The following discussion and analysis presents our consolidated financial condition and results of operations for the years ended December 31, 2007, 2006 and 2005. This discussion should be read together with the "Selected Consolidated Financial Data," our consolidated financial statements and the notes related thereto which appear elsewhere in this Annual Report on Form 10-K.

Executive Overview

Introduction

We are a diversified financial holding company headquartered in San Juan, Puerto Rico, offering a broad array of financial services through our wholly owned banking subsidiary, Eurobank, and our wholly owned insurance agency subsidiary, EuroSeguros. As of December 31, 2007, we had, on a consolidated basis, total assets of $2.8 billion, net loans and leases of $1.8 billion, investment securities of $751.3 million, total deposits of $2.0 billion, and stockholders' equity of $179.9 million. We currently operate through a network of 26 branch offices located throughout Puerto Rico.

Over the past three years, we have experienced significant balance sheet growth. Our management team has implemented a strategy of building our core banking franchise by focusing on commercial loans, business transaction accounts, our mortgage business and acquisitions. We believe that this strategy will increase recurring revenue streams, enhance profitability, broaden our product and service offerings and continue to build stockholder value.

2007 Key Performance Indicators

We believe the following were key indicators of our performance and results of operations in 2007:

? our total assets grew to $2.751 billion at the end of 2007, representing an increase of 10.02%, from $2.501 billion at the end of 2006;

? our net loans and leases grew to $1.830 billion at the end of 2007, representing an increase of 5.69%, from $1.732 billion at the end of 2006;

? our investment securities grew to $751.3 million at the end of 2007, representing an increase of 30.00%, from $577.9 million at the end of 2006;

? our total deposits grew to $1.993 billion at the end of 2007, representing an increase of 4.60%, from $1.905 billion at the end of 2006;

? our nonperforming assets increased to $111.6 million, or by 77.07%, in 2007, from $63.0 million at the end of 2006;

? our total revenue grew to $182.0 million in 2007, representing an increase of 7.09%, from $169.9 million in 2006;

? our net interest margin and spread on a fully taxable equivalent basis was 2.80% and 2.29% in 2007, respectively, compared to 2.86% and 2.33% in 2006;

? our provision for loan and lease losses grew to $25.3 million in 2007, representing an increase of 49.96%, from $16.9 million in 2006;

? our total noninterest expense grew to $48.2 million in 2007, representing an increase of 11.15%, from $43.4 million in 2006; and

? for 2007, we recorded a tax benefit of $249,000, compared to an income tax expense of $6.3 million for 2006.

These items, as well as other factors, resulted in a net income for 2007 of $3.2 million, compared to $8.0 million in 2006, or $0.13 per common share for 2007, compared to $0.37 per common share for 2006, assuming dilution, and are discussed in further detail throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Annual Report on Form 10-K.

Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. The following is a description of our significant accounting policies used in the preparation of the accompanying consolidated financial statements.

Loans and Allowance for Loan and Lease Losses

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted by any charge-offs, unearned finance charges, allowance for loan and lease losses, and net deferred nonrefundable fees or costs on origination. The allowance for loan and lease losses is an estimate to provide for probable collection losses in our loan and lease portfolio. Losses are charged and recoveries are credited to the allowance account at the time a loss is incurred or a recovery is received. The allowance for loan and lease losses amounted to $28.1 million, $18.9 million and $18.2 million as of December 31, 2007, 2006 and 2005, respectively. Losses charged to the allowance amounted to $18.3 million, $18.8 million and $16.6 million as of December 31, 2007, 2006 and 2005, respectively. Recoveries were credited to the allowance in the amounts of $2.1 million, $2.6 million and $3.0 million for those same periods, respectively.

We follow a consistent procedural discipline and account for loan and lease loss contingencies in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, and SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.

To mitigate any difference between estimates and actual results relative to the determination of the allowance for loan and lease losses, our loan review department is specifically charged with reviewing monthly delinquency reports to determine if additional allowances are necessary. Delinquency reports and analysis of the allowance for loan and lease losses are also provided to senior management and the Board of Directors on a monthly basis.

The loan review department evaluates significant changes in delinquency with regard to a particular loan portfolio to determine the potential for continuing trends, and loss projections are estimated and adjustments are made to the historical loss factor applied to that portfolio in connection with the calculation of loss allowances.

Portfolio performance is also monitored through the monthly calculation of the percentage of non-performing loans to the total portfolio outstanding. A significant change in this percentage may trigger a review of the portfolio and eventually lead to additional allowances. We also track the ratio of net charge-offs to total portfolio outstanding.

Our methodology for the determination of the adequacy of the allowance for loan and lease losses for impaired loans is based on classifications of loans and leases into various categories and the application of SFAS No. 114. For non-classified loans, the estimated allowance is based on historical loss experiences, which, at least on an annual basis, are adjusted for changes in trends and conditions. In addition, in evaluating the adequacy of the allowance for loan and lease losses, management also considers the probable effect that current internal and external environmental factors could have on the historical loss factors. While our allowance for loan and lease losses is established in different portfolio components, we maintain an allowance that we believe is sufficient to absorb all credit losses inherent in our portfolio.

With the exception of residential mortgages with a 60% or lower loan-to-value, and the commercial and construction loans pools, loans that are more than 90 days delinquent result in an additional allowance. When commercial and construction loans become 90 days delinquent, or earlier if deemed by management, each is subjected to full review by the loan review officer including, but not limited to, a review of financial statements, repayment ability and collateral held. Depending on the review results, our allowance may be increased. In connection with this review, the loan review officer will determine what economic factors may have led to the change in the client's ability to service the obligation, and this in turn may result in an additional review of a particular sector of the economy. For additional information relating to how each portion of the allowance for loan and lease losses is determined, see the section of this discussion and analysis captioned "Allowance for Loan and Lease Losses."

We believe that our allowance for loan and lease losses is adequate; however, regulatory agencies, including the Commissioner of Financial Institutions of Puerto Rico and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan and lease losses and may from time to time require us to reclassify our loans and leases or make additional provisions to our allowance for loan and lease losses.

Other Real Estate Owned and Repossessed Assets

Other real estate owned, or OREO, and repossessed assets, normally obtained through foreclosure or other workout situations, are initially recorded at the lower of net realizable value or book value at the date of foreclosure, establishing a new cost basis. Any resulting loss is charged to the allowance for loan and lease losses. Appraisals of other real estate properties are made periodically after their acquisition, as necessary. Valuations of repossessed assets are made periodically after their acquisition. For OREO and repossessed assets, a comparison between the appraised value and the carrying value is performed. Additional declines in value after acquisition, if any, are charged to current operations. Other real estate owned amounted to $8.1 million, $3.6 million and $1.5 million as of December 31, 2007, 2006 and 2005, respectively.

Other repossessed assets amounted to $5.4 million, $9.4 million and $8.0 million for those same periods, respectively. Other repossessed assets are mainly comprised of vehicles from our leasing operation. For additional information relating to the composition of other repossessed assets, see the section of this discussion and analysis captioned "Nonperforming Loans, Leases and Assets."

We monitor the total loss ratio on sale of repossessed assets, which is determined by dividing the sum of declines in value, repairs and gain or loss on sale by the book value of repossessed assets sold at the time of repossession. Repossessed vehicles amounted to $4.3 million, $8.3 million and $6.2 million for the years ended December 31, 2007, 2006 and 2005, respectively. The total loss ratio on sale of repossessed vehicles was 9.63%, 6.30% and 7.53% for those same years, respectively. The increase in our total loss ratio on the sale of repossessed vehicles during 2007 was directly attributable to our strategy of being more aggressive in the sale of repossessed vehicles in an attempt to expedite the disposition of slow moving inventory. This strategy resulted in an increase of approximately 39.18% in the number of repossessed vehicles in inventory over six months that were sold during 2007, when compared to 2006. During 2007, we sold 405 units in inventory over six months, compared to 291 units in inventory over six months sold during 2006. The decrease in our total loss ratio on the sale of repossessed vehicles during 2006 when compared with 2005 was mainly due to the net effect of: (i) an increase in the sale of damaged units previously adjusted for subsequent declines in value; (ii) the refinements made to our methodology for estimating net realizable value of vehicles upon repossession; and (iii) our decision to increase the valuation of repossessed vehicles, reducing the book value of the repossessed vehicle in an effort to expedite the disposition of slow moving inventory.

For the year ended December 31, 2007, the total gain on sale of repossessed equipment was $32,000, compared to a total loss of $413,000 and $169,000 for the years ended December 31, 2006 and 2005, respectively. Repossessed equipment amounted to $88,000, $39,000 and $210,000 for those same years, respectively. The decrease in the total loss on sale of repossessed equipment for year 2007 was mainly due to a decrease in the amount of repossessed equipment sold during 2007 when compared to 2006, and the fact that, during the fourth quarter of 2007, a specialized equipment was sold resulting in a gain of $5,000. During 2007, the total amount of repossessed equipment sold decreased by 71.57%, or by $638,000, to $253,000, from $891,000 in 2006. The increase in the total loss on sale of repossessed equipment for year 2006 was mainly due to the sale of damaged equipment previously adjusted for subsequent declines in value as part our strategy to aggressively dispose of deteriorated repossessed equipment.

For the year ended December 31, 2007, the total loss on sale of repossessed boats was $338,000, compared to $539,000 and $419,000 for the years ended December 31, 2006, and 2005, respectively. Total repossessed boats amounted to $991,000, $1.1 million and $1.5 million for those same years, respectively. The boat financing portfolio amounted to $35.0 million, $37.4 million and $39.7 million as of December 31, 2007, 2006 and 2005, respectively. The change in the total loss on sale of repossessed boats during 2007 and 2006 were mainly due to fluctuations in the amount of repossessed boats sold. During 2007, the total of repossessed boats sold decrease by 57.48%, or $1.5 million, to $1.1 million, from $2.6 million in 2006, after increasing by 137.76%, or $1.5 million, from $1.1 million in 2005. The decrease in the total loss on sale of repossessed boats during 2006 was mainly due to the sale of five high profile boats, which resulted in lower losses.

In 2007, the total loss on sale of OREO totaled $153,000 over seven properties sold with an aggregate book value of approximately $835,000, compared to a total gain on sale of OREO totaled $454,000 over eleven properties sold with an aggregate book value of approximately $4.0 million in 2006, and a total loss of $581,000 over nine properties sold with an aggregate book value of approximately $3.9 million in 2005. The total gain on sale of OREO in 2006 included a $362,000 gain from the sale of a real estate property during the second quarter of 2006.

Results of Operations for the Years Ended December 31, 2007, 2006 and 2005

Net Interest Income and Net Interest Margin

Net interest income, our principal source of earnings, is the difference between interest income, principally from loan, lease and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets, and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

Net interest income was $67.9 million during the year ended December 31, 2007, compared to $66.8 million during the year ended December 31, 2006 and $68.3 million during the year ended December 31, 2005, representing an increase of $1.1 million, or 1.60%, in 2007 and a decrease of $1.5 million, or 2.22%, in 2006. The increase in net interest income during 2007 resulted from the net effect of an increase in average interest earning assets and increased yields from higher interest rates, and an increase in average interest-bearing liabilities and increased cost of funds. The decrease in net interest income during 2006 was primarily due to increased cost of funds. Our net interest margin decreased to 2.80% for the year ended December 31, 2007, from 2.86% and 3.29% for the years ended December 31, 2006 and 2005. Our net interest spread decreased to 2.29% in 2007, from 2.33% in 2006 and 2.88% in 2005. These declines in the net interest margin and spread were primarily caused by the increase in the average cost of interest bearing liabilities as a result of the rising short-term interest rates and the LIBOR inverted curve, which increased at a faster rate than the yield on earning-assets; and to the fact that the increase in average deposits has been comprised substantially of broker deposits, a higher cost category, due to the fierce competitive local environment for core deposits, making broker deposits an attractive funding alternative. In addition, during 2007, our net interest margin and spread were also affected by decreases in the prime rate, primarily during the fourth quarter of 2007. During 2006, our net interest margin and spread were also affected by the write-off of $626,000 in unamortized placement costs related to the redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures, as previously mentioned. Without the effect of the write-off of $626,000 in unamortized placement costs, net interest margin and spread on a fully taxable equivalent basis would have been 2.89% and 2.36% for the year ended December 31, 2006, respectively.

Our average interest-earning assets were $2.4 billion in 2007, compared to $2.3 billion in 2006 and $2.2 billion in 2005, representing increases of 2.25% in 2007 and 8.84% in 2006. Average net loans were $1.8 billion in 2007, compared to $1.6 billion in 2006 and $1.5 billion in 2005, representing increases of 8.34% and 11.79% in 2007 and 2006, respectively. Total interest income increased by 6.89% to $173.3 million in 2007, compared to $162.1 million in 2006, after increasing by 21.70% from $133.2 million in 2005. These increases in our interest income were mainly due to the organic growth of our loan portfolio. The average interest yield we received for interest-earning assets increased to 7.73% in 2007, from 7.53% in 2006, and from 6.69% in 2005. During 2007, the Federal Reserve Board's interest rate cuts negatively impacted average yields on our commercial and construction loans since a significant portion of these portfolios were variable rate loans. As of December 31, 2007, approximately 75.38% of our commercial and construction loans were variable rate loans.

Average interest-bearing liabilities also increased by 2.96% to $2.2 billion in 2007, compared to $2.1 billion in 2006, after increasing by 9.69% from $1.9 billion in 2005. Total interest expense increased by 10.60% to $105.5 million in 2007, compared to $95.4 million in 2006, after increasing by 46.86% from $64.9 million in 2005. During 2007 and 2006, the increase in average liabilities had been substantially in broker deposits, higher rate time deposits driven by the extremely competitive local environment for core deposits, and other borrowings, all of which are higher cost categories resulting in increased interest expense. The average interest rate we paid for interest-bearing liabilities increased to 5.44% in 2007, from 5.20% in 2006, and from 3.81% in 2005.

The following table set forth, for the periods indicated, our average balances of assets, liabilities and stockholders' equity, in addition to the major components of net interest income and our net interest margin. Net loans and leases shown on these tables include nonaccrual loans although interest accrued but not collected on these loans is placed in nonaccrual status and reversed against interest income.

                                                                                             Year Ended December 31,
                                                      2007                                             2006                                            2005
                                                                   Average Rate/                                   Average Rate/                                   Average Rate/
                                  Average Balance      Interest      Yield(1)       Average Balance    Interest      Yield(1)       Average Balance    Interest      Yield(1)
                                                                                             (Dollars in thousands)
ASSETS:
Interest-earning assets:
Net loans and leases(2)          $       1,780,719     $ 143,360            8.13 % $       1,643,587   $ 130,003            8.00 % $       1,470,256   $ 107,971            7.41 %
Securities of U.S. government
agencies(3)                                482,605        22,690            6.53             604,606      27,137            6.45             600,461      21,795            5.14
Other investment securities(3)              72,919         3,883            7.40              46,083       2,296            7.03              38,811       1,726            6.12
Puerto Rico government
obligations(3)                               8,149           385            6.57               9,397         412            6.29               8,783         352            5.67
Securities purchased under
agreements to resell and
federal funds sold                          37,826         2,042            6.14              34,841       1,791            5.57              32,297       1,150            4.19
Interest-earning deposits                   18,579           964            5.19               9,565         507            5.30               6,767         239            3.53
Total interest-earning assets    $       2,400,797     $ 173,324            7.73 % $       2,348,079   $ 162,146            7.53 % $       2,157,375   $ 133,233            6.69 %
Total noninterest-earning
assets                                     100,660                                            80,735                                          77,612
TOTAL ASSETS                     $       2,501,457                                 $       2,428,814                               $       2,234,987

LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Money market deposits            $          18,361     $     532            2.91 % $          25,470   $     584            2.31 % $          51,787   $   1,090            2.13 %
NOW deposits                                47,068         1,169            2.49              46,330       1,035            2.24              46,421         858            1.85
Savings deposits                           141,120         3,497            2.48             184,824       4,386            2.37             254,923       5,861            2.30
Time certificates of deposit
in denominations of $100,000
or more(4)                               1,475,942        75,467            5.52           1,240,403      58,351            5.13             869,054      32,384            3.96
Other time deposits                         91,887         4,041            4.37             113,097       4,189            3.71             152,787       4,741            3.11
Other borrowings(5)                        397,415        20,794            6.95             499,275      26,818            7.17             548,141      20,002            4.81
Total interest-bearing
liabilities                      $       2,171,893     $ 105,470            5.44 % $       2,109,399   $  95,363            5.20 % $       1,923,113   $  64,936            3.81 %
Noninterest-bearing
liabilities:
Noninterest-bearing deposits               119,004                                           128,551                                         129,676
Other liabilities                           35,735                                            25,830                                          16,962
Total noninterest-bearing
liabilities                                154,739                                           154,381                                         146,638
STOCKHOLDERS' EQUITY                       174,825                                           165,034                                         165,236
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY             $       2,501,457                                 $       2,428,814                               $       2,234,987
Net interest income(6)                                 $  67,854                                       $  66,783                                       $  68,297
Net interest spread(7)                                                      2.29 %                                          2.33 %                                          2.88 %
Net interest margin(8)                                                      2.80 %                                          2.86 %                                          3.29 %

(2) The amortization of loan costs (fees) has been included in the calculation of interest income. Net loan costs were approximately $838,000, $539,000 and $780,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Loans includes nonaccrual loans, which balance as of the periods ended December 31, 2007, 2006 and 2005 was $69.0 million, $37.3 million and $27.7 million, respectively, and are net of the allowance for loan and lease losses, deferred fees, unearned income, and related direct costs.

(3) Available-for-sale investments are adjusted for unrealized gain or loss.

(4) For 2007, interest expense on time certificates of deposit in denominations of $100,000 or more was reduced by approximately $616,000 of capitalized interest on construction in progress. This capitalized interest was mainly related to the improvements being performed to our new headquarters purchased in February 2007. Without the effect of the capitalized interest of $616,000, our net interest margin and spread on a fully taxable basis for the year ended December 31, 2007 would have been 2.78% and 2.26%, respectively.

(5) For 2006, interest expense on other borrowings includes the write-off of approximately $626,000 in unamortized placement costs related to the redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures on December 18, 2006, as previously mentioned.

(6) Net interest income on a tax equivalent basis was $67.3 million, $67.2 million and $71.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.

(7) Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities on a fully taxable equivalent basis.

(8) Represents net interest income on a fully taxable equivalent basis as a percentage of average interest-earning assets.

The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and paid for interest-earning assets and interest-bearing liabilities and the amount of change attributable to changes in average daily balances (volume) or changes in average daily interest rates
(rate). All changes in interest owed and paid for interest-earning assets and interest-bearing liabilities are attributable to either volume or rate. The impact of changes in the mix of interest-earning assets and interest-bearing liabilities is reflected in our net interest income.

                                                   Year Ended December 31,
                                     2007 Over 2006                      2006 Over 2005
                                  Increases/(Decreases)               Increases/(Decreases)
. . .