UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2009

Commission File Number 000-50872

EUROBANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Commonwealth of Puerto Rico		66-0608955
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

State Road PR-1, Km. 24.5, Quebrada Arenas Ward, San Juan, Puerto Rico 00926 ~~(Address of principal executive offices, including zip code) (787) 751-7340 (Registrant’s telephone number, including area code)~~

(Address of principal executive offices, including zip code)

(787) 751-7340

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). `

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes ¨ No x

The number of shares outstanding of the issuer’s Common Stock as of ~~August~~November 1420, ~~2009~~ 2009 was 19,499,~~515~~215 shares.

EUROBANCSHARES, INC.

INDEX

		PAGE
PART I - FINANCIAL INFORMATION		1
ITEM 1.	FINANCIAL STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	29
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	63
ITEM 4.	CONTROLS AND PROCEDURES	63
PART II - OTHER INFORMATION		64
ITEM 1.	LEGAL PROCEEDINGS	64
ITEM 1A.	RISK FACTORS	64
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	67
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	67
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	67
ITEM 5.	OTHER INFORMATION	68
ITEM 6.	EXHIBITS	68

	PAGE
PART I - FINANCIAL INFORMATION	1
ITEM 1. FINANCIAL STATEMENTS	1
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	70
ITEM 4. CONTROLS AND PROCEDURES	70
PART II - OTHER INFORMATION	71
ITEM 1. LEGAL PROCEEDINGS	71
ITEM 1A. RISK FACTORS	71
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	76
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	76
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	76
ITEM 5. OTHER INFORMATION	76
ITEM 6. EXHIBITS	77

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

EUROBANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

~~June~~ September 30, 2009 (Unaudited) and December 31, 2008

	June 30,			December 31,
	September 30,			December 31,
	2009			2008
Assets
Cash and cash equivalents	$			$
Cash and due from banks	$	~~221~~254,~~655~~171,~~244~~013		$	43,275,239
Interest bearing deposits		400,000			400,000
Federal funds sold		—			44,470,925
Total cash and cash equivalents		~~222~~254,~~055~~571,~~244~~013			88,146,164
Securities purchased under agreements to resell		2421,~~179~~027,~~698~~247			24,486,774
Investment securities available for sale, at fair value		~~577~~814,~~458~~444,~~823~~679			751,016,565
Investment securities held to maturity, fair value of $111,153,307 in 2009 and $132,890,502 in 2008		110,201,991			132,798,181
Investment securities held to maturity, fair value of $132,890,502 in 2008		—			132,798,181
Other investments		1110,~~131~~996,~~700~~000			14,932,400
Loans held for sale		178,~~019,702~~219			1,873,445
Loans, net of allowance for loan and lease losses of $42,729,222 in 2009 and $41,639,051 in 2008		1,665,163,485			1,740,539,113
Loans, net of allowance for loan and lease losses of $45,969,169 in 2009 and $41,639,051 in 2008		1,589,155,888			1,740,539,113
Accrued interest receivable		13,~~683~~827,~~245~~991			14,614,445
Customers’ liability on acceptances		~~365~~532,~~299~~636			405,341
Premises and equipment, net		3433,~~273~~827,~~013~~756			34,466,471
Deferred tax assets, net		2927,~~300~~840,~~777~~459			23,825,896
Other assets		4940,~~266~~606,~~566~~887			33,324,128
Total assets	$	2,~~738~~806,~~099~~908,~~543~~775		$	2,860,428,923
Liabilities and Stockholders’ Equity
Deposits:
Noninterest bearing	$	~~100~~101,~~730~~473,~~850~~113		$	108,645,242
Interest bearing		12,~~977~~050,~~975~~969,~~978~~974			1,975,662,802
Total deposits		2,~~078~~152,~~706~~443,~~828~~087			2,084,308,044
Securities sold under agreements to repurchase		~~471~~468,675,000			556,475,000
Acceptances outstanding		~~365~~532,~~299~~636			405,341
Advances from Federal Home Loan Bank		~~369~~354,~~169~~494			15,398,041
Note payable to Statutory Trust		20,619,000			20,619,000
Accrued interest payable		1213,~~574~~268,~~585~~954			16,073,737
Accrued expenses and other liabilities		1312,~~806~~129,~~345~~169			10,579,960
		2,598,116,226			2,703,859,123
Total Liabilities		2,668,022,340			2,703,859,123
Stockholders’ equity:
Preferred stock:
Preferred stock Series A, $0.01 par value. Authorized 20,000,000 shares; issued and outstanding 430,537 in 2009 and 2008(aggregate liquidation preference value of $10,763,425)		4,305			4,305
Capital paid in excess of par value		10,759,120			10,759,120
Common stock:
Common stock, $0.01 par value. Authorized 150,000,000 shares; issued: 20,439,398 shares in 2009 and 2008; outstanding: 19,499,515 shares in 2009 and 2008		204,394			204,394
Common stock, $0.01 par value. Authorized 150,000,000 shares; issued: 20,439,398 shares in 2009 and 2008; outstanding: 19,499,215 shares in 2009 and 19,499,515 in 2008		204,394			204,394
Capital paid in excess of par value		110,~~182~~219,~~763~~541			110,109,207
Retained earnings:
Reserve fund		8,029,106			8,029,106
Undivided profits		4033,~~914~~497,~~466~~668			49,773,573
Treasury stock, 940,183 shares in 2009 and 939,883 in 2008, at cost		(9,918,147	)		(9,916,962	)
Accumulated other comprehensive loss:
Unrealized loss on available for sale securities		(7744,~~187,763~~754	)		(12,392,943	)
Other-than-temporary impairment losses on available for sale securities for which a portion has been recognized in operations, net of taxes		(1314,~~004~~654,~~927~~306	)		—
Total stockholders’ equity		~~139~~138,~~983~~886,~~317~~435			156,569,800
Total liabilities and stockholders’ equity	$	2,~~738~~806,~~099~~908,~~543~~775		$	2,860,428,923

See accompanying notes to condensed consolidated financial statements.

EUROBANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

For the three and ~~six~~nine-month periods ended ~~June~~September 30, 2009 and 2008

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2009

2008

2009

2008

Interest income:

Loans, including fees

2322,~~025~~368,~~962~~006

2928,~~106~~963,~~477~~623

4769,~~625~~993,~~867~~872

6190,~~864~~827,~~250~~873

Investment securities

Taxable

14,~~912~~745

2,~~588~~375

38,~~859~~604

57,~~231~~605

Exempt

108,~~119~~981,~~844~~415

10,~~822~~939,~~424~~820

2130,~~638~~620,~~907~~321

2031,~~314~~254,~~226~~046

Interest bearing deposits, securities purchased under agreements to resell, and other

~~200~~220,~~060~~424

~~411~~344,~~651~~071

~~278~~499,~~849~~274

~~798~~1,~~638~~142,709

Total interest income

3331,~~347~~574,~~778~~590

40,~~343~~249,~~140~~889

69101,~~547~~122,~~482~~071

82123,~~982~~232,~~345~~233

Interest expense:

Deposits

1716,~~143~~553,~~727~~934

2019,~~609~~252,~~064~~420

3451,~~686~~239,~~046~~980

4261,~~382~~634,~~230~~650

Securities sold under agreements to repurchase, notes payable, and other

4,~~416~~476,~~595~~193

5,~~030~~226,~~573~~505

913,~~036~~512,~~498~~691

1015,~~663~~889,~~270~~775

Total interest expense

21,~~560~~030,~~322~~127

2524,~~639~~478,~~637~~925

4364,~~722~~752,~~544~~671

5377,~~045~~524,~~500~~425

Net interest income

1110,~~787~~544,~~456~~463

1415,~~703~~770,~~503~~964

2536,~~824~~369,~~938~~400

2945,~~936~~707,~~845~~808

Provision for loan and lease losses

1217,~~707~~588,000

97,~~986~~980,~~800~~000

1835,~~396~~984,000

1725,~~819~~799,800

Net interest (expense) income after provision for loan and lease losses

(~~919~~7,~~544~~043,537

)

47,~~716~~790,~~703~~964

7385,~~428,938~~400

1219,~~117~~908,~~045~~008

Noninterest income:

Other-than-temporary impairment losses in securities:

Total other-than-temporary impairment losses

(1,~~791,~~876,421

)

—

(1719,~~283~~159,~~095~~516

)

—

Portion of loss recognized in other comprehensive loss

~~(883~~1,~~876~~625,834

)

—

1315,~~799~~425,~~751~~585

—

Net impairment losses recognized in losses

(2,675,752

)

—

(3,483,344

)

—

Net impairment losses recognized in operations

(250,587

)

—

(3,733,931

)

—

Net gain on sale of securities

39,~~526~~391,~~781~~228

—190,956

716,~~563~~954,~~169~~397

—190,956

Service charges – fees and other

2,~~059~~330,~~174~~253

32,~~218~~466,~~454~~422

46,~~184~~514,~~053~~306

58,~~641~~108,~~828~~250

Net loss on sale of other real estate owned, repossessed assets and on disposition of other assets

(108,145

)

(85,721

)

(321,869

)

(119,479

)

Net gain (loss) on sale of other real estate owned, repossessed assets and on disposition of other assets

6,963

(279,595

)

(314,906

)

(399,074

)

Net gain on sale of loans and leases

18387,~~847~~267

~~116~~47,~~942~~726

~~814~~1,~~419~~201,685

1,~~352~~399,~~137~~864

Total noninterest income

211,~~820~~865,~~905~~124

32,~~249~~425,~~675~~509

820,~~756~~621,~~428~~551

69,~~874~~299,~~486~~996

Noninterest expense:

Salaries and employee benefits

4,~~685~~563,~~863~~330

5,~~318~~102,~~139~~149

914,~~488~~051,~~002~~332

1015,~~897~~999,~~052~~202

Occupancy

2,~~490~~622,~~437~~348

2,~~757~~936,~~843~~293

57,~~038~~660,~~533~~882

58,~~700~~636,~~611~~904

Professional services

12,~~704~~171,~~644~~233

1,~~243~~408,~~021~~797

35,~~261~~432,~~119~~352

23,~~484~~893,~~239~~036

Insurance

42,~~373~~520,~~530~~212

~~636~~970,~~177~~878

58,~~548~~068,~~099~~311

12,~~282~~253,~~768~~646

Promotional

~~135~~90,~~601~~911

~~213~~153,~~655~~458

~~253~~344,~~519~~429

~~580~~734,~~673~~131

Other

2,~~666~~176,~~015~~124

2,~~463~~885,~~228~~356

47,~~946~~123,~~989~~111

47,~~952~~837,~~425~~782

Total noninterest expense

1614,~~056~~144,~~090~~158

1213,~~632~~456,~~063~~931

2842,~~536~~680,~~261~~417

2539,~~897~~354,~~768~~701

Loss before income taxes

(149,~~154~~322,~~729~~571

)

(43,~~665~~240,~~685~~458

)

(1221,~~350~~673,~~895~~466

)

(610,~~906~~146,~~237~~697

)

Income Tax Benefit

(21,~~558~~905,~~816~~773

)

(2,~~902~~452,~~780~~507

)

(35,~~799~~705,~~913~~686

)

(46,~~140~~592,~~008~~515

)

Net loss

(117,~~595~~416,~~913~~798

)

(1787,~~762,905~~951

)

(815,~~550~~967,~~982~~780

)

(23,~~766~~554,~~229~~182

)

Loss per share:

Basic:

(0.6038

)

(0.1005

)

(0.4583

)

(0.1621

)

Diluted:

(0.6038

)

(0.1005

)

(0.4583

)

(0.1621

)

See accompanying notes to condensed consolidated financial statements.

EUROBANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

For the nine ~~six~~ months ended ~~June~~September 30, 2009 and 2008

	2009			2008
Preferred stock:
Balance at beginning of period	$	4,305		$	4,305
Issuance of preferred stock		—			—
Balance at end of period		4,305			4,305
Capital paid in excess of par value - preferred stock:
Balance at beginning of period		10,759,120			10,759,120
Issuance of preferred stock		—			—
Balance at end of period		10,759,120			10,759,120
Common stock:
Balance at beginning of period		204,394			200,324
Exercised stock options		—			4,070
Balance at end of period		204,394			204,394
Capital paid in excess of par value – common stock:
Balance at beginning of period		110,109,207			107,936,531
Exercised stock options		—			2,024,930
Stock based compensation		73110,~~556~~334			74110,~~190~~968
Balance at end of period		110,~~182~~219,~~763~~541			110,~~035~~072,~~651~~429
Reserve fund:
Balance at beginning of period		8,029,106			8,029,106
Transfer from undivided profits		—			—
Balance at end of period		8,029,106			8,029,106
Undivided profits:
Balance at beginning of period		49,773,573			61,789,048
Net loss		(815,~~550~~967,~~982~~780	)		(23,~~766~~554,~~229~~182	)
Preferred stock dividends ($0.43 per share in 2009 and 2008)		(308,125	)		(371,383	)
Preferred stock dividends ($0.72 per share in 2009 and $1.30 per share in 2008)		(308,125	)		(559,114	)
Transfer to reserve fund		—			—
Balance at end of period		4033,~~914~~497,~~466~~668			5857,~~651~~675,~~436~~752
Treasury stock
Balance at beginning of period		(9,916,962	)		(9,910,458	)
Purchase of common stock		(1,185	)		—(6,504	)
Balance at end of period		(9,918,147	)		(9,~~910~~916,~~458~~962	)
Accumulated other comprehensive (loss) income, net of taxes:
Balance at beginning of period		(12,392,943	)		1,110,173
Unrealized net gain on investment securities available for sale		513,~~205~~137,~~180~~697			(1421,~~144~~809,~~503~~245	)
Other-than-temporary impairment losses of available for sale securities for which a portion has been recognized in operations		(1314,~~004~~654,~~927~~306	)		—
Balance at end of period		(2013,~~192~~909,~~690~~552	)		(1320,~~034~~699,~~330~~072	)
Total stockholders’ equity	$	~~139~~138,~~983~~886,~~317~~435		$	~~164~~156,~~739~~129,~~224~~072

See accompanying notes to condensed consolidated financial statements.

EUROBANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

For the three and ~~six~~nine months ended ~~June~~ September 30, 2009 and 2008

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Net loss	$	(117,~~595~~416,~~913~~798	)	$	(1787,~~762,905~~951	)	$	(815,~~550~~967,~~982~~780	)	$	(23,~~766~~554,~~230~~182	)
Other comprehensive (loss) income, net of tax:
Unrealized net gain (loss) on investment securities available for sale		17,~~528~~932,~~151~~517			(157,~~548~~664,~~191~~742	)		513,~~205~~137,~~180~~697			(1421,~~144~~809,~~503~~245	)
Other-than-temporary impairment losses of available for sale securities for which a portion has been recognized in operations		~~944~~(1,~~518~~649,379	)		—			(1314,~~004~~654,~~927~~306	)		—
Comprehensive loss	$	(91,~~123~~133,~~244~~660	)	$	(178,~~311~~452,~~096~~693	)	$	(1617,~~350~~484,~~729~~389	)	$	(1625,~~910~~363,~~733~~427	)

See accompanying notes to condensed consolidated financial statements.

EUROBANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

For the nine ~~six~~ months ended ~~June~~September 30, 2009 and 2008

	2009			2008
Cash flows from operating activities:
Net loss	$	(815,~~550~~967,~~982~~780	)	$	(23,~~766~~554,~~230~~182	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		23,~~159~~206,~~347~~552			12,~~894~~987,~~599~~187
Provision for loan and lease losses		1835,~~396~~984,000			1725,~~819~~799,800
Stock-based compensation		73110,~~556~~334			74110,~~190~~968
Deferred tax and acquired tax credits benefit		(47,~~868~~341,~~313~~090	)		(46,~~149~~604,~~937~~468	)
Net gain on sale of securities		(716,~~563~~954,~~169~~397	)		—(190,956	)
Net other than temporary impairment losses		3,~~483~~733,~~344~~931			—
Net gain on sale of loans		(814,419	)		(1,352,137	)
Net gain on sale of loans and leases		(1,201,685	)		(1,399,864	)
Net loss on sale of repossessed assets and on disposition of other assets		~~321~~314,~~869~~906			~~119~~399,~~479~~074
Net amortization of premiums and accretion of discount on investment securities		(~~892~~1,~~786~~217,277	)		(~~687~~1,~~842~~037,590	)
Valuation expense of repossesed assets		~~735~~993,~~658~~463			~~499~~1,~~583~~004,380
Decrease in deferred loan costs		~~481~~597,~~043~~614			1,~~186~~435,~~887~~108
Origination of loans held for sale		(24,~~503~~075,~~895~~509	)		(1221,~~586~~670,~~698~~376	)
Proceeds from sale of loans held for sale		24,~~561~~159,~~645~~713			1221,~~762~~893,~~266~~658
Decrease in accrued interest receivable		~~931~~786,~~200~~454			~~906~~1,~~880~~254,988
Net (increase) decrease in other assets		(12,063,941	)		3,934,687
Net decrease in other assets		5,167,698			11,499,775
(Decrease) increase in accrued interest payable, accrued expenses, and other liabilities		(272,744	)		7,569,509
Decrease in accrued interest payable, accrued expenses, and other liabilities		(1,255,551	)		(1,821,537	)
Net cash (used in) provided by operating activities		(8,386,586	)		25,225,036
Net cash provided by operating activities		7,041,376			30,105,965
Cash flows from investing actitivies:
Net decrease (increase) in securities purchased under agreements to resell		~~307~~3,~~076~~459,527			(363,~~704~~019,~~035~~903	)
Proceeds from sale of investment securities available for sale		203,511,176			—
Proceeds from sale of investment securities available for sale and held to maturity		465,566,007			19,090,869
Purchases of investment securities available for sale		(~~167~~600,~~545~~479,~~378~~358	)		(~~290~~347,~~027~~046,~~400~~408	)
Proceeds from principal payments and maturities of investment securities available for sale		~~133~~185,~~391~~939,~~440~~539			~~197~~245,~~000~~918,~~674~~447
Purchases of investment securities held to maturity		—			—
Proceeds from principal payments, maturities, and calls of investment securities held to maturity		30,492,733			7,191,949
Proceeds from principal payments, maturities, and calls of investment securities held to matu		22,804,079			4,833,560
Purchase of Federal Home Loan Bank Stocks		(4,966,600	)		(29,667,885	)
Purchase of Federal Home Loan Bank Stocks		(2,716,600	)		(10,351,500	)
Proceeds from principal payments and maturities of Federal Home Loan Bank Stocks		8,903,000			8,120,300
Proceeds from principal payments and maturities of Federal Home Loan Bank Stocks		6,517,300			8,119,700
Net decrease (increase) in loans		71,286,737			(18,559,632	)
Net decrease (increase) in loans		33,063,742			(43,353,871	)
Proceeds from sale of loans		35,306,804			37,671,519
Proceeds from sale of loans		19,608,076			37,671,519
Proceeds from sale of other assets		578,702			788,459
Proceeds from sale of other assets		427,898			677,684
Capital expenditures		(1,685,781	)		(3,293,744	)
Capital expenditures		(1,333,722	)		(2,234,891	)
Net cash provided by (used in) investing activities		194,401,310			(82,806,029	)
Net cash provided by (used in) investing activities		248,035,087			(134,368,560	)
Cash flows from financing activities:
Net (decrease) increase in deposits		(5,601,216	)		56,743,091
(Decrease) income in brokered deposits		(105,716,295	)		45,255,474
(Decrease) increase in securities sold under agreements to repurchase and other borrowings		(84,800,000	)		34,653,750
Net income (decrease) in other deposits		173,851,338			(12,758,135	)
Net decrease in Federal Home Loan Bank Advances		(15,028,872	)		(5,027,637	)
(Decrease) increase in securities sold under agreements to repurchase and other borrowings		(87,800,000	)		31,295,750
Dividends paid to preferred stockholders		(308,148	)		(371,382	)
Net decrease in Federal Home Loan Bank Advances		(15,043,547	)		(5,041,684	)
Dividends paid to preferred stockholders		(308,148	)		(559,114	)
Net proceeds from issuance of common stock		—			2,029,000
Purchase of common stock		(1,185	)		—(6,504	)
Net cash (used in) provided by financing activities		(~~105~~35,~~739~~017,~~421~~837	)		8860,~~026~~214,~~822~~787
Net increase (decrease) in cash and due from banks		133,909,080			(21,116,702	)
Net increase in cash and due from banks		166,424,849			7,514,723
Cash and cash equivalents beginning balance		88,146,164			48,173,130
Cash and cash equivalents ending balance	$	~~222~~254,~~055~~571,~~244~~013		$	2755,~~056~~687,~~428~~853
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest	$	4767,~~221~~557,~~696~~454		$	5478,~~564~~535,~~640~~244
Income Taxes		32,665			6,580
Noncash transactions:
Repossessed assets acquired through foreclosure of loans		1220,~~687~~962,~~522~~912			1625,~~436~~673,~~193~~189
Finance of repossessed assets acquired through foreclosure of loans		810,~~007~~959,~~012~~616			813,~~315~~466,~~707~~370
Change in fair value of available-for-sale securities, net of taxes		(71,~~799~~516,~~746~~608	)		14(21,~~144~~809,~~503~~245	)

See accompanying notes to consolidated financial statements.

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.	Nature of Operations and Basis of Presentation

EuroBancshares, Inc. (the Company or EuroBancshares) was incorporated on November 21, 2001, under the laws of the Commonwealth of Puerto Rico to engage, for profit, in any lawful acts or businesses and serve as the holding company for Eurobank (the Bank). As a bank holding company, the Company is subject to the provisions of the Bank Holding Company Act, and to the supervision and regulation by the board of governors of the Federal Reserve System.

On September 1, 2009, Eurobank consented to the issuance by the FDIC and the Puerto Rico Office of the Commissioner of Financial Institutions of an order to cease and desist (the “Order”). Under the terms of the Order, which was issued and became effective on October 9, 2009, Eurobank is required to, among other things: (1) develop a management plan to address certain deficiencies noted by the Bank’s regulatory authorities with respect to the Bank’s management and staffing needs; (2) increase the Board’s participation in the affairs of the Bank and assume full responsibility for the approval of sound policies and objectives; (3) prepare and submit to the FDIC enhanced loan policies and procedures that address certain recommendations noted by the Bank’s regulatory authorities; (4) improve its lending and credit administration function through the enhancement of loan review procedures and loan documentation procedures, and the reduction of classified and delinquent loans through aggressive workout programs; (5) establish an adequate and effective appraisal compliance program, including enhancing the Bank’s appraisal policy; (6) eliminate all items classified as “loss” which have not previously been charged off or collected; (7) formulate a written plan to reduce the Bank’s exposure to certain classified assets; (8) not extend any additional credit to certain borrowers who have a loan or other extension or credit that is classified unless there is a written statement giving the reasons why such credits are in the best interest of the Bank, improves the Bank’s position and is in compliance with the Bank’s loan policy; (9) maintain, through charges to current operating income, an adequate allowance for loan and lease losses; (10) formulate and submit to the FDIC a written profit plan and comprehensive budget plan for the remainder of 2009 and for each year thereafter; (11) maintain a ratio of Tier 1 capital to total assets of at least 6.5% as of December 31, 2009 and 7% as of March 31, 2010, and a ratio of qualifying total capital to risk-weighted assets of at least 11% as of December 31, 2009; (12) develop and submit to the FDIC a written plan for systematically reducing and monitoring the Bank’s portfolio of loans, securities, or other extensions of credit advanced or committed to or for the benefit of any borrowers in commercial real estate and acquisition, development and construction to an amount that is commensurate with the Bank’s business strategy, management expertise, size and location; (13) submit to the FDIC a revised and comprehensive funds management and liquidity plan; (14) develop and submit to the FDIC a comprehensive business/strategic plan covering an operating period of at least three years; (15) cease soliciting, accepting, renewing or rolling over any brokered deposits without the prior consent of the FDIC; (16) engage a qualified independent firm to conduct a review of account and transaction activity under the Bank Secrecy Act/Anti Money Laundering to determine whether suspicious activity and transactions through the Bank were properly identified and reported in accordance with laws and regulations; (17) not declare or pay any cash dividends, pay any management fees, or make any payments to or for the benefit of the Bank’s holding company or other affiliates without the prior consent of the FDIC; and (18) establish a compliance committee of at least three non-employee directors whose responsibilities include monitoring and coordinating the Bank’s compliance with the Order. The Company can offer no assurance that the bank will be able to meet the deadlines imposed by the Order.

In addition to the FDIC Order, the Company has entered into a Written Agreement with the Federal Reserve Bank of New York effective as of September 30, 2009. Under the terms of the Written Agreement, the Company is required to submit a capital plan and maintain regular reporting to the Federal Reserve. The Company has agreed to take certain actions that are designed to maintain its financial soundness in order that it may continue to serve as a source of strength to the Bank. In addition, the written Agreement requires prior approval relating to the payment of dividends and distributions, incurrence of debt, and the purchase or redemption of stock. The Company can offer no assurance that will be able to meet the deadlines imposed by the Written Agreement.

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. These statements are, in the opinion of management, a fair presentation of the financial position and results for the periods presented. These financial statements are unaudited but, in the opinion of management, include all necessary adjustments, all of which are of a normal recurring nature, for a fair presentation of such financial statements.

The presentation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting periods. These estimates are based on information available as of the date of the condensed consolidated financial statements. Therefore, actual results could differ from those estimates.

Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and, accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2008. The results of operations for the ~~six~~nine ~~months~~month period ended ~~June~~September 30, 2009 are not necessarily indicative of the results to be ~~expected~~ expected for the full year.

~~2. New Accounting Pronouncements~~(continued)

· Recently Adopted Accounting Standards

On January 12, 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position

EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20”. It amends 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” to provide more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and related disclosure requirements in FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. The FSP establishes that companies should consider guidance in Statement 115. Companies should also consider all available information including past events and current conditions when developing estimates of future cash flows to determine whether to record an other than temporary impairment. The FSP is effective for interim and annual reporting periods ending after December 15, 2008, and should be applied prospectively. The implementation of EITF 99-20-1 did not has a significant impact on the financial statements.

On April 9, 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS 115-2 and FAS-124-2, Recognition and Presentation of Other-Than-Temporary Impairments. 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 operations. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in operations is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive loss. The FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company elected to adopt this FSP for the quarter ended March 31, 2009 and recorded in operations approximately $17,283,000 for other than temporary impairment (“OTTI”) losses from which approximately $13,800,000 were offset through other comprehensive loss. There was no effect as of the beginning of the quarter, since no OTTI were recorded on prior years.

(Continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On2. ~~April~~New ~~9, 2009, the Financial~~ Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance with FASB Statement 157, Fair Value Measurements, when volume and level of activity have significantly decreased for the asset or liability. The FSP clarifies that, even if there is a significant decrease in the volume and level of activity of an asset or liability, and regardless of the valuation technique used, the objective of fair value measurement remains the same. It also provides guidance on identifying a transaction that is not orderly. An orderly transaction is one in which there is no forced liquidation or distressed sale. This FSP is effective for interim and annual reporting periods ending after June 15, 2009 and will be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company elected to adopt this FSP for the quarter ended March 31, 2009. The implementation of the FSP did not have a significant impact on the financial statements.Pronouncements

On· ~~April~~Recently 9,Adopted ~~2009, the Financial~~ Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods and annual statements of publicly traded companies. The FSP also amends APB Opinion 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for reporting periods ending after June 15, 2009. The implementation of this statement did not have a significant impact on the financial statements.

OnThe Company ~~April~~adopted ~~14, 2009,~~ the ~~Securities~~provisions ~~and Exchange~~of ~~Commission~~FASB ~~(SEC)~~ASC ~~issued Staff Accounting Bulletin (SAB) 111~~105, “~~Miscellaneous Accounting-~~Generally ~~Other~~Accepted ~~Than Temporary Impairment of Certain Investments in Equity~~Accounting ~~Securities~~Principles”. Under ~~This~~FASB ~~staff accounting~~ASC ~~bulletin~~105, ~~amends and replaces Topic 5.M. in~~ the ~~Staff~~FASB Accounting Standards ~~Bulletin~~Codification ~~Series~~becomes ~~entitled~~the ~~“Other~~sole ~~Than Temporary~~source ~~Impairment~~ of ~~Certain~~authoritative ~~Investments~~U.S. ingenerally ~~Debt and Equity~~accepted ~~Securities”~~accounting toprinciples ~~reflect Financial~~(U.S. ~~Accounting~~GAAP). ~~Standards~~The ~~Board~~Company ~~(FASB)~~has ~~Staff~~updated ~~Position~~references ~~(FSP)~~to ~~115-2~~GAAP ~~and FAS~~in ~~124-2,~~its ~~“Recognition~~financial ~~and Presentation~~statements ofissued ~~Other-Than-Temporary~~for ~~Impairments”.~~the ~~The~~period ~~amended~~ended ~~SAB~~September ~~Topic~~30, 52009.M. ~~maintains~~The ~~the~~adoption ~~prior~~of ~~staff~~FASB ~~views~~ASC ~~related~~105 todid ~~equity~~not ~~securities~~have ~~but~~a ~~has~~significant ~~been~~impact ~~amended~~on ~~to exclude~~the ~~debt securities from its scope~~financial statements.

InThe Company ~~May~~adopted ~~2009,~~ the ~~Financial~~provisions ~~Accounting Standards~~of FASB ~~Board~~ASC ~~issued~~320-10-35, ~~SFAS~~“Investments-Debt ~~165~~and ~~“Subsequent~~Equity Securities, Overall, ~~Events~~Subsequent Measurement”. It ~~This~~provides ~~statement~~more ~~establishes general~~consistent ~~standards~~determination of ~~accounting~~whether ~~for~~an ~~and~~other-than-temporary impairment ~~disclosure~~has ofoccurred. ~~events~~The ~~that~~FASB ~~occur~~ASC 320-10-35 ~~after~~also retains and emphasizes the ~~balance~~objective ~~sheet~~of ~~date~~an ~~but~~other-than-temporary ~~before~~impairment ~~financial~~assessment. ~~statements~~Furthermore, companies ~~are~~should ~~issued~~also orconsider all available to beinformation ~~issued.~~including ~~The~~past ~~statement~~events and ~~introduces~~current ~~the~~conditions ~~concept~~when developing estimates of ~~financial~~future ~~statements available~~cash toflows beto ~~issued,~~determine ~~which~~whether ~~are~~to ~~financial statements~~record ~~that~~an ~~are~~other ~~complete~~than intemporary ~~form~~impairment. ~~and~~Also, ~~format~~it requires ~~that~~an ~~complies~~entity ~~with~~to ~~generally accepted~~assess ~~accounting~~whether ~~principles~~it ~~(GAAP)~~intends ~~and~~to ~~have~~sell, ~~obtained~~or ~~all~~it ~~approvals~~is ~~required~~more likely ~~for~~than ~~issuance.~~not ~~The~~that ~~SFAS~~it ~~requires~~will ~~the~~be ~~disclosure~~required ofto ~~the~~sell ~~date~~a ~~through~~security ~~which~~in an unrealized loss ~~entity~~position ~~has~~before ~~evaluated~~recovery ~~subsequent~~of ~~events~~its ~~and~~amortized ~~the~~cost basis. If ~~for~~either ~~the~~of these ~~date,~~criteria ~~whether it~~ is ~~the~~ ~~date~~met, the ~~financial~~entire ~~statements~~difference ~~were~~between ~~issued~~amortized orcost ~~were~~and ~~available~~fair value tois berecognized ~~issued~~in operations. For securities that do not meet ~~This~~the ~~statement~~aforementioned ~~should~~criteria, bethe ~~applied~~amount of impairment recognized in operations is limited to the ~~accounting~~amount ~~and~~related ~~disclosure~~to ofcredit ~~subsequent~~losses, while impairment related to ~~events~~other ~~not~~factors ~~addressed~~is onrecognized in other ~~applicable~~comprehensive ~~GAAP~~loss. The ~~SFAS~~FASB ASC 320-10-35 isestablishes ~~effective~~that ~~for~~companies ~~interim and~~should ~~annual~~consider ~~financial~~guidance ~~periods~~in ~~ending~~FASB ASC ~~after~~325-40-35, ~~June 15~~“Investments-Other, ~~2009~~Beneficial ~~and~~Interests ~~should~~in beSecuritized Financial ~~applied~~Assets, ~~prospectively~~Subsequent Measurement”. The Company ~~had~~elected ~~evaluated~~to ~~subsequent~~adopt ~~events~~FASB ~~until August~~ASC 13320-10-35 for the quarter ended March 31, 2009. There was no effect as of the beginning of the quarter, since no OTTI were recorded on prior years.

The Company adopted the provisions of FASB ASC 825, “Financial Instruments”. FASB ASC 825 requires disclosures about fair value of financial instruments for interim reporting periods and annual statements of publicly traded companies. FASB ASC 825 also requires those disclosures in summarized financial information at interim reporting periods. FASB ASC 825 is effective for reporting periods ending after June 15, 2009. The implementation of this statement did not have a significant impact on the financial statements.

The Company adopted the provisions of FASB ASC 855, “Subsequent Events”. This topic establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. This topic introduces the concept of financial statements available to be issued, which are financial statements that are complete in form and format that complies with generally accepted accounting principles (GAAP) and have obtained all approvals required for issuance. FASB ASC 855 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for the date, whether it is the date the financial statements were issued or were available to be issued. This topic should be applied to the accounting and disclosure of subsequent events not addressed on other applicable GAAP. FASB ASC 855 is effective for interim and annual financial periods ending after June 15, 2009 and should be applied prospectively. The Company has evaluated subsequent events through November 20, 2009.

Recently Issued Accounting Standards

OnIn June ~~12,~~ 2009, the Financial Accounting Standards Board (FASB) issued ~~SFAS~~FASB ~~166,~~ASC ~~“Accounting for Transfers of Financial Assets”. This statement amends SFAS 140~~860-10-35, “~~Accounting for~~ Transfers and Servicing, Overall, ofSubsequent ~~Financial~~Measurement”. ~~Assets~~FASB ~~and~~ASC ~~Extinguishments~~860-10-35 ofrequires ~~Liabilities” to require additional~~ information about transfers of financial assets, and risks related to continuing ~~involvement~~ involvement with the transferred financial assets. Disclosure requirements for ~~this~~ ~~statement~~FASB ASC 860-10-35 should apply to transfers that occurred both before and after the effective date of the ~~statement~~standard. ~~This~~FASB ~~statement~~ASC 860-10-35 is effective at ~~the~~ the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. The Company believes that ~~this~~FASB ~~statement~~ASC 860-10-35 will not have a significant financial impact.

In June 2009, the Financial Accounting Standards Board (~~Continued~~FASB) issued FASB ASC 810-10-35, “Consolidation, Overall, Subsequent Measurement, Variable Interest Entities”. FASB ASC 810-10-35 improves financial reporting by companies involved with variable interest entities. It requires an analysis to identify the primary beneficiary in a variable interest entity and the company’s implicit financial responsibility to ensure that a variable interest entity operates as designed. FASB ASC 810-10-35 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company is evaluating the financial impact of FASB ASC 810-10-35, if any.

In August 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value”. This update provides amendments to Subtopic 820-10, “Fair Value Measurements and Disclosures”. Under this update, when a quoted price in an active market is not available for the identical liability, the reporting entity is required to measure fair value using one of the following valuation techniques: the quoted price of the identical liability when traded as an asset; quoted prices for similar liabilities or similar liabilities when traded as an asset; or another valuation technique consistent with Topic 820. This update is effective for the first reporting period beginning after issuance. For the Company, this statement is effective for the quarter ending December 31, 2009.

In September 2009, the Financial Accounting Standards Board issued Accounting Standards Update No. 2009-09, “Earnings Per Share”. This update provides amendments to section 260-10-S99. According to this update if a public company redeems its preferred stocks, the difference between: (i) the fair values of the consideration transferred to the holders of the preferred stock; and (ii) the carrying amount of the preferred stock in the public company’s balance sheet, should be subtracted from or added to net income to arrive at income available to common stockholders in the calculation of earnings per share. This update also states that the SEC staff does not believes that it is appropriate to aggregate securities with different effective dividends yields when determining the “if-converted” method is dilutive for the earnings per share computation. As of September 30, 2009, the Company has not been in a transaction involving redemption of its preferred stocks.

(continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS 167, “Amendments to FASB Interpretation No. 46(R). This statement amends FASB Interpretation 46(R) “Consolidation of Variable Interest Entities” to improve financial reporting by companies involved with variable interest entities. This statement requires an analysis to identify the primary beneficiary in a variable interest entity and the company’s implicit financial responsibility to ensure that a variable interest entity operates as designed. In addition, SFAS 167 revises certain provisions of Interpretation 46(R) due to elimination of the qualifying special-purpose entity concept in SFAS 166. This statement shall be effective as of the beginning of each reporting entity’s fist annual reporting period that begins after November 15, 2009, for interim periods within that fist annual reporting period, and for interim and annual reporting periods thereafter. Earlier application of SFAS 167 is prohibited. The Company is evaluating the financial impact of SFAS 167, if any.

On June 29, 2009, the Financial Accounting Standards Board (FASB) issued SFAS 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”. This statement replaces SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles”. Under FASB 168, the FASB Accounting Standards Codification becomes the source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB. Other sources of authoritative U.S. GAAP include rulings and interpretative releases by the Securities and Exchange Commission (SEC) for SEC registrants. The U.S. GAAP hierarchy will be modified to include only two levels of U.S. GAAP, authoritative and non-authoritative. Once it becomes effective, the Codification will supersede all existing non-SEC accounting and reporting standards. The FASB will issue Accounting Standards Update instead of Statements, Staff Positions, and Emerging Issues Task Force Abstracts. Statement 168 and the Codification are effective for financial statements issued for interim and annual periods after September 15, 2009.

3.	Losses Per Share

Basic losses per share represent income/ (loss) available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted losses per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

The computation of loss per share is presented below:

	Three months ended June 30,						Six months ended June 30,
	Three months ended September 30,						Nine months ended September 30
	2009			2008			2009			2008
Loss before preferred stock dividends	$	(117,~~595~~416,~~913~~798	)	$	(1787,~~762,905~~951	)	$	(815,~~550~~967,~~982~~780	)	$	(23,~~766~~554,~~230~~182	)
Preferred stock dividend		~~(124,474~~-	)		(~~185~~187,~~691~~732	)		(308,125	)		(~~371~~559,~~382~~114	)
Loss to common shareholders	$	(117,~~720~~416,~~387~~798	)	$	(1975,~~948,596~~683	)	$	(816,~~859~~275,~~107~~905	)	$	(34,~~137~~113,~~612~~296	)
Weighted average number of common shares outstanding applicable to basic earning per share		19,499,~~403~~215			19,~~500~~499,~~315~~967			19,499,~~459~~377			19,~~336~~391,~~419~~333
Effect of dilutive securities		-			~~30,176~~-			-			445,~~552~~926
Adjusted weighted average number of common shares outstanding applicable to diluted earnings per share		19,499,~~403~~215			19,~~530~~499,~~491~~967			19,499,~~459~~377			19,~~380~~397,~~971~~259
Net loss per common share:
Basic	$	(0.6038	)	$	(0.1005	)	$	(0.4583	)	$	(0.1621	)
Diluted	$	(0.6038	)	$	(0.1005	)	$	(0.4583	)	$	(0.1621	)

~~(Continued)~~In computing diluted loss per common share for the quarter and nine months period ended September 30 2009, stock options of 74,700, 75,300, 73,670 and 114,500 shares on common stock with exercise price of $21.00, $14.17, $8.60, and $4.00, respectively, were not considered because they were antidilutive. For the third quarter of 2008, stock options of 174,000, 96,600, 76,800, 73,670, and 114,500 shares on common stock with exercise price of $8.13, $21.00, $14.17, $8.60, and $4.00, respectively, were not considered because they were antidilutive. For the nine months period ended September 30, 2008, stock options of 174,000, 96,600, 76,800, and 73,670 shares on common stock with exercise price of $8.13, $21.00, $14.17, and $8.60, respectively, were not considered because they were antidilutive.

(continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In computing diluted loss per common share for the second quarter of 2009, stock options of 74,700, 75,300, 73,670 and 114,500 shares on common stock with exercise price of $21.00, $14.17, $8.60 and $4.00, respectively, were not considered because they were antidilutive. For the second quarter of 2008, stock options of 174,000, 96,600, 76,800 and 73,670 shares on common stock with exercise price of $8.13, $21.00, $14.17 and $8.60, respectively, were not considered because they were antidilutive.

4.	Investment Securities Available for Sale

Investment securities available for sale and related contractual maturities as of ~~June~~ September 30, 2009 and December 31, 2008 are as follows:

	2009
	Amortized		Gross unrealized		Gross unrealized			Fair
	cost		gains		losses			value
Commonwealth of Puerto
Rico obligations:
Puerto Rico Public Corporation
Less than one year	$	200,020	$	5,175	$	(985	)	$	204,210
Five to ten years	$	200,000	$	5,994	$	–		$	205,994
Puerto Rico Housing Finance Authority
One through five years		52,~~290~~482,~~642~~526		4449,~~210~~713		~~(1,283~~–	)		52,~~333~~532,~~569~~239
Five to ten years		2,807,842		37,252		–			2,845,094
Fed Farm Credit Bonds
One through five years		50,~~130~~117,~~890~~480		~~238~~581,~~600~~894		–			50,~~369~~699,~~490~~374
US Treasury Obligations
Less than one year		15,000,000		–		–			15,000,000
Federal Home Loan Bank notes:
Less than one year		11,000,000		74,745		–			11,074,745
One through five years		25,000,000		132,725		–			25,132,725
One through five years		5,732,783		113,915		–			5,846,698
US Corporate notes:
One through five years		30,000		–		–			30,000
Mortgage-backed securities:
Agency Mortgage Backed Securities		~~323~~511,~~134~~292,~~551~~489		65,~~641~~100,~~280~~674		(~~568~~215,~~993~~936	)		~~329~~516,~~206~~177,~~838~~227
Private Label Mortgage Backed Securities (CMO)		~~203~~222,~~297~~226,~~983~~050		~~254~~366,~~585~~342		(2820,~~159~~740,~~295~~366	)		~~175~~201,~~393~~852,~~273~~026
Total	$	~~598~~829,~~816~~126,~~869~~387	$	76,~~372~~274,~~510~~594	$	(2820,~~730~~956,~~556~~302	)	$	~~577~~814,~~458~~444,~~823~~679

	2008
	Amortized		Gross unrealized		Gross unrealized			Fair
	cost		gains		losses			value
Commonwealth of Puerto
Rico obligations:
Less than one year	$	200,194	$	4,245	$	–		$	204,439
One through five years		5,346,299		16,025		(2,304	)		5,360,021
Federal Home Loan Bank notes:
Less than one year		20,993,213		227,357		–			21,220,570
One through five years		6,530,425		20,387		–			6,550,812
US Corporate note:
Less than one year		4,974,971		–		(83,871	)		4,891,100
One through five years		3,000,000		–		(1,950,000	)		1,050,000
Mortgage-backed securities		722,364,282		13,775,266		(24,399,924	)		711,739,623
Total	$	763,409,384	$	14,043,280	$	(26,436,099	)	$	751,016,565

Contractual maturities on certain investment securities available for sale could differ from actual maturities since certain issuers have the right to call or prepay these securities.

~~(Continued)~~At September 30, 2009 and December 31, 2008, no investments that are payable from and secured by the same source of revenue or taxing authority, other than the U.S. government and U.S. agencies exceeded 10% of stockholders’ equity.

(continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~At June~~During the nine months ended September 30, 2009, the company sold US agency debt securities and ~~December~~mortgage 31backed securities with total proceeds of approximately $372, ~~2008~~904,000, norecognizing ~~investments~~a ~~that~~net ~~are~~gain ~~payable~~of ~~from~~approximately ~~and~~$13,585,000. ~~secured by~~During the nine ~~same~~months ~~source~~ended ofSeptember ~~revenue~~30, or2008, ~~taxing~~the ~~authority,~~Company ~~other~~sold ~~than~~US ~~the~~agency ~~U.S. government~~debt securities and ~~U.S.~~mortgage ~~agencies~~backed ~~exceeded~~securities ~~10%~~with total proceeds of ~~stockholders’~~approximately ~~equity~~$19,091,000, recognizing a net gain of approximately $191,000.

~~During~~At ~~the~~September ~~six~~30, ~~months~~2009 ~~ended~~and ~~June~~December 3031, ~~2009~~2008, ~~the~~gross ~~company~~unrealized ~~sold~~losses USon ~~agency debt securities~~investment ~~and~~securities ~~mortgage~~available ~~backed~~for ~~securities~~sale ~~with~~and ~~total~~the ~~proceeds~~fair value of ~~approximately $203~~the related securities,~~511,000,~~ aggregated ~~recognizing~~by ainvestment ~~net~~category ~~gain~~and length of ~~approximately~~time ~~$7,563,000.~~that ~~During~~individual ~~the six~~securities ~~months~~have ~~ended~~been ~~June~~in ~~30,~~a ~~2008,~~continuous ~~there~~unrealized ~~were~~loss noposition ~~sales~~were ofas ~~investment securities available for sale.~~follows:

At June 30, 2009 and December 31, 2008, gross unrealized losses on investment securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

	2009
	Less than 12 months					12 months or more					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	losses			value		losses			value		losses			value
Mortgage backed securities:
Agency mortgage backed securities	$	(215,936	)	$	50,220,859	$	–		$	–	$	(215,936	)	$	50,220,859
Private label mortgage backed securities (CMO)		(2,264,710	)		54,293,907		(18,475,656	)		119,422,300		(20,740,366	)		173,716,207
	$	(2,480,646	)	$	104,514,766	$	(18,475,656	)	$	119,422,300	$	(20,956,302	)	$	223,937,066

	2009
	Less than 12 months					12 months or more					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	losses			Value		losses			value		losses			value
Commonwealth of Puerto Rico
Obligations:
Puerto Rico Public Corporation	$	(2,268	)	$	519,276	$	–		$	–	$	(2,268	)	$	519,276
Mortgage backed securities:
Agency mortgage backed securities		(568,993	)		108,120,288		–			–		(568,993	)		108,120,288
Private label mortgage backed Securities		(4,801,659	)		24,121,280		(23,357,636	)		122,962,745		(28,159,295	)		147,084,025
	$	(5,372,920	)	$	132,760,844	$	(23,357,636	)	$	122,962,745	$	(28,730,556	)	$	255,723,589

	2008
	Less than 12 months					12 months or more					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	losses			value		losses			value		losses			value
Commonwealth of Puerto Rico and municipal obligations	$	(2,304	)	$	775,889	$	–		$	–	$	(2,304	)	$	775,889
US Corporate Notes		(83,871	)		4,891,100		(1,950,000	)		1,050,000		(2,033,871	)		5,941,100
Mortgage-backed securities		(20,880,325	)		201,176,140		(3,519,599	)		35,784,953		(24,399,924	)		236,961,093
	$	(20,966,500	)	$	206,843,129	$	(5,469,599	)	$	36,834,953	$	(26,436,099	)	$	243,678,082

· PRAgency ~~public~~mortgage-backed ~~corporation~~securities –— The unrealized losses on the Company’s investments in PRfederal ~~Public~~agencies ~~Corporation~~mortgage ~~Obligations~~backed-securities (“MBS”) were ~~caused~~primarily byattributable ~~interest~~to ~~rate~~changes ~~increases~~in interest rates and levels of market liquidity relative to when the ~~general~~investment ~~economy~~securities ~~deterioration~~were purchased and not due to credit quality of the securities. The contractual ~~terms~~cash flows of those investments doare ~~not~~guaranteed ~~permit~~by agencies of the ~~issuer~~US togovernment. ~~settle~~These mortgage back securities are rated AAA by the major rating agencies and are backed by residential mortgages. Accordingly it is expected that the security will not be settle at a price less than the amortized cost bases of the Company’s investments. Because the decline in market value is attributable to changes in interest rate and not in credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity, the Company does not consider those investments to be other than temporarily impaired as of ~~June~~September 30, 2009.

· ~~Agency~~Private label mortgage- backed securities —- The unrealized losses on the Company’s investments in ~~federal~~private ~~agencies~~label ~~mortgage backed-securities (“~~MBS”) were ~~primarily~~caused ~~attributable~~by ~~to changes in~~ interest ~~rates~~rate ~~and~~increases ~~levels of market liquidity relative to when the investment securities were purchased~~ and ~~not~~general ~~due~~deterioration ~~to credit quality~~ of the ~~securities~~economy. The contractual cash flows of ~~those~~the ~~investments~~securities ~~are~~issued ~~guaranteed~~ by ~~agencies~~a ofprivate ~~the~~label USMBS ~~government.~~will ~~These~~depend ~~mortgage~~on ~~back~~the ~~securities~~amount ~~are~~of ~~rated~~collateral ~~AAA~~and by the ~~major~~cash ~~rating~~flows ~~agencies~~structure ~~and~~established ~~are~~for ~~backed~~each ~~by residential mortgages~~security.. Accordingly it is expected that the security will not be settle at a price less than the amortized cost bases of the Company’s investments. Because of the ~~decline~~general indeterioration ~~market~~of ~~value~~the iseconomy, ~~attributable~~we toconsidered ~~changes~~that inan ~~interest~~estimate ~~rate~~of ~~and~~the ~~not in credit quality~~OTTI, ~~and~~during ~~because~~ the ~~Company~~first ~~does~~nine ~~not~~months ~~intend~~of to2009, ~~sell~~due ~~the investments and it is not more likely than not that the Company will be required~~ to ~~sell~~ the ~~investments~~possible ~~before~~deterioration ~~recovery~~ of ~~the~~credit ~~amortized~~quality ~~cost~~was ~~bases,~~approximately ~~which may be maturity~~$734,000. ~~the~~Please ~~Company~~refer ~~does not consider those investments~~ to bethe ~~other~~detail ~~than~~explanation ~~temporarily impaired as of June 30, 2009~~below.

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

·With ~~Private~~the assistance ~~label~~of ~~mortgage~~a ~~backed~~third ~~securities~~party -provider, ~~The unrealized losses on~~ the Company’s ~~investments~~reviewed inthe ~~private~~investment portfolio ~~label~~as ~~MBS~~of ~~were~~September 30, ~~caused~~2009 byusing ~~interest~~cash ~~rate~~flow ~~increases~~ and ~~general~~valuation models ~~deterioration~~and ofconsidering the ~~economy.~~provisions ~~The contractual cash flows~~ of ~~the~~FASB ~~securities~~ASC ~~issued~~320-10-35 by“Investments-Debt ~~a private label MBS will depend on the amount of collateral~~ and ~~the~~Equity Securities”, ~~cash flows structure established~~ for ~~each~~applicable ~~security~~securities. During ~~Accordingly it is expected that~~ the ~~security~~review, ~~will not be settle at a price less than~~ the ~~amortized cost bases of the~~ Company’s ~~investments.~~identified ~~Because~~securities ofwith ~~the~~characteristics ~~general deterioration of the economy, we considered~~ that warranted a ~~reasonable~~more detailed ~~estimate of the OTTI~~analysis, ~~during~~as ~~the first six months of 2009, due to the possible deterioration of credit quality was $513,000. Please refer to the detail explanation below.~~follows:

~~With~~(i) ~~the assistance~~One security for $3,000,000 of original par value and a ~~third~~current ~~party~~market ~~provider~~value of $30,000 ~~the~~is ~~Company~~a ~~reviewed~~non-rated Trust Preferred Stock (“TPS”). During the ~~investment portfolio~~third asquarter of ~~June~~2009, the Company recognized a $30,000 ~~2009~~OTTI ~~using~~on ~~cash~~this ~~flow~~security ~~and~~due ~~valuation~~to ~~models~~the ~~and considering~~deterioration of the ~~provisions~~credit ofquality. ~~FSP~~The ~~115-2~~issuer could not raise the capital needed to keep operating and ~~EITF~~the ~~99-20,~~regulators ~~for~~took ~~applicable securities~~over. ~~During~~ ~~the~~At ~~review~~June 30, 2009, the Company ~~identified~~had ~~securities~~already ~~with characteristics~~recognized ~~that~~a ~~warranted~~$2,970,000 aOTTI ~~more~~on ~~detailed~~this ~~analysis,~~security ~~as follows:~~due to the deterioration of the credit quality.

(iii) ~~One~~As ~~security~~of ~~for~~September 30, 2009, our total book value of private label MBS was $3222,226,000 from which approximately $140,911,000 were considered investment grade, of ~~original~~those ~~par~~$108,526,000 ~~value~~are ~~and~~rated High Credit Quality. Approximately $81,315,000 were mixed rated but considered non investment grade. From the total private label MBS portfolio, eleven securities totaling $35,424,000 had a current market value of 80% or less below their book values, and only for three securities totaling $309,785,000 isno OTTI has been determined. From the total portfolio, fifty private label MBS amounting to $197,662,000 had a ~~non-rated~~current ~~Trust~~estimated ~~Preferred~~market ~~Stock~~value ~~(“TPS”)~~below its book value. ~~Considering~~For ~~the~~each ~~deterioration~~one of the ~~issuer’s~~private ~~current~~label ~~financial~~MBS, ~~position~~the ~~and~~Company reviewed the ~~company’s~~collateral ~~recent~~performance ~~request~~and toconsidered the ~~FDIC~~impact of current economic trends as of September 30, ~~for~~2009. ~~their~~These ~~approval~~analyses towere aperformed ~~plan~~taking ofinto ~~open~~consideration ~~bank~~current ~~assistant,~~U.S. wemarket ~~estimated~~conditions aand $2trends,~~570,000~~ asand ~~OTTI~~the onpresent ~~this~~value ~~security~~of the forward projected cash flows. Some of the analysis performed to the mixed credit ratings mortgage-backed securities included:

(ii) For each one of the private label MBS, the Company reviewed the collateral performance and considered the impact of current economic trends as of June 30, 2009. These analyses were performed taking into consideration current U.S. market conditions and trends, forward projected cash flows and the present value of the forward projected cash flows. Some of the analysis performed to the downgraded mortgage-backed securities included:

the calculation of their coverage ratios;

current credit support;

total delinquency over sixty days;

average loan-to-values;

e. projected defaults considering a conservative ~~additional~~ downside scenario of (an additional 5)% annual reduction in Housing Price Index values ~~for~~through ~~each~~approximately ofSeptember 2011; a mortgage loan Conditional Prepayment Rate (“CPR”) speed considering the ~~following~~average for the last three ~~years~~months for each security;

f. aprojected ~~mortgage~~total ~~loan~~future ~~Conditional~~deal ~~Prepayment~~loss ~~Rate~~based ~~(“CPR”) speed equal to 8 or 15 depending~~ on the ~~approximately~~previous ~~last~~conservative ~~six months average for each security~~assumptions;

g. ~~projected~~excess ~~total~~credit ~~future~~support ~~deal loss based on the previous conservative assumptions~~protection;

h. ~~excess~~projected ~~credit~~tranche ~~support~~dollar ~~protection~~loss; and

i. projected tranche ~~dollar~~percentage loss;, if any, and economic value.

jBased on this assessment, for the quarter ended September 30, 2009, the Company estimated an additional $221,000 OTTI due to the apparent deterioration of the credit quality over private label MBS. For ~~projected~~the ~~tranche~~six ~~percentage~~months ~~loss~~ended June 30, 2009, ifthe ~~any~~Company had already recognized a $513,000 ~~and~~OTTI ~~economic~~on ~~value~~private label MBS due to the apparent deterioration of their credit quality.

~~Based on this assessment, as of June 30, 2009, the Company estimated a $513,000 OTTI due to the deterioration of the credit quality over three private label MBS.~~(continued)

(Continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The ~~unrealized~~activity ~~losses~~in ~~associated~~other ~~with~~than ~~private-label~~temporary ~~collateralized~~impairment ~~mortgage obligations are primarily~~ related to ~~securities backed by residential mortgages. In addition to verifying the~~ credit ~~ratings~~losses ~~for the private label CMOs,~~recognized management analyzed the underlying mortgage loan collateral for these bonds. Various statistics or metrics were reviewed for each private-label CMO, including among others, the weighted average loan-to-value, FICO score, and delinquency and foreclosure rates of the underlying assets in ~~the securities. For private-label CMOs with unrealized~~ losses asduring ~~of June 30, 2009, credit impairment was assessed using a cash flow model that estimates~~ the ~~cash~~nine ~~flows~~month on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows through the current period ~~and~~ended ~~then~~September projects the remaining cash flows using a number of assumptions, including the current book yield, different scenarios related to the Housing Price Adjustment and the current six months Conditional Prepayment Rate. Based on this assessment, management concluded that the other tranches of the private-label CMOs held by the Corporation were not other-than-temporarily impaired at June 30, 2009, ~~thus~~is ~~management expects to recover the amortized~~as ~~cost basis of the securities.~~follows:

The activity in other than temporary impairment related to credit losses recognized in losses during the six months period ended June 30, 2009 is as follows:

	Credit losses

Beginning Balance, January 1, 2009	$	—

Additions to credit loss for which an OTTI was not previously recognized		3,733,931

Ending Balance, September 30, 2009	$	3,733,931

	June 30, 2009
Beginning Balance	$	—
Additions to credit loss for which an
OTTI was not previously recognized		3,483,344
Ending Balance	$	3,483,344

5.	Investment Securities Held to Maturity

~~Investment~~As of September 30, 2009, the Company did not have investment securities held to maturity. asInvestment ofsecurities ~~June~~held ~~30,~~to ~~2009~~maturity ~~and~~as of December 31, 2008 are as follows:

	2009
		Amortized		Gross unrealized		Gross unrealized			Fair
		cost		gains		losses			value
Federal Home Loan Bank Notes		$	2,196,686	$	18,504	$	–		$	2,215,190
Mortgage-backed securities:
Agency mortgage backed securities			93,594,492		2,577,508		(82,682	)		96,089,318
Private label mortgage backed securities (CMO)			14,410,813		–		(1,562,014	)		12,848,799
Total		$	110,201,991	$	2,596,012	$	(1,644,696	)	$	111,153,307

	2008
	Amortized		Gross unrealized		Gross unrealized			Fair
	cost		gains		losses			value
Federal Home Loan Bank notes	$	2,457,389	$	4,690	$	–		$	2,462,079
Mortgage-backed securities		130,340,792		1,677,328		(1,589,697	)		130,428,423
Total	$	132,798,181	$	1,682,018	$	(1,589,697	)	$	132,890,502

~~There~~During ~~were~~the noquarter ~~sales~~ended September 30, 2009, the Company sold US agency debt securities and mortgage backed securities resulting in total proceeds of ~~investment~~approximately $92,662,000, and recognized a net gain of approximately $3,369,000. These securities were classified as held to maturity ~~during~~when acquired because management’s intention was to keep them in the ~~six~~investment ~~month~~portfolio until their ~~period~~maturity ~~ended~~date. ~~June~~However, 30the Company decided to sell these securities as an alternative to improve capital ratios, ~~2009~~which requirement rose under an order of cease and ~~2008~~desist with the FDIC and the Puerto Rico Office of the Commissioner of Financial Institutions; please refer to note 18, “Regulatory Matters”, for details.

~~At June~~The ~~30,~~Company ~~2009~~considers ~~and~~that ~~December~~this 31is an isolated,~~2008~~ non recurring, ~~gross~~and ~~unrealized~~unusual ~~losses~~event that oncould ~~investment~~not ~~securities held~~have tobeen ~~maturity~~reasonably anticipated and that was primarily caused by a significant increase in capital requirements by the ~~fair~~regulatory ~~value~~agencies. ofIn addition, consequent to the ~~related~~aforementioned ~~securities~~transaction, ~~aggregated~~the byCompany reclassified ~~investment~~the ~~category~~remaining ~~and~~balance ~~length~~ of ~~time~~$13,258,000 ~~that~~in ~~individual~~held to maturity securities ~~have~~to ~~been~~the available for sale investment portfolio. This reclassification required the Company to record $1,128,000 in aother comprehensive income, representing the ~~continuous~~difference ~~unrealized~~between ~~loss~~the ~~position~~securities ~~were~~amortized ascost ~~follows:~~and their fair value.

~~(Continued)~~During the nine-month period ended September 30, 2008, there was no sale of investment securities held to maturity.

(continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	2009
	Less than 12 months					12 months or more					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	losses			value		losses			value		Losses			value
Mortgage backed securtities:
Agency mortgage backed securities	$	(82,682	)	$	9,269,075	$	—		$	—	$	(82,682	)		9,269,075
Private label mortgage backed
securities		(712,010	)		4,202,091		(850,004	)		8,646,708		(1,562,014	)	$	12,848,799
	$	(794,692	)	$	13,471,166	$	(850,004	)	$	8,646,708	$	(1,644,696	)	$	22,117,874

At December 31,2008, gross unrealized losses on investment securities held to maturity and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows:

	2008
	Less than 12 months					12 months or more					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	losses			value		losses			value		losses			value
Mortgage-backed securities	$	(614,754	)	$	20,967,964	$	(974,943	)	$	6,350,354	$	(1,589,697	)	$	27,318,318
	$	(614,754	)	$	20,967,964	$	(974,943	)	$	6,350,354	$	(1,589,697	)	$	27,318,318

· ~~Agency~~Mortgage-Backed ~~mortgage~~Securities ~~backed~~– ~~securities -~~ The unrealized losses on ~~the Company’s~~ investments in ~~federal agencies~~ mortgage ~~backed~~-backed securities were ~~primarily~~caused ~~attributable~~by to changes in interest ~~rates~~rate expectations and ~~levels~~the general deterioration of ~~market~~the ~~liquidity~~economy. ~~relative~~The tocompany ~~when~~has ~~the~~Mortgage-Backed ~~investment~~Securities ~~securities~~that were ~~purchased~~issued ~~and~~by ~~not~~private ~~due~~corporations toand ~~credit~~by ~~quality~~U.S. ofgovernment ~~the securities~~enterprise. The contractual cash flows of ~~those~~the ~~investments~~securities issued by private corporations are guaranteed by ~~agencies~~mortgage loans. The credit quality of the USprivate ~~government.~~label ~~These~~MBS ~~mortgage~~will ~~back~~depend ~~securities~~on ~~are~~the ~~rated~~amount ~~AAA~~of bycollateral and the ~~major~~cash-flows ~~rating~~structure ~~agencies~~established ~~and~~for each security. The contractual cash flows of securities issued by U.S. government enterprise are ~~backed~~guaranteed by ~~residential~~the ~~mortgages~~U.S. ~~Accordingly~~government. itIt is expected that the ~~security~~securities ~~will~~would not be ~~settle~~settled at a price less than the ~~amortized~~par ~~cost~~value ~~bases~~ of the ~~Company’s investments~~investment. Because the decline in ~~market~~fair value is attributable to changes in interest ~~rate~~rates’ expectations and ~~not~~the ingeneral ~~credit~~deterioration ~~quality,~~of ~~and because~~ the ~~Company~~economy ~~does~~and not ~~intend~~ to ~~sell~~credit quality of the ~~investments~~securities, and itbecause isthe ~~not~~Company ~~more~~has ~~likely than not that~~ the ~~Company~~ability ~~will~~and beintent ~~required~~ to ~~sell~~hold ~~the~~these investments ~~before~~until ~~recovery~~a ofmarket ~~the~~price ~~amortized~~recovery ~~cost~~or ~~bases, which may be~~ maturity, ~~the~~these ~~Company~~investments ~~does~~are not ~~consider~~considered ~~those investments to be~~ other -than -temporarily impaired ~~at June 30, 2009~~.

· Private label mortgage backed securities - The unrealized losses on the Company’s investments in private label mortgage backed-securities were caused by interest rate increases and general deterioration of the economy6. ~~The~~Other contractual cash flows of the securities issued by a private label MBS will depend on the amount of collateral and the cash flows structure established for each security. Accordingly, it is expected that the security will not be settle at a price less than the amortized cost bases of the Company’s investments. Because the decline in market value is attributable to changes in interest rate and not in credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost bases which may be maturity, the Company does not consider those investments to be other than temporarily impaired at June 30, 2009.Investments

~~The~~Other ~~company~~investments ~~reviewed~~at ~~the~~September ~~investment portfolio as of June~~ 30, 2009 ~~using the provisions of FSP SFAS No. 115-2~~ and ~~FAS~~December ~~124-2~~31, ~~Recognition~~2008 ~~and Presentation~~consist of ~~Other-Than-Temporary Impairments. During~~ the ~~review, the Company~~ ~~concluded that the impairment related to held to maturity securities was not considered other than temporary.~~following:

(Continued)

	2009		2008

FHLB stock, at cost	$	10,386,000	$	14,322,400
Investment in statutory trust		610,000		610,000

Other investments	$	10,996,000	$	14,932,400

(continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

6. Other Investments

Other investments at June 30, 2009 and December 31, 2008 consist of the following:

	2009		2008
FHLB s tock, at cost	$	10,521,700	$	14,322,400
Investment in statutory trust		610,000		610,000
Other investments	$	11,131,700	$	14,932,400

7.	Loans and allowance for loan and lease losses

A summary of the Company’s loan portfolio at ~~June~~September 30, 2009 and December 31, 2008 is as as follows:

	2009			2008
Loans secured by real estate:
Commercial and industrial	$	~~857~~867,~~097~~627,~~834~~939		$	851,493,614
Construction		~~234~~195,~~338~~843,~~359~~342			220,579,003
Residential mortgage		~~130~~135,~~144~~014,~~195~~505			125,556,755
Consumer		2,~~482~~451,~~822~~797			2,445,232
		1,224,063,210			1,200,074,604
		1,200,937,583			1,200,074,604
Commercial and industrial		~~221~~204,~~624~~733,~~531~~938			263,331,838
Consumer		4543,~~509~~520,~~878~~003			49,414,894
Lease financing contracts		~~215~~184,~~742~~874,~~652~~581			267,324,959
Overdrafts		1,~~522~~707,~~387~~836			2,146,131
		1,708,462,658			1,782,292,426
		1,635,773,941			1,782,292,426
Deferred loan origination costs, net		(25142,~~992~~562	)		455,051
Unearned finance charges		(~~543~~506,~~959~~322	)		(569,313	)
Allowance for loan and lease losses		(4245,~~729~~969,~~222~~169	)		(41,639,051	)
Loans, net	$	1,~~665~~589,~~163~~155,~~485~~888		$	1,740,539,113

The following is a summary of information pertaining to impaired loans at ~~June~~ September 30, 2009 and December 31, 2008:

	2009		2008
Impaired loans with related allowance	$	~~145~~142,~~333~~358,000	$	137,109,000
Impaired loans that did not require allowance		~~185~~251,~~080~~128,000		127,134,000
Total impaired loans	$	~~330~~393,~~413~~486,000	$	264,243,000
A llowance for impaired loans	$	20,430,000	$	22,381,000
Allowance for impaired loans	$	21,481,000	$	22,381,000

As of ~~June~~September 30, 2009 and 2008, loans in which the accrual of interest has been discontinued amounted to $~~162~~174,~~446~~230,000 and $8692,~~325~~326,000, respectively. If these loans had been accruing interest, the additional interest income realized would have been approximately $48,~~724~~291,000 and $34,~~353~~967,000 for the ~~six~~nine months ended ~~June~~ September 30, 2009 and 2008, respectively.

~~(Continued)~~The following analysis summarizes the changes in the allowance for loan and lease losses for the nine month period ended September 30:

	2009			2008

Balance, beginning of period	$	41,639,051		$	28,137,104
Provision for loan and lease losses		35,984,000			25,799,800
Loans and leases charged-off		(33,487,080	)		(22,025,707	)
Recoveries		1,833,198			1,731,992

Balance, end of period	$	45,969,169		$	33,643,190

(continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following analysis summarizes the changes in the allowance for loan and lease losses for the six-month period ended June 30:

	2009			2008
Balance, beginning of period	$	41,639,051		$	28,137,104
Provision for loan and lease losses		18,396,000			17,819,800
Loans and leases charged-off		(18,400,754	)		(17,103,428	)
Recoveries		1,094,925			1,302,364
Balance, end of period	$	42,729,222		$	30,155,840

8.	Deferred Tax Asset

Deferred income taxes 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. Significant components of the Company’s deferred tax assets and liabilities at ~~June~~September 30, 2009 and December 31, 2008 were as follows:

	2009			2008
Deferred tax assets:
Allowance for loan and lease losses	$	1617,~~664~~927,~~397~~976		$	16,239,230
Unrealized loss on securities available for sale		1772,~~165,357~~157			124
Current NOL carryforward		15,261,844			7,094,665
Net operating losses carryforward		21,584,061			7,094,665
Other temporary differences		1,~~254~~350,~~189~~514			1,099,323
Deferred tax assets		3441,~~345~~634,~~787~~708			24,433,094
Deferred tax liabilities:
Deferred loan origination costs, net		–			(177,470	)
Servicing assets		(~~483~~556,~~336~~583	)		(346,992	)
Fair value adjustments on loans		(5036,~~615~~987	)		(82,736	)
Deferred tax liabilities		(~~533~~593,~~951~~570	)		(607,198	)
Valuation allowance on deferred tax asset		(413,~~511~~200,~~059~~679	)		–
Net deferred tax asset	$	2927,~~300~~840,~~777~~459		$	23,825,896

The company assesses the realization of its deferred tax assets at each reporting period based on ~~SFAS~~FASB ~~109~~ASC ~~“Accounting~~740 ~~for~~ “Income Taxes”. ~~SFAS~~FASB ~~No.109 requires~~ASC 740 requires that a deferred tax asset should be reduced by a valuation allowance if it is more likely than not that some portion or all deferred tax asset will not be be realized based on the available evidence,. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be ~~realize~~realized. The determination of whether a deferred tax asset is realizable is based on weighing all positive or negative ~~available~~ available evidence. In assessing the viability of deferred tax assets, management considers the scheduled reversal of deferred tax assets, projected future taxable income, and tax planning strategies in making ~~this~~ this assessment. The significant component of the deferred income tax benefits was the increase in the allowance for loan and lease losses and net operating losses carry forward.

The Company’s operations ~~are~~reflected in a three year cumulative taxable loss position Although ~~for~~this ~~the~~cumulative ~~six months~~taxable ~~period~~loss ~~and~~position ~~year~~is ~~ended~~considered ~~June 30~~significant negative evidence, ~~2009~~the ~~and~~Company ~~December~~expects ~~31,~~to ~~2008,~~raise new capital in a short-term ~~respectively. This~~period, ~~cumulative~~which ~~taxable~~will ~~loss~~allow it to better position inthe ~~recent~~net ~~periods~~interest earning assets isaccompanied ~~considered~~with ~~significant~~a ~~negative~~structured ~~evidence~~growth and an operating costs reduction strategy. Based ~~The~~on this, the Company had re-evaluated its projections and tax strategies for the allowed carryforward period. The ~~and~~Company ~~concluded~~believes that itthe ~~will~~short-term ~~not~~expectation beof ~~able~~raising new capital, in conjunction with the ability to ~~realize~~move ~~some~~currently ~~portion~~exempt ofincome to taxable income, is sufficient positive evidence that overweight negative evidence, which allow the Company to still rely on projections in order to measure the deferred tax assets invaluation ~~the future~~allowance. As of ~~June~~ September 30, 2009, the Company had deferred tax assets, net of deferred tax ~~assets~~liabilities of approximately $3341,~~811~~041,000 with a valuation allowance of $413,~~511~~201,000.

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of September ~~June~~ 30, 2009 and December 31, 2008 the Company had net operating losses of approximately $3955,~~133~~343,000 and $18,191,000, respectively; which expires as follow:

Expiration
Date	Net operating loss ~~carry forward~~carryforward
2015	$	18,191,000
2016		2037,~~942~~152,000
	$	3955,~~133~~343,000

9.	Other Assets

Other assets at ~~June~~September 30, 2009 and December 31, 2008 consist of the following:

	2009		2008
Merchant credit card items in process of collection	$	2,~~457~~346,~~251~~227	$	2,930,325
Auto insurance claims receivable on repossessed vehicles		~~709~~539,~~825~~884		866,805
Accounts receivable		173,~~683~~131,~~207~~736		1,198,087
Other real estate, net of valuation allowance of $507,601 in June 30, 2009 and $121,888 in December 31,2008		10,266,377		8,759,307
Other real estate, net of valuation allowance of $700,698 in September 30, 2009 and $121,888 in December 31,2008		13,910,290		8,759,307
Other repossessed assets, net of valuation allowance of $491,513
Other repossessed assets, net of valuation allowance of $312,893 in September 30, 2009 and $633,165 in December 31, 2008, respectively		2,377,825		4,747,048
in June 30, 2009 and $633,165 in December 31,2008, respectively		2,455,696		4,747,048
Prepaid expenses and deposits		7,006,076		6,264,994
Prepaid expenses and deposits		8,238,880		6,264,994
Net servicing assets		2,048,571		1,220,243
Net servicing assets		1,725,375		1,220,243
Other		9,246,278		7,337,319
Other		5,729,955		7,337,319
	$	40,606,887	$	33,324,128
	$	49,266,566	$	33,324,128

Other repossessed assets are presented net of an allowance for losses. The following analysis summarizes the changes in the allowance for losses for the ~~six~~nine-month period ended ~~June~~September 30:

	2009			2008
Balance, beginning of period	$	633,165		$	565,767
Provision for losses		~~341~~406,~~542~~249			~~499~~984,~~583~~940
Net charge-offs		(~~483~~726,~~194~~521	)		(~~566~~825,~~703~~001	)
Balance, end of period	$	~~491~~312,~~513~~893		$	~~498~~725,~~647~~706

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

10.

Deposits

Total deposits as of ~~June~~September 30, 2009 and December 31, 2008 consisted of the following:

	2009		2008
Non interest bearing deposits	$	~~100~~101,~~730~~473,~~850~~113	$	108,645,242
Interest bearing deposits:
NOW & Money Market		6360,~~442~~578,~~668~~223		59,309,057
Savings		105,~~237~~796,~~572~~384		104,424,319
Regular CD's & IRAS		~~129~~160,~~711~~116,~~805~~384		109,731,499
Jumbo CD's		~~289~~406,~~819~~380,~~137~~967		278,383,616
Brokered Deposits		1,~~389~~318,~~764~~098,~~796~~016		1,423,814,311
		1,977,975,978		1,975,662,802
		2,050,969,974		1,975,662,802
Total Deposits	$	2,~~078~~152,~~706~~443,~~828~~087	$	2,084,308,044

The ~~Company~~ Bank evaluated its dependency risk on broker dealers and the possibility of a ~~near~~ near term severe impact, as defined on ~~the~~FASB ~~SOP~~ASC ~~94-6~~275, “~~Disclosure of Certain Significant~~ Risks and Uncertainties”, and concluded that the ~~Company~~Bank relies on broker deposits as a short-term funding source to meet its liquidity needs. Broker deposits, when compared to retail deposits attracted through a branch network, are generally more sensitive to changes in interest rates and volatility in the capital markets and could reduce the ~~Company~~Bank’s net interest spread and net interest margin. In addition, broker deposit funding sources may be more sensitive to significant changes in the ~~Company~~Bank’s financial condition. The ability to continue to acquire broker deposits is subject to the ~~Company~~Bank ability to price these deposits at competitive levels, which may substantially increase the funding costs, and the confidence of the market. In addition, Section 29 of the Federal Deposit Insurance Act (“FDIA”) limits the use of brokered deposits by institutions that are less than “well-capitalized” and allows the FDIC to place restrictions on interest rates that institutions may pay. On May 29, 2009, the FDIC approved a final rule to implement new interest rate restrictions on institutions that are not “well capitalized.” The rule limits the interest rate paid by such institutions to 75 basis points above a national rate, as derived from the interest rate average of all institutions. If an institution could provide evidence that its local rate is higher, it would be permitted to offer the higher local rate plus 75 basis points. Because the local rates in Puerto Rico are significantly higher than the national rate, the Company intends to apply to the FDIC for permission to offer rates based on its higher local rates but it can make no assurances that such permission will be granted. Even though the rule is not effective until January 1, 2010, the FDIC has stated that it will not object to the rule’s immediate application.

~~As of~~Although ~~June 30, 2009,~~ the ~~Company’s~~Bank ~~total~~regulatory ~~risk-based~~ capital ~~ratio~~ratios ~~was~~currently ~~9.71%,~~exceed ~~which~~the isminimum levels required ~~considered~~to ~~adequately~~be “well capitalized” under the regulatory framework for prompt ~~corrective~~ corrective action~~. Although~~, the ~~Company~~Bank ~~has~~is ~~since~~deemed ~~sold~~to ~~approximately $163,370,000~~be in“adequately ~~securities~~capitalized” ~~with~~as a ~~$6,023,000~~consequence ~~gain~~of the ~~which~~recently ~~increased~~issued ~~the~~order ~~Company’s total~~to ~~risk-based~~cease ~~capital~~and ~~ratio~~desist that contains requirements to ~~over~~meet and ~~10%~~maintain asspecific ofcapital ~~July~~levels. As ~~31,~~a ~~2009~~result, the ~~Company~~Bank is currently restricted from using broker deposits as a short-term funding source unless it obtains a waiver from the FDIC. These restrictions on the ~~Company~~ Bank’s ability to participate in this market could place limitations on its ~~growth~~ growth strategy or could result in the participation in other more expensive ~~funding~~ funding sources. ~~Although~~ The ~~the~~Bank has ~~Company~~applied for and has ~~applied~~received toa waiver from the FDIC that allows the Company to ~~obtain~~continue ato ~~waiver~~accept, ~~that~~renew ~~would~~and/or ~~permit~~roll itover brokered deposits through November 30, 2009, subject to an aggregate cap of $79,000,000. To continue to accept, ~~broker~~renew and/or roll over brokered deposits after November 30, no2009 or for amounts in excess of $79,000,000, the ~~assurance~~Bank ~~can~~will be ~~made~~required to obtain an additional waiver from the FDIC and the Company can make no assurances that such a waiver will be granted. ~~These~~ In addition, the Bank can make no assurances that it will be able to accept, renew or roll over brokered deposits in such amounts and at such rates that are consistent with past results. These restrictions could materially and adversely impact the ~~Company~~Bank’s ability to generate sufficient deposits to maintain an adequate liquidity position. For more details on the order to cease and desist issued by the FDIC, please refer to “Note 1 – Nature of Operations and Basis of Presentation” herein.

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

11.	Advance from Federal Home Loan Bank

At ~~June~~ September 30, 2009, the Company owes an advance to the FHLB as follows:

Maturity		Interest rate				2009
2014			4.38%	%		$	~~369~~354,~~169~~494

Interest rates are fixed for the term of each advance and are payable on the first business day of the following month when the original maturity of the note exceeds six months. In notes with original terms of six months or less, interest is paid at maturity. Interest payments for the ~~six-~~nine month periods ended ~~June~~September 30, 2009 and 2008 amounted to approximately $~~130~~135,000 and $~~173~~530,000, respectively. Advances are secured by mortgage loans and securities pledged at the FHLB. As of ~~June~~September 30, 2009, based on the collateral pledged at the FHLB, the Company had a borrowing capacity on additional advances of of approximately $51,~~487~~214,000.

12.	Derivative Financial Instruments

~~Statement of~~FASB ~~Financial Accounting Standards No. 133, Accounting for Derivative~~ASC ~~Instruments and Hedging Activities (SFAS 133)~~815, as“Derivatives ~~amended~~ and ~~interpreted,~~Hedging” establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by ~~SFAS~~FASB ~~133,~~ASC ~~the~~815, the Company records all derivatives on the balance sheet (in other asset or ~~other~~ other liabilities) at fair value. The accounting for changes in the fair ~~value~~ value of derivatives depends on the intended use of the derivative and the ~~resulting~~ resulting designation. Derivatives used to hedge the exposure to the variation of the fair value of an asset or a liability imputable to a particular risk that has effects on the net profit is considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

The Company’s objective in using derivatives is to manage interest rate risk exposure of the variable commercial loan portfolio and other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps as part of its fair value hedging strategy. Interest rate swaps designated as fair value hedges protect the Company against the changes in fair value of the hedged item over the life of the agreements without exchange of the underlying principal amount. The Company uses fair value hedges to protect against adverse changes in fair value of certain brokered certificates of deposit (CDs). The Company also uses options to mitigate certain financial risks as further described below. The Company’s objective in using option contracts is to offset the risk characteristics of the specifically identified assets or liabilities to which the contract is tied.

Fair value hedges result in the immediate recognition in earnings of gains or losses on the derivative instrument, as well as corresponding losses or gains on the hedged item; to the extent they are attributable to the hedged risk. The ineffective portion of the gain or loss, if any, is recognized in current operations.

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of ~~June~~September 30, 2009 and December 31, 2008, the Company had the following ~~derivative~~ derivative financial instruments outstanding:

	2009					2008
	Notional					Notional
Description	amount		Fair value			amount		Fair value
Derivative designated as hedging instruments under SFAS 133
Derivative designated as hedging instruments under FASB ASC 815
LIBOR-based interest rate swaps	$	-	$	-		$	14,000,000	$	12,959
Derivatives not designated as hedging instruments under SFAS 133
Derivatives not designated as hedging instruments under FASB ASC 815
Purchased Option	$	25,000,000	$	515,000		$	25,000,000	$	110,000
Written Option	$	25,000,000	$	(515,000	)	$	25,000,000	$	(110,000	)

In February of 2007, the Corporation for the State Insurance Fund (FSE) for the Government of the Commonwealth of Puerto Rico invested approximately $25,000,000 in a CD indexed to a global equity basket. The return on the CD equals 100% appreciation of the equity basket at maturity, approximately 5 years. To protect against adverse changes in fair value of the CD, the Company purchased an option that offsets changes in fair value of the global equity basket. Consistent with the guidance in ~~SFAS~~FASB ~~133~~ASC 815, the equity-based return on the CD represents a written option and is bifurcated and accounted for separately from the debt host as a derivative. Both the embedded equity-based return derivative and the purchased option are adjusted to their respective fair values through earnings. As the values of the two derivatives are equal and offset each other, the net effect on earnings is zero. At ~~June~~September 30, 2009, $515,000 was included in other assets and ~~other~~ other liabilities related to the purchased option and equity-based return derivative.

As of December 31, 2008, the Company had one interest rate swap agreement, designated as fair value hedge, which converted $12,235,000 of a fixed rate time deposit to variable rate time deposit that will mature in 2018, with semi-annual call options that match the call options on the swap. This swap was terminated in January 27, 2009 and the certificate of deposit was also cancelled.

This interest rate swap agreement was effective in achieving the economic objectives explained above. During the year ended December 31, 2008, net gain or loss from fair value hedging ineffectiveness was considered inconsequential and reported within other non-interest income.

The Company has agreements with each of its derivative counterparties that contain standard default provisions, such that if the Company were to default on any of its indebtedness, then it could also be declared in default on its derivative obligations. However, as of ~~June~~September 30, 2009, the Company has not ~~posted~~ posted any collateral related to these agreements and is not in a net liability position with any of its derivative counterparties.

13.	Note Payable to Statutory Trust

On December 19, 2002, Eurobank Statutory Trust II (the Trust II) issued $20,000,000 of floating rate Trust Preferred Capital Securities due in 2032 with a liquidation amount of $1,000 per security; with an option to redeem in five years. Distributions payable on each capital security is payable at an annual rate equal to 4.66% beginning on (and including) the date of original issuance and ending on (but excluding) March 26, 2003, and at an annual rate for each successive period equal to the three-month LIBOR plus 3.25% with a ceiling rate of 11.75%. The capital securities of the Trust II are fully and unconditionally guaranteed by EuroBancshares. The Company then issued $20,619,000 of floating rate junior subordinated deferrable interest debentures to the Trust II due in 2032. The terms of the debentures, which comprise substantially all of the assets of the Trust II, are the same as the terms of the capital securities issued by the Trust II. These debentures are fully and unconditionally guaranteed by the Bank. The Bank subsequently issued an unsecured promissory note to EuroBancshares for the issued amount and at an annual rate equal to that being paid on the Trust Preferred Capital Securities due in 2032.

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On May 28, 2009, the Company elected to defer interest payments on the Company’s $20,619,000 of floating rate junior subordinated deferrable interest debentures relating to the trust preferred securities issued by its wholly-owned subsidiary, the Trust II. The terms of the debentures and trust indenture allow for the Company to defer interest payments for up to 20 consecutive quarters. As such, the deferral of interest does not constitute a default. During the period that the interest deferrals have been elected, the Company will continue to record the expense associated with the debentures. Upon the expiration of the deferral period, all accrued and unpaid interest will be due and payable.

Interest expense on notes payable to statutory trusts amounted to approximately $~~460~~656,000 and $~~699~~1,011,000 for the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, respectively. As of ~~June~~September 30, 2009, the Company had accrued $~~239~~436,000 in interest payable.

14.	Commitments and Contingencies

The Company is involved as plaintiff or defendant in a variety of routine litigation incidental to the normal course of business. Management believes based on the opinion of legal counsel, that it has adequate defense or insurance protection with respect to such litigations and that any losses there from, whether or not insured, would not have a material adverse effect on the results of operations or financial position of the Company.

15.	Sale of Receivable and Servicing Assets

During the ~~quarter~~quarters ended March 31, 2009 and September 30, 2009, the Company sold to a third party lease financing contracts with carrying values of approximately $19,608,000 and $15,699,000, respectively. In ~~this~~these ~~sale~~sales, the Company retained servicing responsibilities, and servicing assets of $1,171,000 and ~~was~~$671,000 were recognized, respectively. The estimated fair value of related servicing asset as of March 31, 2009 ~~was approximately~~and September 30, 2009 were approximately $1,171,000 and $671,000, respectively. Such fair ~~value~~values ~~was~~were estimated by an ~~independent~~ independent financial advisor using the present value of expected cash flows associated with the servicing assets taking into account an annual prepayment assumptions ~~assumption~~ of 18.36%, aand 16.56%, discount ~~rate~~rates of 10.00% and a8.32%, and weighted average portfolio ~~life~~lives of 3.93 ~~years~~ and 3.46years, ~~The~~respectively. The Company surrendered control of the lease financing receivables, as defined by FASB ~~SFAS No. 140~~ASC 860, ~~Accounting for~~ “Transfers and Servicing ~~of Financial Assets and Extinguishment of Liabilities~~”, and accounted for these transactions as sales and recognized net gains of approximately $757,000 and $420,000, respectively. Under the terms of the transactions, the Company has limited recourse obligations to repurchase defaulted leases up to 5% of the outstanding aggregate principal lease balance as of the cut-off date of all leases purchased. As of ~~June~~September 30, 2009, total amount accrued on ~~books~~ books related to recourse liability amounted to approximately $~~486~~621,000.

A summary of servicing assets as of ~~June~~September 30, 2009 and December 31, 2008 are as follows:

Servicing assets	2009			2008
	2009			2008
Servicing assets
Balance, beginning of year	$	1,221,542		$	148,880
Servicing retained on lease financing contracts sold		1,~~170~~842,~~776~~158			2,166,113
Change in valuation allowance		—			—
Amortization		(1,013,830	)		(1,093,451	)
Amortization		(665,646	)		(1,093,451	)
Balance, end of period	$	2,049,870		$	1,221,542
Balance, end of period	$	1,726,672		$	1,221,542
Valuation allowance for servicing assets
Balance, beginning of year	$	1,299		$	1,299
Direct write-downs		—			—
Total valuation allowance		1,299			1,299
Balance, end of period, net	$	12,~~725~~048,~~373~~571		$	1,220,243

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

During the quarter ended ~~June~~September 30, 2009 the Company evaluated the fair value of servicing assets for impairment using the present value of expected cash flows associated with the servicing assets, taking into account a prepayment assumption of 16.6556%, a discount rate of 98.6732% and a weighted average portfolio life of 3.1546 years. During the quarter ended December 31, 2008 the Company evaluated the fair value of servicing assets for impairment using the present value of expected cash flows associated with the servicing assets, taking into account a prepayment assumption of 18.24%, a discount rate of 9.00% and a weighted average portfolio life of 2.73 years. There were no custodial escrow balances maintained in connection with serviced leases as of ~~June~~September 30, 2009 and December 31, 2008.

The estimated aggregate amortization expense related to servicing assets for the next years is as follows:

2009	$	~~642~~409,~~884~~423
2010		~~745~~1,~~677~~075,078
2011		~~255~~424,~~566~~054
Thereafter		82141,~~545~~315
	$	12,~~726~~049,~~672~~870

During the ~~six~~nine month periods ended ~~June~~September 30, 2009 and 2008, the Company sold to ~~third~~ third parties approximately $24,~~504~~076,000 and $1221,~~587~~671,000 of mortgage loans, respectively. The Company surrendered control of the mortgage loans receivables, including servicing rights, as defined by ~~SFAS~~FASB ~~No. 140~~ASC 860, ~~Accounting for~~ “Transfers and ~~Servicing~~ ~~of Financial Assets and Extinguishment of Liabilities~~Servicing”, ~~and~~ and accounted for these transactions as a sale. The net proceeds from the sale ~~from~~ from such loans amounted to approximately $24,~~562~~160,000 and $1221,~~763~~894,000, resulting in a gain of approximately $5884,000 and $~~176~~223,000 during the ~~six~~nine month periods ~~ended~~ ~~June~~ended ~~30,~~ 2009 and 2008, respectively.

16.	Stock Transactions

For the ~~six~~nine month period ended ~~June~~September 30, 2009, the Company did not issue common ~~stock~~ stock shares. During the second quarter of 2009, the company repurchases 300 ~~unvested~~ unvested restricted shares from former employees for a total of $1,185. These restricted shares were originally granted in April 2004.

During the first quarter of 2008, the Company issued 407,000 of the common stock shares through stock options exercised, for a total of $2,029,000. During the third quarter of 2008, the company ~~repurchases~~repurchased 800 unvested restricted shares from former employees for a total of $6,504. These restricted shares were originally granted in April 2004.

17.	Fair Value

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

(a)

Cash and Cash Equivalents

The carrying amount of cash and cash equivalents is a reasonable estimate of fair value, due to the short maturity of these instruments.

(b)

Investment Securities

The fair value of investment securities available for sale and held to maturity are estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Please see further explanation below.

(c)

Other Investments

The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB. The carrying value of equity interest in unconsolidated statutory trust approximates the fair value of the residual equity in the trust.

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(d)

Loans and Loans Held for Sale

Fair values are estimated for portfolios of loans with similar financial characteristics in accordance with ~~SFAS~~FASB ~~No.~~ASC ~~107~~825, ~~as amended~~“Financial Instruments”. Loans are segregated by type such as commercial, consumer, mortgage, and other loans. Each loan category is further segmented into fixed and adjustable interest rate terms.

The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.

The estimate of fair value of loans considers the credit risk inherent in the portfolio through the allowance for loan and lease losses. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific-borrower information.

(e)

Accrued Interest Receivable

The carrying amount of accrued interest receivable is a reasonable estimate of its fair value, due to the short-term nature of the instruments.

(f)

Deposits

The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, money market, and checking accounts is equal to the amount payable on demand as of ~~June~~September 30, 2009 and December 31, 2008. The fair value of of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rate currently offered for deposits of similar remaining maturities.

(g)

Securities Sold under Agreements to Repurchase

The fair value of securities sold under agreements to repurchase are estimated using discounted cash flow analysis using rates for similar types of borrowing arrangements.

(h)

Advances from Federal Home Loan Bank

The fair value of advances from Federal Home Loan Bank is calculated by discounted scheduled cash flows through the estimated maturity using market discount rates.

(i)

Note Payable to Statutory Trust

The carrying amount of the outstanding note payable to statutory trust approximates its fair value due to their variable interest rate.

(j)

Accrued Interest Payable

The carrying amount of accrued interest payable is a reasonable estimate of fair value, due to the short-term nature of the instruments.

(k)

Derivatives

Derivative instruments were recorded on the balance sheet at their respective fair values. Interest rate swaps are valued using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. The options are valued using the market standard methodology of calculating the basket average closing level of each underlying index on the observation dates less the average closing level of each underlying index at the initial date, divided by the average closing level of each underlying index at the initial date. In addition, credit valuation adjustments are made to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements, which consider the impact of netting and any applicable credit enhancements, such as collateral posting, thresholds, mutual puts, and guarantees.

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(l)

Commitments to Extend Credit and Letters of Credit

The fair value of commitments to extend credit and letters of credit was not readily available and not deemed significant.

(m)

Fair Value

The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. As described for investments and mortgage-backed securities, the tax ramifications related to the realization of the unrealized gains and losses may have a significant effect on fair value estimates and have not been considered in many of the estimates.

Following are the carrying amount and fair value of financial instruments as of ~~June~~ September 30, 2009 and December 31, 2008:

	2009				2008
	Carrying				Carrying
	amount		Fair value		amount		Fair value
Financial assets:
Cash and cash equivalents	$	~~222~~254,~~055~~571,~~244~~013	$	~~222~~254,~~055~~571,~~244~~013	$	88,146,164	$	88,146,164
Securities purchased under agreements to resell		2421,~~179~~027,~~698~~247		2421,~~179~~027,~~698~~247		24,486,774		24,486,774
Investment securities available for sale		~~577~~814,~~458~~444,~~823~~679		~~577~~814,~~458~~444,~~823~~679		751,016,565		751,016,565
Investment securities held to maturity		~~110,201,991~~—		~~111,153,307~~—		132,798,181		132,890,503
Other investments		1110,~~131~~996,~~700~~000		1110,~~131~~996,~~700~~000		14,932,400		14,932,400
Loans held for sale		178,~~019,702~~219		178,~~019,702~~219		1,873,445		1,873,445
Loans, net		1,~~665~~589,~~163~~155,~~485~~888		1,~~659~~576,~~492~~959,~~276~~652		1,740,539,113		1,729,938,119
Derivatives - Purchased Option		515,000		515,000		110,000		110,000
Accrued interest receivable		13,~~683~~827,~~245~~991		13,~~683~~827,~~245~~991		14,614,445		14,614,445
Financial liabilities:
Deposits		2,~~078~~152,~~706~~443,~~828~~087		2,~~133~~223,~~319~~495,~~396~~929		2,084,308,044		2,114,507,829
Securities sold under agreements to repurchase		~~471~~468,675,000		~~476~~472,~~317~~435,~~365~~569		556,475,000		573,390,657
Advances from FHLB		~~369~~354,~~169~~494		~~369~~378,~~169~~267		15,398,041		15,431,886
Note payable to statutory trust		20,619,000		20,~~619~~618,~~355~~819		20,619,000		20,621,127
Accrued interest payable		1213,~~574~~268,~~585~~954		1213,~~574~~268,~~585~~954		16,073,737		16,073,737
Derivatives - Interest Rate Swaps		—		—		12,959		12,959
Derivatives - Written Option		515,000		515,000		110,000		110,000

~~SFAS~~FASB ~~No.~~ASC ~~157~~820, “Fair Value Measurements and Disclosures”, emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ~~SFAS~~FASB ASC ~~No.~~820 ~~157~~ establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The fair values of obligations available for sale issued by US Government Agencies, US Government Sponsored Enterprises, US Corporations, Commonwealth of Puerto Rico Government and Commonwealth of Puerto Rico Government Agencies and Mortgage-backed securities issued by US Agencies and US Sponsored Enterprises are determined by obtaining quoted prices from nationally recognized securities broker-dealers (Level 2 inputs). Quoted price for each security is determined utilizing the risk free US Treasury Securities Yield Curve as the base plus a spread that represents the cost of the risks inherent to the characteristics (credit, option and other possible risks) of each investment alternative. In the case of the Mortgage Back Securities (“MBS”), the specific characteristics of the different tranches on a MBS are very important in the expected performance of the security and its fair value (Level 3 inputs).

The Company uses Interest Rate Swaps and Call Options to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates derived from observable market interest rate curves.

The fair values of call options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if the values of a global equity basket of indices rise above the strike price of the caps for 100% appreciation of a global equity basket. The appreciation of a global equity basket used in the calculation of projected receipts on the cap are based on an expectation of future appreciation of a global equity basket value, derived from observable market appreciation of a global equity basket value curves and volatilities. To comply with the provisions of ~~SFAS~~FASB ~~No.~~ASC ~~157~~820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of ~~June~~ September 30, 2009, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

(~~Continued~~continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

Fair Value Measurement at June 30, 2009 using

Fair Value Measurement at September 30, 2009 using

Quoted prices in

Significant other

Significant

active markets

observable

unobservable

for identical

inputs

June 30, 2009

assets (Level 1)

(Level 2)

(Level 3)

September 30, 2009

assets (Level 1)

(Level 2)

(Level 3)

Assets:

Available for sale securities

~~577~~814,~~458~~444,~~823~~679

—

~~402~~612,~~035~~592,~~550~~653

~~175~~201,~~423~~852,~~273~~026

Purchased option jumbo CD

515,000

—

515,000

—

Liabilities:

Embedded option jumbo CD

515,000

—

515,000

—

			Fair Value Measurement at December 31, 2008 using
			Quoted prices in		Significant other		Significant
			active markets		observable		unobservable
			for identical		inputs		inputs
	December 31, 2008		assets (Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale securities	$	751,016,565	$	—	$	530,362,366	$	220,654,199
Purchased option jumbo CD		110,000		—		110,000		—
FVH swaps valuation		12,959		—		12,959		—

Liabilities:
Embedded option jumbo CD	$	110,000	$	—	$	110,000	$	—

~~The activity in assets measured at fair value in a recurring basis using significant unobservable inputs~~ (~~level 3~~continued) ~~as of June 30, 2009 and December 31, 2008 consisted of the following:~~

	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Available for Sale Securities
	June 30, 2009			December 31, 2008
Beginning Balance	$	220,654,199		$	178,321,255
Net other comprehensive loss		(3,863,540	)		(23,816,803	)
Other than temporary impairment recognized in operations		(3,483,345	)		-
Amortization and Accretion included in operations		651,830			1,023,980
Purchases, issuances, and settlements		5,237,738			103,884,868
Prepayments and maturities		(43,773,610	)		(38,759,100	)
Ending Balance	$	175,423,273		$	220,654,199

(Continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The activity in assets measured at fair value in a recurring basis using significant unobservable inputs (level 3) as September 30, 2009 and December 31, 2008 consisted of the following:

	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Available for Sale Securities
	September 30, 2009			December 31, 2008
Beginning Balance	$	220,654,199		$	178,321,255
Net other comprehensive income (loss)		3,667,147			(23,816,803	)
Other than temporary impairment recognized in operations		(733,931	)		-
Amortization and Accretion included in operations		1,219,561			1,023,980
Purchases, issuances, and settlements		32,666,905			103,884,868
Prepayments and maturities		(59,531,387	)		(38,759,100	)
Charge-off		(3,000,000	)		-
Reclassifications		13,258,063			-
Sale		(6,348,531	)		-
Ending Balance	$	201,852,026		$	220,654,199

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurement at June 30, 2009 using

Fair Value Measurement at September 30, 2009 using

Quoted prices in

Significant other

Significant

active markets

observable

unobservable

Total gains

for identical

inputs

(losses)

June 30, 2009

assets (Level 1)

(Level 2)

(Level 3)

September 30, 2009

assets (Level 1)

(Level 2)

(Level 3)

Assets:

Repossessed asset

1,~~935~~439,~~426~~973

—

1,~~623~~208,~~582~~422

~~311~~231,~~844~~551

(9862,~~765~~746

)

Other real estate owned

2,~~348~~983,~~662~~932

—

12,~~301~~716,~~662~~932

1267,~~047,~~000

(~~394~~587,~~117~~214

)

Impaired loans

~~109~~107,~~818~~531,~~235~~092

—

5851,~~383~~794,~~958~~794

5155,~~434~~736,~~277~~298

(56,~~000~~550,~~812~~563

)

Fair Value Measurement at December 31, 2008 using

Quoted prices in

Significant other

Significant

active markets

observable

unobservable

Total gains

for identical

inputs

(losses)

December 31, 2008

assets (Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

95,220,267

—

60,096,242

35,124,025

(19,133,238

)

Fair Value Measurement at December 31, 2008 using

Quoted prices in

Significant other

Significant

active markets

observable

unobservable

Total gains

for identical

inputs

(losses)

December 31, 2008

assets (Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

95,220,267

—

60,096,242

35,124,025

(19,133,238

)

The following represent a summary of the assumptions using significant unobservable inputs (Level 3) and impairment charges recognized during the period:

Repossessed assets, which are carried at lower of cost or fair value, were written down to fair value resulting in a valuation allowance of $9963,000, which was included in earnings for the period. Those assets using significant unobservable inputs (level 3) are based in the physical condition of the repossessed asset and the Company experience while disposing similar asset.

Other real estate owned (OREO) which are carried at lower of cost or fair value, were written down to fair value resulting in a valuation allowance of $~~394~~587,000, which was included in earnings for the period. Those assets using significant unobservable inputs (level 3) are based on physical condition of the OREO and the Company experience while disposing similar assets.

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $109,818,000, net of a valuation allowance of $19,418,000, resulting in an additional provision for loan losses of $5,001,000 for the six month period ended June 30, 2009. Those assets using significant unobservable inputs (~~level 3~~continued) ~~are based in the physical condition of the collateral and the Company experience while disposing similar assets.~~

18. Regulatory Matters

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

(Continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~Quantitative~~Impaired ~~measures~~loans, ~~established~~which byare ~~regulations~~measured tofor ~~ensure~~impairment ~~capital~~using ~~adequacy~~the ~~require~~fair ~~the Company~~value ~~and~~of the ~~Bank~~collateral for tocollateral ~~maintain~~dependent ~~minimum~~loans, ~~amounts~~had ~~and~~a ~~ratios~~fair ~~(set~~value ~~forth in the following table)~~ of ~~total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined)~~$107,531,000, ~~and~~net of ~~Tier I Capital~~a ~~(as~~valuation ~~defined)~~allowance ~~to average assets (Leverage) (as defined). As~~ of ~~June 30~~$19, ~~2009~~478, ~~the Company’s total risk-based capital ratio was 9.71%~~000, ~~which~~resulting ~~is considered~~in ~~adequately~~an ~~capitalized~~additional ~~under~~provision ~~the regulatory framework~~ for ~~prompt~~ ~~corrective~~loan ~~action. Although~~losses ~~the~~of ~~Company has since sold approximately~~ $~~163,370,000 in securities with a $~~6,~~023~~551,000 ~~gain~~for ~~which increased~~ the ~~Company’s total~~nine ~~risk-based~~month ~~capital~~period ~~ratio~~ended toSeptember ~~over 10% as of July 31~~30, ~~2009, the Company is~~ ~~currently restricted from using broker deposits as a short-term funding source unless it obtains a waiver from the FDIC~~2009. ~~These~~Those ~~restrictions~~assets onusing ~~the Company’s~~significant ~~ability~~unobservable toinputs ~~participate~~(level ~~in this market could place limitations on its~~3) ~~growth~~are ~~strategy~~based ~~or could result~~ in the ~~participation~~physical incondition ~~other~~of ~~more expensive funding sources. Although~~ the ~~Company~~collateral ~~has applied to the FDIC to obtain a waiver that would permit it to accept broker deposits, no assurance can be made that such waiver will be granted. These restrictions could materially~~ and ~~adversely impact~~ the Company’s ~~ability to~~experience ~~generate~~while ~~sufficient~~disposing ~~deposits~~similar ~~to maintain an adequate liquidity position~~assets.

In addition, as a result of recent discussions with our bank regulatory authorities, it has come to the Company attention that Eurobank will likely become subject to a regulatory enforcement action, which could take the form of an order to cease and desist or similar administrative action, primarily due to the high level of non-performing assets and the resulting impact on its financial condition18. ~~Any~~ ~~enforcement~~Regulatory action proposed by our regulators would be designed to remediate certain deficiencies noted by our regulators and generally would require certain corrective steps, impose limits on activities, prescribe lending parameters and require additional capital to be raised. In many cases, policies must be revised by the institution and submitted to the regulatory authority for approval within time frames prescribed by the regulatory authorities. The Company would expect that any administrative action would have performance metrics related to asset quality, regulatory capital levels, core funding sources, and profitability, among others, that the Company would be required to satisfy within a prescribed period of time to comply with the order. Company failure or inability to comply with the enforcement action could subject the bank to additional regulatory actions and could result in the forced disposition of the bank. Generally, these enforcement actions will be lifted only after subsequent examinations substantiate complete correction of the underlying issues. Should the Company become subject to one or more administrative actions, the Company may be required to alter certain aspects of its operations, in some cases in a manner that management and the Board of Directors might otherwise deem to be opposed to the best interests of the stockholders. For example, the Company may be required to raise capital on terms that may not be favorable to the existing stockholders, or may be required to reduce the reliance on funding sources, such as brokered deposits, that otherwise consider attractive. Any restrictions placed on the Company operations by an administrative action may have an adverse effect on earnings and plan of operations.Matters

The Company (~~Continued~~on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (Leverage) (as defined). Although the Bank regulatory capital ratios currently exceed the minimum levels required to be “well capitalized” under the regulatory framework for prompt corrective action, the Bank is deemed to be “adequately capitalized” as a consequence of the recently issued order to cease and desist that contains requirements to meet and maintain specific capital levels. As a result, the Bank is currently restricted from using broker deposits as a short-term funding source unless it obtains a waiver from the FDIC. These restrictions on the Bank’s ability to participate in this market could place limitations on its growth strategy or could result in the participation in other more expensive funding sources. The Bank has applied for and has received a waiver from the FDIC that allows the Company to continue to accept, renew and/or roll over brokered deposits through November 30, 2009, subject to an aggregate cap of $79,000,000. To continue to accept, renew and/or roll over brokered deposits after November 30, 2009 or for amounts in excess of $79,000,000, the Bank will be required to obtain an additional waiver from the FDIC and the Company can make no assurances that such a waiver will be granted. In addition, the Bank can make no assurances that it will be able to accept, renew or roll over brokered deposits in such amounts and at such rates that are consistent with past results. These restrictions could materially and adversely impact the Bank’s ability to generate sufficient deposits to maintain an adequate liquidity position.

(continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

AtEBS Overseas, ~~June~~Inc., a Puerto Rico international banking entity and wholly-owned subsidiary of Eurobank, is a party to certain repurchase agreements involving various mortgage backed securities and collateralized mortgage obligations. Certain of these agreements are guaranteed by Eurobank. As of September 30, 2009, ~~and~~EBS ~~December~~Overseas’ 31repurchase obligations totaled $316,275,000. Under ~~2008~~certain of these repurchase agreements, ~~required~~the issuance of the Order and ~~actual~~Eurobank’s regulatory capital ~~amounts~~category may constitute an event ~~and~~of ~~ratios~~default ~~are~~or astermination ~~follows~~event ~~(dollars~~that could require the early repurchase of the securities sold under the repurchase agreements at a substantial premium. The early repurchase of securities sold under these repurchase agreements could result in ~~thousands):~~ an estimated repurchase premium of approximately $18,205,000.

Actual

For Minimum Capital Adequacy Purposes

To Be Well Capitalized Under Prompt Corrective Action Provision

Amount Is

Ratio Is

Amount Must Be

Ratio Must Be

Amount Must Be

Ratio Must Be

(Dollars in thousands)

As of June 30, 2009:

Total Capital (to Risk Weighted Assets)

EuroBancshares, Inc

184,286

9.71

≥ $ 151,879

≥ 8.00

N/A

Eurobank

184,377

9.71

≥ 151,868

≥ 8.00

≥ 189,835

≥ 10.00

Tier 1 Capital (to Risk Weighted Assets)

EuroBancshares, Inc

160,443

8.45

≥ 75,939

≥ 4.00

N/A

Eurobank

160,535

8.46

≥ 75,934

≥ 4.00

≥ 113,901

≥ 6.00

Leverage (to average assets)

EuroBancshares, Inc

160,443

5.66

≥ 113,455

≥ 4.00

N/A

Eurobank

160,535

5.66

≥ 113,421

≥ 4.00

≥141,776

≥ 5.00

As of December 31, 2008:

Total Capital (to Risk Weighted Assets)

EuroBancshares, Inc

208,626

10.25

≥ $ 162,752

≥ 8.00%

N/A

Eurobank

206,422

10.15

≥ 162,732

≥ 8.00

≥ 203,415

≥ 10.00

Tier 1 Capital (to Risk Weighted Assets)

EuroBancshares, Inc

182,993

8.99

≥ 81,376

≥ 4.00

N/A

Eurobank

180,792

8.89

≥ 81,366

≥ 4.00

≥ 122,049

≥ 6.00

Leverage (to average assets)

EuroBancshares, Inc

182,993

6.55

≥ 111,803

≥ 4.00

N/A

Eurobank

180,792

6.47

≥ 111,764

≥ 4.00

≥ 139,705

≥ 5.00

The Order and the Written Agreement will remain in effect until modified, terminated, suspended or set aside by the FDIC or the Federal Reserve, as applicable. The failure or inability to comply with these regulatory enforcement actions could subject the Company, the bank and their respective directors to additional regulatory actions and could result in the forced disposition of the bank. Generally, these enforcement actions will be lifted only after subsequent examinations substantiate complete correction of the underlying issues.

(continued)

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

At September 30, 2009 and December 31, 2008, required and actual regulatory capital amounts and ratios are as follows (dollars in thousands):

Actual

For Minimum Capital

Adequacy Purposes

To Be Well Capitalized

Under Prompt Corrective

Action Provision

Amount Is

Ratio Is

Amount

Must Be

Ratio

Must Be

Amount

Must Be

Ratio

Must Be

(Dollars in thousands)

As of September 30, 2009:

Total Capital (to Risk Weighted Assets)

EuroBancshares, Inc

176,144

10.05

$ > 140,247

> 8.00

N/A

Eurobank

176,408

10.06

> 140,230

> 8.00

> 175,287

> 10.00

Tier 1 Capital (to Risk Weighted Assets)

EuroBancshares, Inc

154,136

8.79

> 70,124

> 4.00

N/A

Eurobank

154,403

8.81

> 70,115

> 4.00

> 105,172

> 6.00

Leverage (to average assets)

EuroBancshares, Inc

154,136

5.49

>112,375

> 4.00

N/A

Eurobank

154,403

5.50

>112,340

> 4.00

>140,426

> 5.00

As of December 31, 2008:

Total Capital (to Risk Weighted Assets)

EuroBancshares, Inc

208,626

10.25

$ > 162,752

> 8.00

N/A

Eurobank

206,422

10.15

> 162,732

> 8.00

> 203,415

> 10.00

Tier 1 Capital (to Risk Weighted Assets)

EuroBancshares, Inc

182,993

8.99

> 81,376

> 4.00

N/A

Eurobank

180,792

8.89

> 81,366

> 4.00

> 122,049

> 6.00

Leverage (to average assets)

EuroBancshares, Inc

182,993

6.55

> 111,803

> 4.00

N/A

Eurobank

180,792

6.47

> 111,764

> 4.00

> 139,705

> 5.00

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis presents our consolidated financial condition and results of operations for the quarter ended ~~June~~September 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 and in the “Risk Factors” section of this Quarterly Report on Form 10-Q, including the following:

we are subject to additional regulatory oversight as a result of the regulatory written agreement we entered with the Federal Reserve Bank of New York effective on September 30, 2009, and the order to cease and desist Eurobank received from the FDIC and the Puerto Rico Office of the Commissioner of Financial Institutions on October 6, 2009:

we may become subject to additional regulatory restrictions in the event that our regulatory capital levels continue to decline or in the event that we are unable to comply with our regulatory enforcement actions;

we may elect or be compelled to seek additional capital in the future, but capital may not be available when it is needed;

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

concern of customers over deposit insurance may cause a decrease in deposits;

our deposit insurance premium could be substantially higher in the future, which could have a material adverse effect on our future earnings;

we rely heavily on wholesale funding sources to meet our liquidity needs, such as brokered deposits and repurchase obligations, which are generally more sensitive to changes in interest rates and can be adversely affected by local and general economic conditions. In addition, we are currently restricted from using broker deposits as a funding source unless we obtain a waiver from the FDIC;

we may be restricted in paying deposit rates above a national rate, which may adversely affect our ability to maintain and increase our deposit levels;

our international banking entity subsidiary, EBS Overseas, Inc., is a party to certain repurchase agreements that may require early termination as a result of the issuance of the Order to Cease and Desist and Eurobank’s inability to remain well-capitalized for regulatory capital purposes;

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~~currently nodo ~~current~~not ~~intentions~~intend ofto ~~paying~~pay ~~cash~~ dividends on our common stock. In addition, our future ability to continue paying dividends on our preferred stock is currently subject to restrictions;

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;

29· holders of our Series A Preferred Stock may be able to alter the composition of our Board of Directors;

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~~may ~~heavily~~not onrealize ~~short-term~~the ~~funding~~full ~~sources,~~value ~~such as brokered deposits, and our access to such funding sources is currently restricted as a result~~ of our ~~capital~~deferred ~~category~~tax ~~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.~~assets;

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~~and those in the “Risk Factors” section of this Quarterly Report on Form 10-Q 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~~September 30, 2009, we had, on a consolidated basis, total assets of $2.~~738~~807 billion, net loans and leases of $1.~~665~~592 billion, total investments of $~~698~~825.84 million, total deposits of $2.~~079~~152 billion, other borrowings of $~~492~~489.76 million, and stockholders’ equity of $~~140~~138.05 million. We currently operate through a network of 25 branch offices located throughout Puerto Rico. Although in the past we have sought to further develop our footprint throughout the entire island by opening branches along the main vehicular arteries that circle Puerto Rico, we will be taking steps to close our branch locations in Fajardo, Cayey and Cabo Rojo, effective as of December 31, 2009, following our evaluation of the effectiveness and viability of our branch locations. We focus our core banking ~~franchise~~ franchise on commercial loans, investments, and business transaction accounts.

Key Performance Indicators at ~~June~~September 30, 2009

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

· our total assets decreased to $2.~~738~~807 billion, or by 82.5549% on an annualized basis, at the end of the ~~second~~third quarter of 2009, from $2.860 billion at the end of 2008;

· total cash and cash equivalents increased to $~~222~~254.16 million, or by ~~303~~251.8374% on an annualized basis, at the end of the ~~second~~third quarter of 2009, from $88.1 million at the end of 2008, resulting primarily from the net effect of: the sale of securities, ~~and~~ prepayments of principal in our investment and loans portfolios, increase in deposits, and repayment of other borrowings;

· our net loans and leases decreased to $1.~~665~~589 billion at the end of the ~~second~~third quarter of 2009, representing an annualized decrease of 811.6660%, from $1.741 billion at the end of 2008, including the sale of $1935.63 million in lease financing contracts during the first and third quarter of 2009;

· our investment securities decreased to $~~698~~825.84 million, or 4410.5088% on an annualized basis, at the end of the ~~second~~third quarter of 2009, from $898.7 million at the end of 2008, including the sale of $~~195~~448.96 million in securities during the ~~six~~nine months ended ~~June~~September 30, 2009;

· our total deposits ~~decreased~~increased to $2.~~079~~152 billion, or by 04.5436% on an annualized basis, at the end of the ~~second~~third quarter of 2009, from $2.084 billion at the end of 2008;

· ~~our~~other ~~short-term~~ borrowings decreased to $~~492~~489.76 million, or by 3323.7014% on an annualized basis, at the end of the ~~second~~third quarter of 2009, from $592.5 million at the end of 2008;

30· our nonperforming assets increased to $223.2 million, or by 34.39% on an annualized basis, at the end of the third quarter of 2009, from $177.4 million at the end of 2008;

· our ~~nonperforming~~total ~~assets~~revenue increased to $~~208~~43.84 million, orin bythe ~~35.43%~~third onquarter anof ~~annualized basis~~2009, atrepresenting ~~the~~an ~~end~~increase of ~~the second quarter of 2009~~1.79%, from $~~177~~42.47 million atin the ~~end~~same period of 2008;

· our ~~total~~net ~~revenue~~interest ~~decreased~~margin and spread on a fully taxable equivalent basis changed to ~~$36~~1.274% ~~million~~and in1.55% for the ~~second~~third quarter of 2009 respectively, ~~representing~~from a2.57% ~~decrease~~and ~~of 17~~2.0326%, ~~from~~respectively, ~~$43.6~~for ~~million in~~ the same period ofin 2008;

· our ~~net~~provision ~~interest~~for ~~margin~~loan and ~~spread~~lease onlosses aincreased ~~fully taxable equivalent basis changed~~ to 1$17.~~97%~~6 ~~and~~million ~~1.76%~~in ~~for~~ the ~~second~~third quarter of 2009, ~~respectively,~~representing ~~from~~an toincrease 2of 120.3740%, ~~and~~from 2$8.~~02%,~~0 ~~respectively,~~million ~~for~~in the same period inof 2008;

· our ~~provision~~total ~~for~~noninterest ~~loan~~income ~~and lease losses~~ increased to $1211.79 million in the ~~second~~third quarter of 2009, representing an increase of 27389.2418%, from $102.04 million in the same period of 2008;

· our total noninterest ~~income~~expense ~~decreased~~increased to $214.81 million in the ~~second~~third quarter of 2009, representing aan ~~decrease~~increase of 135.1911%, from $313.25 million in the same period of 2008; and

· ~~our~~for ~~total~~the ~~noninterest~~third ~~expense~~quarter ~~increased~~of to2009 ~~$16.1~~we ~~million~~recorded inan ~~the~~income ~~second~~tax ~~quarter~~benefit of ~~2009~~$1.9 million, ~~representing~~compared to an ~~increase~~income oftax ~~27.11%,~~benefit ~~from~~of $122.65 million in the same period ofin 2008~~; and~~.

·These items, as well as other factors, resulted in a net loss of $7.4 million for the third ~~second~~ quarter of 2009, wecompared ~~recorded~~to ana ~~income~~net ~~tax~~loss ~~benefit~~ of $~~2.6~~788,000 ~~million~~for the same period in 2008, ~~compared~~or to$(0.38) anper ~~income~~common ~~tax~~share ~~benefit~~for the third quarter of 2009 compared to $2(0.905) ~~million~~per incommon 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.

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.32

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 $4246.70 million, $41.6 million and $3033.26 million as of ~~June~~September 30, 2009, ~~December~~ December 31, 2008 and ~~June~~September 30, 2008, respectively. Losses charged to the allowance amounted to $1833.45 million for the ~~six~~nine months ended September ~~June~~ 30, 2009, compared to $1722.10 million for the same period in 2008. Recoveries were credited to the allowance in the amounts of $1.18 million and $1.37 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 September 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 September 2009, March 2009 and March 2008: prepayment rate of 16.56%; weighted average life of 3.46 years; and a discount rate of 8.32%. 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 $2.0 million, $1.2 million and $1.5 million as of September 30, 2009, December 31, 2008, and September 30, 2008, respectively.

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.33

~~Other~~As of ~~repossessed~~September ~~assets~~30, ~~amounted~~2009, toour OREO consisted of 66 properties with an aggregate value of $213.59 million, compared to 36 properties with an aggregate value of $48.7 8 million as of December 31, 2008, and 32 properties with an aggregate value of $67.51 million as of September 30, 2008. During the quarter and nine ~~June~~months ended September 30, 2009, ~~December~~two 31OREO properties and five OREO properties were sold, ~~2008~~respectively, resulting in a $8,000 total gain for the quarter and ~~June~~a year-to-date 30total loss of $49,000, compared to one OREO properties and 25 OREO properties sold during the same periods in 2008, ~~respectively. Other~~ ~~repossessed~~resulting ~~assets~~in ~~are~~no ~~mainly~~loss ~~comprised~~for ofthe ~~vehicles~~Company ~~from~~during ~~our~~the ~~leasing~~third ~~operation~~quarter of 2009 and ~~boats~~a ~~from~~year-to-date ~~our~~total ~~marine~~gain ~~loans~~of ~~portfolio~~$44,000 at September 30, 2008, respectively.

WeOther ~~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 $12.84 million, $34.5 7 million and $45.73 million as of September ~~June~~ 30, 2009, December 31, 2008 and ~~June~~September 30, 2008, respectively. ~~The~~Other ~~total~~repossessed ~~loss~~assets ~~ratio~~are onmainly ~~sale~~comprised of ~~repossessed~~ vehicles ~~for~~from ~~the~~our ~~quarter~~leasing ~~and~~operation ~~six months ended June 30, 2009 was 4.3%~~ and ~~6.3%, respectively,~~boats ~~compared to 16.3% and 14.6% for the same periods in 2008. These decreases resulted mainly~~ from ~~the~~our ~~combined~~marine ~~effect of an~~loans ~~increase in the volume of repossessed vehicles sold and a reduction in related repair expenses~~portfolio. ~~As of June 30, 2009, we had 155 repossessed vehicles in inventory, compared to 357 units as of June 30, 2008.~~

~~Total~~We monitor the total loss ratio on sale of repossessed ~~boats~~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 $~~589~~2.0 million,~~000,~~ $13.2 5 million and $14.83 million as of ~~June~~ September 30, 2009, ~~and~~ December 31, 2008 and September ~~June~~ 30, 2008, respectively. ~~For~~The total loss ratio on sale of repossessed vehicles for the quarter and ~~six~~nine months ended ~~June~~September 30, 2009~~, the total loss on sale of~~ ~~repossessed boats~~ was ~~$323,000~~4.5% and ~~$412~~5.9%,~~000,~~ respectively, compared to a13.43% ~~loss of $105,000~~ and ~~$169,000~~14.16% for the same periods in 2008. ~~This~~These ~~increase~~decreases ~~was primarily~~resulted ~~attributable~~mainly tofrom ~~our~~the combined ~~strategy~~effect of ~~being~~an ~~more~~increase ~~aggressive~~ in the ~~sale~~volume of repossessed ~~boats~~vehicles tosold ~~expedite their disposition~~ and ~~avoid~~a reduction ~~build-up~~in ofrelated ~~inventory~~repair expenses. ~~During~~ As ~~the~~of ~~six~~September ~~months ended June~~ 30, 2009, we ~~sold~~had ~~11 boats and~~ 179 repossessed 3vehicles ~~boats~~in inventory, compared to 10297 ~~boats sold~~units and 8334 ~~boats repossessed during the same period in 2008. Our inventory of repossessed boats totaled 7~~ units as of ~~June 30, 2009, compared to~~ 16December ~~units as of June 30~~31, 2008~~. As~~ ofand ~~June~~September 30, ~~2009 and December 31,~~ 2008, ~~our boat financing portfolio amounted to $28.2 million and $30.3 million,~~ respectively.

~~Repossessed~~Total ~~equipment~~repossessed boats amounted to $35401,000, $1.2 million and $6994,000 as of September ~~June~~ 30, 2009 and December 31, 2008, ~~respectively. There~~and ~~was~~September ~~no repossessed equipment as of June~~ 30, 2008, respectively. For the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, the total ~~amount~~ ofloss ~~repossessed~~on ~~equipment~~sale ~~sold~~of ~~amounted~~repossessed toboats was $~~108~~231,000 and $~~149~~643,000, respectively, ~~resulting~~compared into a ~~total~~loss ~~gain~~ of $15189,000 and $16358,000 for ~~those~~the same periods, in ~~compared~~2008. This increase was primarily attributable to ~~$197,000~~our strategy of being more aggressive in ~~equipment~~the ~~sold~~sale ~~during~~of repossessed boats to expedite their disposition and avoid build-up of inventory. During the ~~six~~nine months ended ~~June~~ September 30, ~~2008~~2009, ~~resulting~~we insold a13 ~~total~~boats ~~gain~~and ofrepossessed ~~$17~~six boats,~~000~~ compared to 19 boats sold and 14 boats repossessed during the same period in 2008. NoOur inventory of repossessed boats totaled eight units as of ~~equipment~~September ~~was~~30, ~~sold~~2009, ~~during~~compared ~~the~~to ~~second~~13 ~~quarter~~units as of September 30, 2008. As of September 30, 2009 and December 31, 2008, our boat financing portfolio amounted to $27.5 million and $30.3 million, respectively.

32There was no repossessed equipment as of September 30, 2009. Repossessed equipment amounted to $6,000 and $12,000 as of December 31, 2008 and September 30, 2008, respectively. For the quarter and nine months ended September 30, 2009, the total amount of repossessed equipment sold amounted to $86,200 and $235,000, respectively, resulting in a total gain of $8,000 and $24,000 for those same periods, compared to $52,000 and $249,000 in equipment sold during the same periods in 2008, resulting in a total gain of $2,000 and $19,000, 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~~reflects 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. As of September 30, 2009, we had net deferred tax assets of $27.8 million, compared to $23.8 million as of December 31, 2008. After considering a valuation allowance of $413.52 million, we ~~believe~~ believe it is more likely than not that the benefits of the carrying net amount of these deductible differences as of ~~June~~September 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~~ Income Taxes.”

Investment Securities

We review the investment portfolio based on the provisions of FASB ~~Staff~~ASC ~~Position~~320-10-35, (“~~FSP”) No.~~Investments ~~115-2,~~– ~~Recognition~~Debt and Equity ~~Presentation~~Securities of– ~~Other-Than-Temporary~~Overall ~~Impairments~~– Subsequent Measurement,” which we adopted for ~~the~~ the quarter ended March 31, 2009. ~~This~~ FASB ~~FSP~~ASC ~~amends the other~~320-~~than~~10-~~temporary impairment~~35 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~~ 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~~FASB ~~FSP~~ ASC 320-10-35 and investment securities, please refer to ~~the~~ 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~~quarter and ~~Six~~nine months ended ~~June~~September 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 1933.8314%, or $25.92 million, and by 1320.7443%, or $49.13 million, to $1110.85 million and $2536.84 million in the quarter and ~~six~~nine-month period ended ~~June~~September 30, 2009, from $1415.78 million and $2945.97 million for the same ~~periods~~ periods in 2008. This decrease resulted from the net effect of a net ~~increase~~ increase in volumes and a net decrease in rates as shown on tables on page 3739.

Total interest income amounted to $3331.36 million ~~for the second quarter of 2009, compared to $36.2 million for the previous quarter~~ and $40101.31 million for the quarter ~~ended~~and ~~June~~nine ~~30, 2008. For the six~~ months ended ~~June~~September 30, 2009, ~~total~~ ~~interest~~respectively, ~~income~~compared ~~was~~ to $6940.52 million, ~~compared~~and to $83123.02 ~~million~~ for the same ~~period~~ periods 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, particularly in the yield on our commercial and construction loans with variable rates as well as the yield on recently originated loans in a lower interest rate environment, accompanied by lower ~~decreased~~ average ~~net~~balances ~~loans~~on ~~and~~interest-earning ~~investments~~assets, primarily loans, and also by the effect caused by the increase in nonaccrual loans, as further explained below.

33For the quarter and nine months ended September 30, 2009, the average interest yield on a fully taxable equivalent basis earned on net loans was 5.46% and 5.55%, respectively, compared to 6.51% and 6.72% for the same periods in 2008. Average net loans amounted to $1.646 billion and $1.691 billion for the quarter and nine months ended September 30, 2009, compared to $1.795 billion and $1.816 billion for the same periods in 2008. Average interest yield on a fully taxable equivalent basis earned on investments was 6.72% for the quarters ended September 30, 2009, compared to 7.37% for the same quarter in 2008, while it decreased to 7.03% for the nine-month periods ended September 30, 2009, from 7.23% for the same period in 2008. Average investments amounted to $718.2 million and $779.4 million for the quarter and nine months ended September 30, 2009, compared to $825.4 million and $801.1 million for the same periods in 2008.

~~During~~Nonaccrual ~~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 $1174.~~693 billion~~2 million and $192.~~713~~3 ~~billion~~million ~~for~~as ~~the~~of ~~quarter~~September ~~and six months ended June~~ 30, 2009, and ~~compared~~2008, ~~to $1~~respectively.~~734~~ The ~~billion~~increase ~~for~~in ~~the~~nonaccrual ~~previous~~loans ~~quarter,~~has ~~and $1.818 billion and~~adversely ~~$1.827~~impacted ~~billion~~our ~~for~~net ~~the~~interest ~~same~~spread ~~periods~~and innet ~~2008~~interest margin. ~~Average~~If ~~interest yield~~these onloans ahad ~~fully~~been ~~taxable~~accruing ~~equivalent~~interest during ~~basis~~the ~~earned~~quarter ~~on investments remained relatively stable at 7.15%, 7.16%~~ and ~~7.28%~~nine ~~for~~months ~~the quarters~~ ended September ~~June~~ 30, 2009, ~~March 31, 2009 and June 30, 2008, respectively, while it remained at 7.16% for~~ the ~~six-month~~ ~~periods~~additional ~~ended~~interest ~~June~~income ~~30,~~realized ~~2009~~would ~~and~~have ~~2008. Average investments~~been ~~amounted~~approximately to $~~758~~3.56 million and $~~810~~8.53 million ~~for the quarter and six months ended June 30~~, ~~2009~~respectively, compared to $~~863.~~1 ~~million for the previous quarter, and $826~~.9 6 million and $~~788~~5.80 million ~~for~~during 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 2008.35

For the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, our total interest expense ~~amounted~~ amounted to $21.60 million and $4364.78 million, respectively, compared to $2224.~~2 million for~~5 ~~the previous quarter, and $25.6~~ million and $5377.05 million for the same periods in 2008. ~~These~~On a linked-quarter and year-to-date basis, the 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~~ nine months ended ~~June~~September 30, 2009, the average interest rate on a fully taxable equivalent basis paid for interest-bearing liabilities decreased to 3.7064% and 3.7974%, respectively, from ~~3.89%~~ ~~for the previous quarter, and~~ 4.5943% and 4.8571% for the same periods in 2008. During the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, ~~average~~ average interest-bearing liabilities amounted to $2.~~558~~537 billion and $2.538 billion, respectively, compared to $2.~~518~~494 billion ~~for the previous quarter,~~ and $2.~~510 billion~~473 ~~and $2.462~~ billion for the same periods in 2008.

For the ~~second~~third quarter of 2009, net interest margin and net interest spread on a fully taxable equivalent basis was 1.9774% and 1.7655%, respectively, compared to 2.3757% and 2.1426% for the ~~previous~~ quarter, ~~and 2.37% and 2.02% for the quarter~~ ended ~~June~~ September 30, 2008. Net interest margin and net interest spread on a fully taxable equivalent basis was 2.1602% and 1.9582% for the ~~six~~nine-month period ended ~~June~~ September 30, 2009, respectively, compared to 2.3744% and 12.9908% for the same period in 2008.

~~The~~These ~~decrease~~decreases in net interest margin and net interest spread on a fully taxable equivalent basis ~~during~~were ~~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, asfor the reasons previously mentioned, ~~which outpaced~~accompanied ~~the~~by the reduction in the interest rate paid on average interest-bearing liabilities, and, the effect on athe ~~linked-quarter~~fully ~~basis,~~taxable itequivalent ~~was~~margin ~~also~~and ~~impacted~~spread caused 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 management ~~discussion~~ and discussion analysis captioned “Provision for Income Taxes.”.

3436

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,
	Three Months Ended September 30,
	2009							2008
	Average Balance		Interest		Average Rate/ Yield(1)			Average Balance		Interest		Average Rate/ Yield(1)
	(Dollars in thousands)
ASSETS:
Interest-earning assets:
Net loans and leases(2)	$	1,~~693~~645,~~029~~825	$	2322,~~026~~368		5.4746	%	$	1,~~818~~794,~~209~~738	$	2928,~~106~~964		6.4551	%
Securities of U.S. government agencies(3)		~~542~~508,~~221~~181		65,~~615~~384		65.5470			~~543~~551,~~254~~734		6,~~652~~875		6.8193
Other investment securities(3)		~~210~~204,~~698~~448		3,~~440~~537		89.7527			~~273~~266,~~167~~201		43,~~046~~996		8.2435
Puerto Rico government obligations(3)		5,~~585~~551		66		6.4953			107,~~522~~423		~~127~~71		65.7132
Securities purchased under agreements to resell, federal funds sold, and other interest-earning deposits		~~256~~315,~~085~~500		~~199~~219		0.3330			3226,~~708~~590		~~220~~177		3.2235
Interest-earning time deposits		400		21		21.6834			3731,~~064~~394		~~192~~167		2.0713
Total interest-earning assets	$	2,~~708~~679,~~018~~905	$	3331,~~348~~575		5.4619	%	$	2,~~714~~678,~~924~~080	$	40,~~343~~250		6.6169	%
Total noninterest-earning assets		~~124~~126,~~633~~890							~~118~~119,~~338~~036
TOTAL ASSETS	$	2,~~832~~806,~~651~~795						$	2,~~833~~797,~~262~~116
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Money market deposits	$	1817,~~398~~212	$	~~100~~97		2.1927	%	$	2019,~~469~~239	$	~~165~~152		3.2418	%
NOW deposits		44,~~487~~836		~~224~~229		2.0205			5047,~~241~~083		~~329~~307		2.6261
Savings deposits		~~104~~105,~~515~~816		~~478~~495		1.8387			~~124~~110,~~545~~561		~~699~~633		2.2529
Time certificates of deposit in denominations of $100,000 or more(4)		283,419		2,441		3.45			267,478		2,747		4.26
Time certificates of deposit in denominations of $100,000 or more		359,563		2,769		3.09			258,066		2,564		3.99
Other time deposits		1,~~613~~517,~~979~~375		1312,~~901~~964		3.6158			1,~~477~~480,~~873~~104		1615,~~668~~596		4.8656
Other borrowings		~~493~~492,~~217~~186		4,~~417~~476		4.7381			~~569~~578,~~708~~831		5,~~031~~227		4.7788
Total interest-bearing liabilities	$	2,~~558~~536,~~015~~987	$	21,~~561~~030		3.7064	%	$	2,~~510~~493,~~314~~884	$	2524,~~639~~479		4.5943	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		9998,~~708~~692							~~115~~112,~~716~~617
Other liabilities		2630,~~066~~068							3128,~~842~~892
Total noninterest-bearing liabilities		~~125~~128,~~774~~760							~~147~~141,~~558~~509
STOCKHOLDERS’ EQUITY		~~148~~141,~~862~~047							~~175~~161,~~390~~723
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,~~832~~806,~~651~~795						$	2,~~833~~797,~~262~~116
Net interest income(5)			$	11,787						$	14,704
Net interest income(4)			$	10,545						$	15,771
Net interest spread(6)						1.76	%						2.02	%
Net interest spread(5)						1.55	%						2.26	%
Net interest margin(7)						1.97	%						2.37	%
Net interest margin(6)						1.74	%						2.57	%

~~__________~~(1) Interest yield and expense is calculated on a fully taxable equivalent basis assuming a 39% tax rate for each of the quarters ended September 30, 2009 and 2008, respectively. During the second quarter of 2009, the 39% tax rate used to calculate interest yield and expense on a fully taxable equivalent basis was reduced by 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.”

(12) ~~Interest~~The ~~yield~~amortization ~~and~~of ~~expense~~net isloan ~~calculated~~costs onor afees ~~fully~~have ~~taxable~~been ~~equivalent~~included ~~basis~~in ~~assuming~~the acalculation ~~39%~~of ~~tax~~interest ~~rate~~income. ~~for~~Net ~~each~~loan of(fees)/costs were approximately ($395,000) and $13,000 for the quarters ended ~~June~~September 30, 2009 and 2008, respectively. ~~During~~Loans ~~the~~include ~~second~~nonaccrual ~~quarter of 2009~~loans, ~~the~~which ~~39%~~balance ~~tax~~as ~~rate~~of ~~used~~September to30, ~~calculate~~2009 ~~interest yield~~ and ~~expense~~2008 onwas a$174.2 ~~fully~~million ~~taxable~~and ~~equivalent~~$92.3 ~~basis~~million, ~~was~~respectively, ~~reduced~~and byare ~~the~~net ~~special income tax~~ of ~~5% imposed by~~ the ~~Puerto~~allowance ~~Rico~~for ~~Act~~loan ~~No.~~and 7lease onlosses, ~~the~~deferred ~~net~~fees, ~~income~~unearned ~~of international banking entities~~income, ~~as discussed further in the section of this discussion~~ and ~~analysis~~related ~~captioned~~direct ~~“Provision for Income Taxes~~costs.”

(2) The amortization of net loan costs or fees have been included in the calculation of interest income. Net loan (fees)/costs were approximately ($265,000) and $64,000 for the quarters ended June 30, 2009 and 2008, respectively. Loans include nonaccrual loans, which balance as of June 30, 2009 and 2008 was $162.4 million and $86.3 million, respectively, and are net of the allowance for loan and lease losses, deferred fees, unearned income, and related direct costs.

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

(4) ~~Certain~~Net ~~adjustments~~interest ~~were~~income ~~made~~on toa ~~the~~tax ~~comparable~~equivalent ~~period~~basis ~~resulting~~was ~~from~~$11.7 ~~the~~million ~~reclassification~~and of$17.2 ~~broker~~million ~~master~~for ~~certificate~~the ~~agreements~~quarters toended ~~the~~September ~~caption~~30, of2009 ~~“other~~and ~~time~~2008, ~~deposits~~respectively.”

(5) ~~Net~~Represents ~~interest~~the ~~income~~rate earned on aaverage ~~tax~~interest-earning ~~equivalent~~assets ~~basis~~less ~~was~~the ~~$13.3~~rate ~~million~~paid ~~and~~on ~~$16.1~~average ~~million~~interest-bearing ~~for~~liabilities ~~the~~on ~~quarters~~a ~~ended~~fully ~~June~~taxable ~~30,~~equivalent ~~2009 and 2008, respectively~~basis.

35(6) Represents net interest income on a fully taxable equivalent basis as a percentage of average interest-earning assets.

~~(6) Represents the rate earned on average interest-earning assets less the rate paid on average interest-bearing liabilities on a fully taxable equivalent basis.~~37

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

	Nine Months Ended September 30,
	2009							2008
	Average Balance		Interest		Average Rate/ Yield(1)			Average Balance		Interest		Average Rate/ Yield(1)
	(Dollars in thousands)

ASSETS:
Interest-earning assets:
Net loans and leases(2)	$	1,690,652	$	69,994		5.55	%	$	1,816,296	$	90,828		6.72	%
Securities of U.S. government agencies(3)		559,684		19,823		6.33			541,059		20,014		6.86
Other investment securities(3)		214,121		10,608		8.85			251,897		10,973		8.07
Puerto Rico government obligations(3)		5,580		198		6.50			8,109		274		6.26
Securities purchased under agreements to resell, federal funds sold, and other interest-earning deposits		216,885		494		0.33			31,185		678		3.49
Interest-earning time deposits		400		5		2.23			26,781		465		2.32
Total interest-earning assets	$	2,687,322	$	101,122		5.56	%	$	2,675,327	$	123,232		6.79	%
Total noninterest-earning assets		124,492							115,654
TOTAL ASSETS	$	2,811,814						$	2,790,981

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Money market deposits	$	18,009	$	305		2.27	%	$	19,178	$	456		3.18	%
NOW deposits		43,019		663		2.06			46,200		882		2.55
Savings deposits		104,989		1,493		1.90			121,648		2,059		2.26
Time certificates of deposit in denominations of $100,000 or more		309,485		7,829		3.38			263,077		8,281		4.21
Other time deposits		1,550,994		40,950		3.71			1,453,035		49,957		4.97
Other borrowings		511,327		13,513		4.65			569,510		15,890		5.01
Total interest-bearing liabilities	$	2,537,823	$	64,753		3.74	%	$	2,472,648	$	77,525		4.71	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		100,283							114,667
Other liabilities		27,335							30,270
Total noninterest-bearing liabilities		127,618							144,937
STOCKHOLDERS’ EQUITY		146,373							173,396
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,811,814						$	2,790,981
Net interest income(4)			$	36,369						$	45,707
Net interest spread(5)						1.82	%						2.08	%
Net interest margin(6)						2.02	%						2.44	%

	Six Months Ended June 30,
	2009							2008
	Average Balance		Interest		Average Rate/ Yield(1)			Average Balance		Interest		Average Rate/ Yield(1)
	(Dollars in thousands)
ASSETS:
Interest-earning assets:
Net loans and leases(2)	$	1,713,437	$	47,626		5.59	%	$	1,827,194	$	61,864		6.83	%
Securities of U.S. government agencies(3)		585,862		14,441		6.61			535,664		13,138		6.82
Other investment securities(3)		219,038		7,070		8.65			244,666		6,977		7.93
Puerto Rico government obligations(3)		5,595		132		6.48			8,455		203		6.67
Securities purchased under agreements to resell, federal funds sold, and other interest-earning deposits		166,760		275		0.36			35,308		501		3.54
Interest-earning time deposits		400		4		2.68			24,449		298		2.44
Total interest-earning assets	$	2,691,092	$	69,548		5.74	%	$	2,673,936	$	82,981		6.84	%
Total noninterest-earning assets		123,282							113,980
TOTAL ASSETS	$	2,814,374						$	2,787,916
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Money market deposits	$	18,414	$	209		2.28	%	$	19,147	$	304		3.19	%
NOW deposits		42,095		433		2.06			45,754		575		2.52
Savings deposits		104,569		998		1.91			127,253		1,426		2.24
Time certificates of deposit in denominations of $100,000 or more(4)		284,030		5,060		3.57			265,512		5,709		4.46
Other time deposits		1,568,082		27,986		3.76			1,439,449		34,367		5.16
Other borrowings		521,057		9,036		4.58			564,798		10,663		5.08
Total interest-bearing liabilities	$	2,538,247	$	43,722		3.79	%	$	2,461,913	$	53,044		4.85	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		101,091							115,704
Other liabilities		25,955							30,999
Total noninterest-bearing liabilities		127,046							146,703
STOCKHOLDERS’ EQUITY		149,081							179,300
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,814,374						$	2,787,916
Net interest income(5)			$	25,826						$	29,937
Net interest spread(6)						1.95	%						1.99	%
Net interest margin(7)						2.16	%						2.37	%

(1)

Interest yield and expense is calculated on a fully taxable equivalent basis assuming a 39% tax rate for each of the nine-month periods ended September 30, 2009 and 2008, respectively. During the first nine months of 2009, the 39% tax rate used to calculate interest yield and expense on a fully taxable equivalent basis was reduced by 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.”

(12) ~~Interest~~The ~~yield~~amortization ~~and~~of ~~expense~~net isloan ~~calculated~~costs onor afees ~~fully~~have ~~taxable~~been ~~equivalent~~included ~~basis~~in ~~assuming~~the acalculation ~~39%~~of ~~tax~~interest ~~rate~~income. ~~for~~Net ~~each~~loan of(fees)/costs were approximately ($807,000) and $91,000 for the ~~six-month~~nine ~~periods~~months ended ~~June~~September 30, 2009 and 2008, respectively. ~~During~~Loans ~~the~~include ~~first~~nonaccrual ~~six months of 2009~~loans, ~~the~~which ~~39%~~balance ~~tax~~as ~~rate~~of ~~used~~September to30, ~~calculate~~2009 ~~interest yield~~ and ~~expense~~2008 onwas a$174.2 ~~fully~~million ~~taxable~~and ~~equivalent~~$92.3 ~~basis~~million, ~~was~~respectively, ~~reduced~~and byare ~~the~~net ~~special income tax~~ of ~~5% imposed by~~ the ~~Puerto~~allowance ~~Rico~~for ~~Act~~loan ~~No.~~and 7lease onlosses, ~~the~~deferred ~~net~~fees, ~~income~~unearned ~~of international banking entities~~income, ~~as discussed further in the section of this discussion~~ and ~~analysis~~related ~~captioned~~direct ~~“Provision for Income Taxes~~costs.”

(2) The amortization of net loan costs or fees have been included in the calculation of interest income. Net loan (fees)/costs were approximately ($412,000) and $78,000 for the six months ended June 30, 2009 and 2008, respectively. Loans include nonaccrual loans, which balance as of June 30, 2009 and 2008 was $162.4 million and $86.3 million, respectively, and are net of the allowance for loan and lease losses, deferred fees, unearned income, and related direct costs.

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

(4) ~~Certain~~Net ~~adjustments~~interest ~~were~~income ~~made~~on toa ~~the~~tax ~~comparable~~equivalent ~~period~~basis ~~resulting~~was ~~from~~$40.7 ~~the~~million ~~reclassification~~and of$49.0 ~~broker~~million ~~master~~for ~~certificate~~the ~~agreements~~nine tomonths ~~the~~ended ~~caption~~September of30, ~~“other~~2009 ~~time~~and ~~deposits~~2008, respectively.”

(5) ~~Net~~Represents ~~interest~~the ~~income~~rate earned on aaverage ~~tax~~interest-earning ~~equivalent~~assets ~~basis~~less ~~was~~the ~~$29.1~~rate ~~million~~paid ~~and~~on ~~$31.8~~average ~~million~~interest-bearing ~~for~~liabilities ~~the~~on ~~six~~a ~~months~~fully ~~ended~~taxable ~~June~~equivalent ~~30, 2009 and 2008, respectively~~basis.

36(6) Represents net interest income on a fully taxable equivalent basis as a percentage of average interest-earning assets.

~~(6) Represents the rate earned on average interest-earning assets less the rate paid on average interest-bearing liabilities on a fully taxable equivalent basis.~~38

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

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

	Three Months Ended June 30, 2009 Over 2008 Increases/(Decreases) Due to Change in									Six Months Ended June 30, 2009 Over 2008 Increases/(Decreases) Due to Change in
	Three Months Ended September 30, 2009 Over 2008 Increases/(Decreases) Due to Change in									Nine Months Ended September 30, 2009 Over 2008 Increases/(Decreases) Due to Change in
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
INTEREST EARNED ON:
Net loans(1)	$	(2,~~004~~403	)	$	(4,~~076~~193	)	$	(6,~~080~~596	)	$	(36,~~852~~283	)	$	(1014,~~386~~551	)	$	(1420,~~238~~834	)
Securities of U.S. government agencies		(13543	)		(24948	)		(371,491	)		~~1,231~~689			72(880	)		~~1,303~~(191	)
Other investment securities		(~~925~~927	)		~~319~~468			(~~606~~459	)		(~~731~~1,646	)		~~824~~1,281			93(365	)
Puerto Rico government obligations		(6018	)		(113	)		(615	)		(6985	)		(29	)		(7176	)
Securities purchased under agreements to resell, federal funds sold, and other interest-earning deposits		1,~~502~~923			(1,~~523~~881	)		~~(21~~42	)		14,~~992~~037			(24,~~218~~221	)		(~~226~~184	)
Interest-earning time deposits		(~~190~~165	)		-(1	)		(~~190~~166	)		(~~293~~458	)		(12	)		(~~294~~460	)
Total interest-earning assets	$	(12,~~690~~133	)	$	(56,~~305~~542	)	$	(68,~~995~~675	)	$	(13,~~722~~746	)	$	(1118,~~711~~364	)	$	(1322,~~433~~110	)
INTEREST PAID ON:
Money market deposits	$	(1716	)	$	(4839	)	$	(6555	)		(1228	)	$	(83123	)		(95151	)
NOW deposits		(3815	)		(6763	)		(~~105~~78	)		(4661	)		(96158	)		(~~142~~219	)
Savings deposits		(~~112~~27	)		(~~109~~111	)		(~~221~~138	)		(~~254~~282	)		(~~174~~284	)		(~~428~~566	)
Time certificates of deposit in denominations of $100,000 or more(2)		164			(470	)		(306	)		398			(1,047	)		(649	)
Time certificates of deposit in denominations of $100,000 or more		1,008			(803	)		205			1,461			(1,913	)		(452	)
Other time deposits		~~1,535~~393			(43,~~302~~025	)		(2,~~767~~632	)		3,~~071~~368			(912,~~452~~375	)		(69,~~381~~007	)
Other borrowings		(~~675~~782	)		6131			(~~614~~751	)		(~~826~~1,623	)		(~~801~~754	)		(12,~~627~~377	)
Total interest-bearing liabilities	$	~~857~~561		$	(4,~~935~~010	)	$	(43,~~078~~449	)	$	2,~~331~~835		$	(1115,~~653~~607	)	$	(912,~~322~~772	)
Net interest income	$	(2,~~547~~694	)	$	(~~370~~2,532	)	$	(25,~~917~~226	)	$	(46,~~053~~581	)	$	(582,757	)	$	(49,~~111~~338	)

(1) The amortization of net loan costs or fees have been included in the calculation of interest income. Net loan (fees~~)/costs~~ were approximately ($~~265~~395,000) and ($~~412~~807,000) for the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, compared to net loan costs of $6413,000 and $7891,000 for the same periods in 2008. Loans include nonaccrual loans, which balance as of ~~June~~September 30, 2009 and 2008 was $~~162~~174.42 million and $8692.3 million, respectively, and are net of the allowance for loan and lease losses, deferred fees, unearned income, and related direct costs.

(2) Certain adjustments were made to the comparable periods resulting from the reclassification of broker master certificate agreements to the caption of “other time deposits.”

Provision for Loan and Lease Losses

The provision for loan and lease losses for the quarter and ~~six~~nine months ended ~~June~~ September 30, 2009 was $1217.76 million and $1836.40 million, respectively, or ~~136~~122.2858% ~~and~~ ~~106~~and 113.3068% of net charge-offs, compared to $108.0 million and $1725.8 million, or ~~159~~177.5661% and ~~112~~127.7813% of net charge-offs, for the same periods in 2008. These increases were mainly concentrated in ~~the~~general ~~commercial~~ and ~~industrial~~specific ~~loans~~allowances ~~portfolio,~~on ~~primarily~~the incommercial ~~those~~and ~~unsecured~~construction ~~or with~~ loan ~~to values~~portfolios, inprimarily ~~excess~~required ofbecause ~~80%. General reserves were increased to anticipate possible future losses as a result~~ of ~~the~~distressed ~~continued~~economic ~~distress~~conditions, ofdecreases ~~the economic~~in ~~environment,~~property ~~increased~~values ~~nonperforming~~and ~~loans,~~low ~~level~~demand ofon ~~delinquencies,~~certain ~~and credit losses~~areas.

37The evaluation of the provision for loan losses also takes into consideration non-performing loan levels. Non-performing loans amounted to $206.9 million as of September 30, 2009, compared to $162.7 million as of September 30, 2008. This increase was mainly concentrated in construction loans attributable to the continued distressed economic conditions, as previously mentioned.

The ~~evaluation of the~~ provision for loan and lease losses ~~also~~is ~~takes~~part ~~into~~of ~~consideration nonperforming~~the ~~loan~~continuous ~~levels.~~evaluation ~~Nonperforming~~of the allowance for loans ~~amounted~~and tolease ~~$196~~losses.1 The ~~million~~periodic asevaluation of the ~~June~~allowance ~~30,~~for ~~2009,~~loan ~~compared~~and tolease ~~$126.9~~losses ~~million~~considers asthe level of ~~June~~net 30charge-offs, ~~2008. This~~ ~~increase~~nonperforming ~~was mainly concentrated in construction~~ loans, ~~which~~delinquencies, ~~were~~related ~~analysed under~~loss ~~SFAS~~experience ~~No. 114~~ and ~~corresponding~~overall ~~specific allowances~~economic ~~established~~conditions.

For more detail on impairments and charge-offs, please refer to the sections of this discussion and analysis captioned “Nonperforming Loans, Leases and Assets” and “Allowance for Loan and Lease Losses.”

Noninterest Income

The following tables set forth the various components of our noninterest income for the periods indicated:

	Three Months Ended June 30,
	Three Months Ended September 30,
	2009						2008
	(Amount)			(%)			(Amount)			(%)
	(Dollars in thousands)
Other-than-temporary impairment losses:
Total other-than-temporary impairment losses	$	(1,~~792~~877	)		(6315.58	)%	$	-			-	%
Portion of loss recognized in other comprehensive income		~~(884~~1,626	)		~~(31~~13.37	)		-			-
Net impairment losses recognized in earnings		(~~2,676~~251	)		(942.91	)		-			-
Gain on sale of securities		39,~~527~~391			~~125~~79.01			-191			-7.9
Service charges and other fees		2,~~059~~330			7319.06			32,~~218~~466			99101.06
Gain on sale of loans and leases, net		19387			03.73			~~117~~48			32.60
Loss on sale of repossessed assets and on disposition of other assets, net		~~(108~~8	)		(30.81	)		(86280	)		(211.65	)
Total noninterest income	$	211,~~821~~865			100.0	%	$	32,~~249~~425			100.0	%

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2009						2008
	(Amount)			(%)			(Amount)			(%)
	(Dollars in thousands)
Other-than-temporary impairment losses:
Total other-than-temporary impairment losses	$	(1719,~~283~~160	)		(~~197~~92.49	)%	$	-			-	%
Portion of loss recognized in other comprehensive income		1315,~~799~~426			~~157~~74.68			-			-
Net impairment losses recognized in earnings		(3,~~484~~734	)		(3918.81	)		-			-
Gain on sale of securities		716,~~563~~954			8682.42			-191			-2.1
Service charges and other fees		46,~~184~~513			4731.86			58,~~642~~108			8287.01
Gain on sale of loans and leases, net		~~815~~1,202			95.38			1,~~352~~400			1915.71
Loss on sale of repossessed assets and on disposition of other assets, net		(~~322~~315	)		(31.75	)		(~~119~~399	)		(14.73	)
Total noninterest income	$	820,~~756~~620			100.0	%	$	69,~~875~~300			100.0	%

Our total noninterest income for the quarter and ~~six~~nine months ended ~~June~~September 30, 2009 was $211.8 9 million and $820.86 million, respectively, compared to $3.2.4 million and $6.9.3 million for the same periods in 2008. For the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, annualized noninterest income represented ~~approximately~~ 0approximately 1.4069% and 0.6298% of average assets, respectively, compared to 0.4635% and 0.4944% for the same periods in 2008.

During the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, we recognized a $39.5 4 million and $717.60 million gain on the sale of $88252.67 million and $~~195~~448.9 6 million in investment securities, respectively, compared to a $191,000 gain on the sale of $18.9 million in investment securities during the third quarter of 2008. No securities were sold during the first semester of 2008. In addition, during the quarter and ~~six~~ nine months ended ~~June~~ September 30, 2009, there were a $~~2.7~~251,000 ~~million~~ and $3.57 million in other-than-temporary impairment (“OTTI”) adjustments in the investment portfolio, ~~respectively. Of these OTTI adjustments, $400,000 and $2.6~~ ~~million were related to a single non-rated Trust Preferred Stock (“TPS”),~~ respectively. ~~As of June 30, 2009, we did not have any other TPS in our investment portfolio.~~ For more information on the sale of investments and the OTTI adjustments please refer to the section of this discussion and analysis captioned “Financial Condition – Investment Securities.”

38Service charges and other fees amounted to $2.3 million and $6.5 million for the quarter and nine months ended September 30, 2009, respectively, compared to $2.5 million and $8.1 million for the same periods in 2008. These decreases were mainly due to a $136,000 and $1.6 million net reduction in non-sufficient and overdraft charges, respectively, primarily resulting from a decrease in the average balance of overdrawn accounts, and the recording of one-time $233,000 and $596,000 in income from the partial redemption of Visa, Inc. shares of stock recorded during the third quarter of 2009 and the second quarter of 2008, respectively.

Service charges and other fees amounted to $2.1 million and $4.2 million for the quarter and six months ended June 30, 2009, respectively, compared to $3.2 million and $5.6 million for the same periods in 2008. These decreases were mainly due to a $259,000 and $556,000 net reduction in non-sufficient and overdraft charges, respectively, primarily resulting from a decrease in the average balance of overdrawn accounts, and a $638,000 and $669,000 reduction in miscellaneous income, respectively, mainly related to the one-time $596,000 in income from the partial redemption of Visa, Inc. shares of stock recorded during the second quarter of 2008.40

Gain on sale of loans and leases amounted to $19387,000 and $~~815,000~~1.2 million for the quarter ~~and~~ ~~six~~and nine months ended ~~June~~September 30, 2009, respectively, compared to $~~117~~48,000 and $1.4 million for the same periods in 2008. This source of noninterest income was derived from the sale of lease financing contracts and residential mortgage loans. In September 2009, March 2009 and March 2008, we sold lease financing contracts on a limited recourse basis to a third party with carrying values of $15.7 million, $19.6 million and $37.7 million, respectively. ~~No lease financing contracts were sold during the second quarters of 2009 and 2008.~~ We retained servicing responsibilities of the lease financing contracts sold. We surrendered control of the lease financing receivables, as defined by ~~SFAS~~FASB ~~No.~~ASC ~~140~~860, ~~Accounting for~~ “Transfers and ~~Servicing~~ ~~of Financial Assets and Extinguishment of Liabilities~~Servicing, ~~and~~” and accounted for this transaction as sale, recognizing a net gain of ~~approximately~~ approximately $361,000 in September 2009, $757,000 in March 2009 and $1.2 million in March 2008, net of limited recourse allowances of $~~314~~251,000, $314,000 and $471,000, respectively, of which $~~194~~251,000, $273,000 and $~~291~~95,000 remained and had been included in the other liabilities section of our balance sheet as of September ~~June~~ 30, 2009.

During the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, we sold $1.16 million and $24.5 1 million in residential mortgage loans to other financial institutions, ~~compared~~ compared to $9.02 million and $1221.57 million for the same periods in 2008. We did not retain the servicing rights on these residential mortgage loans and we accounted for these transactions as sales, resulting in a gain of approximately $1926,000 and $5884,000 during 2009, and $~~109~~48,000 and $~~168~~223,000 during 2008, respectively.

Net ~~loss~~gain on sale of repossessed assets amounted to $~~108~~8,000 ~~and~~for ~~$322~~the quarter,~~000~~ while for the ~~quarter~~ ~~and~~nine ~~six~~ months ended ~~June~~September 30, 2009, ~~respectively,~~it ~~compared~~amounted to a net loss of ~~$86,000~~ ~~and~~ $~~119~~315,000 ~~during the same periods in 2008. These changes were~~, ~~concentrated~~compared into ana ~~increase~~net loss of $~~128~~280,000 and $~~155~~399,000 induring the ~~loss~~same onperiods ~~sale of~~in ~~repossessed~~2008. These ~~boats,~~decreases ~~primarily~~were mainly attributable to ~~our~~a ~~strategy~~reduction ~~of being more aggressive~~ in the ~~sale~~ volume of repossessed ~~boats~~assets ~~to expedite their disposition and avoid build-up of inventory~~sold. Repossessed assets activity during the ~~six~~nine months ended ~~June~~September 30, 2009 when compared to the same period in 2008 was as follows:

(i) During the ~~six~~nine months ended ~~June~~September 30, 2009, we sold afive ~~total~~OREO ofproperties 11and ~~boats~~foreclosed ~~and~~35 OREO properties, including 14 properties which were repossessed 3from ~~boats~~a commercial customer during the third quarter of 2009, compared to 1025 ~~boats~~OREO properties sold and 812 ~~boats~~foreclosed ~~repossessed~~OREO properties during the same periods in 2008, respectively. Year-to-date net loss on sale of OREO at September 30, 2009 amounted to $49,000, compared to a net gain of $47,000 for the same period in 2008. As of ~~June~~September 30, 2009, the amount of ~~repossessed~~OREO ~~boats~~properties in inventory amounted to $~~589~~13.9 million,~~000,~~ compared to $17.81 million as of ~~June~~September 30, 2008.

(ii) During the same periods, we sold 3925 ~~OREO~~vehicles ~~properties~~ and ~~foreclosed~~repossessed 18807 ~~OREO properties~~vehicles, compared to 241,058 ~~OREO~~vehicles ~~properties~~ sold and 81,067 ~~foreclosed~~vehicles ~~OREO properties~~repossessed, respectively. Year-to-date net loss on sale of repossessed vehicles at September 30, 2009 amounted to $56,000, compared to $390,000 for the same period in 2008. As of ~~June~~September 30, 2009, the amount of ~~OREO~~repossessed ~~properties~~vehicles in inventory amounted to $102.30 million, compared to $74.63 million as of ~~June~~September 30, 2008.

(iii) During the same periods, we sold ~~668~~a ~~vehicles~~total of 13 boats and repossessed ~~526~~six ~~vehicles~~boats, compared to ~~673~~19 ~~vehicles~~boats sold and ~~708~~14 ~~vehicles~~boats repossessed during the same period in 2008. Year-to-date net loss on sale of repossessed boats at September 30, ~~respectively~~2009 amounted to $245,000, compared to $83,000 for the same period in 2008. As of ~~June~~September 30, 2009, the amount of repossessed ~~vehicles~~boats in inventory amounted to $~~1.8 million~~401,000, compared to $~~4.7~~994,000 ~~million~~ as of ~~June~~September 30, 2008.

3941

Noninterest Expense

The following tables set forth a summary of noninterest expenses for the periods indicated:

	Three Months Ended June 30,
	Three Months Ended September 30,
	2009					2008
	(Amount)		(%)			(Amount)		(%)
	(Dollars in thousands)
Salaries and employee benefits	$	4,~~686~~563		2632.25	%	$	5,~~318~~102		4237.29	%
Occupancy and equipment		2,~~490~~622		1518.5			2,~~758~~936		21.8
Professional services, including directors’ fees		12,~~705~~171		1015.63			1,~~243~~409		910.85
Office supplies		~~315~~285		2.0			~~314~~321		2.54
Other real estate owned and other repossessed assets expenses		~~672~~384		4.2.7			~~600~~794		45.79
Promotion and advertising		~~136~~91		0.86			~~214~~153		1.71
Lease expenses		96100		0.67			~~124~~122		1.0.9
Insurance		42,~~374~~520		2717.28			~~636~~971		57.02
Municipal and other taxes		~~522~~400		32.38			~~493~~522		3.9
Commissions and service fees credit and debit cards		~~635~~629		4.04			~~453~~588		34.64
Other noninterest expense		~~425~~379		2.67			~~479~~539		34.80
Total noninterest expense	$	1614,~~056~~144		100.0	%	$	1213,~~632~~457		100.0	%

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2009					2008
	(Amount)		(%)			(Amount)		(%)
	(Dollars in thousands)
Salaries and employee benefits	$	914,~~488~~051		33.31	%	$	1015,~~897~~999		4240.17	%
Occupancy and equipment		57,~~039~~661		17.79			58,~~701~~637		2221.09
Professional services, including directors’ fees		35,~~261~~432		1112.47			23,~~484~~893		9.69
Office supplies		~~619~~905		2.21			~~646~~968		2.5
Other real estate owned and other repossessed assets expenses		1,~~122~~506		3.95			1,~~089~~882		4.28
Promotion and advertising		~~254~~344		0.98			~~581~~734		21.29
Lease expenses		~~205~~305		0.7			~~270~~393		1.0
Insurance		58,~~548~~068		1918.49			12,~~283~~254		5.07
Municipal and other taxes		1,~~044~~444		3.74			~~986~~1,508		3.8
Commissions and service fees credit and debit cards		1,~~204~~833		4.23			~~871~~1,459		3.47
Other noninterest expense		~~752~~1,131		2.6			1,~~090~~628		4.21
Total noninterest expense	$	2842,~~536~~680		100.0	%	$	2539,~~898~~355		100.0	%

Total noninterest expense amounted to $1614.1 million and $2842.57 million for the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, compared to $1213.6 5 million and $2539.94 million for the same periods in 2008. These changes ~~represent~~ represent an increase of 275.11% and 108.1945% in noninterest expense over the ~~same~~ same periods in 2008, respectively. These ~~changes~~variations can be attributed mainly to an increase in FDIC insurance expenses and professional fees and changes in FDIC insurance expenses, net of a decrease in salaries, as explained further below. Noninterest expenses as a percentage of average assets increased to 2.2702% ~~and 2.03%~~ for the quarter and ~~six~~nine months ended September ~~June~~ 30, 2009, respectively, from 1.7892% and 1.8688% for the same periods in 2008. Our efficiency ratio was 9960.6310% and 75 69.4355% for the quarter and nine ~~six~~ months ended ~~June~~September 30, 2009, respectively, compared to 6568.4156% and 67.0254% for the same periods in 2008. The efficiency ratio is determined by dividing total noninterest expense by an amount equal to net interest income on a fully taxable equivalent basis plus ~~noninterest~~ noninterest income.

The overall volume of our noninterest expense may increase as we grow. However, we remain committed to controlling costs and efficiency and expect to moderate these increases relative to our revenue growth.

Salaries and employee benefits decreased to $4.76 million and $914.51 million for the ~~quarter~~ quarter and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, compared to $5.3 1 million and $1016.90 million for the same periods in 2008. These decreases resulted from a $~~1.3~~838,000 ~~million~~ and $23.54 million decrease in salaries and employee benefits, respectively, primarily related to a reduction in personnel, a reduction strategy in an effort to control expenses, and decreased bonus expenses, partially off-set by a $~~618~~299,000 and $1.14 million decrease in deferred ~~loan~~ loan origination costs, respectively, because of a reduction in loan originations. As of ~~June~~September 30, 2009, we had ~~439~~440 full-time ~~equivalent~~ equivalent employees, compared with ~~491~~492 full-time equivalent employees as of September ~~June~~ 30, 2008. Our volume of assets per employee increased to $6.24 million as of ~~June~~September 30, 2009, compared to $5.87 million for the same period in 2008.

4042

Occupancy and equipment expenses decreased to $2.56 million and $57.07 million for the quarter and the ~~six~~nine months ended ~~June~~September 30, 2009, respectively, from $2.~~8 million~~9 million and $58.76 million for the same periods in 2008, representing a decrease of 910.7269% and 11.6130% over the comparable periods, respectively. These ~~decreases~~ decreases were mainly attributable to a $~~206~~265,000 and $~~396~~760,000 decrease in repairs, maintenance, telephone, utilities and security expenses, respectively, and a $4645,000 and $86131,000 decrease in mileage and car expenses, respectively, mainly attributable to operational efficiencies and a cost reduction strategy, as previously mentioned; net of a $57,000 and $181,000 increase in property tax caused by the combined effect of a temporary new special tax and the growth of our other real estate assets.

Professional and directors’ fees totaled $12.72 million and $35.34 million, or 1015.63% and 1112.47% of total noninterest expenses, for the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, compared to $1.24 million and $23.59 million, or 910.85% and 9.69% of of total noninterest expenses, for the same periods in 2008. These increases were mainly due to the combined effect of: a $~~495~~624,000 and $~~714,000~~1.3 million increase in professional fees, respectively, primarily related to a BSA regulatory compliance consulting services and other management consulting services; and a $~~122~~133,000 and $~~267~~400,000 increase in legal fees, respectively, mainly related to legal collection proceedings resulting from the deterioration in our loan portfolio.

Promotion and advertising decreased to $~~136~~91,000 and $~~254~~344,000 for the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, from $~~214~~153,000 and $~~581~~734,000 ~~for~~ for the same periods in 2008. These decreases were mainly attributable to a cost reduction strategy, as previously mentioned.

Insurance expenses were $42.45 million and $58.51 million, or 2717.28% and 1918.49% of total noninterest expenses, for the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, compared to $~~636~~971,000 and $12.3 million, or 7.2% and 5.07% of total noninterest expense, for the same periods in 2008. These increases were mainly ~~concentrated~~related into athe ~~$1.9 million~~ new FDIC’s quarterly assessment, ~~and~~ including a $1.3 million one-time FDIC’s special assessment recorded during the second quarter of 2009. On October 16, 2008, the FDIC published a restoration plan designed to replenish the Deposit Insurance Fund over a period of five years and to increase the deposit insurance reserve ratio, which decreased to 1.01% of insured deposits on June 30, 2008, to the statutory minimum of 1.15% of insured deposits by December 31, 2013. For more information on FDIC’s restoration plan please refer to the business section captioned “FDIC Deposit Insurance Assessments” in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2009.

Commissions and service fees on credit and debit cards increased to $~~635~~629,000 and $1.28 million for the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, compared to $~~453~~588,000 and $~~871,000~~1.5 million for the same periods in 2008. These increases were in part related to an increase in the volume of credit card transactions.

Other noninterest expenses were $~~425~~379,000 and $~~752~~1.1 million,~~000,~~ or 2.7% and 2.6% of total ~~noninterest~~ noninterest expenses, for the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, respectively, compared to $~~479~~539,000 and $1.16 million, or 34.80% and 4.21% of total ~~noninterest~~ noninterest expenses, for the same periods in 2008. These decreases were mainly attributable to the combined effect of a reduction in ~~loan~~the ~~processing~~estimated losses ~~and~~on off-balance sheet items; decreased losses on other accounts receivables; and a reduction in other miscellaneous expenses.

Provision for Income Taxes

Puerto Rico income tax law does not provide for the filing of a consolidated tax return; therefore, the income tax expense reflected in our consolidated income statement is the sum of our income tax expense and the income tax expenses of our individual subsidiaries. Our revenues are generally not subject to U.S. federal income tax; with the exception of interest income from interest earning deposits in the United States that are not considered portfolio interest.

On March 9, 2009, the governor of Puerto Rico signed into law Act No. 7 (the “Act No. 7”), also known as Special Act Declaring a Fiscal Emergency Status to Save the Credit of Puerto Rico, which amended several sections of the Puerto Rico’s Internal Revenue Code (the “Code”). Act No. 7 amended various income, property, excise, and sales and use tax provision of the Code. Under the provisions of Act No. 7, corporations, among other taxpayers, with adjusted gross income of $100,000 or more, will be subject to surtax of 5% on the total tax determined (not on the taxable income). In addition, Act No. 7 imposes a special income tax of 5% on the net income of International Banking Entities ("IBE"), among a group of exempt taxpayers. Both, the 5% surtax and the special income tax rate of 5% are applicable for taxable years commencing after December 31, 2008 and prior January 1, 2012. Act No. 7 also revamps the alternative basic tax provisions of the Code. Under the revised version, our dividends, generally subject to a maximum 10% preferential rate tax, may now be subject to an effectively tax of 20% in the case of individuals with income (computed with certain addition of exempt income and income subject to preferential rates) in excess of $175,000, or 15% if such income is over $125,000. Act No. 7 provides for several additional changes to the Code, which the Company believes will have an inconsequential financial impact or are not applicable since are related to individuals taxpayers.43

41On March 9, 2009, the governor of Puerto Rico signed into law Act No. 7 (the “Act No. 7”), also known as Special Act Declaring a Fiscal Emergency Status to Save the Credit of Puerto Rico, which amended several sections of the Puerto Rico’s Internal Revenue Code (the “Code”). Act No. 7 amended various income, property, excise, and sales and use tax provision of the Code. Under the provisions of Act No. 7, corporations, among other taxpayers, with adjusted gross income of $100,000 or more, will be subject to surtax of 5% on the total tax determined (not on the taxable income). In addition, Act No. 7 imposes a special income tax of 5% on the net income of International Banking Entities ("IBE"), among a group of exempt taxpayers. Both, the 5% surtax and the special income tax rate of 5% are applicable for taxable years commencing after December 31, 2008 and prior January 1, 2012. Act No. 7 also revamps the alternative basic tax provisions of the Code. Under the revised version, our dividends, generally subject to a maximum 10% preferential rate tax, may now be subject to an effective tax of 20% in the case of individuals with income (computed with certain addition of exempt income and income subject to preferential rates) in excess of $175,000, or 15% if such income is between $125,000 and $175,000. Act No. 7 provides for several additional changes to the Code, which the Company believes will have an inconsequential financial impact or are not applicable since these are related to individuals taxpayers.

For the quarter and ~~six~~nine months ended ~~June~~September 30, 2009, we recorded an income tax benefit of $21.69 million and $35.87 million, respectively, compared to an income tax benefit of $2.95 million and $46.16 million for the same periods in 2008. Our income tax ~~benefit~~provision for the quarter and ~~six~~nine months ended ~~June~~September 30, 2009 resulted mainly from the net effect of: (i) a deferred tax ~~benefit~~ expense of $21.41 million and ~~$4.2~~a ~~million~~deferred ~~for~~tax ~~those~~benefit ~~same~~of ~~periods,~~$3.1 million, respectively; (ii) a current tax expense of $~~506~~567,000 and $1.16 million, respectively; and (iii) aan income tax benefit of $~~657~~3.5 million and $4.2 million,~~000~~ respectively, for the year-to-date effective tax rate adjustment recorded ~~during the quarter~~ in accordance with FASB ~~Interpretation~~ASC ~~No. 18~~740-270, “~~Accounting for~~ Income Taxes ~~in Interim~~– ~~Periods~~Interim Reporting,” which requires that an estimated annual effective ~~tax~~ tax rate be used to determine the interim period income tax provision or benefit.

Our current income tax expense for the quarter and ~~six~~nine months ended ~~June~~September 30, ~~2009~~ 2009 increased to $~~506~~567,000 and $1.16 million, respectively, from $12,000 and $1012,000 for the same periods in 2008, respectively. Increases in our current income tax expense during the quarter and ~~six~~nine months ended September ~~June~~ 30, 2009 were mainly due to the new special tax of 5% on IBE net income which amounted to approximately $~~461~~518,000 and $1.05 million, respectively. Other current income tax expense is related to nonbanking subsidiaries or and federal income tax related to interest income on interest earning deposits in the United States. There is ~~not~~no current tax expense related ~~the~~to the bank subsidiary operations in Puerto Rico during the ~~quarters~~quarter and ~~six~~nine months periods ended ~~June~~ September 30, 2009 and 2008, since the results of operations reported on this activity included a taxable loss net of exempt income.

~~Our~~We recorded a deferred tax ~~benefit~~expense for the quarter ended ~~June~~September 30, 2009 ~~decreased to~~ of $21.4 1 million, ~~from~~compared to $2.73 million deferred tax benefit for the ~~second~~third quarter of 2008. Deferred tax benefit for the ~~six~~nine-month ~~months~~ period ended September ~~June~~ 30, 2009 ~~increased~~decreased to $43.2 1 million, from $46.03 million for the same period in 2008. ~~These~~The changes in our deferred tax ~~benefit~~provision during the quarter and nine months ended September 30, 2009 were mainly due to the net effect of: (i) a $814.25 million year-to-date increase in the net deferred tax asset related to the net operating loss (“NOL”) carryforward from the taxable loss in our banking subsidiary; (ii) a year-to-date increase of $~~653,000~~2.0 million in the other net deferred tax assets primarily from a an increase in our allowance for loan and lease losses ~~net~~combined ofwith ana ~~increase~~decrease in the deferred tax liability related to ~~servicing~~deferred ~~asset~~costs ~~from~~on ~~leases~~loans ~~sold~~and leases; and (iii) a $413.5 2 million valuation allowance recorded ~~during the second quarter of 2009~~ to account for the net deferred tax assets’ portion for which it was more likely than not that a tax benefit would not be realized in accordance with ~~FAS~~FASB ~~109~~ASC 740, “~~Accounting for~~ Income Taxes.”

As of ~~June~~September 30, 2009, we had net deferred tax assets of $2927.38 million, compared to $23.8 million as of December 31, 2008. ~~This~~ The increase in our net ~~deferred~~ deferred tax assets was mainly attributable to the net effect of: (i) an increase in the NOL carryforward of our banking subsidiary; (ii) an increase in our allowance for loan and lease losses; (iii) aan ~~decrease~~increase in other net deferred tax assets, primarily from ana ~~increase~~decrease in the deferred tax liability related to deferred ~~servicing~~costs ~~assets~~ on ~~leases~~loans ~~sold~~and leases; (iv) an increase in deferred tax assets related to to the net unrealized loss recognized in other comprehensive income; and (v) a valuation allowance on the net deferred tax assets’ portion for which it was more likely than not that a tax benefit would not be realized, as previously mentioned. In assessing the realizability 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 of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The FASB ASC 740, “Income Taxes,” requires that a deferred tax asset should be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized based on the available evidence. We believe the valuation allowance should be sufficient to reduce the deferred tax asset to an amount that is more likely than not that will be realized. The determination of whether a deferred tax asset is realizable is based on weighing all positive or negative available evidence. Management considers the scheduled reversal of deferred tax assets;, projected future taxable income;, and tax planning strategies in making this assessment. The result of our operations ~~compliance~~reflected ~~with~~a cumulative taxable loss position for the ~~Financial~~nine months ~~Accounting~~period ~~Standards~~ended ~~Board~~September ~~Interpretation~~30, No2009 and the year ended December 31, 2008. Although 48this recent cumulative taxable loss position is considered significant negative evidence, ~~“Accounting~~we ~~for~~expect ~~Uncertainty~~to raise new capital in ~~Income~~a short-term period, which ~~Taxes”;~~will allow us to better position our net interest earning assets accompanied with a structured growth and ~~tax~~an operating costs reduction strategy. Based ~~planning~~on this, we had re-evaluated our projections and tax strategies for the allowed carryforward period. We believe that the short-term expectation of raising new capital, in ~~making~~conjunction ~~this~~with ~~assessment~~our ability to move currently exempt income to taxable income, is sufficient positive evidence that overweight negative evidence, allowing us to still rely on projections in order to measure our deferred tax assets valuation allowance. As of September 30, 2009, we had deferred tax assets, net of deferred tax liabilities of approximately $41,041,000 with a valuation allowance of $13,201,000. We believe it is ~~more~~ more likely than not that the benefits of the carrying net amount of these ~~deductible~~ deductible differences as of ~~June~~September 30, 2009 will be realized.

For additional information on our deferred tax asset, please refer to the “Note 8 – Deferred Tax Asset” to our condensed consolidated financial statements included herein.

Financial Condition

Total assets as of ~~June~~September 30, 2009 amounted to $2.~~738~~807 billion, compared to $2.860 billion as of December 31, 2008. The $~~122~~53.35 million decrease in our total assets during the first ~~six~~nine months of 2009 was primarily due to the net effect of: (i) a net increase of $133.9 million in cash and cash equivalents, mainly resulting from the sale of securities and prepayments of principal in our investment and loans portfolios; (ii) a $200.0 million decrease in the investment securities portfolio, including the $195.9 sale of securities, as previously mentioned; (iii) a decrease of $75.4 million in net loans, including the $19.6 million sale of lease financing contracts in March 2009, as previously mentioned, and (iii) a $21.4 million increase in other assets, mainly due to a $16.5 million increase in other receivables in connection to the proceeds on some of the securities sold.

42(i) a net increase of $166.4 million in cash and cash equivalents, mainly resulting from the net effect of: the sale of securities, prepayments of principal in our investment and loans portfolios, increase in deposits, and repayment of other borrowings;

~~Our~~(ii) total deposits decreased by $5.6 million, or by 0.54% on an annualized basis, to $2.079 billion as of June 30, 2009, from $2.084 billion as of December 31, 2008. The decrease in deposits during the first six months of 2009 was mainly due to the net effect of a decrease in brokered deposits and an increase in jumbo and regular time deposits, as further explained in the section of this discussion and analysis captioned “Deposits.” Other borrowings decreased to $~~492~~73.73 million ~~as of June 30, 2009, from $592.5 million as of December 31, 2008. This~~ decrease in ~~other borrowings was mainly attributable to~~ our ~~strategy~~investment ofsecurities ~~focusing on other funding alternatives to lower our cost of funds~~portfolio, as ~~discussed~~explained further below.;

As(iii) a decrease of ~~June~~ ~~30,~~$153.2 ~~2009,~~million ~~our~~in ~~stockholders’~~net ~~equity~~loans, ~~decreased~~including tothe $~~140~~35.03 million~~, representing~~ ansale ~~annualized~~of ~~decrease~~lease offinancing ~~21.19%,~~contracts ~~from~~during ~~$156.6~~the ~~million~~nine asmonths ~~of December~~ended 31September 30, ~~2008~~2009, as ~~further~~previously ~~explained~~mentioned, inand ~~the~~a ~~section~~$42.5 ofmillion ~~this~~and ~~discussion~~24.7 ~~and analysis~~million ~~captioned~~decrease ~~“Capital Resources~~in commercial and ~~Capital~~construction ~~Adequacy~~loans, ~~Requirements.”~~respectively, as explained further in the Loans section below; and

(iv)

a $11.3 million increase in other assets, mainly concentrated in a $4.0 million increase in deferred tax assets, as previously explained and a $5.2 million increase in other real estate owned, as explained further in the Asset Quality and Delinquency section below.

Our total deposits increased by $68.1 million, or by 4.36% on an annualized basis, to $2.152 billion as of September 30, 2009, from $2.084 billion as of December 31, 2008. This $68.1 million increase was mainly attributable to a net effect of a $105.7 million decrease in broker deposits and a $178.4 million increase in jumbo and regular time deposits, as further explained in the section of this discussion and analysis captioned “Deposits.”

Other borrowings decreased to $489.6 million as of September 30, 2009, from $592.5 million as of December 31, 2008. This decrease in other borrowings was mainly attributable to our strategy of focusing on other funding alternatives to lower our cost of funds, as discussed further below.

As of September 30, 2009, our stockholders’ equity decreased to $138.9 million, representing an annualized decrease of 15.06%, from $156.6 million as of December 31, 2008, as further explained in the section of this discussion and analysis captioned “Capital Resources and Capital Adequacy Requirements.”

Short-Term Investments and Interest-bearing Deposits in Other Financial Institutions

We sell federal funds, purchase securities under agreements to resell, and deposit funds in interest-bearing accounts in other financial institutions to help meet liquidity requirements and provide temporary holdings until the funds can be otherwise deployed or invested. As of ~~June~~September 30, 2009, we had $400,000 in interest-bearing deposits in other financial institutions and federal funds sold, compared to $44.9 million as of December 31, 2008. This decrease resulted from a $44.5 million decrease in federal funds sold, which were transferred to cash and due from banks interest bearing accounts. Also, as of those same periods, we had $2421.2 0 million and $24.5 million in purchased securities under agreements to resell, respectively. On a fully taxable equivalent basis, the yield on interest-bearing deposits, federal funds sold, and the purchased securities under agreements to resell was 0.33% and 3 2.0895% for the ~~six~~nine months ended September ~~June~~ 30, 2009 and 2008, respectively. This decrease was primarily attributable to decreased yields mainly resulting from interest rate cuts by the Federal Reserve Bank, as previously mentioned.

Investment Securities

Our investment portfolio primarily serves as a source of interest income and, secondarily, as a source of liquidity and a management tool for our interest rate sensitivity. We manage our investment portfolio according to a written investment policy implemented by our Asset/Liability Management Committee. Our investment policy is reviewed at least annually by our Board of Directors. Investment balances, including cash equivalents and interest-bearing deposits in other financial institutions, are subject to change over time based on our asset/liability funding needs and our interest rate risk management objectives. Our liquidity levels take into consideration anticipated future cash flows and all available sources of credits and are maintained at levels management believes are appropriate to assure future flexibility in meeting our anticipated funding needs.

Our investment portfolio mainly consists of securities classified as “available-for-sale” and, as of December 31, 2008, of a portion of securities we intended ~~intend~~ to hold until maturity, or “held-to-maturity securities.” The carrying values of our available-for-sale securities are adjusted for other-than-temporary impairment recognized in operations, which create a new carrying value, and unrealized gain or loss as a valuation allowance, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income (loss). ~~The~~As of December 31, 2008, the carrying values of our held-to-maturity securities are adjusted for other-than-temporary impairment recognized in operations, which create a new carrying value. Held-to-maturity securities ~~are~~ were presented at amortized cost. During the quarter ended September 30, 2009, we reclassified the remaining balance of our held-to-maturity securities, as explained further below.

The following table presents the composition, book value and fair value of our investment portfolio by major category as of the dates indicated:

	Available–for–Sale				Held–to–Maturity				Other Investments				Total
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
June 30, 2009:
September 30, 2009:
U.S. government agencies obligations	$	66,864	$	67,291	$	2,197	$	2,215	$	—	$	—	$	69,061	$	69,506
U.S. Treasury and government agencies obligations	$	90,118	$	90,832	$	—	$	—	$	—	$	—	$	90,118	$	90,832
Collateralized mortgage obligations		~~330~~558,~~623~~142		~~305~~541,~~953~~015		~~86,335~~—		~~86,526~~—		—		—		~~416~~558,~~958~~142		~~392~~541,~~479~~015
Mortgage-backed securities		~~195~~175,~~809~~377		~~198~~177,~~647~~015		~~21,670~~—		~~22,412~~—		—		—		~~217~~175,~~479~~377		~~221~~177,~~059~~015
Commonwealth of Puerto Rico obligations		5,~~491~~490		5,~~538~~583		—		—		—		—		5,~~491~~490		5,~~538~~583
US Corporate Notes		30		30		—		—		—		—		30		30
Other investments		—		—		—		—		10,996		10,996		10,996		10,996
Other investments		—		—		—		—		11,132		11,132		11,132		11,132
Total	$	829,127	$	814,445	$	—	$	—	$	10,996	$	10,996	$	840,123	$	825,441
Total	$	598,817	$	577,459	$	110,202	$	111,153	$	11,132	$	11,132	$	720,151	$	699,744
December 31, 2008:
U.S. government agencies obligations	$	27,524	$	27,771	$	2,457	$	2,462	$	—	$	—	$	29,981	$	30,233
Collateralized mortgage obligations		442,509		423,727		105,307		104,796		—		—		547,816		528,524
Mortgage-backed securities		279,855		288,012		25,034		25,632		—		—		304,889		313,645
Commonwealth of Puerto Rico obligations		5,546		5,564		—		—		—		—		5,546		5,564
US Corporate Notes		7,975		5,941		—		—		—		—		7,975		5,941
Other investments		—		—		—		—		14,932		14,932		14,932		14,932
Total	$	763,409	$	751,~~017~~015	$	132,798	$	132,~~891~~890	$	14,932	$	14,932	$	911,~~140~~139	$	898,839

During the first ~~six~~nine months of 2009, the investment portfolio decreased by approximately $~~200~~73.03 million to $~~698~~825.84 million from $898.7 million as of ~~December~~ December 31, 2008. This decrease was primarily due to the net effect of:

(i) the sale of $~~195~~448.96 million in FHLMCs, FNMAs, ~~and~~GNMAs, ~~GNMA~~a private label mortgage-backed ~~securities~~security and FHLB Notes, which were replaced with the purchase of $~~109~~466.0 million in GNMA mortgage-backed securities, $50.0 million in FFCB obligations; ~~and~~ $534.21 million in a private label mortgage-backed security, $15.0 million in a US Treasury Bill, and $25.0 million in FHLB obligations;

(ii) prepayments of approximately $~~133~~182.03 million on mortgage-backed securities and FHLB obligations;

~~(iii) $5.9 million in FHLB obligations, $12.2 million in private label mortgage-backed securities and $5.0 million in a corporate note that were called-back or matured during the period;~~46

(iviii) ~~the~~$16.9 ~~decrease~~million ofin FHLB obligations, $912.02 million in ~~the~~private ~~market~~label ~~valuation~~mortgage-backed of securities, ~~available~~and ~~for~~a ~~sale~~$5.0 million Corporate Note that were called-back or matured during the period;

(viv) the increase of $411.26 million in the premium of purchases of securities and the net amortization of discount/premiums;

(viv) the reduction of $3.89 million in FHLB stocks; ~~and~~

(~~vii~~vi) a $3.57 million other than temporary impairment adjustment in the investment portfolio, as previously mentioned. in the section of this discussion and analysis captioned “Noninterest Income;” and

~~During the~~(vii) ~~six~~a ~~months ended June 30, 2009, we restructured our investment portfolio by selling approximately~~ $~~150~~1.35 million inincrease ~~FNMA MBS and $36.9 million~~ in ~~FHLMC~~the ~~MBS with an aggregate estimated average life of 3.44 years and an aggregate estimated average yield of approximately 5.25%; and $8.8 million~~ in ~~GNMA~~the ~~MBS with~~unrealized anloss ~~average estimated average life~~ of ~~4.07 years and an estimated average yield of 5.55%. These sales of~~ securities ~~resulted~~available ~~in a $3.5 million and $7.6 million gain~~ for ~~the quarter and six months ended June 30~~sale, ~~2009, respectively. The~~from ~~proceeds of these sales were used to purchase approximately~~ $~~109~~12.~~0 million in GNMA MBS with an estimated average life of 2.88 years and an average estimated yield of approximately~~ 4~~.32%;~~ ~~$50.0~~ million ~~in Federal~~as ~~Farm Credit Bond with an estimated average life~~ of ~~approximately~~December ~~2.76 years~~31, ~~and~~2008 anto ~~estimated average yield of 1.95%; and~~ $513.29 million inas ~~a private label mortgage-backed security with an estimated average life~~ of ~~approximately 1.83~~September ~~years and an estimated average yield of 9.64%. This private label is a mortgage-backed security with a “Credit Enhancement Plus” structure~~30, ~~which~~ ~~purpose it to mitigate some of the regulatory risk associated with possible rating downgrades~~2009. These transactions did not only increase our capital through the gain, but also served to stabilize our regulatory risk-based capital levels as the GNMA MBS acquired have a 0% risk-based capital weight when compared to 20% on the MBS sold.

44During the nine months ended September 30, 2009, we have restructured our investment portfolio by selling approximately $239.9 million in FNMA CMO and MBS with an aggregate estimated average life of 3.4 years and an aggregate estimated average yield of 5.16%; $136.1 million in FHLMC CMO and MBS with an aggregate estimated average life of 2.2 years and an aggregate estimated average yield of 5.43%; $58.6 million in GNMAs CMOs and MBS with an aggregate estimated average life of 2.7 years and an aggregate estimated average yield of 4.81%; $6.3 million in a private label mortgage-backed security with an aggregate estimated average life of 8.8 years and an aggregate estimated average yield of 5.81%; and $7.6 million in FHLB obligations with an aggregate estimated average life of 1.3 years and an aggregate estimated average yield of 4.89%. The sale of these securities resulted in a $9.4 million and $17.0 million gain for the quarter and nine months ended September 30, 2009, respectively.

~~For~~As ~~the~~part ~~first~~of ~~six~~the ~~month~~securities sold, during the quarter ended ~~June~~September 30, 2009, ~~after~~we ~~the~~sold $92.7 ~~above~~million in U.S. agency debt securities and mortgage-~~mentioned~~backed ~~transactions,~~securities ~~the~~that ~~estimated~~were ~~average~~previously classified as held to maturity, ofresulting ~~our~~in ~~investment~~a ~~portfolio~~net ~~was~~gain of approximately $3.434 million. These securities were classified as held to ~~years~~maturity ~~and~~when ~~the~~acquired ~~estimated~~because ~~average~~management’s ~~yield~~intention was ~~approximately~~to 4keep them in the investment portfolio until their maturity date.~~94%~~ However, ~~compared~~we decided to sell anthese securities to augment our regulatory capital, which will support our ~~estimated~~continuing ~~average~~efforts ~~maturity~~to comply with the regulatory capital requirements of ~~5.7~~our order ~~years~~of cease and desist issued by the FDIC and the Puerto Rico Office of the Commissioner of Financial Institutions. We consider that this is an ~~average~~isolated, nonrecurring, ~~yield~~and unusual event that could not have been reasonably anticipated and that was primarily caused by a significant increase in capital requirements by the regulatory agencies, as previously mentioned. Consequent to the aforementioned transaction, we reclassified the remaining balance of 5$13.2%3 million in held to maturity securities to the available for sale investment portfolio. This reclassification required us to record $1.1 million in other comprehensive income, representing the difference between the securities ~~year~~amortized ~~ended~~cost ~~December~~and 31their fair value. For more information on our capital requirements, ~~2008~~please refer to the section of this discussion and analysis captioned “Recent Developments – Regulatory Capital Category.”

~~In April~~The ~~2009,~~proceeds ~~the~~of ~~FASB~~these ~~issued~~sales ~~Staff~~were ~~Position~~used ~~(“FSP”)~~to Nopurchase approximately $466.0 ~~115-2,~~million ~~Recognition~~in GNMAs CMOs and ~~Presentation~~MBS with an aggregate estimated average life of 5.3 years and an ~~Other-Than-Temporary~~aggregate ~~Impairments,~~estimated ~~which~~average ~~amends~~yield

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