The following discussion and analysis presents our consolidated financial condition and results of operations for the years ended December 31, 2008, 2007 and 2006. This discussion should be read together with the "Selected Consolidated Financial Data," our consolidated financial statements and the notes related thereto which appear elsewhere in this Annual Report on Form 10-K.

Executive Overview

Introduction

We are a diversified financial holding company headquartered in San Juan, Puerto Rico, offering a broad array of financial services through our wholly owned banking subsidiary, Eurobank, and our wholly owned insurance agency subsidiary, EuroSeguros. As of December 31, 2008, we had, on a consolidated basis, total assets of $2.860 billion, net loans and leases of $1.742 billion, total investments of $898.7 million, total deposits of $2.084 billion, other borrowings of $592.5 million, and stockholders' equity of $156.6 million. We currently operate through a network of 26 branch offices located throughout Puerto Rico.

Our management team has implemented a strategy of building our core banking franchise by focusing on commercial loans, our investment portfolio, business transaction accounts, and the mortgage business. We believe that this strategy will increase recurring revenue streams, enhance profitability, broaden our product and service offerings and continue to build stockholder value.

2008 Key Performance Indicators

We believe the following were key indicators of our performance and results of operations in 2008:

? our total assets grew to $2.860 billion at the end of 2008, representing an increase of 3.96%, from $2.751 billion at the end of 2007;

? our net loans and leases decreased to $1.742 billion at the end of 2008, representing a decrease of 4.81%, from $1.830 billion at the end of 2007, resulting primarily from our decision to strategically pare back our automobile leasing operations, including the sale of $37.7 million in lease financing contracts in March 2008;

? our investment securities grew to $898.7 million at the end of 2008, representing an increase of 19.63%, from $751.3 million at the end of 2007;

? our total deposits grew to $2.084 billion at the end of 2008, representing an increase of 4.58%, from $1.993 billion at the end of 2007;

? our short-term borrowings increased to $592.5 million, representing an increase of 8.22%, from $547.5 million at the end of 2007;

? our nonperforming assets increased to $177.4 million, or by 58.96%, in 2008, from $111.6 million at the end of 2007;

? our total revenue decreased to $170.5 million in 2008, representing a decrease of 6.34%, from $182.0 million in 2007;

? our net interest margin and spread on a fully taxable equivalent basis was 2.33% and 1.99% in 2008, respectively, compared to 2.80% and 2.29% in 2007;

? our provision for loan and lease losses grew to $42.3 million in 2008, representing an increase of 66.93%, from $25.3 million in 2007;

? our total noninterest income grew to $11.5 million in 2008, representing an increase of 32.05%, from $8.7 million in 2007;

? our total noninterest expense grew to $50.9 million in 2008, representing an increase of 5.58%, from $48.2 million in 2007; and

? for 2008, we recorded a tax benefit of $13.2 million, compared to an income tax benefit of $249,000 for 2007.

These items, as well as other factors, resulted in a net loss for 2008 of $11.3 million, compared to a net income of $3.2 million in 2007, or a loss of $0.62 per common share for 2008, compared to earnings of $0.13 per common share for 2007, assuming dilution. Financial results for the year ended December 31, 2008 when compared to year 2007 were predominantly impacted by an increase of $17.0 million in the provision for loan and lease losses and a decrease of $10.6 million in the net interest income. The increase in our provision for loan and lease losses was primarily related to our commercial and construction loan portfolios, which reported further deterioration due to current economic conditions requiring some of them to be classified as impaired loans under SFAS No. 114 or an increase in their specific allowances. The decrease in our net interest income was mainly due to the interest rate cuts by the Federal Reserve accompanied by increased average interest-earning assets and average interest-bearing liabilities, and an increase in nonaccrual loans. These items are discussed in further detail throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Annual Report on Form 10-K.

Critical Accounting Policies

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

Loans and Allowance for Loan and Lease Losses

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted by any charge-offs, unearned finance charges, allowance for loan and lease losses, and net deferred nonrefundable fees or costs on origination. The allowance for loan and lease losses is an estimate to provide for probable losses that have been incurred in our loan and lease portfolio. Losses are charged and recoveries are credited to the allowance account at the time a loss is incurred or a recovery is received. The allowance for loan and lease losses amounted to $41.6 million, $28.1 million and $18.9 million as of December 31, 2008, 2007 and 2006, respectively. Losses charged to the allowance amounted to $31.1 million, $18.3 million and $18.8 million as of December 31, 2008, 2007 and 2006, respectively. Recoveries were credited to the allowance in the amounts of $2.3 million, $2.1 million and $2.6 million for those same periods, respectively. For additional information on the allowance for loan and lease losses, see the section of this discussion and analysis captioned "Allowance for Loan and Lease Losses" and "Note 2(i) - Loans and Allowance for Loan and Lease Losses" to our consolidated financial statements included herein.

Servicing Assets

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

To estimate the fair value of servicing assets we consider prices for similar assets and the present value of expected future cash flows associated with the servicing assets calculated using assumptions that market participants would use in estimating future servicing income and expense, including discount rates, anticipated prepayment and credit loss rates. For purposes of evaluating and measuring impairment of capitalized servicing assets, we evaluate separately servicing retained for each loan portfolio sold. The amount of impairment recognized, if any, is the amount by which the capitalized servicing assets exceed its estimated fair value. Impairment is recognized through a valuation allowance with changes included in current operations for the period in which the change occurs. As of December 31, 2008, we utilized the following key assumptions for the impairment analysis of the servicing assets related to the sale of lease financing contracts completed in March 2008: prepayment rate of 18.24%; weighted average live of 2.73 years; and a discount rate of 9.00%. This impairment analysis revealed that there was no impairment. There was no sale of lease financing contracts during 2007. Servicing assets are included as part of other assets in the balance sheets. Servicing assets' book value amounted to $1.2 million, $148,000 and $782,000 as of December 31, 2008, 2007 and 2006, respectively. Servicing assets as of December 31, 2007 and 2006 were related to lease financing contracts sold in or before 2005.

Other Real Estate Owned and Repossessed Assets

Other real estate owned, or OREO, and repossessed assets, normally obtained through foreclosure or other workout situations, are initially recorded at the lower of net realizable value or book value at the date of foreclosure, establishing a new cost basis. Any resulting loss is charged to the allowance for loan and lease losses. Appraisals of other real estate properties are made periodically after their acquisition, as necessary. Valuations of repossessed assets are made periodically after their acquisition. For OREO and repossessed assets, a comparison between the appraised value and the carrying value is performed. Additional declines in value after acquisition, if any, are charged to current operations. Gains or losses on disposition of OREO and repossessed assets, and related operating income and maintenance expenses, are included in current operations. Other real estate owned amounted to $8.8 million, $8.1 million and $3.6 million as of December 31, 2008, 2007 and 2006, respectively.

Other repossessed assets amounted to $4.7 million, $5.4 million and $9.4 million for those same periods, respectively. Other repossessed assets are mainly comprised of vehicles from our leasing operation and boats from our marine loans portfolio.

We monitor the total loss ratio on sale of repossessed assets, which is determined by dividing the sum of declines in value, repairs and gain or loss on sale by the book value of repossessed assets sold at the time of repossession. Repossessed vehicles amounted to $3.5 million, $4.3 million and $8.3 million as of December 31, 2008, 2007 and 2006, respectively. The total loss ratio on sale of repossessed vehicles was 13.85%, 9.63% and 6.30% for those same years, respectively. These increases in our total loss ratio on the sale of repossessed vehicles were directly attributable to our decision of being more aggressive in the sale of repossessed vehicles in an effort to expedite the disposition of inventory. During 2008, we sold 1,434 vehicles and repossessed 1,406 vehicles, moving our inventory of repossessed vehicles to 297 units as of December 31, 2008, from 325 units as of December 31, 2007, after selling 1,855 vehicles and repossessing 1,616 vehicles, from 564 units in inventory as of December 31, 2006. During 2007, the increase in our total loss ratio on the sale of repossessed vehicles was directly attributable to our strategy of being more aggressive in the sale of repossessed vehicles in an attempt to expedite the disposition of slow moving inventory. This strategy resulted in an increase of approximately 39.18% in the number of repossessed vehicles in inventory over six months that were sold during 2007, when compared to 2006. During 2007, we sold 405 units in inventory over six months, compared to 291 units in inventory over six months sold during 2006.

Repossessed equipment amounted to $6,000, $88,000 and $39,000 as of December 31, 2008, 2007 and 2006, respectively. For those same years, the total amount of repossessed equipment sold amounted to $266,000, $253,000 and $891,000, respectively. For the year ended December 31, 2008, the total gain on sale of repossessed equipment was $20,000, compared to a total gain of $32,000 and a total loss of $413,000 for the years ended December 31, 2007 and 2006, respectively. The decrease in the total loss on sale of repossessed equipment for year 2007 was mainly due to a decrease in the amount of repossessed equipment.

Total repossessed boats amounted to $1.2 million, $991,000 and $1.1 million for those same years, respectively. For the year ended December 31, 2008, the total loss on sale of repossessed boats was $546,000, compared to $338,000 and $539,000 for the years ended December 31, 2007, and 2006, respectively. The change in the total loss on sale of repossessed boats during 2008 and 2007 was mainly due to fluctuations in the amount of repossessed boats sold. During 2008, the total of repossessed boats sold increased by 54.85%, or $611,000, to $1.7 million, after decreasing by 57.48%, or $1.5 million, to $1.1 million in 2007, from $2.6 million in 2006. During 2008 and 2007, we sold 23 boats and 18 boats, respectively, and repossessed 20 boats and 16 boats, respectively, decreasing our inventory of repossessed boats to 15 units as of December 31, 2008, from 18 units as of December 31, 2007 and from 20 units as of December 31, 2006. As of December 31, 2008, 2007 and 2006, our boat financing portfolio amounted to $30.3 million, $35.0 million and $37.4 million, respectively.

In 2008, the total loss on sale of OREO was $48,000 over twenty-five properties sold with an aggregate book value of approximately $4.7 million, compared to a total loss of $153,000 over seven properties sold in 2007 with an aggregate book value of approximately $835,000 and a total gain of $454,000 over eleven properties sold with an aggregate book value of approximately $4.0 million in 2006. As of December 31, 2008, our OREO consisted of 36 properties with an aggregate value of $8.8 million, compared to 45 properties with an aggregate value of $8.1 million as of December 31, 2007, and 18 properties with an aggregate value of $3.6 million as of December 31, 2006.

For additional information relating to OREO and the composition of other repossessed assets, see the section of this discussion and analysis captioned "Nonperforming Loans, Leases and Assets."

Investment Securities

We review the investment portfolio based on the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity, and the EITF 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets. These analyses are performed taking into consideration current U.S. market conditions, projected cash flows and the present value of the projected cash flows. Declines in fair value of securities below their cost that are deemed to be other than temporary result in an impairment that is charged to operations and a new cost basis for the security is established. To determine whether an impairment is other than temporary, we consider whether it has the ability and intent to hold the investment until a market price recovery or maturity and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end and forecasted performance of the investee. Premiums and discounts are amortized over the estimated average life of the related investment security available for sale as an adjustment to yield using a method that approximates the interest method. Additionally, we anticipate estimated prepayments on mortgage-backed securities in the amortization of premiums and accretion of discounts on such securities. Dividend and interest income are recognized when earned.

Results of Operations for the Years Ended December 31, 2008, 2007 and 2006

Net Interest Income and Net Interest Margin

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

Net interest income was $57.3 million during the year December 31, 2008, compared to $67.9 million during the year ended December 31, 2007 and $66.8 million during the year ended December 31, 2006, representing a decrease of $10.6 million, or 15.56% in 2008, and a $1.1 million increase, or 1.60%, in 2007. The decrease in net interest income during 2008 was mainly driven by the net effect of decreased yields and cost of funds resulting from interest rate cuts by the Federal Reserve accompanied by increased average interest-earning assets and average interest-bearing liabilities, and an increase in nonaccrual loans, as explained further below. During 2007, the increase in net interest income resulted from the net effect of an increase in average interest-earning assets and increased yields from higher interest rates, and an increase in average interest-bearing liabilities and increased cost of funds. These changes in rates and volumes are shown on table on page 45.

Total interest income decreased by 8.26% to $159.0 million in 2008, compared to $173.3 million in 2007, and $162.1 million in 2006. The average interest yield earned on a fully taxable equivalent basis on interest-earning assets decreased to 6.61% in 2008, from 7.73% in 2007 and 7.53% in 2006. The decrease in the average interest yield on a fully taxable equivalent basis during 2008 was mainly attributable to the net effect of decreased loan yields resulting from interest rate cuts of 100 basis points during the last four months of 2007, and additional rate cuts of 75 basis points in March 2008, 25 basis points in May 2008, and 175 basis points during the fourth quarter of 2008, while average net loans during 2008 decreased when compared to 2007. These interest rate cuts negatively impacted average yields on our commercial and construction loans since a significant portion of these portfolios were variable rate loans. As of December 31, 2008 and 2007, approximately 73.63% and 75.38% of our commercial and construction loans were variable rate loans, respectively. The average interest yield on a fully taxable equivalent basis earned on net loans decreased to 6.45% for the year ended December 31, 2008, from 8.13% and 8.00% for years 2007 and 2006, respectively. Average net loans were $1.803 billion in 2008, compared to $1.781 billion in 2007 and $1.644 billion in 2006. Also, total interest income and loan yields were impacted by the effect caused by a $72.3 million increase in nonaccrual loans during 2008, primarily during the fourth quarter of 2008, and a $31.7 million increase in nonaccrual loans during 2007. The amount of interest income we ceased to accrue on nonaccrual loans amounted to $8.1 million in 2008, compared to $5.5 million and $3.3 million in 2007 and 2006, respectively, while during the fourth quarter of 2008, it amounted to $3.1 million, compared to $1.6 million during the previous quarter. The amount of interest income we ceased to accrue during the fourth quarter of 2008 represented a reduction of approximately 46 basis points in the average interest yield on a fully taxable equivalent basis earned on net loans. The increase during the fourth quarter of 2008 when compared to the previous quarter was directly related to the amount of loans placed in nonaccrual status, which increased from $92.3 million as of September 30, 2008 to $141.3 million as of December 31, 2008.

Total interest expense decreased by 3.56% to $101.7 million in 2008, compared to $105.5 million in 2007, after increasing by 10.60% from $95.4 million in 2006. The decrease in total interest expense during 2008 mainly resulted from the net effect of a decrease in the cost of funds mainly caused by our strategy of calling back our broker callable broker deposits, as explained further below, partially offset by an increase in interest-bearing liabilities. During 2007, the increase in average liabilities were substantially in broker deposits and other borrowings, both of which were higher cost categories resulting in increased interest expense. The average interest rate on a fully taxable equivalent basis paid for interest-bearing liabilities was 4.62% in 2008, 5.44% in 2007 and 5.20% in 2006. Average interest-bearing liabilities increased by 14.02% to $2.476 billion in 2008, after increasing by 2.96% to $2.172 billion in 2007, from $2.109 billion in 2006. During the first quarter of 2008, we called $162.4 million in broker deposits that paid an average rate of 5.50% and had a total of $463,000 in unamortized commissions that were written-off during that quarter. Also, between May 2008 and July 2008, we wrote-off $176,000 in unamortized commissions related to $105.7 million in broker deposits that paid an average rate of 5.37% and were called during that period. We did not call back any broker deposits during the fourth quarter of 2008.

Net interest margin on a fully taxable equivalent basis decreased to 2.33% for the year ended December 31, 2008, from 2.80% and 2.86% for the years ended December 31, 2007 and 2006. Our net interest spread on a fully taxable equivalent basis decreased to 1.99% in 2008, from 2.29% in 2007 and 2.33% in 2006. The decrease in net interest margin and net interest spread during 2008 was mainly caused by decreased yields from interest rate cuts accompanied by a $72.3 million increase in nonaccrual loans, as previously mentioned, and increased average interest-bearing liabilities, which outpaced the reduction in interest rate paid. During 2007, the decline in the net interest margin and spread was primarily caused by an increase in the average cost of interest-bearing liabilities as a result of the rising short-term interest rates and the LIBOR inverted yield curve, which increased at a faster rate than the yield on earning-assets; and to the fact that the increase in average deposits was substantially in broker deposits, a higher cost category. In addition, during 2007, our net interest margin and spread were also affected by decreases in the prime rate, primarily during the fourth quarter of 2007. During 2006, our net interest margin and spread were also affected by the write-off of $626,000 in unamortized placement costs related to the redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures, as previously mentioned.

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

                                                                                         Year Ended December 31,
                                                      2008                                         2007                                         2006
                                                                   Average                                      Average                                      Average
                                      Average                       Rate/          Average                       Rate/          Average                       Rate/
                                      Balance       Interest       Yield(1)        Balance       Interest       Yield(1)        Balance       Interest       Yield(1)
                                                                                          (Dollars in thousands)
ASSETS:
Interest-earning assets:
Net loans and leases(2)             $ 1,802,703     $ 115,274           6.45 %   $ 1,780,719     $ 143,360           8.13 %   $ 1,643,587     $ 130,003           8.00 %
Securities of U.S. government
agencies(3)                             553,540        27,391           6.88         482,605        22,690           6.53         604,606        27,137           6.45
Other investment securities(3)          250,704        14,704           8.15          72,919         3,883           7.40          46,083         2,296           7.03
Puerto Rico government
obligations(3)                            7,451           340           6.34           8,149           385           6.57           9,397           412           6.29
Securities purchased under
agreements to resell and federal
funds sold                               34,798           801           2.80          37,826         2,042           6.14          34,841         1,791           5.57
Interest-earning deposits                23,018           500           2.17          18,579           964           5.19           9,565           507           5.30
Total interest-earning assets       $ 2,672,214     $ 159,010           6.61 %   $ 2,400,797     $ 173,324           7.73 %   $ 2,348,079     $ 162,146           7.53 %
Total noninterest-earning assets        115,619                                      100,660                                       80,735
TOTAL ASSETS                        $ 2,787,833                                  $ 2,501,457                                  $ 2,428,814

LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Money market deposits               $    18,983     $     599           3.17 %   $    18,361     $     532           2.91 %   $    25,470     $     584           2.31 %
NOW deposits                             45,633         1,163           2.55          47,068         1,169           2.49          46,330         1,035           2.24
Savings deposits                        117,857         2,665           2.26         141,120         3,497           2.48         184,824         4,386           2.37
Time certificates of deposit in
denominations of $100,000 or
more(4)                                 261,627        10,859           4.17         236,183        12,064           5.28         204,527         8,883           4.58
Other time deposits(5)                1,460,662        65,223           4.83       1,331,646        67,414           5.48       1,148,973        53,657           5.09
Other borrowings(6)                     571,644        21,207           5.01         397,515        20,794           6.95         499,275        26,818           7.17
Total interest-bearing
liabilities                         $ 2,476,406     $ 101,716           4.62 %   $ 2,171,893     $ 105,470           5.44 %   $ 2,109,399     $  95,363           5.20 %
Noninterest-bearing liabilities:
Noninterest-bearing deposits            113,275                                      119,004                                      128,551
Other liabilities                        30,039                                       35,735                                       25,830
Total noninterest-bearing
liabilities                             143,314                                      154,739                                      154,381
STOCKHOLDERS' EQUITY                    168,113                                      174,825                                      165,034
TOTAL LIABILITIES AND
. . .