or
reductions based on tax position of current or prior years. As of January 1,
2007, the Company had approximately $750,000 of unrecorded tax positions. This
total represents the amount of unrecognized tax benefits that, if recognized,
would favorably affect the effective income tax rate in future periods. The
Company does not expect the total amount of unrecognized tax benefits to
significantly increase or decrease in the next twelve months.
Total
amount of interest recorded in the income statement for the year ended December
31, 2007 was approximately $44,000. Total accrued interest related to unrecorded
tax positions as of December 31, 2007 was $58,000. The Company is no longer
subject to examination by taxing authorities for taxable years before
2003.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
During
the year 2007 and 2006, the Company purchased 285,368 and 488,477 shares,
respectively; under the stock repurchase programs approved by the Board of
Directors in May 2007 and October 2005.
During
2007, the Company issued 254,862 of the common stock shares through stock
options exercised, as follows:
|
|
|
Number
of
|
|
Exercise
|
|
|
|
|
Date
|
|
shares
|
|
Price
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
February-07
|
|
|
250,862
|
|
$
|
4.50
|
|
$
|
1,128,880
|
|
|
July-07
|
|
|
4,000
|
|
|
5.00
|
|
|
20,000
|
|
|
|
|
|
254,862
|
|
|
|
|
$
|
1,148,880
|
|
On
January 31, 2008, a total of 50,000 stock options were exercised at an exercise
price of $5.00.
The
Series A preferred stockholders are entitled to receive, when and if declared
by
the board of directors, monthly noncumulative cash dividends at an annual rate
of 6.825%. The board of directors has no obligation to declare dividends on
the
Series A preferred stock in any dividend period. However, so long as any Series
A preferred stock remains outstanding, there are certain limitations on the
payment of dividends or distributions on common stock. The Series A preferred
stock is not convertible or exchangeable for any other class of stock. At the
Company’s option, the stock is redeemable at its liquidation value, which equals
at the option of the Company a redemption price of $25.00 per share, plus
accrued but unpaid dividends (noncumulative), which is equal to its liquidation
value. The stock has no voting preferences and has no preemptive
rights.
The
stockholders of EuroBancshares approved the 2005 Stock Option Plan at the annual
meeting held at the main office of the Company on May 12, 2005. The 2005 Stock
Option Plan has reserved 700,000 shares of our common stock for issuance
pursuant to the stock options. Once the 2005 Stock Options Plan was approved,
no
further options were available to acquire shares under the 2002 Stock Option
Plan. The outstanding options as of December 31, 2007 included options granted
under the 2002 and 2005 Stock Option Plan.
All
employees and directors of EuroBancshares are eligible under the Plan, provided,
however, that stock options shall not be exercisable by an optionee who is
the
owner of 5% or more of the issued and outstanding shares of the Company or
in
exercising the stock options would become the owner of 5% or more of the issued
and outstanding shares of the Company, unless the optionee obtains the approvals
required from the appropriate regulatory agencies to hold shares in excess
of
such percent. Any eligible person may hold more than one option at a
time.
The
Compensation Committee, appointed by the board of directors, has absolute
discretion to select which of the eligible persons will be granted stock
options, the number of shares of the Company’s common stock subject to such
options, whether stock appreciation rights will be granted for such options,
and
generally, to determine the terms and conditions of such options in accordance
to the provisions of the Plan.
On
February 26, 2007 and December 31, 2007, the Company granted to its directors
and executive officers, a total of 80,670 options and 120,500 options,
respectively, under the established 2005 stock option plan. Of these options,
61,670 stock options were granted to directors and were vested immediately.
The
remaining 139,500 stock options were granted to employees vesting in five equal
annual installments beginning on February 26, 2007 and December 31, 2008,
respectively. These options have an exercise price of $8.60 and $4.00,
respectively, and are exercisable within ten years after the grant date at
the
discretion of the optionee.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
On
March
1, 2006, the Company granted to its directors and executive officers, a total
of
98,700 options, under the established 2005 stock option plan. Of these options,
16,000 stock options were granted to directors and were vested immediately.
The
remaining 82,700 stock options were granted to employees vesting in five equal
annual installments beginning on March 1, 2007. These options have an exercise
price of $14.17 and are exercisable within ten years after the grant date at
the
discretion of the optionee.
All
options granted prior to December 31, 2005, were fully vested at grant date
and
are exercisable at the discretion of the optionee within five years after the
grant date.
The
fair
value of the options granted was estimated on the date of the grants using
the
Black-Sholes Option Pricing Model. In 2007, the expected term of share options
granted was determined using the simplified method approach allowed under Staff
Accounting Bulletin No. 107 and No. 110. Expected volatilities were based on
historical volatility of the Company’s shares and the average volatility of
similar and comparable entities due to the short period of public history of
the
Company’s shares in comparison with the expected term of share options. Also,
expected volatilities considered other factors, such as expected changes in
volatility arising from planned changes in the Company’s operations. The
weighted average assumptions used for the grants issued were:
|
|
|
2007
|
|
2006
|
|
|
Expected
life of options (in years)
|
|
|
6.04
|
|
|
6.26
|
|
|
Expected
volatility
|
|
|
37.14
|
%
|
|
39.28
|
%
|
|
Expected
dividends
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
Risk-
free rate
|
|
|
3.96
|
%
|
|
4.60
|
%
|
A
summary
of the activity in the stock option plan for 2007 follows:
|
|
|
|
|
|
|
Weighthed
|
|
|
|
|
|
|
|
|
Weighted
|
|
average
|
|
|
|
|
|
|
|
|
average
|
|
remaining
|
|
Aggregate
|
|
|
|
|
|
|
exercise
|
|
contractual
|
|
intrinsic
|
|
|
|
|
Shares
|
|
price
|
|
term
|
|
value
|
|
|
Options
outstanding January 1
|
|
|
1,063,162
|
|
$
|
7.72
|
|
|
|
|
|
|
|
|
Granted
|
|
|
201,170
|
|
|
5.84
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(254,862
|
)
|
|
4.51
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(10,900
|
)
|
|
21.00
|
|
|
|
|
|
|
|
|
Outstanding
at end of year
|
|
|
998,570
|
|
$
|
8.02
|
|
|
3.10
|
|
$
|
—
|
|
|
Exercisable
at end of year
|
|
|
805,630
|
|
$
|
7.92
|
|
|
1.63
|
|
$
|
—
|
|
Information
related to the stock option plan during each year follows:
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Intrinsic
value of options exercised
|
|
$
|
1,043,134
|
|
$
|
1,579,530
|
|
|
Cash
received from option exercises
|
|
|
1,148,880
|
|
|
879,764
|
|
|
Tax
benefit realized from option exercises
|
|
|
-
|
|
|
-
|
|
|
Weighted
average fair value of options granted
|
|
|
2.53
|
|
|
5.65
|
|
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
At
December 31, 2007 there was approximately $574,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under the Plan. That cost is expected to be recognized over a weighted
average period of 3.93 years.
The
computation of earnings per share is presented below:
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
income before extraordinary item
|
|
|
|
|
|
|
and
preferred stock dividends
|
|
$
|
3,209,083
|
|
$
|
8,011,885
|
|
|
Dividend
declared to preferred shareholders
|
|
|
(744,805
|
)
|
|
(744,805
|
)
|
|
Net
income available to
|
|
|
|
|
|
|
|
|
common
shareholders
|
|
$
|
2,464,278
|
|
$
|
7,267,080
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common
|
|
|
|
|
|
|
|
|
shares
outstanding applicable to
|
|
|
|
|
|
|
|
|
basic
earnings per share
|
|
|
19,212,801
|
|
|
19,217,178
|
|
|
Effect
of dilutive securities
|
|
|
178,837
|
|
|
440,381
|
|
|
Adjusted
weighted average
|
|
|
|
|
|
|
|
|
number
of common shares
|
|
|
|
|
|
|
|
|
outstanding
applicable to
|
|
|
|
|
|
|
|
|
diluted
earnings per share
|
|
|
19,391,639
|
|
|
19,657,559
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
0.13
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
0.13
|
|
$
|
0.37
|
|
In
computing diluted earnings per common share for 2007, stock options of 174,000,
80,670, 78,800 and 98,600 shares on common stock with exercise price of $8.13,
$8.60, $14.17 and $21.00, respectively, were not considered because they were
antidilutive. For 2006, stock options of 78,800 and 113,500 shares on common
stock with exercise price of $14.17 and $21.00, respectively, were not
considered because they were antidilutive.
|
(24)
|
Employees’
Benefit Plan
|
The
Company maintains a defined contribution plan covering substantially all its
employees after three months of service. Under the provisions of the plan,
employees can elect to contribute to the plan up to 10% limited to $8,000 of
their compensation and the Company matches 100% of the amount contributed by
the
employees up to a maximum of 3% limited to $3,000 of the employees’ annual
compensation. The amount of contribution expense recognized by the Company
for
the years ended December 31, 2007 and 2006 amounted to approximately
$275,000 and $277,000, respectively.
|
(25)
|
Related-Party
Transactions
|
The
Company makes loans to its directors, principal stockholders, officers,
employees, organizations, and individuals associated with them in the normal
course of business. At December 31, 2007 and 2006, loans outstanding with
these parties amounted to approximately $13,300,000 and $8,386,000,
respectively.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
The
summary of changes in the related-party loans follows:
|
|
|
Executive
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
officers
|
|
|
|
|
|
shareholders
|
|
|
|
|
|
|
and
related
|
|
Directors
and
|
|
|
|
and
related
|
|
|
|
|
|
|
parties
|
|
related
parties
|
|
Employees
|
|
parties
|
|
Total
|
|
|
Balance
at December 31, 2005
|
|
$
|
398,486
|
|
$
|
3,078,086
|
|
$
|
1,662,536
|
|
$
|
—
|
|
$
|
5,139,108
|
|
|
Additions
|
|
|
115,626
|
|
|
3,103,758
|
|
|
2,262,566
|
|
|
|
|
|
5,481,950
|
|
|
Reductions
|
|
|
(334,397
|
)
|
|
(920,636
|
)
|
|
(979,568
|
)
|
|
|
|
|
(2,234,601
|
)
|
|
Balance
at December 31, 2006
|
|
|
179,715
|
|
|
5,261,208
|
|
|
2,945,534
|
|
|
—
|
|
|
8,386,457
|
|
|
Additions
|
|
|
35,928
|
|
|
6,960,624
|
|
|
708,470
|
|
|
|
|
|
7,705,022
|
|
|
Reductions
|
|
|
(85,980
|
)
|
|
(1,848,412
|
)
|
|
(856,693
|
)
|
|
|
|
|
(2,791,085
|
)
|
|
Balance
at December 31, 2007
|
|
$
|
129,663
|
|
$
|
10,373,420
|
|
$
|
2,797,311
|
|
$
|
—
|
|
$
|
13,300,394
|
|
Deposits
of approximately $15,826,000 and $12,704,000 from these parties were outstanding
as of December 31, 2007 and 2006, respectively.
During
2007, the Company leased three facilities from corporations controlled by three
directors. One of these lease agreement expired in July 2007. The rent expense
related to these lease agreements amounted to approximately $242,000 and
$221,000 for the years 2007 and 2006, respectively
|
(26)
|
Financial
Instruments with Off-Balance-Sheet
Risk
|
The
Company is a party to financial instruments with off-balance-sheet risk in
the
normal course of business to meet the financial needs of its customers, such
as
commitments to extend credit, approved loans not yet disbursed, unused lines
of
credit, and stand-by letters of credit. Such instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional amount
reflects the extent of involvement the Company has in this particular class
of
financial instrument.
The
Company’s exposure to credit loss in the event of nonperformance by the other
party to these financial instruments is represented by the contractual notional
amount of those instruments. The Company uses some credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Unless
noted otherwise, the Company requires collateral or other security to support
financial instruments with credit risk. The Company performs its normal credit
granting due diligence procedures, to the extent necessary, in evaluating its
involvement in financial instruments with credit risk.
At
December 31, the approximate contract or notional amount of the Company’s
financial instruments with off-balance-sheet risk were as follows:
|
|
|
2007
|
|
2006
|
|
|
Financial
instruments whose contract amounts represent
|
|
|
|
|
|
|
credit
risk - stand-by and commercial letters of credit
|
|
$
|
15,066,000
|
|
$
|
9,351,000
|
|
|
Commitments
to extend credit, approved loans not yet
|
|
|
|
|
|
|
|
|
disbursed,
and unused lines of credit:
|
|
|
|
|
|
|
|
|
Variable
rate
|
|
|
221,111,000
|
|
|
276,204,000
|
|
|
Fixed
rate
|
|
|
30,270,000
|
|
|
23,156,000
|
|
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. The commitments may expire without being drawn upon. Therefore, the
total commitment amounts do not necessarily represent future cash requirements.
The amount of collateral obtained, if it is deemed necessary by the Company,
is
based on management’s credit evaluation of the customer.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
Unused
lines of credit are commitments for possible future extensions of credit to
existing customers. These lines of credit are uncollateralized and usually
do
not contain a specified maturity date and may not be drawn upon to the total
extent to which the Company is committed.
Commercial
and stand-by letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. All
guarantees expire within a year. The credit risk involved in issuing letters
of
credit is essentially the same as that involved in extending loan facilities
to
customers. The Company holds certificates of deposit as collateral supporting
those commitments for which collateral is deemed necessary.
|
(27)
|
Fair
Value of Financial
Instruments
|
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments in accordance with SFAS No. 107, as amended
by SFAS No. 119,
Disclosure
about Derivative Financial Instruments and Fair Value of Financial
Instruments
.
|
|
(a)
|
Cash
and Due from Banks, Interest-Bearing Deposits, and Securities Purchased
under Agreements to Resell
|
The
carrying amount of cash and due from banks, interest-bearing deposits, and
securities purchased under agreements to resell is a reasonable estimate of
fair
value, due to the short maturity of these instruments.
|
|
(b)
|
Investment
Securities
|
The
fair
value of investment securities available for sale and held to maturity are
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
The
carrying value of FHLB stock approximates fair value based on the redemption
provisions of the FHLB. The carrying value of equity interest in unconsolidated
statutory trust approximates the fair value of the residual equity in the
trust.
|
|
(d)
|
Loans
and Loans Held for
Sale
|
Fair
values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, consumer,
mortgage, and other loans. Each loan category is further segmented into fixed
and adjustable interest rate terms.
The
fair
value of loans is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan.
The
estimate of fair value of loans considers the credit risk inherent in the
portfolio through the allowance for loan and lease losses. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally determined using
available market information and specific-borrower information.
|
|
(e)
|
Accrued
Interest Receivable
|
The
carrying amount of accrued interest receivable is a reasonable estimate of
its
fair value, due to the short-term nature of the instruments.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
The
fair
value of deposits with no stated maturity, such as demand deposits, savings
accounts, money market, and checking accounts is equal to the amount payable
on
demand as of December 31, 2007 and 2006. The fair value of time deposits is
based on the discounted value of contractual cash flows. The discount rate
is
estimated using the rate currently offered for deposits of similar remaining
maturities.
|
|
(g)
|
Securities
Sold under Agreements to
Repurchase
|
The
fair
value of securities sold under agreements to repurchase are estimated using
discounted cash flow analysis using rates for similar types of borrowing
arrangements.
|
|
(h)
|
Advances
from Federal Home Loan
Bank
|
The
fair
value of advances from Federal Home Loan Bank is calculated by discounted
scheduled cash flows through the estimated maturity using market discount
rates.
|
|
(i)
|
Note
Payable to Statutory
Trust
|
The
carrying amount of the outstanding note payable to statutory trust approximates
its fair value due to their variable interest rate.
|
|
(j)
|
Accrued
Interest Payable
|
The
carrying amount of accrued interest payable is a reasonable estimate of fair
value, due to the short-term nature of the instruments.
Derivative
instruments were recorded on the balance sheet at their respective fair values.
The fair value of derivatives reflects the estimated amounts that would be
paid
or received to terminate these contracts at the reporting date based upon
pricing or valuation models applied to current market information.
Interest rate swaps are valued using the market standard methodology of netting
the discounted future fixed cash receipts (or payments) and the discounted
expected variable cash payments (or receipts). The variable cash payments
(or receipts) are based on an expectation of future interest rates derived
from
observable market interest rate curves.
The
options are valued using the market standard methodology of calculating the
basket average closing level of each underlying index on the observation dates
less the average closing level of each underlying index at the initial date,
divided by the average closing level of each underlying index at the initial
date.
|
|
(l)
|
Commitments
to Extend Credit and Letters of
Credit
|
The
fair
value of commitments to extend credit and letters of credit was not readily
available and not deemed significant.
The
fair
value estimates are made at a discrete point in time based on relevant market
information and information about the financial instruments. Because no market
exists for a significant portion of the Company’s financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
The
fair
value estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. As described for investments and mortgage-backed
securities, the tax ramifications related to the realization of the unrealized
gains and losses may have a significant effect on fair value estimates and
have
not been considered in many of the estimates.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
Following
are the carrying amount and fair value of financial instruments as of
December 31:
|
|
|
2007
|
|
2006
|
|
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
|
|
amount
|
|
Fair
value
|
|
amount
|
|
Fair
value
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
15,866,221
|
|
$
|
15,866,221
|
|
$
|
25,527,489
|
|
$
|
25,527,489
|
|
|
Interest-bearing
deposits
|
|
|
32,306,909
|
|
|
32,306,909
|
|
|
49,050,368
|
|
|
49,050,368
|
|
|
Securities
purchased under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
to resell
|
|
|
19,879,008
|
|
|
19,879,008
|
|
|
51,191,323
|
|
|
51,191,323
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available
for sale
|
|
|
707,103,432
|
|
|
707,103,432
|
|
|
535,159,009
|
|
|
535,159,009
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held
to maturity
|
|
|
30,845,218
|
|
|
30,451,926
|
|
|
38,432,820
|
|
|
37,473,773
|
|
|
Other
investments
|
|
|
13,354,300
|
|
|
13,354,300
|
|
|
4,329,200
|
|
|
4,329,200
|
|
|
Loans
held for sale
|
|
|
1,359,494
|
|
|
1,359,494
|
|
|
879,000
|
|
|
879,000
|
|
|
Loans,
net
|
|
|
1,829,082,008
|
|
|
1,819,152,795
|
|
|
1,731,022,290
|
|
|
1,717,238,967
|
|
|
Derivatives
- Purchased Option
|
|
|
3,950,000
|
|
|
3,950,000
|
|
|
—
|
|
|
—
|
|
|
Accrued
interest receivable
|
|
|
18,136,489
|
|
|
18,136,489
|
|
|
15,760,852
|
|
|
15,760,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,993,046,314
|
|
|
2,013,817,980
|
|
|
1,905,356,207
|
|
|
1,900,249,949
|
|
|
Securities
sold under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
to repurchase
|
|
|
496,419,250
|
|
|
495,224,506
|
|
|
365,664,250
|
|
|
363,509,336
|
|
|
Advances
from FHLB
|
|
|
30,453,926
|
|
|
30,445,061
|
|
|
8,707,420
|
|
|
8,663,848
|
|
|
Note
payable to statutory trust
|
|
|
20,619,000
|
|
|
20,627,779
|
|
|
20,619,000
|
|
|
20,619,000
|
|
|
Accrued
interest payable
|
|
|
17,371,698
|
|
|
17,371,698
|
|
|
18,047,074
|
|
|
18,047,074
|
|
|
Derivatives
- Interest Rate Swaps
|
|
|
415,176
|
|
|
415,176
|
|
|
1,236,093
|
|
|
1,236,093
|
|
|
Derivatives
- Written Option
|
|
|
3,950,000
|
|
|
3,950,000
|
|
|
—
|
|
|
—
|
|
|
(28)
|
Significant
Group Concentrations of Credit
Risk
|
Most
of
the Company’s business activities are with customers located within Puerto Rico.
The Company has a commercial, industrial, and leasing loan portfolio with no
significant concentration in any economic sector.
The
Company reviews the subprime lending characteristics from the borrowers of
the
lease portfolio. From this analysis the Company determined that the
behavior of the borrowers with subprime lending characteristics does not differ
from other risk categories of the lease portfolio.
The
Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a
direct material effect on the Bank’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The
capital amounts and classifications are also subject to qualitative judgments
by
the regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding
companies.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
Quantitative
measures established by regulations to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I Capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I Capital
(as defined) to average assets (Leverage) (as defined). Management believes
that
as of December 31, 2007 and 2006, the Company and the Bank met all capital
adequacy requirements to which they were subject.
The
most
recent notification from the FDIC categorized the Bank as well capitalized
under
the regulatory framework for prompt corrective action. To be categorized as
well
capitalized, an institution must maintain minimum total risk-based, Tier I
risk-based, and Tier I Leverage ratios as set forth in the following
tables. There are no conditions or events since the notification that management
believes have changed the institution’s capital category. The Company’s and the
Bank’s actual capital amounts and ratios as of December 31, 2007 and 2006
are also presented in the following table.
At
December 31, required and actual regulatory capital amounts and ratios are
as follow (dollars in thousands):
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
|
|
|
|
|
Required
|
|
|
|
Actual
|
|
|
|
capitalized
|
|
|
|
|
amount
|
|
Ratio
|
|
amount
|
|
Ratio
|
|
ratio
|
|
|
Total
Capital (to risk-weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
166,720
|
|
|
8.00
|
%
|
$
|
224,873
|
|
|
10.79
|
%
|
|
N/A
|
|
|
Eurobank
|
|
|
166,719
|
|
|
8.00
|
%
|
|
224,137
|
|
|
10.76
|
%
|
|
>
10.00
|
%
|
|
Tier
I Capital (to risk-weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
83,360
|
|
|
4.00
|
%
|
|
198,793
|
|
|
9.54
|
%
|
|
N/A
|
|
|
Eurobank
|
|
|
83,360
|
|
|
4.00
|
%
|
|
198,057
|
|
|
9.50
|
%
|
|
>
6.00
|
%
|
|
Tier
I Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
105,308
|
|
|
4.00
|
%
|
|
198,793
|
|
|
7.55
|
%
|
|
N/A
|
|
|
Eurobank
|
|
|
105,282
|
|
|
4.00
|
%
|
|
198,057
|
|
|
7.52
|
%
|
|
>
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
|
|
|
|
|
Required
|
|
|
|
Actual
|
|
|
|
capitalized
|
|
|
|
|
amount
|
|
Ratio
|
|
amount
|
|
Ratio
|
|
ratio
|
|
|
Total
Capital (to risk-weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
154,038
|
|
|
8.00
|
%
|
$
|
216,673
|
|
|
11.25
|
%
|
|
N/A
|
|
|
Eurobank
|
|
|
154,045
|
|
|
8.00
|
%
|
|
198,179
|
|
|
10.29
|
%
|
|
>
10.00
|
%
|
|
Tier
I Capital (to risk-weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
77,019
|
|
|
4.00
|
%
|
|
197,366
|
|
|
10.25
|
%
|
|
N/A
|
|
|
Eurobank
|
|
|
77,023
|
|
|
4.00
|
%
|
|
178,871
|
|
|
9.29
|
%
|
|
>
6.00
|
%
|
|
Tier
I Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
99,679
|
|
|
4.00
|
%
|
|
197,366
|
|
|
7.92
|
%
|
|
N/A
|
|
|
Eurobank
|
|
|
99,637
|
|
|
4.00
|
%
|
|
178,871
|
|
|
7.18
|
%
|
|
>
5.00
|
%
|
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
|
(30)
|
Parent
Company Financial
Information
|
The
following condensed financial information presents the financial position of
Eurobancshares as of December 31, 2007 and 2006 and the results of its
operations and its cash flows for the years ended December 31, 2007 and
2006.
|
|
|
2007
|
|
2006
|
|
|
|
|
(In
thousands)
|
|
|
Assets
|
|
|
|
|
|
|
Dividend
receivable from non bank subsidiaries
|
|
$
|
1
|
|
$
|
1
|
|
|
Dividend
receivable from Eurobank
|
|
|
27
|
|
|
17,998
|
|
|
Investment
in Eurobank
|
|
|
199,182
|
|
|
171,384
|
|
|
Investment
in other subsidiaries
|
|
|
1,356
|
|
|
1,141
|
|
|
Prepaid
expenses
|
|
|
9
|
|
|
8
|
|
|
Total
assets
|
|
$
|
200,575
|
|
$
|
190,532
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Due
to non bank subsidiary
|
|
$
|
10
|
|
$
|
10
|
|
|
Notes
payable to subsidiaries
|
|
|
20,619
|
|
|
20,619
|
|
|
Accrued
interest payable to non bank subsidiaries
|
|
|
28
|
|
|
25
|
|
|
Total
liabilities
|
|
|
20,657
|
|
|
20,654
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
179,918
|
|
|
169,878
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
200,575
|
|
$
|
190,532
|
|
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
Condensed
Statement of Income:
|
|
|
Year
ended December 31
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
Interest
on note receivable from Eurobank
|
|
$
|
-
|
|
$
|
1,399
|
|
|
Dividend
from preferred stocks of
|
|
|
|
|
|
|
|
|
Eurobank
|
|
|
1,740
|
|
|
2,407
|
|
|
Dividend
income from non bank subsidiaries
|
|
|
54
|
|
|
118
|
|
|
Total
interest income
|
|
|
1,794
|
|
|
3,924
|
|
|
Interest
on note payable to
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
|
1,794
|
|
|
3,924
|
|
|
Net
interest income
|
|
|
-
|
|
|
-
|
|
|
Equity
in undistributed earnings of subsidiaries
|
|
|
3,231
|
|
|
8,026
|
|
|
Noninterest
expense
|
|
|
22
|
|
|
14
|
|
|
Earnings
before income taxes
|
|
|
3,209
|
|
|
8,012
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
Net
income
|
|
$
|
3,209
|
|
$
|
8,012
|
|
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December 31,
2007 and 2006
Condensed
Statements of Cash Flows:
|
|
|
Year
ended December 31
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(In
thousands)
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,209
|
|
$
|
8,012
|
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
cash
(used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Equity
in net earnings of subsidiaries
|
|
|
(3,232
|
)
|
|
(8,026
|
)
|
|
(Increase)
decrease in accrued interest and dividend
|
|
|
|
|
|
|
|
|
receivable
from subsidiaries
|
|
|
(3
|
)
|
|
79
|
|
|
Increase
in prepaid expenses
|
|
|
(2
|
)
|
|
(3
|
)
|
|
Increase
(decrease) in accrued interest
|
|
|
|
|
|
|
|
|
payable
to subsidiaries
|
|
|
3
|
|
|
(79
|
)
|
|
Net
cash used in operating activities
|
|
|
(24
|
)
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Advance
to Subsidiary
|
|
|
(1,149
|
)
|
|
(880
|
)
|
|
Decrease
in due from Eurobank
|
|
|
3,276
|
|
|
31,228
|
|
|
Net
cash provided by investing activities
|
|
|
2,127
|
|
|
30,348
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Decrease
in due to Eurobank
|
|
|
(7
|
)
|
|
—
|
|
|
Dividends
on preferred stocks
|
|
|
(745
|
)
|
|
(746
|
)
|
|
Repayment
of Trust Preferred Securities
|
|
|
—
|
|
|
(25,000
|
)
|
|
Proceeds
from issuance of common stock
|
|
|
1,149
|
|
|
880
|
|
|
Purchase
and retirement of common stock
|
|
|
(2,500
|
)
|
|
(5,465
|
)
|
|
Net
cash used in financing activities
|
|
|
(2,103
|
)
|
|
(30,331
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and
|
|
|
|
|
|
|
|
|
cash
equivalents
|
|
|
—
|
|
|
—
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
—
|
|
|
—
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
—
|
|
$
|
—
|
|
Eurobancshares (MM) (NASDAQ:EUBK)
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