On June 21, 2004, the board of directors authorized a two-for-one common stock split in the form of a stock dividend. The stock dividend was distributed on July 15, 2004 to stockholders of record on July 1, 2004. All share data and earnings per share data in these financial statements give effect to the stock split, applied retroactively, to all periods.
On August 11, 2004, the Company completed an initial public offering in which the Company sold 3,450,000 shares of common stock, plus an additional 517,500 shares in connection with the exercise of the underwriters’ over allotment option (excluding shares sold by certain stockholders of the Company), at the initial offering price of $14.00 per share. Total proceeds received from the offering, after deducting offering expenses, including underwriting discounts and commissions, were approximately $51.6 million.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis presents our consolidated financial condition and results of operations for the six months ended June 30, 2004 and 2003. The discussion should be read in conjunction with our financial statements and the notes related thereto which appear elsewhere in this Quarterly Report on Form 10-Q.
Statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including our expectations, intentions, beliefs, or strategies regarding the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,”
“anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results may differ materially from those in such forward-looking statements due to fluctuations in interest rates, inflation, government
regulations, economic conditions, customer disintermediation and competitive product and pricing pressures in the geographic and business areas in which we conduct operations, including our plans, objectives, expectations and intentions and other factors discussed under the section entitled “Risk Factors,” in our Prospectus on Form S-1 dated August 11, 2004, including the following:
| l |
if a significant number of our clients fail to perform under their loans, our business, profitability, and financial condition would be adversely affected; |
| l |
our current level of interest rate spread may decline in the future, and any material reduction in our interest spread could have a material impact on our business and profitability; |
| l |
the modification of the Federal Reserve Board’s current position on the capital treatment of our junior subordinated debt and trust preferred securities could have a material adverse effect on our financial condition and results of operations; |
| l |
adverse changes in domestic or global economic conditions, especially in the Commonwealth of Puerto Rico, could have a material adverse effect on our business, growth, and profitability; |
| l |
we could be liable for breaches of security in its online banking services, and fear of security breaches could limit the growth of our online services; |
| l |
maintaining or increasing our market share depends on market acceptance and regulatory approval of new products and services; |
| l |
significant reliance on loans secured by real estate may increase our vulnerability to downturns in the Puerto Rico real estate market and other variables impacting the value of real estate; |
| l |
if we fail to retain our key employees, growth and profitability could be adversely affected; |
| l |
we may be unable to manage our future growth; |
| l |
we have no current intentions of paying cash dividends; |
| l |
increases in our allowance for loan and lease losses could materially adversely affect our earnings; |
| l |
our directors and executive officers beneficially own a significant portion of our outstanding common stock; |
| l |
the market for our common stock is limited, and potentially subject to volatile changes in price; |
| l |
we face substantial competition in our primary market area; |
| l |
we are subject to significant government regulation and legislation that increases the cost of doing business and inhibits our ability to compete; |
| l |
we may not be able to integrate BankTrust’s operations with our business effectively; and |
| l |
we could be negatively impacted by downturns in the Puerto Rican economy. |
These factors and the risk factors referred to in our Prospectus on Form S-1 dated August 11, 2004 could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Executive Overview
Introduction
We are a diversified financial holding company headquartered in San Juan, Puerto Rico, offering a broad array of financial services through our wholly owned banking subsidiary, Eurobank, and our wholly owned insurance agency subsidiary, EuroSeguros. As of June 30, 2004, we had, on a consolidated basis, total assets of $1.9 billion, net loans and leases of $1.3 billion, total deposits of $1.4 billion, and stockholders’ equity of $98.1 million. We currently operate through a network of 21 branch offices located throughout Puerto Rico. On May 3, 2004, we acquired all of the capital stock of The Bank & Trust of Puerto Rico, a commercial bank headquartered in San Juan, Puerto Rico with $550.4 million in total assets as of March 31, 2004.
We were incorporated on November 21, 2001 and became the parent bank holding company for Eurobank on July 1, 2002. Our consolidated financial statements include the results of operations for each of our wholly owned subsidiaries. Additionally, Eurobank Statutory Trust I and Eurobank Statutory Trust II are special purpose vehicles that were used to issue the trust preferred securities. It should be noted, however, that in December 2003, the FASB issued a revision to Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, that required the deconsolidation of certain “variable interest entities,
” such as our statutory trust subsidiaries that issued the trust preferred securities. Effective December 31, 2003, we adopted the provisions of FIN No. 46R, requiring the deconsolidation of these trusts. As a result, our statutory trusts are no longer consolidated with us or Eurobank. Commencing on December 31, 2003, we refer to the trust preferred securities we issued through Eurobank Statutory Trust I and Eurobank Statutory Trust II as “Notes Payable to Statutory Trusts” instead of trust preferred securities, as we had prior to that date.
Over the past three years, we have experienced significant balance sheet growth. Our management team has implemented a strategy of building our core banking franchise by focusing on commercial loans, business transaction accounts, our lease financing business and acquisitions. We believe that this strategy will increase recurring revenue streams, enhance profitability, broaden our product and service offerings and continue to build stockholder value.
In 2001 and 2002, we raised an aggregate of $46.4 million through the issuance of junior subordinated debentures in connection with the trust preferred securities issuances. We believe that the supplemental capital raised in connection with the issuance of these securities will allow us to achieve and maintain our status as a well-capitalized institution and to sustain our continued loan growth.
We completed our initial public offering in August 2004 in which we and certain of our stockholders sold 3,894,988 shares of our common stock at the initial offering price of $14.00 per share. In September 2004, we and certain of our stockholders sold an additional 584,248 shares in connection with the exercise of the underwriters’ over-allotment option, also at the initial offering price of $14.00 per share. The net proceeds that we received from the offering plus the exercise of the underwriters’ over-allotment option, after deducting offering expenses, including underwriting discounts and commissions, were approximately $51.6 million.
Key Performance Indicators at June 30, 2004
We believe the following were key indicators of our performance and results of operations through the second quarter of 2004:
| l |
our total assets grew to $1.9 billion at the end of the second quarter of 2004, representing an increase of 46.0%, from $1.3 billion at the end of 2003; |
| l |
our total loans grew to $1.3 billion at the end of the second quarter of 2004, representing an increase of 48.5%, from $890.0 million at the end of 2003; |
| l |
our total deposits grew to $1.4 billion at the end of the second quarter of 2004, representing an increase of 42.8%, from $984.5 million at the end of 2003; |
| l |
our total revenue grew to $17.3 million in the second quarter of 2004, representing an increase of 35.8%, from $12.7 million in the same period of 2003; |
| l |
our net income before extraordinary gain grew to $4.5 million in the second quarter of 2004, representing an increase of 74.9%, from $2.6 million in the same period of 2003; and |
| l |
we recognized an extraordinary gain amounting to $4.4 million on the acquisition of BankTrust. |
These items, as well as other factors, contributed to the increase in net income for the second quarter of 2004 to $8.9 million from $2.6 million for the same period in 2003, or $0.57 per common share ($0.28 per common share before extraordinary gain) as compared to $0.18 per common share for the same period in 2003, assuming dilution, and are discussed in further detail throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Quarterly Report on Form 10-Q.
Critical Accounting Policies
This discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires management to make estimates and judgments that effect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. The following is a description of our significant accounting policies used in the preparation of the accompanying consolidated financial statements.
Loans and Allowance for Loan and Lease Losses
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted by any charge-offs, unearned finance charges, allowance for loan and lease losses, and net deferred nonrefundable fees or costs on origination. The allowance for loan and lease losses is an estimate to provide for probable collection losses in our loan and lease portfolio. Losses are charged and recoveries are credited to the allowance account at the time a loss is incurred or a recovery takes place. The allowance for loan and lease losses amounted to $19.4 million and $8.3 million as of June 30, 2004 and June 30, 2003, respectively. Losses charged to the allowance amounted to $5.6 million for the six months ended June 30, 2004 compared to $
2.7 million for the same period in 2003. Recoveries were credited to the allowance in the amounts of $763,000 and $387,000 for those same periods, respectively.
We follow a consistent procedural discipline and account for loan and lease loss contingencies in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, and SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.
To mitigate any difference between estimates and actual results relative to the calculation of the allowance for loan and lease losses, our loan review department is specifically charged with reviewing monthly delinquency reports to determine if additional reserves 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 reserves. 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 reserves. For larger portfolios, we also track the ratio of net charge-offs to total portfolio outstanding.
With the exception of the commercial loans pool, loans that are more than 90 days delinquent result in an additional reserve. When commercial loans become 90 days delinquent, each is subjected to full review by the loan review officer including, but not limited to, a review of financial statements, repayment ability and collateral held. Depending on the findings, our allowance may be increased. In connection with this review, the loan review officer will determine what economic factors may have led to the change in the client’s ability to service the obligation, and this in turn may result in an additional review of a particular sector of the economy. For additional information relating to how each portion of the allowance for loan and lease losses is determined, see the section of this discussion and analysis
captioned “Allowance for Loan and Lease Losses.”
We believe that our allowance for loan and lease losses is adequate; however, regulatory agencies, including the Commissioner of Financial Institutions of Puerto Rico and the FDIC, as an integral part of their examination process, periodically review our allowance for loan and lease losses and may from time to time require us to reclassify our loans and leases or make additional provisions to our allowance for loan and lease losses.
We classify loans as nonperforming when they become 90 days past due. Nonperforming loans amounted to $40.9 million, $26.8 million and $28.7 million as of June 30, 2004, December 31, 2003 and June 30, 2003, respectively.
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 net income for the period in which the change occurs. Servicing assets are included as part of other
assets in the balance sheets. Servicing assets recorded amounted to $3.3 million, $3.0 million and $2.5 million as of June 30, 2004, December 31, 2003 and June 30, 2003, respectively.
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 fair 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 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. Other real estate owned amounted to $2.9 million, $2.8 million, and $2.0 million as of June 30, 2004, December 31, 2003 and June 30, 2003, respectively. Other repossessed assets amounted to $4.1 million, $3.6 million and $6.3 million as of June 30, 2004,
December 31, 2003 and June 30, 2003, respectively.
Results of Operations as of and for the Six Months Ended June 30, 2004 and 2003
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income, principally from loan, lease and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Net interest income is our principal source of earnings. Changes in net interest income result from changes in volume, spread and margin. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the 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 increased by 64.2%, or $6.0 million, to $15.5 million in the second quarter from $9.5 million in the same period of 2003. Our net interest margin and net interest spread also increased to 3.79% and 3.54% from 3.68% and 3.34%, respectively. These increases resulted from the combined effect on net increases in volumes and rates, respectively.
Net interest income increased by 39.5%, or $7.4 million, to $26.2 million in the first half of 2004 from $18.8 million in the same period of 2003. These increases resulted from the net effect of higher volumes of interest-earning assets and interest-bearing liabilities and lower yields and costs of funds for corresponding periods. As a result, our net interest margin and net interest spread decreased from 3.76% and 3.39% to 3.63% and 3.37%, respectively, for the six months period ended on June 30, 2003 and 2004.
Our average interest-earning assets increased by $618.5 million (58.4%) and $454.6 million (44.1%), to $1.7 billion and $1.5 billion, respectively, in the second quarter and first half of 2004, as compared to $1.1 billion and $1.0 billion, respectively, for the same periods in the prior year. Average net loans increased by $372.5 million (45.0%) and $253.6 million (31.5%), to $1.2 billion and $1.1 billion, respectively, in the second quarter and first half of 2004, as compared to $829.1 million and $803.8 million, respectively, for the same periods in the prior year. The Federal Reserve Board’s interest rate cut in June 2003 further lowered the average yields on our interest-earning assets to 6.25% for the six months ended June 30, 2004, as compared to 6.96% in the same period of 2003. Due to increased volumes in
our loan and investment portfolios, our total interest income increased by 46.1% and 28.2% to $25.4 million and $44.4 million, respectively, for the second quarter and first half of 2004, as compared to $17.4 million and $34.7 million, respectively, for the same periods in 2003.
Average interest-bearing liabilities also increased by 59.8% to $1.5 billion and 45.9% to $1.3 billion, respectively, in the second quarter and first half of 2004, compared to $954.6 million and $923.3 million, respectively, in the same periods of 2003. Total interest expense increased by 24.6% to $9.9 million and 14.8% to $18.2 million, respectively, in the second quarter and first half of 2004, compared to $7.9 million and $15.9 million, respectively, in the same periods of 2003. The increase in our interest expense is due mainly to higher volumes on interest bearing deposits to fund increased volumes in loans and investments. The average interest rate we paid for interest-bearing deposits for the second quarter and first half of 2004 was down to 2.77% and 2.88%, respectively, from 3.43% and 3.57% for same periods in 2
003.
The following tables set forth, for the periods indicated, our average balances of assets, liabilities and stockholders' equity, in addition to the major components of net interest income and our net interest margin. Net loans and leases shown on these tables include nonaccrual loans although interest accrued but not collected on these loans is placed in nonaccrual status and reversed against interest income.
| |
|
For the Quarter Ended June 30, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
Average Balance |
|
Interest |
|
Average Rate/
Yield(1) |
|
Average
Balance |
|
|
Interest |
Average Rate/ Yield(1) |
|
|
|
(Dollars in thousands) |
|
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases(2) |
|
$ |
1,201,608 |
|
$ |
22,691 |
|
|
7.58 |
% |
$ |
829,139 |
|
$ |
15,887 |
|
7.69 |
% |
|
Securities of U.S. government agencies |
|
|
415,359 |
|
|
2,478 |
|
|
3.26 |
|
|
152,199 |
|
|
1,089 |
|
3.95 |
|
|
Other investment securities |
|
|
14,799 |
|
|
86 |
|
|
2.88 |
|
|
17,192 |
|
|
188 |
|
5.74 |
|
|
Puerto Rico government obligations |
|
|
7,693 |
|
|
81 |
|
|
6.77 |
|
|
4,743 |
|
|
50 |
|
5.86 |
|
|
Securities purchased under agreements to resell and federal funds sold |
|
|
29,691 |
|
|
66 |
|
|
0.89 |
|
|
24,832 |
|
|
85 |
|
1.39 |
|
|
Interest-earning deposits |
|
|
9,062 |
|
|
18 |
|
|
0.81 |
|
|
31,645 |
|
|
100 |
|
1.26 |
|
|
Total interest-earning assets |
|
|
1,678,212 |
|
|
25,420 |
|
|
6.31 |
% |
|
1,059,750 |
|
|
17,399 |
|
6.77 |
% |
|
Total noninterest-earning assets |
|
|
76,382 |
|
|
|
|
|
|
|
|
52,197 |
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,754,594 |
|
|
|
|
|
|
|
$ |
1,111,947 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits |
|
$ |
57,729 |
|
$ |
300 |
|
|
2.15 |
% |
$ |
45,470 |
|
$ |
311 |
|
2.75 |
% |
|
NOW deposits |
|
|
40,667 |
|
|
181 |
|
|
1.78 |
|
|
25,123 |
|
|
139 |
|
2.22 |
|
|
Savings deposits |
|
|
262,055 |
|
|
1,529 |
|
|
2.34 |
|
|
192,969 |
|
|
1,430 |
|
2.97 |
|
|
Time certificates of deposit in denominations of $100,000 or more |
|
|
613,259 |
|
|
5,014 |
|
|
3.48 |
|
|
385,448 |
|
|
3,587 |
|
3.84 |
|
|
Other time deposits |
|
|
200,947 |
|
|
1,254 |
|
|
2.50 |
|
|
158,072 |
|
|
1,319 |
|
3.34 |
|
|
Other borrowings |
|
|
351,306 |
|
|
1,620 |
|
|
2.22 |
|
|
147,566 |
|
|
1,158 |
|
3.48 |
|
|
Total interest-bearing liabilities |
|
|
1,525,963 |
|
|
9,898 |
|
|
2.77 |
% |
|
954,648 |
|
|
7,944 |
|
3.43 |
% |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
117,803 |
|
|
|
|
|
|
|
|
90,457 |
|
|
|
|
|
|
|
Other liabilities |
|
|
28,849 |
|
|
|
|
|
|
|
|
8,201 |
|
|
|
|
|
|
|
Total noninterest-bearing liabilities |
|
|
146,652 |
|
|
|
|
|
|
|
|
98,658 |
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
81,979 |
|
|
|
|
|
|
|
|
58,641 |
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
1,754,594 |
|
|
|
|
|
|
|
$ |
1,111,947 |
|
|
|
|
|
|
|
Net interest income(3) |
|
|
|
|
$ |
15,522 |
|
|
|
|
|
|
|
$ |
9,455 |
|
|
|
|
Net interest spread(4) |
|
|
|
|
|
|
|
|
3.54 |
% |
|
|
|
|
|
|
3.34 |
% |
|
Net interest margin(5) |
|
|
|
|
|
|
|
|
3.79 |
% |
|
|
|
|
|
|
3.68 |
% |
__________
| |
(1) |
Yields on tax-exempt securities, loans and leases are calculated on a fully taxable equivalent basis assuming a 39% tax rate. |
| |
|
|
| |
(2) |
Loan fees (costs) have been included in the calculation of interest income. Loan fees were approximately $1.2 and $1.5 million for the quarters ended June 30, 2004 and 2003, respectively. Loans are net of the allowance for loan and lease losses, deferred fees, unearned income, and related direct costs. |
| |
|
|
| |
(3) |
Net interest income on a tax equivalent basis was $15.9 million and $9.8 million for the quarters ended June 30, 2004 and 2003, respectively. |
| |
|
|
| |
(4) |
Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities on a fully taxable equivalent basis. |
| |
|
|
| |
(5) |
Represents net interest income on a fully taxable equivalent basis as a percentage of average interest-earning assets. |
| |
|
For the Six Months Ended June 30, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
Average Balance |
|
Interest |
|
Average Rate/ Yield(1) |
|
Average Balance |
|
Interest |
|
Average Rate/ Yield(1) |
|
|
|
|
(Dollars in thousands) |
|
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases(2) |
|
$ |
1,057,394 |
|
$ |
39,442 |
|
|
7.49 |
% |
$ |
803,834 |
|
$ |
31,451 |
|
|
7.85 |
% |
|
Securities of U.S. government agencies |
|
|
364,512 |
|
|
4,485 |
|
|
3.38 |
|
|
143,444 |
|
|
2,360 |
|
|
4.53 |
|
|
Other investment securities |
|
|
12,555 |
|
|
158 |
|
|
3.29 |
|
|
16,867 |
|
|
373 |
|
|
5.82 |
|
|
Puerto Rico government obligations |
|
|
6,136 |
|
|
129 |
|
|
6.42 |
|
|
4,745 |
|
|
99 |
|
|
5.80 |
|
|
Securities purchased under agreements to resell and federal funds sold |
|
|
33,914 |
|
|
165 |
|
|
0.97 |
|
|
31,861 |
|
|
197 |
|
|
1.25 |
|
|
Interest-earning deposits |
|
|
10,199 |
|
|
47 |
|
|
0.93 |
|
|
29,387 |
|
|
187 |
|
|
1.27 |
|
|
Total interest-earning assets |
|
$ |
1,484,710 |
|
$ |
44,426 |
|
|
6.25 |
% |
$ |
1,030,138 |
|
$ |
34,667 |
|
|
6.96 |
% |
|
Total noninterest-earning assets |
|
|
65,362 |
|
|
|
|
|
|
|
|
48,251 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,550,072 |
|
|
|
|
|
|
|
$ |
1,078,389 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits |
|
$ |
54,923 |
|
$ |
609 |
|
|
2.26 |
% |
$ |
43,946 |
|
$ |
640 |
|
|
2.93 |
% |
|
NOW deposits |
|
|
34,140 |
|
|
296 |
|
|
1.74 |
|
|
25,448 |
|
|
305 |
|
|
2.41 |
|
|
Savings deposits |
|
|
256,114 |
|
|
3,196 |
|
|
2.50 |
|
|
181,070 |
|
|
2,819 |
|
|
3.12 |
|
|
Time certificates of deposit in denominations of $100,000 or more |
|
|
512,951 |
|
|
8,532 |
|
|
3.55 |
|
|
380,026 |
|
|
7,178 |
|
|
3.96 |
|
|
Other time deposits |
|
|
183,718 |
|
|
2,679 |
|
|
2.92 |
|
|
157,930 |
|
|
2,661 |
|
|
3.37 |
|
|
Other borrowings |
|
|
305,556 |
|
|
2,933 |
|
|
2.27 |
|
|
134,901 |
|
|
2,296 |
|
|
3.74 |
|
|
Total interest-bearing liabilities |
|
$ |
1,347,402 |
|
$ |
18,245 |
|
|
2.88 |
% |
$ |
923,321 |
|
$ |
15,899 |
|
|
3.57 |
% |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
108,830 |
|
|
|
|
|
|
|
|
87,888 |
|
|
|
|
|
|
|
|
Other liabilities |
|
|
19,536 |
|
|
|
|
|
|
|
|
8,887 |
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities |
|
|
128,366 |
|
|
|
|
|
|
|
|
96,775 |
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
74,304 |
|
|
|
|
|
|
|
|
58,293 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
1,550,072 |
|
|
|
|
|
|
|
$ |
1,078,389 |
|
|
|
|
|
|
|
|
Net interest income(3) |
|
|
|
|
$ |
26,181 |
|
|
|
|
|
|
|
$ |
18,768 |
|
|
|
|
|
Net interest spread(4) |
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
3.39 |
% |
|
Net interest margin(5) |
|
|
|
|
|
|
|
|
3.63 |
% |
|
|
|
|
|
|
|
3.76 |
% |
__________
| |
(1) |
Yields on tax-exempt securities, loans and leases are calculated on a fully taxable equivalent basis assuming a 39% tax rate. |
| |
|
|
| |
(2) |
Loan fees (costs) have been included in the calculation of interest income. Loan fees were approximately $2.1 and $1.5 million for the six months ended June 30, 2004 and 2003, respectively. Loans are net of the allowance for loan and lease losses, deferred fees, unearned income, and related direct costs. |
| |
|
|
| |
(3) |
Net interest income on a tax equivalent basis was $27.0 million and $19.4 million for the six months ended June 30, 2004 and 2003, respectively. |
| |
|
|
| |
(4) |
Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities on a fully taxable equivalent basis. |
| |
|
|
| |
(5) |
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) on a fully taxable equivalent basis. All changes in interest owed and paid for interest-earning assets and interest-bearing liabilities are attributable to either volume or rate. The impact of changes in the mix of interest-earning assets and interest-bearing liabilities is reflected in our net interest income.
| |
|
Three Months Ended June 30, 2004 Over 2003
Increases/(Decreases) Due to Change in |
|
Six Months Ended June 30, 2004 Over 2003
Increases/(Decreases) Due to Change in |
|
|
|
|
Volume |
|
Rate |
|
Net |
|
Volume |
|
Rate |
|
Net |
|
|
|
(In thousands) |
|
INTEREST EARNED ON: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans(1) |
|
$ |
7,161 |
|
$ |
(345 |
) |
$ |
6,816 |
|
$ |
9,957 |
|
$ |
(1,946 |
) |
$ |
8,011 |
|
|
Securities of U.S. government agencies |
|
|
2,599 |
|
|
(721 |
) |
|
1,878 |
|
|
5,012 |
|
|
(2,095 |
) |
|
2,917 |
|
|
Other investment securities |
|
|
(34 |
) |
|
(106 |
) |
|
(140 |
) |
|
(125 |
) |
|
(159 |
) |
|
(284 |
) |
|
Puerto Rico government obligations |
|
|
43 |
|
|
17 |
|
|
60 |
|
|
40 |
|
|
19 |
|
|
59 |
|
|
Securities purchased under agreements to resell and federal funds sold |
|
|
17 |
|
|
(37 |
) |
|
(20 |
) |
|
13 |
|
|
(48 |
) |
|
(35 |
) |
|
Interest-earning deposits |
|
|
(71 |
) |
|
(10 |
) |
|
(81 |
) |
|
(122 |
) |
|
(18 |
) |
|
(140 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
9,715 |
|
$ |
(1,202 |
) |
$ |
8,513 |
|
$ |
14,775 |
|
$ |
(4,247 |
) |
$ |
10,528 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST PAID ON: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits |
|
$ |
84 |
|
$ |
(87 |
) |
$ |
(3 |
) |
$ |
161 |
|
$ |
(183 |
) |
$ |
(22 |
) |
|
NOW deposits |
|
|
86 |
|
|
(44 |
) |
|
42 |
|
|
105 |
|
|
(114 |
) |
|
(9 |
) |
|
Savings deposits |
|
|
513 |
|
|
(415 |
) |
|
98 |
|
|
1,170 |
|
|
(796 |
) |
|
374 |
|
|
Time certificates of deposit in denominations of $100,000 or more |
|
|
2,187 |
|
|
(559 |
) |
|
1,628 |
|
|
2,630 |
|
|
(1,038 |
) |
|
1,592 |
|
|
Other time deposits |
|
|
358 |
|
|
(424 |
) |
|
(66 |
) |
|
435 |
|
|
(418 |
) |
|
17 |
|
|
Other borrowings |
|
|
1,771 |
|
|
(1,106 |
) |
|
665 |
|
|
3,193 |
|
|
(2,242 |
) |
|
951 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
4,999 |
|
$ |
(2,635 |
) |
$ |
2,364 |
|
$ |
7,694 |
|
$ |
(4,791 |
) |
$ |
2,903 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
4,716 |
|
$ |
1,433 |
|
$ |
6,149 |
|
$ |
7,081 |
|
$ |
544 |
|
$ |
7,625 |
|
__________
| |
(1) |
Loan fees (costs) have been included in the calculation of interest income. Loan fees were approximately $2.1 and $1.5 million for the six months ended June 30, 2004 and 2003, respectively. Loans are net of the allowance for loan and lease losses, deferred fees, unearned income, and related direct costs. |
Provision for Loan and Lease Losses
We determine a provision for loan and lease losses that we consider sufficient to maintain an allowance to absorb probable losses inherent in our portfolio as of the balance sheet date. For additional information concerning this determination, see the section of this discussion and analysis captioned “Allowance for Loan and Lease Losses.”
In the second quarter and first half of 2004, our provision for loan and lease losses increased to $2.5 million and $4.0 million, respectively, from $1.6 million and $3.7 million for the same periods in 2003. These increases in our provision resulted mainly from an increase in our net charge-offs to $4.9 million for the six months ended June 30, 2004 compared to $2.3 million for the same period in 2003. Nonperforming loans and leases to total loans and leases decreased from 3.46% as of June 30, 2003 to 3.05% as of June 30, 2004.
Noninterest Income
The following tables set forth the various components of our noninterest income for the periods indicated:
|
|
|
Three Months Ended June 30, |
|
|
|
2004 |
2003 |
|
|
|
(Amount) |
|
(%) |
|
(Amount) |
|
(%) |
|
|
|
(Dollars in thousands) |
|
Service charges and other fees |
|
$ |
2,096 |
|
|
117.8 |
% |
$ |
1,245 |
|
|
37.9 |
% |
|
Gain on sale of loans and leases, net |
|
|
69 |
|
|
3.9 |
|
|
2,196 |
|
|
66.9 |
|
|
Loss on sale of other real estate owned, repossessed assets, and
on disposition of other assets, net |
|
|
(385 |
) |
|
(21.6 |
) |
|
(158 |
) |
|
(4.8 |
) |
|
Total noninterest income |
|
$ |
1,780 |
|
|
100.0 |
% |
$ |
3,283 |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2004 |
2003 |
|
|
|
(Amount) |
|
(%) |
|
(Amount) |
|
(%) |
|
|
|
|
(Dollars in thousands) |
|
Service charges and other fees |
|
$ |
3,733 |
|
|
110.7 |
% |
$ |
2,482 |
|
|
56.5 |
% |
|
Gain on sale of loans and leases, net |
|
|
69 |
|
|
2.0 |
|
|
2,196 |
|
|
50.0 |
|
|
Loss on sale of other real estate owned, repossessed assets, and
on disposition of other assets, net |
|
|
(429 |
) |
|
(12.7 |
) |
|
(287 |
) |
|
(6.5 |
) |
|
Total noninterest income |
|
$ |
3,373 |
|
|
100.0 |
% |
$ |
4,391 |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total noninterest income for the second quarter and first half of 2004 was $1.8 million and $3.4 million, respectively, representing a 45.8% and 23.2% decrease from $3.3 million and $4.4 million for the same periods in 2003. Noninterest income represented approximately 0.22% and 0.50% of average assets as of June 30, 2004 and 2003, respectively.
As a result of our efforts to diversify our revenue sources, we currently earn noninterest income from various sources. Our largest noninterest income source is service charges, primarily on deposit accounts, representing 117.8% and 37.9% of total noninterest income for the second quarter of June 30, 2004 and 2003, respectively. This income source increased from $1.2 million in the second quarter of 2003 to $2.1 million in the second quarter of 2004 and from $2.5 million for the first half of 2003 to $3.7 million for the first half of 2004. These increases were primarily due to an increase in our number of transactional and savings accounts.
Our other component of noninterest income for the six month periods ended June 30, 2004 and 2003 is the net gain/loss on the sale of our OREO, repossessed assets and other assets. We experienced net losses in this component of $385,000 and $158,000 during the second quarters of 2004 and 2003, respectively, and $429,000 and $287,000 for the six months ended June 30, 2004 and 2003, respectively. These net losses were mainly comprised of losses on the sale of repossessed automobiles and equipment totaling $334,000 and $151,000 for the second quarters of 2004 and 2003, respectively, and $51,000 and $279,000 for the six months ended June 30, 2004 and 2003, respectively. As our volume of lease financings has increased, in order to avoid building our inventory of repossessed automobiles, we have been more aggressive in our
disposition efforts, resulting in additional previously unanticipated losses. OREO and repossessed assets were $6.9 million and $8.3 million as of June 30, 2004 and 2003, respectively.
The loss on the sale of repossessed vehicles and equipment as a percentage of the lease balance at the date of repossession was 15.7% and 14.0% for the second quarters of 2004 and 2003, respectively. For the first half of 2004 and 2003, the loss on the sale of repossessed vehicles and equipment as a percentage of the lease balance at the date of repossession was 15.2% and 12.1%, respectively, as compared to 14.2% at December 31, 2003. When our inventory of repossessed assets is larger, we are more aggressive in our disposition efforts. This strategy permits us to move inventory at a faster pace, but increases our losses per unit. The ratio of loss on the sale of repossessed vehicles and equipment to our leasing portfolio balance remained relatively constant. The ratio of loss on the sale of repossessed vehicles and
equipment to our leasing portfolio balance was 0.75% at June 30, 2004, as compared to 0.82% at December 31, 2003.
There was no loss on the sale of repossessed boats for the six month period ended on June 30, 2004. We did not have any marine loans as of June 30, 2003. We acquired marine loans totaling $47.0 million on May 3, 2004 as a result of our acquisition of Bank Trust.
Noninterest Expense
The following tables set forth a summary of noninterest expenses for the periods indicated:
| |
|
Three Months Ended June 30, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
(Amount) |
|
(%) |
|
(Amount) |
|
(%) |
|
|
|
|
(Dollars in thousands) |
|
Salaries and employee benefits |
|
$ |
4,792 |
|
|
54.0 |
% |
$ |
4,022 |
|
|
55.7 |
% |
|
Occupancy and equipment |
|
|
1,662 |
|
|
18.7 |
|
|
1,506 |
|
|
20.9 |
|
|
Professional and directors’ fees |
|
|
366 |
|
|
4.1 |
|
|
398 |
|
|
5.5 |
|
|
Office supplies |
|
|
273 |
|
|
3.1 |
|
|
251 |
|
|
3.5 |
|
|
Other real estate owned and other repossessed assets expenses |
|
|
37 |
|
|
0.4 |
|
|
43 |
|
|
0.6 |
|
|
Promotion and advertising |
|
|
155 |
|
|
1.7 |
|
|
108 |
|
|
1.5 |
|
|
Lease expenses |
|
|
325 |
|
|
3.7 |
|
|
82 |
|
|
1.1 |
|
|
Insurance |
|
|
182 |
|
|
2.1 |
|
|
205 |
|
|
2.8 |
|
|
Municipal taxes |
|
|
196 |
|
|
2.2 |
|
|
169 |
|
|
2.3 |
|
|
Commissions and service fees credit and debit cards |
|
|
290 |
|
|
3.3 |
|
|
221 |
|
|
3.1 |
|
|
Other noninterest expense |
|
|
620 |
|
|
6.7 |
|
|
216 |
|
|
3.0 |
|
|
Total noninterest expense |
|
$ |
8,876 |
|
|
100.0 |
% |
$ |
7,221 |
|
|
100.0 |
% |
| |
|
Six Months Ended June 30, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
(Amount) |
|
(%) |
|
(Amount) |
|
(%) |
|
|
|
|
(Dollars in thousands) |
|
Salaries and employee benefits |
|
$ |
8,796 |
|
|
54.2 |
% |
$ |
7,590 |
|
|
55.5 |
% |
|
Occupancy and equipment |
|
|
3,194 |
|
|
19.7 |
|
|
2,893 |
|
|
21.2 |
|
|
Professional and directors’ fees |
|
|
720 |
|
|
4.4 |
|
|
674 |
|
|
4.9 |
|
|
Office supplies |
|
|
493 |
|
|
3.0 |
|
|
498 |
|
|
3.6 |
|
|
Other real estate owned and other repossessed assets expenses |
|
|
93 |
|
|
0.6 |
|
|
59 |
|
|
0.4 |
|
|
Promotion and advertising |
|
|
271 |
|
|
1.7 |
|
|
258 |
|
|
1.9 |
|
|
Lease expenses |
|
|
392 |
|
|
2.4 |
|
|
194 |
|
|
1.4 |
|
|
Insurance |
|
|
331 |
|
|
2.0 |
|
|
330 |
|
|
2.4 |
|
|
Municipal taxes |
|
|
392 |
|
|
2.4 |
|
|
337 |
|
|
2.5 |
|
|
Commissions and service fees credit and debit cards |
|
|
563 |
|
|
3.5 |
|
|
446 |
|
|
3.3 |
|
|
Other noninterest expense |
|
|
994 |
|
|
6.1 |
|
|
399 |
|
|
2.9 |
|
|
Total noninterest expense |
|
$ |
16,239 |
|
|
100.0 |
% |
$ |
13,678 |
|
|
100.0 |
% |
Our total noninterest expense increased to $8.9 million and $16.2 million in the second quarter and the first half of 2004, as compared to $7.2 million and $13.7 million for the same periods in 2003, representing an increase of 22.9% and 18.7%, respectively. These increases can be attributed to the expanded personnel and occupancy costs associated with our business growth, our acquisition of Banco Financiero and BankTrust, and the recent opening of new branch offices. Our expansion of various groups, including our EuroLease group, our construction lending activities and our trust and wealth management group, also contributed to the increase in our total noninterest expense. Due to our continuing efforts to minimize noninterest expense, however, noninterest expenses as a percentage of average assets remained relatively
constant at 2.02% and 2.10% in the second quarter and first half of 2004, as compared to 2.10% and 2.54%, respectively, for the same periods in 2003. We believe that our efforts to expand without comparative increases in our number of employees have improved our operational efficiency. Our efficiency improvement is evidenced by the decrease in our efficiency ratio to 50.17% and 53.50% in the second quarter and first half of 2004, as compared to 55.35% and 57.60%, respectively, for the same periods in 2003. The efficiency ratio is determined by dividing total noninterest expense by an amount equal to net interest income (fully taxable equivalent) plus noninterest income.
We anticipate that the overall volume of our noninterest expense will continue to increase as we grow. However, we remain committed to controlling costs and efficiency and expect to moderate these increases relative to our revenue growth.
Salaries and employee benefits totaled $4.8 million and $8.8 million for the second quarter and first half of 2004, as compared to $4.0 million and $7.6 million for the same periods in 2003, representing an increase of 19.1% or 15.9%, respectively, for the comparable periods. Despite the new branch openings and significant asset growth in the past year, we have limited full-time employee growth by making efficient use of existing employees. We had 434 full-time equivalent employees as of June 30, 2004, compared with 373 as of June 30, 2003. Our volume of assets per employee increased to $4.4 million as of June 30, 2004 from $3.2 million as of June 30, 2003.
Occupancy and equipment expenses totaled $1.7 million and $3.2 million, respectively, for the second quarter and first half of 2004 as compared to $1.5 million and $2.9 million for the same periods in 2003, representing an increase of 10.3% and 10.4%, respectively, for the comparable periods. These cost increases are attributable primarily to the expansion of our branch network and franchise.
Professional and directors’ fees were $366,000 and $398,000 or 4.1% and 5.5% of total noninterest expenses, for the second quarter of 2004 and 2003, respectively. For the first half, these expenses increased to $720,000 in 2004 from $674,000 a year ago. This increase is attributable primarily to the growth of our business and other legal, consulting and professional fees. We expect that expenditures in this area will continue to be significant as we address recently released SEC regulations and the new Nasdaq corporate governance requirements.
Office supplies expenses were $273,000 and $251,000 or 3.1% and 3.5% of total noninterest expenses, for the second quarter of 2004 and 2003, respectively. For the first half, these expenses decreased to $493,000 in 2004 from $498,000 a year ago.
Our expenses related to OREO and repossessed assets were $37,000 and $43,000 or 0.4% and 0.6% of total noninterest expenses, for the second quarter of 2004 and 2003, respectively. For the first half, these expenses increased to $93,000 in 2004 from $59,000 a year ago. This increase is attributable primarily to the growth of our loan and lease portfolio, and in particular, our lease financing portfolio.
Insurance expenses were $182,000 and $205,000 or 2.0% and 2.8% of total noninterest expenses, for the second quarter of 2004 and 2003, respectively. For the first half, these expenses increased to $331,000 in 2004 from $330,000 a year ago.
Municipal taxes increased to $196,000 and $392,000 for the second quarter and first half of 2004 as compared to $169,000 and $337,000 for the same periods in 2003. These increases are directly attributable to our asset growth.
Commissions and service fees on credit and debit cards increased to $290,000 and $563,000 for the second quarter and first half of 2004 as compared to $221,000 and $446,000 for the same periods in 2003. These increases are attributable primarily to the increase in the size of our commercial loan portfolio, which provides us with merchant point-of-sale business.
Other noninterest expenses also increased for the second quarter and first half of 2004; however, these increases were related in large part to our asset growth over these periods. Due in part to management’s commitment to overhead control, these expense increases were significantly outpaced by our revenue growth rate.
We also expect our noninterest expense to increase as a result of our becoming a publicly-traded company. Specifically, we expect increases in audit fees, legal fees associated with public reporting, printing costs, proxy solicitation costs, additional directors, and officers’ insurance cost and other expenses generally associated with publicly-traded companies.
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 federal income tax.
For the second quarter ended June 30, 2004, we recorded a $1.5 million income tax expense compared to $1.4 million expense for the same period in 2003. For the first half of 2004, we recorded a $2.5 million income tax expense compared to $2.0 million expense for the same period in 2003. Our current income tax provision is lower than a provision based on the statutory tax rate applicable to Eurobank, which is 39.0%, because we have interest income from certain investments that is exempt from Puerto Rico income tax. Exempt interest relates mostly to interest earned on securities held by EBS Overseas. The main reason for the increase in our tax expense for the second quarter and first half of 2004 is the 51.0% and 60.7% increase in our income before taxes from the same periods in 2003.
Income tax expense is the sum of two components: current tax expense and deferred tax expense (benefit). Current tax expense is calculated by applying our current tax rate to taxable income. The deferred tax expense accounts for the change in deferred tax assets (liabilities) from year to year. 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. At June 30, 2004 and June 30, 2003 we had net deferred tax assets of $15.5 million and $4.1 million, respectively. The main reason for the increase in our deferred tax asset was the acquisition of BankTrust. At June 30, 2004, the deferred tax asset that resulted from the acquisition of BankTrust amounted to $11.9
million.
Extraordinary Gain on Acquisition of BankTrust
On May 3, 2004, we acquired all of the capital stock of BankTrust. The estimated fair value of assets acquired less liabilities assumed exceeded the purchase price by approximately $5.7 million. This was allocated to eliminate the fair value of intangible assets acquired, and the value of the furniture, fixtures and equipment acquired. Since all other remaining assets were either financial assets, assets to be disposed of in the near term or prepaid assets, the remaining negative goodwill amounting to $4.4 million resulted in an extraordinary gain on the acquisition. However, we are still in the process of evaluating the net assets acquired. Consequently, the allocation of the purchase price to the assets and liabilities acquired is preliminary and subject to revision based on the outcome of ongoing evaluations of
these assets and liabilities.
Financial Condition
Our total assets as of June 30, 2004 were $1.9 billion, compared to $1.3 billion as of December 31, 2003. The increase in our total assets during the first six months of 2004 were primarily the result of growth in our investment securities and loan and lease portfolio and from those assets acquired in the acquisition of BankTrust.
Our total deposits increased to $1.4 billion as of June 30, 2004, compared to $984.5 million as of December 31, 2003. Our asset growth during the first six months of 2004 was, in part, the result of our acquisition of BankTrust, in which we assumed $397.8 million of deposits. Growth was also funded with a $134.8 million increase in securities sold under agreements to repurchase.
As
of June 30, 2004, our stockholders’ equity was $98.1 million,
compared to $65.1 million as of December 31, 2003. This increase was
primarily attributable to the sale of shares in our May 2004 private
placement and our initial public offering.
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. We had $12.6 million and $19.3 million in interest-bearing deposits in other financial institutions as of June 30, 2004 and December 31, 2003, respectively. As of June 30, 2004 and December 31, 2003, we had $30.8 million and $20.5 million, respectively, in purchased securities under agreements to resell.
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 me
eting our anticipated funding needs.
Our investment portfolio consists of securities we intend to hold until maturity, or “held-to-maturity securities,” and all other securities are classified as “available-for-sale.” The carrying values of our available-for-sale securities are adjusted for unrealized gain or loss as a valuation allowance, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income.
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 |
|
|
|
|
Amortized Cost |
|
Estimated
Fair Value |
|
|
|
|
(Dollars in thousands) |
|
|
June 30, 2004: |
|
|
|
|
|
|
|
|
U.S. treasury securities |
|
$ |
84,815 |
|
$ |
84,576 |
|
|
U.S. government agencies obligations |
|
|
48,428 |
|
|
48,669 |
|
|
Collateralized mortgage obligations |
|
|
280,882 |
|
|
277,657 |
|
|
Mortgage-backed securities |
|
|
48,122 |
|
|
49,210 |
|
|
State and municipal obligations |
|
|
9,176 |
|
|
9,203 |
|
|
Other debt securities |
|
|
2,992 |
|
|
3,000 |
|
|
Total |
|
$ |
474,415 |
|
$ |
472,315 |
|
| |
|
|
|
|
|
|
|
|
December 31, 2003: |
|
|
|
|
|
|
|
|
U.S. treasury securities |
|
$ |
84,748 |
|
$ |
85,116 |
|
|
U.S. government agencies obligations |
|
|
39,867 |
|
|
39,930 |
|
|
Collateralized mortgage obligations |
|
|
144,885 |
|
|
143,189 |
|
|
Mortgage-backed securities |
|
|
49,027 |
|
|
49,134 |
|
|
State and municipal obligations |
|
|
4,519 |
|
|
4,575 |
|
|
Other debt securities |
|
|
2,968 |
|
|
2,994 |
|
|
Total |
|
$ |
326,014 |
|
$ |
324,938 |
|
Available-for-sale securities, which are stated at their fair value, increased to $472.3 million as of June 30, 2004 from $324.9 million as of December 31, 2003. This increase is representative of our strategy to enhance our liquidity level through the use of available-for-sale securities in addition to immediately available funds. The majority of our immediately available funds are maintained in the form of overnight investments. As of June 30, 2004, investment securities having a carrying value of approximately $375.5 million were pledged to secure borrowings and deposits of public funds and to comply with other pledging requirements.
Investment Portfolio — Maturity and Yields
The following table summarizes the contractual maturity of investment securities held in our investment portfolio and their weighted average yields:
|
|
As of June 30, 2004 |
|
|
|
Within One Year |
|
After One but
Within Five Years |
|
After One but
Within Five Years |
|
After Ten Years |
|
Total |
|
|
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
|
|
|
(Dollars in thousands) |
|
Investments available-for- sale:(1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury obligations |
|
$ |
— |
|
|
— |
% |
$ |
84,576 |
|
|
1.79 |
% |
$ |
— |
|
|
— |
% |
$ |
— |
|
|
— |
% |
$ |
84,576 |
|
|
1.79 |
% |
|
U.S. government agencies obligations |
|
|
27,086 |
|
|
2.60 |
|
|
21,584 |
|
|
3.10 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
48,670 |
|
|
2.82 |
|
|
Mortgage backed securities(3) |
|
|
7,706 |
|
|
4.23 |
|
|
41,504 |
|
|
3.43 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
49,210 |
|
|
3.55 |
|
|
Collateral mortgage obligations(3) |
|
|
— |
|
|
— |
|
|
277,657 |
|
|
5.38 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
277,657 |
|
|
5.38 |
|
|
State & political subdivisions |
|
|
1,001 |
|
|
4.30 |
|
|
6,448 |
|
|
5.09 |
|
|
— |
|
|
— |
|
|
1,753 |
|
|
6.24 |
|
|
9,202 |
|
|
5.22 |
|
|
Other debt securities |
|
|
3,000 |
|
|
2.05 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,000 |
|
|
2.05 |
|
|
Total investments available-for-sale |
|
$ |
38,793 |
|
|
2.92 |
% |
$ |
431,769 |
|
|
4.37 |
% |
|
— |
|
|
— |
|
$ |
1,753 |
|
|
6.24 |
% |
$ |
472,315 |
|
|
4.26 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB stock |
|
|
5,075 |
|
|
1.58 |
% |
|
— |
|
|
— |
% |
|
— |
|
|
— |
% |
|
— |
|
|
— |
% |
|
5,075 |
|
|
1.58 |
% |
|
Investment in statutory trust |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,387 |
|
|
5.00 |
|
|
1,387 |
|
|
5.00 |
|
|
Total other investments |
|
$ |
5,075 |
|
|
1.58 |
% |
$ |
— |
|
|
— |
% |
$ |
— |
|
|
— |
% |
$ |
1,387 |
|
|
5.00 |
% |
$ |
6,462 |
|
|
2.31 |
% |
|
Total investments |
|
$ |
43,868 |
|
|
2.77 |
% |
$ |
431,769 |
|
|
4.37 |
% |
|
— |
|
|
— |
|
$ |
3,140 |
|
|
3.48 |
% |
$ |
478,777 |
|
|
4.24 |
% |
__________
| |
(1) |
Based on estimated fair value. |
| |
|
|
| |
(2) |
All of our income from investments in available-for-sale securities is tax exempt because these securities are held in our IBE. 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. |
Other Earning Assets
For various business purposes, we make investments in earning assets other than the interest-earning securities discussed above. As of June 30, 2004, our investment in other earning assets included $5.1 million in FHLB stock and $1.4 million equity in our statutory trusts. The following table presents the balances of other earning assets as of the dates indicated:
| |
|
As of June 30, |
|
As of December 31, |
|
|
Type |
|
2004 |
|
2003 |
|
|
|
|
(In thousands) |
|
| |
|
|
|
|
|
|
|
|
Statutory trusts |
|
$ |
1,387 |
|
$ |
1,388 |
|
|
Federal FHLB stock |
|
|
5,075 |
|
|
1,954 |
|
|
Total |
|
$ |
6,462 |
|
$ |
3,342 |
|
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 $2.8 million and $6.8 million as of June 30, 2004 and December 31, 2003, respectively:
| |
|
As of June 30, |
|
As of December 31, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
(In thousands) |
| |
|
|
|
|
|
|
|
|
Real estate secured |
|
$ |
456,348 |
|
$ |
317,491 |
|
|
Leases |
|
|
432,050 |
|
|
315,935 |
|
|
Commercial and industrial |
|
|
274,827 |
|
|
177,989 |
|
|
Consumer |
|
|
86,217 |
|
|
26,592 |
|
|
Real estate - construction |
|
|
79,221 |
|
|
47,370 |
|
|
Other loans |
|
|
4,945 |
|
|
4,236 |
|
|
Gross loans and leases |
|
$ |
1,333,608 |
|
$ |
889,613 |
|
|
Plus: Deferred loan costs, net |
|
|
5,605 |
|
|
4,707 |
|
|
Total loans, including deferred loan costs, net |
|
$ |
1,339,213 |
|
$ |
894,320 |
|
|
Less: Unearned income |
|
|
(1,240 |
) |
|
(1,774 |
) |
|
Total loans, net of unearned income |
|
$ |
1,337,973 |
|
$ |
892,546 |
|
|
Less: Allowance for loan and lease losses |
|
|
(19,390 |
) |
|
(9,394 |
) |
|
Loans, net |
|
$ |
1,318,583 |
|
$ |
883,152 |
|
As of June 30, 2004 and December 31, 2003, our total loans and leases, net of unearned income, were $1.3 billion and $892.5 million, respectively. The increase in our loan and lease volume during the six months ended June 30, 2004 resulted primarily from the growth of our operations and our acquisition of BankTrust. In the acquisition, we acquired loans totaling $348.6 million. Our total loans and leases, net of unearned income as a percentage of total assets increased to 69.5% as of June 30, 2004 from 68.1% as of December 31, 2003.
Real estate secured loans, the largest component of our loan and lease portfolio, consist primarily 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. Loans secured by real estate equaled $456.3 million and $317.5 million as of June 30, 2004 and December 31, 2003, respectively. The volume of our real estate loans has
increased significantly as a result of our growth and as a result of our acquisition of BankTrust. In the acquisition, we acquired real estate loans totaling $106.2 million. The percentage of our real estate secured loans in relation to our total loan and lease portfolio, however, has remained relatively constant. Real estate secured loans as a percentage of total loans and leases were 34.2% for the six months ended June 30, 2004 and 35.7% for the fiscal year ended 2003.
Lease financing contracts, the second largest component of our loan portfolio, consist of automobile and equipment leases made to individuals and corporate customers. In the last two years, we have deemphasized equipment leasing and focused on automobile leasing. As of June 30, 2004, approximately 78.2% of our lease financing contracts were for new automobiles, approximately 20.4% were for used automobiles and the remaining 1.4% consisted primarily of construction and medical equipment leases. The volume of our lease financing contracts increased to $432.1 million and $315.9 million as of June 30, 2004 and December 31, 2003, respectively. Lease financing contracts, as a percentage of total loans and leases were 32.4% as of June 30, 2004 and 35.5% at the end of 2003. During June and December 2003, we sold lease contracts
with carrying values of $30.0 million and $20.0 million, respectively, to another financial institution, while retaining servicing responsibilities. The lease contracts sold in 2003 were sold on a limited recourse basis. The recourse is limited to a maximum of 5.0% of the principal balance on any defaulted lease, subject to an aggregate limitation of 5.0% on all of the leases sold.
Commercial and industrial loans include revolving lines of credit as well as term business loans. Commercial and industrial loans increased to $274.8 million as of June 30, 2004 from $178.0 million as of December 31, 2003. The significant increase in commercial and industrial loans in 2004 is attributable to our acquisition of BankTrust. Commercial and industrial loans as a percentage of total loans were 20.6% as of June 30, 2004, and 20.0% at the end of 2003.
Construction loans are not a significant part of our total loan portfolio. Construction loans totaled $79.2 million and $47.4 million as of June 30, 2004 and December 31, 2003. Construction loans as a percentage of total loans and leases were 5.9% and 5.3% as of June 30, 2004 and December 31, 2003. The volume of our construction loans has increased significantly as a result of our growth and as a result of our acquisition of BankTrust. In the acquisition, we acquired construction loans totaling $42.4 million.
Consumer loans have historically represented a small part of our total loan and lease portfolio. The majority of consumer loans consist of personal installment loans, credit cards, boat loans, and consumer lines of credit. We make consumer loans only to complement our commercial business, and these loans are not emphasized by our branch managers. Consumer loans increased to $86.2 million as of June 30, 2004 from $26.6 million as of December 31, 2003. Consumer loans as a percentage of total loans and leases were 6.5% and 3.0% at June 30, 2004 and December 31, 2003. The volume of our construction loans has increased significantly as a result of our growth and as a result of our acquisition of BankTrust. In the acquisition, we acquired consumer loans totaling $60.2 million.
Our loan terms vary according to loan type. Commercial term loans generally have maturities of three to five years, while we generally limit real estate loan maturities to five to eight years. Lines of credit, in general, are extended on an annual basis to businesses that need temporary working capital and/or import/export financing. The following table shows our maturity distribution of loans and leases, including loans held for sale of $2.8 million, as of June 30, 2004, excluding non-accrual loans amounting to $29.1 million. A significant part of our non-consumer loan portfolio is floating rate loans which comprise both commercial and industrial loans and commercial real estate loans. By contrast, residential mortgage loans originated by Eurobank are fixed rate. Residential mortgage loans are included in the real
estate - secured category in the following table.
| |
|
As of June 30, 2004 |
|
|
|
|
|
|
Over 1 Year
through 5 Years |
|
Over 5 Years |
|
|
|
|
|
|
|
One Year
or Less(1) |
|
|
Fixed
Rate |
|
|
Floating or
Adjustable Rate |
|
|
Fixed
Rate |
|
|
Floating or Adjustable Rate |
|
|
Total |
|
|
|
|
(In thousands) |
|
Real estate — construction |
|
$ |
81,443 |
|
$ |
— |
|
$ |
8,481 |
|
$ |
49 |
|
$ |
— |
|
$ |
89,973 |
|
|
Real estate — secured |
|
|
110,079 |
|
|
54,952 |
|
|
192,619 |
|
|
62,969 |
|
|
14,189 |
|
|
434,808 |
|
|
Commercial and industrial |
|
|
190,298 |
|
|
25,009 |
|
|
39,225 |
|
|
6,841 |
|
|
2,408 |
|
|
263,781 |
|
|
Consumer |
|
|
15,558 |
|
|
20,745 |
|
|
84 |
|
|
48,920 |
|
|
626 |
|
|
85,933 |
|
|
Leases |
|
|
5,501 |
|
|
322,266 |
|
|
— |
|
|
104,500 |
|
|
— |
|
|
432,267 |
|
|
Other loans |
|
|
4,902 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,902 |
|
|
Total |
|
$ |
407,751 |
|
$ |
422,972 |
|
$ |
240,409 |
|
$ |
223,279 |
|
$ |
17,223 |
|
$ |
1,311,667 |
|
__________
| |
(1) |
Maturities are based upon contract dates. Demand loans are included in the one year or less category and totaled $282.0 million as of June 30, 2004. |
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 June 30, |
|
As of December 31, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
(Dollars in thousands) |
|
Loans contractually past due 90 days or more but still accruing interest |
|
$ |
11,721 |
|
$ |
9,700 |
|
|
Nonaccrual loans |
|
|
29,146 |
|
|
17,058 |
|
|
Total nonperforming loans |
|
|
40,867 |
|
|
26,758 |
|
|
Other real estate owned |
|
|
2,850 |
|
|
2,774 |
|
|
Other repossessed assets |
|
|
4,067 |
|
|
3,643 |
|
|
Total nonperforming assets |
|
$ |
47,784 |
|
$ |
33,175 |
|
|
Nonperforming loans to total loans and leases |
|
|
3.05 |
% |
|
2.98 |
% |
|
Nonperforming assets to total loans and leases
plus repossessed property |
|
|
3.56 |
|
|
3.68 |
|
|
Nonperforming assets to total assets |
|
|
2.48 |
|
|
2.51 |
|
We continuously 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 loans in excess of $100,000 for secured loans and $50,000 for unsecured 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. We do not engage in sub-prime
lending.
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. 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 cash basis or cost recovery method, until qualifying for return to accrual status.
Generally, our nonperforming loans and leases have increased in connection with the growth of our loan and lease portfolio. The recent economic downturn and our acquisition of BankTrust further increased our nonperforming loans and leases to $40.9 million and $26.8 million as of June 30, 2004 and December 31, 2003, respectively. As of June 30, 2004, nonperforming loans acquired from BankTrust amounted to $8.8 million. However, the ratio of nonperforming loans and leases over total loans and leases remained relatively constant at 3.05% and 2.98% as of June 30, 2004 and December 31, 2003, respectively.
We believe all loans and leases, with which we have serious doubts as to collectibility, are classified within the category of nonperforming loans and leases and are appropriately reserved.
OREO consists of properties acquired by foreclosure or similar means and that management intends to offer for sale. Other repossessed assets are comprised primarily of repossessed automobiles and equipment subject to lease contracts. OREO and repossessed assets are initially recorded at fair value. Any resulting loss is charged to the allowance for loan and lease losses. An appraisal of OREO and repossessed assets is made periodically after a property is acquired, and a comparison between the appraised value and the carrying value is performed. Additional declines in value after acquisition, if any, are charged to current operations. Gains or losses on disposition of OREO and repossessed assets, and related operating income and maintenance expenses, are included in current operations.
Our OREO consisted of 13 properties with an aggregate value of $2.9 million and $2.8 million as of June 30, 2004 and December 31, 2003, respectively.
Other repossessed assets as of June 30, 2004 and December 31, 2003 were $4.1 million and $3.6 million, respectively. The increase in volume of repossessed assets during 2004 was attributable to increases in volumes of our automobile lease originations. As our volume of lease financings has increased, in order to avoid building our inventory of repossessed automobiles, we have been more aggressive in our disposition efforts.
Together with OREO, the ratio of nonperforming assets as a percentage of total loans and leases plus repossessed property improved to 3.56% as of June 30, 2004 from 3.68% as of December 31, 2003.
Allowance for Loan and Lease Losses
We have established an allowance for loan and lease losses to provide for loans in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, monthly assessments of the probable estimated losses inherent in the loan and lease portfolio. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula described below, specific allowances for identified problem loans and portfolio segments and the unallocated allowance.
When analyzing the adequacy of our allowance, our portfolio is segmented into as many components as practical. Although the evaluation of the adequacy of our allowance focuses on loans and leases and pools of similar loans and leases, no part of our allowance is segregated for, or allocated to, any particular asset or group of assets. Our allowance is available to absorb all credit losses inherent in our portfolio.
Each component would normally have similar characteristics, such as classification, type of loan or lease, industry or collateral. As needed, we separately analyze the following components of our portfolio and provide for them in our allowance:
| l |
sufficiency of credit and collateral documentation; |
| l |
proper lien perfection; |
| l |
appropriate approval by the loan officer and the loan committees; |
| l |
adherence to any loan agreement covenants; and |
| l |
compliance with internal policies and procedures and laws and regulations. |
The general portion of our allowance is calculated by applying loss factors to all categories of loans and leases outstanding in our portfolio. We use historic loss rates, determined over a period of years, plus migration analysis techniques. The resulting loss factors are then multiplied against the current period’s balance of loans outstanding to derive an estimated loss. We adjust the historical loss percentage for each pool of loans to reflect any current conditions that are expected to result in loss recognition. Factors that we consider include, but are not limited to:
| l |
effects of any changes in lending policies and procedures, including those for underwriting, collection, charge-offs, and recoveries; |
| l |
changes in the experience, ability and depth of our lending management and staff; |
| l |
concentrations of credit that might affect loss experience across one or more components of the portfolio; |
| l |
levels of, and trends in, delinquencies and nonaccruals; and |
| l |
national and local economic business trends and conditions. |
Historical loss rates are reviewed and adjusted for the above factors on a pool-by-pool basis. 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. For such pools of loans or leases, management believes that coverage of one year’s losses in the current portfolio is an appropriate measure.
For our commercial loan portfolio, we maintain a general reserve equal to 2.93% of the outstanding balance of such portfolio.
Our consumer installment closed end loan portfolio has averaged a 3.07% net loss experience over the past five calendar years. This is partially attributable to the fact that, in connection with our acquisitions of other banks, additional reserves have been built into the transaction pricing to compensate for future losses. For our consumer loan portfolio, we maintain a general reserve equal to 4.17% of the outstanding balance of such portfolio.
Our three year old construction loan portfolio has no loss experience. Nevertheless, we maintain a general reserve for this portfolio equal to 1.81% of the portfolio balance.
Our leasing portfolio has averaged a 0.48% net loss experience over the past four calendar years. We maintain a reserve equal to 0.83% of the balance of this portfolio for general reserve purposes. As described in more detail below, we have also established a “specific reserve” over and above the general reserve for certain leases.
The mortgage portfolio has no loss experience. The large majority of mortgage originations are sold into the secondary market and the existing portfolio is generally of a mature nature. Nevertheless, we maintain a general reserve equal to 0.08% of the mortgage portfolio for general reserve purposes.
As of May 3, 2004 Eurobank acquired loan portfolios from BankTrust, totaling $348.6 million with accompanying general, specific and unallocated allowances of $10.9 million. Because a number of BankTrust’s problem loans were acquired by a special purpose vehicle immediately prior to closing, and as a result of a series of charge-offs performed prior closing, except with regard to the newly acquired boat financing portfolio described below, we have determined that the portfolios acquired from BankTrust generally have a risk level comparable to our portfolio prior to the BankTrust transaction. Consequently, we will continue to apply the same reserve guidelines to our portfolio.
The only major loan category acquired from BankTrust not previously marketed by Eurobank was BankTrust’s $47.0 million boat financing portfolio. As with all other BankTrust loans, the special purpose vehicle assumed all loans in the BankTrust boat financing portfolio that were more than 90 days delinquent. Additionally, an unallocated reserve of $1.5 million was acquired from BankTrust. In the six months prior to its acquisition, BankTrust maintained a boat financing reserve between 1.6% and 1.9% of the outstanding portfolio. At June 31, 2004, we maintain a $2.6 million general reserve on the boat financing portfolio, or 5.26% of the outstanding portfolio. While we may adjust this reserve in the future, we believe it is appropriate at this time.
All internal and external factors that may impact the adequacy of our general reserves are reviewed on an ongoing basis with formal recommendations being made to the Board of Directors at least annually, and more frequently if deemed necessary.
In addition to our general portfolio allowances, specific reserves are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate a high probability that a loss will be incurred. This amount may be determined either by a method prescribed by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, or by a method that identifies certain qualitative factors.
Through continual management review at branch and executive level and utilization of internal delinquency processes, both portfolios and individual loans and leases are monitored on an ongoing basis. When considered appropriate, a specific reserve will be considered on individual loan or lease accounts. A review is generally conducted of all the conditions surrounding any particular account such as the borrower’s character, existing and potential financial condition, realizable value of collateral, prospects for additional collateral and payment record. As a result, the loss potential is determined and specific reserves may be established. The level of reserve will vary depending on the analysis but we utilize the same classification categories as federal regulators, which result in varying amounts of reserve depend
ing on loss potential.
The unallocated portion of the allowance contains amounts that are based on management’s evaluation of conditions that are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated portion of the allowance include the following:
| l |
general economic and business conditions affecting our key lending areas; |
| l |
then-existing economic and business conditions of areas outside the lending areas, such as other sections of the United States and Caribbean; |
| l |
credit quality trends, including trends in nonperforming loans and leases expected to result from existing conditions; |
| l |
loan and lease concentrations by collateral and by obligor; |
| l |
specific industry conditions within portfolio segments; |
| l |
recent loss experience in particular segments of the portfolio; |
| l |
duration of the current business cycle; |
| l |
bank regulatory examination results and guidance; and |
| l |
findings of our internal and external loan review examiners. |
Our loan review officer reviews these conditions on an ongoing basis in discussion with our executive management, senior lenders and credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance, applicable to such loan or portfolio segment. When any of these conditions is not evidenced by a specifically identifiable problem loan or portfolio segment, management’s evaluation of the probable loss related to such conditions is reflected in the unallocated portion of the allowance.
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 averages during the period, changes in the allowance for loan and lease losses arising from loans and leases charged-off, recoveries on loans and leases previously charged-off, and additions to the allowance, and certain ratios related to the allowance for loan and lease losses:
| |
|
Six Months Ended June 30, |
|
Year Ended December 31, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
(Dollars in thousands) |
|
|
Average total loans and leases outstanding during period |
|
$ |
1,057,394 |
|
$ |
842,033 |
|
|
Total loans and leases outstanding at end of period, including loans held for sale |
|
|
1,340,813 |
|
|
899,392 |
|
|
Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
Allowance at beginning of period |
|
|
9,394 |
|
|
6,918 |
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
Real estate — secured |
|
|
5 |
|
|
— |
|
|
Commercial and industrial |
|
|
2,238 |
|
|
966 |
|
|
Consumer |
|
|
608 |
|
|
1,347 |
|
|
Leases |
|
|
2,696 |
|
|
2,715 |
|
|
Other loans |
|
|
97 |
|
|
37 |
|
|
Total charge-offs |
|
|
5,644 |
|
|
5,065 |
|
| |
|
Six Months Ended June 30, |
|
Year Ended December 31, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
(Dollars in thousands) |
|
Recoveries: |
|
|
|
|
|
|
|
|
Real estate — secured |
|
|
— |
|
|
— |
|
|
Commercial and industrial |
|
|
66 |
|
|
160 |
|
|
Consumer |
|
|
118 |
|
|
254 |
|
|
Leases |
|
|
579 |
|
|
675 |
|
|
Other loans |
|
|
— |
|
|
1 |
|
|
Total recoveries |
|
|
763 |
|
|
1,090 |
|
|
Net loan and lease charge-offs |
|
|
4,881 |
|
|
3,975 |
|
|
Provision for loan and lease losses |
|
|
3,975 |
|
|
6,451 |
|
|
Allowance of acquired bank — BankTrust |
|
|
10,902 |
|
|
— |
|
|
Allowance at end of period |
|
$ |
19,390 |
|
$ |
9,394 |
|
|
Ratios: |
|
|
|
|
|
|
|
|
Net loan and lease charge-offs to average total loans |
|
|
0.92 |
% |
|
0.47 |
% |
|
Allowance for loan and lease losses to total loans at end of period |
|
|
1.45 |
|
|
1.04 |
|
|
Net loan and lease charge-offs to allowance for loan losses at end of period |
|
|
50.36 |
|
|
42.31 |
|
|
Net loan and lease charge-offs to provision for loan and lease losses |
|
|
122.82 |
|
|
61.62 |
|
The allowance for loan and lease losses increased by 106.4%, or $10.0 million, to $19.4 million at June 30, 2004, as compared to $9.4 million at December 31, 2003. The allowance for loan and lease losses as a percentage of total loans and leases increased to 1.45% at June 30, 2004 from 1.04% at December 31, 2003.
Net charge-offs as a percentage of our year end portfolio balance, or “net loss experience,” has averaged 0.15% for our commercial loan portfolio over the past five calendar years. Annualized net charge-offs as a percentage of average loans was 1.29% and 0.96% for the second quarter and first half of 2004, as compared to 0.53% and 0.58% for the same periods in 2003. The commercial and industrial charge-offs for the second quarter of 2004 included the unsecured portion of a loan granted to a construction company amounting to $885,000.
In March 2003, we commenced the practice of effecting partial charge-off on all lease finance contracts that were over 120 days past due. This is done based on our historical lease loss experience. At the end of 2003, we had a historical loss ratio in lease finance contracts of approximately 11.0%. This partial charge-off is made on a quarterly basis. Accordingly, all lease finance contracts that are over 120 days past due at the end of the quarter are partially charged-off. As of June 30, 2004, $936,000 was charged off for this purpose. During the first half of 2004, the actual ratio has increased to 12.0%.
Nonearning Assets
Premises, leasehold improvements and equipment, net of accumulated depreciation and amortization, totaled $10.9 million at June 30, 2004 and $10.5 million at December 31, 2003. 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. 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:
| |
|
Six Months Ended June 30, |
|
Year Ended December 31, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
Average Balance |
|
Percent of Deposits |
|
Average Rate |
|
Average Balance |
|
Percent of Deposits |
|
Average Rate |
|
|
|
|
(Dollars in thousands) |
|
|
Noninterest-bearing demand deposits |
|
$ |
108,830 |
|
|
9.46 |
% |
|
— |
% |
$ |
92,643 |
|
|
10.09 |
% |
|
— |
% |
|
Money market deposits |
|
|
54,923 |
|
|
4.77 |
|
|
2.22 |
|
|
47,896 |
|
|
5.21 |
|
|
2.70 |
|
|
NOW deposits |
|
|
34,140 |
|
|
2.97 |
|
|
1.73 |
|
|
26,579 |
|
|
2.89 |
|
|
2.14 |
|
|
Savings deposits |
|
|
256,114 |
|
|
22.26 |
|
|
2.50 |
|
|
197,242 |
|
|
21.47 |
|
|
2.95 |
|
|
Time certificates of deposit in denominations of $100,000 or more |
|
|
194,650 |
|
|
16.92 |
|
|
2.65 |
|
|
176,216 |
|
|
19.18 |
|
|
3.03 |
|
|
Brokered certificates of deposits |
|
|
318,301 |
|
|
27.65 |
|
|
3.86 |
|
|
216,395 |
|
|
23.55 |
|
|
4.19 |
|
|
Other time deposits |
|
|
183,718 |
|
|
15.97 |
|
|
2.71 |
|
|
161,811 |
|
|
17.61 |
|
|
3.28 |
|
|
Total deposits |
|
$ |
1,150,676 |
|
|
100.00 |
% |
|
|
|
$ |
918,782 |
|
|
100.00 |
% |
|
|
|
Total deposits at June 30, 2004 and December 31, 2003 were $1.4 billion and $984.5 million, respectively, representing an increase of $420.3 million, or 42.7%, in the first half of 2004. Average deposits for the second quarter and first half of 2004 were $1.3 billion and $1.2 billion, respectively, as compared to $854.8 million and $876.3 million for the same periods in 2003. This dramatic increase in average deposits in 2004 is the result of our May 2004 acquisition of BankTrust. We assumed $397.8 million in deposits in connection with our acquisition of BankTrust.
Our core deposits increased to $712.4 million as of June 30, 2004 from $578.3 million as of December 31, 2003. However, the percentage of our core deposits to total deposits decreased to 50.7% as of June 30, 2004 from 58.7% in 2003. We attribute the decrease in our core deposits mainly to our acquisition of BankTrust. In the acquisition, we assumed deposits totaling $397.8 million, including time deposits in denominations of $100,000 or more totaling $232.4 million, or 58.4% of total deposits assumed. The average rate paid on time deposits in denominations of $100,000 or more was 3.48% for the second quarter of 2004 as compared to 3.95% for the second quarter of 2003.
In addition to the deposits we generate locally, we have also accepted brokered deposits to augment retail deposits and to fund asset growth. In order to take advantage of historically low funding costs, brokered deposits increased to $509.6 million as of June 30, 2004 from $228.2 million as of December 31, 2003. Most of our brokered deposits have maturities of one to seven years. Because brokered deposits are generally more volatile and interest rate sensitive than other sources of funds, management closely monitors growth in this category.
The following table sets forth the amount and maturities of the time deposits of $100,000 or more as of June 30, 2004:
|
|
June 30, 2004 |
|
|
|
|
(In thousands) |
|
|
Three months or less |
|
$ |
155,036 |
|
|
Over three months through six months |
|
|
112,758 |
|
|
Over six months through 12 months |
|
|
90,517 |
|
|
Over 12 months |
|
|
335,169 |
|
|
Total |
|
$ |
693,480 |
|
| |
|
|
|
|
Other Sources of Funds
Securities Sold Under Agreements to Repurchase
To support our asset base, we sell securities subject to obligations to repurchase to securities dealers and the FHLB. These repurchase transactions generally have maturities of one month to less than five years. The following table summarizes certain information with respect to securities under agreements to repurchase for the three months ended June 30, 2004 and December 31 2003:
| |
|
Three Months Ended June 30, |
|
Year Ended December 31, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
(Dollars in thousands) |
|
|
Balance at period-end |
|
$ |
342,338 |
|
$ |
207,523 |
|
|
Average monthly aggregate balance outstanding during the period |
|
|
391,160 |
|
|
92,069 |
|
|
Maximum aggregate balance outstanding at any month-end |
|
|
342,338 |
|
|
207,523 |
|
|
Weighted average interest rate for the period |
|
|
1.28 |
% |
|
1.71 |
% |
|
Weighted average interest rate at period-end |
|
|
1.91 |
|
|
1.25 |
|
FHLB Advances
Although deposits and repurchase agreements are the primary source of funds for our lending and investment activities and for general business purposes, we may obtain advances from the Federal Home Loan Bank of New York as an alternative source of liquidity. The following table provides a summary of FHLB advances for the three months ended June 30, 2004 and December 31 2003:
| |
|
Three Months Ended June 30, |
|
Year Ended December 31, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
(Dollars in thousands) |
|
|
Balance at period-end |
|
$ |
10,700 |
|
$ |
10,700 |
|
|
Average balance during the period |
|
|
10,700 |
|
|
14,954 |
|
|
Maximum amount outstanding at any month-end |
|
|
10,700 |
|
|
18,850 |
|
|
Average interest rate during the period |
|
|
7.21 |
% |
|
5.30 |
% |
|
Average interest rate at period-end |
|
|
7.21 |
|
|
5.64 |
|
Notes Payable to Statutory Trusts
On December 19, 2002, Eurobank Statutory Trust II (“Trust II”) issued $20 million of floating rate Trust Preferred Capital Securities (the “Trust II Preferred Securities”) due in 2032 with a liquidation amount of $1,000 per security. Distributions payable on each capital security will be payable at an annual rate equal to 4.7% 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 London Interbank Offered Rate (LIBOR), plus 3.3% with a ceiling rate of 11.8%. The Trust II Preferred Securities are fully and unconditionally guaranteed by EuroBancshares. Following the issuance of the Trust II Preferred Securities by Trust II, EuroBancshares issued $20.6 million of floating rate
Junior Subordinated Deferrable Interest Debentures (the “2002 Debentures”) due in 2032 to Trust II. The terms of the 2002 Debentures, which comprise substantially all of the assets of Trust II, are identical to the terms of the Trust II Preferred Securities. The 2002 Debentures are conditionally guaranteed by EuroBancshares. Eurobank 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 II Preferred Securities. See “Recent accounting pronouncements,” below.
On December 18, 2001, Eurobank Statutory Trust I (“Trust I”) issued $25.0 million of floating rate Trust Preferred Capital Securities Series I (“Trust I Preferred Securities”) due in 2031 with a liquidation amount of $1,000 per security. Distributions payable on each Trust I Preferred Security will be payable at an annual rate equal to 5.6% beginning on (and including) the date of original issuance and ending on (but excluding) March 18, 2002, and at an annual rate for each successive period equal to the three-month LIBOR, plus 3.6% with a ceiling rate of 12.5%. The Trust I Preferred Securities are fully and unconditionally guaranteed by EuroBancshares, which was a wholly owned subsidiary of Eurobank in 2001. Following the issuance of the Trust I Preferred Securities, EuroBancshares issued $25.8 milli
on of floating rate Junior Subordinated Deferrable Interest Debentures (the “2001 Debentures”) to Trust I due in 2031. The terms of the 2001 Debentures, which comprise substantially all of the assets of Trust I, are equal to the terms of the capital securities issued by Trust I. These trust preferred securities are conditionally guaranteed by EuroBancshares. Eurobank subsequently issued an unsecured promissory note to us for the issued amount and at an annual rate equal to that being paid on the Trust Preferred Capital Securities Series I due in 2031.
Capital Resources and Capital Adequacy Requirements
We are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can trigger regulatory actions that could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that rely on quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
We monitor compliance with bank regulatory capital requirements, focusing primarily on the risk-based capital guidelines. Under the risk-based capital method of capital measurement, the ratio computed is dependent on the amount and composition of assets recorded on the balance sheet and the amount and composition of off-balance sheet items, in addition to the level of capital. Generally, Tier 1 capital includes common stockholders’ equity our Series A Preferred Stock, our junior subordinated debentures (subject to certain limitations) less goodwill. Total capital represents Tier 1 plus the allowance for loan and lease losses (subject to certain limits).
In
the past three years, our primary sources of capital have been internally
generated operating income through retained earnings and capital derived
from the issuance of the 2001 and 2002 Debentures. Specifically, in 2001
and 2002 we raised $20.9 million in regulatory tier 1 capital
and $24.1 million supplemental capital (regulatory tier 2 capital)
through the issuance of the Debentures. As of June 30, 2004 and December
31, 2003, total stockholders’ equity was $98.1 million and $65.1
million, respectively. Increases in stockholders’ equity during
this period are attributable primarily to the above-mentioned transactions
internally generated operating income and stock option exercises.
On May 3, 2004, we acquired all of the capital stock of BankTrust for approximately $23.4 million for which we issued 683,304 common shares (valued at $8.13 per share) and 433,337 shares of perpetual non-cumulative preferred stock, Series A (valued at $25 per share) and made cash payments of approximately $6.5 million. BankTrust was a commercial bank operating in Puerto Rico through an existing network of five branches and whose total assets at December 31, 2003 amounted to approximately $567 million. The BankTrust acquisition is consistent with our growth strategy.
On June 21, 2004, our board of directors authorized a two-for-one common stock split in the form of a stock dividend. The stock dividend was distributed on July 15, 2004 to stockholders of record on July 1, 2004. All share data and earnings per share data in these financial statements give effect to the stock split, applied retroactively, to all periods.
On August 11, 2004, we completed an initial public offering in which we and certain of our stockholders sold 3,894,988 shares of commons tock, plus an additional 584,248 shares in connection with the exercise of the underwriters’ over-allotment option, at the initial offering price of $14.00 per share. Total proceeds received from the offering, after deducting offering expenses, including underwriting discounts and commissions, were approximately $51.6 million.
We are not aware of any material trends that could materially affect our capital resources other than those described in the section entitled “Risk Factors,” in our Prospectus on Form S-1 dated August 11, 2004.
As of June 30, 2004, we and Eurobank both qualified as “well-capitalized” institutions under the regulatory framework for prompt corrective action. The following table presents the regulatory standards for well-capitalized institutions, compared to our capital ratios for Eurobank as of the dates specified:
| |
|
Actual |
|
For Minimum Capital
Adequecy 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 June 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares, Inc |
|
$ |
152,611 |
|
|
10.14 |
% |
$ |
> 120,458 |
|
|
> 8.00 |
% |
|
N/A |
|
|
|
|
|
Eurobank. |
|
|
152,050 |
|
|
10.10 |
|
|
> 120,492 |
|
|
> 8.00 |
|
|
> 150,615 |
|
|
> 10.00 |
% |
|
Tier 1 Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares, Inc |
|
|
118,090 |
|
|
7.84 |
|
|
> 60,229 |
|
|
> 4.00 |
|
|
N/A |
|
|
|
|
|
Eurobank |
|
|
113,223 |
|
|
7.52 |
|
|
> 60,246 |
|
|
> 4.00 |
|
|
> 90,369 |
|
|
> 6.00 |
|
|
Leverage (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares, Inc |
|
|
118,090 |
|
|
6.58 |
|
|
> 71,747 |
|
|
> 4.00 |
|
|
N/A |
|
|
|
|
|
Eurobank |
|
|
113,223 |
|
|
6.31 |
|
|
> 71,766 |
|
|
> 4.00 |
|
|
> 89,708 |
|
|
> 5.00 |
|
|
As of December 31, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares, Inc |
|
$ |
117,934 |
|
|
11.60 |
% |
$ |
> 81,308 |
|
|
> 8.00 |
% |
|
N/A |
|
|
|
|
|
Eurobank |
|
|
117,614 |
|
|
11.57 |
|
|
> 81,315 |
|
|
> 8.00 |
|
|
> 101,643 |
|
|
> 10.00 |
% |
|
Tier 1 Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares, Inc |
|
|
84,400 |
|
|
8.30 |
|
|
> 40,654 |
|
|
> 4.00 |
|
|
N/A |
|
|
|
|
|
Eurobank |
|
|
75,638 |
|
|
7.44 |
|
|
> 40,657 |
|
|
> 4.00 |
|
|
> 60,986 |
|
|
> 6.00 |
|
|
Leverage (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroBancshares, Inc |
|
|
84,400 |
|
|
6.76 |
|
|
> 49,958 |
|
|
> 4.00 |
|
|
N/A |
|
|
|
|
|
Eurobank |
|
|
75,638 |
|
|
6.06 |
|
|
> 49,958 |
|
|
> 4.00 |
|
|
> 50,822 |
|
|
> 5.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity Management
Maintenance of adequate 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, we maintain a portion of our funds in cash and cash equivalents, deposits in other financial institutions and loans and securities available-for-sale. Our liquid assets at June 30, 2004 and December 31, 2003 totaled approximately $154.4 million and $144.0 million, respectively. Our
liquidity level measured as a percentage of net cash, short-term and marketable assets to net deposits and short-term liabilities was 11.6% and 15.2% as of June 30, 2004 and December 31, 2003, respectively.
As a secondary source of liquidity, we rely on advances from the FHLB to supplement our supply of lendable funds and to meet deposit withdrawal requirements. 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. Other funding alternatives available are local and United States conventional and brokered time deposits, unsecured lines of credit with correspondent banks, borrowing lines with brokers and the Federal
Reserve Bank of New York. To participate in the broker time deposits market, we must be categorized as “well capitalized” under the regulatory framework for prompt corrective action unless we obtain a waiver from the FDIC. 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. Our expansion strategies will have to be reviewed to reflect the possible limitation to funding sources and changes in cost structures. We do not foresee any changes in our capital ratios that would restrict our ability to participate in the brokered deposit market. Our target liquidity ratio established in our Liquidity Policy of liquid assets as a percentage of net deposits and short-term liabilities is 10.0%. Our liquidity demands are not seasonal and all trends have been stable over the last three years. We are not aware of any trends or demands, commitments, events or uncertainties that will
result in or that are reasonably likely to materially impair our liquidity. Generally, financial institutions determine their target liquidity ratios internally, based on the composition of their liquidity assets and their ability to participate in different funding markets that can provide the required liquidity. In addition, the local market has characteristics make it impossible to compare our liquidity needs and sources to the liquidity needs and sources of our peers in the rest of the nation. After careful analysis of the diversity of liquidity sources available to us, our asset quality and the historic stability of our core deposits, we have determined that our target liquidity ratio is adequate.
In addition to the normal influx of liquidity from core deposit growth, together with repayments and maturities of loans and investments, we utilize brokered and out-of-market certificates of deposit, FHLB borrowings and broker-dealer repurchase agreements to meet our liquidity needs. The FHLB borrowings are collateralized by first mortgage residential loans, selected investment securities and FHLB stock. Pre-approved repurchase agreement availability with major brokers and banks totaled $285.5 million at June 30, 2004, subject to acceptable unpledged marketable securities available-for-sale. In addition, Eurobank is able to borrow from the Federal Reserve Bank using securities as collateral. Eurobank also maintains pre-approved overnight borrowing lines at various correspondent banks, which provided additional
short-term borrowing capacity of $7.0 million at June 30, 2004.
During first half of 2004, asset growth was funded with growth in deposits and borrowings. The deposit growth was distributed as follows as of June 30, 2004: $57.1 million in demand deposits; $32.9 million in savings accounts; $332.0 million in time deposits of which $280.6 million was comprised of brokered deposits. The increase in the level of borrowings was primarily attributable to securities sold under agreements to repurchase of $135.0 million.
As of December 31, 2003, deposit growth was distributed as follows: $19.3 million in demand deposits; $83.6 million in savings accounts; $29.1 million in time deposits of which $13.5 million was comprised of brokered deposits. The increase in the level of borrowings was primarily attributable to securities sold under agreements to repurchase of $143.4 million. During 2003, cash inflows from operating activities exceeded cash outflows by $7.2 million.
Our net cash outflows from investment activities for the six months ended June 30, 2004 and for the year 2003 were $99.2 million and $143.1 million, respectively. The higher net investing cash outflows experienced in 2003 were primarily due to growth in the investment securities portfolio, which provided additional collateral in that year to support wholesale funding increases.
Our net cash inflows from financing activities for the six months ended June 30, 2004 and the year 2003 were $78.6 million and $154.3 million, respectively. During the first six months of 2004 and in 2003, the net financing cash inflows were primarily provided by deposit and repurchase agreements growth.
Quantitative and Qualitative Disclosures About Market Risks
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.
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 June 30, 2004, we modeled rising ramp and declining interest rate simulations in 100 basis point increments over a 12-month period. The impact of imbedded 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.
In the June 30, 2004 simulation, our model indicated an exposure in the level of net interest income to rising rates for a 12-month period. The hypothetical rate scenarios consider a change of 100 and 200 basis points during a 12-month period. The decreasing rate scenarios have a floor of 200 basis points. This floor causes liabilities to have little cost reduction, while assets do have a decrease in yields, causing a small loss in declining rate simulations of 200 basis points. At June 30, 2004, the net interest income at risk for year one in the 100 basis point falling rate scenario was calculated at $250,000, or 0.42% lower than the net interest income
in the rates unchanged scenario, and $751,000, or 1.25%, lower than the net interest income in the rates unchanged scenario at the June 30, 2004 simulation with a 200 basis point decrease. These exposures are well within our policy guidelines of 15.0%. At June 30, 2004, the net interest income for year one in the 100 basis point rising rate scenario was calculated to be $1.088 billion, or 1.81%, higher than the net interest income in the rates unchanged scenario, and $2.151 billion, or 3.58%, higher than the net interest income in the rate unchanged scenario at the June 30, 2004 simulation with a 200 basis point increase. 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 June 30, 2004:
|
|
|
Change in Future Net Interest Income |
|
|
|
At June 30, 2004 |
|
Change in Interest Rates |
|
|
Dollar Change |
|
|
Percentage Change |
|
|
|
|
(Dollars in thousands) |
|
+200 basis points over one year |
|
$ |
2,151 |
|
|
3.58 |
% |
|
+100 basis points over one year |
|
$ |
1,088 |
|
|
1.81 |
% |
|
-100 basis points over one year |
|
$ |
(250 |
) |
|
(0.42 |
)% |
|
-200 basis points over one year |
|
$ |
(751 |
) |
|
(1.25 |
)% |
| |
|
|
|
|
|
|
|
We also monitor the repricing terms of our assets and liabilities through gap matrix reports for the rates in unchanged, rising and falling interest rate scenarios. The reports illustrate, at designated time frames, the dollar amount of assets and liabilities maturing or repricing.
The following table sets forth, on a stand-alone basis, Eurobank’s amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2004, which we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. The projected repricing of assets and liabilities anticipates prepayments and scheduled rate adjustments, as well as contractual maturities under an interest rate unchanged scenario within the selected time intervals. While we believe such assumptions are reasonable, we cannot assure you that assumed repricing rates will approximate our actual future deposit activity.
|
|
|
As of June 30, 2004 Volumes Subject to Repricing Within |
|
|
|
|
0-1 Days |
|
2-180 Days |
|
181-365 Days |
|
1-3 Years |
|
Over 3 Years |
|
Non-Interest Sensitive |
|
Total |
|
|
|
|
(Dollars in thousands) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments and federal funds sold |
|
$ |
44,791 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
44,791 |
|
|
Investment securities and FHLB/ Federal Reserve Bank stock |
|
|
— |
|
|
43,650 |
|
|
23,999 |
|
|
180,863 |
|
|
222,380 |
|
|
— |
|
|
470,892 |
|
|
Loans |
|
|
— |
|
|
727,401 |
|
|
65,151 |
|
|
256,546 |
|
|
288,456 |
|
|
— |
|
|
1,337,554 |
|
|
Fixed and other assets |
|
|
— |
|
|
1,518 |
|
|
— |
|
|
— |
|
|
— |
|
|
74,591 |
|
|
76,109 |
|
|
Total assets |
|
$ |
44,791 |
|
$ |
772,569 |
|
$ |
89,150 |
|
$ |
437,409 |
|
$ |
510,836 |
|
$ |
74,591 |
|
$ |
1,929,346 |
|
| |
|
As of June 30, 2004 Volumes Subject to Repricing Within |
|
|
|
|
0-1 Days |
|
2-180 Days |
|
181-365 Days |
|
1-3 Years |
|
Over 3 Years |
|
Non-Interest Sensitive |
|
Total |
|
|
|
|
(Dollars in thousands) |
|
Liabilities and Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking, savings and money market accounts |
|
|
— |
|
|
57,669 |
|
|
— |
|
|
— |
|
|
311,626 |
|
|
132,637 |
|
|
501,932 |
|
|
Certificates of deposit |
|
|
— |
|
|
340,520 |
|
|
138,514 |
|
|
277,013 |
|
|
152,112 |
|
|
— |
|
|
908,159 |
|
|
Borrowed funds |
|
|
— |
|
|
240,209 |
|
|
13,390 |
|
|
78,819 |
|
|
68,800 |
|
|
— |
|
|
401,218 |
|
|
Other liabilities |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
17,985 |
|
|
17,985 |
|
|
Stockholders’ equity |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
100,052 |
|
|
100,052 |
|
|
Total liabilities and stockholders’ equity |
|
$ |
— |
|
$ |
638,398 |
|
$ |
151,904 |
|
$ |
355,832 |
|
$ |
532,538 |
|
$ |
250,674 |
|
$ |
1,929,346 |
|
|
Period gap |
|
$ |
44,791 |
|
$ |
134,171 |
|
$ |
(62,754 |
) |
$ |
81,577 |
|
$ |
(21,701 |
) |
|
|
|
|
|
|
|
Cumulative gap |
|
$ |
44,791 |
|
$ |
178,962 |
|
$ |
116,208 |
|
$ |
197,785 |
|
$ |
176,084 |
|
|
|
|
|
|
|
|
Period gap to total assets |
|
|
2.32 |
% |
|
6.95 |
% |
|
(3.25 |
)% |
|
4.23 |
% |
|
(1.12 |
)% |
|
|
|
|
|
|
|
Cumulative gap to total assets |
|
|
2.32 |
|
|
9.28 |
|
|
6.02 |
|
|
10.25 |
|
|
9.13 |
|
|
|
|
|
|
|
|
Cumulative interest-earning assets to cumulative interest-bearing liabilities |
|
|
N/A |
|
|
128.03 |
|
|
114.70 |
|
|
117.26 |
|
|
110.49 |
|
|
|
|
|
|
|
Certain shortcomings are inherent in the method of analysis presented in the gap table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates, both on a short-term basis and over the life of the asset. More importantly, changes in interest rates, prepayments and early withdrawal levels may deviate significantly from those assumed in the calculations in the table. As a result of these shortcomings, we focus more on earnings at risk simulation modeling than on gap analysis. Even though the gap analysis reflects a ratio of cumulative gap to total assets within acceptable limits, the
earnings at risk simulation modeling is considered by management to be more informative in forecasting future income at risk.
Finally, 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 June 30, 2004 |
|
|
|
Less than One Year |
|
One Year to Three Years |
|
Over Three Years to Five Years |
|
Over Five Years |
|
|
|
|
(In thousands) |
|
FHLB advances |
|
$ |
2,500 |
|
$ |
8,200 |
|
$ |
— |
|
$ |
— |
|
|
Junior subordinated debenture |
|
|
— |
|
|
— |
|
|
— |
|
|
46,393 |
|
|
Operating leases |
|
|
2,065,437 |
|
|
5,295,233 |
|
|
1,694,828 |
|
|
8,366,895 |
|
|
Total |
|
$ |
2,067,937 |
|
$ |
5,303,433 |
|
$ |
1,694,828 |
|
$ |
8,413,288 |
|
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 June 30, 2004 and December 31, 2003, we had commitments to extend credit of $228.8 million and $157.7 million, respectively. These commitments included standby letters of credit of $9.8 and $2.7 million, for June 30, 2004 and December 31, 2003, respectively, and commercial letters of credit of $3.0 million and $977,000 for the same periods. Starting in the fiscal year 2003, in accordance with FIN 45, it is our policy to recognize the estimated fair value of our obligations under standby letters of credit issued, which are then reduced by credits to earnings as we are released from the stand-ready risk. However, at December 31, 2003 and June 30, 2004, no obligation was recorded since the amounts were inconsequential.
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 24 — Financial Instruments with Off-Balance-Sheet Risk” to our consolidated financial statements.
Recent Accounting Pronouncements
In December 2003, the Accounting Standards Executive Committee issued Statement of Position 03-3 (SOP 03-3), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This statement addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 does not apply to loans originated by the entity. SOP 03-3 limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of
undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. SOP 03-3 prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment. SOP 03-3 prohibits “carrying over” or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this statement. The prohibition of the valuation allowance carryover applies to the purchase o
f
an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. Early adoption is encouraged. The Company elected adopt SOP 03-3 for the year ending December 31, 2005. The impact of the new accounting pronouncement cannot be reasonably estimated as it is related to future loan acquisitions.
In March 2004, the U.S. Securities and Exchange Commission released the Staff Accounting Bulletin (“SAB”) No. 105, “Loan Commitments Accounted for as Derivative Instruments.” This bulletin informs registrants of the staff’s view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The staff will not object to the application of existing accounting practices to loan commitments accounted for as derivatives that are entered into on or before March 31, 2004, with appropriate disclosures. On April 1, 2004, the Company adopted the
provisions of SAB 105, which did not have an impact on the Company’s financial condition or results of operations.
In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on the application on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The EITF reached a consensus on the impairment model to be used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The impairment model also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This impairment model is applicable for investments in debt and equity securities that are within the scope of SFAS No. 115, “
Accounting for Certain Investments in Debt and Equity Securities” and equity securities that are not subject to the scope of SFAS 115 and not accounted for under the equity method under APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” referred in Issue 03-1 as the cost method investments. The impairment model developed by the EITF to determine whether an investment is within the scope of Issue 03-1 involves a sequence of steps including the following: Step 1 - determine whether an investment is impaired. If an impairment indicator is present, as determined in Step 1, the investor should estimate the fair value of the investment. If the fair value of the investment is less than its cost, proceed with Step 2 - evaluate whether an impairment is other than temporary. Step 3 - if the impairment is other than temporary, recognize an impairment loss equal to the difference between the investment’s cost and its fair
value. The impairment model described above-used to determine other-than-temporary impairment should be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The EITF is presently evaluating deferral of certain provisions of this pronouncement. The Company is monitoring and evaluating the application of Issue 03-01 on its financial position and result of operations.
ITEM 3. 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 I, Item 2 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of June 30, 2004. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) that occurred during the six-month period ended on June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
ITEM 1. 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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Acquisition of BankTrust
On May 3, 2004, we acquired all of the capital stock of BankTrust, a Puerto Rico chartered commercial bank, through the merger of BankTrust with and into Eurobank. The aggregate purchase price was $23.4 million, and consisted of the issuance of 683,304 shares of our common stock, 433,337 shares of our Perpetual Noncumulative Preferred Stock, Series A and $6.5 million in cash. We valued the shares of our common stock issued in connection with the BankTrust acquisition at $8.13 based on a valuation performed by our independent financial advisor, Feldman Financial Advisors, Inc. We valued our Series A Preferred Stock issued in connection with the BankTrust acquisition at $25.00 per share, which is the amount of its liquidation preference. The issuance of shares of our common stock and Series A Preferred Stock was made in
reliance upon the exemption from compliance with the registration requirements contained in Section 3(a)(11) of the Securities Act of 1933, or the Securities Act, and Section 882(b)(11) of the Puerto Rico Securities Act.
Private Placement
On May 12, 2004, we completed a private placement of our common stock pursuant to which we issued 733,316 shares of our common stock at a price of $8.13 to our common stockholders and to holders of options to purchase our common stock who were not otherwise stockholders. Under the terms of the private placement, each of our existing stockholders had the right to subscribe to purchase one share of our common stock, at a price of $8.13 per share, for every 5.975 shares of our common stock that he or she owned. In addition, each holder of options to purchase our common stock who did not already own shares of our common stock was granted the right to purchase, at a price of $8.13 per share, one share of our common stock for every four shares of our common stock into which the optionholder's options would be exercisable. Each
of the common stockholders and optionholders also had the right to subscribe for additional shares of common stock that were not subscribed for by other current stockholders and optionholders pursuant to their basic subscription right. The offering was made in reliance upon the exemption from compliance with the registration requirements contained in Section 3(a)(11) of the Securities Act of 1933, or the Securities Act, and Section 882(b)(11) of the Puerto Rico Securities Act. This offering was oversubscribed; however, we only accepted subscriptions for the minimum amount we needed to fund the cash portion of the BankTrust purchase price. The net proceeds received from the private placement of our common stock were $6.0 million.
Stock Split
On June 21, 2004, our Board of Directors authorized a two-for-one common stock split in the form of a stock dividend. The dividend was distributed on July 15, 2004 to stockholders of record on July 1, 2004. All share and per share data included in this Quarterly Report on Form 10-Q has been adjusted to reflect the stock split.
Initial Public Offering
On August 11, 2004, we completed our initial public offering of 3,894,988 shares of our common stock, $0.01 par value. On September 15, 2004, we completed our initial public offering with respect to an additional 584,248 shares pursuant to an underwriters overallotment. The shares of our common stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1, No. 333-115510, that was declared effective by the Securities and Exchange Commission on August 11, 2004. On August 11, 2004, our common stock commenced trading on the Nasdaq National Market under the symbol “EUBK.” The managing underwriters in the offering were Keefe, Bruyette & Woods, UBS Investment Bank and Brean Murray & Co., Inc. All 4,479,236 shares of our common stock registered
under our Registration Statement were sold at a price of $14.00 per share.
We issued and sold 3,967,500 of the aggregate 4,479,236 shares sold in the offering. The aggregate price of the shares registered and sold by us was $55.5 million. In connection with the offering, we paid an aggregate of approximately $3.9 million in underwriting discounts and commissions to the underwriters and paid other estimated expenses of approximately $1.4 million. After deducting the underwriting discounts and commissions and the estimated offering expenses described above, we received net proceeds from the offering of approximately $50.2 million. We have invested the net proceeds from the offering in United States government securities and other short-term, investment-grade, interest-bearing instruments which have been classified as cash equivalents on the consolidated balance sheet.
Certain of our stockholders issued and sold the remaining 511,736 of the aggregate 4,479,236 shares sold in the offering. The aggregate price of the shares registered and sold by the selling stockholders was $7.2 million. The selling stockholders paid an aggregate of approximately $501,501 in underwriting discounts and commissions to the underwriters in connection with the offering. After deducting the underwriting discounts and commissions described above, the selling stockholders received net proceeds from the offering of approximately $6.7 million.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
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Exhibit Number |
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Description of Exhibit |
| 3.1 |
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Amended and Restated Certificate of Incorporation of EuroBancshares, Inc. † |
| 3.2 |
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Amended and Restated Bylaws of EuroBancshares, Inc. † |
| 4.1 |
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Specimen stock certificate representing EuroBancshares, Inc. Common Stock. † |
| 31.1 |
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Rule 13a-14(a) Certification of Chief Executive Officer. |
| 31.2 |
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Rule 13a-14(a) Certification of Chief Financial Officer. |
| 32.1 |
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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 |
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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. |
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| † |
Incorporated by reference from EuroBancshares, Inc.’s Amended Registration Statement on Form S-1 filed August 9, 2004 (Registration No. 333-115510). |
b. Reports on Form 8-K
No reports of Form 8-K were filed by the Registrant during the quarter ended June 30, 2004.
SIGNATURES
Pursuant to the requirements 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.
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EUROBANCSHARES, INC. |
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| Date: September 27, 2004 |
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By: /s/ Rafael Arrillaga Torréns, Jr. |
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Rafael Arrillaga Torréns, Jr. |
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Chairman of the Board, President and Chief Executive Officer |
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| Date: September 27, 2004 |
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By: /s/ Yadira R. Mercado |
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Yadira R. Mercado |
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Chief Financial Officer |
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