	As of or for the Year Ended December 31,
	2006		2005		2004		2003		2002
	(In thousands)
Originations	$	147,352	$	230,985	$	257,808	$	185,321	$	138,922
End of period balance	$	443,311	$	487,863	$	459,251	$	315,935	$	256,087

Eurobank intends to maintain its lease origination volume at current levels and focus on improving the overall quality of the portfolio and service to its network of dealers. In doing so, we also intend to provide dealers, on a selective basis, with floor plan financing. We seek to avoid an excess concentration of leases as a percentage of interest-earning assets. Typically, we retain the right to service the leases we sell. During 2005, we sold approximately $29.9 million in leases, compared to $30.0 million in leases sold during 2004. There was no sale of lease financing contracts during 2006. For more information regarding the accounting treatment of these servicing assets, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Servicing Assets,” and “Note 2 — Summary of Significant Accounting Policies” to our consolidated financial statements.

Mortgage Banking

Under the tradename “EuroMortgage,” Eurobank offers Federal National Mortgage Association, or FNMA, Veterans Affairs, or VA, and Federal Housing Administration, or FHA, and Freddie Mac loans, as well as conforming and non-conforming mortgage loans. We are an approved seller/servicer for FNMA and Freddie Mac. Eurobank has continued to make inroads in the market by providing for the efficient and expeditious turnaround of new loan applications and by establishing certain strategic relationships that allow access to secondary mortgage markets on a best price basis. At December 31, 2006, residential mortgage loans totaled $76.3 million, representing 4.37% of our gross loan and lease portfolio.

Our targeted market for mortgage banking is the financing of the homes on the island or units financed by our construction lending department. We also provide mortgage banking services to our retail customers and to the owners, executives and employees of our targeted commercial customers. In addition, our salespeople engage in marketing and direct selling efforts to the general community. All mortgages originated by Eurobank are fixed-rate mortgages with a maximum term of 30 years. Part of the mortgage loans we originate are sold to other financial institutions with servicing released. We have been authorized by FNMA, Freddie Mac, and recently by GNMA to create mortgage loan pools to be sold in the secondary market. However, as of December 31, 2006, we had not created any such pool. It is our intention to create such pools in the future.

The following table sets forth the dollar volume of residential mortgage originations by Eurobank and the end of period balances of residential mortgages for the periods indicated below:

	As of or for the Year Ended December 31,
	2006		2005		2004		2003		2002
	(In thousands)
Originations	$	55,097	$	21,112	$	28,028	$	53,880	$	32,635
End of period balance	$	76,277	$	44,841	$	51,730	$	15,941	$	34,198

Our portfolio of mortgage loans is subject to certain risks, including: (1) a possible downturn in the Puerto Rico economy affecting real estate values; (2) interest rate increase; (3) the deterioration of a borrower’s or guarantor’s financial capabilities; and (4) environmental risks, including natural disasters. We attempt to reduce the exposure to such risks through: (1) reviewing each loan request and renewal individually; (2) utilizing a centralized approval system for loans in excess of $500,000; (3) strictly adhering to written loan policies; and (4) conducting an independent credit review. In general, we receive and review financial statements of borrowing customers on an ongoing basis during the term of the relationship and respond to any deterioration noted.

Trust and Wealth Management

We established Eurobank’s trust and wealth management to cross-sell retirement benefits, personal and corporate trust and wealth management services to the owners, executives and employees of our customer base. As of December 31, 2006, Eurobank had approximately $235.3 million in trust assets under management, primarily acquired in the BankTrust merger.

We offer a full array of investment products and services guided by an experienced and specialized team focused on serving our customers’ financial needs. This is part of our strategy of creating financial centers in which each customer may access a variety of integrated financial products and services. Investment products are offered through an association with National Financial Services, LLC, a registered broker-dealer. We offer financial planning and investment management services to individuals and corporate customers. During 2006, 2005 and 2004, we traded approximately $17.4 million, $36.2 million and $18.9 million, respectively, in investment securities for our customers.

Insurance

EuroSeguros primarily offers automobile, property and casualty, and guaranteed auto protection insurance to customers in our market area. EuroSeguros represents several insurance companies in Puerto Rico and is licensed and regulated by the Office of the Commissioner of Insurance of Puerto Rico.

EuroSeguros’ goals for the year 2007 are to expand to offer life insurance products and to continue to work closely with Eurobank’s mortgage customers, leasing customers and branch professionals, while continuing to enhance personalized service to all of these customers.

International Banking Entities

During the first six months of 2004, we transferred all of the assets and liabilities of Eurobank International, an IBE that operated as a division of Eurobank, to an IBE subsidiary of Eurobank, EBS Overseas, Inc. We also have an IBE that operates as a division of Eurobank under the name EBS International Bank. This IBE was acquired under the name of BT International in connection with the acquisition of BankTrust and changed to EBS International Bank on September 27, 2005. We have continued to operate EBS International Bank as a division of Eurobank and do not have immediate plans to transfer its assets to our subsidiary, EBS Overseas, Inc.

IBEs are limited under the IBE Act with respect to the types of activities they can undertake. In general, IBEs may accept deposits or borrow money from other IBEs and from “foreign persons.” For purposes of the IBE Act, a “foreign person” is defined as anyone who is not a resident of Puerto Rico. IBEs are also permitted to engage in any activity that is financial in nature outside of Puerto Rico that is permissible for a bank holding company or a foreign office or subsidiary of a United States bank under applicable United States law. Typically, we borrow funds in the United States in the form of repurchase obligations or brokered deposits (considered foreign under the IBE Act) and invest those funds primarily in United States Treasury Obligations, U.S. Government Agencies Obligations, U.S. Government Sponsored Agencies Obligations, Mortgage Back Securities issued or guaranteed by U.S. Government Agencies or U.S. Government Sponsored Agencies and obligations issued by U.S. Corporations. The income earned from this activity is tax exempt. For more information regarding the regulation of IBEs, see the section of this Annual Report on Form 10-K captioned “Supervision and Regulation — International Banking Center Regulatory Act.”

EBS Overseas, Inc. is authorized to invest in notes and bonds issued by the U.S. government, the Commonwealth of Puerto Rico, other foreign governments and their agencies, and U.S. and foreign corporations. As of December 31, 2006, EBS Overseas’ investment portfolio consisted of the following: $248.0 million, or 53.9%, in mortgage-backed securities issued or guaranteed by government or government sponsored agencies, $150.7 million, or 32.8%, in U.S. government agency obligations, $56.4 million, or 12.3%, in mortgage-backed securities issued by U.S. corporations, and $5.1 million, or 1.1%, in Puerto Rico Public Authorities.

We have structured EBS Overseas’ investment portfolio in an effort to improve our net interest margin in the future. The maturities on debt obligations in EBS Overseas’ investment portfolio range from 2 to 6.5 years with an estimated average maturity as of December 31, 2006 of 2.8 years. The original estimated average maturities of mortgage-backed securities in the portfolio also range from 2 to 7 years, with an average maturity as of December 31, 2006 of approximately 3.3 years.

As of December 31, 2006, EBS Overseas had total assets of approximately $464.8 million, repurchase obligations of approximately $317.2 million, borrowings from EBS International Bank of approximately $98.0 million and stockholders’ equity of approximately $47.0 million. Further, as of December 31, 2006, EBS International Bank had total assets of approximately $313.2 million, deposits of approximately $284.9 million, and repurchase agreements of approximately $26.0 million.

Eurobank Statutory Trust I and II

On November 11, 2001, Eurobank Statutory Trust I, a special purpose statutory trust subsidiary of EuroBancshares, was formed for the purpose of issuing $25.0 million in trust preferred securities, which were issued on December 18, 2001 with a liquidation amount of $1,000 per security, with option to redeem in five years. In an effort to improve our net interest margin, on December 18, 2006, these trust preferred securities were redeemed resulting in the write-off of approximately $626,000 in unamortized placement costs.

On December 10, 2002, Eurobank Statutory Trust II, a special purpose statutory trust subsidiary of EuroBancshares was formed for the purpose of issuing $20.0 million in trust preferred securities, which were issued on December 19, 2002.

On March 1, 2005 the Federal Reserve Board adopted the final rule that allows the continued limited inclusion of trust-preferred securities in the Tier 1 capital of bank holding companies (BHCs). Under the final rule, trust preferred securities and other restricted core capital elements are subject to stricter quantitative limits. The Federal Reserve Board’s final rule limits restricted core capital elements to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009, for application of the quantitative limits.

For more detail on notes payable to statutory trusts please refer to “Note 17 - Notes Payable to Statutory Trusts” to our consolidated financial statements.

Market

We consider our primary market area to be the island of Puerto Rico. We serve this market through our main office and branches in the greater metropolitan area of San Juan and our branches in Aguadilla, Bayamón, Caguas, Carolina, Canóvanas, Cidra, Condado, Guaynabo, Hatillo, Ponce, Humacao, Luquillo, San Lorenzo, Manatí and Mayagüez, Puerto Rico. Puerto Rico is the fourth largest of the Caribbean Islands and is located approximately 1,100 miles southeast of Miami. It is approximately 100 miles long and 35 miles wide.

Puerto Rico came under United States sovereignty in 1898 and obtained commonwealth status in 1952. Puerto Ricans have been citizens of the United States since 1917. The United States and Puerto Rico share a common defense, market and currency. The Commonwealth of Puerto Rico exercises virtually the same control over its internal affairs as do the fifty states. Most federal taxes, except those such as Social Security taxes which are imposed by mutual consent, are not levied in Puerto Rico. No federal income tax is collected from Puerto Rico residents on income earned in Puerto Rico, except for certain federal employees who are subject to taxes on their salaries. According to the United States Census Bureau, the population of Puerto Rico was 3.8 million in 2000, compared to 3.5 million in 1990. As of 2005, the population of San Juan, the island’s capital and largest city, was estimated in approximately 429,000.

The economy of Puerto Rico is closely linked to that of the United States. As such, factors affecting the United States economy usually have a significant impact on the performance of the Puerto Rico economy. These include exports, direct investment, the amount of federal transfer payments, the level of interest rates, the level of oil prices, and the rate of inflation and tourist expenditures. In the past, the economy of Puerto Rico had usually followed the trends of the United States economy. The economic slowdown in the United States in 2001 and 2002 and the subsequent recovery in 2003, which continued in 2004 and 2005, were also reflected in the Puerto Rico economy, in somewhat of a more limited extent, but lagging behind the growth in the United States for fiscal 2006. In January 2006, the Planning Board of Puerto Rico (“the Planning Board”) estimated that in 2006 and 2007, the Gross National Product (“GNP”) growth rates would not exceed 2.2% and 2.5%, respectively. On June 30, 2006, the Planning Board announced that the agency revised the estimate of macroeconomic variables for fiscal year 2006 and the projection for fiscal year 2007 and estimated the GNP growth at 1.2% and 0.6% for those same periods, respectively. For 2005 and 2004, the GNP growth was 2.0% and 2.8%, respectively.

Between May 1 and May 17, 2006, Puerto Rico experienced a partial government shutdown caused by the inability of the Legislature and Governor to agree on a budget, which resulted in an estimated $740 million budget shortfall. This government shutdown forced the closure of approximately 43 public agencies, including Puerto Rico’s public schools, leaving an estimate of 90,000 government employees out of work. In response to this economic crisis, several bills were approved by the Puerto Rico legislature to impose additional taxes, some of which were applicable to the banking industry, resulting in an increase in our effective tax rate. For more information relating to the risks surrounding our economic environment and the additional taxes imposed to the banking industry, see the sections captioned “Risks Relating to the Economic Environment” and “Provision for Income Taxes” in Item 1A - Risk Factors and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, respectively, of this Annual Report on Form 10-K.

Recent increases in the price of gasoline and several basic services and utilities are negatively affecting the purchasing power of local consumers, which undoubtedly have been the key driver of the Puerto Rico economy in recent years. Considering prices as of year 2000, the GNP grew to $44.9 billion in 2005, from $44.0 billion in fiscal year 2004. According to the Puerto Rico Department of Labor and Human Resources, the average unemployment rate in Puerto Rico was 10.6% in 2005, compared to 11.4% in 2004. As of September 30, 2006, the unemployment rate was estimated at 11.3%, representing an increase of 0.2% when compared to the same period in 2005. The employment rate decreased to 42.3% as of September 30, 2006, from 43.8% for the same period in 2005.

The dominant sectors of the Puerto Rico economy are manufacturing and services. The manufacturing sector has undergone fundamental changes over the years as a result of increased emphasis on higher wages, high technology industries, such as pharmaceuticals, biotechnology, electronics, computers, microprocessors, professional and scientific instruments and certain high technology machinery and equipment. The services sector, including finance, insurance, real estate, wholesale and retail trade and tourism, also plays a major role in the economy. It ranks second only to manufacturing in contribution to the gross domestic product and leads all sectors in providing employment. The other material sectors of the Puerto Rican economy include government, transportation and agriculture.

As of December 31, 2006, there were 14 FDIC-insured commercial bank and trust companies operating in Puerto Rico. Total assets of these institutions as of December 31, 2006 were $89.2 billion. As of December 31, 2006, there were 32 International Banking Entities operating in Puerto Rico licensed to conduct offshore banking transactions, with total assets of $76.3 billion. As of December 31, 2006, Eurobank held 3.52% of the deposits held by FDIC insured financial institutions in Puerto Rico.

Environmental Compliance

In addition to our obligations under environmental laws with respect to property that we own, there are several federal and state statutes that govern the rights and obligations of financial institutions with respect to environmental issues. In addition to being directly liable under these statutes for its own conduct, a financial institution may also be held liable under certain circumstances for the actions of borrowers or other third parties on property that collateralizes a loan held by the institution. This potential liability may far exceed the original amount of the loan made by the financial institution, which is secured by the property. Currently, we are not a party to any legal proceedings involving potential liability under applicable environmental laws.

Employees

We had approximately 509 full-time equivalent employees as of December 31, 2006. Our future success will depend in part on our ability to attract, retain and motivate highly qualified management and other personnel. We provide health, life and disability coverage for our employees and make contributions on behalf of eligible employees under a plan intended to qualify as a simplified employee pension plan under the Puerto Rico Internal Revenue Code. Our employees are not represented by a collective bargaining agreement and we have never experienced a strike or similar work stoppage. We consider our relationship with our employees to be good.

Available Information

Our Internet website address is www.eurobankpr.com. We make available free of charge on or through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. You may also read and copy any materials we file with the Securities and Exchange Commission at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549-0102. You may obtain information on the operation of the SEC’s Public Reference Room by calling at 1-800-SEC-0220. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. However, the information found on our website is not part of this or any other report.

SUPERVISION AND REGULATION

This following is a summary description of the relevant laws, rules and regulations governing banks and bank and financial holding companies. The descriptions of, and references to, the statutes and regulations below are brief summaries and do not purport to be complete. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.

General

The supervision and regulation of bank holding companies and their subsidiaries are intended primarily for the protection of depositors, the deposit insurance funds of the FDIC and the banking system as a whole, and not for the protection of the bank holding company stockholders or creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the power to impose substantial fines and other penalties for violations of laws and regulations.

Legislation is from time to time introduced in Congress and Puerto Rico’s legislature, including proposals to overhaul the bank regulatory system, expand the powers of depository institutions and limit the investments that depository institutions may make with insured funds. Such legislation may change applicable statutes and the operating environment of EuroBancshares and Eurobank in substantial and unpredictable ways. We cannot determine the ultimate effect that future legislation or implementing regulations would have upon the financial condition and results of operations of EuroBancshares or Eurobank, or any of their subsidiaries.

On March 13, 2007, EuroBancshares’ subsidiary bank, Eurobank, entered into a Stipulation and Consent Order with the FDIC agreeing to the issuance of a Cease and Desist Order. The Cease and Desist Order was based upon examination results which indicated that the Bank’s Bank Secrecy Act/Anti-Money Laundering Program was not fully in compliance with the requirements of the BSA laws, regulations, and guidance. For additional information, see the sections of this report captioned “Recent Developments” on page 27.

EuroBancshares

EuroBancshares is a financial holding company registered under the Bank Holding Company Act, and is subject to supervision, regulation and examination by the Federal Reserve Board. The Bank Holding Company Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

Regulatory Restrictions on Dividends; Source of Strength

EuroBancshares is regarded as a legal entity separate and distinct from its other subsidiaries. The principal source of our revenue is dividends received from Eurobank. Various federal and state statutory provisions limit the amount of dividends Eurobank can pay to EuroBancshares without regulatory approval. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.

Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal Reserve Board policy, a holding company may not be inclined to provide it. As discussed below, a bank holding company, in certain circumstances, could be required to guarantee the capital plan of an undercapitalized banking subsidiary.

In the event of a bank holding company’s bankruptcy under Chapter 11 of the United States Bankruptcy Code, the trustee will be deemed to have assumed, and is required to cure immediately, any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority over most other unsecured claims.

Activities “Closely Related” to Banking

The Bank Holding Company Act prohibits a bank holding company, with certain limited exceptions, from acquiring direct or indirect ownership or control of any voting shares of any company which is not a bank or from engaging in any activities other than those of banking, managing or controlling banks and certain other subsidiaries, or furnishing services to or performing services for its subsidiaries. One principal exception to these prohibitions allows the acquisition of interests in companies whose activities are found by the Federal Reserve Board, by order or regulation, to be so closely related to banking or managing or controlling banks, as to be a proper incident thereto. These activities include, among other things, numerous services and functions performed in connection with lending, investing, and financial counseling and tax planning. In approving acquisitions by bank holding companies of companies engaged in banking-related activities, the Federal Reserve Board considers a number of factors, and weighs the expected benefits to the public (such as greater convenience and increased competition or gains in efficiency) against the risks of possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices). The Federal Reserve Board is also empowered to differentiate between activities commenced de novo and activities commenced through acquisition of a going concern.

Gramm-Leach Bliley Act; Financial Holding Companies

The Gramm-Leach-Bliley Financial Modernization Act of 1999, revised and expanded the provisions of the Bank Holding Company Act by including a new section that permits a bank holding company to elect to become a financial holding company to engage in a full range of activities that are “financial in nature.” The qualification requirements and the process for a bank holding company that elects to be treated as a financial holding company require that all of the subsidiary banks controlled by the bank holding company at the time of election to become a financial holding company must be and remain at all times “well-capitalized” and “well managed.” EuroBancshares made an election to become a financial holding company on September 20, 2002.

The Gramm-Leach-Bliley Act further requires that, in the event that the bank holding company elects to become a financial holding company, the election must be made by filing a written declaration with the appropriate Federal Reserve Bank that:

●

states that the bank holding company elects to become a financial holding company;

●

provides the name and head office address of the bank holding company and each depository institution controlled by the bank holding company;

●

certifies that each depository institution controlled by the bank holding company is “well-capitalized” as of the date the bank holding company submits its declaration;

●

provides the capital ratios for all relevant capital measures as of the close of the previous quarter for each depository institution controlled by the bank holding company; and

●

certifies that each depository institution controlled by the bank holding company is “well managed” as of the date the bank holding company submits its declaration.

The bank holding company must have also achieved at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act during the institution’s most recent examination.

Financial holding companies may engage, directly or indirectly, in any activity that is determined to be:

●

financial in nature;

●

incidental to such financial activity; or

●

complementary to a financial activity provided it “does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.”

The Gramm-Leach-Bliley Act specifically provides that the following activities have been determined to be “financial in nature”: lending, trust and other banking activities; insurance activities; financial or economic advisory services; securitization of assets; securities underwriting and dealing; existing bank holding company domestic activities; existing bank holding company foreign activities and merchant banking activities. In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand the list of “financial” or “incidental” activities, but requires consultation with the United States Treasury Department, and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is “complementary” to a financial activity and does not “pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.”

Privacy Policies

Under the Gramm-Leach-Bliley Act, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties and establish procedures and practices to protect customer data from unauthorized access. EuroBancshares and its subsidiaries have established policies and procedures to assure our compliance with all privacy provisions of the Gramm-Leach-Bliley Act.

Safe and Sound Banking Practices

Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1 million for each day the activity continues.

Annual Reporting; Examinations

We are required to file annual reports with the Federal Reserve Board, and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may examine a bank holding company or any of its subsidiaries, and charge the company for the cost of such the examination.

Capital Adequacy Requirements

The Federal Reserve Board has adopted a system using risk-based capital guidelines to evaluate the capital adequacy of certain large bank holding companies. Prior to March 30, 2006, these capital guidelines were applicable to all bank holding companies having $150 million or more in assets on a consolidated basis. However, effective March 30, 2006, the Federal Reserve Board amended the asset size threshold to $500 million for purposes of determining whether a bank holding company is subject to the capital adequacy guidelines. EuroBancshares currently has consolidated assets in excess of $500 million and is therefore subject to the Federal Reserve Board’s capital adequacy guidelines.

Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. The guidelines require a minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. To be considered “well-capitalized,” a bank holding company must maintain, on a consolidated basis, (i) a Tier 1 risk-based capital ratio of at least 6.0%, and (ii) a total risk-based capital ratio of 10.0% or greater. As of December 31, 2006, our Tier 1 risk-based capital ratio was 10.25% and its total risk-based capital ratio was 11.25%. Thus, EuroBancshares is considered “well-capitalized” for regulatory purposes.

In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain highly-rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but other bank holding companies are required to maintain a leverage ratio of at least 4.0%. As of December 31, 2006, our leverage ratio was 7.92%.

The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions, substantially above the minimum supervisory levels, without significant reliance on intangible assets.

Imposition of Liability for Undercapitalized Subsidiaries

Bank regulators are required to take “prompt corrective action” to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.

Acquisitions by Bank Holding Companies

The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire all, or substantially all, of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors.

Control Acquisitions

The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute acquisition of control.

In addition, any company is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of the outstanding common stock of the company, or otherwise obtaining control or a “controlling influence” over the company.

Cross-guarantees

Under the Federal Deposit Insurance Act, or FDIA, a depository institution (which definition includes both banks and savings associations), the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution or (2) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is defined generally as the appointment of a conservator or a receiver and “in danger of default” is defined generally as the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance. In some circumstances (depending upon the amount of the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the ultimate failure or insolvency of one or more insured depository institutions in a holding company structure. Any obligation or liability owed by a subsidiary bank to its parent company is subordinated to the subsidiary bank’s cross-guarantee liability with respect to commonly controlled insured depository institutions. Eurobank is currently the only FDIC-insured depository institution subsidiary of EuroBancshares.

Because EuroBancshares is a legal entity separate and distinct from Eurobank, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. In the event of a liquidation or other resolution of Eurobank, the claims of depositors and other general or subordinated creditors of Eurobank would be entitled to a priority of payment over the claims of holders of any obligation of Eurobank to its shareholders, including any depository institution holding company (such as EuroBancshares) or any shareholder or creditor of such holding company.

Anti-Terrorism Legislation

In the wake of the tragic events of September 11th, on October 26, 2001, the President signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. Also known as the “Patriot Act,” the law enhances the powers of the federal government and law enforcement organizations to combat terrorism, organized crime, and money laundering. The Patriot Act significantly amends and expands the application of the Bank Secrecy Act, including enhanced measures regarding customer identity, new suspicious activity reporting rules, and enhanced anti-money laundering programs.

Under the Patriot Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps:

to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;

to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;

to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and

to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

Under the Patriot Act, financial institutions must also establish anti-money laundering programs. The Patriot Act sets forth minimum standards for these programs, including: (i) the development of internal policies, procedures and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test the adequacy of such programs.

In addition, the Patriot Act requires bank regulatory agencies to consider the record of a bank in combating money laundering activities in their evaluation of bank and bank holding company merger or acquisition transactions. Regulations proposed by the U.S. Department of the Treasury to effect certain provisions of the Patriot Act provide that all transaction or other correspondent accounts held by a U.S. financial institution on behalf of any foreign bank must be closed within 90 days after the final regulations are issued, unless the foreign bank has provided the U.S. financial institution with a means of verification that the institution is not a “shell bank.” Proposed regulations interpreting other provisions of the Patriot Act continue to be issued.

Under the authority of the Patriot Act, the Secretary of the Treasury adopted rules on September 26, 2002 increasing the cooperation and information sharing among financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Under those rules, a financial institution is required to:

expeditiously search its records to determine whether it maintains or has maintained accounts, or engaged in transactions with individuals or entities, listed in a request submitted by the Financial Crimes Enforcement Network (“FinCEN”);

notify FinCEN if an account or transaction is identified;

designate a contact person to receive information requests;

limit use of information provided by FinCEN to (i) reporting to FinCEN, (ii) determining whether to establish or maintain an account or engage in a transaction, and (iii) assisting the financial institution in complying with the Bank Secrecy Act; and

maintain adequate procedures to protect the security and confidentiality of FinCEN requests.

Under the new rules, a financial institution may also share information regarding individuals, entities, organizations, and countries for purposes of identifying and, as appropriate, reporting activities that it suspects may involve possible terrorist activity or money laundering. Such information-sharing is protected under a safe harbor if the financial institution: (i) notifies FinCEN of its intention to share information, even when sharing with an affiliated financial institution; (ii) takes reasonable steps to verify that, prior to sharing, the financial institution or association of financial institutions with which it intends to share information has submitted a notice to FinCEN; (iii) limits the use of shared information to identifying and reporting on money laundering or terrorist activities, determining whether to establish or maintain an account or engage in a transaction, or assisting it in complying with the Bank Security Act; and (iv) maintains adequate procedures to protect the security and confidentiality of the information. Any financial institution complying with these rules will not be deemed to have violated the privacy requirements discussed above.

The Secretary of the Treasury also adopted a rule on September 26, 2002 intended to prevent money laundering and terrorist financing through correspondent accounts maintained by U.S. financial institutions on behalf of foreign banks. Under the rule, financial institutions: (i) are prohibited from providing correspondent accounts to foreign shell banks; (ii) are required to obtain a certification from foreign banks for which they maintain a correspondent account stating the foreign bank is not a shell bank and that it will not permit a foreign shell bank to have access to the U.S. account; (iii) must maintain records identifying the owner of the foreign bank for which they may maintain a correspondent account and its agent in the United States designated to accept services of legal process; and (iv) must terminate correspondent accounts of foreign banks that fail to comply with or fail to contest a lawful request of the Secretary of the Treasury or the Attorney General of the United States, after being notified by the Secretary or Attorney General.

Sarbanes-Oxley Act of 2002

In July 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which implemented legislative reforms intended to address corporate and accounting fraud. The Sarbanes-Oxley Act contains reforms of various business practices and numerous aspects of corporate governance. Most of these requirements have been implemented pursuant to regulations issued by the SEC. The following is a summary of certain key provisions of the Sarbanes-Oxley Act.

In addition to the establishment of a new accounting oversight board that enforces auditing, quality control and independence standards and is funded by fees from all registered public accounting firms and publicly traded companies, the Sarbanes-Oxley Act places restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. Any non-audit services being provided to a public company audit client requires pre-approval by the client’s audit committee. Also, the Sarbanes-Oxley Act makes certain changes to the requirements for partner rotation after a period of time. The Sarbanes-Oxley Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. Furthermore, counsel is required to report evidence of a material violation of securities laws or a breach of fiduciary duties to the company’s chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.

Under this law, longer prison terms apply to corporate executives who violate federal securities laws; the period during which certain types of suits can be brought against a company or its officers is extended and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives (other than loans by financial institutions permitted by federal rules or regulations) are restricted. In addition, the legislation accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers required to report changes in ownership in a company’s securities must now report any such change within two business days of the change.

The Sarbanes-Oxley Act increases responsibilities and codifies certain requirements relating to audit committees of public companies and how they interact with the company’s registered public accounting firm. Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the company. In addition, companies are required to disclose whether at least one member of the committee is a “financial expert” (as such term is defined by the SEC) and if not, why not. A company’s registered public accounting firm is prohibited from performing statutorily mandated audit services for a company if the company’s chief executive officer, chief financial officer, controller, chief accounting officer or any person serving in equivalent positions had been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The Sarbanes-Oxley Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statements materially misleading.

The Sarbanes-Oxley Act also has provisions relating to inclusion of certain internal control reports and assessments by management in the annual report to stockholders. Commencing with this annual report, EuroBancshares is required to include an internal control report containing management’s assertions regarding the effectiveness of its internal control structure and procedures over financial reporting. The internal control report must include statements regarding management’s responsibility for establishing and maintaining adequate internal control over financial reporting; management’s assessment as to the effectiveness of the company’s internal control over financial reporting, based on management’s evaluation of it as of year-end; and of the framework used as criteria for evaluating the effectiveness of the company’s internal control over financial reporting. The law also requires the company’s registered public accounting firm that issues the audit report to attest to, and report on, management’s assessment of the company’s internal controls over financial reporting in accordance with standards for attestation engagements issued or adopted by the Public Company Accounting Oversight Board.

Eurobank

Eurobank is subject to extensive regulation and examination by the Commissioner of Financial Institutions of Puerto Rico and the FDIC, which insures its deposits to the maximum extent permitted by law, and is subject to certain Federal Reserve Board regulations of transactions with its affiliates. The federal and Puerto Rico laws and regulations which are applicable to Eurobank, regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. In addition to the impact of such regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.

Transactions with Affiliates

There are various statutory and regulatory limitations, including those set forth in sections 23A and 23B of the Federal Reserve Act and Regulation W, governing the extent to which Eurobank will be able to purchase assets from or securities of or otherwise finance or transfer funds to EuroBancshares or its nonbanking subsidiaries. Among other restrictions, such transfers by Eurobank to EuroBancshares or any of its nonbanking subsidiaries generally will be limited to 10.0% of Eurobank’s capital and surplus and, with respect to EuroBancshares and all such nonbanking subsidiaries, to an aggregate of 20.0% of Eurobank’s subsidiary’s capital and surplus. Furthermore, loans and extensions of credit are required to be secured in specified amounts and are required to be on terms and conditions consistent with safe and sound banking practices.

In addition, any transaction by a bank with an affiliate and any sale of assets or provision of services to an affiliate generally must be on terms that are substantially the same, or at least as favorable, to the bank as those prevailing at the time for comparable transactions with nonaffiliated companies.

Loans to Insiders

Sections 22(g) and (h) of the Federal Reserve Act and its implementing regulation, Regulation O, place restrictions on loans by a bank to executive officers, directors, and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a bank and certain of their related interests, or insiders, and insiders of affiliates, may not exceed, together with all other outstanding loans to such person and related interests, the bank’s loans-to-one-borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) also requires that loans to insiders and to insiders of affiliates be made on terms substantially the same as offered in comparable transactions to other persons, unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the bank and (ii) does not give preference to insiders over other employees of the bank. Section 22(h) also requires prior Board of Directors approval for certain loans, and the aggregate amount of extensions of credit by a bank to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.

Dividends

The ability of Eurobank to pay dividends on its common stock is restricted by the Puerto Rico Banking Act of 1933, as amended, the FDIA and FDIC regulations. In general terms, the Puerto Rico Banking Act provides that when the expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be charged against the undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If there is no sufficient reserve fund to cover such balance in whole or in part, the outstanding amount shall be charged against the bank’s capital account. The Puerto Rico Banking Act provides that until said capital has been restored to its original amount and the reserve fund to 20% of the original capital, the bank may not declare any dividends. In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a bank.

The payment of dividends by Eurobank may also be affected by other regulatory requirements and policies, such as maintenance of adequate capital. If, in the opinion of the regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. The Federal Reserve Board has issued a policy statement that provides that insured banks and bank holding companies should generally pay dividends only out of operating earnings for the current and preceding two years. In addition, all insured depository institutions are subject to the capital-based limitations required by the Federal Deposit Insurance Corporation Improvement Act of 1991.

FDIC Capital Requirements

Eurobank is also subject to certain restrictions on the payment of dividends as a result of the requirement that it maintain adequate levels of capital in accordance with guidelines promulgated from time to time by applicable regulators.

The FDIC and the Commissioner of Financial Institutions of Puerto Rico monitor the capital adequacy of Eurobank by using a combination of risk-based guidelines and leverage ratios. The agencies consider the bank’s capital levels when taking action on various types of applications and when conducting supervisory activities related to the safety and soundness of individual banks and the banking system.

Under the risk-based capital guidelines, a risk weight factor of 0% to 100% is assigned to each category of assets based generally on the perceived credit risk of the asset class. The risk weights are then multiplied by the corresponding asset balances to determine a “risk-weighted” asset base. At least half of the risk-based capital must consist of core (Tier 1) capital, which is comprised of:

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common stockholders’ equity (includes common stock and any related surplus, undivided profits, disclosed capital reserves that represent a segregation of undivided profits, and foreign currency translation adjustments; less net unrealized losses on marketable equity securities);

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certain noncumulative perpetual preferred stock and related surplus; and

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minority interests in the equity capital accounts of consolidated subsidiaries, and excludes goodwill and various intangible assets.

The remainder, supplementary (Tier 2) capital, may consist of:

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allowance for loan and lease losses, up to a maximum of 1.25% of risk-weighted assets;

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certain perpetual preferred stock and related surplus;

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hybrid capital instruments;

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perpetual debt;

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mandatory convertible debt securities;

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term subordinated debt;

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intermediate-term preferred stock; and

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certain unrealized holding gains on equity securities.

“Total risk-based capital” is determined by combining core capital and supplementary capital.

Under the regulatory capital guidelines, Eurobank must maintain a total risk-based capital to risk-weighted assets ratio of at least 8.0%, a Tier 1 capital to risk-weighted assets ratio of at least 4.0%, and a Tier 1 capital to adjusted total assets ratio of at least 4.0% (3.0% for banks receiving the highest examination rating) to be considered adequately capitalized. See discussion in the section below captioned “The FDIC Improvement Act.”

FIRREA

The Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA, includes various provisions that affect or may affect Eurobank. Among other matters, FIRREA generally permits bank holding companies to acquire healthy thrifts as well as failed or failing thrifts. FIRREA removed certain cross-marketing prohibitions previously applicable to thrift and bank subsidiaries of a common holding company. Furthermore, a multi-bank holding company may now be required to indemnify the federal deposit insurance fund against losses it incurs with respect to such company’s affiliated banks, which in effect makes a bank holding company’s equity investments in healthy bank subsidiaries available to the FDIC to assist such company’s failing or failed bank subsidiaries.

In addition, pursuant to FIRREA, any depository institution that has been chartered less than two years, is not in compliance with the minimum capital requirements of its primary federal banking regulator, or is otherwise in a troubled condition must notify its primary federal banking regulator of the proposed addition of any person to the Board of Directors or the employment of any person as a senior executive officer of the institution at least 30 days before such addition or employment becomes effective. During such 30-day period, the applicable federal banking regulatory agency may disapprove of the addition of employment of such director or officer. Eurobank is not subject to any such requirements.

FIRREA also expanded and increased civil and criminal penalties available for use by the appropriate regulatory agency against certain “institution-affiliated parties” primarily including (i) management, employees and agents of a financial institution, as well as (ii) independent contractors such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs and who caused or are likely to cause more than minimum financial loss to or a significant adverse affect on the institution, who knowingly or recklessly violate a law or regulation, breach a fiduciary duty or engage in unsafe or unsound practices. Such practices can include the failure of an institution to timely file required reports or the submission of inaccurate reports. Furthermore, FIRREA authorizes the appropriate banking agency to issue cease and desist orders that may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets or take other action as determined by the ordering agency to be appropriate.

The FDIC Improvement Act

The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, made a number of reforms addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions, and improvement of accounting standards. This statute also limited deposit insurance coverage, implemented changes in consumer protection laws and provided for least-cost resolution and prompt regulatory action with regard to troubled institutions.

FDICIA requires every bank with total assets in excess of $500 million to have an annual independent audit made of the bank’s financial statements by a certified public accountant to verify that the financial statements of the bank are presented in accordance with generally accepted accounting principles and comply with such other disclosure requirements as prescribed by the FDIC.

FDICIA also places certain restrictions on activities of banks depending on their level of capital. FDICIA divides banks into five different categories, depending on their level of capital. Under regulations adopted by the FDIC, a bank is deemed to be “well-capitalized” if it has a total Risk-Based Capital Ratio of 10.0% or more, a Tier 1 Capital Ratio of 6.0% or more and a Leverage Ratio of 5.0% or more, and the bank is not subject to an order or capital directive to meet and maintain a certain capital level. Under such regulations, a bank is deemed to be “adequately capitalized” if it has a total Risk-Based Capital Ratio of 8.0% or more, a Tier 1 Capital Ratio of 4.0% or more and a Leverage Ratio of 4.0% or more (unless it receives the highest composite rating at its most recent examination and is not experiencing or anticipating significant growth, in which instance it must maintain a Leverage Ratio of 3.0% or more). Under such regulations, a bank is deemed to be “undercapitalized” if it has a total Risk-Based Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less than 4.0% or a Leverage Ratio of less than 4.0%. Under such regulations, a bank is deemed to be “significantly undercapitalized” if it has a Risk-Based Capital Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than 3.0% and a Leverage Ratio of less than 3.0%. Under such regulations, a bank is deemed to be “critically undercapitalized” if it has a Leverage Ratio of less than or equal to 2.0%. In addition, the FDIC has the ability to downgrade a bank’s classification (but not to “critically undercapitalized”) based on other considerations even if the bank meets the capital guidelines. According to these guidelines, Eurobank was classified as “well-capitalized” as of December 31, 2006.

In addition, if a state non-member bank is classified as undercapitalized, the bank is required to submit a capital restoration plan to the FDIC. Pursuant to FDICIA, an undercapitalized bank is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the acceptance by the FDIC of a capital restoration plan for the bank.

Furthermore, if a state non-member bank is classified as undercapitalized, the FDIC may take certain actions to correct the capital position of the bank; if a bank is classified as significantly undercapitalized or critically undercapitalized, the FDIC would be required to take one or more prompt corrective actions. These actions would include, among other things, requiring: sales of new securities to bolster capital; improvements in management; limits on interest rates paid; prohibitions on transactions with affiliates; termination of certain risky activities and restrictions on compensation paid to executive officers. If a bank is classified as critically undercapitalized, FDICIA requires the bank to be placed into conservatorship or receivership within ninety days, unless the FDIC determines that other action would better achieve the purposes of FDICIA regarding prompt corrective action with respect to undercapitalized banks.

The capital classification of a bank affects the frequency of examinations of the bank and impacts the ability of the bank to engage in certain activities and affects the deposit insurance premiums paid by such bank. Under FDICIA, the FDIC is required to conduct a full-scope, on-site examination of every bank at least once every twelve months. An exception to this rule is made, however, that provides that banks (i) with assets of less than $100 million, (ii) are categorized as “well-capitalized,” (iii) were found to be well managed and its composite rating was outstanding and (iv) has not been subject to a change in control during the last twelve months, need only be examined by the FDIC once every eighteen months.

Brokered Deposits

Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending on their capital classification. “Well-capitalized” banks are permitted to accept brokered deposits, but all banks that are not well-capitalized are not permitted to accept such deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank. Deposits obtained from financial intermediaries, so-called “brokered deposits,” represented approximately 64.35% of Eurobank’s total deposits as of December 31, 2006. As previously mentioned, Eurobank is currently well-capitalized and therefore is not subject to any limitations with respect to its brokered deposits.

Federal Limitations on Activities and Investments

The equity investments and activities as a principal of FDIC-insured state-chartered banks such as Eurobank are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank.

FDIC Deposit Insurance Assessments

In addition, under FDICIA, the Federal Deposit Insurance Corporation, or FDIC, is authorized to assess insurance premiums on a bank’s deposits at a variable rate depending on the probability that the deposit insurance fund will incur a loss with respect to the bank. (Under prior law, the deposit insurance assessment was a flat rate, regardless of the likelihood of loss.) In this regard, the FDIC has issued regulations that provide for a transitional risk-based deposit assessment that determines the deposit insurance assessment rates on the basis of the bank’s capital classification and supervisory evaluations. Each of these categories has three subcategories, resulting in nine assessment risk classifications. The three subcategories with respect to capital are “well-capitalized,” “adequately capitalized” and “less than adequately capitalized” (which would include “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized” banks). The three subcategories with respect to supervisory concerns are “healthy,” “supervisory concern” and “substantial supervisory concern.” A bank is deemed “healthy” if it is financially sound with only a few minor weaknesses. A bank is deemed subject to “supervisory concern” if it has weaknesses that, if not corrected, could result in significant deterioration of the bank and increased risk to the Bank Insurance Fund, or BIF. A bank is deemed subject to “substantial supervisory concern” if it poses a substantial probability of loss to the BIF.

On June 30, 1996, the Deposit Insurance Funds Act of 1996, or DIFA, was enacted and signed into law as part of the Economic Growth and Regulatory Paperwork Reduction Act of 1996. DIFA established the framework for the eventual merger of the BIF and the Savings Association Insurance Fund, or SAIF, into a single Deposit Insurance Fund. It repealed the statutory minimum premium and, under implementing FDIC regulations promulgated in 1997, premiums assessed by both the BIF and the SAIF are to be assessed using the matrix described above at a rates between 0 cents and 27 cents per $100 of deposits.

DIFA also separated, effective January 1, 1997, the Financing Corporation, or FICO, assessment to service the interest on its bond obligations from the BIF and SAIF assessments. The amount assessed on individual institutions by the FICO would be in addition to the amount, if any, paid for deposit insurance according to the FDIC’s risk-related assessment rate schedules. The FICO rate could be adjusted quarterly to reflect changes in assessment bases for the BIF and the SAIF. Accordingly, Eurobank could be subject to two separate premiums (for servicing interest on bond obligations and for the BIF/SAIF insurance), if such premiums were assessed. The FDIC acts as collection agent for the FICO.

In addition, DIFA authorized the FICO to asses both BIF and SAIF insured deposits, and required the BIF rate to equal one-fifth the SAIF rate through year-end 1999, or until insurance funds were merged, whichever occurred first. On March 31, 2006, the BIF and SAIF were merged into a newly created Deposit Insurance Fund (DIF).

In October 2006, as required by the Federal Deposit Insurance Reform Act of 2005, the FDIC issued a final rule to implement the one-time deposit insurance assessment credit. Beginning in 2007, the FDIC will apply an eligible institution's assessment credit (less any portion of the credit transferred to another institution) against the institution's future assessments to the maximum extent allowed by the statute. The one-time assessment credit cannot be applied to reduce FICO payments. The one time assessment credit for Eurobank, our wholly owned banking subsidiary, amounted to approximately $670,000 and will be used to reduce the FDIC’s new insurance premium assessment during 2007, as further explained below.

In November 2006, the FDIC adopted a final rule amending its assessment regulations to improve and modernize its operational systems for deposit insurance assessments. Beginning in 2007, the FDIC will categorize each insured institution into one of four risk categories following a two-step process, which will evaluate first the capital ratios of the insured institution and then, other relevant information. The FDIC’s new insurance premium rates will range between 5 and 43 cents per $100 in accessible deposits.

The FDIC may terminate the deposit insurance of any insured depository institution, including Eurobank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of Eurobank’s deposit insurance.

Check Clearing for the 21^st Century Act

On October 28, 2003, President Bush signed into law the Check Clearing for the 21^st Century Act, also known as Check 21. The new law, which was not effective until October 28, 2004, gives “substitute checks,” such as a digital image of a check and copies made from that image, the same legal standing as the original paper check. Some of the major provisions include:

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allowing check truncation without making it mandatory;

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demanding that every financial institution communicate to accountholders in writing a description of its substitute check processing program and their rights under the law;

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legalizing substitutions for and replacements of paper checks without agreement from consumers;

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retaining in place the previously mandated electronic collection and return of checks between financial institutions only when individual agreements are in place;

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requiring that when accountholders request verification, financial institutions produce the original check (or a copy that accurately represents the original) and demonstrate that the account debit was accurate and valid; and

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requiring recrediting of funds to an individual’s account on the next business day after a consumer proves that the financial institution has erred.

This new legislation will likely affect bank capital spending as many financial institutions assess whether technological or operational changes are necessary to stay competitive and take advantage of the new opportunities presented by Check 21.

Community Reinvestment Act

Under the Community Reinvestment Act, or CRA, as implemented by the Congress in 1977, a financial institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires federal examiners, in connection with the examination of a financial institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. EuroBancshares has a Compliance Committee, which oversees the planning of products, and services offered to the community, especially those aimed to serve low and moderate income communities. The FDIC rated Eurobank as “satisfactory” in meeting community credit needs under the CRA at its most recent examination for CRA performance.

Consumer Laws and Regulations

In addition to the laws and regulations discussed herein, Eurobank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. Eurobank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.

Interstate Branching

Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 amended the FDIA and certain other statutes to permit state and national banks with different home states to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank had passed legislation prior to May 31, 1997 expressly prohibiting interstate mergers. Under the Riegle-Neal Act amendments, once a state or national bank has established branches in a state, that bank may establish and acquire additional branches at any location in the state at which any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. If a state opts out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo.

For purposes of the Riegle-Neal Act’s amendments to the FDIA, Eurobank is treated as a state bank and is subject to the same restrictions on interstate branching as other state banks. However, for purposes of the International Banking Act of 1978, Eurobank is considered to be a foreign bank and may branch interstate by merger or de novo to the same extent as a domestic bank in Eurobank’s home state. It is not yet possible to determine how these statutes will be harmonized, with respect either to which federal agency will approve interstate transactions or to which “home state” determination rules will apply.

Eurobank currently does not have any branches outside Puerto Rico.

Federal Home Loan Bank System

The FHLB system, of which Eurobank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board. The FHLBs serve as reserve or credit facilities for member institutions within their assigned regions. They are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. They make loans (i.e., advances) to members in accordance with policies and procedures established by the FHLB and the boards of directors of each regional FHLB.

As a system member, Eurobank is entitled to borrow from the FHLB of New York, or FHLB-NY, and is required to own capital stock in the FHLB-NY in an amount equal to the greater of 1% of the aggregate of the unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each fiscal year, which for this purpose is deemed to be not less than 30% of assets or 5% of the total amount of advances by the FHLB-NY to Eurobank. Eurobank is in compliance with the stock ownership rules described above with respect to such advances, commitments and letters of credit and home mortgage loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB-NY to Eurobank are secured by a portion of its mortgage loan portfolio, certain other investments and the capital stock of the FHLB-NY held by Eurobank.

Mortgage Banking Operations

Eurobank is subject to the rules and regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts and, with respect to VA loans, fix maximum interest rates. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other things, prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Eurobank is also subject to regulation by the Commissioner of Financial Institutions of Puerto Rico, with respect to, among other things, the establishment of maximum origination fees on certain types of mortgage loan products.

Puerto Rico Regulation

As a commercial bank organized under the laws of Puerto Rico, Eurobank is subject to the supervision, examination and regulation of the Commissioner of Financial Institutions of Puerto Rico, pursuant to the Puerto Rico Banking Act of 1933, as amended. Certain of those activities are described in this “Supervision and Regulation” section above.

Puerto Rico Banking Law

Section 12 of the Puerto Rico Banking Law requires the prior approval of the Commissioner of Financial Institutions of Puerto Rico with respect to a transfer of capital stock of a bank that results in a change of control of the bank. Under Section 12, a change of control is presumed to occur if a person or group of persons acting in concert, directly or indirectly, acquires more than 5.0% of the outstanding voting capital stock of the bank. The Commissioner of Financial Institutions of Puerto Rico has interpreted the restrictions of Section 12 as applying to acquisitions of voting securities of entities controlling a bank, such as a bank holding company. Under the Puerto Rico Banking Law, the determination of the Commissioner of Financial Institutions of Puerto Rico whether to approve a change of control filing is final and non- appealable.

Section 16 of the Puerto Rico Banking Law requires every bank to maintain a legal reserve which shall not be less than 20% of its demand liabilities, except government deposits (federal, state and municipal) which are secured by actual collateral. The reserve is required to be composed of any of the following securities or combination thereof: (1) legal tender of the United States; (2) checks on banks or trust companies located in any part of Puerto Rico, to be presented for collection during the day following that on which they are received; (3) money deposited in other banks or depository institutions, subject to immediate collection; (4) federal funds sold to any Federal Reserve Bank and securities purchased under agreement to resell executed by the bank with such funds that are subject to be repaid to the bank on or before the close of the next business day and (5) any other asset that the Commissioner of Financial Institutions of Puerto Rico determines from time to time.

Section 17 of the Puerto Rico Banking Law permits Puerto Rico commercial banks to make unsecured loans to any one person, firm, partnership or corporation, up to an aggregate amount of 15.0% the sum of (i) paid-in capital; (ii) reserve fund of the commercial bank; (iii) 50.0% of the commercial bank’s retained earnings and (iv) any other components that the Commissioner of Financial Institutions of Puerto Rico may determine from time to time. As of December 31, 2006, the legal lending limit for Eurobank under this provision was approximately $14.6 million. If such loans are secured by collateral worth at least 25.0% more than the amount of the loan, the aggregate maximum amount may reach one-third of the sum of Eurobank’s paid-in capital, reserve fund, 50% of retained earnings and any other components that the Commissioner of Financial Institutions of Puerto Rico may determine from time to time. As of December 31, 2006, the legal lending limit for Eurobank under this provision was approximately $32.3 million. There are no restrictions under Section 17 of the Puerto Rico Banking Law on the amount of loans which are fully secured by bonds, securities and other evidences of indebtedness of the Government of the United States, of the Commonwealth of Puerto Rico, or by bonds, not in default, of authorities, instrumentalities or dependencies of the Commonwealth of Puerto Rico or its municipalities.

Section 17 of the Puerto Rico Banking Law also prohibits Puerto Rico commercial banks from making loans secured by their own stock and from purchasing their own stock, unless such purchase is necessary to prevent losses because of a debt previously contracted in good faith. The stock so purchased by the Puerto Rico commercial bank must be sold by the bank in a public or private sale within one year from the date of purchase.

Section 27 of the Puerto Rico Banking Law also requires that at least 10.0% of the yearly net income of a Puerto Rico commercial bank be credited to a reserve fund until the amount deposited to the credit of the reserve fund is equal to 100.0% of total paid-in capital (common and preferred) of the commercial bank. As of December 31, 2006, Eurobank had $7.6 million in its reserve fund.

Section 27 of the Puerto Rico Banking Law also provides that when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividends shall be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital of the bank.

Section 14 of the Puerto Rico Banking Law authorizes Eurobank to conduct certain financial and related activities directly or through subsidiaries, including lease financing of personal property, operating small loans companies and mortgage loans activities. In 2004, Eurobank organized an IBE subsidiary, EBS Overseas.

Puerto Rico Usury Law

The rate of interest that Eurobank may charge on real estate and other types of loans to individuals in Puerto Rico is subject to Puerto Rico’s usury law. That law is administered by the Finance Board, which consists of the Secretaries of the Treasury, Commerce and Consumer Affairs Departments, the Commissioner of Financial Institutions of Puerto Rico, the President of the Planning Board, the President of the Government Development Bank for Puerto Rico, the Secretary of Economic Development and Commerce Department and a representative of the private financial industry. The Finance Board promulgates regulations which specify maximum rates on various types of loans to individuals and revises those regulations periodically as general interest rates change.

Among the most important regulations enforced on interest rates are Regulations 5722, 5782 and 6070. Pursuant to Regulation 5782, there is no limitation on interest rates that may be charged on small personal loans. The same rule applies to retail installment sale contracts and credit card loans as provided by Regulation 6070. The rates on these loans are established as a result of the market and competition.

Interest rates that may be charged on personal loans, personal lines of credit, cash advances on credit cards, commercial loans or commercial lines of credit and residential and commercial mortgage loans are not restricted by Regulation 5722. The rates on these loans are established as a result of the market and competition. Regulation 5722 does establish restrictions on prepayment penalties and late charges for all loans, except commercial loans.

International Banking Center Regulatory Act

In 2004, we transferred all of the assets and liabilities of Eurobank International, an IBE that operated as a division of Eurobank, to an IBE subsidiary of Eurobank, EBS Overseas, Inc. We also have an IBE that operates as a division of Eurobank under the name EBS International Bank. This IBE was acquired under the name of BT International in connection with the acquisition of BankTrust and changed to EBS International Bank on September 27, 2005. We have continued to operate EBS International as a division of Eurobank and do not have immediate plans to transfer its assets to our subsidiary, EBS Overseas, Inc.

The business and operations of our IBEs are subject to supervision and regulation by the Commissioner of Financial Institutions of Puerto Rico. Under the IBE Act, no sale, encumbrance, assignment, merger, exchange or transfer of shares, interest or participation in the capital of an IBE may be initiated without the prior approval of the Commissioner of Financial Institutions of Puerto Rico, if by such transaction a person would acquire, directly or indirectly, control of 10% or more of any class of stock, interest or participation in the capital of the IBE. The IBE Act and the regulations issued thereunder by the Commissioner of Financial Institutions of Puerto Rico limit the business activities that may be carried out by an IBE. Such activities are limited in part to persons and assets located outside of Puerto Rico. The IBE Act provides further that every IBE must have not less than $300,000 of unencumbered assets or acceptable financial guarantees.

Pursuant to the IBE Act and the IBE regulations, our IBEs must maintain books and records of all their transactions in the ordinary course of business. The IBEs are also required to submit to the Commissioner of Financial Institutions of Puerto Rico quarterly and annual reports of their financial condition and results of operations, including annual audited financial statements.

The IBE Act empowers the Commissioner of Financial Institutions of Puerto Rico to revoke or suspend, after notice and hearing, a license issued thereunder if, among other things, the IBE fails to comply with the IBE Act, the IBE regulations or the terms of its license, or if the Commissioner of Financial Institutions of Puerto Rico finds that the business or affairs of the IBE are conducted in a manner that is not consistent with the public interest.

IBEs generally are exempt from taxation under United States federal law and Puerto Rico law. Recently, the Legislature of Puerto Rico and the Governor of Puerto Rico approved a law amending the IBE Act. This law imposes income taxes at normal statutory rates on each IBE that operates as a unit of a bank, if the IBE’s net income generated after December 31, 2003 exceeds 40% of the bank’s net income in the taxable year commenced on July 1, 2003, 30% of the bank’s net income in the taxable year commencing on July 1, 2004, and 20% of the bank’s net income in the taxable year commencing on July 1, 2005, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a bank. Thus, only EBS International Bank, which operates as a division of Eurobank rather than a subsidiary, is impacted by the new law. However, we cannot give any assurance that the IBE Act will not be modified in the future in a manner to reduce the tax benefits available to EBS Overseas. A reduction of such tax benefits may reduce our earnings.

EuroSeguros, Inc.

EuroSeguros is a wholly-owned subsidiary of EuroBancshares and is registered as a corporate agent and general agency with the Office of the Commissioner of Insurance of the Commonwealth of Puerto Rico. EuroSeguros is subject to regulation by the Commissioner of Insurance relating to, among other things, licensing of employees, sales practices, charging of commissions and obligations to customers.

Future Legislation and Economic Policy

Management of EuroBancshares and Eurobank cannot predict what other legislation or economic and monetary policies of the various regulatory authorities might be enacted or adopted or what other regulations might be adopted or the effects thereof. Future legislation and policies and the effects thereof might have a significant influence on overall growth and distribution of loans, investments and deposits and affect interest rates charged on loans or paid from time and savings deposits. Such legislation and policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

Recent Developments

On March 13, 2007, Eurobank, the wholly-owned banking subsidiary of EuroBancshares, Inc., and the Board of Directors of Eurobank executed and entered into, without admitting or denying the allegations, a Stipulation and Consent Order (the “Stipulation”) with the Federal Deposit Insurance Corp. (the “FDIC”) agreeing to the issuance of a Cease and Desist Order (the “Order”). The Order, which was issued by the FDIC on March 15, 2007, was based upon the findings of the most recent joint examination of the Bank by the FDIC and the Commonwealth of Puerto Rico Office of the Commissioner of Financial Institutions (the “Commonwealth”). There were no fines or civil money penalties imposed on the Bank in connection with the examination findings. The joint examination was concluded in October 2006 and the Bank signed the Stipulation on March 13, 2007.

The findings set out in the joint Report of Examination concluded that the Bank Secrecy Act/Anti-Money Laundering Program (“BSA Program”) at the Bank was deficient based upon allegations of inadequate training for bank personnel, an inadequate system of independent testing for BSA compliance, failure to comply with certain recordkeeping requirements, and failure to comply completely with the rules of the Office of Foreign Assets Control (“OFAC”). The Order contains several Articles, each addressing a separate issue concerning the BSA Program and its operation. The Order lays out the specific steps the Bank needs to take in order to bring the BSA Program back into compliance with the laws and regulations, including, among others, requirements that the Bank: (i) perform a new risk assessment of the Bank’s operations; (ii) adopt and implement new procedures for customer due diligence; (iii) amend its policies and procedures for identifying and monitoring high-risk accounts; (iv) amend its procedures for monitoring currency transactions and wire transfers; (v) amend its policies and procedures for detecting and reporting suspicious activity; (vi) strengthen its Customer Identification Program procedures; and (vii) ensure that it has the necessary staffing, properly trained, to manage the BSA program. Each of these requirements and the various deadlines for remediation are described in more detail in the Order.

In response to the requirements of the Order, management and the Board of Directors of the Bank are in the process of developing a corrective action plan that is designed to remediate the deficiencies alleged in the Order. As part of this process, the Bank has engaged an independent, third party consultant to assist with the development and implementation of its corrective action plan.

ITEM 1A. Risk Factors.

Risks Relating to Our Business

Our decisions regarding credit risk could be inaccurate and our allowance for loan and lease losses may be inadequate, which could materially and adversely affect our business, financial condition, results of operations, cash flows and/or future prospects.

Our loan and lease portfolio and investments in marketable securities subject us to credit risk. Inherent risks in lending also include fluctuations in collateral values and economic downturns. Making loans and leases is an essential element of our business, and there is a risk that our loans and leases will not be repaid.

We attempt to maintain an appropriate allowance for loan and lease losses to provide for losses inherent in our loan and lease portfolio. As of December 31, 2006, our allowance for loan and lease losses totaled $18.9 million, which represents approximately 1.08% of our total loans and leases. There is no precise method of predicting loan and lease losses, and therefore, we always face the risk that charge-offs in future periods will exceed our allowance for loan and lease losses and that we would need to make additional provisions to our allowance for loan and lease losses.

Our methodology for the determination of the adequacy of the allowance for loan and lease losses for impaired loans is based on classifications of loans and leases into various categories and the application of SFAS No. 114, as amended. For non-classified loans, the estimated allowance is based on historical loss experiences as adjusted for changes in trends and conditions on an annual basis. In addition, on a quarterly basis, the estimated allowance for non-classified loans is adjusted for the probable effect that current environmental factors could have on the historical loss factors currently in use. While our allowance for loan and lease losses is established in different portfolio components, we maintain an allowance that we believe is sufficient to absorb all credit losses inherent in our portfolio.

In addition, the FDIC as well as the Commissioner of Financial Institutions of Puerto Rico review our allowance for loan and lease losses and may require us to establish additional reserves. Additions to the allowance for loan and lease losses will result in a decrease in our net earnings and capital and could hinder our ability to grow our assets.

We have a concentration of exposure to a number of individual borrowers and a significant loss on any one of these credits could materially affect our financial condition and results of operations.

Under applicable law, there are quantitative limitations on the amount of loans we can make to one borrower or a group of related borrowers. As of December 31, 2006, our legal lending limit was approximately $14.6 million in the unsecured category, and approximately $32.3 million in the secured category. As of December 31, 2006, we had 14 individual borrowers with a loan principal balance of more than $10.0 million per borrower and another 25 individual borrowers with a loan principal balance of more than $5.0 million per borrower. Given the size of these current outstanding loans relative to our capital levels and earnings, a significant loss on any one of these credits could materially and adversely affect our business, financial condition, results of operations, cash flows and/or future prospects.

A significant portion of our leases are secured by automobiles, and the loss of purchasers for our leases or a downturn in automobile purchases could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects.

A significant portion of our leases are secured by automobiles. As of December 31, 2006, the total amount of automobile leases was $432.6 million or 17.3% of our total assets. We sometimes sell our leases to other financial institutions in order to manage our lease financing concentration. The loss of purchasers of our leases could cause us to reduce our lease originations, reducing our net income. Alternatively, we may increase the portion of the leases that we retain for our portfolio with the result that our exposure to automobile leases will increase. In addition, a downturn in automobile purchases could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects.

We rely heavily on short-term 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.

We have frequently utilized as a source of funds certificates of deposit obtained through deposit brokers that solicit funds from their customers for deposit with us, or brokered deposits. Brokered 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 our net interest spread and net interest margin. In addition, brokered deposit funding sources may be more sensitive to significant changes in our financial condition. As of December 31, 2006, brokered deposits amounted to $1.2 billion, or approximately 64.35% of our total deposits, compared to brokered deposits in the amount of $967.2 million, or approximately 55.77% of our total deposits for the same period in 2005. Approximately $841.7 million of these brokered deposits, or approximately 68.6% of our total brokered deposits, mature within one year. Our ability to continue to acquire brokered deposits is subject to our ability to price these deposits at competitive levels, which may substantially increase our funding costs, and the confidence of the market. In addition, if our capital ratios fall below the levels necessary to be considered “well-capitalized” under current regulatory guidelines, we could be restricted in using brokered deposits as a short-term funding source.

We also have borrowings in the form of repurchase obligations with the Federal Home Loan Bank, or the FHLB, and other broker-dealers. These agreements are collateralized by some of our investment securities. As of December 31, 2006, our repurchase obligations totaled $365.7 million, of which $206.4 million, or approximately 56.4% of the total repurchase obligations, mature within one year. If we are unable to borrow in the form of repurchase obligations, we may be required to seek higher cost funding sources, which could materially and adversely affect our net interest income.

We have experienced rapid growth in recent years, and we may be unable to successfully continue to implement our growth strategy, which may adversely affect our business, financial condition, results of operations, cash flows and/or future prospects.

Our assets have grown rapidly in recent years. With the ultimate goal of increasing net income, we have grown our assets from $1.0 billion as of December 31, 2002 to $2.5 billion as of December 31, 2006. The types of assets on our balance sheet that have experienced the largest categorical increases are commercial loans and lease financings. We have funded this growth, in part, with brokered deposits, FHLB advances, and other borrowings. These types of funds are generally more costly and volatile than traditional retail deposits.

We may not be able to sustain our current growth rate. Throughout our expansion, we have been successful in attracting new customers, expanding new services to existing customers, adding new business lines, engaging in acquisitions and increasing our deposit base. We cannot assure you that we will be able to continue this trend, and it will become more difficult to maintain sustained growth as we increase in size. Our ability to implement our strategy for continued growth depends on our ability to attract and retain customers in a highly competitive market, on the growth of those customers’ businesses, on entering and expanding in lines of business in which we do not have significant past experience or for which we have only recently added personnel with the requisite experience, on our ability to continue to identify new acquisition targets and on our ability to increase our deposit base. Many of these growth prerequisites may be affected by circumstances that are beyond our control. Our inability to meet any of these growth prerequisites could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects.

We rely heavily on our management team and the unexpected loss of key officers could adversely affect our business, financial condition, results of operations, cash flows and/or future prospects.

Our success has been and will continue to be greatly influenced by our ability to retain the services of existing senior management and, as we expand, to attract and retain qualified additional senior and middle management. Rafael Arrillaga-Torréns, Jr., our President and Chief Executive Officer, has been instrumental in managing our business affairs. Our other senior executive officers have had, and will continue to have, a significant role in the development and management of our business. The loss of the services of Mr. Arrillaga-Torrens, Jr. or any of our other senior executive officers could have an adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects. We have not established a formal management succession plan. Accordingly, should we lose the services of Mr. Arrillaga-Torr’ens, Jr., our Board of Directors may have to search outside of EuroBancshares for a qualified permanent replacement. This search may be prolonged and we cannot assure you that we will be able to locate and hire a qualified replacement. We do not maintain key man life insurance policies on any of our senior executive officers. We currently do not have any employment agreements with our senior executive officers, with the exception of a Severance Payment Agreement with Yadira R. Mercado, our Executive Vice President and Chief Financial Officer. If any of our senior executive officers leaves his or her respective position, our business, financial condition, results of operations, cash flows and/or future prospects may suffer.

The regulatory capital treatment of our junior subordinated debentures and related trust preferred securities is uncertain.

Financial holding companies with more than $500 million in assets, like us, must maintain minimum capital ratios. In particular, we must maintain a leverage ratio of Tier 1 capital to average assets of 5.0%; a Tier 1 risk-based capital ratio of 6.0% of risk-weighted assets; and a total risk-based capital ratio (Tier 1 and Tier 2 capital) of 10.0% of risk-weighted assets to be considered “well-capitalized” for regulatory purposes. The Federal Reserve Board’s current rules regarding the capital treatment of trust preferred securities allow us to count trust preferred securities as Tier 1 capital up to 25.0% of our total Tier 1 capital for regulatory purposes. The remaining portion counts as Tier 2 capital.

On March 1, 2005 the Federal Reserve Board adopted the final rule that allows the continued limited inclusion of trust preferred securities in the Tier 1 capital of bank holding companies (BHCs). Under the final rule, trust preferred securities and other restricted core capital elements would be subject to stricter quantitative limits. The Federal Reserve Board’s final rule limits restricted core capital elements to 25% of all core capital elements, net of goodwill less any associated deferred tax liability. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009, for application of the quantitative limits. As of December 31, 2006, we had $20.0 million in trust preferred securities of which all counted as Tier 1 capital.

A determination by the Federal Reserve Board not to continue to allow the inclusion of our junior subordinated debentures or the trust preferred securities in Tier 1 capital, or otherwise limiting the inclusion of such debentures or securities in Tier 1 capital, could have a material and adverse impact on our regulatory capital levels and cause our capital ratios to fall below the levels necessary to be considered “well-capitalized” under current regulatory guidelines. This could impact our ability to grow our assets. In addition, inadequate regulatory capital levels may result in the imposition of certain operating restrictions on us and Eurobank, including restrictions in using brokered deposits as a short-term funding source.

Eurobank has entered into a Cease and Desist Order with the FDIC regarding its compliance with anti-money laundering laws and the Bank Secrecy Act.

On March 13, 2007, the Board of Directors of Eurobank (the “Bank”), the wholly-owned banking subsidiary of EuroBancshares, consented to the issuance of a Cease and Desist Order by the Federal Deposit Insurance Corporation based upon the findings of the FDIC and the Commonwealth of Puerto Rico Office of the Commissioner of Financial Institutions relating to deficiencies in the Bank’s Bank Secrecy Act/Anti-Money Laundering Compliance Program. Under the terms of the FDIC order, the Bank is required to make specific improvements to its anti-money laundering and BSA compliance activities. While Eurobank believes that it will be able to implement effective compliance procedures necessary to remediate the deficiencies identified in the FDIC order, in the event that Eurobank is unable to satisfy the requirements imposed by the FDIC order, Eurobank may become subject to monetary fines and penalties as well as additional restrictions on its banking operations, which could affect its ability to execute certain aspects of its business plan. Such measures could materially and adversely affect its business, financial condition, results of operations, cash flows and/or future prospects.

Risks Relating to an Investment in Our Common Stock

Our common stock has a short trading history and you may not be able to trade our common stock if an active trading market does not prevail. Additionally, the price of our common stock may fluctuate significantly.

The market price of our common stock may be subject to significant fluctuation in response to numerous factors, including variations in our annual or quarterly financial results or those of our competitors, changes by financial research analysts in their evaluation of our financial results or those of our competitors, or our failure or that of our competitors to meet such estimates, conditions in the economy in general or the banking industry in particular, or unfavorable publicity affecting us or the banking industry. In addition, the equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market prices for many companies’ securities and have been unrelated to the operating performance of those companies. In addition, the sale by any of our large stockholders of a significant portion of that stockholder’s holdings could have a material adverse effect on the market price of our common stock. Further, the registration of any significant amount of additional shares of our common stock will have the immediate effect of increasing the public float of our common stock and any such increase may cause the market price of our common stock to decline or fluctuate significantly. Any such fluctuations may adversely affect the prevailing market price of the common stock.

Our executive officers and directors own a significant number of shares of our common stock, allowing management significant control over our corporate affairs.

As of December 31, 2006, our executive officers and directors beneficially own 49.30% of the outstanding shares of our common stock. Accordingly, these executive officers and directors will be able to control, to a significant extent, the outcome of all matters required to be submitted to our stockholders for approval, including decisions relating to the election of directors, the determination of our day-to-day corporate and management policies and other significant corporate transactions.

Your share ownership may be diluted by the issuance of additional shares of our common stock in the future.

Your share ownership may be diluted by the issuance of additional shares of our common stock in the future. First, we have adopted a stock option plan that provides for the granting of stock options to our directors, executive officers and other employees. As of December 31, 2006, 996,362 shares of our common stock were issuable under options granted in connection with our stock option plan. In addition, 621,200 shares of our common stock are reserved for future issuance to directors, officers and employees under our stock option plan. It is probable that the stock options will be exercised during their respective terms if the fair market value of our common stock exceeds the exercise price of the particular option. If the stock options are exercised, your share ownership will be diluted.

In addition, our amended and restated certificate of incorporation authorizes the issuance of up to 150,000,000 shares of common stock, but does not provide for preemptive rights to the holders of our common stock. Any authorized but unissued shares are available for issuance by our Board of Directors. As a result, if we issue additional shares of common stock to raise additional capital or for other corporate purposes, you may be unable to maintain your pro rata ownership in EuroBancshares.

Future sales of common stock by existing stockholders may have an adverse impact on the market price of our common stock.

Sales of a substantial number of shares of our common stock in the public market, or the perception that large sales could occur, could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity securities. As of December 31, 2006, there were 19,123,821 shares of our common stock outstanding, which are freely tradable without restriction or further registration under the federal securities laws unless purchased by our “affiliates” within the meaning of Rule 144 under the Securities Act.

Holders of our junior subordinated debentures have rights that are senior to those of our stockholders.

On December 19, 2002, we issued $20.6 million of floating rate junior subordinated interest debentures in connection with a $20.0 million trust preferred securities issuance by our subsidiary, Eurobank Statutory Trust II. The 2002 junior subordinated debentures mature in 2032. The purpose of this transaction was to raise additional capital to fund our continued growth.

Payments of the principal and interest on the trust preferred securities of Eurobank Statutory Trust II are conditionally guaranteed by us. The 2002 junior subordinated debentures are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on the 2002 junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock.

Holders of our Series A Preferred Stock have rights senior to those of our common stockholders.

In connection with our acquisition of BankTrust, we issued 430,537 shares in the amount of $10.8 million of our Series A Preferred Stock to certain stockholders of BankTrust in exchange for their shares of the Series A and Series B preferred stock of BankTrust. Our Series A Preferred Stock has rights and preferences that could adversely affect holders of our common stock. For example, we generally are unable to declare and pay dividends on our common stock if there are any accrued and unpaid dividends on our Series A Preferred Stock for the preceding twelve months. Additionally, upon any voluntary or involuntary liquidation, dissolution, or winding up of our business, the holders of our Series A Preferred Stock are entitled to receive distributions out of our available assets before any distributions can be made to holders of our common stock.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws could delay or prevent a takeover of us by a third party.

Our amended and restated certificate of incorporation and amended and restated bylaws could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or could otherwise adversely affect the price of our common stock. For example, our bylaws contain advance notice requirements for nominations for election to our Board of Directors and for proposing matters that stockholders may act on at stockholder meetings. We also have a staggered board of directors, which means that only one-third of our Board of Directors can be replaced by stockholders at any annual meeting.

We currently do not intend to pay dividends on our common stock. In addition, our future ability to pay dividends is subject to restrictions. As a result, capital appreciation, if any, of our common stock will be your sole source of gains for the foreseeable future.

We have not historically and we currently do not intend to pay any dividends on our common stock. In addition, since we are a financial holding company with no significant assets other than Eurobank, we have no material source of income other than dividends that we receive from Eurobank. Therefore, our ability to pay dividends to our stockholders will depend on Eurobank’s ability to pay dividends to us. Moreover, banks and bank holding companies are both subject to federal and Puerto Rico regulatory restrictions on the payment of cash dividends. We intend to retain the earnings of Eurobank to support growth and build equity capital. Accordingly, you should not expect to receive dividends from us in the foreseeable future.

We are also restricted from paying dividends on our common stock if we have deferred payments of the interest on, or an event of default has occurred with respect to, our junior subordinated debentures. In addition, we generally are unable to declare and pay dividends on our common stock if there are any accrued and unpaid dividends on our Series A Preferred Stock for the preceding 12 months.

Your shares are not an insured deposit.

Your investment in our common stock will not be a bank deposit and will not be insured or guaranteed by the FDIC or any other government agency. Your investment will be subject to investment risk, and you must be capable of affording the loss of your entire investment.

Risks Relating to the Economic Environment

The recent economic and government budget crisis in Puerto Rico could adversely affect our business, financial condition, results of operations, cash flows and/or future prospects.

Between May 1 and May 17, 2006, Puerto Rico experienced a partial government shutdown caused by the inability of the Legislature and Governor to agree on a budget, which resulted in an estimated $740 million budget shortfall. This government shutdown forced the closure of approximately 43 public agencies, including Puerto Rico’s public schools, leaving an estimated 90,000 government employees out of work. In response to this economic crisis, several bills were approved by the Puerto Rico legislature to impose additional taxes, some of which were applicable to the banking industry, resulting in an increase in our effective tax rate. For more information relating to additional taxes imposed to the banking industry, see the section captioned “Provision for Income Taxes” in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.

On May 17, 2006, the Puerto Rico Legislature reached an agreement on the retail sales tax rate that was approved in July 2006 and the Government Development Bank for Puerto Rico granted a loan of up to $741 million to the Puerto Rico Department of the Treasury to cover payroll and operational expenses of the Central Government. In addition, the Government Development Bank for Puerto Rico authorized the issuance of $675 million in General Obligation Bonds, of which $173 million benefits the municipalities for public works and infrastructure, and $316 million covers anticipations authorized for these public works. As per the Government Development Bank for Puerto Rico, this millionaire investment will have an immediate effect on the local economy.

In July 4, 2006, the Commonwealth of Puerto Rico enacted legislation authorizing a new sales and use tax of up to 7%. The new sales and use tax is comprised of a 1.5% municipal tax, which some municipalities started collecting after the approval of this law, and a 5.5% central government sales and use tax that became effective as of November 15, 2006. This legislation also abrogated the general excise tax on most imported and manufactured goods.

In addition, the legislation mandates the establishment of measures to limit spending and a controlled budget plan for fiscal 2007. These measures include a significant reduction in debt service due to the 1% of sales tax designated for debt service and restructuring of debt transactions, as well as a millionaire reduction in non-debt service expenses by planned savings in the health and education areas.

On June 30, 2006, the Puerto Rico Planning Board (the “Planning Board”) revised its growth forecasts for fiscal years 2006 and 2007. According to the revision, the Planning Board estimated the Puerto Rico’s Gross National Product (GNP) growth rates for fiscal years 2006 and 2007 in 1.2% and 0.6% in real terms for the base case scenario, respectively, compared to 2.2% and 2.5% the Planning Board forecasted in January 2006 for those same periods.

In July 2006, Standard and Poor’s and Moody’s Investor Services (“Moody’s”) removed the Commonwealth of Puerto Rico general obligations and public debt from their “Watchlists.” As per the Government Development Bank for Puerto Rico, their determination reflects the recent passage of legislation authorizing a retail sales tax and mandating spending controls, as well as a balanced budget for the current fiscal year.

Although these actions could represent an affirmative attempt to address the government’s prolonged trend of budget and borrowings deficits, certain sectors believe the revenue yield of the sales tax could be lower than previously expected because of tax exemptions included in the law. Also, these sectors believe the government's plan to reduce expenditures heavily depends on debt restructuring and health and education cuts, which could be in an early phase of development.

An economic downturn, such as this, could contribute to the deterioration of the quality of our loan and corporate bond portfolios. During an economic downturn, affected borrowers may be less likely to repay interest and principal on their loans or bonds as scheduled. Moreover, the value of real estate or other collateral that secures the loans and bonds could be adversely affected by an economic downturn. This would cause the number of foreclosures to increase and, therefore, decrease our ability to recover losses on such properties and assets.

If we or any of our subsidiaries are determined to be a passive foreign investment company, U.S. holders of our stock could be subject to adverse tax consequences.

If we or any of our subsidiaries are determined to be a passive foreign investment company, known as a “PFIC”, U.S. holders could be subject to adverse United States federal income tax consequences. Specifically, if either we or any of our subsidiaries are determined to be a PFIC for any taxable year, each U.S. holder would generally be subject to taxation under special rules, regardless of whether we or any of our subsidiaries remains a PFIC, with respect to (1) any “excess distribution” made by us to the U.S. holders during that taxable year, and (2) any gain realized on the sale, pledge or other disposition during that taxable year of our common stock or the stock of the subsidiary that was determined to be a PFIC. These rules could, in addition to other consequences, cause certain income otherwise classified as capital gain to be taxed at ordinary income rates or the highest rate of tax for ordinary income in the year to which it is allocated regardless of the U.S. holder’s particular tax situation and cause the U.S. holder to be subject to an interest charge on the deemed deferred amount at the underpayment rate. “Excess distributions” generally are any distributions received by the U.S. holder on the common stock in a taxable year that exceed 125% of the average annual distributions received by the U.S. holder in the three preceding taxable years, or the U.S. holder’s holding period for the common stock, if shorter. We believe that neither we nor any of our subsidiaries will be determined to be a PFIC in our current taxable year, and we expect to continue to conduct our affairs in a manner so that neither we nor any of our subsidiaries qualifies as a PFIC in the foreseeable future. However, we have not requested or received an opinion from our United States tax counsel as to whether we will be determined to be a PFIC in our current taxable year and we can give no assurance in this regard.

Repeal of foreign personal holding company rules.

Prior to December 31, 2004, if we or any of our subsidiaries were classified as a foreign personal holding company, known as a “FPHC”, certain U.S. holders of our stock could have been subject to adverse United States federal income tax consequences. The 2004 American Jobs Creation Act repealed the foreign personal holding company rules, effective for taxable years beginning after December 31, 2004, and for taxable years of U.S. shareholders with or within which the taxable year of applicable foreign corporation ends. As a result, we are not subject to these rules for taxable years from 2005 going forward.

ITEM 1B. Unresolved Staff Comments.

None.

ITEM 2. Properties.

Our principal offices, including the principal offices of the Bank, are located in our main office building at 270 Muñoz Rivera Avenue in San Juan, Puerto Rico.

On February 6, 2007, Eurobank, our wholly-owned banking subsidiary, closed on the purchase of land and an office building to serve as our new headquarters. The property, which is located in San Juan, includes a 57,187 square foot office building that will be used to consolidate our headquarter and administrative operations. We anticipate that there may be a benefit from certain efficiencies associated with centralizing these operations in one location.

The purchase price for the property was $12,360,000. We are in the process of renovating the space to conform to our needs, and expect to move in between the summer and December 2007.

Currently, in addition to the main office, we operate at 27 locations. The following is a list of our operating locations:

Location	Lease Expiration Date⁽¹⁾	Owned or Leased

Main Office:
270 Muñoz Rivera Avenue	N/A	Owned⁽²⁾
San Juan, Puerto Rico 00918

Departments
EuroLease Credit, Accounting, Marketing and Human Resources:
Fourth Floor	12/31/2007	Leased
270 Muñoz Rivera Avenue
San Juan, Puerto Rico 00918

EuroLease:
State Road #2, Km. 2.5	8/31/2007	Leased
Kennedy Avenue
San Juan, Puerto Rico 00920

EuroMortgage:
State Road #190	5/31/2007	Leased
Lot #1, Km. 0.7
La Cerámica Industrial Park
Carolina, Puerto Rico 00983

Location	Lease Expiration Date⁽¹⁾	Owned or Leased

Compliance:
1302 Jesús T. Piñero Avenue	12/31/2011	Leased
San Juan, Puerto Rico 00918

Credit Administration, Security and MIS:
Old Corona Building	4/30/2007	Leased
Building #5, Second and Fifth Floor
Santurce, Puerto Rico 00907

Operations:
Old Corona Building	8/31/2007	Leased
Building #5, Second Floor, Local #3
Santurce, Puerto Rico 00907

Branches
Aguadilla Branch	10/31/2006⁽³⁾	Leased
State Road No. PR2, Km. 129.3
Aguadilla, Puerto Rico 00603

Bayamón Branch	9/30/2017	Leased
Comerío Avenue, corner of Sierra Bayamón
Bayamón, Puerto Rico 00961

Caguas I Branch	5/31/2007	Leased
A-1 Muñoz Rivera Avenue
Caguas, Puerto Rico 00725

Caguas II Branch	6/30/2010	Leased
32 Acosta Street, corner of Ruiz Belvis
Caguas, Puerto Rico 00725

Canóvanas Branch	6/30/2025	Leased
Marginal PR-3, Km. 20.3
Canóvanas, Puerto Rico 00729

Carolina Branch	9/30/2007	Leased
State Road #190
Lot #1, Km. 0.7
La Cerámica Industrial Park
Carolina, Puerto Rico 00983

Cidra Branch	4/30/2006	Leased
Luis Muñoz Rivera Street
corner of José de Diego
Cidra, Puerto Rico 00739

Condado Branch	3/31/2009	Leased
1408 Magdalena Avenue
Santurce, Puerto Rico 00907

Hatillo Branch	11/30/2007	Leased
State Road No. PR2, Km. 87.0
Hatillo, Puerto Rico 00659

Hato Rey Branch	N/A	Owned⁽²⁾
270 Muñoz Rivera Avenue
San Juan, Puerto Rico 00918

Location	Lease Expiration Date⁽¹⁾	Owned or Leased

Humacao Branch	5/31/2026	Leased
Plaza Mall Lot #3, State Road No. PR52
Corner State Road No. PR3
Humacao, Puerto Rico 00791

Luquillo Branch	4/29/2006	Leased
State Road No. PR3, Km. 36.2
Luquillo, Puerto Rico 00773

Manatí Branch	8/30/2011	Leased
State Road No. PR2, Km. 49.5
Manatí, Puerto Rico 00674

Ponce Plaza Branch	12/31/2006	Leased
Mayor Street, corner of Isabel Street
Ponce, Puerto Rico 00731

Ponce Hostos Branch	10/31/2008	Leased
26 Hostos Avenue
Ponce, Puerto Rico 00731

Ponce Morell Campos Branch	4/01/2011	Leased
State Road #10, Km. 1.5
Ponce, Puerto Rico 00731

Ponce Marvesa Branch	Expired⁽⁴⁾	Leased
Marvesa Building #100
La Rambla
Ponce, Puerto Rico 00731

Puerto Nuevo Branch	12/31/2011	Leased
1302 Jesús T. Piñero
corner de Diego Avenue
San Juan, Puerto Rico 00921

San Francisco Branch	4/30/2011	Leased
Villas de San Francisco Shopping Center
85 de Diego Avenue
Río Piedras, Puerto Rico 00927

San Lorenzo Branch	8/01/2008	Leased
155 South Luis Muñoz Rivera Street
San Lorenzo, Puerto Rico 00754

San Patricio Branch	2/15/2010	Leased
San Patricio Office Center
8 Tabonuco Street
Guaynabo, Puerto Rico 00969

Villa Palmera Branch	12/31/2008	Leased
Eduardo Conde Avenue
corner of Tapia Street
Santurce, Puerto Rico 00915

Mayagüez Branch	11/30/2025	Leased
State Road No. PR2, Km. 153.2
Mayagüez, Puerto Rico 00681

(1)	Most of these leases have options for extensions. In addition, several have early termination clauses.

(2)

The properties owned by EuroBancshares located at 270 Muñoz Rivera Avenue are part of a 180,000 square foot commercial office building. EuroBancshares owns a portion of the lobby area on the ground floor where it operates a branch, the mezzanine where it operates its trust business, and also owns the first floor of this office building where its headquarters are located. In addition, EuroBancshares also owns certain parking spaces and a portion of the common areas of this office building.

(3)	The Aguadilla Branch is currently under construction. Once the construction is finished, the lease term will be twenty years with an option to extend the contract for two additional terms of five years each. We started operating the branch in a trailer until construction is finished.

(4)	The lease at this location expired on January 1, 1997, but Eurobank continues to pay rent to the lessor on a month-to-month basis. Eurobank believes that the lessor will not require Eurobank to vacate the premises in the immediate future.

ITEM 3. Legal Proceedings.

From time to time, we and our subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on our financial position or results of operation.

ITEM 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of 2006.

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock began trading on August 11, 2004 and is listed on the NASDAQ Global Select Market under the symbol “EUBK”. Prior to that date, our common stock was privately held and not listed on any public exchange or actively traded. As of February 28, 2007, there were 20,028,398 shares issued and 19,374,683 shares outstanding held by 353 stockholders of record, including all directors and officers of EuroBancshares, Inc., excluding beneficial owners whose shares are held in “street” name by securities broker-dealers or other nominees. The number of beneficial owners is unknown to us at this time.

The following table presents the high and low sales prices for our common stock reported on the NASDAQ Global Select Market for the last two fiscal years:

Quarter Ended	High		Low

March 31, 2005	$	22.19	$	16.80
June 30, 2005	$	17.60	$	13.58
September 30, 2005	$	17.55	$	14.78
December 31, 2005	$	15.06	$	10.20

March 31, 2006	$	15.13	$	11.64
June 30, 2006	$	12.00	$	8.35
September 30, 2006	$	9.90	$	8.47
December 31, 2006	$	9.47	$	8.50

Dividends

We have not paid cash dividends historically, nor do we anticipate paying any cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used for working capital, to support our operations and to finance the growth and development of our business. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects and other factors that our Board of Directors may deem relevant.

As a holding company, we ultimately depend on Eurobank to provide funding for our noninterest expenses and dividends. Various banking laws applicable to Eurobank limit the payment of dividends, management fees and other distributions by Eurobank to us, and may therefore limit our ability to pay dividends on our common stock. We are also restricted from paying dividends on our common stock if we have deferred payments of the interest, or if an event of default has occurred, on our junior subordinated debentures. In addition, we generally are unable to declare and pay dividends on our common stock if there are any accrued and unpaid dividends on our Series A Preferred Stock for the preceding 12 months. For additional information, see the sections of this report captioned “Supervision and Regulation — EuroBancshares — Regulatory Restrictions on Dividends; Source of Strength” and “Supervision and Regulation — Eurobank — Dividends.”

Securities Authorized for Issuance Under Equity Compensation Plans

Under the 2005 Stock Option Plan, approved at the 2005 annual meeting held at the main office of EuroBancshares on May 12, 2005, 700,000 shares of our common stock have been reserved for issuance pursuant to the exercise of stock options granted under the plan. As of December 31, 2006, 98,700 options to acquire shares of our common stock have been granted under the 2005 Stock Option Plan. Since the 2005 Stock Options Plan was approved, no further options were permitted to be issued under the 2002 Stock Option Plan.

The following table presents information regarding our equity compensation plans at December 31, 2006:

Equity Compensation Plan Information

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)

Equity compensation plans approved by security holders
2002 Stock Option Plan		984,362	$	7.21		—
2005 Stock Option Plan		78,800		14.17		621,200

ITEM 6. Selected Financial Data.

We derived our selected consolidated financial data as of and for each of the years in the five year period ended December 31, 2006 from our audited consolidated financial statements and the notes thereto.

You should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the related notes included elsewhere in this Annual Report. Results from past periods are not necessarily indicative of results that may be expected for any future period. Average balances have been computed using daily averages.

	As of or for the Year Ended December 31,
	2006		2005		2004		2003		2002
	(Dollars in thousands, except per share data)
Income Statement Data:
Total interest income	$	162,146	$	133,233	$	95,394	$	64,949	$	49,756
Total interest expense		95,363		64,936		41,481		31,922		25,124
Net interest income		66,783		68,297		53,913		33,027		24,632
Provision for loan and lease losses		16,903		12,775		7,100		6,451		3,354
Net interest income after provision for loan and lease losses		49,880		55,522		46,813		26,576		21,278

	As of or for the Year Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in thousands, except per share data)
Noninterest income:
Service charges and other fees		8,476			9,069			8,057			5,456			4,331
Net loss on non-hedging derivatives		-			(944	)		—			—			—
Gain on sale of loans and leases, net		401			945			1,395			3,547			—
(Loss) gain on sale of securities, net		(1,092	)		(301	)		—			707			—
Gain (loss) on sale of other real estate owned and repossessed assets, net		16			(1,040	)		(359	)		(663	)		(310	)
Total noninterest income		7,801			7,729			9,093			9,047			4,021
Noninterest expense:
Salaries and benefits		17,507			14,727			11,111			8,867			6,731
Professional fees		4,104			3,912			2,196			1,402			1,055
Other noninterest expense		21,775			19,005			15,635			12,039			8,936
Total noninterest expense		43,386			37,644			28,942			22,308			16,722
Income before income taxes and extraordinary gain		14,295			25,607			26,964			13,315			8,577
Income taxes		6,283			9,077			8,663			3,432			2,724
Extraordinary gain⁽¹⁾		—			—			4,419			—			1,081
Net income	$	8,012		$	16,530		$	22,720		$	9,883		$	6,934
Common Share Data:
Earnings per common share — basic:
Income before extraordinary gain	$	0.38		$	0.81		$	1.08		$	0.71		$	0.43
Extraordinary gain		—			—			0.27			—			0.08
Net income		0.38			0.81			1.35			0.71			0.51
Earnings per common share — diluted:
Income before extraordinary gain		0.37			0.78			1.04			0.69			0.42
Extraordinary gain		—			—			0.26			—			0.08
Net income		0.37			0.78			1.30			0.69			0.50
Cash dividends declared		—			—			—			—			—
Book value per common share		8.32			7.95			7.54			4.67			4.13
Common shares outstanding at end of period		19,123,821			19,398,848			19,564,086			13,947,396			13,879,370
Average diluted shares outstanding		19,657,559			20,277,799			17,152,261			14,234,168			13,724,248
Balance Sheet Data (at end of period):
Total assets	$	2,500,920		$	2,391,283		$	2,102,789		$	1,320,934		$	1,035,305
Investment securities available-for-sale		535,159			627,080			555,482			324,938			145,795
Investment securities held-to-maturity		38,433			42,471			49,504			—			—
Total loans and leases, net of unearned		1,750,838			1,577,196			1,387,613			899,392			767,792
Allowance for loan and lease losses		18,937			18,188			19,039			9,394			6,918
Deposits		1,905,356			1,734,128			1,409,036			984,549			843,045
Other borrowings		394,991			475,712			520,206			264,616			127,963
Total stockholders’ equity		169,878			164,967			158,302			65,075			57,335
Performance Ratios:
Return on average common stockholders’ equity⁽²⁾		5.19	%		10.70	%		18.67	%		16.50	%		11.45	%
Return on average assets⁽³⁾		0.33			0.74			1.03			0.87			0.77
Net interest margin⁽⁴⁾		2.86			3.29			3.29			3.15			3.57
Efficiency ratio⁽⁵⁾		57.89			47.84			44.44			51.48			56.33
Loans and leases to deposits		91.89			90.95			98.48			91.35			91.07
Asset Quality Data:
Nonperforming loans and leases	$	49,978		$	36,263		$	40,533		$	26,758		$	22,060
Other real estate owned and repossessed assets		13,048			9,517			6,441			6,417			7,644
Total nonperforming assets		63,026			45,780			46,974			33,175			29,704
Nonperforming assets to total assets		2.52	%		1.91	%		2.23	%		2.51	%		2.87	%
Nonperforming loans to total loans and leases		2.85			2.30			2.92			2.98			2.87
Allowance for loan and lease losses to nonperforming loans		37.89			50.16			46.97			35.11			31.36
Allowance for loan and lease losses to total loans		1.08			1.15			1.37			1.04			0.90
Net charge-offs to average loans		0.97			0.92			0.69			0.47			0.51

	As of or for the Year Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in thousands, except per share data)
Capital Ratios:
Leverage ratio		7.92	%		9.35	%		9.91	%		6.76	%		7.93	%
Tier 1 risk-based capital		10.25			12.45			12.73			8.30			8.63
Total risk-based capital		11.25			13.49			13.94			11.60			12.79
Tangible common equity to tangible assets		6.44			6.91			7.54			4.93			5.54

(1)

Extraordinary gains resulting from the negative goodwill on the acquisition of BankTrust and Banco Financiero in 2004 and 2002, respectively. The excess of the fair value of the assets acquired over the purchase price resulted in a negative goodwill of $5.7 million and 1.5 million, respectively. The negative goodwill of BankTrust was allocated between a $4.4 million extraordinary gain, $670,000 of the fair value of intangible assets, net of their tax effect, and the $627,000 of the fair value of the acquired furniture, fixtures and equipment. The negative goodwill of Banco Financiero was allocated between a $1.1 million extraordinary gain and the $456,000 of the fair value of the acquired furniture, fixtures and equipment.

(2)	Return on average common equity is determined by dividing net income before extraordinary gain by average common equity.

(3)	Return on average assets is determined by dividing net income before extraordinary gain by average assets.

(4)	Net interest margin is determined by dividing net interest income (fully taxable equivalent) by average interest-earning assets.

(5)	The efficiency ratio is determined by dividing total noninterest expense by an amount equal to net interest income (fully taxable equivalent) plus noninterest income.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion and analysis presents our consolidated financial condition and results of operations for the years ended December 31, 2006, 2005 and 2004. This discussion should be read together with the “Selected Consolidated Financial Data,” our consolidated financial statements and the notes related thereto which appear elsewhere in this Annual Report on Form 10-K.

Executive Overview

Introduction

We are a diversified financial holding company headquartered in San Juan, Puerto Rico, offering a broad array of financial services through our wholly owned banking subsidiary, Eurobank, and our wholly owned insurance agency subsidiary, EuroSeguros. As of December 31, 2006, we had, on a consolidated basis, total assets of $2.5 billion, net loans and leases of $1.7 billion, total deposits of $1.9 billion, and stockholders’ equity of $169.9 million. We currently operate through a network of 23 branch offices located throughout Puerto Rico. On May 3, 2004, we acquired all of the capital stock of The Bank & Trust of Puerto Rico, a commercial bank headquartered in San Juan, Puerto Rico. On the closing date, the estimated fair value of assets acquired was $522.0 million and the estimated fair value of the deposits and other liabilities assumed was $492.9 million.

Over the past three years, we have experienced significant balance sheet growth. Our management team has implemented a strategy of building our core banking franchise by focusing on commercial loans, business transaction accounts, our lease financing business and acquisitions. We believe that this strategy will increase recurring revenue streams, enhance profitability, broaden our product and service offerings and continue to build stockholder value.

In 2001 and 2002, we raised an aggregate of $46.4 million through the issuance of junior subordinated debentures in connection with trust preferred securities issuances. In an effort to improve our net interest margin, on December 18, 2006, we redeemed $25.8 million of floating rate junior subordinated deferrable interest debentures bearing an interest rate of 8.99% at the time of redemption. This redemption resulted in the write-off of approximately $626,000 in unamortized placement costs related to the redeemed trust preferred securities. For more detail on notes payable to statutory trusts please refer to “Note 17 - Notes Payable to Statutory Trusts” to our consolidated financial statements. We believe that remaining supplemental capital raised in connection with the issuance of these securities will allow us to maintain our status as a well-capitalized institution and to sustain our continued loan growth.

We completed our initial public offering in August 2004 in which we sold 3,450,000 shares of our common stock at the initial offering price of $14.00 per share. In September 2004, we sold an additional 517,500 shares in connection with the exercise of the underwriters’ over-allotment option, also at the initial offering price of $14.00 per share. The net proceeds that we received from the offering plus the exercise of the underwriters’ over-allotment option, after deducting offering expenses, including underwriting discounts and commissions, were approximately $50.1 million.

On October 27, 2005, EuroBancshares’ Board of Directors announced the authorization of a program to acquire shares of its common stock for an aggregate purchase price of up to $10.0 million in open market purchases, block trades and privately negotiated transactions over a period of one year, which expired in October 2006. Between November 2005 and May 2006, we purchased 652,027 shares of our common stock under the program.

On November 18, 2005, we recorded 1,688 shares at a price of $12.95 per share held in treasury as a result of a payment in lieu of foreclosure from a former customer.

2006 Key Performance Indicators

We believe the following were key indicators of our performance and results of operations in 2006:

●

the write-off of approximately $626,000 in unamortized placement costs in 2006 related to the redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures on December 18, 2006;

●

our net loss on sale of securities increased to $1.1 million in 2006, representing a $791,000 increase, from $301,000 in 2005;

●

our total revenue grew to $169.9 million in 2006, representing an increase of 20.56%, from $141.0 million in 2005;

●

our net interest margin and spread on a fully taxable equivalent basis decreased to 2.86% and 2.33% in 2006, respectively, compared to 3.29% and 2.88% in 2005;

●

our provision for loan and lease losses grew to $16.9 million in 2006, representing an increase of 32.31%, from $12.8 million in 2005;

●

our total noninterest expense grew to $43.4 million in 2006, representing an increase of 15.25%, from $37.6 million in 2005;

●

our effective tax rate increased to 43.95% in 2006, from 35.45% in 2005;

●

our total assets grew to $2.501 billion at the end of 2006, representing an increase of 4.58%, from $2.391 billion at the end of 2005;

●

our net loans and leases grew to $1.732 billion at the end of 2006, representing an increase of 11.09%, from $1.559 billion at the end of 2005; and

●

our total deposits grew to $1.905 billion at the end of 2006, representing an increase of 9.87%, from $1.734 billion at the end of 2005.

These items, as well as other factors, resulted in a net income for 2006 of $8.0 million, compared to $16.5 million in 2005, or $0.37 per common share for 2006, compared to $0.78 per common share for 2005, assuming dilution, and are discussed in further detail throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report on Form 10-K.

Critical Accounting Policies

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

Loans and Allowance for Loan and Lease Losses

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted by any charge-offs, unearned finance charges, allowance for loan and lease losses, and net deferred nonrefundable fees or costs on origination. The allowance for loan and lease losses is an estimate to provide for probable collection losses in our loan and lease portfolio. Losses are charged and recoveries are credited to the allowance account at the time a loss is incurred or a recovery is received. The allowance for loan and lease losses amounted to $18.9 million, $18.2 million and $19.0 million as of December 31, 2006, 2005 and 2004, respectively. Losses charged to the allowance amounted to $18.8 million, $16.6 million and $10.5 million as of December 31, 2006, 2005 and 2004, respectively. Recoveries were credited to the allowance in the amounts of $2.6 million, $3.0 million and $2.1 million for those same periods, respectively.

We follow a consistent procedural discipline and account for loan and lease loss contingencies in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, and SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.

To mitigate any difference between estimates and actual results relative to the determination of the allowance for loan and lease losses, our loan review department is specifically charged with reviewing monthly delinquency reports to determine if additional allowances are necessary. Delinquency reports and analysis of the allowance for loan and lease losses are also provided to senior management and the Board of Directors on a monthly basis.

The loan review department evaluates significant changes in delinquency with regard to a particular loan portfolio to determine the potential for continuing trends, and loss projections are estimated and adjustments are made to the historical loss factor applied to that portfolio in connection with the calculation of loss allowances. Portfolio performance is also monitored through the monthly calculation of the percentage of non-performing loans to the total portfolio outstanding. A significant change in this percentage may trigger a review of the portfolio and eventually lead to additional allowances. We also track the ratio of net charge-offs to total portfolio outstanding.

Our methodology for the determination of the adequacy of the allowance for loan and lease losses for impaired loans is based on classifications of loans and leases into various categories and the application of SFAS No. 114. For non-classified loans, the estimated allowance is based on historical loss experiences, which, at least on an annual basis, are adjusted for changes in trends and conditions. While our allowance for loan and lease losses is established in different portfolio components, we maintain an allowance that we believe is sufficient to absorb all credit losses inherent in our portfolio.

As a result of increasing loss ratios experienced in the later part of 2005, particularly with the Company’s auto lease portfolio, during the quarter ended March 31, 2006, we made some revisions to our methodology for the determination of the allowance for loan and lease losses to provide for more structured and timely monitoring of changes in loss trends and conditions. Additionally, new reports and analyses have been incorporated into our control process over such determination.

With the exception of the commercial loans pool and loans secured by real estate with a 60% or lower loan-to-value, loans that are more than 90 days delinquent result in an additional allowance. When commercial loans become 90 days delinquent, each is subjected to full review by the loan review officer including, but not limited to, a review of financial statements, repayment ability and collateral held. Depending on the review results, our allowance may be increased. In connection with this review, the loan review officer will determine what economic factors may have led to the change in the client’s ability to service the obligation, and this in turn may result in an additional review of a particular sector of the economy. For additional information relating to how each portion of the allowance for loan and lease losses is determined, see the section of this discussion and analysis captioned “Allowance for Loan and Lease Losses.”

We believe that our allowance for loan and lease losses is adequate; however, regulatory agencies, including the Commissioner of Financial Institutions of Puerto Rico and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan and lease losses and may from time to time require us to reclassify our loans and leases or make additional provisions to our allowance for loan and lease losses.

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. An appraisal of other real estate properties and valuation of repossessed assets is made periodically after its acquisition, and comparison between the appraised value and the carrying value is performed. Additional declines in value after acquisition, if any, are charged to current operations. Other real estate owned amounted to $3.6 million, $1.5 million, and $2.9 million as of December 31, 2006, 2005 and 2004, respectively.

Other repossessed assets amounted to $9.4 million, $8.0 million, and $3.6 million for those same periods, respectively. Other repossessed assets are mainly comprised of vehicles from our leasing operation. For additional information relating to the composition of other repossessed assets, see the section of this discussion and analysis captioned “Nonperforming Loans, Leases and Assets.”

During the first quarter of 2006, we made certain refinements to our methodology for estimating net realizable value of vehicles upon repossession. We feel these improvements in our estimation procedures, together with revisions in the determination of the allowance for automobile lease losses, will result in more timely recognition of losses in our automobile lease portfolio and better valuation of our repossessed vehicles.

During the third quarter of 2006, we increased the valuation allowance of repossessed vehicles in an effort to expedite the disposition of slow moving inventory. This new strategy resulted from management’s decision of being more aggressive on the disposition of these units in the future in an effort to reduce the build-up of the inventory.

We monitor the total loss ratio on sale of repossessed assets, which is determined by dividing the sum of net charge offs, declines in value, repairs and the gain or loss on sale by the book value of repossessed assets sold. The total loss ratio on sale of repossessed vehicles was 25.4%, 19.6% and 15.2% for the years ended December 31, 2006, 2005 and 2004, respectively. The increase in our total loss on the sale of repossessed vehicles as a percentage of the lease balance at the date of repossession for year 2006 was in part due to the sale of damaged units previously charged-off as part of our strategy to aggressively dispose of deteriorated repossessed vehicles, but primarily to the deterioration of our leasing portfolio. The increase in this ratio for year 2005 was due in part to an increase in the size of our lease portfolio, which increased our volume of repossessed vehicles, and to portfolio deterioration primarily in the last quarter of 2005.

For the year ended December 31, 2006, the total loss ratio on sale of repossessed equipment was 51.2%, compared to 34.1% and 31.3% for the years ended December 31, 2005 and 2004, respectively. The increase in the total loss on sale of repossessed equipment as a percentage of the lease balance at the date of repossession for year 2006 was mainly due to the sale of damaged equipment previously charged-off as part our strategy to aggressively dispose of deteriorated repossessed equipment. The total loss ratio on sale of repossessed equipment for 2005 remained relatively stable when compared to year 2004.

We also monitor the ratio of total loss on the leasing business to the average balance of our leasing portfolio. This ratio is determined by dividing the sum of net charge offs, declines in value, repairs and the gain or loss on sale during the period by the average balance of the leasing portfolio. The total loss ratio on the leasing business was 2.40%, 1.81% and 1.31% for the years ended December 31, 2006, 2005 and 2004, respectively. The increase in our total loss on the leases business during 2006 was mainly due to the combined effect of portfolio deterioration and a decrease in our lease portfolio to $443.3 million as of December 31,2006, from $487.9 million at the end of fiscal year 2005. The increase in this ratio for 2005 was mainly due to portfolio deterioration primarily in the last quarter of 2005. We have been closely monitoring the lease portfolio and have tightened underwriting standards in order to manage delinquencies and possible future losses.

For the year ended December 31, 2006, the total loss ratio on sale of repossessed boats was 39.0%, compared to 49.6% and 48.7% for the years ended December 31, 2005, and 2004, respectively. The boat financing portfolio amounted to $37.4 million, $39.7 million and $45.8 million as of December 31, 2006, 2005 and 2004, respectively. The decrease in the total loss ratio on sale of repossessed boats during 2006 was mainly due to the sale of five high profile boats, which resulted in lower losses. The total loss ratio on sale of repossessed boats for 2005 remained stable when compared to year 2004.

In 2006, the total gain on sale of OREO totaled $454,000 over eleven properties sold with a book value of approximately $4.0 million, compared to a total loss of $581,000 over nine properties sold with a book value of approximately $3.9 million in 2005, and a total loss of $37,000 in 2004 over three properties sold with a book value of approximately $724,000. The total gain on sale of OREO in 2006 included a $362,000 gain from the sale of a real estate property during the second quarter of 2006. The total loss on sale of OREO in 2005 included a total loss of $406,000 related to one real estate property sold in September 2005.

Results of Operations as of and for the Years Ended December 31, 2006, 2005 and 2004

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 average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets, and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

Net interest income was $66.8 million during the year ended December 31, 2006, compared to $68.3 million during the year ended December 31, 2005 and $53.9 million during the year ended December 31, 2004, representing a decrease of $1.5 million, or 2.22%, in 2006 and an increase of $14.4 million, or 26.68%, in 2005. The decrease in the net interest income during 2006 was due to increased cost of funds during 2006. The increase in 2005 was mainly due to the combined result of increases in average interest-earning assets and increased yields resulting from higher interest rates. Our net interest margin decreased to 2.86% for the year ended December 31, 2006 and remained at 3.29% for the year ended December 31, 2005, compared to year ended December 31, 2004. Our net interest spread decreased to 2.33% in 2006, from 2.88% in 2005 and 3.00% in 2004. These declines in the net interest margin and spread were primarily caused by the increase in the average cost of interest bearing liabilities as a result of: (i) the rising short-term interest rates and the inverted yield curve, which caused short term borrowing costs to increase at a faster rate than the yield on earning-assets; and (ii) the increase in average deposits has been comprised substantially of brokered deposits and higher rate time deposits driven by the extremely competitive local environment. In addition, during 2006, our net interest margin and spread were also affected by the write-off of $626,000 in unamortized placement costs related to the redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures, as previously mentioned. Without the effect of the write-off of $626,000 in unamortized placement costs, net interest margin and spread on a fully taxable equivalent basis would have been 2.89% and 2.36% for the year ended December 31, 2006, respectively.

Our average interest-earning assets were $2.3 billion in 2006, compared to $2.2 billion in 2005 and $1.7 billion in 2004, representing increases of 8.84% in 2006 and 26.8% in 2005. Average net loans were $1.6 billion in 2006, compared to $1.5 billion in 2005 and $1.2 billion in 2004, representing increases of 11.79% and 22.5% in 2006 and 2005, respectively. Total interest income increased by 21.70% to $162.1 million in 2006, compared to $133.2 million in 2005, after increasing by 39.67% from $95.4 million in 2004. These increases in our interest income were mainly due to the organic growth of our loan portfolio. The average interest yield we received for interest-earning assets increased to 7.53% in 2006, from 6.69% in 2005, and from 5.90% in 2004. Between 2006 and 2004, the Federal Reserve Board’s interest rate raises positively impacted average yields on our commercial and construction loans since a significant portion of these portfolios were variable rate loans. As of December 31, 2006, approximately 74.68% and 86.62% of our commercial and construction loans, respectively, were variable rate loans.

Average interest-bearing liabilities also increased by 9.69% to $2.1 billion in 2006, compared to $1.9 billion in 2005, after increasing by 26.1% from $1.5 billion in 2004. Total interest expense increased by 46.86% to $95.4 million in 2006, compared to $64.9 million in 2005, after increasing by 56.5% from $41.5 million in 2004. During 2006 and 2005, the increase in average liabilities had been substantially in brokered deposits, higher rate time deposits driven by the extremely competitive local environment, and other borrowings, all of which are higher cost categories resulting in increased interest expense. The average interest rate we paid for interest-bearing liabilities increased to 5.20% in 2006, from 3.81% in 2005, and from 2.90% in 2004.

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.

	Year Ended December 31,
	2006							2005							2004
	Average Balance		Interest		Average Rate/ Yield⁽¹⁾			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⁾	$	1,643,587	$	130,003		8.00	%	$	1,470,256	$	107,971		7.41	%	$	1,200,445	$	82,790		6.94	%
Securities of U.S. government agencies⁽³⁾		604,606		27,137		6.45			600,461		21,795		5.14			433,456		11,180		3.53
Other investment securities⁽³⁾		46,083		2,296		7.03			38,811		1,726		6.12			18,116		602		4.34
Puerto Rico government obligations⁽³⁾		9,397		412		6.29			8,783		352		5.67			7,515		306		5.66
Securities purchased under agreements to resell and federal funds sold		34,841		1,791		5.57			32,297		1,150		4.19			29,556		380		1.29
Interest-earning deposits		9,565		507		5.30			6,767		239		3.53			12,754		135		1.06
Total interest-earning assets	$	2,348,079	$	162,146		7.53	%	$	2,157,375	$	133,233		6.69	%	$	1,701,842	$	95,393		5.90	%
Total noninterest-earning assets		80,735							77,612							71,084
TOTAL ASSETS	$	2,428,814						$	2,234,987						$	1,772,926

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Money market deposits	$	25,470	$	584		2.31	%	$	51,787	$	1,090		2.13	%	$	62,346	$	1,335		2.17	%
NOW deposits		46,330		1,035		2.24			46,421		858		1.85			40,931		738		1.81
Savings deposits		184,824		4,386		2.37			254,923		5,861		2.30			261,660		6,217		2.38
Time certificates of deposit in denominations of $100,000 or more		1,240,403		58,351		5.13			869,054		32,384		3.96			599,660		19,409		3.38
Other time deposits		113,097		4,189		3.71			152,787		4,741		3.11			192,046		5,610		2.92
Other borrowings⁽⁴⁾		499,275		26,818		7.17			548,141		20,002		4.81			369,064		8,172		2.73
Total interest-bearing liabilities	$	2,109,399	$	95,363		5.20	%	$	1,923,113	$	64,936		3.81	%	$	1,525,707	$	41,481		2.90	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		128,551							129,676							119,847
Other liabilities		25,830							16,962							19,234
Total noninterest-bearing liabilities		154,381							146,638							139,081
STOCKHOLDERS’ EQUITY		165,034							165,236							108,138
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,428,814						$	2,234,987						$	1,772,926
Net interest income⁽⁵⁾			$	66,783						$	68,297						$	53,912
Net interest spread⁽⁶⁾						2.33	%						2.88	%						3.00	%
Net interest margin⁽⁷⁾						2.86	%						3.29	%						3.29	%

(1)	Interest yield and expense is calculated on a fully taxable equivalent basis assuming a 43.5% tax rate for the year ended December 31, 2006, a 41.5% tax rate for 2005, and a 39% tax rate for 2004.

(2)

Loan costs (fees) have been included in the calculation of interest income. Loan costs (fees) were approximately $539,000, $780,000 and $(201,000) for the years ended December 31, 2006, 2005 and 2004, respectively. Loans includes nonaccrual loans, which balance as of the periods ended December 31, 2006, 2005 and 2004 was $37.3 million, $27.7 million and $32.2 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)	For 2006, interest expense on other borrowings includes the write-off of approximately $626,000 in unamortized placement costs related to the redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures on December 18, 2006, as previously mentioned.

(5)	Net interest income on a tax equivalent basis was $67.2 million, $71.0 million and $56.0 million for the years ended December 31, 2006, 2005 and 2004, respectively.

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

(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.

	Year Ended December 31,
	2006 Over 2005 Increases/(Decreases) Due to Change in									2005 Over 2004 Increases/(Decreases) Due to Change in
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
INTEREST EARNED ON:
Net loans⁽¹⁾	$	12,729		$	9,303		$	22,032		$	18,608		$	6,573		$	25,181
Securities of U.S. government agencies		150			5,192			5,342			4,308			6,307			10,615
Other investment securities		323			247			570			688			436			1,124
Puerto Rico government obligations		25			35			60			52			(6	)		46
Securities purchased under agreements to resell and federal funds sold		91			550			641			35			735			770
Interest-earning deposits		99			169			268			(63	)		167			104

Total interest-earning assets	$	13,417		$	15,496		$	28,913		$	23,628		$	14,212		$	37,840
INTEREST PAID ON:
Money market deposits	$	(554	)	$	48		$	(506	)	$	(226	)	$	(19	)	$	(245	)
NOW deposits		(2	)		179			177			99			21			120
Savings deposits		(1,612	)		137			(1,475	)		(160	)		(196	)		(356	)
Time certificates of deposit in denominations of $100,000 or more		13,838			12,129			25,967			8,719			4,256			12,975
Other time deposits		(1,232	)		680			(552	)		(1,147	)		278			(869	)
Other borrowings⁽²⁾		(1,783	)		8,599			6,816			3,965			7,865			11,830

Total interest-bearing liabilities	$	8,655		$	21,772		$	30,427		$	11,250		$	12,205		$	23,455

Net interest income	$	4,762		$	(6,276	)	$	(1,514	)	$	12,378		$	2,007		$	14,385

(1)

(2)	For 2006, interest expense on other borrowings includes the write-off of approximately $626,000 in unamortized placement costs related to the redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures on December 18, 2006, as previously mentioned.

Provision for Loan and Lease Losses

The provision for loan and lease losses is a direct result of the periodic evaluation of the allowance for possible loan and lease losses, considering the growth in the loan portfolio, net-charge offs, delinquencies, related loss experience, and current internal and external environmental factors. We determine a provision for loan and lease losses that we consider sufficient to maintain an allowance to absorb probable losses inherent in our portfolio as of the balance sheet date. For additional information concerning this determination, see the section of this discussion and analysis captioned “Allowance for Loan and Lease Losses.”

Our provision for loan and lease losses increased to $16.9 million in 2006, or 104.64% of net charge-offs, from $12.8 million in 2005, or 93.75% of net charge-offs, and from $7.1 million in 2004, or 84.96% of net charge-offs. The increase in the provision during 2006 and 2005 resulted from the growth in our loan portfolio and the net losses experienced, mainly in our leasing portfolio. The net charge-offs increased to $16.2 million in 2006, from $13.6 million in 2005, and from $8.4 million in 2004. For more detail on net charge-offs, please refer to the “Allowance for Loan and Lease Losses” section herein.

We believe existing allowance levels are appropriate. While our allowance for loan and lease losses is established in different portfolio components, we maintain an allowance that we believe is sufficient to absorb all credit losses inherent in our portfolio.

In order to maintain an adequate level of our allowance for loan and lease losses, we monitor our portfolio performance on a monthly basis and determine the additional provision for loan and lease losses. In 2006, the increase in our provision for loan and lease losses resulted from the growth in our commercial and construction loan portfolio, but primarily from the deterioration of our leasing portfolio. During 2005, we increased our provision for loan and lease losses as we experienced an unexpected increase in the number of repossessed vehicles resulting from the impairment of certain leases in our automobile leasing portfolio, primarily during the last quarter of 2005. For additional information relating to how each portion of the allowance for loan and lease losses is determined, see the section of this discussion and analysis captioned “Allowance for Loan and Lease Losses.”

Because we do not have any major industry concentrations, the determination of our provision for loan and lease losses is not impacted by such industry concentrations.

Noninterest Income

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

	Year Ended December 31,
	2006						2005						2004
	Amount			%			Amount			%			Amount			%
	(Dollars in thousands)
Service charges and other fees	$	8,476			108.7	%	$	9,069			117.4	%	$	8,057			88.6	%
Loss on sale of non-hedging derivatives, net		-			-			(944	)		(12.2	)		—			—
Gain on sale of loans and leases, net		401			5.1			945			12.2			1,395			15.3
Loss on sale of securities, net		(1,092	)		(14.0	)		(301	)		(3.9	)		—			—
Gain (loss) on sale of other real estate owned, repossessed assets, and on disposition of other assets, net		16			0.2			(1,040	)		(13.5	)		(359	)		(3.9	)

Total noninterest income	$	7,801			100.0	%	$	7,729			100.0	%	$	9,093			100.0	%

Our total noninterest income was $7.8 million in 2006, compared to $7.7 million in 2005, and $9.1 million in 2004, representing an increase of 0.93% in 2006 and a decrease of 15.0% in 2005. Noninterest income represented approximately 0.3%, 0.4% and 0.5% of average assets in 2006, 2005 and 2004, respectively.

Our largest noninterest income source is service charges, primarily on deposit accounts, representing 108.7%, 117.4% and 88.6% of total noninterest income in 2006, 2005 and 2004, respectively. This income source decreased to $8.5 million in 2006, from $9.1 million in 2005 and $8.1 million in 2004. The decrease in 2006 was mainly due to a decrease in trust fees and non-sufficient fund charges on deposit accounts, while the increase in 2005 was primarily due to an increase in our fees from trust and merchant accounts, and commissions from other banking services, such as an increase of $192,000 in leasing license’s commissions and an increase of $258,000 in commissions received by our insurance subsidiary, EuroSeguros.

Another component of noninterest income for 2005 is the net loss on sale of non-hedging derivatives. During year ended December 31, 2005, net noninterest income reflected a $944,000 net loss on non-hedging derivatives on which hedge accounting had been discontinued. The net loss during 2005 reflected a $1.1 million charge to earnings in the first quarter of 2005 for net losses on non-hedging derivatives on which hedge accounting had been discontinued and a $132,000 gain on the termination of such derivatives in the second quarter of 2005. The derivatives were assumed in connection with the acquisition of BankTrust in May 2004.

During 2006, gain on sale of loans and leases amounted to $401,000, compared to $945,000 in 2005 and to $1.4 million in 2004. Income from gain on sale of loans and leases as a percentage of total noninterest income was 5.1%, 12.2% and 15.3% in 2006, 2005 and 2004, respectively. This source of noninterest income is derived primarily from the sale of mortgage loans and lease financing contracts. During 2006, we sold $13.8 million in mortgage loans to other financial institutions, compared to $21.5 million in 2005 and $28.9 million in 2004. We did not retain the servicing rights on these mortgage loans and we accounted for this transaction as a sale, resulting in a gain of approximately $401,000, $232,000 and $309,000 for those same periods. In June 2006, we became a Government National Mortgage Association’s issuer. In order to take advantage of this designation, we are increasing our volume of mortgage loans originations and have restructured the mortgage loans department to increase our sales in the secondary market. During 2006, our mortgage loan portfolio grew by $31.4 million, or 70.10%, from $44.8 million in 2005, after decreasing by 13.31% from $51.7 million in 2004. Also, during 2004, we sold $5.4 million in mortgage and consumer loans, which were acquired from BankTrust and serviced by another entity. We accounted for this transaction as a sale resulting in a gain of approximately $108,000.

In addition, in September 2005, March 2005 and November 2004, we sold lease financing contracts on a limited recourse basis to a third party with carrying values of $15.0 million, $14.9 million and $30.0 million, respectively. We did not sell lease financing contracts during 2006. During 2005, the decrease of $450,000 in the gain on sale of loans was mainly attributable to the lower yields on the loans sold during the year as compared to those sold in 2004. We retained servicing responsibilities for the lease financing contracts sold. We surrendered control of the lease financing receivables, as defined by SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, and accounted for these transactions as sales, recognizing net gains of approximately $348,000 for the September 2005 sale, $365,000 for the March 2005 sale, and $978,000 for the November 2004 sale. While the estimated losses on the limited recourse obligations assumed in the sale of our lease financing contracts are not significant, we established an allowance of $120,000 in September 2005, $106,000 in March 2005, and $210,000 in November 2004, and have included such estimates in the other liabilities section of our balance sheets. As of December 31, 2006, the remaining balance of the allowance established to cover the limited recourse obligations assumed in the sale of our lease financing contracts during September and March 2005 and November 2004 amounted to approximately $59,000, $60,000 and $110,000, respectively, and are part of the remaining balance of the allowance established to cover the limited recourse obligations assumed in the sales of our lease financing contracts. For more detail on limited recourse obligations please refer to “Note 20 - Sales of Receivables” to our consolidated financial statements.

During 2006, we recognized a $1.1 loss on sale of $50.1 million in FHLB and mortgage backed securities, compared to a $301,000 loss on sale of $85.0 million in U.S. Treasury obligations available for sale in 2005. These investments were sold in an effort to improve the yields of the available for sale securities portfolio. There was no sale of investments in 2004.

Our final component of net noninterest income is the net loss on the sale of other real estate owned, repossessed assets and other assets. During 2006, we experienced a net gain in this component of $16,000, compared to net losses of $1.0 million and $359,000 for the years ended December 31, 2005 and 2004, respectively. The decrease in the net loss on sale of other real estate owned, repossessed assets and other assets during 2006 was in part due to the sale of a real estate property during the second quarter of 2006, which resulted in a gain of approximately $362,000, but primarily to the refinements we made to our methodology for estimating the net realizable value of vehicles upon repossession and to our decision of increasing the valuation allowance of repossessed vehicles in an effort to expedite the disposition of slow moving inventory, as previously mentioned. The increase in 2005 was attributable primarily to an increased volume of losses in our lease financing portfolio as we experienced an unexpected increase in the number of repossessed vehicles resulting from the impairment of certain leases in our automobile leasing portfolio, which created net losses on the sale of repossessed automobiles and equipment totaling $992,000 and $334,000 for the years 2005 and 2004, respectively. Also, as our volume of lease financing contracts increased during 2005, in order to avoid building up our inventory of repossessed automobiles, we were more aggressive in our disposition efforts.

Noninterest Expense

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

	Year Ended December 31,
	2006					2005					2004
	Amount		%			Amount		%			Amount		%
	(Dollars in thousands)
Salaries and employee benefits	$	17,507		40.3	%	$	14,727		39.2	%	$	11,111		38.2	%
Occupancy and equipment		9,565		22.0			8,555		22.7			6,943		24.0
Professional services, including directors’ fees		4,104		9.5			3,912		10.4			2,196		7.6
Office supplies		1,394		3.2			1,163		3.1			1,033		3.6
Other real estate owned and other repossessed assets expenses		2,290		5.3			1,096		2.9			1,060		3.7
Promotion and advertising		1,200		2.8			686		1.8			545		1.9
Lease expenses		776		1.8			862		2.3			687		2.4
Insurance		1,053		2.4			1,095		2.9			804		2.8
Municipal and other taxes		1,657		3.8			1,674		4.4			1,254		4.3
Commissions and service fees credit and debit cards		1,324		3.1			1,364		3.6			1,206		4.2
Other noninterest expense		2,516		5.8			2,509		6.7			2,103		7.3
Total noninterest expense	$	43,386		100.0	%	$	37,643		100.0	%	$	28,942		100.0	%

Our total noninterest expense increased to $43.4 million in 2006, from $37.6 million in 2005 and $28.9 million in 2004. This represents a year over year increase in noninterest expense of 15.26% for 2006 and 30.1% for 2005. These increases are primarily attributable to the expanded personnel and occupancy costs associated with our business growth, our acquisition of BankTrust, the recent opening of our three new branch offices (Aguadilla and Canóvanas in December and September 2005, respectively, and Hatillo in March 2004); the salary increases effective in January 2006; an increased staffing mainly from our new branches and the restructuring of the mortgage loan department to take advantage of the opportunities available in this area on the Island and also to increase our sales in the secondary market; and an increase in the valuation allowance of repossessed vehicles in an effort to expedite their disposition in the future. Noninterest expenses as a percentage of average assets increased to 1.79% in 2006, from 1.68% in 2005 and 1.63% in 2004. Our efficiency ratio was 57.9% in 2006, 47.8% in 2005 and 44.4% in 2004.

We anticipate that the overall volume of our noninterest expense will continue to 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 benefit expenses increased to $17.5 million in 2006, from $14.7 million in 2005. This increase was mainly attributable to an increase of approximately $1.9 million in salary adjustments and expanded personnel for business growth; and an increase of approximately $870,000 related to employees’ benefits, mainly related to an increase in: social security payroll taxes, the stock based compensation expense, and the medical plan expense.

Salaries and employee benefit expenses increased to $14.7 million in 2005, from $11.1 million in 2004. This increase was mainly attributable to an increase of approximately $3.1 million in salary adjustments and expanded personnel for business growth; an increase of approximately $450,000 related to employees’ benefits, mainly related to an increase in social security payroll taxes and medical plan expenses; and an increase of approximately $96,000 resulting from two new branches opened at Aguadilla and Canóvanas, Puerto Rico.

Occupancy and equipment expenses increased to $9.6 million in 2006, from $8.6 million in 2005. This increase was mainly attributable to an increase of approximately $410,000 related to our lease financing and trust businesses, an increase of approximately $342,000 related to the opening of our most two recent branches in September and December 2005, respectively, and an increase of approximately $164,000 related to our data processing systems.

Occupancy and equipment expenses increased to $8.6 million in 2005, from $6.9 million in 2004. This increase was mainly attributable to an increase of approximately $414,000 related to new premises for support departments, an increase of approximately $321,000 related to property taxes on branches, leasehold improvements and other real estate owned, an increase of $232,000 resulting from new branch openings, and an increase of approximately $207,000 in occupancy expenses related to business growth in the lease financing and trust departments.

Professional and directors’ fees were $4.1 million, $3.9 million and $2.2 million, or 9.5%, 10.4% and 7.6% of total noninterest expenses, in 2006, 2005 and 2004, respectively. During 2006, the increase in professional and directors’ fees was mainly due to an increase of $300,000 related to additional expenses billed by our former external auditors in connection with year 2005 audit and compliance with the Sarbanes Oxley Act. These additional expenses were recorded during the first quarter of 2006. The increase in 2005 was attributable primarily to the growth of our business and also to legal, audit, consulting, and professional fees related to becoming a publicly-traded company, the implementation costs of Sarbanes-Oxley Act Section 404 compliance regarding management’s assessment of internal controls over financial reporting, and our other actions to implement our strategic plan.

Office supplies expenses were $1.4 million, $1.2 million and $1.0 million, or 3.2%, 3.1% and 3.6% of our total noninterest expenses, in 2006, 2005 and 2004, respectively. These increases are attributable primarily to the expansion of our branch network and franchise.

Our expenses related to OREO and repossessed assets were $2.3 million of total interest expense in 2006 and $1.1 million, or 2.9% and 3.7% of total noninterest expense in 2005 and 2004, respectively. The increase in 2006 was attributable primarily to the combined effect of an increase in the average number of repossessed vehicles in inventory, which resulted in increased repairs and maintenance expenses, and an increase in the valuation allowance of repossessed vehicles in an effort to expedite their disposition in the future. During 2006, the average number of repossessed vehicles in inventory increased by 56.98% to 540 units, when compared to 344 vehicles for 2005, after increasing by 63.81% from 210 vehicles for 2004. Repossessed assets are initially recorded at the lower of fair value or book value upon repossession and resulting losses are charged to the allowance for loan and lease losses. These assets are periodically evaluated and any subsequent decline in the fair value is charged to current operations.

Promotion and advertising increased to $1.2 million in 2006, from $686,000 and $545,000 in 2005 and 2004, respectively. The significant increase in 2006 was mainly attributable to an advertising campaign as part of the expansion of the mortgage loan department.

Lease expenses decreased by 9.98% to $776,000 in 2006, after increasing by 25.47% to $862,000 in 2005, from $687,000 in 2004. These expenses are primarily comprised of registration costs on leased vehicles and license renewal expenses on repossessed vehicles. During 2006, the decrease in lease expenses was mainly attributable to a reduction of 36.21% in lease portfolio originations for 2006, when compared to year 2005. The increase in leases expenses during 2005 was in part due to a decrease of 10.40% in lease portfolio originations, when compared to year 2004, but primarily to increased license renewal expenses upon an increase in the volume of repossessed assets during 2005.

Insurance expenses remained at $1.1 million in 2006 and 2005, compared to $804,000 in 2004. The increase in insurance expenses in 2005 was attributable primarily to the expansion of our branch network, becoming a publicly-traded company and our general organic growth.

Municipal and other taxes remained at $1.7 million in 2006 and 2005, compared to $1.3 million in 2004. The increase in 2005 was directly attributable to our organic growth and our acquisition of BankTrust in May 2004.

Commissions and service fees on credit and debit cards decreased by $40,000 to $1.3 million, after increasing by $158,000 to $1.4 million in 2005, from $1.2 million in 2004. The decrease in 2006 was mainly related to a decrease in credit card transactions. The increase in 2005 was attributable primarily to the increase in the size of our commercial loan portfolio, which provided us with increased merchant point-of-sale business during that year.

Other noninterest expenses remained at $2.5 million in 2006, when compared to year 2005, after increasing by $406,000 from $2.1 million in 2004. During 2005, the increase was related in large part to our asset growth over that period and increased expenses in our leasing business. For 2005 and 2004, the other noninterest expense included a charge-off of $480,000 related to an insurance claim still on litigation and $253,000 related to an income tax deficiency, respectively.

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.

Income tax expense is the sum of two components: current tax expense and deferred tax expense (benefit). Current tax expense is calculated by applying our current tax rate to taxable income. The deferred tax expense (benefit) 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. Deferred income tax assets and liabilities represent the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in our financial statements.

For year ended December 31, 2006, we recorded $6.3 million on income tax expense, compared to $9.1 million in 2005, and $8.7 million in 2004. Current income tax expense increased to $7.3 million in 2006, from $1.8 million in 2005, and $3.9 million in 2004, representing an increase of 319.3% in 2006 and a decrease of 55.6% in 2005. The increase in 2006 was mainly due to the net effect of the total consumption of net operating losses (“NOLs”) from acquired institutions, which was substantially lesser than the amount consumed in 2005, and a decrease of 44.2% in our income before taxes. During 2006, we recorded a taxable income related to the operation of acquired banks of approximately $2.5 million in excess of available NOLs. The decrease in our current income tax expense during 2005 was mainly due to the combined effect of a 5.0% decrease in our income before taxes, but primarily to the amount of NOLs consumed during 2005, also reducing our taxable income during that year.

As of December 31, 2006, 2005 and 2004, we had net deferred tax assets of $6.3 million, $5.1 million, and $12.5 million, respectively. The net increase of $1.1 million in our deferred tax asset during 2006 was mainly due to a decrease in deferred loan and leases net origination costs. In 2005, the net decrease of $7.5 million in our deferred tax asset was mainly due to the utilization of the net operating losses acquired from BankTrust in May 2004 and Banco Financiero in December 2002. The change in our deferred tax asset for the year ended December 31, 2006 was directly impacted by the initial application of the Staff Accounting Bulletin No. 108, which if further explained in the “Note 2 - Summary of Significant Accounting Policies” and “Note 21 - Income Taxes” to our 2006 consolidated financial statements, and in the section of this discussion and analysis captioned “Financial Condition.”

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 deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Considering the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies, we believe it is more likely than not that the benefits of these deductible differences as of December 31, 2006 will be realized.

On August 1, 2005, the governor of Puerto Rico approved and signed Law No. 41, which imposes an additional transitory tax of 2.5% on taxable income. This additional tax increases the maximum statutory tax rate from 39.0% to 41.5% and is applicable to all corporations and partnerships with taxable income in excess of $20,000 during the taxable years beginning after December 31, 2004 and ending on or before December 31, 2006.

In addition, on May 13, 2006, the governor of Puerto Rico approved and signed Law No. 89, which imposes an additional transitory tax of 2% on taxable income. This tax is applicable to the Banking industry raising the maximum statutory tax rate to 43.5% for taxable years beginning after December 31, 2005 and ending on or before December 31, 2006. This law also states that for taxable years beginning after December 31, 2006, the maximum statutory tax rate will be 39%.

The approval of the additional transitory taxes of over the original maximum statutory tax rate of 39% as mentioned above, resulted in additional income tax expense of $755,000 and $27,000 for the years ended December 31, 2006 and 2005, respectively.

In addition, on May 16, 2006, the governor of Puerto Rico approved and signed Law No. 98, the “Law of the 2006’s Extraordinary Tax.” This law imposes a prepaid tax of 5% over the 2005 taxable net income by for profit partnerships and corporations with gross income over $10.0 million. The Company could use the full payment as a tax credit in the income tax return for the taxable year beginning after December 31, 2005 and the portion not used, if any, could be used in equal portions for up to the next four taxable years. This prepayment of tax resulted in a disbursement of approximately $196,000. No income tax expense was recorded since such prepayment will be used as a tax credit in the 2006’s income tax return.

Extraordinary Gain on Acquisition of BankTrust

On May 3, 2004, we acquired all of the capital stock of BankTrust. The estimated fair value of assets acquired less liabilities assumed exceeded the purchase price by approximately $5.7 million. This was allocated to eliminate the fair value of intangible assets acquired, and the value of the furniture, fixtures and equipment acquired. Since all other remaining assets were either financial assets, assets to be disposed of in the near term or prepaid assets, the remaining negative goodwill amounting to $4.4 million resulted in an extraordinary gain on the acquisition. Please refer to “Note 3 - Acquisition” to our 2006 consolidated financial statements for further details.

Financial Condition

Our total assets as of December 31, 2006 were $2.5 billion, compared to $2.4 billion and $2.1 billion as of December 31, 2005 and 2004, respectively. During 2006, the increase was primarily the net result of organic growth in our loan and lease portfolio and a decrease in our investment portfolio. The increase during 2005 was primarily the result of organic growth in our investment securities and loan and lease portfolio.

Our total deposits increased by 9.87% to $1.9 billion as of December 31, 2006, after increasing $325.1 million, or 23.1%, to reach $1.7 billion as of December 31, 2005, compared to $1.4 billion as of December 31, 2004. The increase in deposits during 2006 and 2005 was concentrated in time deposits over $100,000 and brokered deposits, as further explained in the section of this discussion and analysis captioned “Deposits.” Other borrowings decreased to $395.0 million as of December 31, 2006, from $475.7 million as of December 31, 2005, compared to $520.2 million as of December 31, 2004. In 2006, the decrease in other borrowings was mainly related to a decrease in securities sold under agreements to repurchase and the redemption of trust preferred securities, as previously mentioned. During 2005, the decrease in other borrowings was mainly concentrated in the securities sold under agreements to repurchase.

Stockholders’ equity increased by 2.98% to $169.9 million as of December 31, 2006, representing an increase of $4.9 million from $165.0 million as of December 31, 2005. As of December 31, 2005, our stockholders’ equity was $165.0 million, representing an increase of 4.2% from $158.3 million as of December 31, 2004. Besides earnings from operations, stock options exercised, a private placement, our initial public offering and stock repurchases, our stockholders’ equity was also impacted by accumulated other comprehensive losses of $7.6 million, $10.4 million and $3.2 million during the years ended December 31, 2006, 2005 and 2004, respectively. In addition, during 2006, the Company’s stockholders’ equity was also affected by the cumulative effect of a $790,000 adjustment on the initial adoption of Staff Accounting Bulletin No. 108 (“SAB 108”), as further explained below.

Explanatory Note on the Adoption of SAB 108

On September 13, 2006, the Securities and Exchange Commission (the “SEC”) added Section N, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, to Topic 1, Financial Statements, of the Staff Accounting Bulletin Series. The interpretations in SAB 108 express the staff’s views regarding the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.

The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the “rollover” and “iron curtain” approaches. The rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statement. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. In SAB 108, the staff believes registrants must quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements by quantifying an error under both the rollover and iron curtain approaches and by evaluating the error measured under each approach. SAB 108 requires a registrant’s financial statements to be adjusted when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. We adopted the provisions of SAB 108 on December 31, 2006. Prior to adopting SAB 108, we consistently used the rollover approach when considering the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.

In August 2006, our assessment of internal controls as required by the Sarbanes-Oxley Act of 2002 revealed an accounting error related to the application of the Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (“FAS 91”) , Financial Accounting Standards No. 13, Accounting for Leases (“FAS 13”) , and FASB Technical Bulleting No. 85-3, Accounting for operating Leases with Scheduled Rent Increases (“FTB85-3”) .

FAS 91 establishes, among others, standards of financial accounting and reporting for purchase premiums or discounts associated with loan purchases. FAS 91 requires the difference between the initial investment in a purchased loan or group of loans and the amount paid to the seller plus any fees paid or less any fees received at the date of purchase to be recognized as an adjustment of yield over the life of the loan. Also, it establishes that if prepayments are not anticipated and they occur, a proportionate amount of the related purchase premium or discount shall be recognized in income so that the effective interest rate on the remaining portion of loans continues unchanged. In the past, we did not apply the provisions of FAS 91 over prepayments of loans purchased to The Bank & Trust of Puerto Rico (“BankTrust”) in May 2004. As of December 31, 2005, there was $849,350 in unamortized net purchase premiums related to canceled loans previously acquired from BankTrust.

FTB85-3 requires that increases in scheduled rent, which are included in minimum lease payments under FAS 13, to be recognized by lessors and lessees on a straight-line basis over the lease term unless another systematic and rational allocation basis is more representative of the time pattern in which the leased property is physically employed. We have several lease agreements with escalating clauses, for which related rent expense was recorded as paid instead of on a straight-line basis over the lease term. As of December 31, 2005, the deferred rent expense liability was understated by $446,500.

On December 31, 2006, we assessed the materiality of the FAS 91 and FAS 13/FTB85-3 error correction by performing a comprehensive analysis following guidance on SAB 99 and SAB 108. As required by SAB 108, we accumulated and quantified the misstatements related to these accounting errors using both the rollover and iron curtain approaches. After considering all relevant quantitative and qualitative characteristics of these accounting errors, we concluded that, when evaluated in the aggregate, the accounting errors were material, on a quantitative or qualitative basis, in relation to our financial statements for year ended December 31, 2006, and continued to be immaterial to previously reported financial statements.

As permitted by the provisions of SAB 108, we did not correct previously reported financial statements but instead corrected the errors via a cumulative effect adjustment in our annual financial statements for year ended December 31, 2006. We reported the cumulative effect of the initial application of SAB 108 provisions in the carrying amounts of assets and liabilities as of the beginning of year 2006, offset by an adjustment of $790,000 from the correction of both accounting errors, net of approximately $505,000 in taxes related to the aforementioned understatement, to the opening balance of retained earnings for year 2006. We included the cumulative effect adjustment on the initial adoption of SAB 108 in our Statement of Changes in Stockholders’ Equity for year ended December 31, 2006.

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 December 31, 2006, 2005 and 2004, we had $49.1 million, $20.8 million and $3.3 million, respectively, in interest-bearing deposits in other financial institutions. Also, we had $51.2 million, $54.1 million and $42.8 million in securities purchased under agreements to resell as of those same dates, respectively. On a fully taxable equivalent basis, the yield on interest-bearing deposits and the purchased securities under agreements to resell was 5.46%, 4.80% and 1.23% for the years ended December 31, 2006, 2005 and 2004, respectively.

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 a small portion of securities we intend to hold until maturity, or “held-to-maturity securities.” The carrying values of our available-for-sale securities are adjusted for 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 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)
December 31, 2006:
U.S. government agencies obligations	$	178,533	$	176,255	$	3,165	$	3,072	$	—	$	—	$	181,698	$	179,327
Collateralized mortgage obligations		305,044		300,192		29,878		29,142		—		—		334,922		329,333
Mortgage-backed securities		49,628		49,149		5,390		5,260		—		—		55,018		54,409
State and municipal obligations		9,518		9,563		—		—		—		—		9,518		9,563
Other investments		—		—		—		—		4,329		4,329		4,329		4,329
Total	$	542,723	$	535,159	$	38,433	$	37,474	$	4,329	$	4,329	$	585,485	$	576,962
December 31, 2005:
U.S. government agencies obligations	$	230,892	$	227,081	$	3,763	$	3,663	$	—	$	—	$	234,655	$	230,744
Collateralized mortgage obligations		333,154		327,399		32,386		31,590		—		—		365,540		358,989
Mortgage-backed securities		65,560		64,779		6,322		6,158		—		—		71,882		70,937
State and municipal obligations		7,902		7,821		—		—		—		—		7,902		7,821
Other investments		—		—		—		—		10,652		10,652		10,652		10,652
Total	$	637,508	$	627,080	$	42,471	$	41,411	$	10,652	$	10,652	$	690,631	$	679,143
December 31, 2004:
U.S. treasury securities	$	84,882	$	84,392	$	—	$	—	$	—	$	—	$	84,882	$	84,392
U.S. government agencies obligations		89,376		88,799		4,813		4,775		—		—		94,189		93,574
Collateralized mortgage obligations		303,016		301,070		37,128		36,991		—		—		340,144		338,061
Mortgage-backed securities		71,304		71,707		7,563		7,540		—		—		78,867		79,247
State and municipal obligations		9,477		9,514		—		—		—		—		9,477		9,514
Other investments		—		—		—		—		8,716		8,716		8,716		8,716
Total	$	558,055.00	$	555,482	$	49,504	$	49,303	$	8,716	$	8,716	$	616,275	$	613,504

During 2006, the investment portfolio decreased by approximately $102.3 million to $577.9 million as of December 31, 2006, from $680.2 million as of December 31, 2005. The decrease during 2006 was primarily due to the net effect of:

prepayments for approximately $100.4 million of mortgage backed securities;

the purchase of $55.4 million in mortgage backed securities, $30.0 million in US government agencies obligations and FHLB stocks, and $5.0 million of Puerto Rico Agency Notes;

a $50.1 million sale of FHLB and mortgage backed securities available for sale with an average book yield of 3.64% at the time of sale, which were sold in December 2006 in an effort to improve our net interest margin resulting in a net loss on sale of investments of $1.1 million, as previously mentioned;

a decrease of $38.3 million in US government agencies obligations due to monthly principal prepayments and maturity of FHLB, FNMA & FHLMC obligations and the redemption of FHLB stocks;

the maturity and monthly principal prepayments of $3.4 million in Puerto Rico Agency Notes;

a decrease of $2.9 million in the unrealized net loss on investment securities available for sale;

a decrease of $774,000 in other investments upon redemption of $25.8 million of floating rate junior subordinated deferrable interest debentures on December 18, 2006, as previously mentioned;

a net premium amortization of $368,000.

During 2005, the investment portfolio increased by approximately $66.5 million to $680.2 million as of December 31, 2005 from $613.7 million as of December 31, 2004. The increase during 2005 was primarily due to the net effect of:

●

the purchase of $142.1 million in US government agencies obligations, $8.3 million in FHLB stocks and $159.8 million in mortgage backed securities and collateralized mortgage obligations, to offset the effect of monthly prepayments and sales during the year and to reinvest cash flows at higher market interest rates in order to improve the average yield of the investment portfolio;

●

the monthly prepayments for approximately $136.8 million of mortgage backed securities;

●

a $85.0 million sale of US Treasury obligations which would have matured between August and November of 2005 and averaged a book yield of 1.94% at the time of sale, which were sold in an effort to improve the yields of the available for sale securities portfolio and resulted in a net loss on sale of investments of $301,000, as previously mentioned;

●

a decrease of $7.9 million in FHLB investments due to monthly principal prepayments and maturity of FHLB obligations, and the redemption of FHLB stocks;

●

a net premium amortization of $4.6 million; and

●

a decrease of $1.5 million in Puerto Rico Bonds due to maturity of the PR Public Finance Corp. Bonds.

During the past few years, we have positioned our investment portfolio for an increase in interest rates by purchasing mostly investments with maturities or estimated maturities between 1½ to 4 years. During the first half of 2006, we were able to reinvest at higher yields and for maturities or estimated maturities from 2 years to 7 years. We did not purchase any securities during the last six months of 2006. As of December 31, 2006, after above-mentioned transactions, the estimated average maturity was approximately 3.16 years and the average yield was approximately 4.67%. As of December 31, 2006, investment securities having a carrying value of approximately $523.7 million were pledged to secure borrowings and deposits of public funds and to comply with other pledging requirements.

Investment Portfolio — Maturity and Yields

The following table summarizes the contractual maturity of investment securities held in our investment portfolio and their weighted average yields:

	Year Ended December 31, 2006
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
Investments available-for-sale: (1)(2)
U.S. government agencies obligations	$	15,765		3.28	%	$	142,564		4.64	%	$	17,926		5.66	%	$	—		—	%	$	176,255		4.62	%
Mortgage backed securities(3)		5,612		4.37			36,358		4.42			2,094		5.80			5,085		4.80			49,149		4.52
Collateral mortgage obligations(3)		31,113		4.28			234,658		4.66			34,420		5.29			—		—			300,191		4.70
State & political subdivisions		2,631		3.38			1,660		6.14			5,273		4.71			—		—			9,564		4.59
Total investments available-for-sale	$	55,121		3.96	%	$	415,240		4.64	%	$	59,713		5.37	%	$	5,085		4.80	%	$	535,159		4.65	%

Investments held-to-maturity: (2)
U.S. government agencies obligations	$	—		—	%	$	3,165		3.95	%	$	—		—	%	$	—		—	%	$	3,165		3.95	%
Mortgage backed securities(3)		—		—			—		—			5,390		4.98			—		—			5,390		4.98
Collateral mortgage obligations(3)		—		—			13,556		3.96			16,322		5.22			—		—			29,878		4.65
State & political subdivisions		—		—			—		—			—		—			—		—			—		—
Total investments held-to-maturity	$	—		—	%	$	16,721		3.96	%	$	21,712		5.16	%	$	—		—	%	$	38,433		4.64	%

Other Investments:
FHLB stock		3,718		6.25	%		—		—	%		—		—	%		—		—	%		3,718		6.25	%
Investment in statutory trust		—		—			—		—			—		—			611		8.62			611		8.62
Total other investments	$	3,718		6.25	%	$	—		—	%	$	—		—	%	$	611		8.62	%	$	4,329		6.58	%
Total investments	$	58,839		4.10	%	$	431,961		4.62	%	$	81,425		5.31	%	$	5,696		5.21	%	$	577,921		4.67	%

(1)	Based on estimated fair value.

(2)	Almost all of our income from investments in securities is tax exempt because 99.16% of these securities are held in our IBEs. The yields shown in the above table are not calculated on a fully taxable equivalent basis.

(3)	Maturities of mortgage-backed securities and collateralized mortgage obligations, or CMOs, are based on anticipated lives of the underlying mortgages, not contractual maturities. CMO maturities are based on cash flow (or payment) windows derived from broker market consensus.

Other Investments

For various business purposes, we make investments in earning assets other than the interest-earning securities discussed above. As of December 31, 2006, our investment in other earning assets included $611,000 equity in our statutory trusts and $3.7 million in FHLB stock. The following table presents the balances of other earning assets as of the dates indicated:

	Year Ended December 31,
Type	2006		2005		2004
	(In thousands)
Statutory trusts	$	611	$	1,382	$	1,386
FHLB stock		3,718		9,270		7,330
Total	$	4,329	$	10,652	$	8,716

Loan and Lease Portfolio

Our primary source of income is interest on loans and leases. The following table presents the composition of our loan and lease portfolio by category as of the dates indicated, excluding loans held for sale secured by real estate amounting to $879,000, $936,000, $2.7 million, $6.8 million and $5.2 million as of December 31, 2006, 2005 2004, 2003 and 2002, respectively:

	Year Ended December 31,
	2006			2005			2004			2003			2002
	(In thousands)
Real estate secured	$	813,615		$	658,123		$	516,542		$	317,491		$	263,600
Leases		443,311			487,863			459,251			315,935			256,087
Other commercial and industrial		297,512			272,205			243,603			177,989			155,622
Consumer		60,682			63,980			74,755			26,592			31,376
Real estate - construction		126,241			82,468			79,334			47,370			52,226
Other loans		5,015			5,336			6,134			4,236			3,665
Gross loans and leases	$	1,746,376		$	1,569,975.00		$	1,379,619.00		$	889,613		$	762,576.00
Plus: Deferred loan costs, net		4,880			7,442			6,480			4,707			3,018
Total loans, including deferred loan costs, net	$	1,751,256		$	1,577,417		$	1,386,099		$	894,320		$	765,594
Less: Unearned income		(1,297	)		(1,157	)		(1,170	)		(1,774	)		(3,041	)
Total loans, net of unearned income	$	1,749,959		$	1,576,260		$	1,384,929		$	892,546		$	762,553
Less: Allowance for loan and lease losses		(18,937	)		(18,188	)		(19,039	)		(9,394	)		(6,918	)
Loans, net	$	1,731,022		$	1,558,072		$	1,365,890		$	883,152		$	755,635

As of December 31, 2006, 2005 and 2004, our total loans and leases, net of unearned income, were $1.7 billion, $1.6 billion and $1.4 billion, respectively. The increase in our loan and lease volume in 2006 and 2005 was the result of organic growth. Our total loans and leases, net of unearned income as a percentage of total assets, increased to 70.0% as of December 31, 2006, and remained at 66.0% as of December 31, 2005 and 2004.

Real estate secured loans, the largest component of our loan and lease portfolio, consist primarily of commercial real estate loans and/or commercial lines of credit that are extended to finance the purchase and/or improvement of commercial real estate and/or businesses thereon or for business working capital purposes. The properties may be either owner-occupied or for investment purposes. Our loan policy adheres to the real estate loan guidelines promulgated by the FDIC in 1993. The policy provides guidelines including, among other things, review of appraised value, limitation on loan-to-value ratio, and minimum cash flow requirements to service debt. Loans secured by real estate equaled $813.6 million, $658.1 million and $516.5 million as of December 31, 2006, 2005 and 2004, respectively. The volume of our real estate loans has increased significantly as a result of our organic growth. Real estate secured loans, excluding real estate secured construction loans, as a percentage of total loans and leases increased to 46.6% in 2006, from 41.9% and 37.4% for the fiscal years ended 2005 and 2004, respectively.

Lease financing contracts, the second largest component of our loan portfolio, consist of automobile and equipment leases made to individuals and corporate customers. In the last three years, we have deemphasized equipment leasing and focused on automobile leasing. For 2006, approximately 63.38% of our lease financing contracts originations were for new automobiles, approximately 32.76% were for used automobiles and the remaining 3.86% consisted primarily of construction and medical equipment leases. The volume of our lease financing contracts decreased to $443.3 million as of December 31, 2006, from $487.9 million and $459.3 million as of December 31, 2005 and 2004, respectively. Lease financing contracts, as a percentage of total loans and leases were 25.4%, 31.0%, and 33.3% at the end of 2006, 2005 and 2004, respectively. The decrease in our lease portfolio during 2006 resulted from the proactive actions we started taking during the third quarter of 2005 to tightening our underwriting standards, enhance our collections efforts and strategically pare back our automobile leasing operations upon the deterioration of our lease portfolio, mainly during the last quarter of 2005. During September 2005, March 2005, and November 2004, we sold lease financing contracts on a limited recourse basis to a third party with carrying values of $15.0 million, $14.9 million and $30.0 million, respectively. We retained servicing responsibilities over all lease financing contracts sold. All lease contracts were sold on a limited recourse basis. The recourse on lease contracts sold in September 2005 is limited to a maximum of 5.0% of the outstanding aggregate principal balance at the selling date of all leases sold. The recourse on lease contracts sold in or before March 2005 is limited to a maximum of 5.0% of the outstanding aggregate principal balance of all leases sold at repossession date. We did not sell lease financing contracts during 2006.

Other commercial and industrial loans include revolving lines of credit as well as term business loans. Other commercial and industrial loans increased to $297.5 million as of December 31, 2006, from $272.2 million in 2005 and $243.6 million in 2004. The increase in other commercial and industrial loans in 2006 and 2005 was due to our organic growth. Other commercial and industrial loans as a percentage of total loans were 17.0%, 17.3% and 17.7% at the end of 2006, 2005 and 2004, respectively.

Consumer loans have historically represented a small part of our total loan and lease portfolio. The majority of consumer loans consist of personal installment loans, credit cards, boat loans, and consumer lines of credit. We make consumer loans only to complement our commercial business, and these loans are not emphasized by our branch managers. As a result, repayment on this portfolio has generally exceeded or equaled origination, except for 2004 and 2002, when we acquired consumer loans in connection with our acquisition of BankTrust and Banco Financiero, respectively. In the BankTrust acquisition, we acquired consumer loans totaling $60.2 million from BankTrust, including a $51.4 million boat financing portfolio, and $12.2 million from Banco Financiero. Consumer loans decreased to $60.7 million as of December 31, 2006, from $64.0 million in 2005, and from $74.8 million in 2004. Consumer loans as a percentage of total loans and leases were 3.5%, 4.1% and 5.4% at the end of 2006, 2005 and 2004, respectively. Consumer loans as of December 31, 2006, 2005 and 2004 included a boat portfolio of $37.4 million, $39.7 million and $45.8 million, respectively, acquired as a result of the acquisition of former BankTrust; $13.8 million, $15.3 million and $19.5 million, respectively, in unsecured installment loans; and credit cards and open-end loans for $9.5 million, $9.0 million and $9.5 million, respectively.

Construction loans secured by real estate totaled $126.2 million, $82.5 million and $79.3 million as of December 31, 2006, 2005 and 2004, respectively. Construction loans secured by real estate as a percentage of total loans and leases were 7.2%, 5.3% and 5.8% for those same periods, respectively. During 2006 and 2005, the volume of our construction loans secured by real estate has increased as a result of our organic growth. In 2006, the originations of construction loans secured by real estate was mainly comprised of loans for land development and the construction of commercial real estate property, but primarily for the construction of residential multi-family projects.

Our loan terms vary according to loan type. Unsecured commercial term loans generally have maturities of three to five years, while we generally limit commercial loans secured by real estate maturities to five to eight years. Lines of credit, in general, are extended on an annual basis to businesses that need temporary working capital and/or import/export financing. Leases are offered for terms up to 72 months. The following table shows our maturity distribution of loans and leases, including loans held for sale of $879,000, as of December 31, 2006, excluding non-accrual loans amounting to $37.3 million as of the same date. A significant part of our non-consumer loan portfolio is floating rate loans which comprise both commercial and industrial loans and commercial real estate loans. By contrast, residential mortgage loans originated by Eurobank are fixed rate. Residential mortgage loans are included in the real estate - secured category in the following table.

	As of December 31, 2006
			Over 1 Year through 5 Years				Over 5 Years
	One Year or Less⁽¹⁾		Fixed Rate		Floating or Adjustable Rate		Fixed Rate		Floating or Adjustable Rate		Total
	(In thousands)
Real estate — construction	$	163,906	$	330	$	3,465	$	559	$	2,512	$	170,772
Real estate — secured		215,800		115,441		258,499		128,896		25,917		744,553
Other commercial and industrial		212,374		20,687		43,028		2,683		13,912		292,684
Consumer		12,302		12,099		1,326		34,505		370		60,602
Leases		10,178		391,304		-		38,661		-		440,143
Other loans		4,829		-		-		-		-		4,829
Total	$	619,389	$	539,861	$	306,318	$	205,304	$	42,711	$	1,713,583

(1)	Maturities are based upon contract dates. Demand loans are included in the one year or less category and totaled $424.0 million as of December 31, 2006.

Nonperforming Loans, Leases and Assets

Nonperforming assets consist of loans and leases on nonaccrual status, loans 90 days or more past due and still accruing interest, loans that have been restructured resulting in a reduction or deferral of interest or principal, OREO, and other repossessed assets.

The following table sets forth the amounts of nonperforming assets (net of the portion guaranteed by the United States government) as of the dates indicated:

	As of December 31,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Loans contractually past due 90 days or more but still accruing interest	$	12,723		$	8,560		$	8,365		$	9,700		$	6,171
Nonaccrual loans		37,255			27,703			32,168			17,058			15,889
Total nonperforming loans		49,978			36,263			40,533			26,758			22,060
Other real estate owned		3,629			1,542			2,875			2,774			1,963
Other repossessed assets		9,419			7,975			3,566			3,643			5,681
Total nonperforming assets	$	63,026		$	45,780		$	46,974		$	33,175		$	29,704
Nonperforming loans to total loans and leases, net of unearned		2.85	%		2.30	%		2.92	%		2.98	%		2.90	%
Nonperforming assets to total loans and leases, net of unearned, plus repossessed property		3.57			2.89			3.37			3.66			3.87
Nonperforming assets to total assets		2.52			1.91			2.23			2.51			2.87
Allowance for loan and lease losses to nonperforming loans		37.89			50.16			46.97			35.11			31.36

We continually review present and estimated future performance of the loans and leases within our portfolio and risk-rate such loans in accordance with a risk rating system. More specifically, we attempt to reduce the exposure to risks through: (1) reviewing each loan request and renewal individually; (2) utilizing a centralized approval system for all unsecured loans and secured loans in excess of $100,000; (3) strictly adhering to written loan policies; and (4) conducting an independent credit review. In addition, loans based on short-term asset values are monitored on a quarterly basis. In general, we receive and review financial statements of borrowing customers on an ongoing basis during the term of the relationship and respond to any deterioration noted.

Loans are generally placed on nonaccrual status when they become 90 days past due, unless we believe the loan is adequately collateralized and we are in the process of collection. For loans placed in nonaccrual status, the nonrecognition of interest income on an accrual basis does not constitute forgiveness of the interest, and collection efforts are continuously pursued. Loans may be restructured by management when a borrower has experienced some change in financial status, resulting in an inability to meet the original repayment terms, and when we believe the borrower will eventually overcome financial difficulties and repay the loan in full.

All interest accrued but not collected for loans and leases that are placed on nonaccrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on a cash basis or cost recovery method, until qualifying for return to accrual status.

The nonperforming loans and leases increased to $50.0 million as of December 31, 2006, from $36.3 million as of December 31, 2005, after decreasing by $4.3 million from $40.5 million as of December 31, 2004, as further explained below.

The increase in nonperforming loans during 2006 was mainly due to the combined effect of a $4.2 million increase in loans over 90 days past due still accruing interest and an increase of $9.6 million in nonaccrual loans. During 2006, the increase in loans over 90 days still accruing interest was mainly concentrated in two business relationships secured by real estate, one for $4.2 million and the other for $693,000, with loan-to-values of 27% and 84%, respectively. Our historical losses on commercial and construction loans secured by real estate have been low. The increase in nonaccrual loans during 2006 was mainly attributable to the combined effect of: an increase of $9.0 million in the commercial and construction loans category, mostly secured by real estate; and an increase of $843,000 in marine loans classified as nonaccrual loans. During 2006, the increase in the nonaccrual commercial and construction loans category included: five business relationships amounting to $6.2 million granted to different companies which are secured by real estate with loan-to-values ranging between 47% and 98%; and other three loans amounting to $1.5 million granted to a construction company, for which real estate collateral is held for approximately 50% of the total debt and proceeds from specific assignments of construction contracts may be sufficient to repay the remaining balance.

The decrease in nonperforming loans and leases in 2005 was mainly due to the net effect of a $4.5 million decrease in nonaccrual loans and an increase of $195,000 in loans over 90 days past due still accruing interest. During 2005, the decrease in nonaccrual loans was mainly attributable to the combined effect of: a decrease of $3.0 million in the commercial loan category; a decrease of $628,000 in the marine loans category; and a decrease of $423,000 in the lease financing contracts classified as nonaccrual loans. The increase in loans over 90 days past due still accruing interest during 2005 was mainly due to the net effect of: a decrease of $1.5 million in the real estate secured loans category, mostly commercial loans; an increase of $926,000 in the installment loan category, mostly marine loans; and an increase of $884,000 in the lease financing contracts category.

As of December 31, 2006, 2005 and 2004, nonaccrual loans acquired from BankTrust amounted to $2.4 million, $2.6 million and $7.5 million, respectively. The ratio of nonperforming loans and leases over total loans and leases was 2.85% as of December 31, 2006, compared to 2.30% and 2.92% as of December 31, 2005 and 2004, respectively.

We believe all loans and leases, with which we have serious doubts as to collectibility, are classified within the category of nonperforming loans and leases and are appropriately reserved.

OREO consists of properties acquired by foreclosure or similar means and that management intends to offer for sale. Other repossessed assets are comprised of repossessed automobiles, boats and equipment subject to lease contracts. OREO and repossessed assets are initially recorded at the lower of net realizable value or book value. Any resulting loss is charged to the allowance for loan and lease losses. An appraisal of OREO and valuation of repossessed assets is made periodically after a property is acquired, and 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 December 31, 2006, our OREO consisted of 18 properties with an aggregate value of $3.6 million, compared to 13 properties with an aggregate value of $1.5 million as of December 31, 2005, and 12 properties with an aggregate value of $2.9 million as of December 31, 2004. During 2006, we repossessed 22 properties with an aggregate value of $6.1 million and sold 12 properties with an aggregate value of $4.0 million.

Other repossessed assets as of December 31, 2006 were $9.4 million, $8.0 million and $3.6 million as of December 31, 2005 and 2004, respectively. As of December 31, 2006, 2005 and 2004, other repossessed assets were comprised of: $8.3 million, $6.2 million and $2.6 million, respectively, in repossessed vehicles; $1.1 million, $1.5 million and $705,000, respectively, in repossessed boats; and $39,000, $210,000 and $231,000, respectively, in repossessed equipment. During 2006, the increase in repossessed assets was mainly due to the net effect of: an increase of $2.1 million in repossessed vehicles, and a decrease of $444,000 and $171,000 in repossessed boats and equipment, respectively. During 2005, the increase in repossessed assets was mainly due to the net effect of: an increase of $3.6 million in repossessed vehicles, an increase of $824,000 in repossessed boats, and a decrease of $20,000 in equipment. The increase in repossessed assets during 2006 was mainly due to the deterioration of our lease portfolio. However, even though the number of repossessed vehicles in 2006 increased when compared to 2005, the net increase during 2006, in term of units, was lower as sales of repossessed assets also increased for 2006 as compared to 2005. Total repossessed and sold vehicles during 2006 were 1,865 and 1,708, respectively, compared to 1,397 and 1,121 in 2005. The increase in repossessed assets during 2005 was in part attributable to increases in volumes of our automobile lease originations, but it was primarily related to the deterioration of our lease portfolio, which resulted in a more aggressive repossession approach by our collection department. We continue monitoring this inventory very closely and taking measures to prevent further deterioration and expedite its disposition. During the fourth quarter of 2006, we completed the relocation of our repossessed vehicles to a more accessible location in order to give them more exposure in an effort to expedite their disposition.

Together with OREO, the ratio of nonperforming assets as a percentage of total loans and leases plus repossessed property increased to 3.57% as of December 31, 2006, from 2.89% and 3.37% as of December 31, 2005 and 2004, respectively.

Allowance for Loan and Lease Losses

We have established an allowance for loan and lease losses to provide for loans and leases in our portfolio that may not be repaid in their entirety. The allowance is based on our regular, monthly assessments of the probable estimated losses inherent in the loan and lease portfolio. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula described below and specific allowances for identified problem loans and leases and portfolio segments.

When analyzing the adequacy of our allowance, our portfolio is segmented into major loan categories. Although the evaluation of the adequacy of our allowance focuses on loans and leases and pools of similar loans and leases, no part of our allowance is segregated for, or allocated to, any particular asset or group of assets. Our allowance is available to absorb all credit losses inherent in our portfolio.

Each component would normally have similar characteristics, such as classification, type of loan or lease, industry or collateral. As needed, we separately analyze the following components of our portfolio and provide for them in our allowance:

credit quality;

sufficiency of credit and collateral documentation;

proper lien perfection;

appropriate approval by the loan officer and the loan committees;

adherence to any loan agreement covenants; and

compliance with internal policies and procedures and laws and regulations.

The general portion of our allowance is calculated by applying loss factors to all categories of loans and leases outstanding in our portfolio. We use historic loss rates determined over a period of 1 to 5 years, which, at least on an annual basis, are adjusted to reflect any current conditions that are expected to result in loss recognition. Factors that we consider include, but are not limited to:

effects of any changes in lending policies and procedures, including those for underwriting, collection, charge-offs, and recoveries;

changes in the experience, ability and depth of our lending management and staff;

concentrations of credit that might affect loss experience across one or more components of the portfolio;

levels of, and trends in, delinquencies and nonaccruals; and

national and local economic business trends and conditions.

The resulting loss factors are then multiplied against the current period’s balance of loans outstanding to derive an estimated loss. Rates for each pool are based on those factors management believes are applicable to that pool. When applied to a pool of loans or leases, the adjusted historical loss rate is a measure of the total inherent losses in the portfolio that would have been estimated if each individual loan or lease had been reviewed.

As a result of increasing loss ratios experienced in the later part of 2005, particularly with our lease portfolio, during the first quarter of 2006, we made some revisions to our methodology for the determination of the allowance for loan and lease losses to provide for a more structured and timely monitoring of changes in loss trends and conditions. New reports and analyses were incorporated into our control process over such determination. In addition, as part of these revisions, we also made some refinements to our methodology for estimating net realizable value of vehicles upon repossession. We feel these revisions will result in more timely recognition of losses in our automobile lease portfolio and better valuation of our repossessed vehicles.

In addition, another component is used in the evaluation of the adequacy of the allowance. This additional component serves as a management tool to measure the probable effect that current internal and external environmental factors could have on the historical loss factors.

On a quarterly basis, a risk percentage is assigned to each environmental factor based on our judgment of the implied risk over each loan category. The result of our assumptions is then applied to the current period’s balance of loans outstanding to derive the probable effect these current internal and external environmental factors could have over the general portion of our allowance. The net allowance resulting from this procedure is included as an additional component in the evaluation of the adequacy of our allowance.

In addition to our general portfolio allowances, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate a high probability that a loss will be incurred. This amount is determined following a consistent procedural discipline in accordance with Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS No. 114”), as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.

Through periodic management review at branch and executive level and utilization of internal delinquency processes, both portfolios and individual loans and leases are monitored on an ongoing basis. When considered appropriate, a specific allowance will be considered on individual loan or lease accounts. A review is generally conducted of all the conditions surrounding any particular account such as the borrower’s character, existing and potential financial condition, realizable value of collateral, prospects for additional collateral and payment record. As a result, the loss potential is determined and specific allowances may be established. The level of allowance will vary depending on the analysis but we utilize the same classification categories as federal regulators, which result in varying amounts of reserve depending on loss potential.

As mentioned above, our methodology for the determination of the adequacy of the allowance for loan and lease losses for impaired loans is based on classifications of loans and leases into various categories and the application of SFAS No. 114, as amended. For non-classified loans, the estimated allowance is based on historical loss experiences as adjusted for changes in trends and conditions on at least an annual basis. In addition, on a quarterly basis, the estimated allowance for non-classified loans is adjusted for the probable effect that current environmental factors could have on the historical loss factors currently in use. While our allowance for loan and lease losses is established in different portfolio components, we maintain an allowance that we believe is sufficient to absorb all credit losses inherent in our portfolio.

Although our management believes that the allowance for loan and lease losses is adequate to absorb probable losses on existing loans and leases that may become uncollectible, there can be no assurance that our allowance will prove sufficient to cover actual loan and lease losses in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of our allowance for loan and lease losses. Such agencies may require us to make additional provisions to the allowance based upon their judgments about information available to them at the time of their examinations.

The table below summarizes, for the periods indicated, loan and lease balances at the end of each period, the daily average balances during the period, changes in the allowance for loan and lease losses arising from loans and leases charged-off, recoveries on loans and leases previously charged-off, and additions to the allowance, and certain ratios related to the allowance for loan and lease losses:

	Year Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Average total loans and leases outstanding during period	$	1,663,330		$	1,487,850		$	1,217,723		$	842,033		$	577,995
Total loans and leases outstanding at end of period, including loans held for sale		1,750,838			1,577,196			1,387,613			899,392			767,791
Allowance for loan and lease losses:
Allowance at beginning of period		18,188			19,039			9,394			6,918			4,513
Charge-offs:
Real estate — secured		685			-			5			-			-
Commercial and industrial		3,050			4,848			3,329			966			887
Consumer		1,978			2,600			1,196			1,347			1,718
Leases		12,927			8,991			5,806			2,715			767
Other loans		149			150			164			37			16
Total charge-offs		18,789			16,589			10,500			5,065			3,388
Recoveries:
Real estate — secured		11			-			-			-			-
Commercial and industrial		534			486			154			160			97
Consumer		465			256			233			254			180
Leases		1,604			2,210			1,741			675			142
Other loans		21			11			15			1			2
Total recoveries		2,635			2,963			2,143			1,090			421
Net loan and lease charge-offs		16,154			13,626			8,357			3,975			2,967
Provision for loan and lease losses		16,903			12,775			7,100			6,451			3,354
Allowance of acquired bank — BankTrust (2004) and Banco Financiero (2002)		-			-			10,902			-			2,018
Allowance at end of period	$	18,937		$	18,188		$	19,039		$	9,394		$	6,918
Ratios:
Net loan and lease charge-offs to average total loans		0.97	%		0.92	%		0.69	%		0.47	%		0.51	%
Allowance for loan and lease losses to total loans at end of period		1.08			1.15			1.37			1.04			0.90
Net loan and lease charge-offs to allowance for loan losses at end of period		85.30			74.92			43.89			42.31			42.89
Net loan and lease charge-offs to provision for loan and lease losses		95.57			106.66			117.70			61.62			55.23

The rapid growth of our loan and lease portfolio in the past five years required an increased allowance for loan and lease losses. The allowance for loan and lease losses increased by 4.1%, or $749,000, to $18.9 million as of December 31, 2006, after decreasing by 4.5%, or $851,000, to $18.2 million as of December 31, 2005, from $19.0 million as of December 31, 2004. The allowance for loan and lease losses as a percentage of total loans and leases decreased to 1.08% at the end of year 2006, from 1.15% in 2005 and 1.37% in 2004. However, the loan portfolio growth during the years 2006 and 2005 has been mostly concentrated in commercial loans secured by real estate, on which the loss of risk is lesser than in the other loan categories. We consider that the allowance for loan and lease losses, which is 1.08% of total loans and leases as of December 31, 2006, is adequate to absorb probable losses in the portfolio.

On a quarterly basis, we have the practice of effecting partial charge-offs on all lease finance contracts that are over 120 days past due. Accordingly, all lease finance contracts that are over 120 days past due at the end of each quarter are partially charged-off. This is done based on our historical lease loss experience. For 2006, we used a historical loss ratio in lease finance contracts of approximately 20%. For the years ended December 31, 2006, 2005 and 2004, approximately $2.5 million, $1.6 million and $1.0 million was charged off for this purpose, respectively.

In June 2004, except for leases in a payment plan, bankruptcy or other legal proceedings, we commenced the practice of charging-off most of our lease finance contracts that were over 365 days past due. This full charge-off is made on a quarterly basis. Accordingly, most of our lease finance contracts that are over 365 days past due at the end of each quarter are fully charged-off. For the years ended December 31, 2006, 2005 and 2004, approximately $781,000, $1.3 million and $1.5 million was charged-off for this purpose, respectively.

Net charge-offs as a percentage of average loans was 0.97%, 0.92%, and 0.69% at the end of year 2006, 2005 and 2004, respectively. The increase in this ratio for 2006 was mainly due to an increase in net charge-offs from our leasing portfolio, as further explained below. The increase in this ratio for 2005 was mainly attributable to the net effect of: increased volumes in the loan and lease portfolio, a decrease in full charge-offs of our lease finance contracts that are over 365 days past due, and the deterioration of our lease portfolio, primarily during the last quarter of 2005.

Net charge-offs as a percentage of provision for loan and lease losses decreased to 95.6% as of December 31, 2006, from 106.7% in 2005 and 117.7% in 2004. The decrease in this ratio for 2006 and 2005 was mainly as a direct result of the increase in our provision for loan and lease losses to account for the loss trends in our leasing portfolio.

Net charge-offs increased to $16.2 million for year ended December 31, 2006, from $13.6 million and $8.4 million for 2005 and 2004, respectively, as further described below.

The increase in net charge-offs for year ended December 31, 2006, when compared to year ended December 31, 2005, was distributed as follows: (i) $4.5 million increase in net charge-offs from our leasing portfolio; (ii) $1.8 million decrease in net charge-offs from other commercial and industrial loans; (iii) $831,000 decrease in net charge-offs from consumer loans; and (iv) $674,000 increase in net charge-offs from real estate secured loans. The increase in net charge-offs from our leasing portfolio was mainly attributable to the increase in the volume of repossessed assets, as explained before, and also to an increase in the initial market valuation of repossessed vehicles at the time of repossession.

The increase in net charge-offs for the year ended December 31, 2005, when compared to year ended December 31, 2004, was distributed as follows: (i) $2.7 million increase in net charge-offs from our leasing portfolio mainly as a result of an increase in the repossessed vehicles inventory; (ii) $1.4 million increase in net charge-offs from consumer loans; and (iii) $1.2 million increase in net charge-offs from other commercial and industrial loans. During 2005, the increase in net charge-offs from consumer loans and the commercial and industrial loans portfolio included $1.1 million and $643,000 related to marine and commercial loans acquired from BankTrust, respectively, for which adequate allowances were previously established. Also, during 2005, the commercial and industrial charge-offs included the unsecured portions of a loan granted to a computer retailing company amounting to $601,000 and $550,000 related to a loan granted to a construction company, respectively.

Net charge offs as a percentage of our year end portfolio balance, or “net loss experience,” has averaged 0.94% for our commercial loan portfolio that is not secured by real estate over the past five years. As previously mentioned, our historical losses through the years from our commercial loan portfolio secured by real estate have been low. However, because a significant portion of our business is focused on commercial lending, we have generally maintained a conservative allowance for our commercial loan portfolio. For the portion of our commercial loan portfolio adequately secured with real estate collateral, we maintain an allowance equal to 0.06% of the outstanding balance of such portfolio. The allowance for commercial loans that are not secured by real estate is equal to 1.63% of the outstanding portfolio balance.

Our consumer loan portfolio has averaged a 3.73% net loss experience over the past five years. This is partially attributable to the fact that, in connection with our acquisitions of other banks, additional charge-offs have been recorded and additional allowances have been built into the transaction pricing to compensate for future losses. For our consumer loan portfolio we maintain an allowance equal to 2.79% of the outstanding balance of such portfolio.

Our five-year old construction loan portfolio has no loss experience. Nevertheless, we maintain an allowance for this portfolio equal to 0.48% of the portfolio balance.

Our leasing portfolio has a 2.55% net loss experience over the last year. We maintain an allowance equal to 2.50% of the balance of this portfolio.

Although our mortgage portfolio has no loss experience, we maintain an allowance equal to 0.14% of this portfolio.

In May 2004, Eurobank acquired loan portfolios from BankTrust totaling $347.2 million with accompanying general, specific and unallocated allowances of $10.9 million. Because a number of BankTrust’s problem loans were acquired by a special purpose vehicle immediately prior to closing, and as a result of a series of charge-offs performed prior to the closing, except with regard to the acquired boat financing portfolio described below, we determined that the portfolios acquired from BankTrust generally had a risk level comparable to our portfolio prior to the BankTrust transaction. Consequently, we continued to apply the same allowance guidelines used to our portfolio.

The only major loan category acquired from BankTrust not previously marketed by Eurobank was BankTrust’s boat financing portfolio, which amounted to $37.4 million as of December 31, 2006. As with all other BankTrust consumer loans, the special purpose vehicle assumed all loans in the BankTrust boat financing portfolio that were more than 90 days delinquent. In the six months prior to its acquisition, BankTrust maintained a boat financing allowance between 1.6% and 1.9% of the outstanding portfolio. We currently maintain a $783,000 allowance on the boat financing portfolio, or 2.09% of the outstanding portfolio.

The table below presents an allocation for loan and lease losses among the various loan categories and sets forth the percentage of loans and leases in each category to gross loans or leases. The allocation of the allowance for loan and lease losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions:

	As of December 31,
	2006					2005					2004					2003					2002
	Amt.		Loan Category to Gross Loans(1)			Amt.		Loan Category to Gross Loans(1)			Amt.		Loan Category to Gross Loans(1)			Amt.		Loan Category to Gross Loans(1)			Amt.		Loan Category to Gross Loans(1)
	(Dollars in thousands)
Allocated:
Real estate — construction	$	610		7.23	%	$	714		5.25	%	$	1,200		5.75	%	$	464		5.32	%	$	495		6.85	%
Real estate — secured		525		46.60			1,137		41.92			1,997		37.44			1,212		35.69			1,037		34.57
Commercial and industrial		4,836		17.03			4,597		17.34			6,470		17.66			4,067		20.01			2,265		20.41
Consumer		1,433		3.47			1,499		4.08			3,239		5.42			750		2.99			992		4.11
Leases		11,089		25.38			9,701		31.07			3,815		33.29			1,950		35.51			1,825		33.58
Other loans		436		0.29			212		0.34			134		0.44			21		0.48			18		0.48
Unallocated		8		—			328		—			2,184		—			930		—			286		—
Total allowance for loan and lease losses	$	18,937		100.00	%	$	18,188		100.00	%	$	19,039		100.00	%	$	9,394		100.00	%	$	6,918		100.00	%

(1)	Excludes mortgage loans held-for-sale.

Nonearning Assets

Premises, leasehold improvements and equipment, net of accumulated depreciation and amortization, totaled $14.9 million as of December 31, 2006, compared to $11.2 million and $11.3 million at the end of year 2005 and 2004, respectively.

On February 6, 2007, Eurobank, our wholly owned banking subsidiary, closed on the purchase of land and an office building to serve as our new headquarters. The property, which is located in San Juan, includes a 57,187 square foot office building that will be used to consolidate our headquarter and administrative operations. We anticipate that there may be a benefit from certain efficiencies associated with centralizing these operations in one location.

The purchase price for the property was $12,360,000. We are in the process of renovating the space to conform to our needs, and expects to move in between the summer and December 2007.

Except for aforementioned acquisition, we have no definitive agreements regarding acquisition or disposition of owned or leased facilities and, for the near-term future, we do not expect significant changes in our total occupancy expense.

Deposits

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

270 Muñoz Rivera Avenue, San Juan, Puerto Rico 00918
(Address of principal executive offices, including zip code)

(787) 751-7340
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value
$0.01 per share

Securities registered pursuant to Section 12(g) of the Act: None

	Year Ended December 31,
	2006								2005								2004
	Average Balance		Percent of Deposits			Average Rate			Average Balance		Percent of Deposits			Average Rate			Average Balance		Percent of Deposits			Average Rate
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	128,551		7.39	%		-	%	$	129,676		8.62	%		-	%	$	119,847		9.39	%		-	%
Money market deposits		25,470		1.46			2.29			51,787		3.44			2.10			62,346		4.88			2.14
NOW deposits		46,330		2.66			2.23			46,421		3.09			1.85			40,931		3.21			1.80
Savings deposits		184,824		10.63			2.37			254,923		16.94			2.30			261,660		20.50			2.38
Time certificates of deposit in denominations of $100,000 or more		205,510		11.82			4.30			202,099		13.43			3.24			203,129		15.91			2.16
Brokered certificates of deposits in denominations of $100,000 or more		1,034,893		59.54			4.78			666,955		44.33			3.87			396,531		31.07			3.79
Other time deposits		113,097		6.50			3.70			152,787		10.15			3.10			192,046		15.04			2.92
Total deposits	$	1,738,675		100.00	%				$	1,504,648		100.00	%				$	1,276,490		100.00	%

	As of December 31,
	2006		2005		2004
	(In thousands)
Interest bearing deposits:
Now and money market	$	62,673	$	70,962	$	118,076
Savings		156,069		223,665		278,802
Broker certificates of deposits in denominations of less than $100,000		707		2,972		24,115
Brokered certificates of deposits in denominations of $100,000 or more		1,225,449		964,233		487,890
Time certificates of deposits in denominations of $100,000 or more		224,741		203,708		200,474
Other time deposits in denominations of less than $100,000		95,396		121,950		161,783
Total interest bearing deposits	$	1,765,035	$	1,587,490	$	1,271,140.00
Plus: non interest bearing deposits		140,321		146,638		137,896
Total deposits	$	1,905,356	$	1,734,128	$	1,409,036

	As of December 31,
	2006		2005		2004
	(In thousands)
Three months or less	$	547,837	$	421,582	$	140,228
Over three months through six months		294,784		250,982		74,461
Over six months through 12 months		188,691		184,880		108,084
Over 12 months		418,878		310,497		365,591
Total	$	1,450,190	$	1,167,941	$	688,364

		PAGE
PART I		1
	SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION	1
	ITEM 1. BUSINESS.	1
	ITEM 1A. RISK FACTORS.	28
	ITEM 1B. UNRESOLVED STAFF COMMENTS.	34
	ITEM 2. PROPERTIES.	34
	ITEM 3. LEGAL PROCEEDINGS.	37
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.	37

PART II		37
	ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.	37
	ITEM 6. SELECTED FINANCIAL DATA.	38
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.	40
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	74
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.	74
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.	76
	ITEM 9A. CONTROLS AND PROCEDURES.	77
	ITEM 9B. OTHER INFORMATION.	79

PART III		80
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.	80
	ITEM 11. EXECUTIVE COMPENSATION.	80
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.	80
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.	80
	ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.	80

PART IV		80
	ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.	80

	Change in Future Net Interest Income Gradual Raising Rate Scenario - Year 1
	At December 31, 2006
Change in Interest Rates	Dollar Change			Percentage Change
	(Dollars in thousands)
+200 basis points over year 1	$	3,077			4.02	%
+100 basis points over year 1		1,426			1.86
- 100 basis points over year 1		(1,866	)		(2.44	)
- 200 basis points over year 1		(4,103	)		(5.36	)

	As of December 31, 2006 Volumes Subject to Repricing Within
	0-1 Days			2-180 Days			181-365 Days			1-3 Years			Over 3 Years			Non-Interest Sensitive		Total
	(Dollars in thousands)
Assets:
Short-term investments and federal funds sold	$	51,191		$	49,050		$	—		$	—		$	—		$	—	$	100,241
Investment securities and FHLB/ Federal Reserve Bank stock		—			95,135			76,820			222,002			183,964			—		577,921
Loans		—			1,008,779			87,749			319,921			315,452			—		1,731,901
Fixed and other assets		—			—			—			—			—			90,857		90,857
Total assets	$	51,191		$	1,152,964		$	164,569		$	541,923		$	499,416		$	90,857	$	2,500,920

Liabilities and Stockholders’ Equity:
Interest-bearing checking, savings and money market accounts		—			18,902			—			—			340,161			—		359,063
Certificates of deposit		—			890,280			211,800			236,392			207,821			—		1,546,293
Borrowed funds					268,372			10,500			45,500			70,000			—		394,372
Other liabilities		—			—			—			—			—			31,314		31,314
Total swaps		—			30,800			—			(10,800	)		(20,000	)		—		—
Stockholders’ equity		—			10,763			—			—			—			159,115		169,878
Total liabilities and stockholders’ equity	$	—		$	1,219,117		$	222,300		$	271,092		$	597,982		$	190,429	$	2,500,920
Period gap	$	51,191			($66,153	)		($57,731	)	$	270,831			($98,566	)
Cumulative gap	$	51,191			($14,962	)		($72,693	)	$	198,138		$	99,572
Period gap to total assets		2.05	%		-2.65	%		-2.31	%		10.83	%		-3.94	%
Cumulative gap to total assets		2.05	%		-0.60	%		-2.91	%		7.92	%		3.98	%
Cumulative interest-earning assets to cumulative interest-bearing liabilities		N/A			98.77	%		94.96	%		111.57	%		104.31	%

	As of December 31, 2006
	Less than One Year		Over One Year to Three Years		Over Three Years to Five Years		Over Five Years
	(In thousands)
FHLB advances	$	8,200	$	—	$	—	$	507
Notes payable to statutory trusts		—		—		—		20,619
Operating leases		1,956		2,643		2,312		11,353
Total	$	10,156	$	2,643	$	2,312	$	32,479

	Year ended December 31, 2006 (as reported)
	Fourth			Third		Second		First
	quarter			quarter		quarter		quarter
Interest income	$	42,699,853		$	41,849,057	$	39,814,536	$	37,782,974
Interest expense		26,898,186			25,315,546		22,750,837		20,398,777
Net interest income		15,801,667			16,533,511		17,063,699		17,384,197
Provision for loan and lease losses		5,274,000			4,849,000		3,390,000		3,390,000
Net interest income
after provision
for loan and lease losses		10,527,667			11,684,511		13,673,699		13,994,197
Total other income		1,109,307			1,778,375		2,546,822		2,366,049
Total other expenses		10,280,554			11,520,753		10,525,851		11,058,573
Income before
income taxes		1,356,420			1,942,133		5,694,670		5,301,673
Income tax		1,347,299			494,556		2,405,669		2,035,487
Net income	$	9,121		$	1,447,577	$	3,289,001	$	3,266,186

Earnings per share:
Basic	$	(0.01	)	$	0.07	$	0.16	$	0.16
Diluted	$	(0.01	)	$	0.06	$	0.16	$	0.15

	Year ended December 31, 2006 (SAB 108)
	Fourth			Third		Second		First
	quarter			quarter		quarter		quarter
Interest income	$	42,700,454		$	41,895,851	$	39,785,574	$	37,764,541
Interest expense		26,898,186			25,315,546		22,750,837		20,398,777
Net interest income		15,802,268			16,580,305		17,034,737		17,365,764
Provision for loan and lease losses		5,274,000			4,849,000		3,390,000		3,390,000
Net interest income
after provision
for loan and lease losses		10,528,268			11,731,305		13,644,737		13,975,764
Total other income		1,109,307			1,778,375		2,546,822		2,366,049
Total other expenses		10,343,881			11,476,456		10,512,722		11,052,672
Income before
income taxes		1,293,694			2,033,224		5,678,837		5,289,141
Income tax		1,346,326			514,732		2,397,274		2,024,679
Net income	$	(52,632	)	$	1,518,492	$	3,281,563	$	3,264,462

Earnings per share:
Basic	$	(0.01	)	$	0.07	$	0.16	$	0.16
Diluted	$	(0.01	)	$	0.07	$	0.16	$	0.15

	Year ended December 31, 2005
	Fourth		Third		Second		First
	quarter		quarter		quarter		quarter
Interest income	$	36,832,404	$	34,713,785	$	31,889,460	$	29,796,832
Interest expense		19,143,116		17,622,676		14,684,896		13,485,061
Net interest income		17,689,288		17,091,109		17,204,564		16,311,771
Provision for loan and lease losses		6,435,000		3,015,000		2,075,000		1,250,000
Net interest income
after provision
for loan and lease losses		11,254,288		14,076,109		15,129,564		15,061,771
Total other income		1,794,212		2,467,971		2,566,147		900,802
Total other expenses		10,174,718		9,329,967		9,274,042		8,864,546
Income before
income taxes		2,873,782		7,214,113		8,421,669		7,098,027
Income tax		1,200,410		2,417,003		3,127,004		2,332,811
Net income	$	1,673,372	$	4,797,110	$	5,294,665	$	4,765,216

Earnings per share:
Basic	$	0.08	$	0.24	$	0.26	$	0.23
Diluted	$	0.07	$	0.23	$	0.25	$	0.23

	Year ended December 31, 2004
	Fourth		Third		Second		First
	quarter		quarter		quarter		quarter
Interest income	$	28,370,659	$	26,430,103	$	23,370,038	$	17,222,838
Interest expense		12,171,282		11,064,900		9,897,769		8,347,321
Net interest income		16,199,377		15,365,203		13,472,269		8,875,517
Provision for loan and lease losses		1,250,000		1,875,000		2,475,000		1,500,000
Net interest income
after provision
for loan and lease losses		14,949,377		13,490,203		10,997,269		7,375,517
Total other income		3,365,466		2,341,494		1,779,771		1,593,122
Total other expenses		8,872,401		7,650,581		6,825,829		5,580,033
Income before
income taxes		9,442,442		8,181,116		5,951,211		3,388,606
Income tax		3,319,084		2,804,423		1,475,145		1,063,981
Extraordinary gain		4,898		-		4,414,220		-
Net income	$	6,128,256	$	5,376,693	$	8,890,286	$	2,324,625

Earnings per share:
Basic earnings per share:
Income before extraor-
dinary item	$	0.30	$	0.30	$	0.29	$	0.17
Extraordinary item		-		-		0.29		-
Net income	$	0.30	$	0.30	$	0.58	$	0.17
Diluted earnings per share:
Income before extraor-
dinary item	$	0.29	$	0.28	$	0.28	$	0.16
Extraordinary item		-		-		0.29		-
Net income	$	0.29	$	0.28	$	0.57	$	0.16

Exhibit Number		Description of Exhibit
3.1		Amended and Restated Certificate of Incorporation of EuroBancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

3.2		Amended and Restated Bylaws of EuroBancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

3.3		Certificate of Designation of EuroBancshares, Inc. Noncumulative Preferred Stock, Series A (incorporated herein by reference to Exhibit 3.3 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

4.1		Specimen stock certificate representing EuroBancshares, Inc. Common Stock (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on August 2, 2004)

4.2		Specimen stock certificate representing EuroBancshares, Inc. Preferred Stock (incorporated herein by reference to Exhibit 4.2 to the Annual Report on Form 10-K (File No. 000-50872) previously filed by EuroBancshares, Inc. on March 31, 2005

4.3		Indenture, dated as of December 19, 2002, between EuroBancshares, Inc. and U.S. Bank National Association (f/k/a State Street Bank & Trust Company of Connecticut, National Association) (incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

4.4		Amended and Restated Declaration of Trust, dated as of December 19, 2002, by and among EuroBancshares, Inc. and U.S. Bank National Association (f/k/a State Street Bank & Trust Company of Connecticut, National Association), and Jose Martinez Recondo, Isabella Arrillaga, as Administrators (incorporated herein by reference to Exhibit 4.6 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

4.5		Guarantee Agreement, dated as of December 19, 2002, between EuroBancshares, Inc. and U.S. Bank National Association (f/k/a State Street Bank & Trust Company of Connecticut, National Association) (incorporated herein by reference to Exhibit 4.7 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

10.1†		EuroBancshares, Inc. 2002 Stock Option Plan (incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

10.2†		Form of EuroBancshares, Inc. Incentive Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.2 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

10.3†		Form of EuroBancshares, Inc. Non-Qualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.3 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

10.4†		2005 Stock Option Plan for EuroBancshares, Inc., dated May 12, 2005 (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-50872) previously filed by EuroBancshares, Inc. on June 2, 2005)

10.5†		Change in Control Agreement, dated as of March 14, 2007, between EuroBancshares, Inc., Eurobank and Mr. Rafael Arrillaga-Torréns, Jr. (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 000-50872) previously filed by EuroBancshares, Inc. on March 16, 2007)

10.6†		Change in Control Agreement, dated as of March 14, 2007, between EuroBancshares, Inc., Eurobank and Ms. Yadira R. Mercado (incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K (File No. 000-50872) previously filed by EuroBancshares, Inc. on March 16, 2007)

10.7†		Eurobank Master Trust Retirement Plan Program (incorporated herein by reference to Exhibit 10.5 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

10.8†		Form of EuroBancshares, Inc. Restricted Stock Purchase Agreement (incorporated herein by reference to Exhibit 10.6 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

10.9†		Agreement and Plan of Merger, dated as of September 6, 2002, by and among EuroBancshares, Inc. and Banco Financiero de Puerto Rico (incorporated herein by reference to Exhibit 10.7 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

10.10		Agreement and Plan of Merger, dated as of February 24, 2004, by and among EuroBancshares, Inc., Eurobank, and The Bank & Trust of Puerto Rico (incorporated herein by reference to Exhibit 2 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

10.11		Stipulation and Consent to the Issuance of a Cease and Desist Order dated as of March 13, 2007, Eurobank, the Board of Directors of Eurobank and the FDIC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-50872) previously filed by EuroBancshares, Inc. on March 16, 2007)

10.12		Order to Cease and Desist Order dated as of March 15, 2007 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 000-50872) previously filed by EuroBancshares, Inc. on March 16, 2007)

21		List of Subsidiaries of EuroBancshares, Inc. (incorporated herein by reference to Exhibit 21 to the Registration Statement on Form S-1 (File No. 333-115510) previously filed by EuroBancshares, Inc. on May 5, 2004)

23.1*		Consent of Crowe Chizek and Company LLP, independent registered public accounting firm

23.2*		Consent of KPMG LLP, independent registered public accounting firm

31.1*		Rule 13a-14(a) Certification of Chief Executive Officer.

31.2*		Rule 13a-14(a) Certification of Chief Financial Officer.

32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	EUROBANCSHARES, INC.

Date: March 16, 2007	By:	/s/ Rafael Arrillaga-Torréns, Jr.
		Rafael Arrillaga Torréns, Jr.
		Chairman of the Board, President and Chief Executive Officer


Date: March 16, 2007	By:	/s/ Rafael Arrillaga-Torréns, Jr.
		Rafael Arrillaga Torréns, Jr. Chairman of the Board, President and Chief
		Executive Officer (principal executive officer)


Date: March 16, 2007	By:	/s/ Yadira R. Mercado
		Yadira R. Mercado
		Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer)


Date: March 16, 2007	By:	/s/ Pedro Feliciano Benítez
		Pedro Feliciano Benítez
		Director


Date: March 16, 2007	By:	/s/ Juan Ramón Gómez-Cuétara Aguilar
		Juan Ramón Gómez-Cuétara Aguilar
		Director


Date: March 16, 2007	By:	/s/ Antonio R. Pavía Bibiloni
		Antonio R. Pavía Bibiloni
		Director


Date: March 16, 2007	By:	/s/ Plácido González Córdova
		Plácido González Córdova
		Director


Date: March 16, 2007	By:	/s/ Luis F. Hernández Santana
		Luis F. Hernández Santana
		Director


Date: March 16, 2007	By:	/s/ Ricardo Levy Echeandía
		Ricardo Levy Echeandía
		Director


Date: March 16, 2007	By:	/s/ Diana López-Feliciano
		Diana López-Feliciano
		Director


Date: March 16, 2007	By:	/s/ William Torres Torres
		William Torres Torres
		Director

		PAGE
CONSOLIDATED FINANCIAL STATEMENTS
	REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS	F-1
	CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005	F-4
	CONSOLIDATED STATEMENTS OF INCOME FOR EACH OF THE YEARS IN
	THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2006	F-5
	CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND
	COMPREHENSIVE INCOME FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD
	ENDED DECEMBER 31, 2006	F-6
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS IN THE
	THREE-YEAR PERIOD ENDED DECEMBER 31, 2006	F-7
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-8

	2006			2005
Assets
Cash and due from banks	$	25,527,489		$	20,993,485
Interest bearing deposits		49,050,368			20,773,171
Securities purchased under agreements to resell		51,191,323			54,132,673
Investment securities available for sale		535,159,009			627,080,276
Investment securities held to maturity		38,432,820			42,470,784
Other investments		4,329,200			10,652,000
Loans held for sale		879,000			936,281
Loans, net of allowance for loan and lease losses
of $18,936,841 in 2006 and $18,188,130 in 2005		1,731,022,290			1,558,071,526
Accrued interest receivable		15,760,852			14,979,784
Customers’ liability on acceptances		1,561,736			501,195
Premises and equipment, net		14,889,456			11,167,981
Other assets		33,116,690			29,523,653
Total assets	$	2,500,920,233		$	2,391,282,809
Liabilities and Stockholders’ Equity
Deposits:
Noninterest bearing	$	140,321,373		$	146,637,966
Interest bearing		1,765,034,834			1,587,490,180
Total deposits		1,905,356,207			1,734,128,146
Securities sold under agreements to repurchase		365,664,250			419,859,750
Acceptances outstanding		1,561,736			501,195
Advances from Federal Home Loan Bank		8,707,420			8,758,626
Notes payable to Statutory Trusts		20,619,000			46,393,000
Other borrowings		—			700,175
Accrued interest payable		18,047,074			9,263,493
Accrued expenses and other liabilities		11,086,705			6,711,389
		2,331,042,392			2,226,315,774
Stockholders’ equity:
Preferred stock:
Preferred stock Series A, $0.01 par value. Authorized 20,000,000
shares; issued and outstanding 430,537 in 2006 and 2005		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: 19,777,536 shares in 2006 and 19,564,086 shares in
2005; outstanding: 19,123,821 shares in 2006 and 19,398,848 in 2005		197,775			195,641
Capital paid in excess of par value		106,539,383			105,508,402
Retained earnings:
Reserve fund		7,553,381			6,528,519
Undivided profits		59,800,495			54,348,750
Treasury stock, 653,715 shares at cost in 2006
and 165,238 shares at cost in 2005		(7,410,711	)		(1,946,052	)
Accumulated other comprehensive loss		(7,565,907	)		(10,431,650	)
Total stockholders’ equity		169,877,841			164,967,035
Total liabilities and stockholders’ equity	$	2,500,920,233		$	2,391,282,809

	2005			2004
Net income, as reported	$	16,530,363		$	22,719,860
Employees stock based compensation		-			37,518	⁽¹⁾
Deduct total stock-based employee
compensation expense
determined under fair value
based method for all awards		(904,368	)		(263,047	)
Pro forma net income	$	15,625,995		$	22,494,331
Earnings per share:
Basic - as reported	$	0.81		$	1.35
Basic - pro forma		0.76			1.33
Diluted - as reported		0.78			1.30
Diluted - pro forma		0.73			1.28

Cash and due from banks	$	78,476
Interest-bearing deposits with banks		3,271
Investments securities		80,140
Loans, net		336,275
Other assets		23,828
Total assets acquired		521,990
Deposits		(398,555	)
Borrowings		(85,738	)
Other liabilities		(8,632	)
Total liabilities assumed		(492,925	)
Net assets acquired	$	29,065

	2006			2005
Amount outstanding at year-end	$	51,191,323		$	54,132,673
Maximum aggregate balance outstanding
at any month-end		51,191,323			58,552,186
Average monthly aggregate balance
outstanding during the year		30,904,690			30,147,950
Weighted average interest rate for the year		5.29	%		3.63	%
Weighted average interest rate at year-end		5.58	%		4.65	%

	2006
	Amortized		Gross unrealized		Gross unrealized			Fair
	cost		gains		losses			value
Commonwealth of Puerto
Rico obligations:
Less than one year	$	4,116,192	$	14,056	$	(39,760	)	$	4,090,488
One through five years		5,401,713		71,851		(1,110	)		5,472,454
FED Farm Credit Bonds:
Less than one year		30,319,617		-		(383,179	)		29,936,438
One through five years		19,994,263		-		(311,883	)		19,682,380
Federal Home Loan Bank notes:
Less than one year		20,885,000		-		(218,738	)		20,666,262
One through five years		79,419,623		-		(1,375,610	)		78,044,013
Five to ten years		7,922,971		-		(71,985	)		7,850,986
Federal National Mortgage
Association notes:
One through five years		19,991,659		83,491		-			20,075,150
Mortgage-backed securities		354,672,013		412,557		(5,743,732	)		349,340,838
Total	$	542,723,052	$	581,955	$	(8,145,997	)	$	535,159,009

	2006
	Less than 12 months					12 months or more					Total
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	losses			value		losses			value		losses			value
U.S. agency debt securities	$	(71,985	)	$	7,850,986	$	(2,289,410	)	$	148,329,093	$	(2,361,395	)	$	156,180,079
State and municipal obligations		(10,563	)		770,325		(30,307	)		2,480,885		(40,870	)		3,251,210
Mortgage-backed securities		(243,756	)		50,655,419		(5,499,976	)		250,971,704		(5,743,732	)		301,627,123
	$	(326,304	)	$	59,276,730	$	(7,819,693	)	$	401,781,682	$	(8,145,997	)	$	461,058,412

	2006		2005
FHLB stock, at cost	$	3,717,700	$	9,269,500
Investment in statutory trusts (notes 17)		611,500		1,382,500
Other investments	$	4,329,200	$	10,652,000

	Carrying
Asset pledged	value		Items secured/collateralized
Securities	$	35,558,515	Deposits of public funds
Commercial loans
guaranteed by the Small
Business Administration		733,188	Deposits of public funds
Residential mortgage loans		25,715,094	Advances from Federal Home Loan Bank
Securities		98,023	Assets pledged with Commissioner of
			Financial Institutions of the Commonwealth of
			Puerto Rico for IRA Trust
Securities		945,835	Assets pledged with Commissioner of
			Financial Institutions of the Commonwealth of
			Puerto Rico for the Trust and the International
			Banking Entity operations
Securities		316,494	Assets pledged with the Federal Reserve Bank
			for Treasury, tax, and loan account
Securities		12,031,696	Assets pledged with the Federal Reserve Bank
			for Discount Window
Securities		4,820,240	Assets pledged for derivatives contracts
Securities		469,958,492	Securities sold under agreements to repurchase