The following discussion and analysis presents our consolidated financial condition and results of operations for the six-month period ended June 30, 2008 and 2007. 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 most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2008, including the following:

· if a significant number of our clients fail to perform under their loans, our business, profitability, and financial condition would be adversely affected;

· 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;

· 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;

· 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;

· we could be liable for breaches of security in our online banking services, and fear of security breaches could limit the growth of our online services;

· maintaining or increasing our market share depends on market acceptance and regulatory approval of new products and services;

· 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;

· if we fail to retain our key employees, growth and profitability could be adversely affected;

· we may be unable to manage our future growth;

· we have no current intentions of paying cash dividends on common stock;

· our directors and executive officers beneficially own a significant portion of our outstanding common stock;

· the market for our common stock is limited, and potentially subject to volatile changes in price;

· we face substantial competition in our primary market area;

· we are subject to significant government regulation and legislation that increases the cost of doing business and inhibits our ability to compete;

· we could be negatively impacted by downturns in the Puerto Rican economy;

· the proportion of core and non-core funding contrast sharply with that of the mainland and in recent quarters contributed to a sharp increase in funding costs; and

· we rely heavily on short-term funding sources, such as brokered deposits, which access could be restricted if our capital ratios fall below the levels necessary to be considered "well-capitalized" under current regulatory guidelines.

These factors and the risk factors referred in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2008 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, Inc. As of June 30, 2008, we had, on a consolidated basis, total assets of $2.8 billion, net loans of $1.8 billion, total investments of $828.3 million, total deposits of $2.0 billion, other borrowings of $577.1 million, and stockholders' equity of $164.7 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, our investment portfolio, business transaction accounts, and our mortgage business. We believe that this strategy will increase recurring revenue streams, enhance profitability, broaden our product and service offerings and continue to build stockholder value.

Key Performance Indicators at June 30, 2008

We believe the following were key indicators of our performance and results of operations through the second quarter of 2008:

· our total assets increased to $2.830 billion, or by 5.69% on an annualized basis, at the end of the second quarter of 2008, from $2.751 billion at the end of 2007;

· our net loans and leases decreased to $1.810 billion at the end of the second quarter of 2008, representing a decrease of 2.21% on an annualized basis, from $1.830 billion at the end of 2007, resulting primarily from the sale of $37.7 million in lease financing contracts in March 2008;

· our investment securities grew to $828.3 million, or 20.49% on an annualized basis, at the end of the second quarter of 2008, from $751.3 million at the end of 2007;

· our total deposits increased to $2.050 billion, or by 5.69% on an annualized basis, at the end of the second quarter of 2008, from $1.993 billion at the end of 2007;

· our short-term borrowings increased to $577.1 million, or by 10.82% on an annualized basis, at the end of the second quarter of 2008, from $547.5 million at the end of 2007;

· our nonperforming assets increased to $141.1 million, or by 52.87% on an annualized basis, at the end of the second quarter of 2008, from $111.6 million at the end of 2007;

· our total revenue decreased to $43.6 million in the second quarter of 2008, representing a decrease of 3.30%, from $45.1 million in the same period of 2007;

· our net interest margin and spread on a fully taxable equivalent basis decreased to 2.37% and 2.02% for the second quarter of 2008, respectively, compared to 2.92% and 2.38%, respectively, for the same period in 2007;

· our provision for loan and lease losses grew to $10.0 million in the second quarter of 2008, representing an increase of 177.87%, from $3.6 million in the same period of 2007;

· our total noninterest income grew to $3.2 million in the second quarter of 2008, representing an increase of 52.38%, from $2.1 million in the same period of 2007; and

· for the second quarter of 2008, we recorded an income tax benefit of $2.9 million, compared to an income tax expense of $1.1 million in the same period of 2007.

These items, as well as other factors, resulted in a net loss of $1.8 million for the second quarter of 2008, compared to a net income of $2.6 million for the same period in 2007, or ($0.10) per common share for the second quarter of 2008, compared to $0.13 per common share for the same period in 2007, assuming dilution. Key performance indicators and other factors 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 affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. The following is a description of our significant accounting policies used in the preparation of the accompanying consolidated financial statements.

Loans and Allowance for Loan and Lease Losses

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted by any charge-offs, unearned finance charges, allowance for loan and lease losses, and net deferred nonrefundable fees or costs on origination. The allowance for loan and lease losses is an estimate to provide for probable losses that may be incurred in our loan and lease portfolio. The allowance for loan and lease losses amounted to $30.2 million, $28.1 million and $20.5 million as of June 30, 2008, December 31, 2007 and June 30, 2007, respectively. Losses charged to the allowance amounted to $17.1 million for the six-month period ended June 30, 2008, compared to $8.5 million for the same period in 2007. Recoveries were credited to the allowance in the amounts of $1.3 million and $1.2 million for the same periods, respectively. For additional information on the allowance for loan and lease losses, see the section of this discussion and analysis captioned "Allowance for Loan and Lease Losses."

Servicing Assets

We have no contracts to service loans for others, except for servicing rights retained on lease sales. The total cost of loans or leases to be sold with servicing assets retained is allocated to the servicing assets and the loans or leases (without the servicing assets), based on their relative fair values. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing income. In addition, we assess capitalized servicing assets for impairment based on the fair value of those assets.

To estimate the fair value of servicing assets we consider prices for similar assets and the present value of expected future cash flows associated with the servicing assets calculated using assumptions that market participants would use in estimating future servicing income and expense, including discount rates, anticipated prepayment and credit loss rates. For purposes of evaluating and measuring impairment of capitalized servicing assets, we evaluate separately servicing retained for each loan portfolio sold. The amount of impairment recognized, if any, is the amount by which the capitalized servicing assets exceed its estimated fair value. Impairment is recognized through a valuation allowance with changes included in current operations for the period in which the change occurs. During the quarter ended June 30, 2008, we utilized the following key assumptions for the impairment analysis of the servicing assets related to the sale of lease financing contracts completed in March 2008:
prepayment rate of 19.68%; weighted average live of 3.16 years; and a discount rate of 10.08%. This impairment analysis revealed that there was no impairment. There was no sale of lease financing contracts during 2007. Servicing assets are included as part of other assets in the balance sheets. Servicing assets recorded amounted to $1.9 million, $148,000 and $340,000 as of June 30, 2008, December 31, 2007, and June 30, 2007, respectively. Servicing assets as of December 31, 2007 and June 30, 2007 were related to lease financing contracts sold in or before fiscal year 2005.

Other Real Estate Owned and Repossessed Assets

Other real estate owned, or OREO, and repossessed assets, normally obtained through foreclosure or other workout situations, are initially recorded at the lower of net realizable value or book value at the date of foreclosure, establishing a new cost basis. Any resulting loss is charged to the allowance for loan and lease losses. Appraisals of other real estate properties and valuations of repossessed assets are made periodically after their acquisition, as necessary. For OREO and repossessed assets, a comparison between the appraised value and the carrying value is performed. Additional declines in value after acquisition, if any, are charged to current operations. Gains or losses on disposition of OREO and repossessed assets, and related operating income and maintenance expenses, are included in current operations. Other real estate owned amounted to $7.6 million, $8.1 million, and $4.3 million as of June 30, 2008, December 31, 2007 and June 30, 2007, respectively.

Other repossessed assets amounted to $6.5 million, $5.4 million and $6.3 million as of June 30, 2008, December 31, 2007 and June 30, 2007, respectively. Other repossessed assets are mainly comprised of vehicles from our leasing operation and boats from our marine loans portfolio.

We monitor the total loss ratio on sale of repossessed vehicles, 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. The total loss ratio on sale of repossessed vehicles for the quarter and six-month period ended June 30, 2008 was 16.3% and 14.6%, respectively, compared to 10.6% and 9.5% for the same periods in 2007. This increase in our total loss ratio on the sale of repossessed vehicles was directly attributable to our decision of being more aggressive in the sale of repossessed vehicles in an effort to expedite the disposition of inventory.

For the quarter and six-month period ended June 30, 2008, there was a total loss of $1,000 and a total gain of $17,000 on sale of repossessed equipment, respectively, compared to a total gain of $26,000 and $32,000 for the same periods in 2007.

For the quarter and six-month period ended June 30, 2008, the total loss on sale of repossessed boats was $105,000 and $169,000, respectively, compared to $110,000 and $177,000 for the same periods in 2007. The boat financing portfolio amounted to $32.2 million and $37.1 million as of June 30, 2008 and 2007, respectively.

During the quarter and six-month period ended June 30, 2008, three OREO properties and twenty-four OREO properties were sold resulting in a total gain of $26,000 and $44,000, respectively, compared to one OREO properties sold during the second quarter of 2007, resulting in a total loss of $20,500. No repossessed properties were sold during the first quarter of 2007.

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."

Results of Operations for the Six Months Ended June 30, 2008

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 yield on average 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 decreased by 15.70%, or $2.7 million, and by 13.23%, or $4.6 million, to $14.7 million and $29.9 million in the quarter and six-month period ended June 30, 2008, respectively, from $17.4 million and $34.5 million for the same periods in 2007. This decrease resulted from the net effect of a net increase in volumes and a net decrease in rates as shown on tables on page 27.

Total interest income for the second quarter of 2008 amounted to $40.3 million, compared to $42.6 million for the previous quarter and $42.9 million for the quarter ended June 30, 2007. Total interest income for the six months ended June 30, 2008 was $83.0 million, compared to total interest income of $85.3 million for prior year same period. Such decreases were mainly driven by the net effect of decreased yields resulting from an interest rate cut of 75 basis points in March 2008 and another 25 basis points in May 2008, partially offset by an increase in average interest-earning assets. The average interest yield on a fully taxable equivalent basis earned on interest-earning assets decreased to 6.61% and 6.84% during the quarter and six months ended June 30, 2008, respectively, from 7.09% for the previous quarter, and 7.84% and 7.77% for the quarter and six months ended June 30, 2007, respectively. Average interest-earning assets increased to $2.715 billion and $2.674 billion for the quarter and six months ended June 30, 2008, respectively, compared to $2.633 billion for the previous quarter, and $2.337 billion and $2.347 billion for the quarter and six months ended June 30, 2007, respectively.

Total interest expense was $25.6 million for the quarter ended June 30, 2008, compared to $27.4 million and $25.5 million for the previous quarter and the quarter ended June 30, 2007, respectively. Total interest expense for the six months ended June 30, 2008 was $53.0 million, compared to total interest expense of $50.8 million for prior year same period. These changes resulted also from the net effect of a decrease in the cost of funds, as explained further below, partially offset by an increase in average interest-bearing liabilities. The average interest rate on a fully taxable equivalent basis paid for interest-bearing liabilities decreased to 4.59% and 4.85% during the quarter and six months ended June 30, 2008, respectively, from 5.13% for the previous quarter, and 5.46% and 5.40% for the quarter and six months ended June 30, 2007, respectively. Average interest-bearing liabilities increased to $2.510 billion and $2.462 billion for the quarter and six months ended June 30, 2008, respectively, compared to $2.414 billion for the previous quarter, and $2.107 billion and $2.113 billion for the quarter and six months ended June 30, 2007, respectively.

Net interest margin on a fully taxable equivalent basis was 2.37% for each of the quarter and six-month period ended June 30, 2008, respectively, compared to 2.39% for the previous quarter, and 2.92% and 2.91% for the quarter and six months ended June 30, 2007, respectively. For the second quarter and six-month period ended June 30, 2008, net interest spread on a fully taxable equivalent basis was 2.02% and 1.99%, respectively, compared to 1.96% for the previous quarter, and 2.38% and 2.37% for the same periods of prior year.

The decreases in net interest margin and net interest spread during the quarter and six-month period ended June 30, 2008 when compared to the same periods in 2007 were caused primarily by:

(i) the reduction in interest rates by the Federal Reserve, which resulted in the reduction of the Prime Rate by 100 basis points during the last four months of 2007, 200 basis points during the first quarter of 2008, of which 75 basis points occurred in March 2008, and another 25 basis points in May 2008; and

(ii) the write-off of $583,000 in unamortized commissions related to $227.0 million in broker deposits that were called back during the six months ended June 30, 2008. During the quarter ended June 30, 2008, we wrote-off $120,000 in unamortized commissions related to $64.6 million in broker deposits we called back during the quarter.

In the quarter of June 2008, we continued experiencing lower funding costs in short term borrowings and commenced to see the benefits from calling back our callable broker deposits, stabilizing our net interest margin and spread on a fully taxable equivalent basis. During the quarter and six months ended June 30, 2008, the average interest rate on a fully taxable equivalent basis paid for broker deposits decreased to 4.91% and 5.24%, respectively, from 5.58% for the previous quarter, and 5.62% and 5.57% for the quarter and six months ended June 30, 2007, respectively. Average broker deposits increased to $1.381 billion and $1.344 billion for the quarter and six months ended June 30, 2008, respectively, compared to $1.307 billion for the previous quarter, and $1.195 billion and $1.187 billion for the quarter and six months ended June 30, 2007, respectively.

During the quarter and six months ended June 30, 2008, the average interest rate on a fully taxable equivalent basis paid for other borrowings decreased to 4.77% and 5.08%, respectively, from 5.40% for the previous quarter, and 7.10% and 7.05% for the quarter and six months ended June 30, 2007, respectively. Average other borrowings increased to $569.7 million and $564.8 million for the quarter and six months ended June 30, 2008, respectively, compared to $559.9 million for the previous quarter, and $384.0 million and $388.6 million for the quarter and six months ended June 30, 2007, respectively.

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.

                                                     Three Months Ended June 30,
                                            2008                                     2007
                             Average                     Rate/         Average                    Rate/
                              Balance      Interest     Yield(1)       Balance      Interest     Yield(1)
                                                        (Dollars in thousands)

ASSETS:
Interest-earning assets:
Net loans and leases(2)     $ 1,818,209   $   29,106         6.45 %  $ 1,757,684   $   36,040         8.29 %
Securities of U.S.
government agencies(3)          543,254        6,652         6.81        468,947        5,457         6.47
Other investment
securities(3)                   273,167        4,046         8.24         48,134          622         7.18
Puerto Rico government
obligations(3)                   10,522          127         6.71          9,492          109         6.38
Securities purchased
under agreements to
resell and federal funds
sold                             32,708          220         3.22         27,283          385         6.66
Interest-earning
deposits                         37,064          192         2.07         25,272          336         5.32
Total interest-earning
assets                      $ 2,714,924   $   40,343         6.61 %  $ 2,336,812   $   42,949         7.84 %
Total noninterest-earning
assets                          118,338                                   98,543
TOTAL ASSETS                $ 2,833,262                              $ 2,435,355

LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Money market deposits       $    20,469   $      165         3.24 %  $    17,065   $      114         2.69 %
NOW deposits                     50,241          329         2.62         51,125          317         2.49
Savings deposits                124,545          699         2.25        144,294          913         2.53
Time certificates of
deposit in denominations
of $100,000 or more(4)        1,648,020       18,420         4.80      1,419,774       18,054         5.52
Other time deposits              97,331          995         4.10         90,607          982         4.34
Other borrowings                569,708        5,031         4.77        383,981        5,127         7.10
Total interest-bearing
liabilities                 $ 2,510,314   $   25,639         4.59 %  $ 2,106,846   $   25,507         5.46 %
Noninterest-bearing
liabilities:
Noninterest-bearing
deposits                        115,716                                  119,520
Other liabilities                31,842                                   34,308
Total noninterest-bearing
liabilities                     147,558                                  153,828
STOCKHOLDERS' EQUITY            175,390                                  174,681
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY        $ 2,833,262                              $ 2,435,355
Net interest income(5)                    $   14,704                               $   17,442
Net interest spread(6)                                       2.02 %                                   2.38 %
Net interest margin(7)                                       2.37 %                                  2. 92 %


__________

(2) The amortization of net loan costs or fees have been included in the calculation of interest income. Net loan costs were approximately $64,000 and $281,000 for the quarters ended June 30, 2008 and 2007, respectively. Loans include nonaccrual loans, which balance as of the periods ended June 30, 2008 and 2007 was $86.3 million and $41.4 million, respectively, and are net of the allowance for loan and lease losses, deferred fees, unearned income, and related direct costs.

. . .