UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10 - K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2008
Commission
File Number
000-50872
EUROBANCSHARES,
INC.
(Exact
name of registrant as specified in its charter)
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Commonwealth of Puerto Rico
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66-0608955
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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State Road PR-1, Km. 24.5,
Quebrada Arenas Ward, San Juan, Puerto Rico 00926
(Address
of principal executive offices, including zip code)
(787)
751-7340
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, par value
$0.01 per
share
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
¨
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
¨
No
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment of this
Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer
¨
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Accelerated
filer
¨
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Non-
accelerated filer
¨
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Smaller
reporting company
x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
¨
No
x
As of
June 30, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter, the aggregate market value of the shares of Common Stock
held by non-affiliates, based on the closing price of the Common Stock on the
NASDAQ Global Select Market on such date, was approximately $27.9
million.
The
number of shares outstanding of the issuer’s Common Stock as of March 24, 2009
was 19,499,515 shares.
Documents
Incorporated by Reference
Portions
of the Company’s Proxy Statement relating to the 2009 Annual Meeting of
Stockholders, which will be filed within 120 days after December 31, 2008, are
incorporated by reference into Part III, Items 10-14 of this Form
10-K.
EUROBANCSHARES,
INC.
INDEX
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PAGE
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PART
I
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1
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SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
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1
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ITEM
1. BUSINESS
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1
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ITEM
1A. RISK FACTORS
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23
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ITEM
1B. UNRESOLVED STAFF COMMENTS
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31
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ITEM
2. PROPERTIES
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31
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ITEM
3. LEGAL PROCEEDINGS
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34
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ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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34
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PART
II
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34
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ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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34
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ITEM
6. SELECTED FINANCIAL DATA
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37
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ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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39
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ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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74
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ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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75
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ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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76
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ITEM
9A. CONTROLS AND PROCEDURES
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76
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ITEM
9B. OTHER INFORMATION
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77
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PART
III
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77
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ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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77
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ITEM
11. EXECUTIVE COMPENSATION
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78
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ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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78
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ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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78
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ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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78
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PART
IV
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78
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ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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78
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SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
Statements
contained in this Annual Report on Form 10-K that are not purely historical are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, including our expectations, intentions,
beliefs, or strategies regarding the future. Any statements in this document
about expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and are forward-looking statements. These
statements are often, but not always, made through the use of words or phrases
such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will
likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,”
“intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions.
Accordingly, these statements involve estimates, assumptions and uncertainties,
which could cause actual results to differ materially from those expressed in
them. Any forward-looking statements are qualified in their entirety by
reference to the factors discussed throughout this document. All forward-looking
statements concerning economic conditions, rates of growth, rates of income or
values as may be included in this document are based on information available to
us on the dates noted, and we assume no obligation to update any such
forward-looking statements. It is important to note that our actual results may
differ materially from those in such forward-looking statements due to
fluctuations in interest rates, inflation, government regulations, economic
conditions, customer disintermediation and competitive product and pricing
pressures in the geographic and business areas in which we conduct operations,
including our plans, objectives, expectations and intentions and other risk
factors, as detailed below.
Our
business operations, financial condition and results of operations are subject
to certain risks. For further information on these risks, see Item 1A – Risk
Factors of this Annual Report on Form 10-K.
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, 2008, we had, on a consolidated basis, total
assets of $2.860 billion, net loans and leases of $1.742 billion, investment
securities of $898.7 million, total deposits of $2.084 billion, and
stockholders’ equity of $156.6 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 relationships 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 annual 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 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.
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 and wealth management
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
2006 and 2008, we opened four new banking offices in 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.
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, who exercise substantial authority over credit presentation and
pricing initiatives, subject to centralized loan approvals for all credits. This
centralized approval process provides credit control, while the 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. 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, 2008, commercial loans totaled $1.115 billion, or 62.55% of our
gross loan and lease portfolio, which included $851.5 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, 2008, construction loans totaled $220.6 million, or 12.38% of our
gross loan and lease portfolio. We did not make any new construction loans
during year 2008. We have sought 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 $10.0 million. Construction loans granted generally have terms of 18 months,
with options to extend for additional periods to complete construction and sale
of the units. We have usually require a 20.0% equity capital investment by the
developer and loan-to-value ratios of not more than 80.0% of anticipated
completion value.
Over the
last four years, our commercial and construction loans have grown 14.15% on a
compounded basis. The following table shows end of period balances of commercial
and construction loans for the periods indicated below:
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As
of December 31,
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(In
thousands)
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$
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1,335,404
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$
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1,298,183
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$
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1,160,308
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$
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967,049
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$
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786,438
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Our
portfolio of commercial and construction loans is subject to certain risks,
including: (1) further downturn in the Puerto Rico economy; (2) interest rate
fluctuations; (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 and secured loans; (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, 2008, consumer loans totaled $51.9 million,
or 2.91% of our gross loan and lease portfolio, which included a boat financing
portfolio of $30.3 million and $2.4 million in consumer loans secured by real
estate. Our consumer loan portfolio is subject to certain risks, including: (1)
further downturn in the Puerto Rico economy; (2) amount of credit offered to
consumers in the market; (3) interest rate fluctuations; 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 all loans; (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,
2008, we held $267.3 million in leases, representing 15.00% of our gross loan
and lease portfolio. During 2008, approximately 98.12% 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 top credit leasing officer, who has the authority to
approve aggregate credit extensions of up to $125,000 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 down payments 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 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, subprime 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 2008, the analysis revealed there
was a similar repayment performance for both categories. This review enables us
to have a better monitoring system and control subprime borrowers in an attempt
to reduce risk of repossessions and future losses.
During
2008, approximately 64.65% 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 payment. 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,
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|
(In
thousands)
|
|
|
Originations
|
|
$
|
70,689
|
|
|
$
|
122,909
|
|
|
$
|
147,352
|
|
|
$
|
230,985
|
|
|
$
|
257,808
|
|
|
End
of period balance
|
|
$
|
267,325
|
|
|
$
|
385,390
|
|
|
$
|
443,311
|
|
|
$
|
487,863
|
|
|
$
|
459,251
|
|
We seek
to avoid an excess concentration of leases as a percentage of interest-earning
assets. From time to time, we sell lease financing contracts on a limited
recourse basis to other financial institutions and, typically, we retain the
right to service the leases we sell. During 2008, we sold approximately $37.7
million in leases. There was no sale of lease financing contracts during 2007
and 2006.
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, 2008, residential mortgage loans, excluding loans held
for sale, totaled $125.6 million, representing 7.04% 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. Almost 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, 2008, 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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
Originations
|
|
$
|
49,682
|
|
|
$
|
56,975
|
|
|
$
|
55,097
|
|
|
$
|
21,112
|
|
|
$
|
28,028
|
|
|
End
of period balance
|
|
$
|
125,557
|
|
|
$
|
106,947
|
|
|
$
|
76,277
|
|
|
$
|
44,841
|
|
|
$
|
51,730
|
|
Our
portfolio of mortgage loans is subject to certain risks, including: (1) further
downturn in the Puerto Rico economy, which could further affect 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 all loans; (3) strictly adhering to written loan
policies; and (4) conducting an independent credit review.
The
Company is in process of establishing a Loss Mitigation Program designed to
address mortgage borrowers with 90 days or more past due. Policies and
procedures have been included in the program to help borrowers in default to
retain home ownership, reduce foreclosure referrals and minimize the real estate
owned portfolio. The program is offered to borrowers who have stabilized,
surplus income which, while not sufficient to sustain the original loan and
repay arrearage, is sufficient to support the monthly payment under the modified
rate and/or term. A similar program is in process of development and
implementation for the lease portfolio.
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, 2008,
Eurobank had approximately $206.1 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 service
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 2008, 2007 and 2006, we traded approximately $45.2
million, $37.3 million and $17.4 million, respectively, in investment securities
for our customers.
Insurance
EuroSeguros
primarily offers automobile, title, life, 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 2009 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, 2008, EBS
Overseas’ investment portfolio consisted of the following: $560.0 million, or
67.71%, in mortgage-backed securities issued or guaranteed by government or
government sponsored agencies, $23.7 million, or 2.86%, in U.S. government
agency obligations, $235.5 million, or 28.48%, in mortgage-backed securities
issued by U.S. corporations, $1.9 million, or 0.23%, in Puerto Rico Public
Authorities, and $5.9 million, or 0.72%, 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 5 to 7 years with an estimated average
maturity as of December 31, 2008 of 4.7 years. Except for approximately $4.5
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 2.3 to 7.4 years, with an average maturity as of December 31, 2008 of
approximately 6.2 years.
As of
December 31, 2008, EBS Overseas had total assets of approximately $855.3
million, repurchase obligations of approximately $316.3 million, borrowings from
EBS International Bank of approximately $479.8 million and stockholders’ equity
of approximately $57.5 million. Further, as of December 31, 2008, EBS
International Bank had total assets of approximately $556.9 million, deposits of
approximately $309.5 million, and repurchase agreements of approximately $240.2
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
beginning in five years from the date of issuance. 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
–
Note Payable to Statutory
Trust”
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 July 2008, the population of Puerto Rico was
estimated at 4.0 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. For more information relating to the risks surrounding our
economic environment see the section captioned
“Risks Relating to the Economic
Environment”
in Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations 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, 2008, there were 13 FDIC-insured commercial bank and trust
companies operating in Puerto Rico. Total assets of these institutions as of
December 31, 2008 were $96.1 billion. As of December 31, 2008, there were 34
International Banking Entities operating in Puerto Rico licensed to conduct
offshore banking transactions, with total assets of $63.8 billion. As of
December 31, 2008, Eurobank held 3.22% 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 477 full-time equivalent employees as of December 31, 2008. 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 14.
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
EuroBancshares
is a financial holding company under the Gramm-Leach-Bliley Financial
Modernization Act of 1999.
Under the
Gramm-Leach-Bliley Act, in order to elect and retain financial holding company
status, all depository institution subsidiaries of a bank holding company must
be well capitalized, well managed, and, except in limited circumstances, be in
satisfactory compliance with the Community Reinvestment Act (“CRA”). Failure to
sustain compliance with these requirements or correct any non-compliance within
a fixed time period could lead to divestiture of subsidiary banks or require all
activities to conform to those permissible for a bank holding
company.
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, 2008, our Tier
1 risk-based capital ratio was 8.99% and its total risk-based capital ratio was
10.25%. 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%. To be
considered “well-capitalized,” a bank holding company must maintain a leverage
ratio of at least 5.0%. As of December 31, 2008, our leverage ratio was
6.55%.
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 acquirer 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-Money
Laundering Initiatives and the USA Patriot Act
A major
focus of governmental policy on financial institutions this decade has been
aimed at combating money laundering and terrorist financing. The USA PATRIOT Act
of 2001, or the USA Patriot Act, substantially broadened the scope of United
States anti-money laundering laws and regulations by imposing significant new
compliance and due diligence obligations, creating new crimes and penalties and
expanding the extra-territorial jurisdiction of the United States. The U.S.
Treasury Department has issued a number of regulations that apply various
requirements of the USA Patriot Act to financial institutions such as the Bank.
These regulations impose obligations on financial institutions to maintain
appropriate policies, procedures and controls to detect, prevent and report
money laundering and terrorist financing and to verify the identity of their
customers. Failure of a financial institution to maintain and implement adequate
programs to combat money laundering and terrorist financing, or to comply with
all of the relevant laws or regulations, could have serious legal and
reputational consequences for the institution.
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 FDIC agreeing to the
issuance of a Cease and Desist Order (the “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 Bank Secrecy Act compliance,
failure to comply with certain recordkeeping requirements, and failure to comply
completely with the rules of the Office of Foreign Assets Control. 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 continue to proactively enhance its related policies and procedures
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 a subject matter expert consultant to assist with the development
and implementation of its corrective action plan. Furthermore, the Bank has
engaged the services of Crowe Horwath as a third party independent BSA
auditor.
Sarbanes-Oxley
Act of 2002
As a
publicly traded company, we are subject to the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act"). The principal provisions of the Sarbanes-Oxley Act, many
of which have been implemented or interpreted through regulations, provide for
and include, among other things: (i) the creation of an independent accounting
oversight board; (ii) auditor independence provisions that restrict non-audit
services that accountants may provide to their audit clients; (iii) additional
corporate governance and responsibility measures, including the requirement that
the chief executive officer and chief financial officer of a public company
certify financial statements; (iv) the forfeiture of bonuses or other
incentive-based compensation and profits from the sale of an issuer's securities
by directors and senior officers in the twelve month period following initial
publication of any financial statements that later require restatement; (v) an
increase in the oversight of, and enhancement of certain requirements relating
to, audit committees of public companies and how they interact with the
Company's independent auditors; (vi) requirements that audit committee members
must be independent and are barred from accepting consulting, advisory or other
compensatory fees from the issuer; (vii) requirements that companies disclose
whether at least one member of the audit committee is a "financial expert" (as
such term is defined by the SEC) and if not discussed, why the audit committee
does not have a financial expert; (viii) expanded disclosure requirements for
corporate insiders, including accelerated reporting of stock transactions by
insiders and a prohibition on insider trading during pension blackout periods;
(ix) a prohibition on personal loans to directors and officers, except certain
loans made by insured financial institutions on nonpreferential terms and in
compliance with other bank regulatory requirements; (x) disclosure of a code of
ethics and filing a Form 8-K for a change or waiver of such code; (xi) a range
of enhanced penalties for fraud and other violations; and (xii) expanded
disclosure and certification relating to an issuer's disclosure controls and
procedures and internal controls over financial reporting.
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 FDIA.
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 200% is assigned to
each category of assets and off-balance sheet items 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
stockholders’ 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, disallowed deferred tax assets, 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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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 $1.0 billion 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. As of December 31,
2008, Eurobank’s total risk-based capital ratio was 10.15%, Tier 1 risk-based
capital ratio was 8.89%, and its leverage ratio was 6.47%. According to these
guidelines, Eurobank was classified as “well-capitalized” as of December 31,
2008.
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 68.31% of Eurobank’s total deposits as of December 31, 2008. 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
The
deposits of the Bank are insured up to applicable limits by the Deposit
Insurance Fund, or the DIF, of the Federal Deposit Insurance Corporation
(“FDIC”) and are subject to deposit insurance assessments to maintain the DIF.
The FDIC utilizes a risk-based assessment system that imposes insurance premiums
based upon a risk matrix that takes into account a bank's capital level and
supervisory rating.
Effective
January 1, 2007, the FDIC imposed deposit assessment rates based on the risk
category of the bank. Risk Category I is the lowest risk category while Risk
Category IV is the highest risk category. Because of favorable loss experience
and a healthy reserve ratio in the Bank Insurance Fund, or the BIF, of the FDIC,
well-capitalized and well-managed banks, have in recent years paid minimal
premiums for FDIC insurance. With the additional deposit insurance, a deposit
premium refund, in the form of credit offsets, was granted to banks that were in
existence on December 31, 1996 and paid deposit insurance premiums prior to that
date.
On
October 16, 2008, the FDIC published a restoration plan designed to replenish
the Deposit Insurance Fund over a period of five years and to increase the
deposit insurance reserve ratio, which decreased to 1.01% of insured deposits on
June 30, 2008, to the statutory minimum of 1.15% of insured deposits by December
31, 2013. In order to implement the restoration plan, the FDIC proposes to
change both its risk-based assessment system and its base assessment rates. For
the first quarter of 2009 only, the FDIC increased all FDIC deposit assessment
rates by 7 basis points. These new rates range from 12-14 basis points for Risk
Category I institutions to 50 basis points for Risk Category IV institutions.
Under the FDIC's restoration plan, the FDIC proposes to establish new initial
base assessment rates that will be subject to adjustment as described below.
Beginning April 1, 2009, the base assessment rates would range from 10-14 basis
points for Risk Category I institutions to 45 basis points for Risk Category IV
institutions. Changes to the risk-based assessment system would include
increasing premiums for institutions that rely on excessive amounts of brokered
deposits, including CDARS, increasing premiums for excessive use of secured
liabilities, including Federal Home Loan Bank advances, lowering premiums for
smaller institutions with very high capital levels, and adding financial ratios
and debt issuer ratings to the premium calculations for banks with over $10
billion in assets, while providing a reduction for their unsecured debt. Either
an increase in the Risk Category of the Eurobank or adjustments to the base
assessment rates could have a material adverse effect on our
earnings.
In
addition, all institutions with deposits insured by the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing
Corporation (“FICO”), a mixed-ownership government corporation established to
recapitalize a predecessor to the Deposit Insurance Fund. The current annualized
assessment rate is 1.14 basis points, or approximately 0.285 basis points per
quarter. These assessments will continue until the Financing Corporation bonds
mature in 2019.
On
February 27, 2009, the FDIC proposed an emergency assessment charged to all
financial institutions of 0.20% of insured deposits as of June 30, 2009, payable
on September 30, 2009. Congress is currently considering a reduction in the
amount of the emergency assessment to 0.10% of insured deposits as of June 30,
2009.
The
enactment of EESA temporarily raised the basic limit on federal deposit
insurance coverage from $100,000 to $250,000 per depositor. The temporary
increase in deposit insurance coverage became effective on October 3, 2008. EESA
provides that the basic deposit insurance limit will return to $100,000 after
December 31, 2009.
On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(“TLGP”). The final rule was adopted on November 21, 2008. The FDIC stated that
its purpose is to strengthen confidence and encourage liquidity in the banking
system by guaranteeing newly issued senior unsecured debt of banks of 31 days or
greater, thrifts, and certain holding companies, and by providing full coverage
of all transaction accounts, regardless of dollar amount. Inclusion in the
program was voluntary. Participating institutions are assessed fees based on a
sliding scale, depending on length of maturity. Shorter-term debt has a lower
fee structure and longer-term debt has a higher fee. The range is from 50 basis
points on debt of 180 days or less, and a maximum of 100 basis points for debt
with maturities of one year or longer, on an annualized basis. A 10-basis point
surcharge is added to a participating institution's current insurance assessment
in order to fully cover all transaction accounts. Eurobank elected to
participate in both parts of the TLGP, and the holding company elected to
participate in the senior unsecured debt portion of the program. The amount of
greater than 30 day unsecured senior debt that is eligible for the program is
limited to 125% of the amount of such debt outstanding as of September 30, 2008.
If there was no unsecured senior debt outstanding at September 30, 2008, the
amount available under the program is limited to two percent of total
liabilities as of September 30, 2008. As we did not have any unsecured senior
debt outstanding as of September 30, 2008, the maximum amount of unsecured
senior debt that can be issued under the program is limited to two percent of
its total liabilities as of September 30, 2008, which represented approximately
$52.6 million as of that date.
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 regulation 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, 2008,
the legal lending limit for Eurobank under this provision was approximately
$14.9 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, 2008, the legal lending limit for Eurobank under this provision was
approximately $33.1 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, 2008, 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
international banking entity (“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
The
business and operations of our international banking entities (“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.
The
following risk factors could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statements made by us,
and you should not place undue reliance on any such forward-looking
statements. Any forward-looking statement speaks only as of the date
on which it is made and we do not undertake any obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is
not possible for us to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
Risks
Relating to the Economic Environment
The
unprecedented levels of market volatility may adversely impact our ability to
access capital or our business, financial condition and results of
operations.
The
volatility and disruption of the capital and credit markets have reached
unprecedented levels, adversely impacting the stock prices and credit
availability for certain issuers, often without regard to their financial
capabilities. If the current levels of market disruption and
volatility continue or further deteriorate, our ability to access capital or our
business, financial condition and results of operations could be adversely
impacted.
Our
business has been and may continue to be adversely affected by current
conditions in the financial markets and economic conditions
generally.
Negative
developments in the financial services industry have resulted in uncertainty in
the financial markets in general and a related general economic
downturn. In addition, as a consequence of the recession in the
United States, beginning in the latter half of 2007 business activity across a
wide range of industries faces serious difficulties due to the lack of consumer
spending and the extreme lack of liquidity in the global credit markets.
Unemployment has also increased significantly.
As a
result of these financial economic crises, many lending institutions, including
us, have experienced declines in the performance of their loans, including
construction and land development loans, residential real estate loans, and
commercial real estate loans and consumer loans. Moreover,
competition among depository institutions for deposits and quality loans has
increased significantly. In addition, the values of real estate
collateral supporting many commercial loans and home mortgages have declined and
may continue to decline. Bank and bank holding company stock prices
have been negatively affected. In addition, the ability of banks and
bank holding companies to raise capital or borrow in the debt markets has become
more difficult compared to recent years. As a result, there is a
potential for new federal or state laws and regulations regarding lending and
funding practices and liquidity standards, and bank regulatory agencies are
expected to be very aggressive in responding to concerns and trends identified
in examinations, including the expected issuance of many formal or informal
enforcement actions or orders. The impact of new legislation in
response to those developments may negatively impact our operations by
restricting our business operations, including our ability to originate loans,
and adversely impact our financial performance or our stock price.
In
addition, further negative market developments may affect consumer confidence
levels and may cause adverse changes in payment patterns, causing increases in
delinquencies and default rates, which may impact our charge-offs and provision
for credit losses. A worsening of these conditions would likely
exacerbate the adverse effects of these difficult market conditions on us and
others in the financial services industry.
Overall,
during the past year, the general business environment has had an adverse effect
on our business, and there can be no assurance that the environment will improve
in the near term. Until conditions improve, we expect our business,
financial condition and results of operations to be adversely
affected.
Further
downturn in our real estate markets could hurt our business.
Substantially
all of our real estate loans are located in Puerto Rico. While we do
not have any subprime loans, our construction and development and residential
real estate loan portfolios, along with our commercial real estate loan
portfolio and certain of our other loans, have been affected by the recent
downturn in the residential and commercial real estate market. Real
estate values and real estate markets are generally affected by changes in
national, regional or local economic conditions, fluctuations in interest rates
and the availability of loans to potential purchasers, changes in tax laws and
other governmental statutes, regulations and policies and acts of
nature. We anticipate that further declines in the real estate
markets in our primary market areas would affect our business. If
real estate values continue to decline, the collateral for our loans will
provide less security. As a result, our ability to recover on
defaulted loans by selling the underlying real estate will be diminished, and we
would be more likely to suffer losses on defaulted loans. The events
and conditions described in this risk factor could therefore have a material
adverse effect on our business, results of operations and financial
condition.
The
soundness of other financial institutions could adversely affect
us.
Since
mid-2007, the financial services industry as a whole, as well as the securities
markets generally, have been materially and adversely affected by very
significant declines in the values of nearly all asset classes and by a very
serious lack of liquidity. Financial institutions in particular have
been subject to increased volatility and an overall loss in investor
confidence.
Our
ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial
institutions. Financial services companies are interrelated as a
result of trading, clearing, counterparty, or other relationships. We
have exposure to different industries and counterparties, and we execute
transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks, and other institutional
clients. As a result, defaults by, or even rumors or questions about,
one or more financial services companies, or the financial services industry
generally, have led to market-wide liquidity problems and could lead to losses
or defaults by us or by other institutions. There is no assurance
that any such losses or defaults would not materially and adversely affect our
business, financial condition or results of operations.
There
can be no assurance that the recently enacted Emergency Economic Stabilization
Act of 2008 and other recently enacted government programs will help stabilize
the U.S. financial system.
On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the
"EESA") was enacted. The U.S. Treasury and banking regulators are
implementing a number of programs under this legislation and otherwise to
address capital and liquidity issues in the banking system, including the
Troubled Assets Relief Program Capital Purchase Program, and the Capital
Assistance Program. In addition, other regulators have taken steps to
attempt to stabilize and add liquidity to the financial markets, such as the
FDIC Temporary Liquidity Guarantee Program ("TLG Program"), in which we are a
participant. However, there can be no assurance that we will issue
any guaranteed debt under the TLG Program, or that we will participate in any
other stabilization programs in the future.
There can
also be no assurance as to the actual impact that the EESA and other programs
will have on the financial markets, including the extreme levels of volatility
and limited credit availability currently being experienced. The
failure of the EESA and other programs to stabilize the financial markets and a
continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of
operations, and access to credit or the trading price of our common
stock.
The EESA
is relatively new legislation and, as such, is subject to change and evolving
interpretation. This is particularly true given the change in
administration that occurred on January 20, 2009. There can be
no assurances as to the effects that such changes will have on the effectiveness
of the EESA or on our business, financial condition or results of
operations.
The
prolonged economic crisis in Puerto Rico could adversely affect our business,
financial condition, results of operations, cash flows and/or future
prospects.
The
prolonged period of reduced economic growth or recession has had an adverse
effect on delinquencies, the quality of our loan and corporate bond
portfolios. During a prolonged 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 continue to be adversely
affected by the prolonged economic downturn. If this prolonged
economic slowdown persists, aforementioned adverse effects may continue and
would likely result in, among other things, a reduction in loan originations,
increased delinquency rates, increased non-performing assets, foreclosures and
loan loss provisions, adversely impacting our profitability.
Risks Relating to Our
Business
Our
financial results are constantly exposed to the market risk.
As a
traditional commercial bank, Eurobank, our wholly-owned banking subsidiary,
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. Depending on the maturity and
repricing characteristics of the assets, liabilities and off-balance sheet
items, changes in interest rates could either increase or decrease our net
interest income.
During
the last fourteen months, changes in the interbank borrowing rates by the Board
of Governors of the Federal Reserve have resulted in a 400 basis points
reduction of the Prime Rate. As of December 31, 2008, approximately
73.63% of our non-consumer loan portfolio was comprised of floating rate loans,
most of them tied to the Prime Rate. Decreases in interest rates may
result in a reduced interest income in the short-term, while depositors will
likely continue to expect a reasonable rate on their deposit accounts, probably
resulting in a further margin compression. The future outlook on
interest rates and their impact on our interest income, interest expense and net
interest income is uncertain.
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. As of December 31, 2008, our nonperforming
assets amounted to $177.4 million, compared to $111.6 million and $63.0 million
for the years ended December 31, 2007 and 2006, respectively.
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, 2008, our allowance for loan and lease losses totaled
$41.6 million, which represents approximately 2.33% 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.
For the
general portion of our allowance, 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
. This estimated allowance is based on historical
loss experiences as adjusted for changes in trends and conditions on at least an
annual basis. Also, another component is used in the evaluation of the
adequacy of our general allowance to measure the probable effect that current
internal and external environmental factors could have on the historical loss
factors currently in use. 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 have been
incurred. These specific allowances are 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
. For
impaired commercial and construction business relationships with aggregate
balances exceeding $150,000, we measure the impairment following the guidance of
SFAS No. 114. 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. Notwithstanding these procedures, our allowance may prove
to be inadequate, causing us to establish additional reserves.
In
addition, we follow supervisory guidance included in the
2006 Interagency Policy Statement on
the Allowance for Loan and Lease Losses
. 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, 2008, our legal lending limit was approximately $14.9 million in the
unsecured category and approximately $33.1 million in the secured
category. As of December 31, 2008, we had 36 individual borrowers
with a loan principal balance of more than $5.0 million and less than $10.0
million per borrower, and another 25 individual borrowers with a loan principal
balance of more than $10.0 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,
2008, the total amount of automobile leases was $264.0 million or 98.74% 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, which may force
us to pay above-market interest rates to retain these deposits, reducing 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, 2008, broker deposits amounted to
$1.424 billion, or approximately 68.31% of our total deposits, compared to
$1.337 billion and $1.226 billion, or approximately 67.06% and 64.35% of
our total deposits, as of December 31, 2007 and 2006,
respectively. As of December 31, 2008, approximately
$922.0 million in broker deposits, or approximately 64.75% 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.
Section
29 of the Federal Deposit Insurance Corporation Improvement Act (“FDIA”) limits
the use of brokered deposits by institutions that are less than
“well-capitalized” and allows the Federal Deposit Insurance Corporation (“FDIC”)
to place restrictions on interest rates that institutions may pay. On
February 3, 2009, the FDIC released a proposed rule to implement new interest
rate restrictions on institutions that are not
“well-capitalized.” The proposed rule would limit the interest rate
paid by such institutions to 75 basis points above a national rate, as derived
from the interest rate average of all institutions. If an institution
could provide evidence that its local rate is higher, it would be permitted to
offer the higher local rate plus 75 basis points. Although we
continue to be “well-capitalized,” these restrictions, if they become
applicable, could materially impact our ability to generate sufficient deposits
to maintain an adequate liquidity position.
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, 2008, our repurchase obligations totaled $556.5 million, of which
$87.8 million, or approximately 15.78% 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 $1.321 billion as of
December 31, 2003 to $2.860 billion As of December 31,
2008. The types of assets on our balance sheet that have experienced
the largest categorical increases are commercial loans and
investments. 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, Yadira R. Mercado, our Executive Vice President and Chief Financial
Officer, and Luis J. Berríos López, our Executive Vice President and Chief
Lending 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 $1.0 billion in assets, like us, must
maintain minimum consolidated capital ratios. In particular, we must
maintain, at least, 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, 2008, 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 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 Bank Secrecy Act 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
The
price of our common stock has fluctuated significantly.
The
market price of our common stock has been 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. The
equity markets, in general, have 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. These fluctuations may adversely affect the prevailing
market price of the common stock.
Nasdaq
may cease to list our common stock, which may cause the value of an investment
in our Company to substantially decrease.
The bid
price of our common stock fell below $1.00 per share on February 18, 2009, which
is the minimum bid price required to maintain compliance with the continued
listing requirements of the Nasdaq Global Select Market. In the event that
the bid price of our common stock remains below $1.00 per share for a period of
30 consecutive trading days, Nasdaq will issue a letter of non-compliance that
will provide us with up to 180 calendar days to regain compliance with the
listing requirements. We are susceptible to volatility of our stock and
could remain out of compliance if appropriate steps are not taken to cure our
non-compliance. In the event that we receive such a notification from
Nasdaq and it appears that the minimum bid price of our common stock will not
exceed $1.00 per share within the applicable compliance period, we may seek to
effect a reverse stock split for the purpose of regaining compliance. Any
proposal to pursue a reverse stock split would be subject to shareholder
approval. We can give no assurances that the steps we propose will be
approved by our stockholders or that they will be effective in curing our
non-compliance. In addition, we may not meet other Nasdaq Global Select
Market continued listing requirements, which could result in our common stock
being delisted from the Nasdaq Global Select Market. Delisting from the
Nasdaq Global Select Market might adversely affect the trading price and limit
the liquidity of our common stock and therefore may cause the value of an
investment in our Company to decrease.
Our
executive officers and directors own a significant number of shares of our
common stock, allowing management to significant control over our corporate
affairs.
As of
December 31, 2008, our executive officers and directors beneficially own 41.26%
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, 2008,
535,570 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, 2008, there were
19,499,515 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.
Shares of our
common stock are not insured deposits.
An
investment in our common stock is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency. An investment
in our common stock is subject to investment risk, and an investor must be
capable of affording the loss of his or her entire investment.
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
1B. Unresolved Staff Comments.
None.
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.
Also, as
of December 31, 2008, Eurobank had three land lots with an aggregate value
amounting to $1.4 million. Currently, in addition to the main office,
we operate at 28 locations. The following is a list of our operating
locations as of December 31, 2008:
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Departments
|
|
|
|
|
|
|
Trust
and Wealth Management:
|
|
N/A
|
|
Owned
(4)
|
|
|
Mezzanine
|
|
|
|
|
|
|
270
Muñoz Rivera Avenue
|
|
|
|
|
|
|
San
Juan, Puerto Rico 00918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branches
|
|
|
|
|
|
|
Aguadilla
Branch
|
|
10/31/2006
(7)
|
|
Leased
|
|
|
State
Road No. PR2, Km. 129.3
|
|
|
|
|
|
|
Aguadilla,
Puerto Rico 00603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bayamón
Branch
|
|
09/30/2017
|
|
Leased
|
|
|
Comerío
Avenue, corner of Sierra Bayamón
|
|
|
|
|
|
|
Bayamón,
Puerto Rico 00961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cabo
Rojo Branch
|
|
06/01/2027
|
|
Leased
|
|
|
State
Road #100, Km. 5.5
|
|
|
|
|
|
|
Cabo
Rojo, Puerto Rico 00623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caguas
I Branch
|
|
05/31/2027
|
|
Leased
(6)
|
|
|
Plaza
Notre Dame
|
|
|
|
|
|
|
Muñoz
Rivera Avenue
|
|
|
|
|
|
|
Caguas,
Puerto Rico 00725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caguas
II Branch
|
|
06/30/2010
|
|
Leased
|
|
|
32
Acosta Street, corner of Ruiz Belvis
|
|
|
|
|
|
|
Caguas,
Puerto Rico 00725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canóvanas
Branch
|
|
06/30/2025
|
|
Leased
|
|
|
Marginal
PR-3, Km. 20.3
|
|
|
|
|
|
|
Canóvanas,
Puerto Rico 00729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina
Branch
|
|
01/31/2013
|
|
Leased
(6)
|
|
|
State
Road #190
|
|
|
|
|
|
|
Lot
#1, Km. 0.7
|
|
|
|
|
|
|
La
Cerámica Industrial Park
|
|
|
|
|
|
|
Carolina,
Puerto Rico 00983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cayey
Branch
|
|
12/31/2008
(5)
|
|
Leased
|
|
|
State
Road #1, Km. 56.2
|
|
|
|
|
|
|
Montellano
Ward
|
|
|
|
|
|
|
Cayey,
Puerto Rico 00736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cidra
Branch
|
|
04/30/2006
(5)
|
|
Leased
|
|
|
Luis
Muñoz Rivera Street
|
|
|
|
|
|
|
corner
of José de Diego
|
|
|
|
|
|
|
Cidra,
Puerto Rico 00739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condado
Branch
|
|
06/30/2021
|
|
Leased
|
|
|
1408
Magdalena Avenue
|
|
|
|
|
|
|
Santurce,
Puerto Rico 00907
|
|
|
|
|
|
|
Location
(1)
|
|
Lease Expiration Date
(2)
|
|
Owned or Leased
|
|
|
|
|
|
|
|
|
|
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
|
|
05/31/2026
|
|
Leased
|
|
|
Plaza
Mall Lot #3, State Road No. PR52
|
|
|
|
|
|
|
Corner
State Road No. PR3
|
|
|
|
|
|
|
Humacao,
Puerto Rico 00791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manatí
Branch
|
|
08/31/2011
|
|
Leased
|
|
|
State
Road No. PR2, Km. 49.5
|
|
|
|
|
|
|
Manatí,
Puerto Rico 00674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ponce
Salud Branch
|
|
05/01/2010
(8)
|
|
Leased
|
|
|
Thamar
Building, Salud Street #32
|
|
|
|
|
|
|
Ponce,
Puerto Rico 00731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ponce
Hostos Branch
|
|
10/31/2008
(5)
|
|
Leased
|
|
|
26
Hostos Avenue
|
|
|
|
|
|
|
Ponce,
Puerto Rico 00731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ponce
Morell Campos Branch
|
|
03/30/2011
|
|
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
|
|
04/30/2011
|
|
Leased
|
|
|
Villas
de San Francisco Shopping Center
|
|
|
|
|
|
|
85
de Diego Avenue
|
|
|
|
|
|
|
Río
Piedras, Puerto Rico 00927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San
Lorenzo Branch
|
|
08/31/2013
|
|
Leased
|
|
|
155
South Luis Muñoz Rivera Street
|
|
|
|
|
|
|
San
Lorenzo, Puerto Rico 00754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San
Patricio Branch
|
|
04/30/2014
|
|
Leased
|
|
|
San
Patricio Office Center
|
|
|
|
|
|
|
8
Tabonuco Street
|
|
|
|
|
|
|
Guaynabo,
Puerto Rico 00969
|
|
|
|
|
|
|
Location
(1)
|
|
Lease Expiration Date
(2)
|
|
Owned or Leased
|
|
|
|
|
|
|
|
|
|
Villa
Palmera Branch
|
|
12/31/2013
|
|
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, 2008, Eurobank had three 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 branch, and our leasing
and mortgage divisions.
|
|
(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.
|
|
(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)
|
This
property is leased from one of our
directors.
|
|
(7)
|
Construction
of the Aguadilla Branch was finished in February 2008. A new
lease agreement is being executed with a term of twenty years and an
option to extend the contract for three additional terms of five years
each.
|
|
|
|
|
(8)
|
This
branch will be closed on April 9, 2009.
|
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 currently 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 2008.
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 28, 2009, there were
20,439,398 shares issued and 19,499,515 shares outstanding held by 325
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2008
|
|
|
7.62
|
|
|
|
4.00
|
|
|
June
30, 2008
|
|
|
6.12
|
|
|
|
3.59
|
|
|
September
30, 2008
|
|
|
4.00
|
|
|
|
1.82
|
|
|
December
31, 2008
|
|
|
2.68
|
|
|
|
1.50
|
|
As
previously mentioned, the bid price of our common stock fell below $1.00 per
share on February 18, 2009, which is the minimum bid price required to maintain
compliance with the continued listing requirements of the Nasdaq Global Select
Market. In the event that the bid price of our common stock remains below
$1.00 per share for a period of 30 consecutive trading days, Nasdaq will issue a
letter of non-compliance that will provide us with up to 180 calendar days to
regain compliance with the listing requirements. We are susceptible to
volatility of our stock and could remain out of compliance if appropriate steps
are not taken to cure our non-compliance. In the event that we receive
such a notification from Nasdaq and it appears that the minimum bid price of our
common stock will not exceed $1.00 per share within the applicable compliance
period, we may seek to effect a reverse stock split for the purpose of regaining
compliance. Any proposal to pursue a reverse stock split would be subject
to shareholder approval. We can give no assurances that the steps we
propose will be approved by our stockholders or that they will be effective in
curing our non-compliance. In addition, we may not meet other Nasdaq
Global Select Market continued listing requirements, which could result in our
common stock being delisted from the Nasdaq Global Select Market.
Delisting from the Nasdaq Global Select Market might adversely affect the
trading price and limit the liquidity of our common stock and therefore may
cause the value of an investment in our Company to decrease.
Stock
Performance
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
EUROBANCSHARES
INC., THE NASDAQ STOCK MARKET COMPOSITE INDEX, THE RUSSELL
2000
INDEX AND THE RUSSELL 3000 INDEX
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, 2008, 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, 2008:
|
Equity
Compensation Plan Information
|
|
|
|
|
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
|
|
|
270,600
|
|
|
$
|
12.72
|
|
|
|
—
|
|
|
2005
Stock Option Plan
|
|
|
264,970
|
|
|
$
|
8.23
|
|
|
|
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, 2008 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,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
$
|
159,010
|
|
|
$
|
173,325
|
|
|
$
|
162,146
|
|
|
$
|
133,233
|
|
|
$
|
95,394
|
|
|
Total
interest expense
|
|
|
101,716
|
|
|
|
105,470
|
|
|
|
95,363
|
|
|
|
64,936
|
|
|
|
41,481
|
|
|
Net
interest income
|
|
|
57,294
|
|
|
|
67,855
|
|
|
|
66,783
|
|
|
|
68,297
|
|
|
|
53,913
|
|
|
Provision
for loan and lease losses
|
|
|
42,314
|
|
|
|
25,348
|
|
|
|
16,903
|
|
|
|
12,775
|
|
|
|
7,100
|
|
|
Net
interest income after provision for
loan
and lease losses
|
|
|
14,980
|
|
|
|
42,507
|
|
|
|
49,880
|
|
|
|
55,522
|
|
|
|
46,813
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and other fees
|
|
|
10,396
|
|
|
|
9,585
|
|
|
|
8,476
|
|
|
|
9,069
|
|
|
|
8,057
|
|
|
Net
loss on non-hedging derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(944
|
)
|
|
|
—
|
|
|
Gain
on sale of loans and leases, net
|
|
|
1,468
|
|
|
|
380
|
|
|
|
401
|
|
|
|
945
|
|
|
|
1,395
|
|
|
Gain
(loss) on sale of securities, net
|
|
|
191
|
|
|
|
—
|
|
|
|
(1,092
|
)
|
|
|
(301
|
)
|
|
|
—
|
|
|
(Loss)
gain on sale of other real estate owned and repossessed assets,
net
|
|
|
(596
|
)
|
|
|
(1,286
|
)
|
|
|
16
|
|
|
|
(1,040
|
)
|
|
|
(359
|
)
|
|
Total
noninterest income
|
|
|
11,459
|
|
|
|
8,678
|
|
|
|
7,801
|
|
|
|
7,729
|
|
|
|
9,093
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
20,088
|
|
|
|
19,890
|
|
|
|
17,507
|
|
|
|
14,727
|
|
|
|
11,111
|
|
|
Professional
fees
|
|
|
5,454
|
|
|
|
4,496
|
|
|
|
4,104
|
|
|
|
3,912
|
|
|
|
2,196
|
|
|
Other
noninterest expense
|
|
|
25,373
|
|
|
|
23,839
|
|
|
|
21,775
|
|
|
|
19,005
|
|
|
|
15,635
|
|
|
Total
noninterest expense
|
|
|
50,915
|
|
|
|
48,225
|
|
|
|
43,386
|
|
|
|
37,644
|
|
|
|
28,942
|
|
|
(Loss)
income before income taxes and extraordinary gain
|
|
|
(24,476
|
)
|
|
|
2,960
|
|
|
|
14,295
|
|
|
|
25,607
|
|
|
|
26,964
|
|
|
Income
tax (benefit) / expense
|
|
|
(13,208
|
)
|
|
|
(249
|
)
|
|
|
6,283
|
|
|
|
9,077
|
|
|
|
8,663
|
|
|
Extraordinary
gain
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,419
|
|
|
Net
(loss) income
|
|
$
|
(11,268
|
)
|
|
$
|
3,209
|
|
|
$
|
8,012
|
|
|
$
|
16,530
|
|
|
$
|
22,720
|
|
|
|
|
As of or for the Year Ended December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars
in thousands, except per share data)
|
|
|
Common
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings per common share — basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before extraordinary gain
|
|
$
|
(0.62
|
)
|
|
$
|
0.13
|
|
|
$
|
0.38
|
|
|
$
|
0.81
|
|
|
$
|
1.08
|
|
|
Extraordinary
gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.27
|
|
|
Net
(loss) income
|
|
|
(0.62
|
)
|
|
|
0.13
|
|
|
|
0.38
|
|
|
|
0.81
|
|
|
|
1.35
|
|
|
(Loss)
earnings per common share — diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss)
income before extraordinary gain
|
|
|
(0.62
|
)
|
|
|
0.13
|
|
|
|
0.37
|
|
|
|
0.78
|
|
|
|
1.04
|
|
|
Extraordinary
gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.26
|
|
|
Net
(loss) income
|
|
|
(0.62
|
)
|
|
|
0.13
|
|
|
|
0.37
|
|
|
|
0.78
|
|
|
|
1.30
|
|
|
Cash
dividends declared
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Book
value per common share
|
|
|
7.48
|
|
|
|
8.86
|
|
|
|
8.32
|
|
|
|
7.95
|
|
|
|
7.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares outstanding at end of period
|
|
|
19,499,515
|
|
|
|
19,093,315
|
|
|
|
19,123,821
|
|
|
|
19,398,848
|
|
|
|
19,564,086
|
|
|
Average
diluted shares outstanding
|
|
|
19,418,526
|
|
|
|
19,391,638
|
|
|
|
19,657,559
|
|
|
|
20,277,799
|
|
|
|
17,152,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,860,429
|
|
|
$
|
2,751,399
|
|
|
$
|
2,500,920
|
|
|
$
|
2,391,283
|
|
|
$
|
2,102,789
|
|
|
Investment
securities available-for-sale
|
|
|
751,017
|
|
|
|
707,103
|
|
|
|
535,159
|
|
|
|
627,080
|
|
|
|
555,482
|
|
|
Investment
securities held-to-maturity
|
|
|
132,798
|
|
|
|
30,845
|
|
|
|
38,433
|
|
|
|
42,471
|
|
|
|
49,504
|
|
|
Total
loans and leases, net of unearned
|
|
|
1,784,052
|
|
|
|
1,857,219
|
|
|
|
1,750,838
|
|
|
|
1,577,196
|
|
|
|
1,387,613
|
|
|
Allowance
for loan and lease losses
|
|
|
41,639
|
|
|
|
28,137
|
|
|
|
18,937
|
|
|
|
18,188
|
|
|
|
19,039
|
|
|
Deposits
|
|
|
2,084,308
|
|
|
|
1,993,046
|
|
|
|
1,905,356
|
|
|
|
1,734,128
|
|
|
|
1,409,036
|
|
|
Other
borrowings
|
|
|
592,492
|
|
|
|
547,492
|
|
|
|
394,991
|
|
|
|
475,712
|
|
|
|
520,206
|
|
|
Total
stockholders’ equity
|
|
|
156,570
|
|
|
|
179,918
|
|
|
|
169,878
|
|
|
|
164,967
|
|
|
|
158,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average common stockholders’ equity
(2)
|
|
|
(7.16
|
)%
|
|
|
1.96
|
%
|
|
|
5.19
|
%
|
|
|
10.70
|
%
|
|
|
18.67
|
%
|
|
Return
on average assets
(3)
|
|
|
(0.40
|
)
|
|
|
0.13
|
|
|
|
0.33
|
|
|
|
0.74
|
|
|
|
1.03
|
|
|
Net
interest margin
(4)
|
|
|
2.33
|
|
|
|
2.80
|
|
|
|
2.86
|
|
|
|
3.29
|
|
|
|
3.29
|
|
|
Efficiency
ratio
(5)
|
|
|
69.11
|
|
|
|
63.48
|
|
|
|
57.89
|
|
|
|
47.84
|
|
|
|
44.44
|
|
|
Loans
and leases to deposits
|
|
|
85.59
|
|
|
|
93.25
|
|
|
|
91.89
|
|
|
|
90.95
|
|
|
|
98.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans and
leases
|
|
$
|
163,894
|
|
|
$
|
98,065
|
|
|
$
|
49,978
|
|
|
$
|
36,263
|
|
|
$
|
40,533
|
|
|
Other
real estate owned and repossessed assets
|
|
|
13,506
|
|
|
|
13,534
|
|
|
|
13,048
|
|
|
|
9,517
|
|
|
|
6,441
|
|
|
Total
nonperforming assets
|
|
|
177,400
|
|
|
|
111,599
|
|
|
|
63,026
|
|
|
|
45,780
|
|
|
|
46,974
|
|
|
Nonperforming
assets to total assets
|
|
|
6.20
|
%
|
|
|
4.06
|
%
|
|
|
2.52
|
%
|
|
|
1.91
|
%
|
|
|
2.23
|
%
|
|
Nonperforming
loans to total loans and leases
|
|
|
9.19
|
|
|
|
5.28
|
|
|
|
2.85
|
|
|
|
2.30
|
|
|
|
2.92
|
|
|
Allowance
for loan and lease losses to nonperforming loans
|
|
|
25.41
|
|
|
|
28.69
|
|
|
|
37.89
|
|
|
|
50.16
|
|
|
|
46.97
|
|
|
Allowance
for loan and lease losses to total
loans
|
|
|
2.33
|
|
|
|
1.51
|
|
|
|
1.08
|
|
|
|
1.15
|
|
|
|
1.37
|
|
|
Net
charge-offs to average loans
|
|
|
1.57
|
|
|
|
0.90
|
|
|
|
0.97
|
|
|
|
0.92
|
|
|
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
ratio
|
|
|
6.55
|
%
|
|
|
7.55
|
%
|
|
|
7.92
|
%
|
|
|
9.35
|
%
|
|
|
9.91
|
%
|
|
Tier
1 risk-based capital
|
|
|
8.99
|
|
|
|
9.54
|
|
|
|
10.25
|
|
|
|
12.45
|
|
|
|
12.73
|
|
|
Total
risk-based capital
|
|
|
10.25
|
|
|
|
10.79
|
|
|
|
11.25
|
|
|
|
13.49
|
|
|
|
13.94
|
|
|
Tangible
common equity to tangible assets
|
|
|
5.10
|
|
|
|
6.15
|
|
|
|
6.44
|
|
|
|
6.91
|
|
|
|
7.54
|
|
|
(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, 2008, 2007 and
2006. 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, 2008, we had, on a consolidated
basis, total assets of $2.860 billion, net loans and leases of $1.742 billion,
total investments of $898.7 million, total deposits of $2.084 billion, other
borrowings of $592.5 million, and stockholders’ equity of $156.6
million. We currently operate through a network of 26 branch offices
located throughout Puerto Rico.
Our
management team has implemented a strategy of building our core banking
franchise by focusing on commercial loans, our investment portfolio, business
transaction accounts, and the mortgage business. We believe that this
strategy will increase recurring revenue streams, enhance profitability, broaden
our product and service offerings and continue to build stockholder
value.
2008
Key Performance Indicators
We
believe the following were key indicators of our performance and results of
operations in 2008:
|
|
|
our
total assets grew to $2.860 billion at the end of 2008, representing an
increase of 3.96%, from $2.751 billion at the end of
2007;
|
|
|
|
our
net loans and leases decreased to $1.742 billion at the end of 2008,
representing a decrease of 4.81%, from $1.830 billion at the end of 2007,
resulting primarily from our decision to strategically pare back our
automobile leasing operations, including the sale of $37.7 million in
lease financing contracts in March
2008;
|
|
|
|
our
investment securities grew to $898.7 million at the end of 2008,
representing an increase of 19.63%, from $751.3 million at the end of
2007;
|
|
|
|
our
total deposits grew to $2.084 billion at the end of 2008, representing an
increase of 4.58%, from $1.993 billion at the end of
2007;
|
|
|
|
our
short-term borrowings increased to $592.5 million, representing an
increase of 8.22%, from $547.5 million at the end of
2007;
|
|
|
|
our
nonperforming assets increased to $177.4 million, or by 58.96%, in 2008,
from $111.6 million at the end of
2007;
|
|
|
|
our
total revenue decreased to $170.5 million in 2008, representing a decrease
of 6.34%, from $182.0 million in
2007;
|
|
|
|
our
net interest margin and spread on a fully taxable equivalent basis was
2.33% and 1.99% in 2008, respectively, compared to 2.80% and
2.29% in 2007;
|
|
|
|
our
provision for loan and lease losses grew to $42.3 million in 2008,
representing an increase of 66.93%, from $25.3 million in
2007;
|
|
|
●
|
our
total noninterest income grew to $11.5 million in 2008, representing an
increase of 32.05%, from $8.7 million in
2007;
|
|
|
|
our
total noninterest expense grew to $50.9 million in 2008, representing an
increase of 5.58%, from $48.2 million in 2007;
and
|
|
|
|
for
2008, we recorded a tax benefit of $13.2 million, compared to an income
tax benefit of $249,000 for 2007.
|
These
items, as well as other factors, resulted in a net loss for 2008 of $11.3
million, compared to a net income of $3.2 million in 2007, or a loss of $0.62
per common share for 2008, compared to earnings of $0.13 per common share for
2007, assuming dilution. Financial results for the year ended December 31,
2008 when compared to year 2007 were predominantly impacted by an increase of
$17.0 million in the provision for loan and lease losses and a decrease of $10.6
million in the net interest income. The increase in our provision for
loan and lease losses was primarily related to our commercial and construction
loan portfolios, which reported further deterioration due to current economic
conditions requiring some of them to be classified as impaired loans under SFAS
No. 114 or an increase in their specific allowances. The decrease in
our net interest income was mainly due to the interest rate cuts by the
Federal Reserve accompanied by increased average interest-earning assets and
average interest-bearing liabilities, and an increase in nonaccrual
loans. These items 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 losses that have been incurred 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 $41.6
million, $28.1 million and $18.9 million as of December 31, 2008, 2007 and 2006,
respectively. Losses charged to the allowance amounted to $31.1
million, $18.3 million and $18.8 million as of December 31, 2008, 2007 and 2006,
respectively. Recoveries were credited to the allowance in the
amounts of $2.3 million, $2.1 million and $2.6 million for those same periods,
respectively. For additional information on the allowance for loan
and lease losses, see the section of this discussion and analysis captioned
“Allowance for Loan and Lease
Losses”
and
“Note 2(i)
– Loans and Allowance for Loan and Lease Losses”
to our consolidated
financial statements included herein.
Servicing
Assets
We have
no contracts to service loans for others, except for servicing rights retained
on lease sales. The total cost of loans or leases to be sold with
servicing assets retained is allocated to the servicing assets and the loans or
leases (without the servicing assets), based on their relative fair
values. Servicing assets are amortized in proportion to, and over the
period of, estimated net servicing income. In addition, we assess
capitalized servicing assets for impairment based on the fair value of those
assets.
To
estimate the fair value of servicing assets we consider prices for similar
assets and the present value of expected future cash flows associated with the
servicing assets calculated using assumptions that market participants would use
in estimating future servicing income and expense, including discount rates,
anticipated prepayment and credit loss rates. For purposes of
evaluating and measuring impairment of capitalized servicing assets, we evaluate
separately servicing retained for each loan portfolio sold. The
amount of impairment recognized, if any, is the amount by which the capitalized
servicing assets exceed its estimated fair value. Impairment is
recognized through a valuation allowance with changes included in current
operations for the period in which the change occurs. As of December
31, 2008, we utilized the following key assumptions for the impairment analysis
of the servicing assets related to the sale of lease financing contracts
completed in March 2008: prepayment rate of 18.24%; weighted average
live of 2.73 years; and a discount rate of 9.00%. This impairment
analysis revealed that there was no impairment. There was no sale of
lease financing contracts during 2007. Servicing assets are included
as part of other assets in the balance sheets. Servicing assets’ book
value amounted to $1.2 million, $148,000 and $782,000 as of December 31, 2008,
2007 and 2006, respectively. Servicing assets as of December 31, 2007
and 2006 were related to lease financing contracts sold in or before
2005.
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. Gains or
losses on disposition of OREO and repossessed assets, and related operating
income and maintenance expenses, are included in current operations. Other
real estate owned amounted to $8.8 million, $8.1 million and $3.6 million as of
December 31, 2008, 2007 and 2006, respectively.
Other
repossessed assets amounted to $4.7 million, $5.4 million and $9.4 million for
those same periods, respectively. Other repossessed assets are mainly
comprised of vehicles from our leasing operation and boats from our marine loans
portfolio.
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 $3.5 million, $4.3
million and $8.3 million as of December 31, 2008, 2007 and 2006,
respectively. The total loss ratio on sale of repossessed vehicles
was 13.85%, 9.63% and 6.30% for those same years, respectively. These
increases in our total loss ratio on the sale of repossessed vehicles were
directly attributable to our decision of being more aggressive in the sale of
repossessed vehicles in an effort to expedite the disposition of
inventory. During 2008, we sold 1,434 vehicles and repossessed 1,406
vehicles, moving our inventory of repossessed vehicles to 297 units as of
December 31, 2008, from 325 units as of December 31, 2007, after selling 1,855
vehicles and repossessing 1,616 vehicles, from 564 units in inventory as of
December 31, 2006. During 2007, the increase in our total loss ratio
on the sale of repossessed vehicles was directly attributable to our strategy of
being more aggressive in the sale of repossessed vehicles in an attempt to
expedite the disposition of slow moving inventory. This strategy
resulted in an increase of approximately 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.
Repossessed
equipment amounted to $6,000, $88,000 and $39,000 as of December 31, 2008, 2007
and 2006, respectively. For those same years, the total amount of
repossessed equipment sold amounted to $266,000, $253,000 and $891,000,
respectively. For the year ended December 31, 2008, the total gain on
sale of repossessed equipment was $20,000, compared to a total gain of $32,000
and a total loss of $413,000 for the years ended December 31, 2007 and 2006,
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.
Total
repossessed boats amounted to $1.2 million, $991,000 and $1.1 million for those
same years, respectively. For the year ended December 31, 2008, the
total loss on sale of repossessed boats was $546,000, compared to $338,000 and
$539,000 for the years ended December 31, 2007, and 2006,
respectively. The change in the total loss on sale of repossessed
boats during 2008 and 2007 was mainly due to fluctuations in the amount of
repossessed boats sold. During 2008, the total of repossessed boats
sold increased by 54.85%, or $611,000, to $1.7 million, after decreasing by
57.48%, or $1.5 million, to $1.1 million in 2007, from $2.6 million in
2006. During 2008 and 2007, we sold 23 boats and 18 boats,
respectively, and repossessed 20 boats and 16 boats, respectively, decreasing
our inventory of repossessed boats to 15 units as of December 31, 2008, from 18
units as of December 31, 2007 and from 20 units as of December 31,
2006. As of December 31, 2008, 2007 and 2006, our boat financing
portfolio amounted to $30.3 million, $35.0 million and $37.4 million,
respectively.
In 2008,
the total loss on sale of OREO was $48,000 over twenty-five properties sold with
an aggregate book value of approximately $4.7 million, compared to a total loss
of $153,000 over seven properties sold in 2007 with an aggregate book value of
approximately $835,000 and a total gain of $454,000 over eleven properties
sold with an aggregate book value of approximately $4.0 million in
2006. As of December 31, 2008, our OREO consisted of 36 properties
with an aggregate value of $8.8 million, compared to 45 properties with an
aggregate value of $8.1 million as of December 31, 2007, and 18 properties with
an aggregate value of $3.6 million as of December 31, 2006.
For
additional information relating to OREO and the composition of other repossessed
assets, see the section of this discussion and analysis captioned
“Nonperforming Loans, Leases and
Assets.”
Investment
Securities
We review
the investment portfolio based on the provisions of SFAS No. 115,
Accounting for Certain Investments
in Debt and Equity
, and the EITF 99-20,
Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial
Assets
. These analyses are performed taking into consideration
current U.S. market conditions, projected cash flows and the present value of
the projected cash flows. 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 operations and a new cost basis for the security is
established. To determine whether an impairment is other than temporary,
we consider 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. 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, we anticipate
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.
Results
of Operations for the Years Ended December 31, 2008, 2007 and 2006
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 $57.3 million during the year December 31, 2008, compared to
$67.9 million during the year ended December 31, 2007 and $66.8 million during
the year ended December 31, 2006, representing a decrease of $10.6 million, or
15.56% in 2008, and a $1.1 million increase, or 1.60%, in 2007. The
decrease in net interest income during 2008 was mainly driven by the net effect
of decreased yields and cost of funds resulting from interest rate cuts by the
Federal Reserve accompanied by increased average interest-earning assets and
average interest-bearing liabilities, and an increase in nonaccrual loans, as
explained further below. During 2007, the increase in net interest
income 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. These changes in rates and volumes are shown on table on page
45.
Total
interest income decreased by 8.26% to $159.0 million in 2008, compared to $173.3
million in 2007, and $162.1 million in 2006. The average interest
yield earned on a fully taxable equivalent basis on interest-earning assets
decreased to 6.61% in 2008, from 7.73% in 2007 and 7.53% in 2006. The
decrease in the average interest yield on a fully taxable equivalent basis
during 2008 was mainly attributable to the net effect of decreased loan yields
resulting from interest rate cuts of 100 basis points during the last four
months of 2007, and additional rate cuts of 75 basis points in March 2008, 25
basis points in May 2008, and 175 basis points during the fourth quarter of
2008, while average net loans during 2008 decreased when compared to
2007. These 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, 2008 and
2007, approximately 73.63% and 75.38% of our commercial and construction loans
were variable rate loans, respectively. The average interest yield on
a fully taxable equivalent basis earned on net loans decreased to 6.45% for the
year ended December 31, 2008, from 8.13% and 8.00% for years 2007 and 2006,
respectively. Average net loans were $1.803 billion in 2008, compared
to $1.781 billion in 2007 and $1.644 billion in 2006. Also, total
interest income and loan yields were impacted by the effect caused by a $72.3
million increase in nonaccrual loans during 2008, primarily during the fourth
quarter of 2008, and a $31.7 million increase in nonaccrual loans during
2007. The amount of interest income we ceased to accrue on nonaccrual
loans amounted to $8.1 million in 2008, compared to $5.5 million and $3.3
million in 2007 and 2006, respectively, while during the fourth quarter of 2008,
it amounted to $3.1 million, compared to $1.6 million during the previous
quarter. The amount of interest income we ceased to accrue during the
fourth quarter of 2008 represented a reduction of approximately 46 basis points
in the average interest yield on a fully taxable equivalent basis earned on net
loans. The increase during the fourth quarter of 2008 when compared
to the previous quarter was directly related to the amount of loans placed in
nonaccrual status, which increased from $92.3 million as of September 30, 2008
to $141.3 million as of December 31, 2008.
Total
interest expense decreased by 3.56% to $101.7 million in 2008, compared to
$105.5 million in 2007, after increasing by 10.60% from $95.4 million in
2006. The decrease in total interest expense during 2008 mainly
resulted from the net effect of a decrease in the cost of funds mainly
caused by our strategy of calling back our broker callable broker deposits, as
explained further below, partially offset by an increase in interest-bearing
liabilities. During 2007, the increase in average liabilities were
substantially in broker deposits and other borrowings, both of which were higher
cost categories resulting in increased interest expense. The average
interest rate on a fully taxable equivalent basis paid for interest-bearing
liabilities was 4.62% in 2008, 5.44% in 2007 and 5.20% in
2006. Average interest-bearing liabilities increased by 14.02% to $2.476
billion in 2008, after increasing by 2.96% to $2.172 billion in 2007, from
$2.109 billion in 2006. During the first quarter of 2008, we called
$162.4 million in broker deposits that paid an average rate of 5.50% and had a
total of $463,000 in unamortized commissions that were written-off during that
quarter. Also, between May 2008 and July 2008, we wrote-off $176,000
in unamortized commissions related to $105.7 million in broker deposits that
paid an average rate of 5.37% and were called during that period. We
did not call back any broker deposits during the fourth quarter of
2008.
Net
interest margin on a fully taxable equivalent basis decreased to 2.33% for the
year ended December 31, 2008, from 2.80% and 2.86% for the years ended December
31, 2007 and 2006. Our net interest spread on a fully taxable
equivalent basis decreased to 1.99% in 2008, from 2.29% in 2007 and 2.33% in
2006. The decrease in net interest margin and net interest spread
during 2008 was mainly caused by decreased yields from interest rate cuts
accompanied by a $72.3 million increase in nonaccrual loans, as previously
mentioned, and increased average interest-bearing liabilities, which outpaced
the reduction in interest rate paid. During 2007, the decline in the
net interest margin and spread was primarily caused by an increase in the
average cost of interest-bearing liabilities as a result of the rising
short-term interest rates and the LIBOR inverted yield curve, which increased at
a faster rate than the yield on earning-assets; and to the fact that the
increase in average deposits was substantially in broker deposits, a higher cost
category. 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and
leases
(2)
|
|
$
|
1,802,703
|
|
|
$
|
115,274
|
|
|
|
6.45
|
%
|
|
$
|
1,780,719
|
|
|
$
|
143,360
|
|
|
|
8.13
|
%
|
|
$
|
1,643,587
|
|
|
$
|
130,003
|
|
|
|
8.00
|
%
|
|
Securities of U.S.
government agencies
(3)
|
|
|
553,540
|
|
|
|
27,391
|
|
|
|
6.88
|
|
|
|
482,605
|
|
|
|
22,690
|
|
|
|
6.53
|
|
|
|
604,606
|
|
|
|
27,137
|
|
|
|
6.45
|
|
|
Other investment
securities
(3)
|
|
|
250,704
|
|
|
|
14,704
|
|
|
|
8.15
|
|
|
|
72,919
|
|
|
|
3,883
|
|
|
|
7.40
|
|
|
|
46,083
|
|
|
|
2,296
|
|
|
|
7.03
|
|
|
Puerto Rico
government obligations
(3)
|
|
|
7,451
|
|
|
|
340
|
|
|
|
6.34
|
|
|
|
8,149
|
|
|
|
385
|
|
|
|
6.57
|
|
|
|
9,397
|
|
|
|
412
|
|
|
|
6.29
|
|
|
Securities
purchased under agreements to resell and federal funds
sold
|
|
|
34,798
|
|
|
|
801
|
|
|
|
2.80
|
|
|
|
37,826
|
|
|
|
2,042
|
|
|
|
6.14
|
|
|
|
34,841
|
|
|
|
1,791
|
|
|
|
5.57
|
|
|
Interest-earning
deposits
|
|
|
23,018
|
|
|
|
500
|
|
|
|
2.17
|
|
|
|
18,579
|
|
|
|
964
|
|
|
|
5.19
|
|
|
|
9,565
|
|
|
|
507
|
|
|
|
5.30
|
|
|
Total
interest-earning assets
|
|
$
|
2,672,214
|
|
|
$
|
159,010
|
|
|
|
6.61
|
%
|
|
$
|
2,400,797
|
|
|
$
|
173,324
|
|
|
|
7.73
|
%
|
|
$
|
2,348,079
|
|
|
$
|
162,146
|
|
|
|
7.53
|
%
|
|
Total
noninterest-earning assets
|
|
|
115,619
|
|
|
|
|
|
|
|
|
|
|
|
100,660
|
|
|
|
|
|
|
|
|
|
|
|
80,735
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
2,787,833
|
|
|
|
|
|
|
|
|
|
|
$
|
2,501,457
|
|
|
|
|
|
|
|
|
|
|
$
|
2,428,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
$
|
18,983
|
|
|
$
|
599
|
|
|
|
3.17
|
%
|
|
$
|
18,361
|
|
|
$
|
532
|
|
|
|
2.91
|
%
|
|
$
|
25,470
|
|
|
$
|
584
|
|
|
|
2.31
|
%
|
|
NOW
deposits
|
|
|
45,633
|
|
|
|
1,163
|
|
|
|
2.55
|
|
|
|
47,068
|
|
|
|
1,169
|
|
|
|
2.49
|
|
|
|
46,330
|
|
|
|
1,035
|
|
|
|
2.24
|
|
|
Savings
deposits
|
|
|
117,857
|
|
|
|
2,665
|
|
|
|
2.26
|
|
|
|
141,120
|
|
|
|
3,497
|
|
|
|
2.48
|
|
|
|
184,824
|
|
|
|
4,386
|
|
|
|
2.37
|
|
|
Time certificates of
deposit in denominations of $100,000 or more
(4)
|
|
|
261,627
|
|
|
|
10,859
|
|
|
|
4.17
|
|
|
|
236,183
|
|
|
|
12,064
|
|
|
|
5.28
|
|
|
|
204,527
|
|
|
|
8,883
|
|
|
|
4.58
|
|
|
Other time
deposits
(5)
|
|
|
1,460,662
|
|
|
|
65,223
|
|
|
|
4.83
|
|
|
|
1,331,646
|
|
|
|
67,414
|
|
|
|
5.48
|
|
|
|
1,148,973
|
|
|
|
53,657
|
|
|
|
5.09
|
|
|
Other borrowings
(6)
|
|
|
571,644
|
|
|
|
21,207
|
|
|
|
5.01
|
|
|
|
397,515
|
|
|
|
20,794
|
|
|
|
6.95
|
|
|
|
499,275
|
|
|
|
26,818
|
|
|
|
7.17
|
|
|
Total
interest-bearing liabilities
|
|
$
|
2,476,406
|
|
|
$
|
101,716
|
|
|
|
4.62
|
%
|
|
$
|
2,171,893
|
|
|
$
|
105,470
|
|
|
|
5.44
|
%
|
|
$
|
2,109,399
|
|
|
$
|
95,363
|
|
|
|
5.20
|
%
|
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
|
113,275
|
|
|
|
|
|
|
|
|
|
|
|
119,004
|
|
|
|
|
|
|
|
|
|
|
|
128,551
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
30,039
|
|
|
|
|
|
|
|
|
|
|
|
35,735
|
|
|
|
|
|
|
|
|
|
|
|
25,830
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest-bearing liabilities
|
|
|
143,314
|
|
|
|
|
|
|
|
|
|
|
|
154,739
|
|
|
|
|
|
|
|
|
|
|
|
154,381
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
168,113
|
|
|
|
|
|
|
|
|
|
|
|
174,825
|
|
|
|
|
|
|
|
|
|
|
|
165,034
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
2,787,833
|
|
|
|
|
|
|
|
|
|
|
$
|
2,501,457
|
|
|
|
|
|
|
|
|
|
|
$
|
2,428,814
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
(7)
|
|
|
|
|
|
$
|
57,294
|
|
|
|
|
|
|
|
|
|
|
$
|
67,854
|
|
|
|
|
|
|
|
|
|
|
$
|
66,783
|
|
|
|
|
|
|
Net interest
spread
(8)
|
|
|
|
|
|
|
|
|
|
|
1.99
|
%
|
|
|
|
|
|
|
|
|
|
|
2.29
|
%
|
|
|
|
|
|
|
|
|
|
|
2.33
|
%
|
|
Net interest
margin
(9)
|
|
|
|
|
|
|
|
|
|
|
2.33
|
%
|
|
|
|
|
|
|
|
|
|
|
2.80
|
%
|
|
|
|
|
|
|
|
|
|
|
2.86
|
%
|
|
(1)
|
Interest yield and expense is
calculated on a fully taxable equivalent basis assuming a 39% tax rate for
the years ended December 31, 2008 and 2007, and a 43.5% tax rate for
2006.
|
|
(2)
|
The
amortization of net loan costs or fees has been included in the
calculation of interest income. Net loan costs were
approximately $38,000, $838,000 and $539,000 for the years ended December
31, 2008, 2007 and 2006, respectively. Loans includes
nonaccrual loans, which balance as of the periods ended December 31, 2008,
2007 and 2006 was $141.3 million, $69.0 million and $37.3 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)
|
Certain
adjustments were made to comparable periods resulting from the
reclassification of broker master certificate agreements to the caption
“other time deposits.”
|
|
(5)
|
For
2007, interest expense on other time deposits 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.
|
|
(6)
|
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.
|
|
(7)
|
Net interest income on a tax
equivalent basis was $62.2 million, $67.3 million and $67.2 million for
the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
(8)
|
Represents
the average rate earned on interest-earning assets less the average rate
paid on interest-bearing liabilities on a fully taxable equivalent
basis.
|
|
(9)
|
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.
|
|
|
|
|
|
|
|
2008
Over 2007
Increases/(Decreases)
Due
to Change in
|
|
|
2007
Over 2006
Increases/(Decreases)
Due
to Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
INTEREST
EARNED ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
(1)
|
|
$
|
1,770
|
|
|
$
|
(29,856
|
)
|
|
$
|
(28,086
|
)
|
|
$
|
10,847
|
|
|
$
|
2,510
|
|
|
$
|
13,357
|
|
|
Securities
of U.S. government agencies
|
|
|
3,335
|
|
|
|
1,366
|
|
|
|
4,701
|
|
|
|
(5,476
|
)
|
|
|
1,029
|
|
|
|
(4,447
|
)
|
|
Other
investment securities
|
|
|
9,467
|
|
|
|
1,354
|
|
|
|
10,821
|
|
|
|
1,337
|
|
|
|
250
|
|
|
|
1,587
|
|
|
Puerto
Rico government obligations
|
|
|
(33
|
)
|
|
|
(12
|
)
|
|
|
(45
|
)
|
|
|
(55
|
)
|
|
|
28
|
|
|
|
(27
|
)
|
|
Securities
purchased under agreements to resell and federal funds
sold
|
|
|
(163
|
)
|
|
|
(1,078
|
)
|
|
|
(1,241
|
)
|
|
|
153
|
|
|
|
98
|
|
|
|
251
|
|
|
Interest-earning
deposits
|
|
|
230
|
|
|
|
(694
|
)
|
|
|
(464
|
)
|
|
|
478
|
|
|
|
(21
|
)
|
|
|
457
|
|
|
Total
interest-earning assets
|
|
$
|
14,606
|
|
|
$
|
(28,920
|
)
|
|
$
|
(14,314
|
)
|
|
$
|
7,284
|
|
|
$
|
3,894
|
|
|
$
|
11,178
|
|
|
INTEREST
PAID ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
$
|
18
|
|
|
$
|
49
|
|
|
$
|
67
|
|
|
$
|
(163
|
)
|
|
$
|
111
|
|
|
$
|
(52
|
)
|
|
NOW
deposits
|
|
|
(36
|
)
|
|
|
30
|
|
|
|
(6
|
)
|
|
|
16
|
|
|
|
118
|
|
|
|
134
|
|
|
Savings
deposits
|
|
|
(576
|
)
|
|
|
(256
|
)
|
|
|
(832
|
)
|
|
|
(1,037
|
)
|
|
|
148
|
|
|
|
(889
|
)
|
|
Time
certificates of deposit in denominations of $100,000 or more
(2)
|
|
|
1,300
|
|
|
|
(2,505
|
)
|
|
|
(1,205
|
)
|
|
|
1,375
|
|
|
|
1,806
|
|
|
|
3,181
|
|
|
Other
time deposits
(3)
|
|
|
6,531
|
|
|
|
(8,722
|
)
|
|
|
(2,191
|
)
|
|
|
8,531
|
|
|
|
5,226
|
|
|
|
13,757
|
|
|
Other
borrowings
(4)
|
|
|
6,109
|
|
|
|
(8,696
|
)
|
|
|
413
|
|
|
|
(5,466
|
)
|
|
|
(558
|
)
|
|
|
(6,204
|
)
|
|
Total
interest-bearing liabilities
|
|
$
|
16,346
|
|
|
$
|
(20,100
|
)
|
|
$
|
(3,754
|
)
|
|
$
|
3,256
|
|
|
$
|
6,851
|
|
|
$
|
10,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
(1,740
|
)
|
|
$
|
(8,820
|
)
|
|
$
|
(10,560
|
)
|
|
$
|
4,028
|
|
|
$
|
(2,957
|
)
|
|
$
|
1,071
|
|
|
(1)
|
The
amortization of loan costs or fees has been included in the calculation of
interest income. Net loan costs were approximately $38,000,
$838,000 and $539,000 for the years ended December 31, 2008, 2007 and
2006, respectively. Loans includes nonaccrual loans, which
balance as of the periods ended December 31, 2008, 2007 and 2006 was
$141.3 million, $69.0 million and $37.3 million, respectively, and are net
of the allowance for loan and lease losses, deferred fees, unearned
income, and related direct costs.
|
|
(2)
|
Certain
adjustments were made to comparable periods resulting from the
reclassification of broker master certificate agreements to the caption
“other time deposits.”
|
|
(3)
|
For
2007, interest expense on other time deposits 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.
|
|
(4)
|
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 was $42.3 million, $25.3 million and $16.9
million in 2008, 2007 and 2006, respectively, or 146.86%, 156.97% and 104.64% of
net charge-offs during those same periods. The increase in the
provision for loan and lease losses during 2008 was primarily related to our
commercial and construction loan portfolios, which reported further
deterioration due to current economic conditions resulting in higher credit
losses and increased specific allowances on impaired loans, as previously
mentioned. The increase in our provision 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; the
increase in our loan portfolio; and the overall economic
conditions. As of December 31, 2008, 2007 and 2006,
impaired loans amounted to $264.2 million, $84.4 million and $39.2 million,
respectively, with related specific allowances amounting to $22.4 million, $9.5
million and $2.2 million for those same periods. Net charge-offs were $28.8
million, $16.1 million and $16.2 million in 2008, 2007 and 2006,
respectively. For more detail on impairments and net charge-offs,
please refer to the sections of this discussion and analysis captioned
“Nonperforming Loans, Leases and
Assets”
and
“Allowance
for Loan and Lease Losses
.
”
Noninterest
Income
The
following table set forth the various components of our noninterest income for
the periods indicated:
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Service
charges and other fees
|
|
$
|
10,396
|
|
|
|
90.7
|
%
|
|
$
|
9,584
|
|
|
|
110.4
|
%
|
|
$
|
8,476
|
|
|
|
108.7
|
%
|
|
Gain
on sale of loans and leases, net
|
|
|
1,468
|
|
|
|
12.8
|
|
|
|
380
|
|
|
|
4.4
|
|
|
|
401
|
|
|
|
5.1
|
|
|
Gain
(loss) on sale of securities
|
|
|
191
|
|
|
|
1.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,092
|
)
|
|
|
(14.0
|
)
|
|
(Loss)
gain on sale of other real estate owned, repossessed assets, and
on
disposition of other assets, net
|
|
|
(596
|
)
|
|
|
(5.2
|
)
|
|
|
(1,286
|
)
|
|
|
(14.8
|
)
|
|
|
16
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest income
|
|
$
|
11,459
|
|
|
|
100.0
|
%
|
|
$
|
8,678
|
|
|
|
100.0
|
%
|
|
$
|
7,801
|
|
|
|
100.0
|
%
|
Our total
noninterest income was $11.5 million, compared to $8.7 million in 2007 and $7.8
million in 2006, representing an increase of 32.05% and 11.24% in 2008 and 2007,
respectively. Noninterest income as a percentage of average assets
remained at approximately 0.4% during 2008 and 2007, compared to 0.3% in
2006.
Our
largest noninterest income source is service charges and other fees, primarily
on deposit accounts. For 2008, this income source amounted to $10.4
million, compared to $9.6 million and $8.5 million in 2007 and 2006,
respectively. For the year ended December 31, 2008, the increase in
service charges and other fees was mainly due to the recording in June 2008 of
$596,000 in income related to the partial redemption of Visa, Inc. shares of
stock as part of a series of transactions arising out of the restructuring of
Visa, Inc. to become a public company; and also, to a $186,000 increase in
service charges on deposits accounts, mainly from increases in ATM and POS fees
from a change in the fee structure during the first quarter of
2008. The increase in 2007 was mainly due to a $234,000 increase in
non-sufficient fund charges on deposit accounts, $103,000 in ATM merchant fees,
$168,000 in trust fees, $130,000 in other fees on loan accounts, $105,000
leasing license commissions, and $259,000 in miscellaneous income mainly related
to our credit card operations.
During
2008, gain on sale of loans and leases amounted to $1.5 million, compared to
$380,000 in 2007 and $401,000 in 2006. This source of noninterest
income is derived primarily from the sale of mortgage loans and lease financing
contracts. In March 2008, we sold lease financing contracts on a
limited recourse basis to a third party with carrying values of $37.7
million. We retained servicing responsibilities of the lease
financing contracts sold. 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 this transaction as sale, recognizing a net gain of approximately
$1.2 million. We did not sell lease financing contracts during 2007
and 2006. While estimated losses on the limited recourse obligations
assumed in the sale of our lease financing contracts are not significant, we
established an allowance of $471,000 in March 2008, of which $331,000 remains
and have been included in the other liabilities section of our balance sheet as
of December 31, 2008.
During
2008, we sold $23.9 million in mortgage loans to other financial institutions,
compared to $16.7 million and $13.8 million in 2007 and 2006,
respectively. In addition, during 2008 and 2007, we sold $162,000 and
$281,000, in individual residential construction loans sold to other financial
institution, respectively. 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 $291,000, $380,000 and $401,000 for those same
periods.
During
the third quarter of 2008, we recognized a $191,000 gain on sale of $18.9
million in investment securities. In 2006, we recognized a $1.1 million loss on
sale of $50.1 million in FHLB and mortgage backed securities. 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 2008, we
experienced a net loss in this component of $596,000, compared to $1.3 million
in 2007 and a net gain of $16,000 in 2006. During 2008, change in the net loss
on sale of repossessed assets was mainly due to a reduction on vehicles sold, as
explained further below. 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,
particularly slow moving inventory, to expedite their disposition and avoid the
build up of our repossessed vehicles inventory, primary during the first and
second quarter of 2007. During 2008, we sold 1,434 vehicles and repossessed
1,406 vehicles, resulting in an inventory of repossessed vehicles of 297 units
as of December 31, 2008, compared to 1,855 and 1,616 vehicles sold and 1,865 and
1,745 vehicles repossessed during 2007 and 2006, respectively, resulting in an
inventory of 325 units and 564 units as of December 31, 2007 and 2006,
respectively. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
(Dollars in thousands)
|
|
|
Salaries
and employee benefits
|
|
$
|
20,088
|
|
|
|
39.6
|
%
|
|
$
|
19,890
|
|
|
|
41.1
|
%
|
|
$
|
17,507
|
|
|
|
40.3
|
%
|
|
Occupancy
and equipment
|
|
|
11,414
|
|
|
|
22.4
|
|
|
|
10,899
|
|
|
|
22.6
|
|
|
|
9,565
|
|
|
|
22.0
|
|
|
Professional
services, including directors’ fees
|
|
|
5,454
|
|
|
|
10.7
|
|
|
|
4,496
|
|
|
|
9.3
|
|
|
|
4,104
|
|
|
|
9.5
|
|
|
Office
supplies
|
|
|
1,283
|
|
|
|
2.5
|
|
|
|
1,375
|
|
|
|
2.9
|
|
|
|
1,394
|
|
|
|
3.2
|
|
|
Other
real estate owned and other repossessed assets expenses
|
|
|
2,403
|
|
|
|
4.7
|
|
|
|
2,340
|
|
|
|
4.9
|
|
|
|
2,290
|
|
|
|
5.3
|
|
|
Promotion
and advertising
|
|
|
882
|
|
|
|
1.7
|
|
|
|
1,492
|
|
|
|
3.1
|
|
|
|
1,200
|
|
|
|
2.8
|
|
|
Lease
expenses
|
|
|
523
|
|
|
|
1.0
|
|
|
|
507
|
|
|
|
1.1
|
|
|
|
776
|
|
|
|
1.8
|
|
|
Insurance
|
|
|
3,111
|
|
|
|
6.1
|
|
|
|
1,865
|
|
|
|
3.9
|
|
|
|
1,053
|
|
|
|
2.4
|
|
|
Municipal
and other taxes
|
|
|
2,030
|
|
|
|
4.0
|
|
|
|
1,837
|
|
|
|
3.8
|
|
|
|
1,657
|
|
|
|
3.8
|
|
|
Commissions
and service fees credit and debit cards
|
|
|
1,988
|
|
|
|
3.9
|
|
|
|
1,445
|
|
|
|
3.0
|
|
|
|
1,324
|
|
|
|
3.1
|
|
|
Other
noninterest expense
|
|
|
1,739
|
|
|
|
3.4
|
|
|
|
2,079
|
|
|
|
4.3
|
|
|
|
2,516
|
|
|
|
5.8
|
|
|
Total
noninterest expense
|
|
$
|
50,915
|
|
|
|
100.0
|
%
|
|
$
|
48,225
|
|
|
|
100.0
|
%
|
|
$
|
43,386
|
|
|
|
100.0
|
%
|
Our total
noninterest expense increased to $50.9 million in 2008, from $48.2 million in
2007 and $43.4 million in 2006. This represents a year over year
increase in noninterest expense of 5.58% for 2008 and 11.15% for
2007. The increase in noninterest expense during 2008 was mainly
attributable to increases in occupancy and equipment expenses, professional
services and insurance expenses, primarily as a result of the FDIC’s new
insurance premium assessment, net of decrease in promotional and other
expenses. During 2007, the increase in noninterest expense was
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 was 1.83% in 2008, compared to 1.93% in 2007 and 1.79% in
2006. Our efficiency ratio was 69.11% in 2008, 63.48% in 2007 and
57.9% in 2006. The efficiency ratio is determined by dividing total
noninterest expense by an amount equal to net interest income on a fully taxable
equivalent basis plus noninterest income.
We
anticipate that the overall volume of our noninterest expense will continue to
increase as we grow. However, we remain committed to controlling costs and
efficiency and expect to moderate these increases relative to our revenue
growth.
Salaries
and employee benefit expenses increased to $20.1 million in 2008, from $19.9
million in 2007. This slight increase mainly resulted from the net effect of a
$562,000 decrease in salary expenses off-set by a $759,000 decrease in deferred
loan origination costs because of a reduction in loan originations during the
year.
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.
Occupancy
and equipment expenses increased to $11.4 million in 2008 from $10.9 million in
2007. This increase was mainly related to a $124,000 increase in equipment
maintenance, a $96,000 increase in utilities, and a $265,000 increase in
security services, primarily attributable to the expansion of our branch
network.
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.
Professional
and directors’ fees were $5.5 million, $4.5 million and $4.1 million, or 10.7%,
9.3% and 9.5% of total noninterest expenses, in 2008, 2007 and 2006,
respectively. The increase in professional and directors’ fess during 2008 was
mainly due to the net effect of: an increase of $563,000 related to the
information technology outsourcing agreement entered with Telefónica Empresas
(“TE”) in August 2007; a $214,000 increase in professional fees mainly related
to internal audit outsourcing fees and other management consulting services; a
decrease of $120,000 in legal fees; and a $188,000 increase in regulatory
examination fees as a consequence of our asset growth. In connection with the TE
outsourcing agreement, during the year ended December 31, 2008, the Bank
experienced a reduction of $589,000 in related salaries and employee benefits
and achieved estimated savings of $416,000 in other operational costs, all
transferred to TE. 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.
Promotion
and advertising amounted to $882,000 in 2008, $1.5 million in 2007 and $1.2
million in 2006. The decrease in promotion and advertising expenses during 2008
was mainly because of a cost reduction strategy. During 2007, the increase was
mainly attributable to an advertising campaign, primarily related to our
residential mortgage loan department, to take advantage of opportunities on the
Island.
Insurance
expenses increased to $3.1 million in 2008, from $1.9 million in 2007 and $1.1
million for 2006. These increases in insurance expense were mainly related to
the FDIC’s new insurance premium assessment, which commenced in January 2007
and, during that year, were net of the one time assessment credit of $669,000.
For the years ended December 31, 2008, 2007 and 2006, total FDIC insurance
premiums amounted to $2.2 million, $892,000 and $212,000, respectively. As
previously mentioned, on October 16, 2008, the FDIC published a restoration plan
designed to replenish the Deposit Insurance Fund over a period of five years and
to increase the deposit insurance reserve ratio, which decreased to 1.01% of
insured deposits on June 30, 2008, to the statutory minimum of 1.15% of insured
deposits by December 31, 2013. For more information on FDIC’s restoration plan
please refer to the business section of this Annual Report on Form 10-K
captioned
“
FDIC Deposit Insurance
Assessments.
”
Commissions
and service fees on credit and debit cards increased to $2.0 million in 2008,
from $1.4 million in 2007, and $1.3 million in 2006. The increase during 2008
was mainly related to a $543,000 increase in merchant commissions and ATM
services fees, primarily from a change in the fee structure. During 2007, the
increase was mainly related to an increase in credit card
transactions.
Other
noninterest expenses decreased to $1.7 million for the year ended December 31,
2008, from $2.1 million and $2.5 million for the years ended December 31, 2007
and 2006, respectively. The decrease during 2008 was primarily attributable to a
$238,000 decrease in other miscellaneous expenses mainly resulting from a boat’s
insurance claim recovery. 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 primarily 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, 2008, we recorded an income tax benefit of $13.2
million, compared to an income tax benefit of $249,000 in 2007, and an income
tax expense of $6.3 million in 2006. Our income tax provision for the year ended
December 31, 2008, 2007 and 2006 was comprised of a current income tax expense
of $52,000, $4.4 million and $7.3 million, respectively, and a deferred tax
benefit of $12.9 million, $4.6 million and $684,000 for those same periods,
respectively.
Our
current income tax expense for the year ended December 31, 2008 decreased to
$52,000, from $4.4 million and $7.3 million in 2007 and 2006, respectively.
During 2008, the decrease in our current income tax expense was mainly due to
the net effect of: (i) a loss before income taxes of $24.5 million for the year
ended December 31, 2008, mainly related to the increase in net charge-offs and
the decrease in net interest income, compared to an income before taxes of $3.0
million and $14.3 million for 2007 and 2006, respectively; and (ii) an increase
in the exempt income as a percentage of total income during 2008.
Our
deferred tax benefit for the year ended December 31, 2008 increased to $12.9
million, from $4.6 million and $684,000 in 2007 and 2006, respectively. The
increase during the year ended December 31, 2008 was mainly due to the combined
effect of: (i) an increase of $7.1 million in the deferred tax asset related to
the net operating loss (“NOL”) carryforward from the taxable loss in our banking
subsidiary; and (ii) an increase of $5.8 million in the other net deferred tax
assets primarily from an increase in our allowance for loan and lease losses.
During 2007, the increase in the deferred tax benefit was mainly due to 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.
In
addition, the income tax benefit for the year ended December 31, 2008, included
an income tax benefit of $334,000, related to tax credits received from Puerto
Rico’s Treasury Department in excess of the amount paid on transactions under
the law No. 197, as further explained below.
As of
December 31, 2008, 2007 and 2006, we had net deferred tax assets of $23.8
million, $10.9 million and $6.3 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 assets; 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. Based on management
projections, we believe it is more likely than not that the benefits of these
deductible differences at December 31, 2008 will be realized.
On March
9, 2009, the governor of Puerto Rico signed into law Act No. 7 (the “Act No.
7”), also know as Special Act Declaring a Fiscal Emergency Status to Save the
Credit of Puerto Rico, which amended several sections of the Puerto Rico’s
Internal Revenue Code (the “Code”). Act No, 7 amended various income, property,
excise, and sales and use tax provision of the Code. Under the provisions of Act
No. 7, corporations, among other taxpayers, will be subject to surtax of 5% on
the total tax determined (not on the taxable income). In addition, Act No. 7
imposes a special income tax of 5% on the net income of International Banking
Entities ("IBE"), among a group of exempt taxpayers. Both, the 5% surtax and the
special income tax rate of 5% are applicable for taxable years commencing after
December 31, 2008 and prior January 1, 2012. Act No. 7 also revamps the
alternative basic tax provisions of the Code. Under the revised version, our
dividends, generally subject to a maximum 10% preferential rate tax, may now be
subject to an effectively tax of 20% in the case of individuals with income
(computed with certain addition of exempt income and income subject to
preferential rates) in excess of $175,000, or 15% if such income is over
$125,000. Act No. 7 provides for several additional changes to the Code, which
the Company believes will have an inconsequential financial impact or are not
applicable since are related to individuals taxpayers.
On
December 14, 2007, the governor of Puerto Rico approved and signed Law No. 197,
which offered tax credits to financial institutions on the financing of
qualified residential mortgages. These tax credits varied based on whether the
property to be financed was an existing dwelling or a new construction and
whether it would be occupied by the buyer or was acquired for investment
purposes. The tax credits were limited, subject to certain restrictions, to a
maximum of a 20% of the property’s selling price, or $25,000, whichever was
lower. This law expired in November 2008, when the tax credits granted reached
the total allotted amount of $220.0 million. The granted tax credits should be
used during taxable years beginning after December 31, 2007 up to taxable year
ended December 31, 2011, provided that in case of tax credits expiration, a
reimbursement will be received from the Puerto Rico Treasury Department. As of
December 31, 2008, we had $3.4 million in tax credits under Law No.
197.
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. Total prepaid tax under Law No. 98 recorded during
2006 amounted to $196,000, which could be used in equal portions as a tax credit
in the income tax return for the taxable years beginning after December 31,
2006. During 2007, we used $49,000 of this prepaid tax, while remaining balance
is available for use in future taxable years.
On May
13, 2006, the governor of Puerto Rico approved and signed Law No. 89, which
imposed an additional transitory tax 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%. The
approval of this additional transitory tax over the original maximum statutory
rate of 39% resulted in additional income tax expense of $755,000 for the year
ended December 31, 2006.
Financial
Condition
Our total
assets as of December 31, 2008 were $2.860 billion, compared to $2.751 billion
and $2.501 billion as of December 31, 2007 and 2006, respectively. The increase
in our total assets during 2008 was primarily the net result of: (i) an increase
of $27.4 million in cash and due from banks; (ii) a $31.9 million decrease in
interest-bearing deposits; (iii) an increase of $44.5 million in federal funds
sold; (iv) a $147.4 million increase in the investment securities portfolio; and
(v) a decrease of $88.0 million in net loans, including the $37.7 million sale
of lease financing contracts in March 2008, as previously mentioned. During
2007, the increase in our total assets was primarily the net result of a $31.3
million decrease in securities purchased under agreements to resell, a $173.4
million increase in our investment securities portfolio, a $98.5 million
increase in of our loan portfolio, and a $18.2 million increase in premises and
equipment.
Our total
deposits increased by 4.58% to $2.084 billion in 2008, after increasing by 4.60%
to $1.993 billion in 2007, from $1.905 billion as of December 31, 2006. The
increase in deposits during 2008 and 2007 was mainly concentrated in broker
deposits, as further explained in the section of this discussion and analysis
captioned “
Deposits
.”
Other borrowings increased to $592.5 million in 2008, after increasing to $547.5
million in 2007, from $395.0 million as of December 31, 2006.
Stockholders’
equity decreased by 12.98% to $156.6 million as of December 31, 2008,
representing a decrease of $23.3 million from $179.9 million as of December 31,
2007. As of December 31, 2007, our stockholders’ equity was $179.9 million,
representing an increase of 5.91% from $169.9 million as of December 31, 2006,
as further explained in the section of this discussion and analysis captioned
“
Capital Resources and Capital
Adequacy Requirements
.”
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, 2008, 2007 and 2006, we had
$400,000, $32.3 million and $49.1 million, respectively, in interest-bearing
deposits in other financial institutions. Also, we had $24.5 million, $19.9
million and $51.2 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, purchased securities under agreements to
resell and federal funds sold was 2.55%, 5.83% and 5.46% for the years ended
December 31, 2008, 2007 and 2006, respectively.
Investment
Securities
Our
investment portfolio primarily serves as a source of interest income and,
secondarily, as a source of liquidity and a management tool for our interest
rate sensitivity. We manage our investment portfolio according to a written
investment policy implemented by our Asset/Liability Management Committee. Our
investment policy is reviewed at least annually by our Board of Directors.
Investment balances, including cash equivalents and interest-bearing deposits in
other financial institutions, are subject to change over time based on our
asset/liability funding needs and our interest rate risk management objectives.
Our liquidity levels take into consideration anticipated future cash flows and
all available sources of credits and are maintained at levels management
believes are appropriate to assure future flexibility in meeting our anticipated
funding needs.
Our
investment portfolio mainly consists of securities classified as
“available-for-sale” and a 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 unrealized 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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies obligations
|
|
$
|
27,524
|
|
|
$
|
27,771
|
|
|
$
|
2,457
|
|
|
$
|
2,462
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29,981
|
|
|
$
|
30,233
|
|
|
Collateralized
mortgage obligations
|
|
|
442,509
|
|
|
|
423,727
|
|
|
|
105,307
|
|
|
|
104,796
|
|
|
|
—
|
|
|
|
—
|
|
|
|
547,816
|
|
|
|
528,524
|
|
|
Mortgage-backed
securities
|
|
|
279,855
|
|
|
|
288,012
|
|
|
|
25,034
|
|
|
|
25,632
|
|
|
|
—
|
|
|
|
—
|
|
|
|
304,889
|
|
|
|
313,645
|
|
|
Commonwealth
of Puerto Rico obligations
|
|
|
5,546
|
|
|
|
5,564
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,546
|
|
|
|
5,564
|
|
|
US
Corporate Notes
|
|
|
7,975
|
|
|
|
5,941
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,975
|
|
|
|
5,941
|
|
|
Other
investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,932
|
|
|
|
14,932
|
|
|
|
14,932
|
|
|
|
14,932
|
|
|
Total
|
|
$
|
763,409
|
|
|
$
|
751,017
|
|
|
$
|
132,798
|
|
|
$
|
132,891
|
|
|
$
|
14,932
|
|
|
$
|
14,932
|
|
|
$
|
911,140
|
|
|
$
|
898,839
|
|
|
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
|
|
|
Commonwealth
of Puerto Rico 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
|
|
|
Commonwealth
of Puerto Rico obligations
|
|
|
9,518
|
|
|
|
9,563
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,518
|
|
|
|
9,563
|
|
|
Other
investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,329
|
|
|
|
4,329
|
|
|
|
4,329
|
|
|
|
4,329
|
|
|
Total
|
|
$
|
542,723
|
|
|
$
|
535,159
|
|
|
$
|
38,433
|
|
|
$
|
37,474
|
|
|
$
|
4,329
|
|
|
$
|
4,329
|
|
|
$
|
585,485
|
|
|
$
|
576,962
|
|
During
2008, our investment portfolio increased by approximately $147.4 million to
$898.7 million, from $751.3 million as of December 31, 2007. This increase
was primarily due to the net effect of:
|
|
(i)
|
the
purchase of $464.8 million in mortgage-backed securities, FHLB
obligations, Puerto Rico government agencies obligations, and a corporate
note;
|
|
|
(ii)
|
prepayments
of approximately $137.8 million on mortgage-backed securities and FHLB
obligations;
|
|
|
(iii)
|
$144.8
million in US government agencies, PR bonds, and private label collateral
mortgage obligations that matured or were called-back during the
year;
|
|
|
(iv)
|
the
sale of $10.0 million in a US agencies note, and $8.9 million in a US
agencies mortgage-backed security, both sold in an effort to improve our
net interest margin, as previously mentioned;
and
|
|
|
(v)
|
a
decrease of $13.5 million in the market valuation on securities available
for sale.
|
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:
|
|
(i)
|
the
purchase of $315.2 million in mortgage-backed securities and $3.0 million
in corporate debt;
|
|
|
(ii)
|
prepayments
of approximately $104.7 million on mortgage-backed securities and FHLB
obligations; and
|
|
|
(iii)
|
$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.
|
As part
of our investment strategy, we analyze 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.
During
2008, we continued analyzing different market opportunities to reposition our
investment portfolio in an attempt to improve its average yield and to maintain
an adequate average life. During 2008, we were able to purchase
approximately $464.8 million in mortgage-backed securities, FHLB obligations,
Puerto Rico government agencies obligations, and a corporate note, all with an
estimated average life of approximately 5.0 years and an estimated average yield
of 5.4%. Purchased mortgage-backed securities totaled $408.1 million and
included approximately $167.5 million in mortgage back securities issued by US
government agencies and by US government sponsored enterprises, $127.0 million
in collateralized mortgage obligations guaranteed by US government agencies and
by US government sponsored enterprises, and $113.6 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, 2008, after the above-mentioned transactions, the
estimated average maturity of the investment portfolio was approximately 5.7
years and the average yield was approximately 5.2%, compared to an estimated
average maturity of 4.8 years and an average yield of 5.06% for 2007, and an
estimated average maturity of 3.2 years and an average yield of 4.64% for the
year ended December 31, 2006.
With the
assistance of a third party provider, we reviewed the investment portfolio as of
December 31, 2008 using cash flow and valuation models and considering the SFAS
No. 115,
Accounting for
Certain Investments in Debt and Equity
, and the EITF 99-20,
Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets
, for
applicable securities.
During
the review, the company identified securities with characteristics that
warranted a more detailed analysis:
|
|
(i)
|
One
security for $1.1 million is a non-rated Trust Preferred Stock
(“TPS”). For the TPS, the company reviewed the current
performance of the security and the current financial position of the
issuer.
|
|
|
(ii)
|
Sixteen
are private label mortgage-backed securities (“MBS”) amounting
to $44.4 million that have mixed credit ratings or other special
characteristics. For each one of the MBS, the company reviewed the
collateral performance and considered the impact of current economic
trends. These analyses were performed taking into consideration
current U.S. market conditions and trends, forward projected cash flows
and the present value of the forward projected cash flows. We
determined that, as of December 31, 2008, the estimated present value of
all expected cash flows of these investments was at or above their book
value. Some of the analysis performed to the downgraded
mortgage-backed securities
included:
|
|
|
a.
|
the
calculation of their coverage
ratios;
|
|
|
b.
|
current
credit support;
|
|
|
c.
|
total
delinquency over sixty days;
|
|
|
d.
|
average
loan-to-values;
|
|
|
e.
|
projected
defaults considering a conservative additional downside scenario of (5)%
in Housing Price Index values for each of the following three
years;
|
|
|
f.
|
a
mortgage loan Conditional Prepayment Rate (“CPR”) speed equal to the
approximately last six months average for each
security;
|
|
|
g.
|
projected
total future deal loss based on the previous conservative
assumptions;
|
|
|
h.
|
excess
credit support protection;
|
|
|
i.
|
projected
tranche dollar loss; and
|
|
|
j.
|
projected
tranche percentage loss, if any, and economic
value.
|
Based on
this assessment, the company concluded that no other than temporary impairment
needs to be recorded for this reporting period. For more information
on fair market value of investment securities please refer to
“Note 4 – Investment Securities
Available for Sale”
and
“Note 5 – Investment Securities Held
to Maturity”
to our consolidated financial statements included
herein.
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, 2008
|
|
|
|
|
Within
One Year
|
|
|
After One but
Within Five Years
|
|
|
After Five but
Within Ten Years
|
|
|
After Ten Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Investments available–for–sale:
(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies obligations
|
|
$
|
21,221
|
|
|
|
4.31
|
%
|
|
$
|
6,551
|
|
|
|
5.23
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
27,772
|
|
|
|
4.53
|
%
|
|
Mortgage backed
securities
(3)
|
|
|
1
|
|
|
|
6.62
|
|
|
|
72,444
|
|
|
|
4.80
|
|
|
|
188,289
|
|
|
|
5.17
|
|
|
|
27,278
|
|
|
|
5.63
|
|
|
|
288,012
|
|
|
|
5.12
|
|
|
Collateral mortgage
obligations
(3)
|
|
|
30,412
|
|
|
|
4.60
|
|
|
|
254,582
|
|
|
|
5.10
|
|
|
|
110,957
|
|
|
|
5.60
|
|
|
|
27,776
|
|
|
|
5.84
|
|
|
|
423,727
|
|
|
|
5.25
|
|
|
Commonwealth
of Puerto Rico obligations
|
|
|
205
|
|
|
|
5.82
|
|
|
|
5,360
|
|
|
|
4.75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,565
|
|
|
|
4.79
|
|
|
Us
Corporate Notes
|
|
|
5,941
|
|
|
|
5.01
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,941
|
|
|
|
5.01
|
|
|
Total
investments available-for-sale
|
|
$
|
57,780
|
|
|
|
4.54
|
%
|
|
$
|
338,937
|
|
|
|
5.03
|
%
|
|
$
|
299,246
|
|
|
|
5.33
|
%
|
|
$
|
55,054
|
|
|
|
5.74
|
%
|
|
$
|
751,017
|
|
|
|
5.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
held–to–maturity:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies obligations
|
|
$
|
2,457
|
|
|
|
3.95
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
2,457
|
|
|
|
3.95
|
%
|
|
Mortgage backed
securities
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,034
|
|
|
|
4.95
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,034
|
|
|
|
4.95
|
|
|
Collateral mortgage
obligations
(3)
|
|
|
1,584
|
|
|
|
3.95
|
|
|
|
65,894
|
|
|
|
5.57
|
|
|
|
37,829
|
|
|
|
5.11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105,307
|
|
|
|
5.38
|
|
|
Total
investments held-to-maturity
|
|
$
|
4,041
|
|
|
|
3.95
|
%
|
|
$
|
65,894
|
|
|
|
5.57
|
%
|
|
$
|
62,863
|
|
|
|
5.05
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
132,798
|
|
|
|
5.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
stock
|
|
$
|
14,322
|
|
|
|
3.50%
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
14,322
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in statutory trust
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
610
|
|
|
|
4.72
|
|
|
|
610
|
|
|
|
4.72
|
|
|
Total
other investments
|
|
$
|
14,322
|
|
|
|
3.50%
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
610
|
|
|
|
4.72
|
%
|
|
$
|
14,932
|
|
|
|
3.55
|
%
|
|
Total
investments
|
|
$
|
76,143
|
|
|
|
4.31%
|
%
|
|
$
|
404,831
|
|
|
|
5.12
|
%
|
|
$
|
362,109
|
|
|
|
5.28
|
%
|
|
$
|
55,664
|
|
|
|
5.73
|
%
|
|
$
|
898,747
|
|
|
|
5.16
|
%
|
__________
|
(1)
|
Based
on estimated fair value.
|
|
(2)
|
Almost
all of our income from investments in securities is tax exempt because
99.59% 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, 2008,
our investment in other earning assets included $14.3 million in FHLB stock and
$610,000 equity in our statutory trust. The following table presents
the balances of other earning assets as of the dates indicated:
|
|
|
|
|
|
Type
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
Statutory
trusts
|
|
$
|
610
|
|
|
$
|
610
|
|
|
$
|
611
|
|
|
FHLB
stock
|
|
|
14,322
|
|
|
|
12,744
|
|
|
|
3,718
|
|
|
Total
|
|
$
|
14,932
|
|
|
$
|
13,354
|
|
|
$
|
4,329
|
|
Dividends
on FHLB stock amounted to $827,000, $393,000 and $528,000 for the years ended
December 31, 2008, 2007 and 2006, 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 $1.9 million, $1.4 million, $879,000, $936,000 and $2.7
million as of December 31, 2008, 2007, 2006, 2005 and 2004,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Real estate secured
|
|
$
|
979,496
|
|
|
$
|
900,036
|
|
|
$
|
813,615
|
|
|
$
|
658,123
|
|
|
$
|
516,542
|
|
|
Leases
|
|
|
267,325
|
|
|
|
385,390
|
|
|
|
443,311
|
|
|
|
487,863
|
|
|
|
459,251
|
|
|
Other
commercial and industrial
|
|
|
263,332
|
|
|
|
302,530
|
|
|
|
297,512
|
|
|
|
272,205
|
|
|
|
243,603
|
|
|
Consumer
|
|
|
49,415
|
|
|
|
57,745
|
|
|
|
60,682
|
|
|
|
63,980
|
|
|
|
74,755
|
|
|
Real
estate – construction
|
|
|
220,579
|
|
|
|
203,344
|
|
|
|
126,241
|
|
|
|
82,468
|
|
|
|
79,334
|
|
|
Other
loans
(1)
|
|
|
2,146
|
|
|
|
6,850
|
|
|
|
5,015
|
|
|
|
5,336
|
|
|
|
6,134
|
|
|
Gross
loans and leases
|
|
$
|
1,782,293
|
|
|
$
|
1,855,895
|
|
|
$
|
1,746,376
|
|
|
$
|
1,569,975
|
|
|
$
|
1,379,619
|
|
|
Plus: Deferred
loan costs, net
|
|
|
455
|
|
|
|
2,366
|
|
|
|
4,880
|
|
|
|
7,442
|
|
|
|
6,480
|
|
|
Total
loans, including deferred loan costs, net
|
|
$
|
1,782,748
|
|
|
$
|
1,858,261
|
|
|
$
|
1,751,256
|
|
|
$
|
1,577,417
|
|
|
$
|
1,386,099
|
|
|
Less:
Unearned income
|
|
|
(569
|
)
|
|
|
(1,042
|
)
|
|
|
(1,297
|
)
|
|
|
(1,157
|
)
|
|
|
(1,170
|
)
|
|
Total
loans, net of unearned income
|
|
$
|
1,782,179
|
|
|
$
|
1,857,219
|
|
|
$
|
1,749,959
|
|
|
$
|
1,576,260
|
|
|
$
|
1,384,929
|
|
|
Less:
Allowance for loan and lease losses
|
|
|
(41,639
|
)
|
|
|
(28,137
|
)
|
|
|
(18,937
|
)
|
|
|
(18,188
|
)
|
|
|
(19,039
|
)
|
|
Loans,
net
|
|
$
|
1,740,540
|
|
|
$
|
1,829,082
|
|
|
$
|
1,731,022
|
|
|
$
|
1,558,072
|
|
|
$
|
1,365,890
|
|
__________
|
(1)
|
Other
loans are comprised of overdrawn deposit
accounts.
|
As of
December 31, 2008, 2007 and 2006, our total loans and leases, net of unearned
income, were $1.782 billion, $1.857 billion and $1.750 billion,
respectively. The decrease in our loan volume during 2008 mainly
resulted from the contraction of our leasing business, as explained further
below. During 2007, the increase in our loan volume resulted from the organic
growth of our operations. Our total loans and leases, net of unearned
income as a percentage of total assets was 62.4%, 67.6% and 70.0% as of December
31, 2008, 2007 and 2006, 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
some instances, additional forms of collateral or guaranties are
obtained. Loans secured by real estate, excluding construction loans,
equaled $979.5 million, $900.0 million and $813.6 million as of December 31,
2008, 2007 and 2006, respectively. The volume of our real estate
loans has increased 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 55.0% in 2008, from 48.4% in 2007, and
from 46.6% in 2006.
Loans
secured by real estate included residential mortgages amounting to $125.6
million as of December 31, 2008, which increased by $18.6 million, or by 17.40%,
when compared to $106.9 million as of December 31, 2007, after increasing by
$30.7 million, or by 40.21%, from $76.3 million as of December 31,
2006. 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.
Lease
financing contracts consist of automobile and equipment leases made to
individuals and corporate customers. Our leasing production is
concentrated on automobile leasing. For 2008, approximately 62.85% of
our lease financing contracts originations were for new automobiles,
approximately 35.27% were for used automobiles and the remaining 1.88% consisted
primarily of construction and medical equipment leases. Our portfolio
of lease financing contracts decreased to $267.3 million as of December 31,
2008, from $385.4 million as of December 31, 2007 and from $443.3 million as of
December 31, 2007 and 2006, respectively. The decrease in
our lease portfolio during 2008 and 2007 resulted from our decision to
strategically pare back our automobile leasing operations upon the
continuous economic distress and the deterioration of our lease portfolio during
previous fiscal years. During 2008, the decrease in our leasing
portfolio includes the sale of $37.7 million in March 2008, as previously
mentioned. Occasionally, we sell lease financing contracts on a
limited recourse basis to other financial institutions and, typically, we retain
the right to service the leases we sold. Lease financing contracts,
as a percentage of total loans and leases were 15.0%, 20.8% and 25.4% at the end
of 2008, 2007 and 2006, respectively.
Other
commercial and industrial loans include revolving lines of credit as well as
term business loans, which are primarily collateralized by personal or corporate
guaranties, accounts receivable and the assets being acquired, such as equipment
or inventory. Other commercial and industrial loans amounted to
$263.3 million as of December 31, 2008, compared to $302.5 million and $297.5
million as of December 31, 2007 and 2006, respectively. During 2008,
the decrease in other commercial and industrial loans was totally offset by an
increase in commercial loans secured by real estate, resulting in a net increase
of $20.0 million in total commercial loans. These were organic changes to the
portfolio. During 2007 and 2006, other commercial and industrial loans remained
relatively stable. Other commercial and industrial loans as a
percentage of total loans were 14.8%, 16.3% and 17.0% at the end of 2008, 2007
and 2006, respectively.
Construction
loans secured by real estate totaled $220.6 million, $203.3 million and $126.2
million as of December 31, 2008, 2007 and 2006,
respectively. Construction loans secured by real estate as a
percentage of total loans and leases were 12.4%, 11.0% and 7.2% for those same
periods, respectively. The increase in construction loans secured by
real estate during 2008 resulted from disbursements on loan commitments we made
during or before year 2007, while during 2007, it resulted from of our
organic growth. Our construction loan portfolio is mainly 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. We did not make any
new construction loans during year 2008.
Consumer
loans have historically represented a small part of our total loan and lease
portfolio. The majority of consumer loans consist of boat loans,
personal installment loans, credit cards, and consumer lines of
credit. We make consumer loans only to complement our commercial
business, and these loans are not emphasized by our branch
managers. 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 BankTrust. Consumer loans
as a percentage of total loans and leases were 2.9%, 3.2% and 3.5% at the end of
2008, 2007 and 2006, respectively. Consumer loans as of December 31,
2008, 2007 and 2006 included a boat portfolio of $30.3 million, $35.0 million
and $37.4 million, respectively; $10.0 million, $13.4 million and $13.8 million,
respectively, in unsecured installment loans; and credit cards and open-end
loans for $9.1 million, $9.3 million and $9.5 million,
respectively.
Our loan
terms vary according to loan type. Commercial term loans generally
have maturities of three to five years, while we generally limit 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 $1.9 million, as of December 31, 2008, excluding
non-accrual loans amounting to $141.3 million as of the same date. As
of December 31, 2008, 73.63% of our non-consumer loan portfolio is comprised of
floating rate loans, which are primarily comprised of both commercial and
industrial loans and commercial real estate loans. Residential
mortgage loans are included in the real estate - secured category in the
following table.
|
|
|
|
|
|
|
|
|
|
|
Over 1 Year
through 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating or
Adjustable
Rate
(2)
|
|
|
|
|
|
Floating or
Adjustable
Rate
(2)
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
Real
estate — construction
|
|
$
|
147,637
|
|
|
$
|
1,332
|
|
|
$
|
57,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
205,969
|
|
|
Real
estate — secured
|
|
|
266,577
|
|
|
|
211,656
|
|
|
|
235,652
|
|
|
|
131,816
|
|
|
|
30,095
|
|
|
|
875,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
commercial and industrial
|
|
|
179,146
|
|
|
|
28,172
|
|
|
|
33,980
|
|
|
|
251
|
|
|
|
7,279
|
|
|
|
248,828
|
|
|
Consumer
|
|
|
10,735
|
|
|
|
9,258
|
|
|
|
1,153
|
|
|
|
26,582
|
|
|
|
-
|
|
|
|
47,728
|
|
|
Leases
|
|
|
23,244
|
|
|
|
223,294
|
|
|
|
-
|
|
|
|
15,786
|
|
|
|
-
|
|
|
|
262,324
|
|
|
Other
loans
|
|
|
2,103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,103
|
|
|
Total
|
|
$
|
629,442
|
|
|
$
|
473,712
|
|
|
$
|
327,785
|
|
|
$
|
174,435
|
|
|
$
|
37,374
|
|
|
$
|
1,642,748
|
|
__________
|
(1)
|
Maturities
are based upon contract dates. Demand loans are included in the
one year or less category and totaled $212.6 million as of December 31,
2008.
|
|
(2)
|
Most
of our floating or adjustable rate loans are pegged to Prime or LIBOR
interest rates.
|
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Loans
contractually past due 90 days or more but still accruing
interest
|
|
$
|
22,590
|
|
|
$
|
29,075
|
|
|
$
|
12,723
|
|
|
$
|
8,560
|
|
|
$
|
8,365
|
|
|
Nonaccrual
loans
|
|
|
141,304
|
|
|
|
68,990
|
|
|
|
37,255
|
|
|
|
27,703
|
|
|
|
32,168
|
|
|
Total
nonperforming loans
|
|
|
163,894
|
|
|
|
98,065
|
|
|
|
49,978
|
|
|
|
36,263
|
|
|
|
40,533
|
|
|
Other
real estate owned
|
|
|
8,759
|
|
|
|
8,125
|
|
|
|
3,629
|
|
|
|
1,542
|
|
|
|
2,875
|
|
|
Other
repossessed assets
|
|
|
4,747
|
|
|
|
5,409
|
|
|
|
9,419
|
|
|
|
7,975
|
|
|
|
3,566
|
|
|
Total
nonperforming assets
|
|
$
|
177,400
|
|
|
$
|
111,599
|
|
|
$
|
63,026
|
|
|
$
|
45,780
|
|
|
$
|
46,974
|
|
|
Nonperforming
loans to total loans and leases, net of unearned
|
|
|
9.19
|
%
|
|
|
5.28
|
%
|
|
|
2.85
|
%
|
|
|
2.30
|
%
|
|
|
2.92
|
%
|
|
Nonperforming
assets to total loans and leases, net of unearned, plus repossessed
property
|
|
|
9.87
|
|
|
|
5.96
|
|
|
|
3.57
|
|
|
|
2.89
|
|
|
|
3.37
|
|
|
Nonperforming
assets to total assets
|
|
|
6.20
|
|
|
|
4.06
|
|
|
|
2.52
|
|
|
|
1.91
|
|
|
|
2.23
|
|
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 and secured loans; (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
loans amounted to $163.9 million as of December 31, 2008, compared to $98.1
million as of December 31, 2007 and $50.0 million as of December 31,
2006.
The
increase in nonperforming loans during 2008 was mainly due to the net effect of
a $72.3 million increase in nonaccrual loans and a $6.5 million decrease in
loans 90 days or more past due still accruing interest. During 2008,
the $72.3 million increase in nonaccrual loans during 2008 was mainly due to the
combined effect of a $34.2 million increase in construction loans; $21.0 million
increase in other commercial and industrial loans; and a $17.2 million increase
in commercial loans secured by real estate. The decrease in loans 90
days or more past due still accruing interest was mainly due to the net effect
of: a $10.1 million decrease in construction loans; a $4.9 million
increase in mortgage loans; and a $2.0 million decrease in commercial loans
secured by real estate.
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. 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.
We
believe all loans and leases, with which we have serious doubts as to
collectibility, are classified within the category of nonperforming loans and
leases and are appropriately reserved.
Repossessed
assets remained at $13.5 million as of December 31, 2008 and 2007, compared to
$13.0 million as of December 31, 2006. Changes in repossessed assets
were mainly attributable to the combined effect of:
|
|
(i)
|
an
increase of $634,000 in other real estate owned (“OREO”) during 2008
resulting from the net effect of the sale of 25 properties and the
foreclosure of 16 properties, including the sale of 18 land lots in the
amount of $1.1 million, which had been repossessed from a commercial
customer during the fourth quarter of 2007; and a $4.5 million increase in
OREO during 2007 resulting from the net effect of the sale of 7 properties
and the foreclosure of 29
properties.
|
|
|
(ii)
|
a
decrease of $662,000 in other repossessed assets during 2008, mainly in
repossessed equipment, compared to a $4.0 million decrease during
2007. As previously mentioned, during 2008 and 2007, we sold
1,434 vehicles and 1,855 vehicles, respectively, and repossessed 1,406
vehicles and 1,616 vehicles, respectively, decreasing our inventory of
repossessed vehicles to 297 units as of December 31, 2008, from 325 units
as of December 31, 2007, and from 564 units as of December 31,
2006. During the same years, we sold 23 boats and 18 boats,
respectively, and repossessed 20 boats and 16 boats, respectively,
decreasing our inventory of repossessed boats to 15 units as of December
31, 2008, from 18 units as of December 31, 2007, and from 20 units as of
December 31, 2006.
|
As of
December 31, 2008, 2007 and 2006, other repossessed assets were comprised
of: repossessed vehicles amounting to $3.5 million, $4.3 million and
$8.3 million, respectively; repossessed boats amounting to $1.2 million,
$991,000 and $1.1 million, respectively; and repossessed equipment amounting to
$6,000, $88,000 and $39,000, respectively. The decrease in repossessed
vehicles during 2008 and 2007 was mainly attributable to our strategy of being
more aggressive in the sale of repossessed vehicles. As previously
mentioned, this strategy resulted in a significant reduction in the number of
repossessed vehicles in inventory.
As of
December 31, 2008, our OREO consisted of 36 properties with an aggregate value
of $8.8 million, compared to 45 properties with an aggregate value of $8.1
million as of December 31, 2007, and 18 properties with an aggregate value of
$3.6 million as of December 31, 2006.
Allowance
for Loan and Lease Losses
We have
established an allowance for loan and lease losses to provide for loans and
leases in our portfolio that may not be repaid in their entirety. The
allowance is based on our regular, monthly assessments of 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, procedures, laws and
regulations.
|
For the
general portion of our allowance, 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. The general portion of our allowance is calculated by
applying loss factors to all categories of unimpaired loans and leases
outstanding in 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 unimpaired 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:
|
|
·
|
levels
of, and trends in, delinquencies and
nonaccruals;
|
|
|
·
|
levels
of, and trends in, charge-offs, and
recoveries;
|
|
|
·
|
trends
in volume and terms of loans;
|
|
|
·
|
effects
of any changes in risk selection and underwriting standards, and other
changes in lending policies, procedures and
practices;
|
|
|
·
|
changes
in the experience, ability and depth of our lending management and
relevant staff;
|
|
|
·
|
national
and local economic business trends and
conditions.
|
|
|
·
|
banking
industry conditions; and
|
|
|
·
|
effect
of changes in concentrations of credit that might affect loss experience
across one or more components of the
portfolio.
|
On a
quarterly basis, a risk percentage is assigned to each environmental factor
based on our judgment of the risks over each loan category. The
result of our assumptions is then applied to the current period’s balance of
unimpaired 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 allowance, 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 have been 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
. For
impaired commercial and construction business relationships with aggregate
balances exceeding $150,000, we measure the impairment following the guidance of
SFAS No. 114.
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, as necessary.
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, among other ratios.
Consumer
loans, leases and residential mortgages with a loan-to-value over 60% that are
more than 90 days delinquent are subject to an additional
allowance. Commercial and construction loans that reach 90 days of
delinquency, or earlier if deemed appropriate by management, are subject to
review by the Loan Review Department including, but not limited to, a review of
financial statements, repayment ability and collateral held. In
connection with this review, the Loan Review Department 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.
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Average
total loans and leases outstanding during period
|
|
$
|
1,834,281
|
|
|
$
|
1,804,099
|
|
|
$
|
1,663,330
|
|
|
$
|
1,487,850
|
|
|
$
|
1,217,723
|
|
|
Total
loans and leases outstanding at end of period
|
|
|
1,784,052
|
|
|
|
1,858,579
|
|
|
|
1,750,838
|
|
|
|
1,577,196
|
|
|
|
1,387,613
|
|
|
Allowance
for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
at beginning of period
|
|
|
28,137
|
|
|
|
18,937
|
|
|
|
18,188
|
|
|
|
19,039
|
|
|
|
9,394
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate — secured
|
|
|
8,748
|
|
|
|
372
|
|
|
|
685
|
|
|
|
–
|
|
|
|
5
|
|
|
Commercial
and industrial
|
|
|
7,461
|
|
|
|
3,122
|
|
|
|
3,050
|
|
|
|
4,848
|
|
|
|
3,329
|
|
|
Consumer
|
|
|
2,129
|
|
|
|
1,699
|
|
|
|
1,978
|
|
|
|
2,600
|
|
|
|
1,196
|
|
|
Leases
|
|
|
12,508
|
|
|
|
12,680
|
|
|
|
12,927
|
|
|
|
8,991
|
|
|
|
5,806
|
|
|
Other
loans
|
|
|
268
|
|
|
|
398
|
|
|
|
149
|
|
|
|
150
|
|
|
|
164
|
|
|
Total
charge-offs
|
|
|
31,114
|
|
|
|
18,271
|
|
|
|
18,789
|
|
|
|
16,589
|
|
|
|
10,500
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate — secured
|
|
|
21
|
|
|
|
52
|
|
|
|
11
|
|
|
|
–
|
|
|
|
–
|
|
|
Commercial
and industrial
|
|
|
737
|
|
|
|
319
|
|
|
|
534
|
|
|
|
486
|
|
|
|
154
|
|
|
Consumer
|
|
|
322
|
|
|
|
319
|
|
|
|
465
|
|
|
|
256
|
|
|
|
233
|
|
|
Leases
|
|
|
1,213
|
|
|
|
1,410
|
|
|
|
1,604
|
|
|
|
2,210
|
|
|
|
1,741
|
|
|
Other
loans
|
|
|
9
|
|
|
|
23
|
|
|
|
21
|
|
|
|
11
|
|
|
|
15
|
|
|
Total
recoveries
|
|
|
2,302
|
|
|
|
2,123
|
|
|
|
2,635
|
|
|
|
2,963
|
|
|
|
2,143
|
|
|
Net
loan and lease charge-offs
|
|
|
28,812
|
|
|
|
16,148
|
|
|
|
16,154
|
|
|
|
13,626
|
|
|
|
8,357
|
|
|
Provision
for loan and lease losses
|
|
|
42,314
|
|
|
|
25,348
|
|
|
|
16,903
|
|
|
|
12,775
|
|
|
|
7,100
|
|
|
Allowance
of acquired bank — BankTrust (2004)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
–
|
|
|
|
10,902
|
|
|
Allowance
at end of period
|
|
$
|
41,639
|
|
|
$
|
28,137
|
|
|
$
|
18,937
|
|
|
$
|
18,188
|
|
|
$
|
19,039
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loan and lease charge-offs to average total loans
|
|
|
1.57
|
%
|
|
|
0.90
|
%
|
|
|
0.97
|
%
|
|
|
0.92
|
%
|
|
|
0.69
|
%
|
|
Allowance
for loan and lease losses to total loans at end of period
|
|
|
2.33
|
|
|
|
1.51
|
|
|
|
1.08
|
|
|
|
1.15
|
|
|
|
1.37
|
|
|
Net
loan and lease charge-offs to allowance for loan losses at end of
period
|
|
|
69.19
|
|
|
|
57.39
|
|
|
|
85.30
|
|
|
|
74.92
|
|
|
|
43.89
|
|
|
Net
loan and lease charge-offs to provision for loan and lease
losses
|
|
|
68.09
|
|
|
|
63.71
|
|
|
|
95.57
|
|
|
|
106.66
|
|
|
|
117.70
|
|
The
allowance for loan and lease losses increased by 48.0%, or $13.5 million, to
$41.6 million as of December 31, 2008, after increasing by 48.6%, or $9.2
million, to $28.1 million as of December 31, 2007, from $18.9 million in
2006. The allowance for loan and lease losses as a percentage of
total loans and leases increased to 2.33% at the end of year 2008, from 1.51% in
2007 and 1.08% in 2006. We consider that the allowance for loan and
lease losses is adequate to absorb probable losses in the
portfolio. The increase in the allowance for loan and lease losses
during 2008 was primarily related to our commercial and construction loan
portfolios, which reported further deterioration due to current economic
conditions resulting in higher credit losses and increased specific allowances
on impaired loans, as previously mentioned. The allowance for loan
and lease losses is affected by net charge-offs, loan portfolio balance, and
also by the provision for loan and lease losses for each related period, which,
during 2008 and 2007, was certainly impacted by the overall economic
conditions. During 2007, the increase in the allowance for loan and
lease losses 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. As of December 31, 2008, 2007
and 2006, impaired loans amounted to $264.2 million, $84.4 million and $39.2
million, respectively, with related specific allowances amounting to $22.4
million, $9.5 million and $2.2 million for those same periods. Net
charge-offs were $28.8 million, $16.1 million and $16.2 million in 2008, 2007
and 2006, respectively.
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. For each of the years ended December 31, 2008, 2007 and 2006,
we used a historical loss ratio in lease finance contracts of approximately 28%,
23% and 20%, respectively. For the years ended December 31, 2008,
2007 and 2006, approximately $2.1 million, $1.8 million and $2.5 million was
charged-off for this purpose, respectively.
Also,
except for leases in a payment plan, bankruptcy or other legal proceedings, we
have the practice of charging-off most of our lease finance contracts that are
over 365 days past due at the end of each quarter. For
the years ended December 31, 2008, 2007 and 2006, approximately $986,000,
$838,000 and $781,000 was charged-off for this purpose,
respectively.
We
monitor the ratio of net charge-offs on the leasing business to the average
balance of our leasing portfolio. The net charge-off ratio on the
leasing business was 3.57%, 2.71% and 2.40% for the years ended December 31,
2008, 2007 and 2006, respectively. The increase in the net charge-off
ratio on the leases business during 2008 and 2007 was mainly due to a decrease
in our lease portfolio. The amount of net charge-offs in our leasing
portfolio remained at $11.3 million between the years ended December 31, 2006
and 2008. Our lease portfolio decreased to $267.3 million as of
December 31, 2008, from $385.4 million as of December 31, 2007, and from $443.3
million at the end of year 2006. We continue closely monitoring the
lease portfolio and have tightened underwriting standards in an attempt to
reduce possible future losses.
Net
charge-offs as a percentage of average loans was 1.57%, 0.90% and 0.97% for the
years 2008, 2007 and 2006, respectively. Net charge-offs as a
percentage of provision for loan and lease losses was 68.09% as of December 31,
2008, compared to 63.71% as of December 31, 2007 and 95.57% in
2006. The change in these ratios during 2008 was impacted by the
increased net charge-offs in our commercial loan portfolio, increased
nonperforming loans, delinquencies, and adverse classifications in our
commercial and construction loans portfolios, mainly driven by the overall
condition of the economy, as previously mentioned.
Net
charge offs as a percentage of our year end portfolio balance, or “net loss
experience,” has averaged 0.65% for our commercial loan portfolio over the past
three years. For our commercial loan portfolio, we maintain an
allowance equal to 1.93% of its outstanding balance.
Our
consumer loan portfolio, excluding boat financing, has averaged a 3.79% net loss
experience over the past three years. For our consumer loan
portfolio, excluding boat financing, we maintain an allowance equal to 4.71% of
its outstanding balance.
Our
construction loan portfolio has averaged a 0.26% net loss experience over the
last year. For this portfolio, we maintain an allowance equal to
3.42% of its outstanding balance.
As
previously mentioned, the net charge-off ratio on the leasing business was 3.57%
over the last year. We maintain an allowance equal to 3.76% of the
outstanding balance of this portfolio.
Our boat
financing portfolio has averaged a 1.93% net loss experience over the past two
years. We maintain an allowance equal to 2.14% of the outstanding
balance of this portfolio.
Our
mortgage portfolio has averaged a 0.07% net loss experience over the past three
years. We maintain an allowance equal to 0.53% of the outstanding
balance 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. While the table presents
the allowance for loan and lease losses in different portfolio components, it is
available to absorb all credit losses inherent in our portfolio. 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,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Amt.
|
|
|
Loan
Category to
Gross
|
|
|
Amt.
|
|
|
Loan
Category to
Gross
|
|
|
Amt.
|
|
|
Loan
Category to
Gross
|
|
|
Amt.
|
|
|
Loan
Category to
Gross
|
|
|
Amt.
|
|
|
Loan
Category
to Gross
|
|
|
|
|
(Dollars in thousands)
|
|
|
Allocated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate — construction
|
|
$
|
7,533
|
|
|
|
12
.38
|
%
|
|
$
|
1,263
|
|
|
|
10.96
|
%
|
|
$
|
610
|
|
|
|
7.23
|
%
|
|
$
|
714
|
|
|
|
5.25
|
%
|
|
$
|
1,200
|
|
|
|
5.75
|
%
|
|
Real
estate — secured
|
|
|
1,342
|
|
|
|
54.96
|
|
|
|
1,301
|
|
|
|
48.49
|
|
|
|
525
|
|
|
|
46.60
|
|
|
|
1,137
|
|
|
|
41.92
|
|
|
|
1,997
|
|
|
|
37.44
|
|
|
Commercial
and industrial
|
|
|
20,817
|
|
|
|
14.77
|
|
|
|
12,760
|
|
|
|
16.30
|
|
|
|
4,836
|
|
|
|
17.03
|
|
|
|
4,597
|
|
|
|
17.34
|
|
|
|
6,470
|
|
|
|
17.66
|
|
|
Consumer
|
|
|
1,663
|
|
|
|
2.77
|
|
|
|
1,520
|
|
|
|
3.11
|
|
|
|
1,433
|
|
|
|
3.47
|
|
|
|
1,499
|
|
|
|
4.08
|
|
|
|
3,239
|
|
|
|
5.42
|
|
|
Leases
|
|
|
10,056
|
|
|
|
15.00
|
|
|
|
11,041
|
|
|
|
20.77
|
|
|
|
11,089
|
|
|
|
25.38
|
|
|
|
9,701
|
|
|
|
31.07
|
|
|
|
3,815
|
|
|
|
33.29
|
|
|
Other
loans
|
|
|
228
|
|
|
|
0.12
|
|
|
|
252
|
|
|
|
0.37
|
|
|
|
436
|
|
|
|
0.29
|
|
|
|
212
|
|
|
|
0.34
|
|
|
|
134
|
|
|
|
0.44
|
|
|
Unallocated
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
|
328
|
|
|
|
—
|
|
|
|
2,184
|
|
|
|
—
|
|
|
Total
allowance for loan and lease losses
|
|
$
|
41,639
|
|
|
|
100.00
|
%
|
|
$
|
28,137
|
|
|
|
100.00
|
%
|
|
$
|
18,937
|
|
|
|
100.00
|
%
|
|
$
|
18,188
|
|
|
|
100.00
|
%
|
|
$
|
19,039
|
|
|
|
100.00
|
%
|
__________
|
|
(1)
|
Excludes
mortgage loans held-for-sale.
|
Nonearning
Assets
Premises,
leasehold improvements and equipment, net of accumulated depreciation and
amortization, totaled $34.5 million as of December 31, 2008, compared to $33.1
million and $14.9 million at the end of year 2007 and 2006,
respectively. The increase in nonearning assets during 2008 was
mainly related to the construction of the Aguadilla Branch, which we completed
in February 2009. During 2007, the increase in nonearning assets was
primarily attributable to the purchase of land and an office building to serve
as our new headquarters.
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, 2008, 2007 and 2006 were $2.018 billion, $1.893 billion, and $1.739
billion, respectively. The increase in average deposits for 2008 and 2007 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Noninterest-bearing
demand deposits
|
|
$
|
113,275
|
|
|
|
5.61
|
%
|
|
|
–
|
%
|
|
$
|
119,004
|
|
|
|
6.29
|
%
|
|
|
–
|
%
|
|
$
|
128,551
|
|
|
|
7.39
|
%
|
|
|
–
|
%
|
|
Money
market deposits
|
|
|
18,983
|
|
|
|
0.94
|
|
|
|
3.16
|
|
|
|
18,361
|
|
|
|
0.97
|
|
|
|
2.90
|
|
|
|
25,470
|
|
|
|
1.46
|
|
|
|
2.29
|
|
|
NOW
deposits
|
|
|
45,633
|
|
|
|
2.26
|
|
|
|
2.55
|
|
|
|
47,068
|
|
|
|
2.49
|
|
|
|
2.23
|
|
|
|
46,330
|
|
|
|
2.66
|
|
|
|
2.23
|
|
|
Savings
deposits
|
|
|
117,857
|
|
|
|
5.84
|
|
|
|
2.26
|
|
|
|
141,120
|
|
|
|
7.45
|
|
|
|
2.48
|
|
|
|
184,824
|
|
|
|
10.63
|
|
|
|
2.37
|
|
|
Broker
certificates of deposits in denominations of less than
$100,000
|
|
|
1,361,382
|
|
|
|
67.46
|
|
|
|
4.49
|
|
|
|
1,239,759
|
|
|
|
65.47
|
|
|
|
5.16
|
|
|
|
1,035,876
|
|
|
|
59.60
|
|
|
|
4.78
|
|
|
Broker certificates
of deposits in denominations of $100,000 or more
(1)
|
|
|
533
|
|
|
|
0.03
|
|
|
|
6.75
|
|
|
|
500
|
|
|
|
0.03
|
|
|
|
6.40
|
|
|
|
709
|
|
|
|
0.04
|
|
|
|
4.51
|
|
|
Time
certificates of deposit in denominations of $100,000 or
more
|
|
|
261,094
|
|
|
|
12.94
|
|
|
|
4.15
|
|
|
|
235,683
|
|
|
|
12.45
|
|
|
|
5.11
|
|
|
|
203,818
|
|
|
|
11.72
|
|
|
|
4.34
|
|
|
Other
time deposits
|
|
|
99,280
|
|
|
|
4.92
|
|
|
|
4.10
|
|
|
|
91,887
|
|
|
|
4.85
|
|
|
|
4.37
|
|
|
|
113,097
|
|
|
|
6.50
|
|
|
|
3.70
|
|
|
Total
deposits
|
|
$
|
2,018,037
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
1,893,382
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
1,738,675
|
|
|
|
100.00
|
%
|
|
|
|
|
__________
|
|
(1)
|
Certain
adjustments were made to the comparable period resulting from the
reclassification of broker master certificate agreements to the caption of
“brokered certificates of deposits in denominations of less than
$100,000.”
|
Total
deposits as of December 31, 2008, 2007 and 2006 were $2.084 billion, $1.993
billion and $1.905 billion, respectively, representing an increase of $91.3
million, or 4.58%, in 2008 and $87.7 million, or 4.60%, in 2007. The
following table presents the composition of our deposits by category as of the
dates indicated:
|
|
|
As of December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
Interest
bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
Now
and money market
|
|
$
|
59,309
|
|
|
$
|
60,893
|
|
|
$
|
62,673
|
|
|
Savings
|
|
|
104,424
|
|
|
|
131,604
|
|
|
|
156,069
|
|
|
Broker
certificates of deposits in denominations of less than
$100,000
|
|
|
1,423,209
|
|
|
|
1,336,060
|
|
|
|
1,225,656
|
|
|
Broker
certificates of deposits in denominations of $100,000 or more
(1)
|
|
|
605
|
|
|
|
500
|
|
|
|
500
|
|
|
Time
certificates of deposits in denominations of $100,000 or
more
|
|
|
278,384
|
|
|
|
251,361
|
|
|
|
224,741
|
|
|
Other
time deposits in denominations of less than $100,000 and
IRAs
|
|
|
109,732
|
|
|
|
92,545
|
|
|
|
95,396
|
|
|
Total
interest bearing deposits
|
|
$
|
1,975,663
|
|
|
$
|
1,872,963
|
|
|
$
|
1,765,035
|
|
|
Plus: non
interest bearing deposits
|
|
|
108,645
|
|
|
|
120,083
|
|
|
|
140,321
|
|
|
Total
deposits
|
|
$
|
2,084,308
|
|
|
$
|
1,993,046
|
|
|
$
|
1,905,356
|
|
__________
|
|
(1)
|
Certain
adjustments were made to the comparable period resulting from the
reclassification of broker master certificate agreements to the caption of
“brokered certificates of deposits in denominations of less than
$100,000.”
|
In
addition to the deposits we generate locally, we have also accepted broker
deposits to augment retail deposits and to fund asset growth. There
is fierce competition for core deposits on the Island. As a result,
replacing called-back broker deposits was an attractive funding strategy,
lowering funding costs when compared to the unusually higher rates offered
locally for time deposits. As previously mentioned, during 2008, we
replaced callable broker deposits in an attempt to control increases in our
funding cost, as follows: $162.4 million during the first quarter of
2008 that paid an average rate of 5.50%; and $105.7 million between May 2008 and
July 2008 that paid an average rate of 5.37%. We did not call back
any broker deposits during the fourth quarter of 2008. Because broker
deposits are generally more volatile and interest rate sensitive than other
sources of funds, management closely monitors growth in this
category.
As
previously mentioned, we heavily rely on broker deposits as a short-term funding
source to meet its liquidity needs. 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. The ability to continue to acquire broker deposits
is subject to our ability to price these deposits at competitive levels, which
may substantially increase the 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 the regulatory framework for prompt
corrective action, we could be restricted in using broker deposits as a
short-term funding source 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. This could materially impact our liquidity
position. As of December 31, 2008, we and Eurobank both qualified as
“well-capitalized” institutions under the regulatory framework for prompt
corrective action.
The
following table sets forth the amount and maturities of the time deposits in
denominations of $100,000 or more and broker deposits, regardless the
denomination, as of the dates indicated, excluding individual retirement
accounts:
|
|
|
As of December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In thousands)
|
|
|
Three
months or less
|
|
$
|
593,140
|
|
|
$
|
360,168
|
|
|
$
|
547,987
|
|
|
Over
three months through six months
|
|
|
257,102
|
|
|
|
318,440
|
|
|
|
294,980
|
|
|
Over
six months through 12 months
|
|
|
316,292
|
|
|
|
195,976
|
|
|
|
188,838
|
|
|
Over
12 months
|
|
|
535,664
|
|
|
|
713,337
|
|
|
|
419,092
|
|
|
Total
|
|
$
|
1,702,198
|
|
|
$
|
1,587,921
|
|
|
$
|
1,450,897
|
|
Section
29 of the Federal Deposit Insurance Act (“FDIA”) limits the use of brokered
deposits by institutions that are less than “well-capitalized” and allows the
Federal Deposit Insurance Corporation (“FDIC”) to place restrictions on interest
rates that institutions may pay. On February 3, 2009, the FDIC
released a proposed rule to implement new interest rate restrictions on
institutions that are not “well-capitalized.” The proposed rule would
limit the interest rate paid by such institutions to 75 basis points above a
national rate, as derived from the interest rate average of all
institutions. If an institution could provide evidence that its local
rate is higher, it would be permitted to offer the higher local rate plus 75
basis points. Although we continue to be “well-capitalized,” these
restrictions, if they become applicable, could materially impact our ability to
generate sufficient deposits to maintain an adequate liquidity
position.
Other
Sources of Funds
The
strong competition for core deposits on the Island made other short-term
borrowings an attractive funding alternative. During 2008, the
average interest rate on a fully taxable equivalent basis we paid for other
borrowings decreased to 5.01%, from 6.95% and 7.17% for the year 2007 and 2006,
respectively. Average other borrowings increased to $571.6 million
for the year ended December 31, 2008, compared to $397.5 million and $499.3
million for the year 2007 and 2006, respectively.
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 years ended December 31, 2008, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance
at period-end
|
|
$
|
556,475
|
|
|
$
|
496,419
|
|
|
$
|
365,664
|
|
|
Maximum
aggregate balance outstanding at any month-end
|
|
|
583,205
|
|
|
|
496,419
|
|
|
|
501,182
|
|
|
Average
monthly aggregate balance outstanding during the period
|
|
|
526,758
|
|
|
|
372,935
|
|
|
|
432,459
|
|
|
Weighted
average interest rate for the year
|
|
|
3.61
|
%
|
|
|
5.04
|
%
|
|
|
4.94
|
%
|
|
Weighted
average interest rate for the last month of the year
|
|
|
3.60
|
%
|
|
|
4.60
|
%
|
|
|
5.27
|
%
|
FHLB
Advances
Although
deposits and repurchase agreements are the primary source of funds for our
lending and investment activities and for general business purposes, we may
obtain advances from the Federal Home Loan Bank of New York as an alternative
source of liquidity. The following table provides a summary of FHLB
advances for years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance
at period-end
|
|
$
|
15,398
|
|
|
$
|
30,454
|
|
|
$
|
8,707
|
|
|
Maximum
amount outstanding at any month-end
|
|
|
30,449
|
|
|
|
30,454
|
|
|
|
121,292
|
|
|
Average
balance during the period
|
|
|
24,140
|
|
|
|
3,668
|
|
|
|
19,016
|
|
|
Weighted
average interest rate for the year
|
|
|
2.99
|
%
|
|
|
5.26
|
%
|
|
|
5.06
|
%
|
|
Weighted
average interest rate for the last month of the year
|
|
|
3.05
|
%
|
|
|
4.64
|
%
|
|
|
5.51
|
%
|
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 – Note Payable to
Statutory Trust”
to our consolidated financial statements.
Fair
Value of Assets and Liabilities
On
January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
Also, the SFAS No. 157 emphasizes that fair value is a market-based measurement,
not an entity-specific measurement. Therefore, a fair value measurement should
be determined based on the assumptions that market participants would use in
pricing the asset or liability.
As a
basis for considering market participant assumptions in fair value measurements,
SFAS No. 157 establishes a fair value hierarchy that distinguishes between
market participant assumptions based on the source of the market data obtained.
This hierarchy is comprised of three levels. If the market data is obtained from
sources independent of the reporting entity, the market data is considered an
“observable input” and related assets or liabilities will be classified within
Levels 1 and 2 of the hierarchy. When the reporting entity’s own assumptions are
used as market participant assumptions, the market data is considered an
“unobservable input” and related assets or liabilities are classified within
Level 3 of the hierarchy. A brief description of possible inputs under each
level of the hierarchy is further discussed below.
Level 1.
Level 1 inputs
utilize unadjusted quoted prices in active markets for identical assets or
liabilities we have the ability to access.
Level 2.
Level 2 inputs are
those other than unadjusted quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These
inputs may include quoted prices for similar assets and liabilities in active
markets, as well as inputs that are observable for the asset or liability, other
than unadjusted quoted prices, such as interest rates; foreign exchange rates;
and yield curves that are observable at commonly quoted intervals.
Level 3.
Level 3 inputs are
unobservable inputs for the asset or liability, which are typically based on an
entity’s own assumptions, as there is little, if any, related market
activity.
Where the
fair value measurement is based on inputs from different levels, the level
within which the entire fair value measurement falls will be based on the lowest
most significant level used to determine the fair value measurement in its
entirety. Our assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and considers factors
specific to the asset or liability being valued.
The fair
value of financial assets requiring to be presented at their fair market value
is measured on a recurring basis. The fair value of non-financial assets or
financial assets requiring to be presented at the lower of cost or fair market
value is measured on a non-recurring basis.
As of
December 31, 2008, we had $751.1 million and $110,000 in assets and liabilities
measured on a recurring basis, respectively, of which $530.5 million in assets
and all liabilities were classified within Level 2 of the hierarchy. Remaining
assets measured on a recurring basis were classified within Level 3 of the
hierarchy. As of the same date, we had $95.2 million in assets measured on a
non-recurring basis, of which $60.1 million and $35.1 million were Level 2 and
Level 3 assets, respectively. The unobservable inputs used to determine the fair
value of Level 3 assets were not considered material.
Assets
measured on a recurring basis as of December 31, 2008 included $751.0 million in
securities available for sale. On a monthly basis, we obtained quoted prices
from two nationally recognized brokers (the “NRB”) to determine the fair value
of securities available for sale. Every month, we compare the valuation received
from one NRB to valuation received from the other NRB, and consistently evaluate
any difference in market price equal or greater than 2.0%. For mortgage-backed
securities (“MBS”), the specific characteristics of the different tranches on a
MBS are very important in the expected performance of the security and its fair
value (Level 3 inputs). As of December 31, 2008, we owned a preferred security
that was issued under the rule 144 A under the Securities Act of 1993. The
quarterly dividends of this security are current but the security does not have
an active secondary market. On a quarterly basis, we review the financial
results of the company to estimate if the issuer has the capacity to pay its
obligations at maturity (Level 3 inputs).
Significant
inputs considered to determine the fair value of securities available for sale
include the market yield curve, credit rating of issuer and collateral. A change
in the slope or an increase in the market yield curve, or deterioration of the
issuer’s credit rating or collateral, can significantly reduce the fair market
value of securities available for sale. Also, a change in the slope or a
decrease in the market yield curve, or an upgrade of the issuer’s credit rating
or collateral, can significantly increase the fair market value of securities
available for sale. Changes in the fair market value of securities available for
sale are reported as part of total stockholders’ equity in other comprehensive
income. A decrease in the fair market value of securities available for sale can
reduce our liquidity levels adversely impacting our borrowing capacity and
reducing our total capital. On the contrary, an increase in the fair market
value of securities available for sale can augment our liquidity levels
positively impacting our borrowing capacity and increasing our total capital.
For more information on the fair value of assets and liabilities please refer to
“Note
27
– Fair Value”
to our
consolidated financial statements included herein.
Capital
Resources and Capital Adequacy Requirements
We are
subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can trigger
regulatory actions that could have a material adverse effect on our business,
financial condition, results of operations, cash flows and/or future prospects.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, we must meet specific capital guidelines that rely on
quantitative measures of our assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Our capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
We
monitor compliance with bank regulatory capital requirements, focusing primarily
on the risk-based capital guidelines. Under the risk-based capital method of
capital measurement, the ratio computed is dependent on the amount and
composition of assets recorded on the balance sheet and the amount and
composition of off-balance sheet items, in addition to the level of capital.
Generally, Tier 1 capital includes common stockholders’ equity, the proceeds
from our Series A Preferred Stock and the proceeds from our junior subordinated
debentures (subject to certain limitations), less goodwill and disallowed
deferred tax assets. Total capital represents Tier 1 plus the allowance for loan
and lease losses (subject to certain limits).
As of
December 31, 2008, 2007 and 2006, total stockholders’ equity was $156.6 million,
$179.9 million and $169.9 million, respectively. Besides losses and earnings
from operations, stock options exercised, and stock repurchases, our
stockholders’ equity was also impacted by an accumulated other comprehensive
loss of $12.4 million as of December 31, 2008, an accumulated other
comprehensive gain of $1.1 million as of December 31, 2007, and an accumulated
other comprehensive loss of $7.6 million for the year ended December 31, 2006.
Also, during 2006, the Company’s stockholders’ equity was also affected by the
cumulative effect of a $790,000 adjustment on the initial adoption of Staff
Accounting Bulletin No. 108 (“SAB 108”) 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”). In addition, the following items
also impacted our stockholders’ equity:
|
|
·
|
During
2008, a total of 407,000 stock options were exercised for the aggregate
price of $2.0 million, as follows: 50,000 on January 31, 2008 at an
aggregate exercise price of $250,000; and 357,000 in March 2008 at an
aggregate exercise price of $1.8
million.
|
|
|
·
|
The
repurchase of 800 unvested restricted shares from former employees during
the third quarter of 2008, for a total of $6,504. These restricted shares
were originally granted in April
2004.
|
|
|
·
|
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 maintain our status as a
well-capitalized institution and to sustain our loan growth. For more
detail on notes payable to statutory trusts please refer to
“Note
16
– Note Payable to Statutory
Trust”
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, we repurchased 488,477 shares for $5.5 million upon a stock
repurchase program approved by our board of directors in October 2005,
which expired in October 2006.
|
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, 2008, 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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
$
|
208,626
|
|
|
|
10.25
|
%
|
≥ $
162,752
|
|
≥
8.00
|
%
|
|
N/A
|
|
|
|
|
Eurobank
|
|
|
206,422
|
|
|
|
10.15
|
|
≥
162,732
|
|
≥
8.00
|
|
≥
203,415
|
|
≥
10.00
|
%
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
|
182,993
|
|
|
|
8.99
|
|
≥
81,376
|
|
≥
4.00
|
|
|
N/A
|
|
|
|
|
Eurobank
|
|
|
180,792
|
|
|
|
8.89
|
|
≥
81,366
|
|
≥
4.00
|
|
≥
122,049
|
|
≥
6.00
|
|
|
Leverage
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares,
Inc
|
|
|
182,993
|
|
|
|
6.55
|
|
≥
111,803
|
|
≥
4.00
|
|
|
N/A
|
|
|
|
|
Eurobank
|
|
|
180,792
|
|
|
|
6.47
|
|
≥
111,764
|
|
≥
4.00
|
|
≥
139,705
|
|
≥
5.00
|
|
|
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
|
|
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, 2008, 2007 and 2006 totaled approximately
$339.4 million, $239.8 million and $300.4 million, respectively. Our Core Basis
Surplus liquidity level was 8.5%, 5.7% and 8.9% as of the same periods,
respectively. The $99.6 million increase in our Core Basic Surplus liquidity
level during 2008 was mainly attributable to the net effect of a $17.2 million
increase in short-term investments, the net growth of $147.4 million in our
investment portfolio by using portfolio repayments in addition to funding with
broker deposits and securities sold under agreements to repurchase, which
increased by $54.5 million. As of December 31, 2007, the decrease in our Core
Basic Surplus liquidity level 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 when 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 an unsecured line of
credit with a correspondent bank.
In
October 2008, the FDIC implemented its new Temporary Liquidity Guarantee Program
to strengthen confidence and encourage liquidity in the banking system by
guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain
holding companies, and by providing full coverage of non-interest bearing
deposit transaction accounts, regardless of dollar amount. Under the current
rules, certain newly issued senior unsecured debt issued on or before June 30,
2009, would be fully protected in the event the issuing institution subsequently
fails, or its holding company files for bankruptcy. The guarantee is limited to
125% of senior unsecured debt as of September 30, 2008 that is scheduled to
mature before June 30, 2009. This includes promissory notes, commercial paper,
inter-bank funding, and any unsecured portion of secured debt. Coverage would be
limited to June 30, 2012, even if the maturity exceeds that date. Participants
will have the option to issue non-guaranteed senior unsecured debt for a
non-refundable fee of 37.5 basis points, provided that the debt has a term
greater than three years. Participants will be charged a 75-basis point fee to
protect their new debt issues (amounts paid as a non-refundable fee will be
applied to offset this 75-basis point fee until the non-refundable fee is
exhausted). Institutions are automatically enrolled in this program unless they
choose to opt-out. Although the Company did not have any senior unsecured
borrowings outstanding as of September 30, 2008, the Company did not opt-out of
this program, which could provide coverage for future senior unsecured debt.
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,
2008, we had FHLB borrowing capacity of $40.5 million, including FHLB advances
and securities sold under agreements to repurchase. Also, as of the same date,
we had $279.0 million in pre-approved repurchase agreements with major brokers
and banks, subject to acceptable unpledged marketable securities, which amounted
$164.0 million as of December 31, 2008. In addition, Eurobank is able to borrow
up to $10.0 million from the Federal Reserve Bank using securities currently
pledged as collateral. Eurobank also maintains a pre-approved overnight
borrowing line with a correspondent bank, which provided additional short-term
borrowing capacity of $10.0 million as of December 31, 2008.
Our
ability to meet our current obligations is dependent on our various sources of
liquidity. As of December 31, 2008, we had, on a stand alone basis, $1.4 million
of liquid assets available to meet our current obligations which consist
primarily of interest payments on junior subordinated debentures and outstanding
preferred stock. In the event that we become less than “well-capitalized” for
regulatory capital purposes, we would become subject to certain interest rate
restrictions that we are permitted to pay on various deposit sources and
Eurobank may become prohibited from paying dividends to us. These restrictions
could impact our ability to meet our current obligations and may require that we
elect to defer quarterly interest payments on our outstanding junior
subordinated debentures in order to preserve our liquidity and capital
positions.
As
previously mentioned, we heavily rely on broker deposits as a short-term funding
source to meet its liquidity needs. 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, which may force
us to pay above-market interest rates to retain these deposits, reducing 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.
The ability to continue to acquire broker deposits is subject to our ability to
price these deposits at competitive levels, which may substantially increase the
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
the regulatory framework for prompt corrective action, we could be restricted in
using broker deposits as a short-term funding source 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
indicated above, our liquidity sources are comprised primarily of secured
funding outlets, such as the FHLB and Federal Reserve Bank, and deposits
originated through Eurobank’s branch network and from broker deposits. There can
be no assurance that actions by the FHLB or FRB would not reduce Eurobank’s
borrowing capacity or that we would be able to continue to replace deposits at
competitive rates. As previously mentioned, if our capital ratio falls below
“well-capitalized,” we would need regulatory consent before accepting brokered
deposits. Over the next 12 months, approximately $922.0 million of broker
deposits will mature. There can be no assurances that we will be able to replace
these broker deposits with deposits at competitive rates. Such events could have
a material adverse impact on our results of operations and financial condition.
However, if we are unable to replace these maturing deposits with new deposits,
we believe that we have adequate liquidity resources to fund this need with our
secured funding outlets with the FHLB and FRB.
Our
minimum target Core Basis Surplus liquidity ratio established in our
Asset/Liability Management Policy is 2.0% of total assets. As of December 31,
2008, our Core Basic Surplus Liquidity Ratio was 8.5%, well above the
established minimum target. 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, we have determined that our target liquidity
ratio is adequate.
Our net
cash inflows from operating activities for 2008 were $39.4 million, compared to
cash inflows of $29.5 million and $56.3 million from operating activities for
the year 2007 and 2006, respectively. During 2008, the net operating cash
inflows resulted primarily from the net effect of: i) proceeds from sale of
loans held for sale; ii) a decrease in accrued interest receivable; iii) a
decrease in accrued interest payable, accrued expenses and other liabilities;
and iv) a net decrease in other assets. The net operating cash inflows during
2007 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 2008, 2007 and 2006 were
$136.9 million, $294.0 million and $137.7 million, respectively. During 2008,
the net investing cash outflows experienced were primarily used for the growth
in our investment portfolio. 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.
Our net
cash inflows from financing activities for the years 2008, 2007 and 2006 were
$137.5 million, $238.1 million and $86.0 million, respectively. The net
financing cash inflows experienced in 2008 and 2007 were primarily provided by a
net increase in deposits and securities sold under agreement to repurchase and
other borrowing. During 2006, 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, 2008, the Bank had interest
rate swap agreements which converted $12.2 million of fixed rate time deposits
to variable rate time deposits maturing in 2018 with semi-annual call options
which match call options on the swaps. This swap was terminated on
January 26, 2009 upon the cancellation of the related certificate of
deposit. In addition, as of December 31, 2008, Eurobank had $110,000
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 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, 2008, 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, 2008 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 100 basis points because, with current interest yield curve, an
additional 100 basis points reduction in rates would imply a negative or zero
percent yield in US Treasury Bills. At December 31, 2008, the net
interest income at risk for year one in the 100 basis point falling rate
scenario was calculated at $57,000, or 0.10% lower than the net interest income
in the rates unchanged scenario. The net interest income at risk for
year two in the 100 basis point falling rate scenario was calculated at $9.8
million, or 17.27% higher than the net interest income in the rates unchanged
scenario. At December 31, 2008, the net interest income at risk for
year one in the 100 basis point rising rate scenario was calculated to be $2.5
million, or 4.41% higher than the net interest income in the rates unchanged
scenario, and $4.7 million, or 8.25% higher than the net interest income in the
rate unchanged scenario at the December 31, 2008 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 $12.7 million, or 22.24%
higher than the net interest income in the rates unchanged scenario, and $14.4
million, or 25.34% higher than the net interest income in the rates unchanged
scenario at the December 31, 2008 simulation with a 200 basis point
increase. During the first year, 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. Exposures during the second year are
above the policy guidelines, but the estimated net interest income for the three
different scenarios are positive and higher than indicated
guidelines. 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, 2008:
|
|
|
Change
in Future
Net
Interest Income Gradual
Raising Rate Scenario – Year
1
|
|
|
|
|
At December 31, 2008
|
|
|
Change in Interest Rates
|
|
Dollar Change
|
|
|
Percentage Change
|
|
|
|
|
(Dollars
in thousands)
|
|
|
+200
basis points over year 1
|
|
$
|
4,698
|
|
|
|
8.25
|
%
|
|
+100
basis points over year 1
|
|
|
2,512
|
|
|
|
4.41
|
|
|
-
100 basis points over year 1
|
|
|
(57
|
)
|
|
|
(0.10
|
)
|
|
-
200 basis points over year 1
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
Change
in Future
Net
Interest Income Rate
Shock Scenario – Year 2
|
|
|
|
|
At December 31, 2008
|
|
|
Change in Interest Rates
|
|
Dollar Change
|
|
|
Percentage Change
|
|
|
|
|
(Dollars
in thousands)
|
|
|
+200
basis points over year 2
|
|
$
|
14,424
|
|
|
|
25.34
|
%
|
|
+100
basis points over year 2
|
|
|
12,655
|
|
|
|
22.24
|
|
|
-
100 basis points over year 2
|
|
|
9,830
|
|
|
|
17.27
|
|
|
-
200 basis points over year 2
|
|
|
N/A
|
|
|
|
N/A
|
|
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, 2008
|
|
|
|
|
One Year or Less
|
|
|
Over
One Year to
Three Years
|
|
|
Over
Three Years
to Five Years
|
|
|
Over Five Years
|
|
|
|
|
(In
thousands)
|
|
|
FHLB
advances
|
|
$
|
15,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
398
|
|
|
Notes
payable to statutory trusts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,619
|
|
|
Operating
leases
|
|
|
1,601
|
|
|
|
3,171
|
|
|
|
2,663
|
|
|
|
14,921
|
|
|
Total
|
|
$
|
16,501
|
|
|
$
|
3,171
|
|
|
$
|
2,663
|
|
|
$
|
35,938
|
|
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, 2008, 2007 and 2006, we had commitments to extend credit of $171.5
million, $265.3 million and $308.5, respectively. These commitments
included standby letters of credit of $14.8 million, $13.6 million and $8.4
million as of December 31, 2008, 2007 and 2006, respectively, and commercial
letters of credit of $757,000, $1.5 million and $916,000 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(aa) – Recently Issued
Accounting Standards”
to our consolidated financial
statements.
Recent
Developments
On
October 3, 2008, the United States Congress passed the Emergency Economic
Stabilization Act of 2008 (“EESA”), which provides the U. S. Secretary of the
Treasury with broad authority to implement certain actions to help restore
stability and liquidity to U.S. markets. One of the provisions
resulting from the Act is the Treasury Capital Purchase Program (the “CPP”),
which provides direct equity investment of perpetual preferred stock by the
Treasury in qualified financial institutions. The CPP is voluntary
and requires an institution to comply with a number of restrictions and
provisions, including limits on executive compensation, stock redemptions and
declaration of dividends.
In
addition, EESA temporarily raises the basic limit on federal deposit insurance
coverage from $100,000 to $250,000 per depositor. The temporary
increase in deposit insurance coverage became effective on October 3,
2008. The legislation provides that the basic deposit insurance limit
will return to $100,000 on December 31, 2009.
On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(“TLGP”), which will guarantee certain newly issued senior unsecured debt issued
by participating institutions on or after October 14, 2008, and before June 30,
2009. Also, the FDIC will provide full FDIC deposit insurance
coverage for non-interest bearing transaction deposit accounts held at
participating FDIC-insured institutions. This provision expires December 31,
2009.
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, 2008, 2007 and 2006.
|
|
|
Year
ended December 31, 2008
|
|
|
|
|
Fourth
quarter
|
|
|
Third
quarter
|
|
|
Second
quarter
|
|
|
First
quarter
|
|
|
Interest
income
|
|
$
|
35,777,971
|
|
|
$
|
40,249,889
|
|
|
$
|
40,343,140
|
|
|
$
|
42,639,204
|
|
|
Interest
expense
|
|
|
24,191,955
|
|
|
|
24,478,925
|
|
|
|
25,639,637
|
|
|
|
27,405,864
|
|
|
Net
interest income
|
|
|
11,586,016
|
|
|
|
15,770,964
|
|
|
|
14,703,503
|
|
|
|
15,233,340
|
|
|
Provision
for loan and lease losses
|
|
|
16,514,000
|
|
|
|
7,980,000
|
|
|
|
9,986,800
|
|
|
|
7,833,000
|
|
|
Net
interest (expense) income
after provision
for loan and lease
losses
|
|
|
(4,927,984
|
)
|
|
|
7,790,964
|
|
|
|
4,716,703
|
|
|
|
7,400,340
|
|
|
Total
other income
|
|
|
2,158,399
|
|
|
|
2,425,509
|
|
|
|
3,249,675
|
|
|
|
3,624,811
|
|
|
Total
other expenses
|
|
|
11,560,295
|
|
|
|
13,456,931
|
|
|
|
12,632,063
|
|
|
|
13,265,705
|
|
Income
before
income taxes
|
|
|
(14,329,880
|
)
|
|
|
(3,240,458
|
)
|
|
|
(4,665,685
|
)
|
|
|
(2,240,554
|
)
|
|
Income
(benefit) tax
|
|
|
(6,615,433
|
)
|
|
|
(2,452,507
|
)
|
|
|
(2,902,780
|
)
|
|
|
(1,237,228
|
)
|
|
Net
loss
|
|
$
|
(7,714,447
|
)
|
|
$
|
(787,951
|
)
|
|
$
|
(1,762,905
|
)
|
|
$
|
(1,003,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.41
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.06
|
)
|
|
Diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.06
|
)
|
Financial
results for the quarter ended December 31, 2008 when compared to the previous
quarter were predominantly impacted by an increase of $9.6 million in the
provision for loan and lease losses, an interest rate cut of 175 basis points by
the Federal Reserve, and a $49.0 million increase in nonaccrual loans, which
reduced further our net interest income for the quarter. The increase
in the provision for loan and lease losses and the increase in nonaccrual loans
were primarily related to our commercial and construction loan portfolios, which
reported further deterioration due to current economic conditions requiring some
of them to be classified as impaired loans under SFAS No. 114 or an increase in
their specific allowances.
|
|
|
Year
ended December 31, 2007
|
|
|
|
|
Fourth
quarter
|
|
|
Third
quarter
|
|
|
Second
quarter
|
|
|
First
quarter
|
|
|
Interest
income
|
|
$
|
44,327,194
|
|
|
$
|
43,734,653
|
|
|
$
|
42,949,603
|
|
|
$
|
42,313,742
|
|
|
Interest
expense
|
|
|
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 expenses
|
|
|
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, 200
6
|
|
|
|
|
Fourth
quarter
|
|
|
Third
quarter
|
|
|
Second
quarter
|
|
|
First
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
|
|
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.
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, 2008, 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, 2008, 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, 2008, 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, 2008 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.
ITEM
10. Directors, Executive Officers and Corporate
Governance.
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 2009 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 2009 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 2009 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, and Director
Independence.
The
information under the caption “Certain Relationships and Related Transactions”
in our definitive proxy statement for our 2009 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 2009 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
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, 2008 and 2007
Consolidated
Statements of Income for each of the years in the two-year period ended December
31, 2008
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive Income for each
of the years in the two-year period ended December 31, 2008
Consolidated
Statements of Cash Flows for each of the years in the two-year period ended
December 31, 2008
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)
|
|
Exhibit Number
|
|
Description of Exhibit
|
|
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)
|
|
|
|
|
|
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)
|
|
Exhibit Number
|
|
Description of Exhibit
|
|
10.7†
|
|
Change
in Control Agreement, dated as of May 8, 2008, between EuroBancshares,
Inc., Eurobank and Mr. Luis J. Berríos López (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 May 13,
2008)
|
|
|
|
|
|
10.8†
|
|
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)
|
|
|
|
|
|
10.9†
|
|
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)
|
|
|
|
|
|
10.10†
|
|
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)
|
|
|
|
|
|
10.11
|
|
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)
|
|
|
|
|
|
10.12
|
|
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)
|
|
|
|
|
|
10.13
|
|
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)
|
|
|
|
|
|
10.14
|
|
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)
|
|
|
|
|
|
10.15
|
|
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 Horwath LLP, independent registered public accounting
firm
|
|
|
|
|
|
31.1*
|
|
Rule
13a-14(a) Certification of Chief Executive Officer.
|
|
|
|
|
|
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
26, 2009
|
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
26, 2009
|
By:
|
/s/ Rafael Arrillaga-Torréns,
Jr.
|
|
|
|
Rafael
Arrillaga Torréns, Jr.
|
|
|
|
Chairman
of the Board, President and Chief
|
|
|
|
Executive
Officer (principal executive
officer)
|
|
|
By:
|
/s/ Yadira R.
Mercado
|
|
|
|
Yadira
R. Mercado
|
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
|
(principal
financial officer and principal accounting
|
|
|
|
officer)
|
|
|
By:
|
/s/ Pedro Feliciano
Benítez
|
|
|
|
Pedro
Feliciano Benítez
|
|
|
|
Director
|
|
|
By:
|
/s/ Juan Ramón Gómez-Cuétara
Aguilar
|
|
|
|
Juan
Ramón Gómez-Cuétara Aguilar
|
|
|
|
Director
|
|
|
By:
|
/s/ Antonio R. Pavía
Bibiloni
|
|
|
|
Antonio
R. Pavía Bibiloni
|
|
|
|
Director
|
|
|
By:
|
/s/ Plácido González
Córdova
|
|
|
|
Plácido
González Córdova
|
|
|
|
Director
|
|
|
By:
|
/s/ Luis F. Hernández
Santana
|
|
|
|
Luis
F. Hernández Santana
|
|
|
|
Director
|
|
|
By:
|
/s/ Ricardo Levy
Echeandía
|
|
|
|
Ricardo
Levy Echeandía
|
|
|
|
Director
|
|
|
By:
|
/s/ Jaime Sifre
Rodríguez
|
|
|
|
Jaime
Sifre Rodríguez
|
|
|
|
Director
|
|
|
By:
|
/s/ William Torres
Torres
|
|
|
|
William
Torres Torres
|
|
|
|
Director
|
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Consolidated
Financial Statements
December 31,
2008 and 2007
(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, 2008 AND 2007
|
F-3
|
|
CONSOLIDATED
STATEMENTS OF INCOME FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED
DECEMBER 31, 2008
|
F-4
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED DECEMBER 31,
2008
|
F-5
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN
THE
TWO-YEAR PERIOD ENDED DECEMBER 31,
2008
|
F-6
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-7
|
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 (“Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, changes in stockholders’ equity and cash
flows for each of the years in the two-year period ended December 31, 2008. We
also have audited EuroBancshares, Inc. and Subsidiaries’ internal control over
financial reporting as of December 31, 2008, 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’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the effectiveness of 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. Because management’s
assessment and our audit were conducted to also meet the reporting requirements
of Section 112 of the Federal Deposit Insurance Corporation Improvement Act
(FDICIA), our audit of EuroBancshares, Inc. and Subsidiaries’ internal control
over financial reporting included controls over the preparation of financial
statements in accordance with the instructions to the Consolidated Financial
Statements for Bank Holding Companies. 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 controls 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 financial position of EuroBancshares, Inc. and
Subsidiaries as of December 31, 2008 and 2007, and the results of its operations
and its cash flows for each of the two-years in the period ended December 31,
2008 in conformity with U.S. generally accepted accounting principles. Also in
our opinion, EuroBancshares, Inc. and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on Internal Control—Integrated Framework issued by
COSO.
Crowe
Horwath LLP
Fort
Lauderdale, Florida
March 24,
2009
Stamp No.
2205219 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, 2008 and 2007
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
43,275,239
|
|
|
$
|
15,866,221
|
|
|
Interest
bearing deposits
|
|
|
400,000
|
|
|
|
32,306,909
|
|
|
Federal
funds sold
|
|
|
44,470,925
|
|
|
|
—
|
|
|
Total
cash and cash equivalents
|
|
|
88,146,164
|
|
|
|
48,173,130
|
|
|
Securities
purchased under agreements to resell
|
|
|
24,486,774
|
|
|
|
19,879,008
|
|
|
Investment
securities available for sale, at fair value
|
|
|
751,016,565
|
|
|
|
707,103,432
|
|
|
Investment
securities held to maturity, fair value of $132,890,502 in 2008 and
$30,451,926 in 2007
|
|
|
132,798,181
|
|
|
|
30,845,218
|
|
|
Other
investments
|
|
|
14,932,400
|
|
|
|
13,354,300
|
|
|
Loans
held for sale
|
|
|
1,873,445
|
|
|
|
1,359,494
|
|
|
Loans,
net of allowance for loan and lease losses of $41,639,051 in 2008 and
$28,137,104 in 2007
|
|
|
1,740,539,113
|
|
|
|
1,829,082,008
|
|
|
Accrued
interest receivable
|
|
|
14,614,445
|
|
|
|
18,136,489
|
|
|
Customers’
liability on acceptances
|
|
|
405,341
|
|
|
|
430,767
|
|
|
Premises
and equipment, net
|
|
|
34,466,471
|
|
|
|
33,083,169
|
|
|
Deferred
tax assets, net
|
|
|
23,825,896
|
|
|
|
10,898,071
|
|
|
Other
assets
|
|
|
33,324,128
|
|
|
|
39,053,827
|
|
|
Total
assets
|
|
$
|
2,860,428,923
|
|
|
$
|
2,751,398,913
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Noninterest
bearing
|
|
$
|
108,645,242
|
|
|
$
|
120,082,912
|
|
|
Interest
bearing
|
|
|
1,975,662,802
|
|
|
|
1,872,963,402
|
|
|
Total
deposits
|
|
|
2,084,308,044
|
|
|
|
1,993,046,314
|
|
|
Securities
sold under agreements to repurchase
|
|
|
556,475,000
|
|
|
|
496,419,250
|
|
|
Acceptances
outstanding
|
|
|
405,341
|
|
|
|
430,767
|
|
|
Advances
from Federal Home Loan Bank
|
|
|
15,398,041
|
|
|
|
30,453,926
|
|
|
Note
payable to Statutory Trust
|
|
|
20,619,000
|
|
|
|
20,619,000
|
|
|
Accrued
interest payable
|
|
|
16,073,737
|
|
|
|
17,371,698
|
|
|
Accrued
expenses and other liabilities
|
|
|
10,579,960
|
|
|
|
13,139,809
|
|
|
|
|
|
2,703,859,123
|
|
|
|
2,571,480,764
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities (note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock:
|
|
|
|
|
|
|
|
|
|
Preferred
stock Series A, $0.01 par value. Authorized 20,000,000 shares; issued
and outstanding 430,537 in 2008 and 2007 (aggregate
liquidation preference value of $10,763,425)
|
|
|
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:
20,439,398 shares in 2008 and 20,032,398 shares in 2007; outstanding:
19,499,515 shares in 2008 and 19,093,315 in 2007
|
|
|
204,394
|
|
|
|
200,324
|
|
|
Capital
paid in excess of par value
|
|
|
110,109,207
|
|
|
|
107,936,531
|
|
|
Retained
earnings:
|
|
|
|
|
|
|
|
|
|
Reserve
fund
|
|
|
8,029,106
|
|
|
|
8,029,106
|
|
|
Undivided
profits
|
|
|
49,773,573
|
|
|
|
61,789,048
|
|
|
Treasury
stock, 939,883 shares in 2008 and 939,083 shares in 2007, at
cost
|
|
|
(9,916,962
|
)
|
|
|
(9,910,458
|
)
|
|
Accumulated
other comprehensive (loss) gain
|
|
|
(12,392,943
|
)
|
|
|
1,110,173
|
|
|
Total
stockholders’ equity
|
|
|
156,569,800
|
|
|
|
179,918,149
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
2,860,428,923
|
|
|
$
|
2,751,398,913
|
|
See
accompanying notes to consolidated financial statements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
For the
years ended December 31, 2008 and 2007
|
|
|
2008
|
|
|
2007
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
115,273,672
|
|
|
$
|
143,360,450
|
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
9,572
|
|
|
|
12,152
|
|
|
Tax
exempt
|
|
|
42,425,867
|
|
|
|
26,946,714
|
|
|
Interest-bearing
deposits, securities purchased
under agreements to resell, and
other
|
|
|
1,301,093
|
|
|
|
3,005,875
|
|
|
Total
interest income
|
|
|
159,010,204
|
|
|
|
173,325,191
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
80,509,682
|
|
|
|
84,675,999
|
|
|
Securities
sold under agreements to repurchase,
notes payable, and
other
|
|
|
21,206,699
|
|
|
|
20,794,338
|
|
|
Total
interest expense
|
|
|
101,716,381
|
|
|
|
105,470,337
|
|
|
Net
interest income
|
|
|
57,293,823
|
|
|
|
67,854,854
|
|
|
Provision
for loan and lease losses
|
|
|
42,313,800
|
|
|
|
25,348,000
|
|
|
Net
interest income after provision for loan
and lease
losses
|
|
|
14,980,023
|
|
|
|
42,506,854
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
Service
charges – fees and other
|
|
|
10,395,736
|
|
|
|
9,584,533
|
|
|
Net
gain on sale of securities
|
|
|
190,956
|
|
|
|
—
|
|
|
Net
loss on sale of other real estate owned, repossessed
assets, and on
disposition of other assets
|
|
|
(595,966
|
)
|
|
|
(1,285,958
|
)
|
|
Net
gain on sale of loans
|
|
|
1,467,668
|
|
|
|
379,622
|
|
|
Total
noninterest income
|
|
|
11,458,394
|
|
|
|
8,678,197
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
20,087,767
|
|
|
|
19,890,373
|
|
|
Occupancy
|
|
|
8,106,897
|
|
|
|
7,827,087
|
|
|
Furniture,
fixtures and equipment
|
|
|
3,307,304
|
|
|
|
3,071,901
|
|
|
Professional
services
|
|
|
5,453,867
|
|
|
|
4,496,283
|
|
|
Municipal
and other taxes
|
|
|
2,029,992
|
|
|
|
1,836,783
|
|
|
Commissions
and service fees
|
|
|
1,987,647
|
|
|
|
1,444,949
|
|
|
Office
supplies
|
|
|
1,282,770
|
|
|
|
1,375,022
|
|
|
Insurance
|
|
|
3,111,260
|
|
|
|
1,865,353
|
|
|
Promotional
|
|
|
881,594
|
|
|
|
1,492,240
|
|
|
Other
|
|
|
4,665,896
|
|
|
|
4,924,851
|
|
|
Total
noninterest expense
|
|
|
50,914,994
|
|
|
|
48,224,842
|
|
|
(Loss)
income before income taxes
|
|
|
(24,476,577
|
)
|
|
|
2,960,209
|
|
|
Income
tax benefit
|
|
|
(13,207,948
|
)
|
|
|
(248,874
|
)
|
|
Net
(loss) income
|
|
$
|
(11,268,629
|
)
|
|
$
|
3,209,083
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
(0.62
|
)
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$
|
(0.62
|
)
|
|
$
|
0.13
|
|
See
accompanying notes to consolidated financial statements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders’ Equity
and
Comprehensive (Loss) Income
Years
Ended December 31, 2008 and 2007
|
|
|
2008
|
|
|
2007
|
|
|
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
|
|
|
200,324
|
|
|
|
197,775
|
|
|
Exercised
stock options
|
|
|
4,070
|
|
|
|
2,549
|
|
|
Balance
at end of period
|
|
|
204,394
|
|
|
|
200,324
|
|
|
Capital
paid in excess of par value – common stock:
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
107,936,531
|
|
|
|
106,539,383
|
|
|
Exercised
stock options
|
|
|
2,024,930
|
|
|
|
1,146,330
|
|
|
Stock
based compensation
|
|
|
147,746
|
|
|
|
250,818
|
|
|
Balance
at end of period
|
|
|
110,109,207
|
|
|
|
107,936,531
|
|
|
Reserve
fund:
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
8,029,106
|
|
|
|
7,553,381
|
|
|
Transfer
from undivided profits
|
|
|
—
|
|
|
|
475,725
|
|
|
Balance
at end of period
|
|
|
8,029,106
|
|
|
|
8,029,106
|
|
|
Undivided
profits:
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
61,789,048
|
|
|
|
59,800,495
|
|
|
Net
(loss) income
|
|
|
(11,268,629
|
)
|
|
|
3,209,083
|
|
|
Preferred
stock dividends ($1.73 in 2008 and 2007 per share)
|
|
|
(746,846
|
)
|
|
|
(744,805
|
)
|
|
Transfer
to reserve fund
|
|
|
—
|
|
|
|
(475,725
|
)
|
|
Balance
at end of period
|
|
|
49,773,573
|
|
|
|
61,789,048
|
|
|
Treasury
stock
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
(9,910,458
|
)
|
|
|
(7,410,711
|
)
|
|
Purchase
of common stock
|
|
|
(6,504
|
)
|
|
|
(2,499,747
|
)
|
|
Balance
at end of period
|
|
|
(9,916,962
|
)
|
|
|
(9,910,458
|
)
|
|
Accumulated
other comprehensive (loss) gain, net of taxes:
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
1,110,173
|
|
|
|
(7,565,907
|
)
|
|
Unrealized
net (loss) gain on investment securities available for
sale
|
|
|
(13,503,116
|
)
|
|
|
8,676,080
|
|
|
Balance
at end of period
|
|
|
(12,392,943
|
)
|
|
|
1,110,173
|
|
|
Total
stockholders’ equity
|
|
$
|
156,569,800
|
|
|
$
|
179,918,149
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(11,268,629
|
)
|
|
$
|
3,209,083
|
|
|
Other
comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
Unrealized
net (loss) gain on investment securities available for
sale
|
|
|
(13,503,116
|
)
|
|
|
8,676,080
|
|
|
Reclassification
adjustment for realized loss included in net income
|
|
|
—
|
|
|
|
—
|
|
|
Unrealized
net (loss) gain on investments securities available for
sale
|
|
|
(13,503,116
|
)
|
|
|
8,676,080
|
|
|
Comprehensive
(loss) income
|
|
$
|
(24,771,745
|
)
|
|
$
|
11,885,163
|
|
See
accompanying notes to consolidated financial statements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
ended December 31, 2008 and 2007
|
|
|
2008
|
|
|
2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(11,268,629
|
)
|
|
$
|
3,209,083
|
|
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,083,633
|
|
|
|
3,020,286
|
|
|
Provision
for loan and lease losses
|
|
|
42,313,800
|
|
|
|
25,348,000
|
|
|
Stock-based
compensation
|
|
|
147,746
|
|
|
|
250,817
|
|
|
Deferred
tax and acquired tax credits benefit
|
|
|
(13,259,882
|
)
|
|
|
(4,636,938
|
)
|
|
Net
gain on sale of securities
|
|
|
(190,956
|
)
|
|
|
—
|
|
|
Net
gain on sale of loans
|
|
|
(1,467,668
|
)
|
|
|
(379,622
|
)
|
|
Net
loss on sale of repossessed assets and on disposition of other
assets
|
|
|
595,966
|
|
|
|
1,285,958
|
|
|
Net
amortization of premiums and accretion of discount on investment
securities
|
|
|
(1,348,686
|
)
|
|
|
52,460
|
|
|
Valuation
expense of repossesed assets
|
|
|
1,296,624
|
|
|
|
1,349,112
|
|
|
Decrease
in deferred loan costs
|
|
|
1,910,844
|
|
|
|
2,513,927
|
|
|
Origination
of loans held for sale
|
|
|
(24,028,838
|
)
|
|
|
(17,003,663
|
)
|
|
Proceeds
from sale of loans held for sale
|
|
|
24,319,925
|
|
|
|
17,387,492
|
|
|
Decrease
(increase) in accrued interest receivable
|
|
|
3,522,044
|
|
|
|
(2,375,637
|
)
|
|
Net
decrease (increase) in other assets
|
|
|
16,613,996
|
|
|
|
(1,941,420
|
)
|
|
(Decrease)
increase in accrued interest payable, accrued expenses, and other
liabilities
|
|
|
(3,857,810
|
)
|
|
|
1,377,672
|
|
|
Net
cash provided by operating activities
|
|
|
39,382,110
|
|
|
|
29,457,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing actitivies:
|
|
|
|
|
|
|
|
|
|
Net
(increase) decrease in securities purchased under agreements to
resell
|
|
|
(4,607,766
|
)
|
|
|
31,312,315
|
|
|
Proceeds
from sale of investment securities available for sale
|
|
|
19,090,869
|
|
|
|
—
|
|
|
Purchases
of investment securities available for sale
|
|
|
(347,047,718
|
)
|
|
|
(313,043,053
|
)
|
|
Proceeds
from principal payments and maturities of investment securities available
for sale
|
|
|
272,146,807
|
|
|
|
149,866,240
|
|
|
Purchases
of investment securities held to maturity
|
|
|
(112,456,830
|
)
|
|
|
—
|
|
|
Proceeds
from principal payments, maturities, and calls of investment securities
held to maturity
|
|
|
10,435,839
|
|
|
|
7,443,335
|
|
|
Purchase
of Federal Home Loan Bank Stocks
|
|
|
(11,251,500
|
)
|
|
|
(14,802,500
|
)
|
Procceds
from principal payments and maturities
of Federal Home Loan
Bank Stocks
|
|
|
9,673,400
|
|
|
|
5,775,900
|
|
|
Net
increase in loans
|
|
|
(7,414,514
|
)
|
|
|
(140,543,978
|
)
|
|
Proceeds
from sale of loans
|
|
|
37,671,519
|
|
|
|
—
|
|
|
Proceeds
from sale of other assets
|
|
|
1,407,323
|
|
|
|
782,944
|
|
|
Capital
expenditures
|
|
|
(4,593,750
|
)
|
|
|
(20,749,454
|
)
|
|
Net
cash used in investing activities
|
|
|
(136,946,321
|
)
|
|
|
(293,958,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
91,261,730
|
|
|
|
87,690,107
|
|
|
Increase
in securities sold under agreements to repurchase and other
borrowings
|
|
|
60,055,750
|
|
|
|
130,755,000
|
|
|
Net
(decrease) increase in Federal Home Loan Bank Advances
|
|
|
(15,055,885
|
)
|
|
|
21,746,506
|
|
|
Dividends
paid to preferred stockholders
|
|
|
(746,846
|
)
|
|
|
(744,750
|
)
|
|
Net
proceeds from issuance of common stock
|
|
|
2,029,000
|
|
|
|
1,148,880
|
|
|
Purchase
of common stock
|
|
|
(6,504
|
)
|
|
|
(2,499,747
|
)
|
|
Net
cash provided by financing activities
|
|
|
137,537,245
|
|
|
|
238,095,996
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and due from banks
|
|
|
39,973,034
|
|
|
|
(26,404,728
|
)
|
|
Cash
and due from banks and cash equivalent beginning balance
|
|
|
48,173,130
|
|
|
|
74,577,857
|
|
|
Cash
and due from banks and cash equivalent ending balance
|
|
$
|
88,146,164
|
|
|
$
|
48,173,130
|
|
See
accompanying notes to consolidated financial statements.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December
31, 2008 and 2007
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)
|
Cash
and Due from banks, Interest bearing deposits and Federal funds
sold
|
For
purposes of the presentation in the statements of cash flows, cash and due from
banks and cash equivalents are defined as those amounts included in the balance
sheets captions cash and due from banks, interest bearing deposits and federal
funds sold. For customer loan and deposits transactions 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 (loss) income until realized. Gains or losses on sales
of investment securities available-for-sale are recognized when realized and are
computed on the specific-identification basis.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December
31, 2008 and 2007
The
Company reviews the investment portfolio based on the provisions of SFAS No.
115,
Accounting for Certain
Investments in Debt and Equity
, and the EITF 99-20,
Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Asset
s
. These analyses are
performed taking into consideration current U.S. market conditions, projected
cash flows and the present value of the projected cash flows. 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 operations 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. 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.
The
company reviews the investment portfolio based on the provisions of SFAS No.
115,
Accounting for Certain
Investments in Debt and Equity
, and the EITF 99-20,
Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Asset
s
. These analyses are
performed taking into consideration current U.S. market conditions, projected
cash flows and the present value of the projected cash flows. 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 trust. 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
current operations.
|
|
(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.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December
31, 2008 and 2007
The
Company determines delinquency status based on contractual terms and generally
classifies loans in non accrual status 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 are reversed against interest
income. The interest on these loans is accounted for using the cost
recovery method, until qualifying for return to accrual status. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current or payments are received for a six-month
period and future payments are reasonably assured.
The
allowance for loan and lease losses is an estimate to provide for probable
losses that have been incurred 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
. For impaired
commercial and construction business relationships with aggregate balances
exceeding $150,000, the Company measures impairment following the guidance of
SFAS No. 114.
The
following is a description of how each portion of the allowance for loan and
lease losses is determined.
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.
The
resulting loss factors are then multiplied against the current period’s balance
of unimpaired 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.
Also,
another component is used in the evaluation of the adequacy of the Company’s
general allowance to measure the probable effect that certain current internal
and external environment factors could have on the historical loss factors
currently in use. Factors that we consider include, but are not limited
to:
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December
31, 2008 and 2007
|
|
·
|
levels
of, and trends in, delinquencies and
nonaccruals;
|
|
|
·
|
levels
of, and trends in, charge-offs, and
recoveries;
|
|
|
·
|
trends
in volume and terms of loans;
|
|
|
·
|
effects
of any changes in risk selection and underwriting standards, and other
changes in lending policies, procedures and
practices;
|
|
|
·
|
changes
in the experience, ability and depth of our lending management and
relevant staff;
|
|
|
·
|
national
and local economic business trends and
conditions;
|
|
|
·
|
banking
industry conditions; and
|
|
|
·
|
effect
of changes in concentrations of credit that might affect loss experience
across one or more components of the
portfolio.
|
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 unimpaired
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 the Company’s general portfolio allowances, specific allowances are
provided when specific analyses on impaired loans indicate that it is probable
the Company will be unable to collect all amounts due, both principal and
interest, according to the contractual terms of the loan agreement. For impaired
commercial and construction business relationships with aggregate balances over
$150,000, 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. Except
for collateral-dependent loans, impairments are recorded through a valuation
allowance. For collateral-dependent loans, impairments are recorded through
partial charge-offs charged to the allowance for loan losses. 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.
|
|
(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.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December
31, 2008 and 2007
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.
|
The
Company receives fees for servicing activities on loans it has sold. These
activities include, but are not limited to, collecting principal, interest and
escrow payments from borrowers; paying taxes and insurance from escrowed funds;
monitoring delinquencies; and accounting for and remitting principal and
interest payments. To the extent that the servicing fees exceed or do not
provide adequate compensation for the services provided, the Company records a
servicing asset or liability for the fair value of the servicing
retained.
|
|
(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 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. 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
$206,056,000 and $299,445,000 at December 31, 2008 and 2007,
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.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December
31, 2008 and 2007
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. 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. Deferred tax
assets are recognized for net operating losses that expire in 2015 because the
benefit is more likely than not to be realized.
The
Company adopted FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109” as of January 1,
2007. 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. The Company adopted the
provision of FIN No. 48, which did not have an impact on the Company’s financial
condition or results of operations.
The
company recognizes interest related to income tax matters as interest expense
and penalties related to income tax matters as other expense.
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 generally discontinued when
collectability 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 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 or payments received for six month period, 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.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December
31, 2008 and 2007
|
|
(s)
|
(Loss)
Earnings per Share
|
Basic
(loss) earnings per share represent (loss) 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.
|
|
(t)
|
Supplementary
Cash Flow Information
|
Supplemental
disclosures of cash flow information are as follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the years for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
103,014,000
|
|
|
$
|
106,146,000
|
|
|
Income
taxes
|
|
|
7,000
|
|
|
|
4,335,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
transactions:
|
|
|
|
|
|
|
|
|
|
Repossessed
assets acquired through foreclosure of loans
|
|
$
|
34,740,000
|
|
|
$
|
36,366,000
|
|
|
Financing
of repossessed assets
|
|
|
17,936,000
|
|
|
|
25,186,000
|
|
The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R,
Share-based Payment and the provisions of Staff Accounting Bulletins No. 107 and
110. Accordingly, the Company has recorded stock based employee
compensation cost using the fair value of these awards at the grant
date.. The fair value of the options granted was estimated using the
Black-Sholes Option Pricing Model. 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. Please
refer to note 22 Stock Option Plan for details.
|
|
(v)
|
Comprehensive
(Loss)Income
|
Comprehensive
(loss) income consists of net (loss) income and other Comprehensive (Loss)
Income. In addition to net (loss) income, the Company recognizes
unrealized holding gains and losses, net of taxes, from available-for-sale
securities as components of comprehensive (loss) income.
|
|
(w)
|
Impairment
of Long-Lived Assets
|
In
accordance with SFAS No. 144, long-lived assets, such as property, plant, and
equipment 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.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
There
were no impairment losses in 2008 and 2007.
|
|
(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.
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 (loss)
income.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
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
Adopted Accounting Standards
|
On
February 12, 2008 the Financial Accounting Standards Board (FASB) issued FASB
staff position (FSP) No. 157-2,
“Effective Date of FASB Statement
No. 157”
. This FSP delays the effective date of FAS 157,
“Fair Value Measurements”,
for nonfinancial assets and liabilities, except for those items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. This FSP defers the effective date of FAS 157 to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years
for items within the scope of this FSP. In addition, on October 10, 2008, the
Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS
157-3, “
Determining the Fair
Value of a Financial Asset when the Market for that Asset is not
Active
”.
The FSP
clarifies the application of FASB Statement No. 157, “
Fair Value Measurements
”, in
a market that is not active for a financial asset. The FSP provides guidance on
the application of available observable inputs in a market that is not active,
the use of market quotes when assessing relevance of observable and unobservable
inputs available and the use of the reporting entity’s assumptions when
observable inputs do not exist. The FSP is effective upon issuance and should be
applied in prior periods for which financial statements have not been
issued. The implementation of this FSP does not have a significant
impact on the financial statement.
In May
2008, the Financial Accounting Standards Board (FASB) issued SFAS 162,
The Hierarchy of Generally Accepted
Accounting Principles
. The main focus of SFAS 162 is to identify the
sources of accounting principles and provide entities with a framework for
selecting the principles used in preparation of financial statements that are
presented in conformity with Generally Accepted Accounting Principles. The Board
believes that the GAAP hierarchy should be directed to entities rather than the
auditor. The current GAAP hierarchy, set forth in the AICPA Statement on
Auditing Standards No. 69,
The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles
, has been criticized for its complexity and for being directed
to the auditor rather than the entity. SFAS 162 is effective 60 days
following the SEC approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. The Company believes that
this statement will not have financial impact.
On
January 12, 2009, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position
EITF
99-20-1,
“Amendments to the
Impairment Guidance of EITF Issue No. 99-20”
.
It amends EITF 99-20,
“Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to be Held by a Transferor in Securitized Financial Assets”
to
provide more consistent determination of whether an other-than-temporary
impairment has occurred. The FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and related disclosure requirements
in FASB Statement No. 115, “
Accounting
for Certain Investments in Debt and
Equity Securities”
.
The FSP establishes that companies should consider guidance in Statement
115. Companies should also consider all available information
including past events and current conditions when developing
estimates of future cash flows to determine whether to record an other than
temporary impairment. The FSP is effective for interim and annual reporting
periods ending after December 15, 2008, and should be applied prospectively. The
implementation of EITF 99-20-1 does not had a significant impact on the
financial statements.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
|
(aa)
|
Recently
Issued Accounting Standards
|
The
Financial Accounting Standards 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 has chosen not to value financial instruments at fair value under this
statement.
In March
2008 the Financial Standards Board (FASB) issued SFAS 161
“Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB No.
133”
. This statement addresses the amount and quality of
required disclosures under FASB 133 and improves the transparency of financial
reporting. Under FASB 161 all entities are required to enhance
disclosures about how and why it uses derivative instruments, how derivative
instruments and related hedged items are accounted for under FASB 133, and how
derivative instruments and related hedged items affect the entity’s financial
position, financial performance, and cash flows. This statement
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company believes that this statement will not have a
financial impact, other than additional disclosures, upon
adoption.
On
September 12, 2008 the Financial Accounting Standards Board (FASB) issued FASB
staff position (FSP) No. 133-1 and FIN 45-4, “
Disclosures about Credit Derivatives
and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161
”. The main focus of this FSP is to address concerns by financial
statements users and others regarding the disclosure of potential adverse
effects of changes in credit risk. This FSP amends FASB 133 to require
disclosures by sellers of credit derivatives, including credit derivatives
embedded in hybrid instruments. The FSP amends FIN 45, “
Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
” to require an additional disclosure about the
current status of the payment/performance risk of a guarantee. The provisions of
the FSP will be effective for reporting periods ending after November 15, 2008.
The FSP clarifies the Board’s intent about the effective date of FASB Statement
No. 161, “
Disclosures about
Derivative Instruments and Hedging Activities
”. The FSP clarifies the
Board’s intent that disclosures required by Statement 161 shall be provided for
any reporting period (annual or interim) beginning after November 15,
2008.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
(3)
|
Securities
Purchased Under Agreements to
Resell
|
Securities
purchased under agreements to resell at December 31, 2008 and 2007 consist
of short-term investments, usually overnight transactions. The
following table summarizes certain information on securities purchased under
agreements to resell:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
outstanding at year-end
|
|
$
|
24,486,774
|
|
|
$
|
19,879,008
|
|
|
Maximum
aggregate balance outstanding at any month-end
|
|
|
56,583,043
|
|
|
|
61,649,614
|
|
|
Average
monthly aggregate balance outstanding during the year
|
|
|
21,470,085
|
|
|
|
32,870,163
|
|
|
Weighted
average interest rate for the year
|
|
|
3.00
|
%
|
|
|
5.49
|
%
|
|
Weighted
average interest rate at year-end
|
|
|
2.45
|
%
|
|
|
5.22
|
%
|
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, 2008 and 2007 was approximately $28,620,000 and
$20,352,000, respectively. It is the Company’s policy to obtain
collateral securities with fair value of at least 102% of the transaction
amount.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
4)
|
Investment
Securities Available for Sale
|
Investment
securities available for sale and related contractual maturities as of
December 31, 2008 and 2007 are as follows:
|
|
|
2008
|
|
|
|
|
Amortized
|
|
|
Gross
unrealized
|
|
|
Gross
unrealized
|
|
|
Fair
|
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
Commonwealth
of Puerto
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rico
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
$
|
200,194
|
|
|
$
|
4,245
|
|
|
$
|
–
|
|
|
$
|
204,439
|
|
|
One
through five years
|
|
|
5,346,299
|
|
|
|
16,025
|
|
|
|
(2,304
|
)
|
|
|
5,360,021
|
|
|
Federal
Home Loan Bank notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
|
20,993,213
|
|
|
|
227,357
|
|
|
|
–
|
|
|
|
21,220,570
|
|
|
One
through five years
|
|
|
6,530,425
|
|
|
|
20,387
|
|
|
|
–
|
|
|
|
6,550,812
|
|
|
US
Corporate Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than one year
|
|
|
4,974,971
|
|
|
|
–
|
|
|
|
(83,871
|
)
|
|
|
4,891,100
|
|
|
One
through five years
|
|
|
3,000,000
|
|
|
|
–
|
|
|
|
(1,950,000
|
)
|
|
|
1,050,000
|
|
|
Mortgage-backed
securities
|
|
|
722,364,282
|
|
|
|
13,775,266
|
|
|
|
(24,399,924
|
)
|
|
|
711,739,623
|
|
|
Total
|
|
$
|
763,409,384
|
|
|
$
|
14,043,280
|
|
|
$
|
(26,436,099
|
)
|
|
$
|
751,016,565
|
|
|
|
|
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
|
|
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, 2008 and 2007, 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, 2008, the company sold US agency debt securities and
mortgage backed securities with total proceeds of approximately $19,091,000,
recognizing a net gain of approximately $191,000. During the year ended December
31, 2007, there were no sales of investment securities available for
sale.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
For the
years ended December 31, 2008 and 2007, 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:
|
|
|
2008
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
Commonwealth
of Puerto Rico and municipal obligations
|
|
$
|
(2,304
|
)
|
|
$
|
775,889
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
(2,304
|
)
|
|
$
|
775,889
|
|
|
US
Corporate Notes
|
|
|
(83,871
|
)
|
|
|
4,891,100
|
|
|
|
(1,950,000
|
)
|
|
|
1,050,000
|
|
|
|
(2,033,871
|
)
|
|
|
5,941,100
|
|
|
Mortgage-backed
securities
|
|
|
(20,880,325
|
)
|
|
|
201,176,140
|
|
|
|
(3,519,599
|
)
|
|
|
35,784,953
|
|
|
|
(24,399,924
|
)
|
|
|
236,961,093
|
|
|
|
|
$
|
(20,966,500
|
)
|
|
$
|
206,843,129
|
|
|
$
|
(5,469,599
|
)
|
|
$
|
36,834,953
|
|
|
$
|
(26,436,099
|
)
|
|
$
|
243,678,082
|
|
|
|
|
200
7
|
|
|
|
|
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
|
|
|
Commonwealth
of Puerto Rico 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
|
|
|
|
·
|
Commonwealth
of Puerto Rico and municipal obligations-
The unrealized losses on
investments in state and municipal obligations were caused primarily by
changes in interest rate expectations and the general economy
deterioration. 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 the general
deterioration of the economy 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.
|
|
|
·
|
US
Corporate Notes-
The unrealized losses on investments in U.S.
corporate notes were caused primarily by changes in interest rate
expectations, the general deterioration of the economy and its possible
effect in the financial institutions economic sector. These securities
were issued by financial institutions that are currently well capitalized,
the interest payments are current and it is expected the securities would
not settle at their maturity date for less than their fair
value. Because the decline in fair value is attributable to
changes in interest rates expectations and the general deterioration of
the economy and not to current credit performance, 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.
|
|
|
·
|
Mortgage-Backed
Securities
– The unrealized losses on investments in
mortgage-backed securities were caused by changes in interest rate
expectations and the general deterioration of the economy. The
company has Mortgage-Backed Securities (“MBS”) that were issued by private
corporations and by U.S. government enterprise. The contractual
cash flows of the securities issued by a private label MBS will depend on
the amount of collateral and the cash-flows structure established for each
security. The contractual cash flows of securities issued by
U.S. government enterprise are guaranteed by the U.S. government. 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 expectations and the general
deterioration of the economy and not to credit quality of the securities,
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.
|
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
|
·
|
U.S. Agency
Debt Securities
– The unrealized losses on investments in
U.S. agency debt securities were caused by changes in interest rate
expectations and the general deterioration of the economy. 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. These
investments are guaranteed by the U.S. government. 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.
|
With the
assistance of a third party provider, the Company reviewed the investment
portfolio as of December 31, 2008 using cash flow and valuation models and
considering the SFAS No. 115,
Accounting for Certain Investments
in Debt and Equity
, and the EITF 99-20,
Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets
, for
applicable securities.
During
the review, the Company identified securities with characteristics that
warranted a more detailed analysis:
|
|
(i)
|
One
security for $1,050,000 is a non-rated Trust Preferred Stock (“TPS”).
For the TPS, the Company reviewed the current performance of the
security and the current financial position of the
issuer.
|
|
|
(ii)
|
Sixteen
are private label mortgage-backed securities (“MBS”) amounting to
$44,429,000that have mixed credit ratings or other special
characteristics. For each one of the MBS, the Company reviewed the
collateral performance and considered the impact of current economic
trends. These analyses were performed taking into consideration
current U.S. market conditions and trends, forward projected cash flows
and the present value of the forward projected cash flows. The
Company determined that, as of December 31, 2008, the estimated present
value of all expected cash flows of these investments was at or above
their book value. Some of the analysis performed to the downgraded
mortgage-backed securities
included:
|
|
|
a.
|
the
calculation of their coverage
ratios;
|
|
|
b.
|
current
credit support;
|
|
|
c.
|
total
delinquency over sixty days;
|
|
|
d.
|
average
loan-to-values;
|
|
|
e.
|
projected
defaults considering a conservative additional downside scenario of (5)%
in Housing Price Index values for each of the following 3
years;
|
|
|
f.
|
a
mortgage loan Conditional Prepayment Rate (“CPR”) speed equal to the
approximately last six months average for each
security;
|
|
|
g.
|
projected
total future deal loss based on the previous
assumptions;
|
|
|
h.
|
excess
credit support protection;
|
|
|
i.
|
projected
tranche dollar loss; and
|
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
|
j.
|
projected
tranche percentage loss, if any, and economic
value.
|
Based on
this assessment, the Company concluded that no other than temporary impairment
needs to be recorded for this reporting period.
|
(5)
|
Investment
Securities Held to Maturity
|
Investment
securities held to maturity as of December 31, 2008 and 2007 were as
follows:
|
|
|
2008
|
|
|
|
|
Amortized
|
|
|
Gross
unrealized
|
|
|
Gross
unrealized
|
|
|
Fair
|
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
value
|
|
|
Federal
Home Loan Bank notes
|
|
$
|
2,457,389
|
|
|
|
4,690
|
|
|
|
–
|
|
|
$
|
2,462,079
|
|
|
Mortgage-backed
securities
|
|
|
130,340,792
|
|
|
|
1,677,328
|
|
|
|
(1,589,697
|
)
|
|
|
130,428,423
|
|
|
Total
|
|
$
|
132,798,181
|
|
|
$
|
1,682,018
|
|
|
$
|
(1,589,697
|
)
|
|
$
|
132,890,502
|
|
|
|
|
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
|
|
During
the years ended December 31, 2008 and 2007, there were no sales or transfer
of investment securities held to maturity.
For the
years ended December 31, 2008 and 2007, 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:
|
|
|
2008
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
Mortgage-backed
securities
|
|
$
|
(614,754
|
)
|
|
$
|
20,967,964
|
|
|
$
|
(974,943
|
)
|
|
$
|
6,350,354
|
|
|
$
|
(1,589,697
|
)
|
|
$
|
27,318,318
|
|
|
|
|
$
|
(614,754
|
)
|
|
$
|
20,967,964
|
|
|
$
|
(974,943
|
)
|
|
$
|
6,350,354
|
|
|
$
|
(1,589,697
|
)
|
|
$
|
27,318,318
|
|
|
|
|
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
|
|
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
|
·
|
Mortgage-Backed
Securities –
The unrealized
losses on investments in mortgage-backed securities were caused by changes
in interest rate expectations and the general deterioration of the
economy. 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 private corporations are guaranteed by mortgage loans. The credit
quality of the private label MBS will depend on the amount of collateral
and the cash-flows structure established for each security. The
contractual cash flows of securities issued by U.S. government enterprise
are guaranteed by the U.S. government. 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’ expectations and the general deterioration of the economy and not
to credit quality of the securities, 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.
|
|
|
·
|
U.S. Agency
Debt Securities
– The unrealized losses on investments in
U.S. agency debt securities were caused by changes in interest rate
increases’ expectations and the general deterioration of the economy. 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. These
investments are guaranteed by the U.S. government. 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.
|
With the
assistance of a third party provider, the Company reviewed the investment
portfolio as of December 31, 2008 using models on the SFAS No. 115,
Accounting for Certain Investments
in Debt and Equity
, and the EITF 99-20,
Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets
, for
applicable securities. These analyses were performed taking into
consideration current U.S. market conditions, forward projected cash flows and
the present value of the forward projected cash flows. Based on this
assessment, the Company concluded that no other than temporary impairment needs
to be recorded for this reporting period.
Other
investments at December 31, 2008 and 2007 consisted of the
following:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
stock, at cost
|
|
$
|
14,322,400
|
|
|
$
|
12,744,300
|
|
|
Investment
in statutory trust (note 16)
|
|
|
610,000
|
|
|
|
610,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
$
|
14,932,400
|
|
|
$
|
13,354,300
|
|
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
At
December 31, 2008, various securities and loans were pledged to secure the
following:
|
|
|
Carrying
|
|
|
|
Asset pledged
|
|
Value
|
|
Items
secured/collateralized
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
64,180,224
|
|
Deposits
of public funds
|
|
Time
Deposit
|
|
|
400,000
|
|
Assets
pledged with Commisioner of Financial Institutions for International
Banking Entity Operations
|
|
Residential
Mortgage Loans
|
|
|
53,779,555
|
|
Advances
from Federal Home Loan Bank
|
|
Securities
|
|
|
120,492
|
|
Assets
pledged with Commissioner of Financial Institutions for IRA
Trust
|
|
Securities
|
|
|
481,799
|
|
Assets
pledged with Commisioner of Financial Institutions for the Trust and
International
Banking Entity Operations
|
|
Securities
|
|
|
245,739
|
|
Assets
pledged with the Federal Reserve Bank for Treasury, Tax & Loan
account
|
|
Securities
|
|
|
11,957,519
|
|
Assets
pledged with the Federal Reserve Bank for Discount
Window
|
|
Securities
|
|
|
1,225,658
|
|
Assets
pledged for derivatives contracts
|
|
Securities
|
|
|
642,014,243
|
|
Securities
sold under agreements to
repurchase
|
At
December 31, 2008, 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 $579,597,997 and $62,416,246,
respectively.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
A summary
of the Company’s loan portfolio at December 31 were as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Loans
secured by real estate:
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
$
|
851,493,614
|
|
|
$
|
792,308,856
|
|
|
Construction
|
|
|
220,579,003
|
|
|
|
203,344,272
|
|
|
Residential
mortgage
|
|
|
125,556,755
|
|
|
|
106,947,204
|
|
|
Consumer
|
|
|
2,445,232
|
|
|
|
779,610
|
|
|
|
|
|
1,200,074,604
|
|
|
|
1,103,379,942
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
|
263,331,838
|
|
|
|
302,530,197
|
|
|
Consumer
|
|
|
49,414,894
|
|
|
|
57,745,127
|
|
|
Lease
financing contracts
|
|
|
267,324,959
|
|
|
|
385,390,263
|
|
|
Overdrafts
|
|
|
2,146,131
|
|
|
|
6,849,655
|
|
|
|
|
|
1,782,292,426
|
|
|
|
1,855,895,184
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan origination costs, net
|
|
|
455,051
|
|
|
|
2,365,896
|
|
|
Unearned
finance charges
|
|
|
(569,313
|
)
|
|
|
(1,041,968
|
)
|
|
Allowance
for loan and lease losses
|
|
|
(41,639,051
|
)
|
|
|
(28,137,104
|
)
|
|
Loans,
net
|
|
$
|
1,740,539,113
|
|
|
$
|
1,829,082,008
|
|
The
components of the net lease financing at December 31 were as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
Installments
lease payments
|
|
$
|
212,804,368
|
|
|
$
|
319,370,361
|
|
|
Contractual
residual payments
|
|
|
54,520,591
|
|
|
|
66,019,902
|
|
|
Minimum
lease payments
|
|
|
267,324,959
|
|
|
|
385,390,263
|
|
|
Deferred
origination costs, net
|
|
|
1,413,082
|
|
|
|
3,463,530
|
|
|
Less
unearned income (equipment leases)
|
|
|
(569,313
|
)
|
|
|
(1,041,968
|
)
|
|
|
|
$
|
268,168,729
|
|
|
$
|
387,811,825
|
|
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.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
At
December 31, 2008, future minimum lease payments are expected to be
received as follows:
|
Years
ending December 31:
|
|
|
|
|
2009
|
|
$
|
90,112,820
|
|
|
2010
|
|
|
77,418,267
|
|
|
2011
|
|
|
51,575,658
|
|
|
2012
|
|
|
32,652,643
|
|
|
2013
|
|
|
13,835,101
|
|
|
Thereafter
|
|
|
1,730,470
|
|
|
|
|
|
|
|
|
|
|
$
|
267,324,959
|
|
The
following is a summary of information pertaining to impaired loans:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans with related allowance
|
|
$
|
137,109,000
|
|
|
$
|
32,147,000
|
|
|
Impaired
loans that did not require allowance
|
|
|
127,134,000
|
|
|
|
52,283,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
impaired loans
|
|
$
|
264,243,000
|
|
|
$
|
84,430,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for impaired loans
|
|
$
|
22,381,000
|
|
|
$
|
9,538,000
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Average
investment in impaired loans
|
|
$
|
168,351,000
|
|
|
$
|
61,234,000
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income recognized on
impaired loans
|
|
|
903,000
|
|
|
|
1,961,000
|
|
The
following is the information pertaining to nonperforming loans as of December
31:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Loans
contractually past due 90 days or more but still accruing
interest
|
|
$
|
22,590,000
|
|
|
$
|
29,075,000
|
|
|
Non
accrual loans
|
|
|
141,304,000
|
|
|
|
68,990,000
|
|
|
Total
non performing loans
|
|
$
|
163,894,000
|
|
|
$
|
98,065,000
|
|
As of
December 31, 2008 and 2007, loans in which the accrual of interest has been
discontinued amounted to $141,304,000 and $68,990,000,
respectively. If these loans had been accruing interest, the
additional interest income realized would have been approximately $8,066,000 and
$5,523,000 for 2008 and 2007, respectively.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
(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:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
28,137,104
|
|
|
$
|
18,936,841
|
|
|
Provision
for loan and leas e losses
|
|
|
42,313,800
|
|
|
|
25,348,000
|
|
|
Loans
and leases charged-off
|
|
|
(31,113,816
|
)
|
|
|
(18,270,875
|
)
|
|
Recoveries
|
|
|
2,301,963
|
|
|
|
2,123,139
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
41,639,051
|
|
|
$
|
28,137,104
|
|
|
(10)
|
Premises
and Equipment, Net
|
Premises
and equipment at December 31 are as follows:
|
|
|
Estimated
useful lives
(years)
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
|
|
|
$
|
4,899,328
|
|
|
$
|
4,899,328
|
|
|
Building
|
|
40
|
|
|
|
14,188,747
|
|
|
|
14,188,747
|
|
|
Building
and leasehold improvements
|
|
3 to 40
|
|
|
|
14,834,028
|
|
|
|
13,756,834
|
|
|
Furniture,
fixtures, and equipment
|
|
2
to 10
|
|
|
|
13,127,203
|
|
|
|
13,835,040
|
|
|
Construction
in progress
|
|
|
|
|
|
|
1,176,248
|
|
|
|
193,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,225,553
|
|
|
|
46,873,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation and amortization
|
|
|
|
|
|
|
(13,759,082
|
)
|
|
|
(13,790,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,466,471
|
|
|
$
|
33,083,169
|
|
Depreciation
and amortization expense for the years ended December 31, 2008 and 2007 amounted
to $2,990,183 and $2,391,119, 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, which includes a 57,187 square foot office
building, consolidates the Company’s and the Bank’s headquarters, administrative
operations and other divisions. The purchase price for the property was
$12,360,000. In addition, as of December 31, 2008 and 2007, building
improvements amounted to approximately $4,290,000 and $2,948,000,
respectively.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
Other
assets at December 31 consist of the following:
|
|
|
2008
|
|
|
2007
|
|
|
Merchant
credit card items in process of collection
|
|
$
|
2,930,325
|
|
|
$
|
2,416,934
|
|
|
Auto
insurance claims receivable on repossessed vehicles
|
|
|
866,805
|
|
|
|
1,148,782
|
|
|
Accounts
receivable
|
|
|
1,198,087
|
|
|
|
8,828,058
|
|
|
Other
real estate, net of valuation allowance of $121,888 and $120,857 in 2008
and 2007, respectively
|
|
|
8,759,307
|
|
|
|
8,124,572
|
|
|
Other
repossessed assets, net of valuation allowance of $633,165 and
$565,767 in 2008 and 2007, respectively
|
|
|
4,747,048
|
|
|
|
5,409,451
|
|
|
Prepaid
expenses and deposits
|
|
|
6,264,994
|
|
|
|
6,766,081
|
|
|
Fair
value option
|
|
|
110,000
|
|
|
|
3,950,000
|
|
|
Other
|
|
|
8,447,562
|
|
|
|
2,409,950
|
|
|
|
|
$
|
33,324,128
|
|
|
$
|
39,053,827
|
|
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:
|
|
|
2008
|
|
|
2007
|
|
|
Balance,
beginning of year
|
|
$
|
565,767
|
|
|
$
|
799,104
|
|
|
Provision
for losses
|
|
|
1,277,215
|
|
|
|
1,252,576
|
|
|
Net
charge-offs
|
|
|
(1,209,817
|
)
|
|
|
(1,485,913
|
)
|
|
Balance,
end of year
|
|
$
|
633,165
|
|
|
$
|
565,767
|
|
Total
deposits as of December 31 consisted of:
|
|
|
2008
|
|
|
2007
|
|
|
Noninterest
bearing deposits
|
|
$
|
108,645,242
|
|
|
$
|
120,082,912
|
|
|
Interest-bearing
deposits :
|
|
|
|
|
|
|
|
|
|
NOW
& Money Market
|
|
|
59,309,057
|
|
|
|
60,893,298
|
|
|
Savings
|
|
|
104,424,319
|
|
|
|
131,604,327
|
|
|
Regular
CD's & IRA S
|
|
|
109,731,499
|
|
|
|
92,544,566
|
|
|
Jumbo
CD's
|
|
|
278,383,616
|
|
|
|
251,360,899
|
|
|
Brokered
deposits
|
|
|
1,423,814,311
|
|
|
|
1,336,560,312
|
|
|
|
|
|
1,975,662,802
|
|
|
|
1,872,963,402
|
|
|
Total
Deposits
|
|
$
|
2,084,308,044
|
|
|
$
|
1,993,046,314
|
|
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
The
Company evaluated its dependency risk on broker dealers and the possibility of a
near term severe impact, as defined on the SOP 94-6,
“Disclosure of Certain Significant
Risks and Uncertainties”
, and concluded that the Company relies on broker
deposits as a short-term funding source to meet its liquidity needs.
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 the Company’s net interest
spread and net interest margin. In addition, broker deposit funding
sources may be more sensitive to significant changes in the Company’s financial
condition. The ability to continue to acquire broker deposits is subject to
the Company ability to price these deposits at competitive levels, which may
substantially increase the funding costs, and the confidence of the
market. In addition, if the Company’s capital ratios fall below the levels
necessary to be considered “well-capitalized” under current regulatory
guidelines, the Company could be restricted in using broker deposits as a
short-term funding source. This could materially impact the Company’s
liquidity position.
Interest
expense on time deposits over $100,000 and brokered deposits regardless the
amount amounted to approximately $72,016,000 and $75,467,000 for the years ended
December 31, 2008 and 2007, respectively.
At
December 31, 2008, the scheduled maturities of time deposits are as
follows:
|
|
|
Under
$100,000
|
|
|
Over
$100,000
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
1,009,683,732
|
|
|
$
|
244,710,834
|
|
|
$
|
1,254,394,566
|
|
|
2010
|
|
|
251,881,885
|
|
|
|
8,252,201
|
|
|
|
260,134,086
|
|
|
2011
|
|
|
176,908,584
|
|
|
|
1,168,747
|
|
|
|
178,077,331
|
|
|
2012
|
|
|
47,207,813
|
|
|
|
25,575,000
|
|
|
|
72,782,813
|
|
|
2013
|
|
|
23,256,905
|
|
|
|
1,230,000
|
|
|
|
24,486,905
|
|
|
Thereafter
|
|
|
23,903,103
|
|
|
|
1,000,000
|
|
|
|
24,903,103
|
|
|
|
|
|
1,532,842,022
|
|
|
|
281,936,782
|
|
|
|
1,814,778,804
|
|
|
Net
premium (discount)
|
|
|
112,533
|
|
|
|
(2,961,911
|
)
|
|
|
(2,849,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,532,954,555
|
|
|
$
|
278,974,871
|
|
|
$
|
1,811,929,426
|
|
|
(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:
|
|
|
2008
|
|
|
2007
|
|
|
Amount
outstanding at year-end
|
|
$
|
556,475,000
|
|
|
$
|
496,419,250
|
|
|
Maximum
aggregate balance outstanding at any month-end
|
|
|
583,205,000
|
|
|
|
496,419,250
|
|
|
Average
aggregate balance outstanding during the year
|
|
|
526,758,383
|
|
|
|
372,934,957
|
|
|
Weighted
average interest rate for the year
|
|
|
3.61
|
%
|
|
|
5.04
|
%
|
|
Weighted
average interest rate at year-end
|
|
|
3.60
|
%
|
|
|
4.60
|
%
|
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,
2008 and 2007
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, 2008 and
2007:
|
|
|
2008
|
|
|
|
|
Borrowing
balance
|
|
|
Amortized
cost of
collateral
|
|
|
Fair value
of collateral
|
|
|
Weighted
average
interest rate
|
|
|
Obligation
of U.S. government agencies and corporations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
90 days
|
|
$
|
16,584,861
|
|
|
$
|
16,453,903
|
|
|
$
|
16,643,114
|
|
|
|
3.95
|
%
|
|
|
|
|
16,584,861
|
|
|
|
16,453,903
|
|
|
|
16,643,114
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
30 days
|
|
|
73,036,270
|
|
|
|
78,334,197
|
|
|
|
80,379,680
|
|
|
|
2.55
|
%
|
|
After
90 days
|
|
|
164,837,071
|
|
|
|
188,902,243
|
|
|
|
194,725,984
|
|
|
|
3.26
|
%
|
|
|
|
|
237,873,341
|
|
|
|
267,236,440
|
|
|
|
275,105,664
|
|
|
|
|
|
|
Collateralized
mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
30 days
|
|
|
11,763,730
|
|
|
|
12,617,052
|
|
|
|
11,645,664
|
|
|
|
2.55
|
%
|
|
After
90 days
|
|
|
290,253,068
|
|
|
|
346,164,592
|
|
|
|
338,117,585
|
|
|
|
3.83
|
%
|
|
|
|
|
302,016,798
|
|
|
|
358,781,644
|
|
|
|
349,763,249
|
|
|
|
|
|
|
|
|
$
|
556,475,000
|
|
|
$
|
642,471,987
|
|
|
$
|
641,512,027
|
|
|
|
3.47
|
%
|
|
|
|
2007
|
|
|
|
|
Borrowing
balance
|
|
|
Amortized
cost of
collateral
|
|
|
Fair value
of collateral
|
|
|
Weighted
average
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
|
%
|
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
(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
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
4.51
|
%
|
|
$
|
—
|
|
|
$
|
30,000,000
|
|
|
2009
|
|
|
2.92
|
%
|
|
|
15,000,000
|
|
|
|
—
|
|
|
2014
|
|
|
4.38
|
%
|
|
|
398,041
|
|
|
|
453,926
|
|
|
|
|
|
|
|
|
$
|
15,398,041
|
|
|
$
|
30,453,926
|
|
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 for the year ended
December 2008 and 2007 amounted approximately to $653,000 and $217,000,
respectively. Advances are secured by mortgage loans and securities pledged at
the FHLB. As of December 2008, our borrowing potential based on the
collateral pledged at the FHLB was approximately $39,181,000.
|
(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
operations.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
As of
December 31, 2008 and 2007, the Company had the following derivative financial
instruments outstanding:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Notional
amount
|
|
|
Fair value
|
|
|
Notional
amount
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Libor-Rate
interest rate swaps
|
|
$
|
14,000,000
|
|
|
$
|
12,959
|
|
|
$
|
30,800,000
|
|
|
$
|
(415,176
|
)
|
|
|
|
$
|
14,000,000
|
|
|
$
|
12,959
|
|
|
$
|
30,800,000
|
|
|
$
|
(415,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
Option
|
|
$
|
25,000,000
|
|
|
$
|
110,000
|
|
|
$
|
25,000,000
|
|
|
$
|
3,950,000
|
|
|
|
|
$
|
25,000,000
|
|
|
$
|
110,000
|
|
|
$
|
25,000,000
|
|
|
$
|
3,950,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written
Option
|
|
$
|
25,000,000
|
|
|
$
|
(110,000
|
)
|
|
$
|
25,000,000
|
|
|
$
|
(3,950,000
|
)
|
|
|
|
$
|
25,000,000
|
|
|
$
|
(110,000
|
)
|
|
$
|
25,000,000
|
|
|
$
|
(3,950,000
|
)
|
In
January 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 represent 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, 2008, $110,000 was included in other assets and
other liabilities related to the purchased option and equity-based return
derivative.
As of
December 31, 2008, the Company had one interest rate swap agreement, designated
as fair value hedge, which converted $12,235,000 of fixed rate time deposit to
variable rate time deposit that will mature in 2018, with semi-annual call
options that match the call options on the swap. This swap and the certificate
of deposit was terminated on January 26, 2009 and had an inconsequential impact
in current operations.
As of
December 31, 2007, the Company had four interest rate swap agreements
outstanding, which synthetically converted $28,382,000 of fixed rate time
deposits to variable rate (LIBOR-based) time deposits, of which $10,316,000 will
mature between 2010 and 2013 and $18,066,000 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, 2008
and 2007, the net loss from fair value hedging ineffectiveness was considered
inconsequential and reported within other non-interest income.
|
(16)
|
Notes
Payable to Statutory Trusts
|
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.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
Interest
expense on notes payable to statutory trusts amounted to approximately
$1,389,000 and $1,794,000 for the years ended December 31, 2008 and 2007,
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
lease
payments
|
|
|
Estimated
lease
income
|
|
|
Net
|
|
|
Years
ending December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
1,551,000
|
|
|
$
|
255,000
|
|
|
$
|
1,296,000
|
|
|
2010
|
|
|
1,491,000
|
|
|
|
255,000
|
|
|
|
1,236,000
|
|
|
2011
|
|
|
1,398,000
|
|
|
|
276,000
|
|
|
|
1,122,000
|
|
|
2012
|
|
|
1,261,000
|
|
|
|
—
|
|
|
|
1,261,000
|
|
|
2013
|
|
|
1,210,000
|
|
|
|
—
|
|
|
|
1,210,000
|
|
|
Thereafter
|
|
|
12,996,000
|
|
|
|
—
|
|
|
|
12,996,000
|
|
|
|
|
$
|
19,907,000
|
|
|
$
|
786,000
|
|
|
$
|
19,121,000
|
|
Rent
expense, net of rent income, for the years ended December 31, 2008 and 2007
was approximately $2,052,000 and $2,468,000, 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 quarter ended March 31, 2008, the Company sold to a third party lease
financing contracts with carrying values of approximately
$37,671,000. In this sale, the Company retained servicing
responsibilities and servicing assets of $2,166,000 was recognized. The Company
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 and recognized net gains of
approximately $1,177,000. Under the terms of the transactions, the Company has
limited recourse obligations to repurchase defaulted leases up to 5% of the
outstanding aggregate principal lease balance as of the cut-off date of all
leases purchased. As of December 31, 2008 and 2007, total amount accrued on
books related to recourse liability amounted to approximately $331,000 and
$27,000, respectively.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
A summary
of servicing assets as of December 31, 2008 are as follows:
|
Servicing
assets
|
|
2008
|
|
|
2007
|
|
|
Balance,
beginning of year
|
|
$
|
148,880
|
|
|
$
|
1,157,706
|
|
|
Servicing
retained on lease financing contracts sold
|
|
|
2,166,113
|
|
|
|
—
|
|
|
Change
in valuation allowance
|
|
|
—
|
|
|
|
(379,659
|
)
|
|
Amortization
|
|
|
(1,093,451
|
)
|
|
|
(629,167
|
)
|
|
Balance,
end of period
|
|
$
|
1,221,542
|
|
|
$
|
148,880
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance for servicing assets
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
1,299
|
|
|
$
|
375,986
|
|
|
Direct
write-downs
|
|
|
—
|
|
|
|
(374,687
|
)
|
|
Total
valuation allowance
|
|
|
1,299
|
|
|
|
1,299
|
|
|
Balance,
end of period, net
|
|
$
|
1,220,243
|
|
|
$
|
147,581
|
|
During
the quarter ended December 31, 2008 the Company evaluated the fair value of
servicing assets for impairment using the present value of expected cash flows
associated with the servicing assets, taking into account a prepayment
assumption of 18.24%, a discount rate of 9.00% and a weighted average portfolio
life of 2.73 years. No fair value impairment analysis was prepared as
of December 31, 2007 since the servicing asset was considered
inconsequential. There were no custodial escrow balances maintained
in connection with serviced leases as of December 31, 2008 and December 31,
2007.
The
estimated aggregate amortization expense related to servicing assets for the
next years is as follows:
|
Year
|
|
Amount
|
|
|
2009
|
|
$
|
809,696
|
|
|
2010
|
|
|
339,366
|
|
|
Thereafter
|
|
|
72,480
|
|
|
|
|
$
|
1,221,542
|
|
During
the years 2008 and 2007, the Company sold approximately $23,868,000 and
$16,706,000 of mortgage loans, respectively. In addition, during 2008
and 2007, the Company sold $162,000 and $281,000 in individual residential
construction loans to other financial institutions, respectively. The Company
surrendered control of the mortgage loans receivables, including servicing
rights, as defined by SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities
, and
accounted for these transactions as a sale. The net proceeds from the
sale from such loans amounted to approximately $24,320,000 and $17,387,000,
resulting in a gain of approximately $291,000 and $380,000 during the years
ended December 31, 2008 and 2007, respectively.
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, 2008 and 2007, the
Company’s tax provision and related accounts are substantially those of its
subsidiary Bank.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
The
Company 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
Company is also subject to federal income tax on its U.S. source
income. However, the Company’s revenues are generally not subject to
U.S. federal income tax. 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.
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 the
subsidiary, EBS Overseas, Inc. The revenues generated by these
entities, net of related interest costs and operating expenses, are exempt from
Puerto Rico taxes.
The
Company includes taxable income from Euroseguros, Inc., a subsidiary acting as
an agent to sell life, property, and casualty insurance products in Puerto Rico,
principally to customers of the Bank.
On
December 14, 2007, the governor of Puerto Rico approved and signed Law No. 197,
which offered tax credits to financial institutions on the financing of
qualified residential mortgages. These tax credits varied based on
whether the property to be financed was an existing dwelling or a new
construction and whether it would be occupied by the buyer or was acquired for
investment purposes. The tax credits were 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 expired in November 2008, when the tax
credits granted reached the total allotted amount of $220.0 million
Total
income taxes for the years ended December 31, were as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Income
tax (benefit) from operations
|
|
$
|
(13,207,948
|
)
|
|
$
|
(248,874
|
)
|
|
Stockholders'
equity for unrealized gain on investment securities
|
|
|
1,462
|
|
|
|
278
|
|
|
|
|
$
|
(13,206,486
|
)
|
|
$
|
(248,596
|
)
|
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
The
components of the income tax benefit for the years ended December 31, were
as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Current
tax provision
|
|
$
|
51,934
|
|
|
$
|
4,388,064
|
|
|
Deferred
tax benefit
|
|
|
(12,926,363
|
)
|
|
|
(4,636,938
|
)
|
|
Benefit
from acquired tax credit
|
|
|
(333,519
|
)
|
|
|
—
|
|
|
Total
income tax benefit
|
|
$
|
(13,207,948
|
)
|
|
$
|
(248,874
|
)
|
The
difference between the income tax provision and the amount computed using the
statutory rate at December 31, was due to the following:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Income
tax at statutory rate
|
|
$
|
(9,545,865
|
)
|
|
|
39.00
|
%
|
|
$
|
1,154,482
|
|
|
|
39.00
|
%
|
|
Net
(benefit) of tax-exempt interest income, including International banking
entities
|
|
|
(3,525,493
|
)
|
|
|
14.40
|
|
|
|
(1,543,510
|
)
|
|
|
(52.14
|
)
|
|
Benefits
from grants of tax credits, law 197
|
|
|
(333,519
|
)
|
|
|
1.36
|
|
|
|
–
|
|
|
|
-
|
|
|
Non
deductible Stock based compensation
|
|
|
49,594
|
|
|
|
(0.19
|
)
|
|
|
95,940
|
|
|
|
3.24
|
|
|
Disallowance
of certain expenses for tax purposes and other items
|
|
|
147,335
|
|
|
|
(0.61
|
)
|
|
|
44,214
|
|
|
|
1.49
|
|
|
|
|
$
|
(13,207,948
|
)
|
|
|
53.96
|
%
|
|
$
|
(248,874
|
)
|
|
|
(8.41
|
)%
|
As of
December 31, 2008 the Company had net operating losses of approximately
$18,181,000, which expires in 2015.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
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:
|
|
|
2008
|
|
|
2007
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
$
|
16,239,230
|
|
|
$
|
10,973,471
|
|
|
Unrealized
loss on securities available for sale
|
|
|
124
|
|
|
|
1,586
|
|
|
Current
NOL carryforward
|
|
|
7,094,665
|
|
|
|
–
|
|
|
Other
temporary differences
|
|
|
1,099,323
|
|
|
|
1,061,016
|
|
|
Deferred
tax assets
|
|
|
24,433,094
|
|
|
|
12,036,073
|
|
|
Deferred
tax liabilities :
|
|
|
|
|
|
|
|
|
|
Deferred
loan origination costs, net
|
|
|
(177,470
|
)
|
|
|
(922,699
|
)
|
|
Servicing
assets
|
|
|
(346,992
|
)
|
|
|
(47,203
|
)
|
|
Fair
value adjustments on loans
|
|
|
(82,736
|
)
|
|
|
(168,100
|
)
|
|
Deferred
tax liabilities
|
|
|
(607,198
|
)
|
|
|
(1,138,002
|
)
|
|
Net
deferred tax asset
|
|
$
|
23,825,896
|
|
|
$
|
10,898,071
|
|
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 assets, 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
and net operating losses carry forward. Based on the Company’s
projections management concluded that the deferred tax assets will be realized.
The following table summarizes the changes in the deferred tax asset for the
years ended December 31:
|
|
|
2008
|
|
|
2007
|
|
|
Balance
at the beginning of year
|
|
$
|
10,898,071
|
|
|
$
|
6,260,855
|
|
|
Deferred
tax benefit
|
|
|
12,926,363
|
|
|
|
4,636,938
|
|
|
Effect
of FAS 115 in other comprehensive income
|
|
|
1,462
|
|
|
|
278
|
|
|
Balance
at the end of year
|
|
$
|
23,825,896
|
|
|
$
|
10,898,071
|
|
Unrecognized
Tax Benefits
During
the year ended December 31, 2008, the Company did not record any additions or
reductions based on tax position of current or prior years. As of January 1,
2008, 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 thestatement of operations for the years ended
December 31, 2008 and 2007 was approximately $75,000 and $44,000,
respectively. The company is not subject to penalties for the
unrecognized tax benefits. Total accrued interest related to unrecorded tax
positions as of December 31, 2008 and 2007 was $133,000 and $58,000,
respectively. The Company is no longer subject to examination by
taxing authorities for taxable years before 2004.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
On March
9, 2009, the governor of Puerto Rico signed into law Act No. 7 (the “Act No.
7”), also know as Special Act Declaring a Fiscal Emergency Status to Save the
Credit of Puerto Rico, which amended several sections of the Puerto Rico’s
Internal Revenue Code (the “Code”). Act No, 7 amended various income,
property, excise, and sales and use tax provision of the Code. Under
the provisions of Act No. 7, corporations, among other taxpayers, will be
subject to surtax of 5% on the total tax determined (not on the taxable
income). In addition, Act No. 7 imposes a special income tax of 5% on
the net income of International Banking Entities ("IBE"), among a group of
exempt taxpayers. Both, the 5% surtax and the special income tax rate
of 5% are applicable for taxable years commencing after December 31, 2008 and
prior January 1, 2012. Act No. 7 also revamps the alternative basic
tax provisions of the Code. Under the revised version, our dividends,
generally subject to a maximum 10% preferential rate tax, may now be subject to
an effectively tax of 20% in the case of individuals with income (computed with
certain addition of exempt income and income subject to preferential rates) in
excess of $175,000, or 15% if such income is over $125,000. Act No. 7
provides for several additional changes to the Code, which the Company believes
will have an inconsequential financial impact or are not applicable since are
related to individual taxpayers.
During
2008, the Company issued 407,000 of the common stock shares through stock
options exercised, as follows:
|
|
|
Number
of
|
|
|
Exercise
|
|
|
|
|
|
Date
|
|
shares
|
|
|
Price
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January-08
|
|
|
50,000
|
|
|
$
|
5.00
|
|
|
$
|
250,000
|
|
|
March-08
|
|
|
351,000
|
|
|
|
5.00
|
|
|
|
1,755,000
|
|
|
March-08
|
|
|
6,000
|
|
|
|
4.00
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407,000
|
|
|
|
|
|
|
$
|
2,029,000
|
|
During
the year 2008, the company repurchased 800 unvested restricted shares from
former employees for a total of $6,504. These restricted shares were originally
granted in April 2004, under a Restricted Stock Purchase Agreement. During the
year 2007, the Company purchased 285,368 shares under the stock repurchase
programs approved by the Board of Directors in May 2007 and October
2005.
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 (aggregate
liquidation preference value of $10,763,425), plus accrued but unpaid dividends
(noncumulative), which is equal to its liquidation value. The stock has no
voting preferences and has no preemptive rights.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
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, 2008 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.
During
the year ended December 31, 2008, no options were granted to the Company’s
directors or employees. 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.
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.
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
The
weighted average assumptions used for the grants issued were:
|
|
|
2008
|
|
|
2007
|
|
|
Expected
life of options (in years)
|
|
|
N/A
|
|
|
|
6.04
|
|
|
Expected
volatility
|
|
|
N/A
|
|
|
|
37.14
|
%
|
|
Expected
dividends
|
|
|
N/A
|
|
|
|
0.00
|
%
|
|
Risk-
free rate
|
|
|
N/A
|
|
|
|
3.96
|
%
|
A summary
of the activity in the stock option plan for 2008 follows:
|
|
|
|
|
|
|
|
Weighthed
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
average
|
|
|
|
|
|
|
|
|
|
average
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
exercise
|
|
contractual
|
|
|
intrinsic
|
|
|
|
Shares
|
|
|
price
|
|
term
|
|
|
value
|
|
Options
outstanding January 1
|
|
|
998,570
|
|
|
$
|
8.02
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
|
(407,000
|
)
|
|
|
4.99
|
|
|
|
|
|
|
Forfeited
|
|
|
(11,000
|
)
|
|
|
11.87
|
|
|
|
|
|
|
Expired
|
|
|
(45,000
|
)
|
|
|
5.00
|
|
|
|
|
|
|
Outstanding
at end of year
|
|
|
535,570
|
|
|
$
|
10.50
|
|
4.33
|
|
$
|
—
|
|
Exercisable
at end of year
|
|
|
392,690
|
|
|
$
|
11.24
|
|
2.92
|
|
$
|
—
|
Information
related to the stock option plan during each year follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
value of options exercised
|
|
$
|
95,070
|
|
|
$
|
1,043,134
|
|
|
Cash
received from option exercises
|
|
|
2,029,000
|
|
|
|
1,148,879
|
|
|
Tax
benefit realized from option exercises
|
|
|
-
|
|
|
|
-
|
|
|
Weighted
average fair value of options granted
|
|
|
-
|
|
|
|
2.53
|
|
At
December 31, 2008 there was approximately $411,000 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 2.97 years.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
(23)
|
(Loss)
Earnings per Share
|
The
computation of (loss) earnings per share is presented below:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income before extraordinary item and preferred stock
dividends
|
|
$
|
(11,268,629
|
)
|
|
$
|
3,209,083
|
|
|
Dividend
declared to preferred shareholders
|
|
|
(746,846
|
)
|
|
|
(744,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders
|
|
$
|
(12,015,474
|
)
|
|
$
|
2,464,278
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding applicable to basic earnings
per share
|
|
|
19,418,526
|
|
|
|
19,212,801
|
|
|
Effect
of dilutive securities
|
|
|
—
|
|
|
|
178,837
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average number of common shares outstanding applicable to diluted
earnings per share
|
|
|
19,418,526
|
|
|
|
19,391,639
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(0.62
|
)
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(0.62
|
)
|
|
$
|
0.13
|
|
In
computing diluted earnings per common share for 2008, stock options of 114,500,
174,000, 73,670, 76,800, and 96,600 shares on common stock with exercise price
of $4.00, $8.13, $8.60, $14.17 and $21.00, respectively, were not considered
because they were antidilutive. 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.
|
(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, 2008 and 2007 amounted to approximately
$285,000 and $275,000, 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, 2008 and 2007, loans
outstanding with these parties amounted to approximately $17,625,000 and
$13,300,000, respectively.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
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, 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
|
|
|
Additions
|
|
|
81,387
|
|
|
|
7,476,600
|
|
|
|
3,860,043
|
|
|
|
—
|
|
|
|
11,418,030
|
|
|
Reductions
|
|
|
(69,097
|
)
|
|
|
(5,192,058
|
)
|
|
|
(1,832,107
|
)
|
|
|
—
|
|
|
|
(7,093,262
|
)
|
|
Balance
at December 31, 2008
|
|
$
|
141,952
|
|
|
$
|
12,657,962
|
|
|
$
|
4,825,247
|
|
|
$
|
—
|
|
|
$
|
17,625,161
|
|
Deposits
of approximately $11,800,000 and $15,826,000 from these parties were outstanding
as of December 31, 2008 and 2007, respectively.
The
Company leases two facilities from corporations in which two directors have a
controlling interest. 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 $199,000 and $242,000 for the years 2008 and 2007,
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.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
At
December 31, the approximate contract or notional amount of the Company’s
financial instruments with off-balance-sheet risk were as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Financial
instruments whose contract amounts represent credit risk – stand-by and
commercial letters of credit
|
|
$
|
15,539,000
|
|
|
$
|
15,066,000
|
|
|
Commitments
to extend credit, approved loans not yet disbursed, and unused lines of
credit:
|
|
|
|
|
|
|
|
|
|
Variable
rate
|
|
|
136,624,000
|
|
|
|
221,111,000
|
|
|
Fixed
rate
|
|
|
19,332,000
|
|
|
|
30,270,000
|
|
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.
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:
|
|
(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. Please see further explanation below.
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.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
|
(d)
|
Loans
and Loans Held for Sale
|
Fair
values are estimated for portfolios of loans with similar financial
characteristics in accordance with SFAS No. 107, as amended. 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.
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, 2008 and 2007. 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. 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. In addition, credit valuation adjustments are made
to appropriately reflect both the Company’s own nonperformance risk and the
respective counterparty’s nonperformance risk in the fair value measurements,
which consider the impact of netting and any applicable credit enhancements,
such as collateral posting, thresholds, mutual puts, and
guarantees.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
|
(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.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
Following
are the carrying amount and fair value of financial instruments as of
December 31:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
amount
|
|
|
Fair value
|
|
|
amount
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
43,275,239
|
|
|
$
|
43,275,239
|
|
|
$
|
15,866,221
|
|
|
$
|
15,866,221
|
|
|
Interest-bearing
deposits
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
32,306,909
|
|
|
|
32,306,909
|
|
|
Federal
funds sold overnight
|
|
|
44,470,925
|
|
|
|
44,470,925
|
|
|
|
|
|
|
|
|
|
|
Securities
purchased under agreements to resell
|
|
|
24,486,774
|
|
|
|
24,486,774
|
|
|
|
19,879,008
|
|
|
|
19,879,008
|
|
|
Investment
securities available for sale
|
|
|
751,016,565
|
|
|
|
751,016,565
|
|
|
|
707,103,432
|
|
|
|
707,103,432
|
|
|
Investment
securities held to maturity
|
|
|
132,798,181
|
|
|
|
132,890,503
|
|
|
|
30,845,218
|
|
|
|
30,451,926
|
|
|
Other
investments
|
|
|
14,932,400
|
|
|
|
14,932,400
|
|
|
|
13,354,300
|
|
|
|
13,354,300
|
|
|
Loans
held for sale
|
|
|
1,873,445
|
|
|
|
1,873,445
|
|
|
|
1,359,494
|
|
|
|
1,359,494
|
|
|
Loans,
net
|
|
|
1,740,539,113
|
|
|
|
1,729,938,119
|
|
|
|
1,829,082,008
|
|
|
|
1,819,152,795
|
|
|
Derivatives
- Purchased Option
|
|
|
110,000
|
|
|
|
110,000
|
|
|
|
3,950,000
|
|
|
|
3,950,000
|
|
|
Accrued
interest receivable
|
|
|
14,614,445
|
|
|
|
14,614,445
|
|
|
|
18,136,489
|
|
|
|
18,136,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,084,308,044
|
|
|
|
2,114,507,829
|
|
|
|
1,993,046,314
|
|
|
|
2,013,817,980
|
|
Securities
sold under
agreements to repurchase
|
|
|
556,475,000
|
|
|
|
573,390,657
|
|
|
|
496,419,250
|
|
|
|
495,224,506
|
|
|
Advances
from FHLB
|
|
|
15,398,041
|
|
|
|
15,431,886
|
|
|
|
30,453,926
|
|
|
|
30,445,061
|
|
|
Notes
payable to statutory trusts
|
|
|
20,619,000
|
|
|
|
12,126,034
|
|
|
|
20,619,000
|
|
|
|
20,627,779
|
|
|
Accrued
interest payable
|
|
|
16,073,737
|
|
|
|
16,073,737
|
|
|
|
17,371,698
|
|
|
|
17,371,698
|
|
|
Derivatives
- Interest Rate Swaps
|
|
|
12,959
|
|
|
|
12,959
|
|
|
|
415,176
|
|
|
|
415,176
|
|
|
Derivatives
- Written Option
|
|
|
110,000
|
|
|
|
110,000
|
|
|
|
3,950,000
|
|
|
|
3,950,000
|
|
SFAS No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use
in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, SFAS No. 157 establishes a
fair value hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include
quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability, which is typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. Company’s assessment of the significance of a particular input to the
fair value measurement in its entirety requires judgment, and considers factors
specific to the asset or liability.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
The fair
values of obligations available for sale issued by US Government Agencies, US
Government Sponsored Enterprises, US Corporations, Commonwealth of Puerto Rico
Government and Commonwealth of Puerto Rico Government Agencies and
Mortgage-backed securities issued by US Agencies and US Sponsored Enterprises
are determined by obtaining quoted prices from nationally recognized securities
broker-dealers (Level 2 inputs). Quoted price for each security is
determined utilizing the risk free US Treasury Securities Yield Curve as the
base plus a spread that represents the cost of the risks inherent to the
characteristics (credit, option and other possible risks) of each investment
alternative. In the case of the Mortgage Back Securities (“MBS”), the specific
characteristics of the different tranches on a MBS are very important in the
expected performance of the security and its fair value (Level 3
inputs). The company owns a preferred security that was issued under
the rule 144 A under the Securities Act of 1993. The quarterly dividends of this
security are current but the security does not have an active secondary market.
On a quarterly basis we review the financial results of the company to estimate
if the issuer has the capacity to pay its obligations at maturity. (Level 3
inputs).
Currently,
the Company uses Interest Rate Swaps and Call Options to manage its interest
rate risk. The valuation of these instruments is determined
using widely accepted valuation techniques including discounted cash flow
analysis on the expected cash flows of each derivative. This analysis reflects
the contractual terms of the derivatives, including the period to maturity and
uses observable market-based inputs, including interest rate curves and implied
volatilities. The fair values of interest rate swaps are determined
using the market standard methodology of netting the discounted future fixed
cash receipts and the discounted expected variable cash payments. The
variable cash payments are based on an expectation of future interest rates
derived from observable market interest rate curves.
The fair
values of call options are determined using the market standard methodology
of discounting the future expected cash receipts that would occur if the
values of a global equity basket of indices rise above the strike price of the
caps for 100% appreciation of a global equity basket. The appreciation of
a global equity basket used in the calculation of projected receipts on the cap
are based on an expectation of future appreciation of a global equity basket
value, derived from observable market appreciation of a global equity basket
value curves and volatilities. To comply with the provisions of
SFAS No. 157, the Company incorporates credit valuation adjustments to
appropriately reflect both its own nonperformance risk and the respective
counterparty’s nonperformance risk in the fair value measurements. In
adjusting the fair value of its derivative contracts for the effect of
nonperformance risk, the Company has considered the impact of netting and any
applicable credit enhancements, such as collateral postings, thresholds, mutual
puts, and guarantees.
Although
the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by itself and its counterparties. However, as of December 31,
2008, the Company has assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its derivative positions and
has determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives. As a result, the Company has determined
that its derivative valuations in their entirety are classified in Level 2 of
the fair value hierarchy.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
Assets
and Liabilities Measured on a Recurring Basis
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
|
|
|
|
|
|
Fair Value Measurement at December 31, 2008 using
|
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
|
active markets
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
for identical
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
December 31, 2008
|
|
|
assets (Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
$
|
751,016,565
|
|
|
$
|
—
|
|
|
$
|
530,362,366
|
|
|
$
|
220,654,199
|
|
|
Purchased
option jumbo CD
|
|
|
110,000
|
|
|
|
—
|
|
|
|
110,000
|
|
|
|
—
|
|
|
FVH
swaps valuation
|
|
|
12,959
|
|
|
|
—
|
|
|
|
12,959
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
option jumbo CD
|
|
$
|
110,000
|
|
|
$
|
—
|
|
|
$
|
110,000
|
|
|
$
|
—
|
|
|
|
|
Fair Value Measurements Using Significant
|
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
|
Level
3
-
Private
Labels
|
|
|
|
|
Available
for
Sale
Securities
|
|
|
Beginning
Balance January 1, 2008
|
|
$
|
178,321,255
|
|
|
Net
other comprehensive loss
|
|
|
(23,816,803
|
)
|
|
Amortization
and Accretion included in operations
|
|
|
1,023,980
|
|
|
Purchases,
issuances, and settlements
|
|
|
103,884,868
|
|
|
Prepayments
and maturities
|
|
|
(38,759,100
|
)
|
|
Ending
Balance December 31, 2008
|
|
$
|
220,654,199
|
|
Assets and Liabilities Measured on a
Non-Recurring Basis
Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:
|
|
|
|
|
|
|
Fair
Value
Measurement
at
December
31,
2008
using
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
|
|
|
|
|
for identical
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
|
|
December
31,
2008
|
|
|
assets
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
(losses)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
|
$
|
95,220,267
|
|
$
|
—
|
|
$
|
60,096,242
|
|
$
|
35,124,025
|
|
$
|
(19,133,238
|
)
|
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a fair value of $95,220,000, net of a
valuation allowance of $19,811,000, resulting in an additional provision for
loan losses of $19,133,000 for the year ended December 31,
2008. Those assets using significant unobservable inputs (level 3)
are based in the physical condition of the collateral and the Company experience
while disposing similar assets.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
|
(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. Although there is no significant concentration in any
economic sector, the Company has a concentration of exposure to a number of
individual borrowers, with principal outstanding balances ranging from $5.0
million to $10.0 million, and a significant loss on any one of these credits
could materially affect our financial condition and results of
operations.
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.
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, 2008 and 2007, 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, 2008 and 2007 are also presented in the following
table.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
At
December 31, required and actual regulatory capital amounts and ratios are
as follow (dollars in thousands):
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
|
|
|
|
|
Required
|
|
|
|
|
|
Actual
|
|
|
|
|
|
capitalized
|
|
|
|
|
amount
|
|
|
Ratio
|
|
|
amount
|
|
|
Ratio
|
|
|
ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
162,752
|
|
|
|
8.00
|
%
|
|
$
|
208,626
|
|
|
|
10.25
|
%
|
|
|
N/A
|
|
|
Eurobank
|
|
|
162,732
|
|
|
|
8.00
|
%
|
|
|
206,422
|
|
|
|
10.15
|
%
|
|
>
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
81,376
|
|
|
|
4.00
|
%
|
|
|
182,993
|
|
|
|
8.99
|
%
|
|
|
N/A
|
|
|
Eurobank
|
|
|
81,366
|
|
|
|
4.00
|
%
|
|
|
180,792
|
|
|
|
8.89
|
%
|
|
>
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
111,803
|
|
|
|
4.00
|
%
|
|
|
182,993
|
|
|
|
6.55
|
%
|
|
|
N/A
|
|
|
Eurobank
|
|
|
111,764
|
|
|
|
4.00
|
%
|
|
|
180,792
|
|
|
|
6.47
|
%
|
|
>
5.00
|
%
|
|
|
|
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
|
%
|
|
(30)
|
Parent
Company Financial Information
|
The
following condensed financial information presents the financial position of
Eurobancshares as of December 31, 2008 and 2007 and the results of its
operations and its cash flows for the years ended December 31, 2008 and
2007.
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
Condensed Balance Sheets:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
Dividend
receivable from non bank subsidiaries
|
|
$
|
-
|
|
|
$
|
1
|
|
|
Dividend
receivable from Eurobank
|
|
|
16
|
|
|
|
27
|
|
|
Due
from non bank subsidiaries
|
|
|
6
|
|
|
|
-
|
|
|
Note
receivable from Eurobank
|
|
|
1,341
|
|
|
|
-
|
|
|
Investment
in Eurobank
|
|
|
174,368
|
|
|
|
199,182
|
|
|
Investment
in other subsidiaries
|
|
|
1,493
|
|
|
|
1,356
|
|
|
Prepaid
expenses
|
|
|
4
|
|
|
|
9
|
|
|
Total
assets
|
|
$
|
177,228
|
|
|
$
|
200,575
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
29
|
|
|
|
28
|
|
|
Total
liabilities
|
|
|
20,658
|
|
|
|
20,657
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
156,570
|
|
|
|
179,918
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
177,228
|
|
|
$
|
200,575
|
|
Condensed
Statement of Operations:
|
|
|
Year ended December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
(Loss)
income:
|
|
|
|
|
|
|
|
Interest
on note receivable from Eurobank
|
|
$
|
1
|
|
|
$
|
-
|
|
|
Dividend
from preferred stocks of Eurobank
|
|
|
1,348
|
|
|
|
1,740
|
|
|
Dividend
income from non bank subsidiaries
|
|
|
42
|
|
|
|
54
|
|
|
Total
interest income
|
|
|
1,391
|
|
|
|
1,794
|
|
|
Interest
on note payable to subsidiaries
|
|
|
1,389
|
|
|
|
1,794
|
|
|
Net
interest income
|
|
|
2
|
|
|
|
(0
|
)
|
|
Equity
in undistributed (loss) earnings of subsidiaries
|
|
|
(11,174
|
)
|
|
|
3,231
|
|
|
Noninterest
expense
|
|
|
94
|
|
|
|
22
|
|
|
Earnings
before income taxes
|
|
|
(11,268
|
)
|
|
|
3,209
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
Net
(loss) income
|
|
$
|
(11,268
|
)
|
|
$
|
3,209
|
|
(Continued)
EUROBANCSHARES,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31,
2008 and 2007
Condensed
Statements of Cash Flows:
|
|
|
Year ended December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(11,268
|
)
|
|
$
|
3,209
|
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
|
cash
(used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Equity
in net earnings of subsidiaries
|
|
|
11,174
|
|
|
|
(3,232
|
)
|
|
(Increase)
decrease in accrued interest and dividend receivable from
subsidiaries
|
|
|
12
|
|
|
|
(3
|
)
|
|
Increase
in prepaid expenses
|
|
|
5
|
|
|
|
(2
|
)
|
|
(Decrease)
increase in accrued interest payable to subsidiaries
|
|
|
(12
|
)
|
|
|
3
|
|
|
Increase
in other liabilities
|
|
|
12
|
|
|
|
-
|
|
|
Net
cash used in operating activities
|
|
|
(77
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Net
(advances) payments in note from Eurobank
|
|
|
(1,198
|
)
|
|
|
2,127
|
|
|
Net
cash (used in) provided by investing activities
|
|
|
(1,198
|
)
|
|
|
2,127
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Decrease
in due to Eurobank
|
|
|
—
|
|
|
|
(7
|
)
|
|
Dividends
on preferred stocks
|
|
|
(747
|
)
|
|
|
(745
|
)
|
|
Repayment
of Trust Preferred Securities
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds
from issuance of common stock
|
|
|
2,029
|
|
|
|
1,149
|
|
|
Purchase
and retirement of common stock
|
|
|
(7
|
)
|
|
|
(2,500
|
)
|
|
Net
cash used in financing activities
|
|
|
1,275
|
|
|
|
(2,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
—
|
|
|
|
—
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
—
|
|
|
|
—
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
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