The following discussion and analysis presents our consolidated financial condition and results of operations for the quarter ended June 30, 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, and our access to such funding sources is currently restricted as a result of our capital category falling below "well-capitalized" as of June 30, 2009 under the regulatory framework for prompt corrective action, unless we obtain a waiver from the FDIC.

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 bank holding company headquartered in San Juan, Puerto Rico, offering a broad array of financial services through our wholly-owned banking subsidiary, Eurobank, and its wholly-owned insurance agency subsidiary, EuroSeguros, Inc. As of June 30, 2009, we had, on a consolidated basis, total assets of $2.738 billion, net loans and leases of $1.665 billion, total investments of $698.8 million, total deposits of $2.079 billion, other borrowings of $492.7 million, and stockholders' equity of $140.0 million. We currently operate through a network of 25 branch offices located throughout Puerto Rico. We focus our core banking franchise on commercial loans, investments, and business transaction accounts.

Key Performance Indicators at June 30, 2009

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

· our total assets decreased to $2.738 billion, or by 8.55% on an annualized basis, at the end of the second quarter of 2009, from $2.860 billion at the end of 2008;

· total cash and cash equivalents increased to $222.1 million, or by 303.83% on an annualized basis, at the end of the second quarter of 2009, from $88.1 million at the end of 2008, resulting primarily from the sale of securities and prepayments of principal in our investment and loans portfolios;

· our net loans and leases decreased to $1.665 billion at the end of the second quarter of 2009, representing an annualized decrease of 8.66%, from $1.741 billion at the end of 2008, including the sale of $19.6 million in lease financing contracts during the first quarter of 2009;

· our investment securities decreased to $698.8 million, or 44.50% on an annualized basis, at the end of the second quarter of 2009, from $898.7 million at the end of 2008, including the sale of $195.9 million in securities during the six months ended June 30, 2009;

· our total deposits decreased to $2.079 billion, or by 0.54% on an annualized basis, at the end of the second quarter of 2009, from $2.084 billion at the end of 2008;

· our short-term borrowings decreased to $492.7 million, or by 33.70% on an annualized basis, at the end of the second quarter of 2009, from $592.5 million at the end of 2008;

· our nonperforming assets increased to $208.8 million, or by 35.43% on an annualized basis, at the end of the second quarter of 2009, from $177.4 million at the end of 2008;

· our total revenue decreased to $36.2 million in the second quarter of 2009, representing a decrease of 17.03%, from $43.6 million in the same period of 2008;

· our net interest margin and spread on a fully taxable equivalent basis changed to 1.97% and 1.76% for the second quarter of 2009, respectively, from to 2.37% and 2.02%, respectively, for the same period in 2008;

· our provision for loan and lease losses increased to $12.7 million in the second quarter of 2009, representing an increase of 27.24%, from $10.0 million in the same period of 2008;

· our total noninterest income decreased to $2.8 million in the second quarter of 2009, representing a decrease of 13.19%, from $3.2 million in the same period of 2008;

· our total noninterest expense increased to $16.1 million in the second quarter of 2009, representing an increase of 27.11%, from $12.6 million in the same period of 2008; and

· for the second quarter of 2009, we recorded an income tax benefit of $2.6 million, compared to an income tax benefit of $2.9 million in the same period in 2008.

These items, as well as other factors, resulted in a net loss of $11.6 million for the second quarter of 2009, compared to a net loss of $1.8 million for the same period in 2008, or $(0.60) per common share for the second quarter of 2009, compared to $(0.10) 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 may have been incurred in our loan and lease portfolio. The allowance for loan and lease losses amounted to $42.7 million, $41.6 million and $30.2 million as of June 30, 2009, December 31, 2008 and June 30, 2008, respectively. Losses charged to the allowance amounted to $18.4 million for the six months ended June 30, 2009, compared to $17.1 million for the same period in 2008. Recoveries were credited to the allowance in the amounts of $1.1 million and $1.3 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. As of June 30, 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: prepayment rate of 16.65%; weighted average life of 3.15 years; and a discount rate of 9.67%. 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 $1.7 million, $1.2 million and $1.9 million as of June 30, 2009, December 31, 2008, and June 30, 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.

As of June 30, 2009, our OREO consisted of fifty-one properties with an aggregate value of $10.3 million, compared to thirty-six properties with an aggregate value of $8.8 million as of December 31, 2008, and twenty-nine properties with an aggregate value of $7.6 million as of June 30, 2008. During the quarter and six months ended June 30, 2009, two OREO properties and three OREO properties were sold, respectively, resulting in a no loss for the quarter and a year-to-date total loss of $57,000, compared to three OREO properties and twenty-four OREO properties sold during the same periods in 2008, resulting in a total gain of $26,000 and $44,000, respectively.

Other repossessed assets amounted to $2.5 million, $4.7 million and $6.5 million as of June 30, 2009, December 31, 2008 and June 30, 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 $1.8 million, $3.5 million and $4.7 million as of June 30, 2009, December 31, 2008 and June 30, 2008, respectively. The total loss ratio on sale of repossessed vehicles for the quarter and six months ended June 30, 2009 was 4.3% and 6.3%, respectively, compared to 16.3% and 14.6% for the same periods in 2008. These decreases resulted mainly from the combined effect of an increase in the volume of repossessed vehicles sold and a reduction in related repair expenses. As of June 30, 2009, we had 155 repossessed vehicles in inventory, compared to 357 units as of June 30, 2008.

Total repossessed boats amounted to $589,000, $1.2 million and $1.8 million as of June 30, 2009 and December 31, 2008 and June 30, 2008, respectively. For the quarter and six months ended June 30, 2009, the total loss on sale of repossessed boats was $323,000 and $412,000, respectively, compared to a loss of $105,000 and $169,000 for the same periods in 2008. This increase was primarily attributable to our strategy of being more aggressive in the sale of repossessed boats to expedite their disposition and avoid build-up of inventory. During the six months ended June 30, 2009, we sold 11 boats and repossessed 3 boats, compared to 10 boats sold and 8 boats repossessed during the same period in 2008. Our inventory of repossessed boats totaled 7 units as of June 30, 2009, compared to 16 units as of June 30, 2008. As of June 30, 2009 and December 31, 2008, our boat financing portfolio amounted to $28.2 million and $30.3 million, respectively.

Repossessed equipment amounted to $35,000 and $6,000 as of June 30, 2009 and December 31, 2008, respectively. There was no repossessed equipment as of June 30, 2008. For the quarter and six months ended June 30, 2009, the total amount of repossessed equipment sold amounted to $108,000 and $149,000, respectively, resulting in a total gain of $15,000 and $16,000 for those same periods, compared to $197,000 in equipment sold during the six months ended June 30, 2008, resulting in a total gain of $17,000. No repossessed equipment was sold during the second quarter of 2008.

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. After considering a valuation allowance of $4.5 million, we believe it is more likely than not that the benefits of the carrying net amount of these deductible differences as of June 30, 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 Quarter and Six months ended June 30, 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 19.83%, or $2.9 million, and by 13.74%, or $4.1 million, to $11.8 million and $25.8 million in the quarter and six-month period ended June 30, 2009, from $14.7 million and $29.9 million for the same periods 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 37.

Total interest income amounted to $33.3 million for the second quarter of 2009, compared to $36.2 million for the previous quarter and $40.3 million for the quarter ended June 30, 2008. For the six months ended June 30, 2009, total interest income was $69.5 million, compared to $83.0 million for the same period in 2008. These decreases in total interest income were mainly driven by the combined effect of decreased loan yields resulting primarily from interest rate cuts of 175 basis points during the fourth quarter of 2008 accompanied by decreased average net loans and investments and the effect caused by the increase in nonaccrual loans, as further explained below.

During the quarter and six months ended June 30, 2009, the average interest yield on a fully taxable equivalent basis earned on net loans was 5.47% and 5.59%, respectively, compared to 5.71% for the previous quarter and 6.45% and 6.83% for the same periods in 2008. Average net loans amounted to $1.693 billion and $1.713 billion for the quarter and six months ended June 30, 2009, compared to $1.734 billion for the previous quarter, and $1.818 billion and $1.827 billion for the same periods in 2008. Average interest yield on a fully taxable equivalent basis earned on investments remained relatively stable at 7.15%, 7.16% and 7.28% for the quarters ended June 30, 2009, March 31, 2009 and June 30, 2008, respectively, while it remained at 7.16% for the six-month periods ended June 30, 2009 and 2008. Average investments amounted to $758.5 million and $810.5 million for the quarter and six months ended June 30, 2009, compared to $863.1 million for the previous quarter, and $826.9 million and $788.8 million for the same periods in 2008.

Nonaccrual loans amounted to $162.4 million, $130.4 million and $86.3 million as of June 30, 2009, March 31, 2009 and June 30, 2008, respectively. If these loans had been accruing interest during the quarter and six months ended June 30, 2009, the additional interest income realized would have been approximately $2.4 million and $4.7 million, respectively, compared to $1.6 million and $3.4 million during the same periods in 2008.

For the quarter and six months ended June 30, 2009, our total interest expense amounted to $21.6 million and $43.7 million, respectively, compared to $22.2 million for the previous quarter, and $25.6 million and $53.0 million for the same periods in 2008. These decreases resulted mainly from the net effect of a re-pricing in all deposit categories and other borrowings under a lower interest rate environment; and a net increase in average interest-bearing liabilities. For the quarter and six months ended June 30, 2009, the average interest rate on a fully taxable equivalent basis paid for interest-bearing liabilities decreased to 3.70% and 3.79%, respectively, from 3.89% for the previous quarter, and 4.59% and 4.85% for the same periods in 2008. During the quarter and six months ended June 30, 2009, average interest-bearing liabilities amounted to $2.558 billion and $2.538 billion, respectively, compared to $2.518 billion for the previous quarter, and $2.510 billion and $2.462 billion for the same periods in 2008.

For the second quarter of 2009, net interest margin and net interest spread on a fully taxable equivalent basis was 1.97% and 1.76%, respectively, compared to 2.37% and 2.14% for the previous quarter, and 2.37% and 2.02% for the quarter ended June 30, 2008. Net interest margin and net interest spread on a fully taxable equivalent basis was 2.16% and 1.95% for the six-month period ended June 30, 2009, respectively, compared to 2.37% and 1.99% for the same period in 2008.

The decrease in net interest margin and net interest spread on a fully taxable equivalent basis during the second quarter of 2009 when compared to the previous quarter and the quarter ended June 30, 2008 was mainly caused by the reduction in the interest yield on average earning assets, as previously mentioned, which outpaced the reduction in the interest rate paid on average interest-bearing liabilities, and, on a linked-quarter basis, it was also impacted by the reduction resulting from the special income tax of 5% imposed by the Puerto Rico Act No. 7 on the net income of international banking entities, as discussed further in the section of this discussion and analysis captioned "Provision for Income Taxes."

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,
                                                 2009                                         2008
                                                              Average                                      Average
                                 Average                       Rate/          Average                       Rate/
                                 Balance       Interest       Yield(1)        Balance       Interest       Yield(1)
                                                              (Dollars in thousands)

ASSETS:
. . .