The following discussion and analysis presents our consolidated financial condition and results of operations for the quarter ended March 31, 2009 and 2008. 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 26, 2009, including the following:

· the unprecedented levels of market volatility may adversely impact our ability to access capital or our business, financial condition and results of operations;

· 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;

· further 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 additional downturns in the Puerto Rican economy; and

· we rely heavily on short-term funding sources, such as brokered deposits, which access could be restricted if our capital category falls below "well-capitalized" under the current regulatory framework for prompt corrective action.

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 26, 2009 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 March 31, 2009, we had, on a consolidated basis, total assets of $2.901 billion, net loans and leases of $1.702 billion, total investments of $824.0 million, total deposits of $2.209 billion, other borrowings of $517.7 million, and stockholders' equity of $149.2 million. We currently operate through a network of 25 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.

Key Performance Indicators at March 31, 2009

We believe the following were key indicators of our performance and results of operations through the first quarter of 2009:

· our total assets increased to $2.901 billion, or by 5.64% on an annualized basis, at the end of the first quarter of 2009, from $2.860 billion at the end of 2008;

· total cash and cash equivalents increased to $242.3 million, or by 699.68% on an annualized basis, at the end of the first quarter of 2009, from $88.1 million at the end of 2008, resulting primarily from an increase in brokered deposits;

· our net loans and leases decreased to $1.702 billion at the end of the first quarter of 2009, representing an annualized decrease of 8.75%, from $1.741 billion at the end of 2008, resulting primarily from the sale of $19.6 million in lease financing contracts in March 2009;

· our investment securities decreased to $824.0 million, or 33.27% on an annualized basis, at the end of the first quarter of 2009, from $898.7 million at the end of 2008, resulting primarily from prepayments of approximately $58.9 million on investment securities;

· our total deposits increased to $2.209 billion, or by 23.90% on an annualized basis, at the end of the first quarter of 2009, from $2.084 billion at the end of 2008;

· our short-term borrowings decreased to $517.7 million, or by 50.51% on an annualized basis, at the end of the first quarter of 2009, from $592.5 million at the end of 2008;

· our nonperforming assets decreased to $167.8 million, or by 21.75% on an annualized basis, at the end of the first quarter of 2009, from $177.4 million at the end of 2008;

· our total revenue decreased to $42.1 million in the first quarter of 2009, representing a decrease of 8.92%, from $46.3 million in the same period of 2008;

· our net interest margin and spread on a fully taxable equivalent basis changed to 2.37% and 2.14% for the first quarter of 2009, respectively, from to 2.39% and 1.96%, respectively, for the same period in 2008;

· our provision for loan and lease losses decreased to $5.7 million in the first quarter of 2009, representing a decrease of 27.37%, from $7.8 million in the same period of 2008;

· our total noninterest income grew to $5.9 million in the first quarter of 2009, representing an increase of 63.75%, from $3.6 million in the same period of 2008;

· our total noninterest expense decreased to $12.5 million in the first quarter of 2009, representing a decrease of 5.92%, from $13.3 million in the same period of 2008; and

These items, as well as other factors, resulted in a net income of $3.0 million for the first quarter of 2009, compared to a net loss of $1.0 million for the same period in 2008, or $0.15 per common share for the first quarter of 2009, compared to $(0.06) per common share for the same period in 2008, 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 condensed 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 partial 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. The allowance for loan and lease losses amounted to $39.3 million, $41.6 million and $26.4 million as of March 31, 2009, December 31, 2008 and March 31, 2008, respectively. Losses charged to the allowance amounted to $8.5 million for the quarter ended March 31, 2009, compared to $10.1 million for the same period in 2008. Recoveries were credited to the allowance in the amounts of $498,000 and $532,000 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. As of March 31, 2009, we utilized the following key assumptions for the impairment analysis of the servicing assets related to the sales of lease financing contracts completed in March 2009 and March 2008, respectively: prepayment rate of 18.36%; weighted average live of 3.93 years and 2.37 years; and a discount rate of 10.00% and 9.90%. This impairment analysis revealed that there was no impairment. Servicing assets are included as part of other assets in the balance sheets. Servicing assets' book value amounted to $2.1 million, $1.2 million and $2.3 million as of March 31, 2009, December 31, 2008, and March 31, 2008, respectively.

Other Real Estate Owned and Repossessed Assets

Other real estate owned, or OREO, and repossessed assets, normally obtained through foreclosure or other workout situations, are initially recorded at 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.

During the quarter ended March 31, 2009, the total loss on sale of OREO was $57,000 over one OREO property sold with an aggregate book value of approximately $302,000, compared to a total gain of $18,000 over three OREO properties sold during the same period in 2008 with an aggregate book value of approximately $1.5 million. As of March 31, 2009, our OREO consisted of 42 properties with an aggregate value of $9.7 million, compared to 36 properties with an aggregate value of $8.1 million as of December 31, 2008, and 28 properties with an aggregate value of $7.2 million as of March 31, 2008.

Other repossessed assets amounted to $3.8 million, $4.7 million and $6.1 million as of March 31, 2009, December 31, 2008 and March 31, 2008, 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. Repossessed vehicles amounted to $2.5 million, $3.5 million and $4.4 million as of March 31, 2009, December 31, 2008 and March 31, 2008, respectively. The total loss ratio on sale of repossessed vehicles for the quarter ended March 31, 2009 was 16.4%, compared to 13.2% for the same period in 2008. The 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. During the quarter ended March 31, 2009, we sold 392 vehicles and repossessed 295 vehicles, compared to 335 vehicles sold and 344 vehicles repossessed during the first quarter of 2008.

Repossessed equipment amounted to $90,000 and $6,000 as of March 31, 2009 and December 31, 2008, respectively. There was no repossessed equipment as of March 31, 2008. As of March 31, 2009 and 2008, the total amount of repossessed equipment sold amounted to $41,000 and $197,000, respectively. For the quarter ended March 31, 2009, there was a total gain of $1,000 on sale of repossessed equipment, compared to a total gain of $18,000 for the same period in 2008. This decrease in the total gain on sale of repossessed equipment was mainly due to a decrease in the amount of repossessed equipment sold.

Total repossessed boats amounted to $1.2 million as of March 31, 2009 and December 31, 2008, and $1.7 million as of March 31, 2008. For the quarter ended March 31, 2009, the total loss on sale of repossessed boats was $89,000, compared to a loss of $64,000 for the same period in 2008. During the quarter ended March 31, 2009, we sold 8 boats and repossessed 3 boats, decreasing our inventory of repossessed boats to 10 units as of March 31, 2009, from 15 units as of December 31, 2008. As of March 31, 2009 and December 31, 2008, our boat financing portfolio amounted to $29.0 million and $30.3 million, respectively.

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."

Deferred Tax Asset

The deferred tax asset reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the viability 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 for futures 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, 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 March 31, 2009 will be realized. For additional information on income taxes, please refer to the "Note
8 - Deferred Tax Asset" to our condensed consolidated financial statements included herein and the section of this discussion and analysis captioned "Provision for Income Taxes."

Investment Securities

We review the investment portfolio based on the provisions of FASB Staff Position ("FSP") No. 115-2, Recognition and Presentation of Other-Than-Temporary Impairments, which we adopted for the quarter ended March 31, 2009. This FSP amends the other-than-temporary impairment guidance in U.S. GAAP to improve presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. For additional information on the adoption of this FSP and investment securities, please refer to the "Note 2 - New Accounting Pronouncements" to our condensed consolidated financial statements included herein and the section of this discussion and analysis captioned "Financial Condition - Investment Securities."

Results of Operations for the Three months ended March 31, 2009

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 7.85%, or $1.2 million to $14.0 million in the quarter ended March 31, 2009, from $15.2 million for the same period in 2008. 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 31.

Total interest income for the first quarter of 2009 was $36.2 million, compared to $35.8 million for the previous quarter and $42.6 million for the quarter ended March 31, 2008. Total interest income during the first quarter of 2009 remained stable when compared to the previous quarter. The decrease during the quarter ended March 31, 2009, when compared to the quarter ended March 31, 2008, was mainly driven by the combined effect of decreased loan yields resulting from interest rate cuts of 25 basis points in May 2008 and 175 basis points during the fourth quarter of 2008 accompanied by a $102.1 million decrease in average net loans and the effect caused by a $63.2 million increase in nonaccrual loans. During the quarter ended March 31, 2009, the average interest yield on a fully taxable equivalent basis earned on net loans was 5.71%, compared to 5.60% and 7.19% for the previous quarter and the quarter ended March 31, 2008, respectively. Average net loans amounted to $1.734 billion for the quarter ended March 31, 2009, compared to $1.762 billion for the previous quarter, and $1.836 billion for the quarter ended March 31, 2008. The amount of interest income we ceased to accrue on nonaccrual loans amounted to $3.7 million, $3.1 million and $1.7 million during the quarters ended March 31, 2009, December 31, 2008 and March 31, 2008, respectively. The amount of interest income we ceased to accrue during the same periods represented a reduction of approximately 55 basis points, 46 basis points and 26 basis points in the average interest yield on a fully taxable equivalent basis earned on net loans, respectively.

Total interest expense for the quarter ended March 31, 2009 was $22.2 million, compared to $24.2 million and $27.4 million for the previous quarter and the quarter ended March 31, 2008, respectively. The decrease during the quarter ended March 31, 2009 when compared to the previous quarter and prior year linked-quarter resulted from the net effect of a decrease in the interest rate paid in all deposit categories and other borrowings and an increase in average interest-bearing liabilities mainly concentrated in brokered deposits and other time deposits. During the quarter ended March 31, 2009, the average interest rate on a fully taxable equivalent basis paid for interest-bearing liabilities decreased to 3.89%, from 4.37% for the previous quarter, and 5.13% for the quarter ended March 31, 2008. Average interest-bearing liabilities amounted to $2.518 billion for the quarter ended March 31, 2009, compared to $2.488 billion for the previous quarter, and $2.414 billion for the quarter ended March 31, 2008.

For the quarter ended March 31, 2009, net interest margin and net interest spread on a fully taxable equivalent basis was 2.37% and 2.14%, respectively, compared to 2.00% and 1.71% for the previous quarter, and 2.39% and 1.96% for the quarter ended March 31, 2008.

Net interest margin and net interest spread on a fully taxable equivalent basis remained relatively stable during the first quarter of 2009 when compared to the first quarter of 2008. The increase in net interest margin and net interest spread during the quarter ended March 31, 2009 when compared to the previous quarter were mainly caused by a reduction of 48 basis points in the interest rate paid on average interest-bearing liabilities, as mentioned above.

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 March 31,
                                            2009                                          2008
                                                          Average                                       Average
                            Average                        Rate/          Average                        Rate/
                            Balance        Interest       Yield(1)        Balance        Interest       Yield(1)
                                                          (Dollars in thousands)
ASSETS:
Interest-earning
assets:
Net loans and leases(2)   $ 1,734,072     $   24,600           5.71 %   $ 1,836,179     $   32,759           7.19 %
Securities of U.S.
government agencies(3)        629,987          7,825           6.66         528,074          6,487           6.83
Other investment
securities(3)                 227,471          3,630           8.55         216,164          2,931           7.54
Puerto Rico government
obligations(3)                  5,605             66           6.47           6,388             76           6.61
Securities purchased
under agreements to
resell and federal
funds sold                     76,442             77           0.47          34,308            281           3.86
Interest-earning
deposits                          400              2           2.68          11,834            106           3.58
Total interest-earning
assets                    $ 2,673,977     $   36,200           6.03 %   $ 2,632,947     $   42,640           7.09 %
Total
noninterest-earning
assets                        122,034                                       110,122
TOTAL ASSETS              $ 2,796,011                                   $ 2,743,069

LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Money market deposits     $    18,431     $      108           2.36 %   $    17,825     $      139           3.14 %
. . .