EuroBancshares, Inc. Reports Financial Results for the Fourth Quarter and Year Ended December 31, 2008

Fri. February 27, 2009; Posted: 09:30 AM

Net Income

EuroBancshares reported a net loss of $11.3 million, or $(0.62) per diluted share, for the year ended December 31, 2008, compared with a net income of $3.2 million, or $0.13 per diluted share, for the year ended December 31, 2007. Net loss for the quarter ended December 31, 2008 was $7.7 million, or $(0.41) per diluted share, compared with a net loss of $788,000, or $(0.05) per diluted share, and a net income of $502,000, or $0.02 per diluted share, for the quarters ended September 30, 2008 and December 31, 2007, respectively.

For the year ended December 31, 2008, Return on Average Assets (ROAA) and Return on Average Common Equity (ROAE) were (0.40)% and (7.16)%, respectively, compared to 0.13% and 1.96% for fiscal year 2007.

ROAA for the fourth quarter of 2008 was (1.11)%, compared to (0.11)% and 0.08% for the quarters ended September 30, 2008 and December 31, 2007, respectively. ROAE for the fourth quarter of 2008 was (21.79)%, compared to (2.09)% and 1.20% for the quarters ended September 30, 2008 and December 31, 2007, respectively.

Financial results for the quarter and year ended December 31, 2008 when compared to the quarter and year ended December 31, 2007 were predominantly impacted by an increase of $9.6 million and $17.0 million in the provision for loan and lease losses, respectively. These increases were primarily related to our commercial and construction loan portfolios, which reported further deterioration due to current economic conditions requiring some of them to be classified as impaired loans under SFAS No. 114 or an increase in their specific allowances.

Rafael Arrillaga-Torrens, Jr., Chairman of the Board, President and Chief Executive Officer said, "Our results for the fourth quarter and year ended December 31, 2008 continue to be disappointing and are a reflection of the deterioration of the Puerto Rico and US economies. Because the economic climate continues to have an adverse effect on our customer base, delinquencies and non-performing loans have increased resulting in a corresponding increase in our provision for loan losses. Despite these challenges, the delinquency in our leasing department continues to stabilize and repossessed units in inventory continue to decline."

"We continue to be aggressive in our response to this increasingly difficult economic environment and we are actively implementing new strategies in preparation of the challenges that lie ahead. In particular, we have taken specific steps to reduce and control our operating expenses through decreases in annual bonuses to employees, reductions in work force, and our review of professional and other service contracts. We have also taken measures to improve our loan pricing and spreads through the establishment of floors, increased pricing on renewals, deposit requirements and compensating balances. Our collections department has been restructured and additional experienced personnel have been hired to enhance our ability to successfully resolve problem credits. We expect that these proactive initiatives will position our organization to endure the current recession and emerge in a position to take advantage of opportunities in future economic recovery."

Net Interest Income

Total interest income for the fourth quarter of 2008 was $35.8 million, compared to $40.2 million for the previous quarter and $44.3 million for the quarter ended December 31, 2007. For the year ended December 31, 2008, total interest income amounted to $159.0 million, compared to total interest income of $173.3 million for fiscal year 2007. The decrease during the quarter ended December 31, 2008 when compared to the previous quarter was mainly driven by the combined effect of decreased loan yields resulting from an interest rate cut of 100 basis points in October 2008 followed by another reduction of 75 basis points in December 2008 accompanied by a $32.5 million decrease in average net loans and the effect caused by a $49.0 million increase in nonaccrual loans. During the quarter and year ended December 31, 2008, the average interest yield on a fully taxable equivalent basis earned on net loans decreased to 5.60% and 6.45%, respectively, compared to 6.51% for the previous quarter, and 7.91% and 8.13% for the quarter and year ended December 31, 2007, respectively. Average net loans amounted to $1.762 billion and $1.803 billion for the quarter and year ended December 31, 2008, respectively, compared to $1.795 billion for the previous quarter, and $1.823 billion and $1.781 billion for the quarter and year ended December 31, 2007, respectively. The amount of interest income we ceased to accrue on nonaccrual loans amounted to $3.1 million and $8.1 million during the quarter and year ended December 31, 2008, respectively, compared to $1.6 million during previous quarter and the quarter ended December 31, 2007, and $5.5 million for year 2007.

Total interest expense for the quarter ended December 31, 2008 was $24.2 million, compared to $24.5 million and $28.1 million for the previous quarter and the quarter ended December 31, 2007, respectively. For the year ended December 31, 2008, total interest expense was $101.7 million, compared to total interest expense of $105.5 million for prior fiscal year. The decrease during the quarter ended December 31, 2008 when compared to the previous quarter resulted from the combined effect of a net decrease in the cost of funds and a decrease in average interest-bearing liabilities. During the quarter and year ended December 31, 2008, the average interest rate on a fully taxable equivalent basis paid for interest-bearing liabilities decreased to 4.37% and 4.62%, respectively, from 4.43% for the previous quarter, and 5.47% and 5.44% for the quarter and year ended December 31, 2007, respectively. Average interest-bearing liabilities amounted to $2.488 billion and $2.476 billion for the quarter and year ended December 31, 2008, respectively, compared to $2.494 billion for the previous quarter, and $2.302 billion and $2.172 billion for the quarter and year ended December 31, 2007, respectively. We did not call back any brokered deposits during the fourth quarter of 2008.

For the quarter and year ended December 31, 2008, net interest margin on a fully taxable equivalent basis was 2.00% and 2.33%, respectively, compared to 2.57% for the previous quarter, and 2.58% and 2.80% for the quarter and year ended December 31, 2007, respectively. Net interest spread on a fully taxable equivalent basis for the fourth quarter and year ended December 31, 2008 was 1.71% and 1.99%, respectively, compared to 2.26% for the previous quarter, and 2.10% and 2.29% for the quarter and year ended December 31, 2007, respectively.

The decreases in net interest margin and net interest spread during the quarter ended December 31, 2008 when compared to the previous quarter were mainly caused by decreased yields from interest rate cuts accompanied by decreased average balance on net loans and an increase in nonaccrual loans, as previously mentioned, which outpaced the reduction in interest rate paid and average balance of interest-bearing liabilities.

Provision for Loan and Lease Losses

The provision for loan and lease losses for the quarter and year ended December 31, 2008 was $16.5 million and $42.3 million, respectively, or 193.87% and 146.86% of net charge-offs, compared to $6.9 million and $25.3 million, or 141.18% and 156.97% of net charge-offs, for the quarter and year ended December 31, 2007, and $8.0 million, or 177.61% of net charge-offs, for the quarter ended September 30, 2008. These increases in the provision for loan and lease losses were primarily related to our commercial and construction loan portfolios, which reported further deterioration due to current economic conditions resulting in higher credit losses and increased specific allowances on impaired loans, as previously mentioned. As of December 31, 2008, there were $264.2 million in impaired loans with a related specific allowance of $22.4 million, compared to $84.4 million in impaired loans as of December 31, 2007, which had specific allowances amounting to $9.5 million.

The provision for loan and lease losses is part of the continuous evaluation of the allowance for loans and lease losses. The periodic evaluation of the allowance for loan and lease losses considers the level of net charge-offs, nonperforming loans, delinquencies, related loss experience and overall economic conditions. More details are discussed further in the Loans and Asset Quality and Delinquency sections of this document.

Non-Interest Income

Non-interest income for the fourth quarter and year ended December 31, 2008 was $2.2 million and $11.5 million, respectively, compared to $2.4 million and $8.7 million for the quarter and year ended December 31, 2007. These changes were mainly due to the net effect of:

    (i)    a $1.1 million increase in gain on sale of loans for the year ended
           December 31, 2008, resulting from a $1.2 million gain on sale of
           $37.7 million of lease financing contracts in March 2008;
    (ii)   a $811,000 increase in service charges for the year ended December
           31, 2008, mainly due to the recording in June 2008 of $596,000 in
           income related to the partial redemption of Visa, Inc. shares of
           stock as part of a series of transactions arising out of the
           restructuring of Visa, Inc. to become a public company; and also,
           to a year-to-date increase of $186,000 in service charges on
           deposits accounts, mainly from increases in ATM and POS fees from a
           change in the fee structure during the first quarter of 2008;
    (iii)  a $197,000 and $596,000 net loss on sale of repossessed assets for
           the quarter and year ended December 31, 2008, respectively,
           compared to a net loss of $132,000 and $1.3 million for the quarter
           and year ended December 31, 2007.  More details on repossessed
           assets are discussed in the Loan and Asset Quality section below;
           and
    (iv)   a year-to-date $191,000 gain on sale of securities resulting from
           the sale of $18.9 million in investment securities sold during
           third quarter of 2008 in an effort to improve our net interest
           margin.

During the fourth quarter of 2008, non-interest income decreased to $2.2 million at December 31, 2008, from $2.4 million in the previous quarter. This decrease was mainly due to the net effect of:

    (i)    a $179,000 decrease in service charges during the fourth quarter of
           2008 mainly related to a $68,000 decrease in non-sufficient funds
           charges, primarily because of a decrease in the overdrafts' average
           balance, and a $29,000 decrease in credit card renewal fees, which
           were recorded during the previous quarter;
    (ii)   a $197,000 net loss on sale of repossessed assets for the quarter
           ended December 31, 2008, compared to a net loss of $280,000 for the
           previous quarter.  More details on repossessed assets are discussed
           in the Loan and Asset Quality section below; and
    (iii)  a $191,000 gain on the sale of $18.9 million in investment
           securities sold during third quarter of 2008, as previously
           mentioned.

Non-Interest Expense

Non-interest expense for the quarter and year ended December 31, 2008 was $11.6 million and $50.9 million, respectively, compared to $11.5 million and $48.2 million for the quarter and year ended December 31, 2007. On a linked-quarter basis, non-interest expense remained relatively stable, while year-to-date increase was mainly due to the net effect of:

    (i)    a $197,000 increase in salaries for the year ended December 31,
           2008 when compared to the fiscal year 2007, mainly from a decrease
           in deferred loan origination costs because of a reduction in loan
           originations during the year;
    (ii)   an increase of $515,000 in occupancy and equipment expenses for the
           year ended December 31, 2008 when compared to the year 2007, mainly
           related to a $124,000 increase in equipment maintenance, a $96,000
           increase in utilities, and a $265,000 increase in security
           services, primarily attributable to the expansion of our branch
           network;
    (iii)  a $958,000 increase in professional services for the year ended
           December 31, 2008 when compared to the year 2007, which was mainly
           due to the net effect of: an increase of $563,000 related to the
           information technology outsourcing agreement entered with
           Telefonica Empresas ("TE") in August 2007; a $214,000 increase in
           professional fees mainly related to internal audit outsourcing fees
           and other management consulting services; a decrease of $120,000 in
           legal fees; and a $188,000 increase in regulatory examination fees
           as a consequence of our asset growth.  In connection with the TE
           outsourcing agreement, during the year ended December 31, 2008, the
           Bank experienced a reduction of $589,000 in related salaries
           and employee benefits and achieved estimated savings of $416,000 in
           other operational costs, all transferred to TE.
    (iv)   a $1.2 million increase in insurance expense for the year ended
           December 31, 2008, mainly related to the FDIC's new insurance
           premium assessment, which, during fiscal year 2007, was net of a
           one time assessment credit of $669,000;
    (v)    a decrease of $611,000 in promotional expenses for the year ended
           December 31, 2008, mainly because of a cost reduction strategy; and
    (vi)   a $385,000 increase in other expenses for the year ended December
           31, 2008, mainly due to the net effect of: a $543,000 increase in
           merchant commissions and ATM services fees, primarily from a change
           in the fee structure, as previously mentioned; a $238,000 decrease
           in other miscellaneous expenses mainly resulting from a boat's
           insurance claim recovery; a $193,000 increase in municipal taxes
           because of an increase in the gross income of our banking
           subsidiary; and a $92,000 decrease in office supplies as part of a
           cost reduction strategy.

During the fourth quarter of 2008, the Company's non-interest expense decreased to $11.6 million, from $13.5 million for the previous quarter. Such decrease was mainly due to the net effect of:

    (i)    a $1.0 million decrease in salaries resulting mainly from a
           decrease in the bonus expense;
    (ii)   a decrease of $159,000 in occupancy and equipment expenses mainly
           related to a $100,000 decrease in utilities and a $24,000 decrease
           in security services;
    (iii)  a $152,000 increase in professional services mainly related to a
           $87,000 increase in legal fees and a $46,000 increase in other
           professional fees;
    (iv)   a decrease of $113,000 in insurance expense mainly attributable to
           an adjustment in the FDIC's insurance premium assessment recorded
           during the previous quarter; and
    (v)    a $757,000 decrease in other expenses mainly due to the combined
           effect of: a $500,000 recovery on a boat's insurance claim, as
           previously mentioned, and a $130,000 decrease in the valuation
           allowance on repossessed boats, mainly because of the extraordinary
           market reevaluation of a single slow-moving boat recorded during
           the previous quarter.

Income Tax Expense

Puerto Rico income tax law does not provide for the filing of a consolidated tax return; therefore, the income tax expense reflected in our consolidated income statement is the sum of our income tax expense and the income tax expenses of our individual subsidiaries. Our revenues are generally not subject to U.S. federal income tax.

For the quarter and year ended December 31, 2008, we recorded an income tax benefit of $6.6 million and $13.2 million, respectively, compared to an income tax benefit of $218,000 and $249,000 for the same periods in 2007. Our income tax benefit for the quarter and year ended December 31, 2008 resulted mainly from a deferred tax benefit of $6.6 million and $12.9 million, respectively, as explained further below.

Our current income tax expense for the quarter and year ended December 31, 2008 decreased to $40,000 and $52,000, respectively, from $602,000 and $4.4 million for the same periods in 2007. Decreases in our current income tax expense during the year ended December 31, 2008 were mainly due to a taxable loss primarily related to: (i) a loss before income taxes of $14.3 million and $24.5 million for the quarter and year ended December 31, 2008, respectively, compared to an income before taxes of $284,000 and $3.0 million for the same periods in 2007; and (ii) an increase in the exempt income as a percentage of total income during 2008.

Our deferred tax benefit for the quarter and year ended December 31, 2008 increased to $6.6 million and 12.9 million, respectively, from $820,000 and $4.6 million for the same periods in 2007. Increases during the year ended December 31, 2008 were mainly due to the combined effect of: (i) an increase of $7.1 million in the deferred tax asset related to the net operating loss ("NOL") carryforward from the taxable loss in our banking subsidiary; and (ii) a year-to-date increase of $5.8 million in the other net deferred tax assets primarily from an increase in our allowance for loan and lease losses.

In addition, the income tax benefit for the quarter and year ended December 31, 2008, included an income tax benefit of $14,000 and $334,000, respectively, related to tax credits received from Puerto Rico's Treasury Department in excess of the amount paid on transactions under the law No. 197. This law, signed on December 14, 2007, offers tax credits to the financial institutions on the financing of qualified residential mortgages.

As of December 31, 2008, we had net deferred tax assets of $23.8 million, compared to $10.9 million as of December 31, 2007. This increase in our net deferred tax assets was mainly attributable to the NOL carryforward in our banking subsidiary and the increase in our allowance for loan and lease losses, as previously mentioned. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax assets; projected future taxable income; our compliance with the Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes; and tax planning strategies in making this assessment. We believe it is more likely than not that the benefits of these deductible differences as of December 31, 2008 will be realized.

Balance Sheet Summary and Asset Quality Data

Assets

Total assets increased to $2.860 billion as of December 31, 2008, from $2.751 billion as of December 31, 2007. This increase was mainly due to the net effect of:

    (i)    an increase of $27.4 million in cash and due from banks;
    (ii)   a $31.9 million decrease in interest bearing deposits;
    (iii)  an increase of $44.5 million in FED funds sold;
    (iv)   a $147.4 million increase in the investment securities portfolio;
           and
    (v)    a decrease of $88.0 million in net loans, including the $37.7
           million sale of lease financing contracts in March 2008, as
           previously mentioned.

Details on investment securities and loan portfolio variances are discussed further below.

Investments

During 2008, our investment portfolio increased by approximately $147.4 million to $898.7 million, from $751.3 million as of December 31, 2007. This increase was primarily due to the net effect of:

    (i)    the purchase of $464.8 million in mortgage-backed securities, FHLB
           obligations, Puerto Rico government agencies obligations, and a
           corporate note;
    (ii)   prepayments of approximately $137.8 million on mortgage-backed
           securities and FHLB obligations;
    (iii)  $144.8 million in US government agencies, PR bonds, and private
           label collateral mortgage obligations that matured or were called-
           back during the year;
    (iv)   the sale of $10.0 million in a US agencies note, and $8.9 million
           in a US agencies mortgage-backed security, both sold in an effort
           to improve our net interest margin, as previously mentioned; and
    (v)    a decrease of $13.5 million in the market valuation on securities
           available for sale.

During 2008, we have been analyzing different market opportunities to reposition our investment portfolio in an attempt to improve its average yield and to maintain an adequate average life. During 2008, we were able to purchase approximately $464.8 million in mortgage-backed securities, FHLB obligations, Puerto Rico government agencies obligations, and a corporate note, all with an estimated average life of approximately 5.0 years and an estimated average yield of 5.4%. Purchased mortgage-backed securities totaled $408.1 million and included approximately $167.5 million in mortgage back securities issued by US government agencies and by US government sponsored enterprises, $127.0 million in collateralized mortgage obligations guaranteed by US government agencies and by US government sponsored enterprises, and $113.6 million in private label collateral mortgage obligations with FICO scores and loan-to-values similar to FNMA and FHLMC underwriting standards and characteristics.

For the year ended December 31, 2008, after the above-mentioned transactions, the estimated average maturity of the investment portfolio was approximately 5.7 years and the average yield was approximately 5.2%, compared to an estimated average maturity of 4.8 years and an average yield of 5.06% for prior fiscal year.

The company reviewed the investment portfolio as of December 31, 2008 using models on the SFAS No. 115, Accounting for Certain Investments in Debt and Equity, and the EITF 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, for applicable securities. During the review, the company found seventeen securities with characteristics that require a detailed analysis. One security for $1.1 million is a non-rated Trust Preferred Stock ("TPS") and sixteen private label mortgage-backed securities ("MBS") amounting to $44.4 million that have mixed credit ratings or other special characteristics. For the TPS, the company reviewed the current performance of the security and the current financial position of the issuer. For each one of the MBS, the company reviewed the collateral performance and determined that, as of December 31, 2008, it was estimated that the present value of all expected cash flows of these investments is at or above their book value. Some of the analysis performed to the downgraded mortgage-backed securities included: (i) the calculation of their coverage ratios; (ii) current credit support; (iii) total delinquency over sixty days; (iv) average loan-to-values; (v) projected defaults considering a conservative additional downside scenario of (5)% in Housing Price Index values for each of the following 3 years; (vi) a mortgage loan Conditional Prepayment Rate ("CPR") speed equal to approximately the last six months average for each security; (vii) projected loss deal based on the previous conservative assumptions; (viii) excess protection; (ix) projected tranche dollar loss; and (x) projected tranche percentage loss and economic value. These analyses were performed taking into consideration current U.S. market conditions, forward projected cash flows and the present value of the forward projected cash flows. Based on this assessment, the company concluded that no other than temporary impairment needs to be recorded for this reporting period.

Loans

Total loans, net of unearned interest, decreased by $74.5 million, or 4.01%, to $1.784 billion as of December 31, 2008, from $1.859 billion as of December 31, 2007. This decrease was mainly due to the net effect of:

    (i)    a $118.1 million, or 30.64% decrease in lease financing contracts
           from $385.4 million as of December 31, 2007 to $267.3 million as of
           December 31, 2008;
    (ii)   a $20.0 million, or 1.83% increase in commercial loans, from $1.095
           billion as of December 31, 2007 to $1.115 billion as of December
           31, 2008;
    (iii)  a $19.1 million, or 17.66% increase in residential mortgages, from
           $108.3 million as of December 31, 2007 to $127.4 million as of
           December 31, 2008; and
    (iv)   a $17.2 million, or 8.48% increase in construction loans, from
           $203.3 million as of December 31, 2007 to $220.6 million as of
           December 31, 2008.

The $118.1 million decrease in lease financing contracts includes the sale of $37.7 million in March 2008, as previously mentioned. Occasionally, we sell lease financing contracts on a limited recourse basis to other financial institutions and, typically, we retain the right to service the leases we sold. The rest of the decrease was mainly because of repayments and a reflection of decreased originations resulting from tightened underwriting standards and our decision to strategically pare back our automobile leasing business because of the economy deceleration.

The $20.0 million increase in commercial loans resulted from a $59.2 million increase in commercial loans secured by real estate, net of a $39.2 million decrease in other commercial loans. As of December 31, 2008, commercial loans secured by real estate equaled $851.5 million, or 76.38% of total commercial loans.

The $17.2 million increase in construction loans secured by real estate resulted from disbursements on loan commitments we made during or before fiscal year 2007, which were primarily related to loans for the construction of residential multi-family projects that, although private, are moderately priced or of the affordable type supported by government assisted programs, and other loans for land development and the construction of commercial real estate property. We did not grant any new construction loans during the year ended December 31, 2008.

Asset Quality and Delinquency

Non-performing assets, which consist of loans 90 days or more past due and still accruing interest, loans and leases on nonaccrual status, other real estate owned ("OREO"), and other repossessed assets, amounted to $177.4 million as of December 31, 2008, compared to $175.2 million and $111.6 million as of September 30, 2008 and December 31, 2007, respectively.

Non-performing loans, which are comprised of loans 90 days or more past due and still accruing interest, and loans and leases on nonaccrual status, amounted to $163.9 million as of December 31, 2008, compared to $162.7 million as of September 30, 2008 and $98.1 million as of December 31, 2007, respectively. Although non-performing loans remained relatively stable when compared to the previous quarter, there was a $47.8 million decrease in loans over 90 days still accruing and a $49.0 million increase in loans placed in nonaccrual status. However, not all of the $47.8 million decrease in loans over 90 days still accruing became nonaccrual as of the year-end. During the fourth quarter of 2008, commercial loans over 90 days still accruing decreased by $41.5 million, while commercial loans placed in nonaccrual status only increased by $27.5 million, which reflects that most of the remaining $13.9 million decrease in commercial loans over 90 days still accruing became less delinquent during the fourth quarter of 2008. On the other hand, during the same period, there was an $8.1 million decrease in construction loans over 90 days still accruing, while construction loans placed in nonaccrual status increased by $21.3 million.

Although not under the original contractual terms, some of the $163.9 million in non-performing loans as of December 31, 2008 continued receiving payments during the year. During 2008, a total of $13.3 million in payments were received from customers in non-performing status as of year-end.

As of December 31, 2008, repossessed assets amounted to $13.5 million, compared to $12.4 million and $13.5 million as of September 30, 2008 and December 31, 2007, respectively. The increase during the quarter ended December 31, 2008 when compared to the previous quarter was attributable to the net effect of:

    (i)    a $1.6 million increase in OREO resulting from the net effect of
           the sale of 2 properties and the foreclosure of 4 properties.
    (ii)   a decrease of $571,000 in other repossessed assets, mainly
           comprised of a $798,000 decrease in the inventory of repossessed
           vehicles and an increase of $232,000 in the inventory of
           repossessed boats.  During the quarter ended December 31, 2008, we
           sold 376 vehicles and repossessed 339 vehicles, respectively,
           decreasing our inventory of repossessed vehicles to 297 units as of
           December 31, 2008, from 334 units as of September 30, 2008.  During
           the same period, we sold 4 boats and repossessed 6 boats,
           respectively, increasing our inventory of repossessed boats to 15
           units as of December 31, 2008, from 13 units as of September 30,
           2008.

Net charge-offs as a percentage of average loans was 1.89% and 1.57% for the quarter and year ended December 31, 2008, respectively, compared to 0.98% for the previous quarter, and 1.05% and 0.90% for the quarter and year ended December 31, 2007.

Net charge-offs for the quarter ended December 31, 2008 were $8.5 million, compared to $4.5 million and $4.9 million for the quarters ended September 30, 2008 and December 31, 2007, respectively. Net charge-offs for the quarter ended December 31, 2008, compared to the quarters ended September 30, 2008 and December 31, 2007 were as follows:

    (i)    $2.1 million in net charge-offs on loans partially secured by real
           estate for the quarter ended December 31, 2008, compared to
           $418,000 and $159,000 for the quarters ended September 30, 2008 and
           December 31, 2007, respectively;
    (ii)   $3.3 million in net charge-offs on other commercial and industrial
           loans for the fourth quarter of 2008, compared to $451,000 and $1.4
           million for the quarters ended September 30, 2008 and December 31,
           2007, respectively;
    (iii)  $397,000 in net charge-offs on consumer loans for the fourth
           quarter of 2008, compared to $324,000 and $385,000 for the quarters
           ended September 30, 2008 and December 31, 2007, respectively;
    (iv)   $2.7 million in net charge-offs on lease financing contracts for
           the fourth quarter of 2008, compared to $3.3 million and $2.8
           million for the quarters ended September 30, 2008 and December 31,
           2007, respectively; and
    (v)    $13,000 in net charge-offs on other loans for the fourth quarter of
           2008, compared to $22,000 and $48,000 in net charge-offs for the
           quarters ended September 30, 2008 and December 31, 2007,
           respectively.

Net charge-offs for the year ended December 31, 2008 were $28.8 million, compared to $16.1 million for the previous fiscal year. Net charge-offs for the year ended December 31, 2008, compared to the previous fiscal year were as follows:

    (i)   $8.7 million in net charge-offs on loans partially secured by real
           estate for the year ended December 31, 2008, compared to $320,000
           for the previous fiscal year;
    (ii)  $6.7 million in net charge-offs on other commercial and industrial
           loans for the year ended December 31, 2008, compared to $2.8
           million for the previous fiscal year;
    (iii) $1.8 million in net charge-offs on consumer loans for the year
           ended December 31, 2008, compared to $1.4 million for the previous
           fiscal year;
    (iv)   net charge-offs on lease financing contracts remained at $11.3
           million for the year ended December 31, 2008, when compared to the
           previous fiscal year; and
    (v)    $259,000 in net charge-offs on other loans for the year ended
           December 31, 2008, compared to $375,000 in net charge-offs for the
           previous fiscal year.

This increases in net charge-offs were mainly attributable to the deterioration in our commercial and construction loans portfolio, as previously mentioned.

As of December 31, 2008, loans between 30 and 89 days past due and still accruing interest amounted to $126.1 million, compared to $87.5 million and $92.1 million as of September 30, 2008 and December 31, 2007, respectively. Changes in loans between 30 and 89 days past due and still accruing interest during the fourth quarter of 2008 when compared to the previous quarter include:

    (i)    an increase of $22.0 million in commercial loans, of which $5.5
           million were impaired loans with related total allowances amounting
           to $587,000;
    (ii)   a $14.9 million increase in construction loans, mainly related to
           two SFAS No. 114 impaired loans of a single business relationship
           amounting to $14.3 million with a related specific allowance of
           $56,000;
    (iii)  an increase of $2.3 million in marine loans; and
    (iv)   a $2.3 million decrease in leases.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses was $41.6 million as of December 31, 2008, compared to $33.6 million and $28.1 million as of September 30, 2008 and December 31, 2007, respectively. The allowance for loan and lease losses was affected by net charge-offs, nonperforming loans, loan portfolio balance, and also by the provision for loan and lease losses for each related period, as previously mentioned.

For the general portion of our allowance, we follow a consistent procedural discipline and account for loan and lease loss contingencies in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies. Also, another component is used in the evaluation of the adequacy of our general allowance to measure the probable effect that current internal and external environmental factors could have on the historical loss factors currently in use. In addition to our general portfolio allowances, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate a high probability that a loss have been incurred. These specific allowances are determined following a consistent procedural discipline in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS No. 114"), as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.

We believe that the allowance for loan and lease losses is adequate and it represents 2.33% of total loans as of December 31, 2008.

Deposits and Borrowings

As of December 31, 2008, total deposits amounted to $2.084 billion, compared to $1.993 billion as of December 31, 2007. This $91.3 million increase was mainly concentrated in broker deposits, jumbo and regular time deposits. During fiscal year 2008, the fierce competition for local deposits continued. In an effort to control increases in our funding cost, we focused on other funding alternatives, including the replacement of called-back broker deposits during the first three quarters of 2008, and attracting other time deposits from the US national markets at lower competitive rates.

Stockholders' Equity

The Company's stockholders' equity decreased to $156.6 million as of December 31, 2008, from $179.9 million as of December 31, 2007, representing a decrease of 12.98%. Besides losses and earnings from operations, which amounted to a $11.3 million net loss and a $3.2 million net income for the years ended December 31, 2008 and 2007, respectively, the stockholders' equity was impacted by an accumulated other comprehensive loss of $12.4 million as of December 31, 2008, compared to an accumulated other comprehensive income of $1.1 million as of December 31, 2007. In addition, the following items also impacted the Company's stockholders' equity:

    (i)    the exercise of 250,862, 4,000, 50,000 and 357,000 stock options in
           February 2007, July 2007, January 2008 and March 2008,
           respectively, for a total of $3.2 million;
    (ii)   the repurchase of 285,368 shares for $2.5 million during the second
           and third quarters of 2007 in connection with a stock repurchase
           program approved by the Board of Directors on May 31, 2007; and
    (iii)  the repurchase of 800 unvested restricted shares from former
           employees during the third quarter of 2008, for a total of $6,504.
           These restricted shares were originally granted in April 2004.

As of December 31, 2008, we and Eurobank both qualified as "well-capitalized" institutions under the regulatory framework for prompt corrective action. As of December 31, 2008, our leverage, Tier 1 and total risk-based capital ratios were 6.55%, 8.99% and 10.25%, respectively, compared to 6.89%, 9.52% and 10.78% as of the previous quarter. We continue evaluating opportunities to increase our capital position.

About EuroBancshares, Inc.

EuroBancshares, Inc. is a diversified financial holding company headquartered in San Juan, Puerto Rico, offering a broad array of financial services through its wholly-owned banking subsidiary, Eurobank; EBS Overseas, Inc., an international banking entity subsidiary of Eurobank; and its wholly-owned insurance agency, EuroSeguros.

Forward-Looking Statements

Statements concerning future performance, events, expectations for growth and market forecasts, and any other guidance on future periods, constitute forward-looking statements that are subject to a number of risks and uncertainties that might cause actual results to differ materially from stated expectations. Specific factors include, but are not limited to, loan volumes, the ability to expand net interest margin, loan portfolio performance, the ability to continue to attract low-cost deposits, success of expansion efforts, competition in the marketplace and general economic conditions. The financial information contained in this release should be read in conjunction with the consolidated financial statements and notes included in EuroBancshares' most recent reports on Form 10-K and Form 10-Q, as filed with the Securities and Exchange Commission as they may be amended from time to time. Results of operations for the most recent quarter are not necessarily indicative of operating results for any future periods. Any projections in this release are based on limited information currently available to management, which is subject to change. Although any such projections and the factors influencing them will likely change, the bank will not necessarily update the information, since management will only provide guidance at certain points during the year. Such information speaks only as of the date of this release. Additional information on these and other factors that could affect our financial results are included in filings by EuroBancshares with the Securities and Exchange Commission.

EUROBANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) For the three-month periods ended December 31, 2008 and 2007 and September 30, 2008, and years ended December 31, 2008 and 2007 Three Months Ended ------------------ December 31, December 31, September 30, 2008 2007 2008 ---- ---- ---- Interest income: Loans, including fees $24,445,799 $35,703,774 $28,963,623 Investment securities: Taxable 1,967 2,694 2,375 Exempt 11,171,821 7,865,189 10,939,820 Interest bearing deposits, securities purchased under agreements to resell, and other 158,384 755,537 344,071 --------- --------- --------- Total interest income 35,777,971 44,327,194 40,249,889 ------------ ------------ ------------ Interest expense: Deposits 18,875,032 22,685,755 19,252,420 Securities sold under agreements to repurchase, notes payable, and other 5,316,923 5,398,934 5,226,505 ----------- ----------- ----------- Total interest expense 24,191,955 28,084,689 24,478,925 ------------ ------------ ------------ Net interest income 11,586,016 16,242,505 15,770,964 Provision for loan and lease losses 16,514,000 6,881,000 7,980,000 ------------ ----------- ----------- Net interest (expense) income after provision for loan and lease losses (4,927,984) 9,361,505 7,790,964 ------------ ----------- ----------- Noninterest income: Service charges - fees and other 2,287,486 2,401,774 2,466,422 Net gain on sale of securities - - 190,956 Net loss on sale of repossessed assets and on disposition of other assets (196,892) (131,980) (279,595) Gain on sale of loans 67,805 140,478 47,726 -------- --------- -------- Total noninterest income 2,158,399 2,410,272 2,425,509 ----------- ----------- ----------- Noninterest expense: Salaries and employee benefits 4,088,565 4,041,718 5,102,149 Occupancy, furniture and equipment 2,777,297 2,858,220 2,936,293 Professional services 1,560,831 1,177,205 1,408,797 Insurance 857,614 456,264 970,878 Promotional 147,463 366,469 153,458 Other 2,128,525 2,588,351 2,885,356 ----------- ----------- ----------- Total noninterest expense 11,560,295 11,488,227 13,456,931 ------------ ------------ ------------ (Loss) income before income taxes (14,329,880) 283,550 (3,240,458) Income tax benefit (6,615,433) (218,428) (2,452,507) ------------ ---------- ------------ Net (loss) income $(7,714,447) $501,978 $(787,951) ============= ========== =========== Basic (loss) earnings per share $(0.41) $0.02 $(0.05) ======== ======= ======== Diluted (loss) earnings per share $(0.41) $0.02 $(0.05) ======== ======= ======== Years Ended December 31, ------------------------ 2008 2007 ---- ---- Interest income: Loans, including fees $115,273,672 $143,360,450 Investment securities: Taxable 9,572 12,152 Exempt 42,425,867 26,946,714 Interest bearing deposits, securities purchased under agreements to resell, and other 1,301,093 3,005,875 ----------- ----------- Total interest income 159,010,204 173,325,191 ------------- ------------- Interest expense: Deposits 80,509,682 84,675,999 Securities sold under agreements to repurchase, notes payable, and other 21,206,699 20,794,338 ------------ ------------ Total interest expense 101,716,381 105,470,337 ------------- ------------- Net interest income 57,293,823 67,854,854 Provision for loan and lease losses 42,313,800 25,348,000 ------------ ------------ Net interest income after provision for loan and lease losses 14,980,023 42,506,854 ------------ ------------ Noninterest income: Service charges - fees and other 10,395,736 9,584,533 Net gain on sale of securities 190,956 - Net loss on sale of repossessed assets and on disposition of other assets (595,966) (1,285,958) Gain on sale of loans 1,467,668 379,622 ----------- --------- Total noninterest income 11,458,394 8,678,197 ------------ ----------- Noninterest expense: Salaries and employee benefits 20,087,767 19,890,373 Occupancy, furniture and equipment 11,414,201 10,898,988 Professional services 5,453,867 4,496,283 Insurance 3,111,260 1,865,353 Promotional 881,594 1,492,240 Other 9,966,305 9,581,605 ----------- ----------- Total noninterest expense 50,914,994 48,224,842 ------------ ------------ (Loss) Income before income taxes (24,476,577) 2,960,209 Income tax benefit (13,207,948) (248,874) ------------- ---------- Net income (loss) $(11,268,629) $3,209,083 ============== ============ Basic (loss) earnings per share $(0.62) $0.13 ======== ======= Diluted (loss) earnings per share $(0.62) $0.13 ======== ======= EUROBANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) December 31, 2008 and December 31, 2007 Assets 2008 2007 ---- ---- Cash and due from banks $43,275,239 $15,866,221 Interest bearing deposits 400,000 32,306,909 FED funds sold 44,470,925 - Securities purchased under agreements to resell 24,486,774 19,879,008 Investment securities available for sale 751,016,565 707,103,432 Investment securities held to maturity 132,798,181 30,845,218 Other investments 14,932,400 13,354,300 Loans held for sale 1,873,445 1,359,494 Loans, net of allowance for loan and lease losses of $41,639,051 in 2008 and $28,137,104 in 2007 1,740,539,113 1,829,082,008 Accrued interest receivable 14,614,445 18,136,489 Customers' liability on acceptances 405,341 430,767 Premises and equipment, net 34,466,471 33,083,169 Other assets 57,150,024 49,951,898 ------------ ------------ Total assets $2,860,428,923 $2,751,398,913 ================ ================ Liabilities and Stockholders' Equity Deposits: Noninterest bearing $108,645,242 $120,082,912 Interest bearing 1,975,662,802 1,872,963,402 --------------- --------------- Total deposits 2,084,308,044 1,993,046,314 Securities sold under agreements to repurchase 556,475,000 496,419,250 Acceptances outstanding 405,341 430,767 Advances from Federal Home Loan Bank 15,398,041 30,453,926 Note payable to Statutory Trust 20,619,000 20,619,000 Accrued interest payable 16,073,737 17,371,698 Accrued expenses and other liabilities 10,579,960 13,139,809 ------------ ------------ 2,703,859,123 2,571,480,764 --------------- --------------- Stockholders' equity: Preferred stock: Preferred stock Series A, $0.01 par value. Authorized 20,000,000 shares; issued and outstanding 430,537 in 2008 and 2007 4,305 4,305 Capital paid in excess of par value 10,759,120 10,759,120 Common stock: Common stock, $0.01 par value. Authorized 150,000,000 shares; issued: 20,439,398 shares in 2008 and 20,032,398 shares in 2007; outstanding: 19,499,515 shares in 2008 and 19,093,315 shares in 2007 204,394 200,324 Capital paid in excess of par value 110,109,207 107,936,531 Retained earnings: Reserve fund 8,029,106 8,029,106 Undivided profits 49,773,573 61,789,048 Treasury stock, 939,883 shares in 2008 and 939,083 shares in 2007, at cost (9,916,962) (9,910,458) Accumulated other comprehensive (loss) income (12,392,943) 1,110,173 ------------- ----------- Total stockholders' equity 156,569,800 179,918,149 ------------- ------------- Total liabilities and stockholders' equity $2,860,428,923 $2,751,398,913 ================ ================ EUROBANCSHARES, INC. AND SUBSIDIARIES OPERATING RATIOS AND OTHER SELECTED DATA (Dollars in thousands, except share data) Unaudited As of ----- December 31, September 30, 2008 2007 2008 ---- ---- ---- Loan Mix -------- Loans secured by real estate Commercial and industrial $851,494 $792,309 $853,682 Construction 220,579 203,344 209,509 Residential mortgage 125,557 106,947 125,167 Consumer 2,445 780 2,564 ----- --- ----- 1,200,075 1,103,380 1,190,922 Commercial and industrial 263,332 302,530 275,146 Consumer 49,415 57,745 51,718 Lease financing contracts 267,325 385,390 287,801 Overdrafts 2,146 6,850 2,508 ----- ----- ----- Total 1,782,293 1,855,895 1,808,095 Deposit Mix ----------- Noninterest-bearing deposits 108,645 120,083 111,654 Now and money market 59,309 60,893 61,318 Savings 104,424 131,604 110,843 Broker deposits 1,423,814 1,336,560 1,385,816 Regular CD's & IRAS 109,732 92,545 102,393 Jumbo CD's 278,384 251,361 253,520 ------- ------- ------- Total 2,084,308 1,993,046 2,025,544 Balance Sheet Data (at end of period) -------------------------- Total assets 2,860,429 2,751,399 2,784,422 Total investments 898,747 751,303 827,114 Loans and leases, net of unearned 1,784,052 1,858,579 1,808,788 Allowance for loan and lease losses 41,639 28,137 33,643 Total deposits 2,084,308 1,993,046 2,025,544 Other borrowings 592,492 547,492 573,746 Preferred stock 10,763 10,763 10,763 Shareholders' equity 156,570 179,918 156,129 Capital Ratios -------------- Leverage ratio 6.55% 7.55% 6.89% Tier 1 risk-based capital 8.99 9.54 9.52 Total risk-based capital 10.25 10.79 10.78 Quarters Ended -------------- December 31, September 30, 2008 2007 2008 ---- ---- ---- Common Share Data ----------------- Average shares outstanding -basic 19,499,515 19,093,315 19,499,967 Average shares outstanding -assuming dilution 19,499,515 19,127,598 19,499,967 Number of shares outstanding at end of period 19,499,515 19,093,315 19,499,515 Book value per common share $7.48 $8.86 $7.45 Balance Sheet Data (average balances) ------------------- Total assets 2,778,475 2,632,453 2,797,116 Loans and leases, net of unearned 1,798,441 1,850,847 1,827,049 Interest-earning assets(1) 2,660,312 2,523,453 2,678,180 Interest-bearing deposits 1,909,598 1,863,419 1,915,053 Other borrowings 578,002 418,474 578,831 Preferred stock 10,763 10,763 10,763 Shareholders' equity 152,384 178,199 161,723 Other Financial Data -------------------- Total interest income 35,778 44,327 40,250 Total interest expense 24,192 28,085 24,479 Provision for loan and lease losses 16,514 6,881 7,980 Services charges - fees and other 2,288 2,402 2,466 Gain on sale of loans 68 140 48 Gain on sale of securities - - 191 Net loss on sale of other assets (197) (132) (280) Non-interest expense 11,560 11,488 13,457 Tax benefit (6,615) (218) (2,453) Net income (loss) (7,714) 501 (788) Dividends on preferred stock 188 188 188 Nonperforming assets 177,400 111,599 175,156 Nonperforming loans 163,894 98,065 162,709 Net charge-offs 8,518 4,874 4,493 Performance Ratios ------------------ Return on average assets(2) (1.11)% 0.08% (0.11)% Return on average common equity(3) (21.79) 1.20 (2.09) Net interest spread(4) 1.71 2.10 2.26 Net interest margin(5) 2.00 2.58 2.57 Efficiency ratio (6) 75.03 61.31 68.56 Earnings (loss) per common share - basic $(0.41) $0.02 $(0.05) Earnings (loss) per common share - diluted (0.41) 0.02 (0.05) Asset Quality Ratios -------------------- Nonperforming assets to total assets 6.20% 4.06% 6.29% Nonperforming loans to total loans 9.19 5.28 9.00 Allowance for loan and lease losses to total loans 2.33 1.51 1.86 Net loan and lease charge-offs to average loans 1.89 1.05 0.98 Provision for loan and lease losses to net loan and lease charge-offs 193.87 141.18 177.61 Years Ended December 31, ------------------------ 2008 2007 ---- ---- Common Share Data ----------------- Average shares outstanding - basic 19,418,526 19,212,801 Average shares outstanding - assuming dilution 19,418,526 19,391,638 Number of shares outstanding at end of period 19,499,515 19,093,315 Book value per common share $7.48 $8.86 Balance Sheet Data (average balances) ------------------- Total assets 2,787,833 2,501,457 Loans and leases, net of unearned 1,834,281 1,804,099 Interest-earning assets(1) 2,672,214 2,400,797 Interest-bearing deposits 1,904,762 1,774,378 Other borrowings 571,644 397,515 Preferred

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