10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

Commission File Number 000-50872

EUROBANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o

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

Yes o No x

The number of shares outstanding of the issuer’s Common Stock as of November 9, 2007, was 19,093,315 shares.

EUROBANCSHARES, INC.

INDEX

	PAGE
PART I - FINANCIAL INFORMATION	1
ITEM 1. FINANCIAL STATEMENTS	1
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	48
ITEM 4. CONTROLS AND PROCEDURES	48
PART II - OTHER INFORMATION	48
ITEM 1. LEGAL PROCEEDINGS	48
ITEM 1A. RISK FACTORS	48
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	48
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	49
ITEM 5. OTHER INFORMATION	49
ITEM 6. EXHIBITS	49

i

PART I - FINANCIAL INFORMATION

ITEM 1.  Financial Statements

EUROBANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

September 30, 2007 and December 31, 2006

	September 30,			December 31,
Assets	2007			2006
Cash and due from banks	$	19,707,364		$	25,527,489
Interest bearing deposits		13,631,666			49,050,368
Securities purchased under agreements to resell		38,761,166			51,191,323
Investment securities available for sale		544,784,240			535,159,009
Investment securities held to maturity		32,892,220			38,432,820
Other investments		5,889,375			4,329,200
Loans held for sale		487,250			879,000
Loans, net of allowance for loan and lease losses of $26,130,647 in 2007 and $18,936,841 in 2006		1,818,021,788			1,731,022,290
Accrued interest receivable		17,867,297			15,760,852
Customers’ liability on acceptances		274,198			1,561,736
Premises and equipment, net		29,912,639			14,889,456
Other assets		38,399,160			33,116,690
Total assets	$	2,560,628,363		$	2,500,920,233
Liabilities and Stockholders’ Equity
Deposits:
Noninterest bearing	$	125,443,542		$	140,321,373
Interest bearing		1,838,505,762			1,765,034,834
Total deposits		1,963,949,304			1,905,356,207
Securities sold under agreements to repurchase		361,414,250			365,664,250
Acceptances outstanding		274,198			1,561,736
Advances from Federal Home Loan Bank		467,519			8,707,420
Notes payable to Statutory Trusts		20,619,000			20,619,000
Accrued interest payable		18,170,901			18,047,074
Accrued expenses and other liabilities		20,294,002			11,086,705
		2,385,189,174			2,331,042,392
Stockholders’ equity:
Preferred stock:
Preferred stock Series A, $0.01 par value. Authorized 20,000,000 shares; issued and outstanding 430,537 in 2007 and 2006		4,305			4,305
Capital paid in excess of par value		10,759,120			10,759,120
Common stock:
Common stock, $0.01 par value. Authorized 150,000,000 shares; issued 20,032,398 shares in 2007 and 19,777,536 shares in 2006;outstanding: 19,093,315 shares in 2007 and 19,123,821 shares in 2006		200,324			197,775
Capital paid in excess of par value		107,824,152			106,539,383
Retained earnings:
Reserve fund		7,938,161			7,553,381
Undivided profits		61,565,747			59,800,495
Treasury stock, 939,083 shares at cost in 2007 and 653,715 in 2006		(9,910,458	)		(7,410,711	)
Accumulated other comprehensive loss		(2,942,162	)		(7,565,907	)
Total stockholders’ equity		175,439,189			169,877,841
Total liabilities and stockholders’ equity	$	2,560,628,363		$	2,500,920,233

See accompanying notes to condensed consolidated financial statements.

1

EUROBANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

For the three and nine-month periods ended September 30, 2007 and 2006

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Interest income:
Loans, including fees	$	36,677,073		$	33,648,864		$	107,656,676		$	95,523,250
Investment securities:
Taxable		2,776			36,658			9,457			89,308
Exempt		6,252,137			7,577,037			19,081,526			22,297,717
Interest bearing deposits, securities purchased under agreements to resell, and other		802,667			633,292			2,250,338			1,535,692
Total interest income		43,734,653			41,895,851			128,997,997			119,445,967
Interest expense:
Deposits		21,553,077			17,730,807			61,990,244			49,013,326
Securities sold under agreements to repurchase, notes payable, and other		5,071,618			7,584,739			15,395,403			19,451,835
Total interest expense		26,624,695			25,315,546			77,385,647			68,465,161
Net interest income		17,109,958			16,580,305			51,612,350			50,980,806
Provision for loan and lease losses		9,594,000			4,849,000			18,467,000			11,629,000
Net interest income after provision for loan and lease losses		7,515,958			11,731,305			33,145,350			39,351,806
Noninterest income:
Service charges - fees and other		2,394,869			2,155,924			7,182,759			6,228,010
Net (loss) gain on sale of repossessed assets and on disposition of other assets		(258,889	)		(510,980	)		(1,153,979	)		200,768
Gain on sale of loans		76,560			133,431			239,143			262,470
Total noninterest income		2,212,540			1,778,375			6,267,923			6,691,248
Noninterest expense:
Salaries and employee benefits		4,950,481			4,535,978			15,848,655			14,012,230
Occupancy		2,812,295			2,542,896			8,040,768			7,023,753
Professional services		1,444,487			966,790			3,319,078			3,154,810
Insurance		479,219			293,349			1,409,089			794,427
Promotional		374,800			323,538			1,125,772			840,593
Other		2,280,458			2,813,905			6,993,252			7,216,039
Total noninterest expense		12,341,740			11,476,456			36,736,614			33,041,852
(Loss) Income before income taxes		(2,613,242	)		2,033,224			2,676,659			13,001,202
Provision for income taxes		(1,378,559	)		514,732			(30,446	)		4,936,685
Net (loss) income	$	(1,234,683	)	$	1,518,492		$	2,707,105		$	8,064,517
Basic (loss) earnings per share	$	(0.07	)	$	0.07		$	0.11		$	0.39
Diluted (loss) earnings per share	$	(0.07	)	$	0.07		$	0.11		$	0.38

See accompanying notes to condensed consolidated financial statements.

2

EUROBANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholder's Equity

(Unaudited)

For the nine-month ended September 30, 2007 and 2006

	2007			2006
Preferred stock:
Balance at beginning of period	$	4,305		$	4,305
Issuance of preferred stock		—			—
Balance at end of period		4,305			4,305
Capital paid in excess of par value - preferred stock:
Balance at beginning of period		10,759,120			10,759,120
Issuance of preferred stock		—			—
Balance at end of period		10,759,120			10,759,120
Common stock:
Balance at beginning of period		197,775			195,641
Issuance of common stock		2,549			2,134
Balance at end of period		200,324			197,775
Capital paid in excess of par value - common stock:
Balance at beginning of period		106,539,383			105,508,402
Issuance of common stock		1,146,330			877,630
Compensation expense - stock options		138,439			155,261
Balance at end of period		107,824,152			106,541,293
Reserve fund:
Balance at beginning of period		7,553,381			6,449,472
Transfer from undivided profits		384,780			955,197
Balance at end of period		7,938,161			7,404,669
Undivided profits:
Balance at beginning of period		59,800,495			53,637,326
Net income		2,707,105			8,064,517
Preferred stock dividends		(557,073	)		(557,073	)
Transfer to reserve fund		(384,780	)		(955,197	)
Balance at end of period		61,565,747			60,189,573
Treasury stock
Balance at beginning of period		(7,410,711	)		(1,946,052	)
Purchase of common stock		(2,499,747	)		(5,464,659	)
Balance at end of period		(9,910,458	)		(7,410,711	)
Accumulated other comprehensive loss, net of taxes:
Balance at beginning of period		(7,565,907	)		(10,431,650	)
Unrealized net gain on investment securities available for sale		4,623,745			2,290,586
Balance at end of period		(2,942,162	)		(8,141,064	)
Total stockholders’ equity	$	175,439,189		$	169,544,960

See accompanying notes to condensed consolidated financial statements.

3

EUROBANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes Comprehensive Income

(Unaudited)

For the three and nine months ended September 30, 2007 and 2006

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007		2006
Net (loss) income	$	(1,234,683	)	$	1,518,492	$	2,707,105	$	8,064,517
Other comprehensive income, net of tax:
Unrealized net income on investment securities available for sale		5,022,474			8,992,184		4,623,745		2,290,586
Comprehensive income	$	3,787,791		$	10,510,676	$	7,330,850	$	10,355,103

See accompanying notes to condensed consolidated financial statements.

4

EUROBANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

for the nine-month period ended September 30, 2007 and 2006

	2007			2006
Cash flows from operating activities:
Net income	$	2,707,105		$	8,064,517
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,362,012			2,889,449
Capitalization of interest		(474,802	)		—
Provision for loan and lease losses		18,467,000			11,629,000
Stock-based employee compensation		138,439			155,260
Deferred tax benefit		(3,816,821	)		(989,878	)
Net gain on sale of loans		(239,143	)		(262,470	)
Net loss (gain) on sale of other real estate, repossessed assets and on disposition of other assets		1,153,979			(200,768	)
Net amortization of premiums and accretion of discount on investment securities		2,138,404			737,405
Valuation of repossesed assets		995,968			1,047,400
Decrease in deferred loan origination costs, net		2,143,198			1,907,848
Origination of loans held for sale		(11,411,782	)		(9,385,151	)
Proceeds from sale of loans held for sale		11,655,132			9,647,622
Increase in accrued interest receivable		(2,106,445	)		(960,567	)
Net decrease in other assets		3,259,944			9,605,545
Increase in accrued interest payable, accrued expenses, and other liabilities		9,331,070			11,031,630
Net cash provided by operating activities		36,303,257			44,916,842
Cash flows from investing activities:
Net decrease in securities purchased under agreements to resell		12,430,157			9,524,801
Net decrease in interest-bearing deposits		35,418,702			487,936
Purchases of investment securities available for sale		(107,783,668	)		(87,452,819	)
Proceeds from principal payments and maturities of investment securities available for sale		100,758,416			102,142,098
Proceeds from principal payments, maturities, and calls of investment securities held to maturity		5,425,528			3,030,505
Purchases of other investments		(6,886,600	)		(1,175,400	)
Proceeds from principal payments, maturities, and calls of other investments		5,325,300			586,300
Net increase in loans		(115,002,829	)		(155,184,771	)
Proceeds from sale of other real estate, repossessed assets and on disposition of other assets		508,213			418,337
Capital expenditures		(16,511,910	)		(4,915,552	)
Net cash used in investing activities		(86,318,691	)		(132,538,565	)
Cash flows from financing activities:
Net increase in deposits		58,593,097			11,121,291
(Decrease) increase in securities sold under agreements to repurchase and other borrowings		(4,250,000	)		80,540,429
Repayment of Federal Home Loan Bank Advances		(8,239,901	)		(38,194	)
Dividends paid to preferred stockholders		(557,019	)		(558,030	)
Purchase of common stock		(2,499,747	)		(5,464,659	)
Net proceeds from exercise of stock options		1,148,879			879,765
Net cash provided by financing activities		44,195,309			86,480,602
Net decrease in cash and cash equivalents		(5,820,125	)		(1,141,121	)
Cash and cash equivalents beginning balance		25,527,489			20,993,485
Cash and cash equivalents ending balance	$	19,707,364		$	19,852,364
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest	$	77,261,821		$	61,442,876
Income taxes		3,794,520			3,842,541
Noncash transactions:
Other real estate and repossessed assets acquired through foreclosure of loans		27,492,582			35,889,424
Finance of other real estate and repossessed assets acquired through foreclosure of loans		19,707,699			21,308,558
Change in fair value of available-for-sale securities, net of taxes		(4,623,745	)		(2,290,586	)

See accompanying notes to condensed consolidated financial statements.

5

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.  Nature of Operations and Basis of Presentation

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

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

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

Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2006. The results of operations for the nine months period ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year.

For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2007 presentation, related to the adoption of SAB 108 provisions.

2.  Recent Accounting Pronouncements

The Financial Accounting Standard Board Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” was issued on June 2006.  This Interpretation provides guidance for the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109 (FAS 109), “Accounting for Income Taxes.”  This Interpretation revises FAS 109 to prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 addresses the diversity that exists in the practice by defining a criterion that an individual tax position is recognized as a benefit only if it meet the “more likely than not” test, which is set at 50%, presuming the occurrence of a tax examination. This interpretation is effective for fiscal years beginning after December 15, 2006. During the first quarter of 2007, the Company adopted the provision of FIN No. 48, which did not have an impact on the Company’s financial condition or results of operations.

The Company and its subsidiaries are subject to the Puerto Rico tax law but generally are not subject to US federal income tax. The Company and its subsidiaries are only subject to examination for taxable years beginning after 2002. Prior to adopting FIN 48, the Company had recognized approximately $765,000 in contingent liabilities for uncertain tax positions under the Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” Upon the adoption of FIN 48, the Company reevaluated this contingency and concluded that it was adequate under FIN 48. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

(continued)

6

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense. As of September 30, 2007, the Company had recorded a contingency for uncertain tax position of $789,900, which includes $39,700 of accrued interests.

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, “Fair Value Measurements.”  This statement provides the generally accepted accounting principles (GAAP) definition for fair value, the framework for measurements and additional disclosures.  The main focus of SFAS 157 is to revise the definition of fair value and to provide guidance for applying the GAAP definition. This statement applies under other accounting pronouncements that require fair value measurements; however this statement does not require any new fair value measurements.  The definition provided in this statement clarifies that the price to be used is the price that would be received by selling the asset or paid to transfer liability instead of the price to acquire the asset or received to assume the liability.  This statement applies prospectively and is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company believes that the impact will not be material to the financial statements.

The Financial Accounting Standard Board (FASB) issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” on February 2007. This statement includes an amendment to SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities” and allows the entities to choose to measure at fair value many financial instruments that are not required under existing SFAS. The main focus of SFAS 159 is to improve the use of fair value measurement providing the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement does not affect the provisions of any other SFAS that requires fair value measurement for certain assets or liabilities. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. The Company is evaluating the impact to the financial statements if any.

3.  Earnings/Loss Per Share

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

(continued)

7

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The computation of earnings per share is presented below:

	Three months ended September 30,						Nine months ended September 30,
	2007			2006			2007			2006
Income/(loss) before preferred stock dividends	$	(1,234,683	)	$	1,518,492		$	2,707,105		$	8,064,517
Preferred stock dividend		(187,732	)		(187,732	)		(557,073	)		(557,073	)
Income/(loss) available to common shareholders	$	(1,422,415	)	$	1,330,760		$	2,150,031		$	7,507,444
Weighted average number of common shares outstanding applicable to basic EPS		19,160,985			19,118,191			19,253,068			19,248,639
Effect of dilutive securities		189,597			349,487			225,220			473,115
Adjusted weighted average number of common shares outstanding applicable to diluted earnings per share		19,350,582			19,467,678			19,478,288			19,721,754
Net income/(loss) per share:
Basic	$	(0.07	)	$	0.07		$	0.11		$	0.39
Diluted	$	(0.07	)	$	0.07		$	0.11		$	0.38

Stock options for 268,470 and 187,800 shares of common stock were not considered in computing diluted earnings per common share for 2007 and 2006 because they were antidilutive.

4.   Investment Securities Available for Sale

Investment securities available for sale and related contractual maturities as of September 30, 2007 and December 31, 2006 are as follows:

	2007
	Amortized		Gross unrealized		Gross unrealized			Fair
	cost		gains		losses			value
Commonwealth of Puerto Rico obligations:
Less than one year	$	1,655,476	$	11,103	$	(14,245	)	$	1,652,335
One through five years		4,840,602		45,162		—			4,885,764
Federal Farm Credit Bonds
Less than one year		50,325,148		2,453		(209,862	)		50,117,740
Federal Home Loan Bank notes:
Less than one year		84,440,232		—		(713,961	)		83,726,271
One through five years		7,269,745		27,809		—			7,297,554
Federal National Mortgage Association notes:
Less than one year		10,000,000		68,750		—			10,068,750
US Corporate Note		3,000,000		—		(70,500	)		2,929,500
Mortgage-backed securities		386,193,768		1,262,004		(3,349,446	)		384,106,326
Total	$	547,724,972	$	1,417,281	$	(4,358,013	)	$	544,784,240

(continued)

8

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	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
Federal 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		354,672,014		412,557		(5,743,732	)		349,340,839
Total	$	542,723,052	$	581,955	$	(8,145,997	)	$	535,159,009

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

At September 30, 2007 and December 31, 2006, no investments that are payable from and secured by the same source of revenue or taxing authority, other than the U.S. government and U.S. agencies exceed 10% of stockholders’ equity.

During the nine-month period ended September 30, 2007 and 2006, there were no sales of investments securities available for sale.

Gross unrealized losses on investment securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2007 and December 31, 2006, were as follows:

	2007
	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	$	–		$	–	$	(923,822	)	$	123,844,691	$	(923,822	)	$	123,844,691
State and municipal obligations		(4,497	)		645,980		(9,748	)		420,252		(14,245	)		1,066,232
US corporate notes		(70,500	)		2,929,500		–			–		(70,500	)		2,929,500
Mortgage-backed securities		(207,627	)		46,982,494		(3,141,819	)		191,860,206		(3,349,446	)		238,842,700
	$	(282,624	)	$	50,557,974	$	(4,075,389	)	$	316,125,149	$	(4,358,013	)	$	366,683,123

 

	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

·   U.S. Agency Debt Securities - The unrealized losses on investments in U.S. agency debt securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

(continued)

9

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

·   U.S. Corporate Notes - The unrealized losses on investments in U.S corporate notes were caused by interest rate increases.  The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.  Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

·   Mortgage-Backed Securities - The unrealized losses on investments in mortgage-backed securities were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by a United States government sponsored enterprise. It is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

5.  Investment Securities Held to Maturity

Investment securities held to maturity as of September 30, 2007 and December 31, 2006 are as follows:

		2007
		Amortized		Gross unrealized		Gross unrealized			Fair
		cost		gains		losses			value
Federal Home Loan Bank Notes	$	2,844,968	$	–	$	(49,949	)	$	2,795,019
Mortgage-backed securities		30,047,252		–		(693,852	)		29,353,401
Total	$	32,892,220	$	–	$	(743,801	)	$	32,148,420

2006
Amortized	Gross unrealized	Gross unrealized	Fair
cost	gains	losses	value

Federal Home Loan Bank Notes	$	3,164,937	$	–	$	(93,402	)	$	3,071,535
Mortgage-backed securities		35,267,883		–		(865,645	)		34,402,238
Total	$	38,432,820	$	–	$	(959,047	)	$	37,473,773

Contractual maturities on certain investment securities held to maturity could differ from actual maturities since certain issuers have right to call or prepay these securities.

At September 30, 2007 and December 31, 2006, no investments that are payable from and secured by the same source of revenue or taxing authority, other than the U.S. government and U.S. agencies exceed 10% of stockholders’ equity.

There were no sales of investment securities held to maturity during the nine-month period ended September 30, 2007 and 2006.

Gross unrealized losses on investment securities held to maturity and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2007 and December 31,2006, were as follows:

(continued)

10

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	2007
	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	$	—	$	—	$	(49,949	)	$	2,795,019	$	(49,949	)	$	2,795,019
Mortgage-backed securities		—		—		(693,852	)		29,353,401		(693,852	)		29,353,401
	$	—	$	—	$	(743,801	)	$	32,148,420	$	(743,801	)	$	32,148,420

	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	$	—	$	—	$	(93,402	)	$	3,071,535	$	(93,402	)	$	3,071,535
Mortgage-backed securities		—		—		(865,645	)		34,402,238		(865,645	)		34,402,238
	$	—	$	—	$	(959,047	)	$	37,473,773	$	(959,047	)	$	37,473,773

·   U.S. Agency Debt Securities - The unrealized losses on investments in U.S. agency debt securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. Because the Company has the ability and intent to hold these investments until maturity, these investments are not considered other-than-temporarily impaired.

·   Mortgage-Backed Securities - The unrealized losses on investments in mortgage-backed securities were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by a United States government sponsored enterprise. It is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until maturity, these investments are not considered other-than-temporarily impaired.

6.  Other Investments

Other investments at September 30, 2007 and December 31, 2006 consist of the following:

	2007		2006
FHLB stock, at cost	$	5,279,000	$	3,717,700
Investment in statutory trusts		610,375		611,500
Other investments	$	5,889,375	$	4,329,200

(continued)

11

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

7.  Loans and allowance for loan and lease losses

A summary of the Company’s loan portfolio at September 30, 2007 and December 31, 2006 is as follows:

	2007			2006
Loans secured by real estate:
Commercial and industrial	$	786,259,324		$	736,555,175
Construction		184,347,376			126,241,190
Residential mortgage		100,509,125			76,277,339
Consumer		801,868			782,456
		1,071,917,693			939,856,160
Commercial and industrial		303,429,729			297,511,599
Consumer		59,532,823			60,682,410
Lease financing contracts		401,209,371			443,310,627
Overdrafts		6,399,391			5,015,183
		1,842,489,007			1,746,375,979
Deferred loan origination costs, net		2,735,417			4,879,823
Unearned finance charges		(1,071,989	)		(1,296,671	)
Allowance for loan and lease losses		(26,130,647	)		(18,936,841	)
Loans, net	$	1,818,021,788		$	1,731,022,290

The following is a summary of information pertaining to impaired loans at September 30, 2007 and December 31, 2006:

	2007		2006
Impaired loans with related allowance	$	28,683,746	$	11,878,000
Impaired loans that did not require allowance		41,237,604		27,319,000
Total impaired loans	$	69,921,350	$	39,197,000
Allowance for impaired loans	$	9,409,009	$	2,219,000

As of September 30, 2007 and December 31, 2006, loans in which the accrual of interest has been discontinued amounted to $55,275,500 and $37,254,793, respectively. If these loans had been accruing interest, the additional interest income realized would have been approximately $3,923,712 and $1,832,000 for the nine month period ended September 30, 2007 and 2006, respectively.

Commercial and industrial loans with principal outstanding balance amounting to approximately $1,960,984 as of September 30, 2007, are guaranteed by the U.S. government through the Small Business Administration at percentages varying from 75% to 90%. As of September 30, 2007, industrial loans with a principal outstanding balance of approximately $652,940 were guaranteed by the U.S. government through the U.S. Department of Agriculture at percentages varying from 80% to 90%.

(continued)

12

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following analysis summarizes the changes in the allowance for loan and lease losses for the nine month periods ended September 30:

	2007			2006
Balance, beginning of period	$	18,936,841		$	18,188,130
Provision for loan and lease losses		18,467,000			11,629,000
Loans and leases charged-off		(12,894,272	)		(13,573,162	)
Recoveries		1,621,078			2,155,704
Balance, end of period	$	26,130,647		$	18,399,672

8.  Other Assets

Other assets at September 30, 2007 and December 31, 2006 consist of the following:

	2007		2006
Deferred tax assets, net	$	10,078,109	$	6,260,855
Merchant credit card items in process of collection		1,380,547		1,854,919
Auto insurance claims receivable on repossessed vehicles		1,130,323		1,864,326
Accounts receivable		828,136		1,146,465
Other real estate, net of valuation allowance of $41,894 at
September 30, 2007 and December 31,2006.		4,332,130		3,628,971
Other repossessed assets, net of valuation allowance of $615,911
at September 30, 2007 and $799,104 at December 31,2006.		6,171,836		9,418,811
Prepaid expenses and deposits		7,320,775		7,772,760
Option		5,122,500		—
Other		2,034,804		1,169,583
	$	38,399,160	$	33,116,690

Other repossessed assets are presented net of valuation allowance for losses. The following analysis summarizes the changes in the allowance for losses for the nine-month periods ended September 30:

	2007			2006
Balance, beginning of period	$	799,104		$	1,216,087
Provision for losses charged to operations		978,840			1,047,400
Net charge-offs		(1,162,033	)		(1,012,682	)
Balance, end of period	$	615,911		$	1,250,805

(continued)

13

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

9.  Deposits

Total deposits as of September 30, 2007 and December 31, 2006 consisted of the following:

	2007		2006
Non interest bearing deposits	$	125,443,542	$	140,321,373
Interest bearing deposits:
NOW & Money Market		68,754,204		62,672,648
Savings		133,738,834		156,069,357
Regular CD's & IRAS		90,631,543		95,396,084
Jumbo CD's		241,021,817		224,741,161
Brokered Deposits		1,304,359,364		1,226,155,584
		1,838,505,762		1,765,034,834
Total Deposits	$	1,963,949,304	$	1,905,356,207

10.  Advances from Federal Home Loan Bank

At September 30, 2007, the Company owes an advance to the FHLB as follows:

Maturity	Interest rate	2007
2014	4.38%	467,519
		$	467,519

Interest rates are fixed for the term of each advance and are payable on the first business day of the following month when the original maturity of the note exceeds six months. In notes with original terms of six months or less, interest is paid at maturity. Interest payments for the nine month period ended September 30, 2007 and 2006 amounted to approximately $212,000 and $863,000, respectively. Advances are secured by mortgage loans and securities pledged at the FHLB.  As of September 30, 2007 our borrowing potential of advances based on the collateral pledged at the FHLB was approximately $40 million.

11.  Derivative Financial Instruments

Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

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

(continued)

14

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

As of September 30, 2007 and December 31, 2006, the Company had the following derivative financial instruments outstanding:

	2007					2006
	Notional					Notional
	amount		Fair value			amount		Fair value
Libor-Rate interest rate swaps	$	30,800,000	$	(1,058,906	)	$	30,800,000	$	(1,236,093	)
	$	30,800,000	$	(1,058,906	)	$	30,800,000	$	(1,236,093	)
Option	$	25,000,000	$	5,122,500		$	-	$	-
	$	25,000,000	$	5,122,500		$	-	$	-

In February of 2007, the Corporation for the State Insurance Fund (FSE) for the Government of the Commonwealth of Puerto Rico invested approximately $25,000,000 in a CD indexed to a global equity basket. The return on the CD equals 100% appreciation of the equity basket at maturity, approximately 5 years. To protect against adverse changes in fair value of the CD, the Company purchased an option that offsets changes in fair value of the global equity basket. Consistent with the guidance in SFAS 133, the equity-based return on the CD is bifurcated and accounted for separately from the debt host as a derivative. Both the embedded equity-based return derivative and the purchased option are adjusted to their respective fair values through earnings. As the values of the two derivatives are equal and offsetting, the net effect on earnings is zero. At September 30, 2007, $5,122,500 was included in other assets related to the purchased option and equity-based return derivative, respectively.

At September 30, 2007, the Company had interest rate swap agreements, designated as fair value hedges, which converted $28,564,000 of fixed rate time deposits to variable rate time deposits, of which $10,316,000 will mature between 2010 and 2013 and $18,248,000 will mature between 2018 and 2023 with semi-annual call options that match the call options on the swaps.

During the three and nine-months ended September 30, 2007 and 2006, the net gain or loss from fair value hedging ineffectiveness was considered inconsequential and reported within other non-interest income.

12.  Notes Payable to Statutory Trusts

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

(continued)

15

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On December 18, 2006 the Company redeemed $25,774,000 of floating rate junior subordinated deferrable interest debentures at an annual rate equal to the three-month LIBOR, plus 3.60% with a ceiling rate of 12.50%, which were issued on December 18, 2001.

Interest expense on notes payable to statutory trusts amounted to approximately $1,310,000 and $2,968,000 for the nine month ended September 30, 2007 and 2006, respectively.

13.  Commitments and Contingencies

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

14.  Stock Transactions

In July 2007, the Company issued 4,000 shares of common stock, through stock options exercised at $5.00 per share

In May 2007, the board of directors approved a stock repurchase program. Under the terms of the stock repurchase program, the Company is authorized to purchase shares of its common stock for an aggregate purchase prices of up to $2.5 million in open market purchases, block trades and privately negotiated transactions over a period of one year. As of September 30, 2007, the Company had purchased 285,368 shares, which represents the authorized maximum amount, of approximately $2.5 million, under the stock repurchase program.

In February 2007, the Company issued 250,862 shares of common stock, through stock options exercised at $4.50 per share.

During the year ended December 31, 2006, the Company had purchased 488,477 shares under the stock repurchase program approved by the board of directors in October 2005. Under the terms of the stock repurchase program, the Company was authorized to acquire shares of its common stock for an aggregate purchase price of up to $10 million in open market purchases, block trades and privately negotiated transactions over a period of one year, which expired in October 2006.

15.  Regulatory Matters

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

Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (Leverage) (as defined). Management believes, as of September 30, 2007 and December 31, 2006, that the Company and the Bank met all capital adequacy requirements to which they are subject.

(continued)

16

EUROBANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier I risk-based and Tier I Leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the institution’s capital category. The Company’s and the Bank’s actual capital amounts and ratios as of September 30, 2007 are also presented in the table.

At September 30, 2007 and December 31, 2006, required and actual regulatory capital amounts and ratios are as follow (dollars in thousands):

	2007
									Well
	Required				Actual				capitalized
	Amount		Ratio		Amount		Ratio		ratio
Total Capital (to risk-weightedassets):
Consolidated	$	162,700		8.00%	$	223,782		11.00%		N/A
Eurobank		162,700		8.00%		206,888		10.17%		>10.00	%
Tier I Capital (to risk-weightedassets):
Consolidated		81,350		4.00%		198,360		9.75%		N/A
Eurobank		81,350		4.00%		181,466		8.92%		>6.00	%
Tier I Capital (to average assets):
Consolidated		99,551		4.00%		198,360		7.97%		N/A
Eurobank		99,521		4.00%		181,466		7.29%		>5.00	%

	2006
									Well
	Required				Actual				capitalized
	amount		Ratio		amount		Ratio		ratio
Total Capital (to risk-weightedassets):
Consolidated	$	154,038		8.00%	$	216,673		11.25%		N/A
Eurobank		154,045		8.00%		198,179		10.29%		>10.00	%
Tier I Capital (to risk-weightedassets):
Consolidated		77,019		4.00%		197,366		10.25%		N/A
Eurobank		77,023		4.00%		178,871		9.29%		>6.00	%
Tier I Capital (to average assets):
Consolidated		99,679		4.00%		197,366		7.92%		N/A
Eurobank		99,637		4.00%		178,871		7.18%		>5.00	%

17

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

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presents our consolidated financial condition and results of operations for the nine-month period ended September 30, 2007 and 2006. The discussion should be read in conjunction with our financial statements and the notes related thereto which appear elsewhere in this Quarterly Report on Form 10-Q.

Statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including our expectations, intentions, beliefs, or strategies regarding the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results may differ materially from those in such forward-looking statements due to fluctuations in interest rates, inflation, government regulations, economic conditions, customer disintermediation and competitive product and pricing pressures in the geographic and business areas in which we conduct operations, including our plans, objectives, expectations and intentions and other factors discussed under the section entitled “Risk Factors,” in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2007, including the following:

·   if a significant number of our clients fail to perform under their loans, our business, profitability, and financial condition would be adversely affected;

·   our current level of interest rate spread may decline in the future, and any material reduction in our interest spread could have a material impact on our business and profitability;

·   the modification of the Federal Reserve Board’s current position on the capital treatment of our junior subordinated debt and trust preferred securities could have a material adverse effect on our financial condition and results of operations;

·   adverse changes in domestic or global economic conditions, especially in the Commonwealth of Puerto Rico, could have a material adverse effect on our business, growth, and profitability;

·   we could be liable for breaches of security in our online banking services, and fear of security breaches could limit the growth of our online services;

·   maintaining or increasing our market share depends on market acceptance and regulatory approval of new products and services;

·   significant reliance on loans secured by real estate may increase our vulnerability to downturns in the Puerto Rico real estate market and other variables impacting the value of real estate;

·   if we fail to retain our key employees, growth and profitability could be adversely affected;

·   we may be unable to manage our future growth;

·   we have no current intentions of paying cash dividends on common stock;

·   increases in our allowance for loan and lease losses could materially adversely affect our earnings;

18

·   our directors and executive officers beneficially own a significant portion of our outstanding common stock;

·   the market for our common stock is limited, and potentially subject to volatile changes in price;

·   we face substantial competition in our primary market area;

·   we are subject to significant government regulation and legislation that increases the cost of doing business and inhibits our ability to compete;

·   we could be negatively impacted by downturns in the Puerto Rican economy;

·   the proportion of core and non-core funding contrast sharply with that of the mainland and in recent quarters contributed to a sharp increase in funding costs; and

·   we rely heavily on short-term funding sources, such as brokered deposits, which access could be restricted if our capital ratios fall below the levels necessary to be considered “well-capitalized” under current regulatory guidelines.

These factors and the risk factors referred in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2007 could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Executive Overview

Introduction

We are a diversified financial holding company headquartered in San Juan, Puerto Rico, offering a broad array of financial services through our wholly-owned banking subsidiary, Eurobank, and our wholly-owned insurance agency subsidiary, EuroSeguros, Inc. As of September 30, 2007, we had, on a consolidated basis, total assets of $2.6 billion, net loans of $1.8 billion, total deposits of $2.0 billion, and stockholders’ equity of $175.4 million. We currently operate through a network of 24 branch offices located throughout the Island. In March and June 2007, we opened two new branches, one in Fajardo and another in Cayey, Puerto Rico, respectively. In July 2007, we closed the branch located at Luquillo, Puerto Rico.

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 mortgage 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.

Key Performance Indicators at September 30, 2007

We believe the following were key indicators of our performance and results of operations through the third quarter of 2007:

·   our total assets increased to $2.561 billion, or by 3.18% on an annualized basis, at the end of the third quarter of 2007, from $2.501 billion at the end of 2006;

·   our net loans grew to $1.819 billion at the end of the third quarter of 2007, representing an increase of 6.67% on an annualized basis, from $1.732 billion at the end of 2006;

·   our total deposits increased to $1.964 billion, or by 4.10% on an annualized basis, at the end of the third quarter of 2007, from $1.905 billion at the end of 2006;

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·   our nonperforming assets increased to $79.7 million, or by 35.31% on an annualized basis, at the end of the third quarter of 2007, from $63.0 million at the end of 2006;

·   our total revenue grew to $45.9 million in the third quarter of 2007, representing an increase of 5.20%, from $43.7 million in the same period of 2006;

·   our net interest margin and spread on a fully taxable equivalent basis increased to 2.83% and 2.31% for the third quarter of 2007, respectively, compared to 2.74% and 2.20%, respectively, for the same period in 2006;

·   our provision for loan and lease losses grew to $9.6 million in the third quarter of 2007, representing an increase of 97.86%, from $4.8 million in the same period of 2006;

·   our total noninterest expense grew to $12.3 million in the third quarter of 2007, representing an increase of 7.54%, from $11.5 million in the same period of 2006; and

·   for the third quarter of 2007, we recorded an income tax benefit of $1.4 million, compared to an income tax expense of $515,000 in the same period of 2006.

These items, as well as other factors, resulted in a net loss of $1.2 million for the third quarter of 2007, compared to a net income of $1.5 million for the same period in 2006, or $(0.07) per common share for the third quarter of 2007, compared to $0.07 per common share for the same period in 2006 on a fully diluted basis. The net loss we experienced in the third quarter of 2007 was mainly caused by three business relationships for which their related loans became impaired during the quarter ended September 30, 2007 and required a specific allowance of $4.5 million, reducing our diluted earnings per share for the quarter by $0.14, net of tax. Key performance indicators and other factors are discussed in further detail throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Quarterly Report on Form 10-Q.

Critical Accounting Policies

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

Loans and Allowance for Loan and Lease Losses

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted by any charge-offs, unearned finance charges, allowance for loan and lease losses, and net deferred nonrefundable fees or costs on origination. The allowance for loan and lease losses is an estimate to provide for probable losses that may be incurred in our loan and lease portfolio. The allowance for loan and lease losses amounted to $26.1 million, $18.9 million and $18.4 million as of September 30, 2007, December 31, 2006 and September 30, 2006, respectively. Losses charged to the allowance amounted to $12.9 million for the nine-month period ended September 30, 2007, compared to $13.6 million for the same period in 2006. Recoveries were credited to the allowance in the amounts of $1.6 million and $2.2 million for the 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.

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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 on an annual basis, are adjusted for changes in trends and conditions. In addition, in evaluating the adequacy of the allowance for loan and lease losses, management also considers the probable effect that current internal and external environmental factors could have on the historical loss factors. 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.

With the exception of the commercial and construction loan pools and residential mortgages with a 60% or lower loan-to-value, loans that are more than 90 days delinquent result in an additional allowance. When commercial and construction loans become impaired, 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 Federal Deposit Insurance Corporation, as an integral part of their examination process, 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. Appraisals of other real estate properties are made periodically after their acquisition, as necessary. Valuations of repossessed assets are made quarterly after their acquisition. For OREO and repossessed assets, a comparison between the appraised value and the carrying value is performed. Additional declines in value after acquisition, if any, are charged to current operations. Other real estate owned amounted to $4.3 million, $3.6 million, and $3.8 million as of September 30, 2007, December 31, 2006 and September 30, 2006, respectively.

Other repossessed assets amounted to $6.2 million, $9.4 million and $10.0 million as of September 30, 2007, December 31, 2006 and September 30, 2006, 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.”

We monitor the total loss ratio on sale of repossessed assets, which is determined by dividing the sum of declines in value, repairs, and gain or loss on sale by the book value of repossessed assets sold at the time of repossession. The total loss ratio on sale of repossessed vehicles for the quarter and nine-month period ended September 30, 2007 was 14.31% and 13.66%, respectively, compared to 11.36% and 6.24% for the same periods in 2006. This increase in our total loss ratio on the sale of repossessed vehicles was directly attributable to our strategy of being more aggressive in the sale of repossessed vehicles in an attempt to expedite the disposition of slow moving inventory. This strategy resulted in an increase of approximately 24% and 86% in the number of repossessed vehicles in inventory over six months that were sold during the quarter and nine-month period ended September 30, 2007, respectively, when compared to the same periods in 2006. During the quarter and nine-month period ended September 30, 2007, we sold 92 and 342 units in inventory over six months, respectively, compared to 74 and 184 units in inventory over six months sold during the same periods in 2006.

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For the quarter and nine-month period ended September 30, 2007, the total gain on sale of repossessed equipment was $50,000 and $31,000, respectively, compared to a total loss of $5,000 and a total gain of $62,000 for the same periods in 2006.

For the quarter and nine-month period ended September 30, 2007, the total loss on sale of repossessed boats was $74,000 and $251,000, respectively, compared to $251,000 and $477,000 for the same periods in 2006. The boat financing portfolio amounted to $37.1 million and $38.3 million as of September 30, 2007 and 2006, respectively.

During the quarter and nine-month period ended September 30, 2007, two OREO properties and three OREO properties were sold resulting in a total loss of $118,000 and $139,000, respectively, compared to four OREO properties sold during the nine-month period ended September 30, 2006, which resulted in no loss for the Company. No repossessed properties were sold during the third quarter of 2006.

Results of Operations for the Quarter and Nine Months Ended September 30, 2007

Net Interest Income and Net Interest Margin

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

Net interest income increased by 3.19%, or $530,000, and by 1.24%, or $632,000, to $17.1 million and $51.6 million in the quarter and nine-month period ended September 30, 2007, respectively, from $16.6 million and $51.0 for the same periods in 2006. This increase resulted from the combined effect of a net increase in volumes and a net increase in rates as shown on tables on pages 24 and 25.

Total interest income increased by 4.39% and 8.00% to $43.7 million and $129.0 million for the quarter and nine-month period ended September 30, 2007, respectively, compared to $41.9 million and $119.4 million for the same periods in 2006. These increases were driven by the combination of a slight increase in average interest-earning assets and increased yields resulting from higher interest rates. Our average interest-earning assets increased by $5.8 million, or by 0.24%, and by $29.3 million, or by 1.26%, to $2.383 billion and $2.359 billion in the quarter and nine-month period ended September 30, 2007, respectively, from $2.378 billion and $2.330 billion for the same periods in 2006. Average net loans increased by $135.9 million, or by 8.15%, and by $145.2 million, or by 8.96%, to $1.803 billion and $1.767 billion in the quarter and nine-month period ended September 30, 2007, respectively, from $1.667 billion and $1.621 billion for the same periods in 2006. The yield on average interest-earning assets for the quarter and nine-month period ended September 30, 2007 increased to 7.82% and 7.78%, respectively, from 7.67% and 7.46% for the same periods in 2006.

Total interest expense increased by 5.17% and 13.03% to $26.6 million and $77.4 million in the quarter and nine-month period ended September 30, 2007, respectively, from $25.3 million and $68.5 million in the same periods of 2006. This increase resulted from the combined effect of higher volumes of interest-bearing liabilities and the higher cost of funds mainly on brokered deposits and jumbo deposits. Average interest-bearing liabilities increased by 0.73% and 1.63% to $2.157 billion and $2.128 billion in the quarter and nine-month period ended September 30, 2007, respectively, from $2.142 billion and $2.094 billion for the same periods in 2006. The rate we paid on average interest-bearing liabilities for the quarter and nine-month period ended September 30, 2007 increased to 5.51% and 5.44%, respectively, from 5.47% and 5.02% for the same periods in 2006.

For the third quarter of 2007, net interest margin and net interest spread on a fully taxable equivalent basis was to 2.83% and 2.31%, respectively, compared to 2.92% and 2.38% for the quarter ended June 30, 2007, and 2.74% and 2.20% for the third quarter of 2006. Our net interest margin and net interest spread for the third quarter of 2007 was impacted by an increase of approximately $391,000 in interest receivable reversed in connection to commercial loans placed in nonaccrual status during the quarter ended September 30, 2007 in excess of the amount of interest receivable reversed on commercial loans during the second quarter of 2007. Without the effect of the $391,000 in reversed interest receivable, net interest margin and net interest spread on a fully taxable basis would have been 2.90% and 2.38% for the quarter ended September 30, 2007, respectively. The increase in net interest margin and net interest spread during the quarter ended September 30, 2007 when compared to the same period in 2006 was primarily attributable to an increase in the yields of our loans and investments portfolios, which outpaced the increase in borrowing costs.

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For the nine-month period ended September 30, 2007, the net interest margin and net interest spread on a fully taxable equivalent basis decreased to 2.88% and 2.34%, respectively, from 2.95% and 2.44% for the same period in 2006. The decline in margin and spread during the nine-month period ended September 30, 2007 when compared to the same period in 2006 was 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 flat 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, which has been comprised substantially of brokered deposits and higher rate time deposits driven by the extremely competitive local operating environment.

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

Three Months Ended September 30,
2007			2006(8)
Average			Average
Balance	Interest	Rate/ Yield(1)	Balance	Interest	Rate/ Yield(1)
(Dollars in thousands)

ASSETS:
Interest-earning assets:
Net loans and leases(2)	$	1,803,002	$	36,677	8.22	%	$	1,667,054	$	33,649	8.17	%
Securities of U.S. government agencies(3)		453,776		5,345	6.55			607,218		6,919	6.55
Other investment securities(3)		60,957		821	7.49			46,667		581	7.03
Puerto Rico government obligations(3)		7,191		89	6.88			9,850		113	6.58
Securities purchased under agreements to resell and federal funds sold		36,760		516	6.44			35,444		482	5.69
Interest-earning deposits		21,635		287	5.31			11,293		152	5.38
Total interest-earning assets	$	2,383,321	$	43,735	7.82	%	$	2,377,526	$	41,896	7.67	%
Total noninterest-earning assets		99,439						83,888
TOTAL ASSETS	$	2,482,760					$	2,461,414
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Money market deposits	$	18,418	$	146	3.19	%	$	23,791	$	141	2.39	%
NOW deposits		47,679		309	2.60			48,838		291	2.39
Savings deposits		136,910		865	2.53			172,836		1,013	2.35
Time certificates of deposit in denominations of $100,000 or more(4)		1,490,147		19,231	5.55			1,242,217		15,225	5.33
Other time deposits		90,154		1,002	4.46			109,847		1,060	3.87
Other borrowings		374,091		5,072	7.21			544,248		7,585	7.53
Total interest-bearing liabilities	$	2,157,399	$	26,625	5.51	%	$	2,141,777	$	25,315	5.47	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		116,748						128,918
Other liabilities		33,941						27,177
Total noninterest-bearing liabilities		150,689						156,095
STOCKHOLDERS’ EQUITY		174,672						163,542
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,482,760					$	2,461,414
Net interest income(5)			$	17,110					$	16,581
Net interest spread(6)					2.31	%					2.20	%
Net interest margin(7)					2.83	%					2.74	%

__________

(1)Yield and expense is calculated on a fully taxable equivalent basis assuming a 39% and 43.5% tax rate for the quarters ended September 30, 2007 and 2006, respectively.

(2)The amortization of net loan costs or fees have been included in the calculation of interest income. Net loan costs were approximately $524,000 and $715,000 for the third quarters ended September 30, 2007 and 2006, respectively. Loans include nonaccrual loans, which balance as of the periods ended September 30, 2007 and 2006 was $55.3 million and $33.9 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 the quarter ended September 30, 2007, interest expense on time certificates of deposit in denominations of $100,000 or more was reduced by approximately $185,000 of capitalized interest on construction in progress. This capitalized interest was mainly related to the improvements being performed to our new headquarters purchased in February 2007. Without the effect of the capitalized interest of $185,000, our net interest margin and spread on a fully taxable basis for the quarter ended September 30, 2007 would have been 2.80% and 2.27%, respectively.

(5)Net interest income on a tax equivalent basis was $16.9 million and $16.3 million for the first quarters ended September 30, 2007 and 2006, respectively.

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

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

(8)Certain adjustments resulting from the initial adoption of SAB 108 as of December 31, 2006 were made to comparable period in 2006.

	Nine Months Ended September 30,
	2007							2006(8)
	Average							Average
	Balance		Interest		Rate/ Yield(1)			Balance		Interest		Rate/ Yield(1)
	(Dollars in thousands)
ASSETS:
Interest-earning assets:
Net loans and leases(2)	$	1,766,569	$	107,657		8.21	%	$	1,621,344	$	95,523		7.95	%
Securities of U.S. government agencies(3)		477,360		16,724		6.49			611,881		20,463		6.40
Other investment securities(3)		57,712		2,059		7.38			44,921		1,623		6.82
Puerto Rico government obligations(3)		8,732		307		6.52			9,256		300		6.20
Securities purchased under agreements to resell and federal funds sold		33,974		1,415		6.36			35,458		1,249		5.15
Interest-earning deposits		21,114		836		5.28			7,276		287		5.26
Total interest-earning assets	$	2,359,461	$	128,998		7.78	%	$	2,330,136	$	119,445		7.46	%
Total noninterest-earning assets		97,860							79,799
TOTAL ASSETS	$	2,457,321						$	2,409,935
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-bearing liabilities:
Money market deposits	$	18,044	$	377		2.80	%	$	27,164	$	458		2.27	%
NOW deposits		47,648		867		2.43			46,405		774		2.23
Savings deposits		144,446		2,713		2.51			193,378		3,390		2.34
Time certificates of deposit in denominations of $100,000 or more(4)		1,442,437		55,063		5.49			1,205,427		41,231		4.97
Other time deposits		91,797		2,971		4.32			117,232		3,160		3.60
Other borrowings		383,712		15,395		7.10			504,246		19,452		6.90
Total interest-bearing liabilities	$	2,128,084	$	77,386		5.44	%	$	2,093,852	$	68,465		5.02	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		119,737							129,046
Other liabilities		35,811							23,634
Total noninterest-bearing liabilities		155,548							152,680
STOCKHOLDERS’ EQUITY		173,689							163,403
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,457,321						$	2,409,935
Net interest income(5)			$	51,612						$	50,980
Net interest spread(6)						2.34	%						2.44	%
Net interest margin(7)						2.88	%						2.95	%

__________

(1)Yield and expense is calculated on a fully taxable equivalent basis assuming a 39% and 43.5% tax rate for the nine-month period ended September 30, 2007 and 2006, respectively.

(2)The amortization of net loan costs or fees have been included in the calculation of interest income. Net loan costs were approximately $805,000 and $1.9 million for the nine-month periods ended September 30, 2007 and 2006, respectively. Loans include nonaccrual loans, which balance as of the periods ended September 30, 2007 and 2006 was $55.3 million and $33.9 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 the nine months ended September 30, 2007, interest expense on time certificates of deposit in denominations of $100,000 or more was reduced by approximately $475,000 of capitalized interest on construction in progress. This capitalized interest was mainly related to the improvements being performed to our new headquarters purchased in February 2007. Without the effect of the capitalized interest of $475,000, our net interest margin and spread on a fully taxable basis for the nine months ended September 30, 2007 would have been 2.85% and 2.31%, respectively.

(5)Net interest income on a tax equivalent basis was $51.0 million and $51.6 million for the nine-month period ended September 30, 2007 and 2006, respectively.

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

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

(8)Certain adjustments resulting from the initial adoption of SAB 108 as of December 31, 2006 were made to comparable period in 2006.

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

	Three Months Ended September 30, 2007 Over 2006(2) Increases/(Decreases) Due to Change in									Nine Months Ended September 30, 2007 Over 2006(2) Increases/(Decreases) Due to Change in
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
INTEREST EARNED ON:
Net loans(1)	$	2,744		$	284		$	3,028		$	8,556		$	3,578		$	12,134
Securities of U.S. government agencies		(1,748	)		174			(1,574	)		(4,499	)		760			(3,739	)
Other investment securities		178			62			240			245			191			436
Puerto Rico government obligations		(31	)		7			(24	)		(17	)		24			7
Securities purchased under agreements to resell and federal funds sold		18			16			34			(52	)		218			166
Interest-earning time deposits		139			(4	)		135			546			3			549
Total interest-earning assets	$	1,300		$	539		$	1,839		$	4,779		$	4,774		$	9,553
INTEREST PAID ON:
Money market deposits		($32	)	$	37		$	5			($154	)	$	73			($81	)
NOW deposits		(7	)		25			18			21			72			93
Savings deposits		(211	)		63			(148	)		(858	)		181			(677	)
Time certificates of deposit in denominations of $100,000 or more		3,039			967			4,006			8,107			5,725			13,832
Other time deposits		(190	)		132			(58	)		(686	)		497			(189	)
Other borrowings		(2,371	)		(142	)		(2,513	)		(4,650	)		593			(4,057	)
Total interest-bearing liabilities	$	228			($1,082	)	$	1,310		$	1,780		$	7,141		$	8,921
Net interest income	$	1,072			($543	)	$	529		$	2,999			($2,367	)	$	632

__________

(1)The amortization of net loan costs or fees have been included in the calculation of interest income. Net loan costs were approximately $524,000 and $805,000 for the quarter and nine-month period ended September 30, 2007, respectively, compared to $715,000 and $1.9 million for the same periods in 2006. Loans include nonaccrual loans, which balance as of the periods ended September 30, 2007 and 2006 was $55.3 million and $33.9 million, respectively, and are net of the allowance for loan and lease losses, deferred fees, unearned income, and related direct costs.

(2)Certain adjustments resulting from the initial adoption of SAB 108 as of December 31, 2006 were made to comparable periods in 2006.

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.”

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In the quarter and nine-month period ended September 30, 2007, our provision for loan and lease losses increased to $9.6 million and $18.5 million, respectively, from $4.8 million and $11.6 million for the same periods in 2006. For the quarter and nine-month period ended September 30, 2007, the provision for loan and lease losses as a percentage of net charge-offs was 241.36% and 163.82%, respectively, compared to 94.50% and 101.86% for the same periods in 2006. The increase in our provision for loan and lease losses during the nine-month period ended September 30, 2007 when compared to the same period in 2006 was mainly caused by: (i) three business relationships, which became impaired during the third quarter of 2007 and required a specific allowance of $4.5 million; and (ii) the net losses experienced, mainly in our leasing portfolio, combined with the growth of our loan portfolio. These business relationships were comprised of two real estate secured commercial business relationships in the food retailing and security systems industries, respectively, which amounted to $8.8 million with loan-to-values exceeding 100%, and another not secured by real estate commercial business relationship in the general freight industry, which amounted to $1.2 million. For more detail on net charge-offs please refer to the “Allowance for Loan and Lease Losses” section herein.

Noninterest Income

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

	Three Months Ended September 30,
	2007						2006
	(Amount)			(%)			(Amount)			(%)
	(Dollars in thousands)
Service charges and other fees	$	2,395			108.2	%	$	2,156			121.2	%
Gain on sale of loans , net		77			3.5			133			7.5
Loss on sale of repossessed assets and on disposition of other assets, net		(259	)		(11.7	)		(511	)		(28.7	)
Total noninterest income	$	2,213			100.0	%	$	1,778			100.0	%

	Nine Months Ended September 30,
	2007						2006
	(Amount)			(%)			(Amount)		(%)
	(Dollars in thousands)
Service charges and other fees	$	7,183			114.6	%	$	6,228		93.1	%
Gain on sale of loans , net		239			3.8			262		3.9
(Loss) gain on sale of repossessed assets and on disposition of other assets, net		(1,154	)		(18.4	)		201		3.0
Total noninterest income	$	6,268			100.0	%	$	6,691		100.0	%

Our total noninterest income for the quarter and nine-month period ended September 30, 2007 was $2.2 million and $6.3 million, respectively, compared to $1.8 million and $6.7 million for the same periods in 2006. For the quarter and nine-month period ended September 30, 2007, noninterest income represented approximately 0.09% and 0.26% of average assets, respectively, compared to 0.07% and 0.28% for the same periods in 2006.

Our largest noninterest income source is service charges, primarily on deposit accounts. The service charges and other fees increased to $2.4 million and $7.2 million in the quarter and nine-month period ended September 30, 2007, respectively, from $2.2 million and $6.2 million for the same periods in 2006. This increase was primarily due to an increase in service charges, mainly non-sufficient fund charges on deposit accounts and an increase in miscellaneous income mainly related to our credit card operations.

During the quarter and nine-month period ended September 30, 2007, we experienced a net loss on sale of repossessed assets of $259,000 and $1.2 million, respectively, compared to a net loss of $511,000 and a net gain of $201,000 during the same periods in 2006. These changes mainly resulted from our strategy of being more aggressive in the sale of repossessed vehicles in an effort to expedite the disposition of slow moving inventory, as previously explained, primarily during the first and second quarter of 2007.

For the quarter and nine-month period ended September 30, 2007, gain on sale of loans was $77,000 and $239,000, respectively, compared to $133,000 and $262,000 for the same periods in 2006. This source of noninterest income was mainly derived from the sale of residential mortgage loans. During the quarter and nine-month period ended September 30, 2007, we sold $3.7 million and $11.3 million in residential mortgage loans to other financial institutions, respectively, compared to $4.7 million and $9.6 million for the same periods in 2006. We did not retain the servicing rights on these residential mortgage loans and we accounted for these transactions as sales.

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Noninterest Expense

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

	Three Months Ended September 30,
	2007					2006(1)
	(Amount)		(%)			(Amount)		(%)
	(Dollars in thousands)
Salaries and employee benefits	$	4,950		40.1	%	$	4,536		39.4	%
Occupancy and equipment		2,812		22.8			2,542		22.2
Professional services, including directors’ fees		1,444		11.7			967		8.4
Office supplies		319		2.6			330		2.9
Other real estate owned and other repossessed assets expenses		498		4.0			1,012		8.8
Promotion and advertising		375		3.0			324		2.8
Lease expenses		120		1.0			157		1.4
Insurance		479		3.9			293		2.6
Municipal and other taxes		500		4.1			420		3.7
Commissions and service fees credit and debit cards		324		2.6			318		2.8
Other noninterest expense		521		4.2			577		5.0
Total noninterest expense	$	12,342		100.0	%	$	11,476		100.0	%

__________

(1)Certain adjustments resulting from the initial adoption of SAB 108 as of December 31, 2006 were made to comparable periods in 2006.

	Nine Months Ended September 30,
	2007					2006(1)
	(Amount)		(%)			(Amount)		(%)
	(Dollars in thousands)
Salaries and employee benefits	$	15,849		43.1	%	$	14,012		42.5	%
Occupancy and equipment		8,041		21.9			7,024		21.3
Professional services, including directors’ fees		3,319		9.0			3,155		9.5
Office supplies		1,018		2.8			1,023		3.1
Other real estate owned and other repossessed assets expenses		1,698		4.6			1,742		5.3
Promotion and advertising		1,126		3.1			841		2.5
Lease expenses		399		1.1			479		1.4
Insurance		1,409		3.8			794		2.4
Municipal and other taxes		1,342		3.7			1,237		3.7
Commissions and service fees credit and debit cards		1,036		2.8			997		3.0
Other noninterest expense		1,500		4.1			1,738		5.3
Total noninterest expense	$	36,737		100.0	%	$	33,042		100.0	%

__________

(1)Certain adjustments resulting from the initial adoption of SAB 108 as of December 31, 2006 were made to comparable periods in 2006.

Our total noninterest expense increased to $12.3 million and $36.7 million in the quarter and nine-month period ended September 30, 2007, respectively, compared to $11.5 million and $33.0 million for the same periods in 2006. These changes represent an increase of 7.55% and 11.18% in noninterest expense over the same periods in 2006, respectively. This increase can be attributed mainly to increases in personnel and occupancy expenses. Noninterest expenses as a percentage of average assets changed to 0.50% and 1.50% in the quarter and nine-month period ended September 30, 2007, respectively, compared to 0.47% and 1.37% for the same periods in 2006. Our efficiency ratio was 64.68% and 64.19% in the quarter and nine-month period ended September 30, 2007, respectively, compared to 63.42% and 56.66% for the same periods in 2006. The efficiency ratio is determined by dividing total noninterest expense by an amount equal to net interest income on a fully taxable equivalent basis plus noninterest income.

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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 benefits totaled $5.0 million and $15.8 million for the quarter and nine-month period ended September 30, 2007, respectively, compared to $4.5 million and $14.0 million for the same periods in 2006, representing an increase of 9.13% and 13.11% for the comparable periods, respectively. This increase in salaries and employee benefits resulted from the increases in personnel, primarily in our residential mortgage and trust operations, the expansion of our branch network, normal salary increases and related employees’ benefits, and $93,000 in one-time employee termination benefits in connection with an information technology outsourcing agreement we entered with Telefónica Empresas in August 2007. As of September 30, 2007, we had 505 full-time equivalent employees, compared with 492 full-time equivalent employees as of September 30, 2006. Our volume of assets per employee remained at $5.1 million as of September 30, 2007, when comparing to the same period in 2006.

Occupancy and equipment expenses totaled $2.8 million and $8.0 million for the quarter and nine-month period ended September 30, 2007, respectively, compared to $2.5 million and $7.0 million for the same periods in 2006, representing an increase of 10.62% and 14.48% for the comparable periods, respectively. This increase was mainly attributable to increased rent, equipment maintenance, property tax expenses, and data, communications, and security services related, in part, to the expansion of our branch network.

Professional and directors’ fees were $1.4 million and $3.3 million, or 11.7% and 9.0% of total noninterest expenses, for the quarter and nine-month period ended September 30, 2007, respectively, compared to $967,000 and $3.2 million, or 8.4% and 9.5% of total noninterest expenses, for the same periods in 2006. The increase during the quarter and nine-month period ended September 30, 2007 when compared to the same periods in 2006 was mainly due to $73,000 in one-time fees related to an information technology outsourcing agreement, as previously explained, $125,000 in legal fees related to this outsourcing agreement, and $441,000 mainly in other BSA compliance consultations services, of which $250,000 was recorded during the third quarter of 2007, net of $300,000 related to additional expenses billed by our former external auditor during the first quarter of 2006.

Our expenses related to OREO and repossessed assets were $498,000 and $1.7 million, or 4.0% and 4.6% of total noninterest expenses, for the quarter and nine-month period ended September 30, 2007, respectively, compared to $1.0 million and $1.7 million, or 8.8% and 5.3% of total noninterest expenses, for the same periods in 2006. The decrease in other real estate owned and repossessed assets expenses during the quarter ended September 30,2007 when compared to the same quarter in 2006 resulted from a decrease in the valuation allowance for subsequent declines in value, mainly related to a decrease in the inventory of repossessed vehicles over six months. The number of repossessed vehicles in inventory over six months as of September 30, 2007 decreased to 53 units, or by approximately 67%, from 160 units as of September 30, 2006. We continue monitoring this inventory very closely and taking measures to expedite its disposition. Repossessed assets are initially recorded at the lower of net realizable value or book value upon repossession and resulting losses are charged to the allowance for loan and lease losses. These assets are then periodically evaluated and recorded at net realizable value. Any subsequent decline in the net realizable value is charged to current operations.

Promotion and advertising increased to $375,000 and $1.1 million for the quarter and nine-month period ended September 30, 2007, respectively, from $324,000 and $841,000 for the same periods in 2006. This increase was mainly attributable to an advertising campaign, primarily related to our residential mortgage loan department, to take advantage of opportunities on the Island.

Insurance expenses were $479,000 and $1.4 million, or 3.9% and 3.8% of total noninterest expenses, for the quarter and nine-month period ended September 30, 2007, respectively, compared to $293,000 and $794,000, or 2.6% and 2.4% of total noninterest expense, for the same periods in 2006. This increase was mainly attributable to the FDIC’s new insurance premium assessment, which commenced in January 2007.

Other noninterest expenses were $521,000 and $1.5 million for the quarter and nine-month period ended September 30, 2007, respectively, compared to $577,000 and $1.7 million for the same periods in 2006. The decrease in other noninterest expenses for the nine-month period ended September 30, 2007 when compared to the same period in 2006 was mainly related to a decrease in the provision for losses on off-balance sheet items and insurance claim receivables. Other noninterest expenses are mainly comprised of loan processing and other miscellaneous expenses.

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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.

For the quarter and nine-month period ended September 30, 2007, we recorded an income tax benefit of $1.4 million and $30,000, respectively, compared to an income tax expense of $515,000 and $4.9 million for the same periods in 2006. Our income tax benefit of $1.4 million and $30,000 for the quarter and nine-month period ended September 30, 2007 was comprised of a current income tax expense of $935,000 and $3.8 million, and a deferred tax benefit of $2.3 million and $3.8 million, respectively, as explained further below.

Our current income tax expense for the quarter ended September 30, 2007 decreased to $935,000, from $1.3 million for the same quarter in 2006. For the nine-month period ended September 2007, the current income tax expense decrease to $3.8 million, from $5.9 million for the same period in 2006. This decrease in our current income tax expense was mainly due to the net effect of: (i) a reduction in our income before taxes, (ii) an increase in the net exempt income during 2007; (iii) the total consumption during the quarter ended March 31, 2006 of net operating losses from acquired financial institutions; and (iv) the termination on December 31, 2006 of the additional transitory taxes of 4.5% imposed by the Puerto Rico Legislature in 2006.

Our deferred tax benefit for the quarter ended September 30, 2007 increased to $2.3 million, from $528,000 for the same quarter in 2006. For the nine-month period ended September 2007, the deferred tax benefit increased to $3.8 million, from $613,000 for the same period in 2006. This increase was mainly due to the combined effect of (i) an increase in deferred tax assets mainly related to the increase in our provision for loan and lease losses as of September 30, 2007, primarily during the third quarter of 2007; and (ii) the total consumption during the quarter ended March 31, 2006 of net operating losses from acquired financial institutions, as previously mentioned.

As of September 30, 2007, we had net deferred tax assets of $10.1 million, compared to $6.3 million and $6.2 million as of December 31, 2006 and September 30, 2006, respectively. 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. Management considers the scheduled reversal of deferred tax liabilities; projected future taxable income; our compliance with the Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes; and tax planning strategies in making this assessment. We believe it is more likely than not that the benefits of these deductible differences at September 30, 2007 will be realized.

Financial Condition

Our total assets as of September 30, 2007 were $2.561 billion, compared to $2.501 billion as of December 31, 2006. The $59.7 million increase in our total assets during the nine-month period ended September 30, 2007 was primarily due to the net effect of (i) a $35.4 million decrease in interest bearing deposits; (ii) a $12.4 million decrease in securities purchased under agreements to resell; (iii) a $5.6 million increase in the investment securities portfolio; (iv) a $86.6 million increase in net loans; and (v) a $15.0 million increase in premises and equipment, mainly from the acquisition of land and an office building to serve as our new headquarters.

Our total deposits increased by $58.6 million, or by 4.10% on an annualized basis, to $1.964 billion as of September 30, 2007, compared to $1.905 billion as of December 31, 2006. The increase in deposits during the nine-month period ended September 30, 2007 was mainly concentrated in brokered deposits, as further explained in the section of this discussion and analysis captioned “Deposits.” Other borrowings decreased to $382.5 million as of September 30, 2007, from $395.0 million as of December 31, 2006. This change in other borrowings was mainly concentrated in the securities sold under agreements to repurchase and notes payable to the Federal Home Loan Bank, as explained further below.

As of September 30, 2007, our stockholders’ equity was $175.4 million, compared to $169.9 million as of December 31, 2006. In addition to earnings and losses from operations, stock options exercised and stock repurchases, our stockholders’ equity was also impacted by accumulated other comprehensive losses of $2.9 million and $7.6 million as of September 30, 2007 and December 31, 2006, respectively.

30

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 September 30, 2007, we had $13.6 million in interest-bearing deposits in other financial institutions, compared to $49.1 million as of December 31, 2006. Also, we had $38.8 million and $51.2 million in purchased securities under agreements to resell as of September 30, 2007 and December 31, 2006, respectively. This reduction in interest-bearing deposits and short-term investments was mainly used to fund the growth in our loan portfolio. On a fully taxable equivalent basis, the yield on interest-bearing deposits and the purchased securities under agreements to resell was 5.95% and 5.46% for the nine-month period ended September 30, 2007 and the year 2006, 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). Held-to-maturity securities are presented at amortized cost.

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)
September 30, 2007:
U.S. government agencies obligations	$	152,035	$	151,210	$	2,845	$	2,795	$	—	$	—	$	154,880	$	154,005
Collateralized mortgage obligations		317,325		315,333		25,238		24,690		—		—		342,563		340,023
Mortgage-backed securities		68,869		68,773		4,810		4,663		—		—		73,679		73,436
State and municipal obligations		6,496		6,538		—		—		—		—		6,496		6,538
US Corporate Notes ………………….		3,000		2,930		—		—		—		—		3,000		2,930
Other investments		—		—		—		—		5,889		5,889		5,889		5,889
Total	$	547,725	$	544,784	$	32,893	$	32,148	$	5,889	$	5,889	$	586,507	$	582,821
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		329,334
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

During the nine-month period ended September 30, 2007, the investment portfolio increased by approximately $5.6 million to $583.6 million as of September 30, 2007, from $577.9 million as of December 31, 2006. This increase was primarily due to the net effect of:

·   the purchase of $107.8 million in corporate obligations and mortgage-backed securities;

·   prepayments of approximately $77.3 million on mortgage-backed securities and FHLB obligations; and

31

·   the maturity of $28.9 million in US government agencies obligations and Puerto Rico government obligations;

During the past few years, we positioned our investment portfolio for an increase in interest rates by purchasing mostly investments with short term maturities or estimated maturities between 1½ to 4 years.  During 2007, we have been analyzing different market opportunities to reposition our investment portfolio in an attempt to improve its average yield and to maintain an adequate average life.   During the nine-month period ended September 30, 2007, we purchased approximately $107.8 million in collateralized mortgage obligations, mortgage-back securities and US corporate notes with an estimated average life of approximately 6.0 years and an estimated average yield of 5.80%. In addition, during the fourth quarter of 2006, we sold approximately $50.1 million of FHLB and FNMA debt securities available for sale with an average yield of 3.64%. For the nine-month period ended September 30, 2007, after the above-mentioned transactions, the estimated average maturity was approximately 3.6 years and the average yield was approximately 4.92%, compared to an estimated average maturity of 3.2 years and an average yield of 4.64% for the period ended December 31, 2006.  As of September 30, 2007, investment securities having a carrying value of approximately $459.1 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 estimated average maturity of investment securities held in our investment portfolio and their weighted average yields:

	Nine Months Ended September 30, 2007
	Within One Year					After One but Within Five Years					After Five but Within Ten Years					After Ten Years					Total
	Amount		Yield(4)			Amount		Yield(4)			Amount		Yield(4)			Amount		Yield(4)			Amount		Yield(4)
	(Dollars in thousands)
Investments available-for-sale: (1)(2)
U.S. government agencies obligations	$	143,912		4.69	%	$	7,298		5.23	%	$	—		—	%	$	—		—	%	$	151,210		4.71	%
Mortgage-backed securities(3)		6,946		4.09			31,680		5.47			20,517		5.20			9,630		5.47			68,773		5.25
Collateral mortgage obligations(3)		32,654		4.09			202,892		4.81			79,787		5.54			—		—			315,333		4.92
State & political subdivisions		1,652		6.14			4,886		4.72			—		—			—		—			6,538		5.08
Other debt securities		2,930		7.49			—		—			—		—			—					2,930		7.49
Total investments available-for-sale	$	188,094		4.62	%	$	246,756		4.90	%	$	100,304		5.47	%	$	9,630		5.47	%	$	544,784		4.92	%
Investments held-to-maturity: (2)
U.S. government agencies obligations	$	—		—	%	$	2,845		3.95	%	$	—		—	%	$	—		—	%	$	2,845		3.95	%
Mortgage-backed securities(3)		—		—								4,810		4.99			—		—			4,810		4.99
Collateral mortgage obligations(3)		8,638		3.76			8,175		4.31			3,811		5.68			4,614		5.14			25,238		4.48
State & political subdivisions		—		—			—		—			—		—			—		—			—		—
Other debt securities		—		—			—		—			—		—			—		—			—		—
Total investments held-to-maturity	$	8,638		3.76	%	$	11,020		4.22	%	$	8,621		5.29	%	$	4,614		5.14	%	$	32,893		4.51	%
Other Investments:
FHLB stock	$	5,279		7.50	%		—		—	%		—		—	%		—		—	%	$	5,279		7.50	%
Investment in statutory trust		—		—			—		—			—		—			610		8.45			610		8.45
Total other investments	$	5,279		7.50	%	$	—		—	%	$	—		—	%	$	610		8.45	%	$	5,889		7.60	%
Total investments	$	202,011		4.66	%	$	257,776		4.87	%	$	108,925		5.45	%	$	14,854		5.49	%	$	583,566		4.92	%

__________

(1)Based on estimated fair value.

(2)Almost all of our income from investments in securities is tax exempt because 99.64% 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.

(4)Represents the present value of the expected future cash flows of each instrument discounted at the estimated market rate offered by other instruments that are currently being traded in the market with similar credit quality, expected maturity and cash flows. For other investments, it represents the last dividend received.

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Other Investments

For various business purposes, we make investments in earning assets other than the interest-earning securities discussed above. As of September 30, 2007, our investment in other earning assets included $5.3 million in FHLB stock and $610,000 equity in our statutory trust. The following table presents the balances of other earning assets as of the dates indicated:

		As of September 30,		As of December 31,
		2007		2006
	(In thousands)
Statutory trusts	$	610	$	611
FHLB stock		5,279		3,718
Total	$	5,889	$	4,329

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 $487,000 and $879,000 as of September 30, 2007 and December 31, 2006, respectively:

	As of September 30,	As of December 31,
	2007	2006
(In thousands)

Real estate secured	$	887,570		$	813,615
Leases		401,209			443,311
Other commercial and industrial		303,430			297,512
Real estate - construction		184,347			126,241
Consumer		59,533			60,682
Other loans(1)		6,400			5,015
Gross loans and leases	$	1,842,489		$	1,746,376
Plus: Deferred loan costs, net		2,735			4,880
Total loans, including deferred loan costs, net	$	1,845,224		$	1,751,256
Less: Unearned income		(1,072	)		(1,297	)
Total loans, net of unearned income	$	1,844,152		$	1,749,959
Less: Allowance for loan and lease losses		(26,131	)		(18,937	)
Loans, net	$	1,818,021		$	1,731,022

__________

(1)Other loans are comprised of overdrawn deposit accounts.

As of September 30, 2007 and December 31, 2006, our total loans and leases, net of unearned income, were $1.844 billion and $1.750 billion, respectively. The $94.2 million increase in our loan and lease portfolio during the nine-month period ended September 30, 2007 resulted from the organic growth of our operations. Our total loans and leases, net of unearned income, as a percentage of total assets increased to 72.0% as of September 30, 2007, from 70.0% as of December 31, 2006.

Real estate secured loans, the largest component of our loan and lease portfolio, include residential mortgages but is primarily comprised 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. On occasions, the bank grants real estate secured loans for which the loan-to-values exceed 100%. In those instances, additional forms of collateral or guaranties are obtained. Loans secured by real estate, excluding construction loans secured by real estate, equaled $887.6 million and $813.6 million as of September 30, 2007 and December 31, 2006, respectively.

Loans secured by real estate included residential mortgages amounting to $100.5 million as of September 30, 2007, which increased by $24.2 million, or by 42.36% on an annualized basis, when compared to $76.3 million as of December 31, 2006. The increase in residential mortgages during the nine-month period ended September 2007 when compared to the year ended December 31, 2006 mainly resulted from our strategy of expanding our residential mortgage operations to take advantage of opportunities in this area on the Island, as previously mentioned.

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Real estate secured loans, excluding real estate secured construction loans, as a percentage of gross loans and leases increased to 48.16% as of September 30, 2007, from 46.59% at the end of fiscal year 2006. Our portfolio of real estate loans has increased as a result of our organic growth.

Lease financing contracts, the second largest component of our loan and lease 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 the nine-month period ended September 30, 2007, approximately 57.67% of our lease financing contracts originations were for new automobiles, approximately 39.50% were for used automobiles and the remaining 2.83% consisted primarily of construction and medical equipment leases. Our portfolio of lease financing contracts decreased to $401.2 million as of September 30, 2007, from $443.3 million as of December 31, 2006. Lease financing contracts, as a percentage of gross loans and leases were 21.78% as of September 30, 2007 and 25.38% as of the end of 2006. This decrease in our lease portfolio resulted from the proactive actions we continued taking during the nine-month period ended September 30, 2007 to tightening our underwriting standards, enhance our collections efforts and strategically pare back our automobile leasing operations in an attempt to reduce possible future losses.

On a monthly basis, we review the existing lease portfolio to determine the repayment performance of borrowers displaying sub-prime lending characteristics.  This analysis contemplates the segregation of the lease portfolio in two different categories, sub-prime and prime, based on the characteristics of each borrower.   The review consists of the segregation of the monthly delinquency report into these categories to compare the percentage of the outstanding balance for each category in different delinquent stratas.  For the nine-month period ended September 30, 2007, the analysis revealed there was a similar repayment performance for both categories.  This review enables us to better monitor and control sub-prime borrowers and to reduce risk of repossessions and future losses.

Other commercial and industrial loans include revolving lines of credit as well as term business loans, which are primarily collateralized by accounts receivable and the assets being acquired, such as equipment or inventory. Other commercial and industrial loans increased to $303.4 million as of September 30, 2007, from $297.5 million as of December 31, 2006. This increase was net of a $11.2 million prepayment of various loans in a commercial business relationship, which were canceled during the first quarter of 2007 with funds from certificates of deposits the customer had on deposit with our banking subsidiary. Other commercial and industrial loans as a percentage of gross loans and leases were 16.47% and 17.04% as of September 30, 2007 and December 31, 2006, respectively.

Construction loans secured by real estate totaled $184.3 million and $126.2 million as of September 30, 2007 and December 31, 2006, respectively. Construction loans as a percentage of gross loans and leases were 10.01% and 7.23% for the same periods, respectively. During the nine-month period ended September 30, 2007, the increase in construction loans secured by real estate resulted from our organic growth, which was, in part, comprised of loans for land development and the construction of commercial real estate property, but primarily of loans for the construction of residential multi-family projects that, although private, are moderately priced or of the affordable type supported by government assisted programs.

Our portfolio of commercial and construction loans is subject to certain risks, including: (1) a possible downturn in the Puerto Rico economy; (2) interest rate increases; (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 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 monthly or 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.

Consumer loans have historically represented a small part of our total loan and lease portfolio. The majority of consumer loans consist of boat loans, personal installment loans, credit cards, 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. Consumer loans decreased to $59.5 million as of September 30, 2007, from $60.7 million as of December 31, 2006. Consumer loans as a percentage of gross loans and leases were 3.23% and 3.47% as of September 30, 2007 and December 31, 2006, respectively. Consumer loans as of September 30, 2007 and December 31, 2006 included a boat portfolio of $37.1 million and $37.4 million, respectively; $13.2 million and $13.8 million, respectively, in unsecured installment loans; and credit cards and open-end loans for $9.2 million and $9.5 million, respectively.

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Our loan terms vary according to loan type. Commercial term loans generally have maturities of three to five years, while we generally limit real estate loan 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 $487,000, as of September 30, 2007, and excluding non-accrual loans amounting to $55.3 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 September 30, 2007
			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	$	217,037	$	286	$	-	$	539	$	2,470	$	220,332
Real estate — secured		252,276		172,374		228,120		141,846		15,173		809,789
Other commercial and industrial		228,848		23,168		31,422		1,996		11,886		297,320
Consumer		12,191		11,414		1,215		33,612		297		58,729
Leases		14,123		351,598		-		31,223		-		396,944
Other loans		6,250		-		-		-		-		6,250
Total	$	730,725	$	558,840	$	260,757	$	209,216	$	29,826	$	1,789,364

__________

(1)Maturities are based upon contract dates. Demand loans are included in the one year or less category and totaled $530.0 million as of September 30, 2007.

For additional information relating to our loan products, see the section captioned “Products and Services” on our last Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2007.

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.

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The following table sets forth the amounts of nonperforming assets as of the dates indicated:

	As of September 30,			As of December 31,
	2007			2006
	(Dollars in thousands)
Loans contractually past due 90 days or more but still accruing interest	$	13,936		$	12,723
Nonaccrual loans		55,276			37,255
Total nonperforming loans		69,212			49,978
Other real estate owned		4,332			3,629
Other repossessed assets		6,172			9,419
Total nonperforming assets	$	79,716		$	63,026
Nonperforming loans to total loans and leases		3.75	%		2.85	%
Nonperforming assets to total loans and leases plus repossessed property		4.30			3.57
Nonperforming assets to total assets		3.11			2.52

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 monthly or 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 and leases is accounted for on a cash basis or cost recovery method, until qualifying for return to accrual status.

Nonperforming loans to total loans increased to 3.75% as of September 30, 2007, from 2.85% as of December 31, 2006. Nonperforming assets to total assets increased to 3.11% as of September 30, 2007, from 2.52% as of December 31, 2006.  Nonperforming loans as of September 30, 2007 amounted to $69.2 million, compared to $50.0 million as of December 31, 2006.  This increase was due to the combined effect of a $1.2 million increase in loans over 90 days past due still accruing interest and an increase of $18.0 million in nonaccrual loans, which are explained below in more detail. 

The $1.2 million increase in loans over 90 days still accruing interest was mainly due to net effect of: (i) a $1.7 million increase in loans secured by real estate; (ii) a $368,000 decrease in lease financing contracts; and (iii) a decrease of $225,000 in overdrafts. The $1.7 million increase in loans secured by real estate was mainly caused by one commercial business relationship amounting to $1.1 million secured by real estate.

The $18.0 million increase in nonaccrual loans was mainly attributable to the net effect of:  (i) three commercial business relationships amounting to $7.1 million secured by real estate, of which two amounting to $6.3 million were in the communications and service industries and were placed in nonaccrual status in February and March 2007, respectively, and the third was in the commercial trade and construction industries and was placed in nonaccrual status during the quarter ended September 30, 2007; (ii) three commercial business relationships in the food retailing, security systems, and service industries, which amounted to $9.8 million secured by real estate with loan-to-values exceeding 100%, and other two in the general freight and health care industries, respectively, amounting to $2.2 million not secured by real estate, which were all placed in nonaccrual status during the quarter ended September 30, 2007; (iii) a decrease of $822,000 in lease financing contracts; and (iv) a $656,000 decrease in marine loans.

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.

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Repossessed assets decreased to $10.5 million as of September 30, 2007, compared to $13.0 million as of December 31, 2006.  This decrease was due to the net effect of:  (i) a decrease of $3.2 million in other repossessed assets, mainly in the inventory of repossessed vehicles; and (ii) an increase of $703,000 in other real estate owned resulting from the foreclosure of seven real estate properties with an aggregate value of $1.2 million and the sale of three real estate properties valued at $514,000 during the nine-month period ended September 30, 2007.

The $3.2 million decrease in the inventory of repossessed vehicles was directly attributable to our strategy of being more aggressive in the sale of repossessed vehicles to expedite their disposition and avoid the build up of our repossessed vehicles inventory, primarily during the first and second quarter of 2007. This strategy resulted in a significant reduction in the number of repossessed vehicles in inventory. During four quarters in a row, sales of repossessed vehicles exceeded the number of units repossessed. The number of repossessed vehicles in inventory as of September 30, 2007 decreased to 366 units, or by approximately 35%, from 564 units as of December 31, 2006. This is the lowest level of repossessed vehicles since August 2005. We continue monitoring this inventory very closely and taking measures to expedite its disposition and prevent deterioration of the vehicles.

OREO consists of properties acquired by foreclosure or similar means and that management intends to offer for sale. Other repossessed assets are comprised primarily of repossessed automobiles subject to lease contracts and repossessed boats. OREO and other 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 valuations of other repossessed assets are 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 other repossessed assets, and related operating income and maintenance expenses, are included in current operations.

As of September 30, 2007, our OREO consisted of 27 properties with an aggregate value of $4.3 million, compared to 23 properties with an aggregate value of $3.6 million as of December 31, 2006.

Allowance for Loan and Lease Losses

We have established an allowance for loan and lease losses to provide for loans 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, as discussed below, and specific allowances for identified problem loans and portfolio segments.

When analyzing the adequacy of our allowance, our portfolio is segmented into as many components as practical. 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 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:

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·   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 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.

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, loan 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, which will vary depending on the analysis.

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 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 averages 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:

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		Nine Months Ended September 30,			Year Ended December 31,
		2007			2006
	(Dollars in thousands)
Average total loans and leases outstanding during period	$	1,788,346		$	1,663,330
Total loans and leases outstanding at end of period, including loans held for sale		1,844,640			1,750,838
Allowance for loan and lease losses:
Allowance at beginning of period		18,937			18,188
Charge-offs:
Real estate — secured		209			685
Commercial and industrial		1,614			3,050
Consumer		1,205			1,978
Leases		9,528			12,927
Other loans		338			149
Total charge-offs		12,894			18,789
Recoveries:
Real estate — secured		48			11
Commercial and industrial		257			534
Consumer		210			465
Leases		1,095			1,604
Other loans		11			21
Total recoveries		1,621			2,635
Net loan and lease charge-offs		11,273			16,154
Provision for loan and lease losses		18,467			16,903
Allowance at end of period	$	26,131		$	18,937
Ratios:
Net loan and lease charge-offs to average total loans(1)		0.84	%		0.97	%
Allowance for loan and lease losses to total loans at end of period		1.42			1.08
Net loan and lease charge-offs to allowance for loan losses at end of period(1)		57.52			85.30
Net loan and lease charge-offs to provision for loan and lease losses		61.04			95.57

(1) Annualized as of September 30, 2007.

The allowance for loan and lease losses increased to $26.1 million at September 30, 2007, from $18.9 million at December 31, 2006. The allowance for loan and lease losses as a percentage of total loans and leases increased to 1.42% at September 30, 2007, from 1.08% at December 31, 2006. The increase in our allowance for loan and lease losses during the nine months ended September 30, 2007 was mainly caused by three business relationships, which became impaired during the third quarter of 2007 and required a specific allowance of $4.5 million, as previously mentioned. We believe that the allowance for loan and lease losses is adequate to absorb probable losses in the portfolio.

On a quarterly basis, we have the practice of effecting partial charge-off on all lease finance contracts that are over 120 days past due. This is done based on our historical lease loss experience during the previous calendar year. Accordingly, all lease finance contracts that are over 120 days past due at the end of the quarter are partially charged-off. For each of the periods ended September 30, 2007 and December 31, 2006, we used a historical loss ratio in auto lease finance contracts of approximately 23% and 20%, respectively. For the nine-month periods ended September 30, 2007 and 2006, $1.2 million and $1.7 million was charged-off for this purpose, respectively.

Also, except for leases in a payment plan, bankruptcy or other legal proceedings, we have the practice of charging-off most of our lease finance contracts that are 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 the quarter are fully charged-off. For the nine-month periods ended September 30, 2007 and 2006, $621,000 and $577,000 was charged-off for this purpose, respectively.

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We monitor the ratio of net charge-offs on the leasing business to the average balance of our leasing portfolio. The annualized total loss ratio on the leasing business was 2.71% and 2.65% for the quarter and nine-month period ended September 30, 2007, respectively, compared to 3.13% and 2.40% for the quarter and year ended December 31, 2006. The increase in the ratio of total loss on the leasing business during the nine-month period ended September 30, 2007 was due to the decrease in our lease portfolio. Our lease portfolio decreased to $401.2 million as of September 30, 2007, from $443.3 million at the end of fiscal 2006. However, for the nine-month period ended September 30, 2007, annualized net charge-offs in our leasing portfolio remained stable when compared to the year ended December 31, 2006. As of September 30, 2007, annualized net charge-offs in our leasing portfolio amounted to $11.2 million, compared to $11.3 million for the year ended December 31, 2006. This decreases resulted from the proactive actions we continued taking during the nine months ended September 30, 2007 in connection to our automobile leasing operations in an attempt to reduce possible future losses, as previously mentioned.

Annualized net charge-offs as a percentage of average loans was 0.87% and 0.84% for the quarter and nine-month period ended September 30, 2007, respectively, compared to 0.77% for the quarter ended June 30, 2007, and 1.10% and 0.97% for the quarter and year ended December 31, 2006, respectively. For the quarter and nine-month period ended September 30, 2006, this ratio was 1.22% and 0.93%, respectively. The increase in this ratio, when comparing the quarter ended September 30, 2007 with the second quarter of 2007 was mainly attributable to an increase in net charge off on commercial loans not secured by real estate and overdrafts. The decrease in this ratio, when comparing the quarter and nine-month period ended September 30, 2007 with the quarter and year ended December 31, 2006 and the same periods in 2006, was mainly attributable to the decrease in our inventory of repossessed vehicles, as previously mentioned.

Net charge-offs as a percentage of provision for loan and lease losses was 41.43% and 61.04% for the quarter and nine-month period ended September 30, 2007, respectively, compared to 95.60% for the quarter ended June 30, 2007, and 89.82% and 95.57% for the quarter and year ended December 31, 2006, respectively. The decrease in this ratio for the quarter and nine-month period ended September 30, 2007 was mainly caused by the specific allowance required by three business relationships, which became impaired during the third quarter of 2007, as previously mentioned.

Nonearning Assets

Premises, leasehold improvements and equipment, net of accumulated depreciation and amortization, totaled $29.9 million as of September 30, 2007 and $14.9 million as of December 31, 2006. This increase was mainly related to the acquisition of land and an office building to relocate our headquarters and administrative offices, as further explained below.

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 headquarters, administrative operations, and our leasing division. 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 by December 2007 or when building improvements are finished.

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

Deposits are our primary source of funds. Average deposits amounted to $1.9 billion for each of the quarter and nine-month period ended September 30, 2007, compared to $1.739 billion for the year 2006. This increase in average deposits during the nine-month period ended September 30, 2007 was mainly concentrated in brokered deposits. The following table sets forth, for the periods indicated, the distribution of our average deposit account balances and average cost of funds on each category of deposits:

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		Nine Months Ended September 30,						Year Ended December 31,
		2007						2006
		Average Balance	Percent of Deposits		Average Rate			Average Balance	Percent of Deposits		Average Rate
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	119,737	6.42	%	-	%	$	128,551	7.39	%	-	%
Money market deposits		18,044	0.97		2.79			25,470	1.46		2.29
NOW deposits		47,648	2.56		2.43			46,330	2.66		2.23
Savings deposits		144,446	7.75		2.50			184,824	10.63		2.37
Time certificates of deposit in denominations of $100,000 or more		231,961	12.44		4.99			205,510	11.82		4.30
Brokered certificates of deposits in denominations of $100,000 or more		1,210,476	64.94		5.11			1,034,893	59.54		4.78
Other time deposits		91,797	4.92		4.32			113,097	6.50		3.70
Total deposits	$	1,864,109	100.00	%			$	1,738,675	100.00	%

Total deposits at September 30, 2007 and December 31, 2006 were $1.964 billion and $1.905 billion, respectively, representing an increase of $58.6 million, or 4.10% on an annualized basis, during the nine-month period ended September 30, 2007. The following table presents the composition of our deposits by category as of the dates indicated:

	As of September 30,		As of December 31,
	2007		2006
	(In thousands)
Interest bearing deposits:
Now and money market	$	68,754	$	62,673
Savings		133,739		156,069
Brokered certificates of deposits in denominations of less than $100,000		181		707
Brokered certificates of deposits in denominations of $100,000 or more		1,304,178		1,225,449
Time certificates of deposits in denominations of $100,000 or more		241,022		224,741
Other time deposits		90,632		95,396
Total interest bearing deposits	$	1,838,506	$	1,765,035
Plus: non interest bearing deposits		125,443		140,321
Total deposits	$	1,963,949	$	1,905,356

In addition to the deposits we generate locally, we have also accepted brokered deposits to augment retail deposits and to fund asset growth. The decrease in savings accounts, and other time deposits in denominations of less than $100,000 was mainly attributable to the fierce competition for core deposits on the Island due to a reduction of local funding sources. This fierce competition for local deposits has made brokered deposits an attractive funding alternative, resulting in lower funding costs when compared to the unusually higher rates offered locally for time deposits. We decided to pursue the use of the brokered deposits alternative in an attempt to control the continuous increase in our funding cost.

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The following table sets forth the amount and maturities of the time deposits of $100,000 or more as of the dates indicated:

	September 30, 2007		December 31, 2006
	(In thousands)
Three months or less	$	370,877	$	547,837
Over three months through six months		187,864		294,784
Over six months through 12 months		175,050		188,691
Over 12 months		811,409		418,878
Total	$	1,545,200	$	1,450,190

Other Sources of Funds

Securities Sold Under Agreements to Repurchase

To support our asset base, we sell securities subject to obligations to repurchase to securities dealers and the FHLB. These repurchase transactions generally have maturities of one month to less than five years. The following table summarizes certain information with respect to securities under agreements to repurchase for the three months ended September 30, 2007 and the year ended December 31, 2006:

	Three Months Ended September 30,			Year Ended December 31,
	2007			2006
		(Dollars in thousands)
Balance at period-end	$	361,414		$	365,664
Average monthly balance outstanding during the period		352,691			432,459
Maximum aggregate balance outstanding at any month-end		361,414			501,182
Weighted average interest rate for the quarter		5.17	%		4.94	%
Weighted average interest rate for the last month		5.06	%		5.27	%

FHLB Advances

Although deposits and repurchase agreements are the primary source of funds for our lending and investment activities and for general business purposes, we may obtain advances from the Federal Home Loan Bank of New York as an alternative source of liquidity. The following table provides a summary of FHLB advances for the three months ended September 30, 2007 and the year ended December 31, 2006:

	Three Months Ended September 30,			Year Ended December 31,
	2007			2006
		(Dollars in thousands)
Balance at period-end	$	468		$	8,707
Average monthly balance outstanding during the period		565			19,016
Maximum aggregate balance outstanding at any month-end		476			121,292
Weighted average interest rate for the quarter		4.58	%		5.06	%
Weighted average interest rate for the last month		4.38	%		5.51	%

Notes Payable to Statutory Trusts

For more detail on notes payable to statutory trusts please refer to the “Note 12 - Notes Payable to Statutory Trusts” to our condensed consolidated financial statements included herein.

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Capital Resources and Capital Adequacy Requirements

We are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can trigger regulatory actions that could have a material adverse effect on our business, financial condition, results of operations, cash flows and/or future prospects. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that rely on quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

We monitor compliance with bank regulatory capital requirements, focusing primarily on the risk-based capital guidelines. Under the risk-based capital method of capital measurement, the ratio computed is dependent on the amount and composition of assets recorded on the balance sheet and the amount and composition of off-balance sheet items, in addition to the level of capital. Generally, Tier 1 capital includes common stockholders’ equity our Series A Preferred Stock, our junior subordinated debentures (subject to certain limitations) less goodwill. Total capital represents Tier 1 plus the allowance for loan and lease losses (subject to certain limits).

In the past three years, our primary sources of capital have been internally generated operating income through retained earnings and our initial public offering. As of September 30, 2007 and December 31, 2006, total stockholders’ equity was $175.4 million and $169.9 million, respectively. In addition, the following items also impacted the Company’s stockholders’ equity:

·   the repurchase of 488,477 shares during 2006 in connection with a stock repurchase program approved by the Board of Directors in October 2005, which expired in October 2006;

·   the exercise of 150,000, 56,450, 7,000, 250,862 and 4,000 stock options in February 2006, June 2006, September 2006, February 2007 and July 2007, respectively; and

·   the repurchase of 285,368 shares during the second and third quarter of 2007 in connection with a stock repurchase program approved by the Board of Directors on May 31, 2007.

We are not aware of any material trends that could materially affect our capital resources other than those described in the section entitled “Risk Factors,” in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2007.

As of September 30, 2007, we and Eurobank both qualified as “well-capitalized” institutions under the regulatory framework for prompt corrective action. The following table presents the regulatory standards for well-capitalized institutions, compared to our capital ratios for Eurobank as of the dates specified:

43

Actual

For Minimum Capital Adequacy Purposes

To Be Well Capitalized Under Prompt Corrective Action Provision

Amount Is

Ratio Is

Amount Must Be

Ratio Must Be

Amount Must Be

Ratio Must Be

(Dollars in thousands)

As of September 30, 2007:

Total Capital (to Risk Weighted Assets)

EuroBancshares, Inc

$

223,782

11.01

%

$

≥ 162,615

≥ 8.00

%

N/A

Eurobank.

206,888

10.18

≥ 162,614

≥ 8.00

≥ 203,268

≥ 10.00

%

Tier 1 Capital (to Risk Weighted Assets)

EuroBancshares, Inc

198,360

9.76

≥ 81,307

≥ 4.00

N/A

Eurobank

181,466

8.93

≥ 81,307

≥ 4.00

≥121,961

≥ 6.00

Leverage (to average assets)

EuroBancshares, Inc

198,360

7.97

≥ 99,551

≥ 4.00

N/A

Eurobank..................

181,466

7.29

≥ 99,521

≥ 4.00

≥124,401

≥ 5.00

As of December 31, 2006:

Total Capital (to Risk Weighted Assets)

EuroBancshares, Inc

$

216,673

11.25

%

$

≥ 154,038

≥ 8.00

%

N/A

Eurobank.

198,179

10.29

≥ 154,045

≥ 8.00

≥ 192,556

≥ 10.00

%

Tier 1 Capital (to Risk Weighted Assets)

EuroBancshares, Inc

197,366

10.25

≥ 77,019

≥ 4.00

N/A

Eurobank

178,871

9.29

≥ 77,023

≥ 4.00

≥ 115,534

≥ 6.00

Leverage (to average assets)

EuroBancshares, Inc

197,366

7.92

≥ 99,679

≥ 4.00

N/A

Eurobank..................

178,871

7.18

≥ 99,637

≥ 4.00

≥ 124,546

≥ 5.00

Liquidity Management

Maintenance of adequate core liquidity requires that sufficient resources be available at all times to meet our cash flow requirements. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of customers and to take advantage of investment opportunities as they arise. Liquidity management involves our ability to convert assets into cash or cash equivalents without incurring significant loss, and to raise cash or maintain funds without incurring excessive additional cost. For this purpose the bank choose to maintain a minimum target liquidity referred as “Core Basis Surplus” and defined as the portion of the bank’s funds maintained in short term investments and other marketable assets, less the liabilities portions secured by any of these assets to cover a portion of time deposits maturing in 30 days and a portion of the non-maturity deposits, expressed as a percentage of total assets. This Core Basis Surplus number generally should be positive, but it may vary as our Asset and Liability Committee decides to maintain relatively large or small liquidity coverage, depending on its estimates of the general business climate, its expectations regarding the future course of interest rates in the near term, and the bank's current financial position. Two additional factors that will impact the magnitude of the Core Basic Surplus target are: 1) the available borrowing capacity at the Federal Home Loan Bank (FHLB), as represented by qualifying loans on the balance sheet, and 2) unused brokered time deposits’ capacity relative to the bank’s related policy limit on acceptable levels of these deposits. For this reason, current FHLB advances and brokered time deposits availability are part of the bank's liquidity presentation. Our liquid assets as of September 30, 2007 and December 31, 2006 totaled approximately $208.1 million and $300.4 million, respectively. Our Core Basis Surplus liquidity level was 5.0% and 8.9% as of the same periods, respectively. As of December 31, 2006, our Core Basic Surplus was impacted by an increase in interest bearing deposits and short-term investments in connection with the approximately $50.1 million in FHLB and FNMA debt securities we sold during that month. The funds generated thru this sale of securities were used to finance a portion of the loans origination during 2007. The decrease in our Core Basic Surplus liquidity level indicated above was mainly attributable to the reduction in interest-bearing deposits and short-term investments previously mentioned, and the use of investment securities as collateral for public funds deposits.

As mentioned above, in addition to the normal influx of liquidity from core deposit growth, together with repayments and maturities of loans and investments, we utilize FHLB advances and brokered and out-of-market certificates of deposit to meet our liquidity needs. Other funding alternatives are borrowing lines with brokers and the Federal Reserve Bank of New York, and unsecured lines of credit with correspondent banks.

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Advances from the FHLB are typically secured by qualified residential and commercial mortgage loans, and investment securities. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness. As of September 30, 2007, we had FHLB borrowing capacity of $44.6 million, including FHLB advances and securities sold under agreements to repurchase. Also, we had $357.1 million in pre-approved repurchase agreements with major brokers and banks totaling $357.1 million, subject to acceptable unpledged marketable securities available for sale. In addition, Eurobank is able to borrow from the Federal Reserve Bank using securities as collateral. Eurobank also maintains pre-approved overnight borrowing lines with correspondent banks, which provided additional short-term borrowing capacity of $10.0 million at September 30, 2007.

In order to participate in the broker time deposits market, we must be categorized as “well capitalized” under the regulatory framework for prompt corrective action unless we obtain a waiver from the Federal Deposit Insurance Corporation. Restrictions on our ability to participate in this market could place limitations on our growth strategy or could result in our participation in other more expensive funding sources. In case of restrictions, our expansion strategies would have to be reviewed to reflect the possible limitation to funding sources and changes in cost structures. As of September 30, 2007, we and Eurobank both qualified as “well-capitalized” institutions under the regulatory framework for prompt corrective action. We do not foresee any changes in our capital ratios that would restrict our ability to participate in the brokered deposit market.

Our minimum target Core Basis Surplus liquidity ratio established in our Asset/Liability Management Policy is 2.0%. Our liquidity demands are not seasonal and all trends have been stable over the last three years. We are not aware of any trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to materially impair our liquidity. Generally, financial institutions determine their target liquidity ratios internally, based on the composition of their liquidity assets and their ability to participate in different funding markets that can provide the required liquidity. In addition, the local market has characteristics, which make it impossible to compare our liquidity needs and sources to the liquidity needs and sources of our peers in the rest of the nation. After careful analysis of the diversity of liquidity sources available to us, our asset quality and the historic stability of our core deposits, we have determined that our target liquidity ratio is adequate.

Our net cash inflows from operating activities for the nine-month period ended September 30, 2007 were $36.3 million, compared to cash inflows of $56.3 million from operating activities for the year 2006. During the nine-month period ended September 30, 2007 and the year 2006, the net operating cash inflows resulted primarily from an increase in accrued interest payable, accrued expenses and other liabilities, and a net decrease in other assets.

Our net cash outflows from investing activities for the nine-month period ended September 30, 2007 were $86.3 million, compared to cash outflows of $137.7 million from investing activities for the year 2006. The net investing cash outflows experienced during the nine-month period ended September 30, 2007 and the year 2006 were primarily due to the growth in our loan and lease portfolio.

Our net cash inflows from financing activities for the nine-month period ended September 30, 2007 were $44.2 million, compared to cash inflows of $86.0 million from financing activities for the year 2006. During the nine-month period ended September 30, 2007 and the year 2006, the net financing cash inflows were primarily provided by the net increase in brokered deposits.

Quantitative and Qualitative Disclosure About Market Risks

Interest rate risk is the most significant market risk affecting us. Other types of market risk, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities. Interest rate risk can be defined as the exposure to a movement in interest rates that could have an adverse effect on our net interest income or the market value of our financial instruments. The ongoing monitoring and management of this risk is an important component of our asset and liability management process, which is governed by policies established by Eurobank’s Board of Directors and carried out by Eurobank’s Asset/Liability Management Committee. The Asset/Liability Management Committee’s objectives are to manage our exposure to interest rate risk over both the one year planning cycle and the longer term strategic horizon and, at the same time, to provide a stable and steadily increasing flow of net interest income. Interest rate risk management activities include establishing guidelines for tenor and repricing characteristics of new business flow, the maturity ladder of wholesale funding, investment security purchase and sale strategies and mortgage loan sales, as well as derivative financial instruments. Eurobank may enter into interest rate swap agreements, in which it exchanges the periodic payments, based on a notional amount and agreed-upon fixed and variable interest rates. Also, Eurobank may use contracts to transform the interest rate characteristics of specifically identified assets or liabilities to which the contract is tied. At September 30, 2007, the Bank had interest rate swap agreements which converted $28.5 million of fixed rate time deposits to variable rate time deposits of which $10.3 million will mature in 2010 and 2013 and $18.2 million with maturity between 2018 and 2023 but with semi-annual call options which match call options on the swaps. In addition, as of September 30, 2007, Eurobank had $5.1 million related to an option and equity-based return derivative, which was purchased in February 2007 to fix the interest rate expense on a $25.0 million certificate of deposit. For more detail on derivative financial instruments please refer to “Note 11 - Derivative Financial Instruments” to our condensed consolidated financial statements included herein.

45

Our primary measurement of interest rate risk is earnings at risk, which is determined through computerized simulation modeling. The primary simulation model assumes a static balance sheet, using the balances, rates, maturities and repricing characteristics of all of the bank’s existing assets and liabilities, including off-balance sheet financial instruments. Net interest income is computed by the model assuming market rates remaining unchanged and compares those results to other interest rate scenarios with changes in the magnitude, timing and relationship between various interest rates. At September 30, 2007, we modeled rising ramp and declining interest rate simulations in 100 basis point increments over two years. The impact of embedded options in such products as callable and mortgage-backed securities, real estate mortgage loans and callable borrowings were considered. Changes in net interest income in the rising and declining rate scenarios are then measured against the net interest income in the rates unchanged scenario. The Asset/Liability Management Committee utilizes the results of the model to quantify the estimated exposure of net interest income to sustained interest rate changes and to understand the level of risk/volatility given a range of reasonable and plausible interest rate scenarios. In this context, the core interest rate risk analysis examines the balance sheet under rates up/down scenarios that are neither too modest nor too extreme. All rate changes are “ramped” over a 12 month horizon based upon a parallel yield curve shift and maintained at those levels over the remainder of the simulation horizon. Using this approach, we are able to obtain results that illustrate the effect that both a gradual change of rates (year 1) and a rate shock (year 2 and beyond) has on margin expectations.

In the September 30, 2007 simulation, our model indicated no exposure in the level of net interest income to gradual rising rates “ramped” for the first 12-month period, and no exposure in the level of net interest income to a rate shock of rising rates for the second 12-month period. This is caused by the effect of the volume of our commercial and industrial loans variable rate portfolio and the maturity distribution of the repurchase agreements and brokered deposits, our primary funding source, from 30 days to approximately 1 ½ year. The hypothetical rate scenarios consider a change of 100 and 200 basis points during two years. The decreasing rate scenarios have a floor of 200 basis points. At September 30, 2007, the net interest income at risk for year one in the 100 basis point falling rate scenario was calculated at $1.2 million, or 1.63% lower than the net interest income in the rates unchanged scenario, and $1.1 million, or 1.56%, lower than the net interest income in the rates unchanged scenario at the September 30, 2007 simulation with a 200 basis point decrease. The net interest income at risk for year two in the 100 basis point falling rate scenario was calculated at $2.0 million, or 2.82% higher than the net interest income in the rates unchanged scenario, and $1.6 million, or 2.28%, higher than the net interest income in the rates unchanged scenario at the September 30, 2007 simulation with a 200 basis point decrease. At September 30, 2007, the net interest income at risk for year one in the 100 basis point rising rate scenario was calculated to be $2.0 million, or 2.80%, higher than the net interest income in the rates unchanged scenario, and $3.7 million, or 5.17%, higher than the net interest income in the rate unchanged scenario at the September 30, 2007 simulation with a 200 basis point increase. The net interest income at risk for year two in the 100 basis point rising rate scenario was calculated at $2.5 million, or 3.51% higher than the net interest income in the rates unchanged scenario, and $3.6 million, or 5.02%, higher than the net interest income in the rates unchanged scenario at the September 30, 2007 simulation with a 200 basis point increase. These exposures are well within our policy guidelines of 15.0% and 25.0% for 100 and 200 basis points changes in rate scenarios, respectively. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan and security prepayments, deposit run-offs and pricing and reinvestment strategies and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions we may take in response to changes in interest rates. We cannot assure you that our actual net interest income would increase or decrease by the amounts computed by the simulations.

46

The following table indicates the estimated impact on net interest income under various interest rate scenarios as of September 30, 2007:

	Change in Future Net Interest Income Gradual Raising Rate Scenario - Year 1
	At September 30, 2007
Change in Interest Rates	Dollar Change			Percentage Change
	(Dollars in thousands)
+200 basis points over year 1	$	3,715			5.17	%
+100 basis points over year 1		2,009			2.80
- 100 basis points over year 1		(1,171	)		(1.63	)
- 200 basis points over year 1		(1,121	)		(1.56	)

	Change in Future Net Interest Income Rate Shock Scenario - Year 2
	At September 30, 2007
Change in Interest Rates	Dollar Change	Percentage Change
	(Dollars in thousands)

+200 basis points over year 2	$	3,610	5.02	%
+100 basis points over year 2		2,524	3.51
- 100 basis points over year 2		2,029	2.82
- 200 basis points over year 2		1,638	2.28

We also monitor core funding utilization in each interest rate scenario as well as market value of equity. These measures are used to evaluate long-term interest rate risk beyond the two-year planning horizon.

Aggregate Contractual Obligations

The following table represents our on and off-balance sheet aggregate contractual obligations, other than deposit liabilities, to make future payments to third parties as of the date specified:

	As of September 30, 2007
	Less than One Year		One Year to Three Years		Over Three Years to Five Years		Over Five Years
	(In thousands)
FHLB advances	$	—	$	—	$	—	$	468
Notes payable to statutory trusts		—		—		—		20,619
Operating leases		1,907		3,231		2,835		16,475
Total	$	1,907	$	3,231	$	2,835	$	37,562

In addition, 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 purchase price for the property was $12,360,000.

Off-Balance Sheet Arrangements

During the ordinary course of business, we provide various forms of credit lines to meet the financing needs of our customers. These commitments, which have a term of less than one year, represent a credit risk and are not represented in any form on our balance sheets.

As of September 30, 2007 and December 31, 2006, we had commitments to extend credit of $311.1 million and $308.5 million, respectively. These commitments included standby letters of credit of $14.4 million and $8.4 million, for September 30, 2007 and December 31, 2006, respectively, and commercial letters of credit of $720,000 and $916,000 for the same periods, respectively.

The effect on our revenues, expenses, cash flows and liquidity of the unused portions of these commitments cannot reasonably be predicted because there is no guarantee that the lines of credit will be used.

47

Recent Accounting Pronouncements

For more detail on recent accounting pronouncements please refer to “Note 2 - Recent Accounting Pronouncements” to our condensed consolidated financial statements included herein.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as set forth in Part I, Item 2 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(f) under the Securities Exchanges Act of 1934, as amended.

Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the fiscal quarter covered by this report, such disclosure controls and procedures were reasonably designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission; and (b) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

There were no significant changes in our internal controls over financial reporting during the quarter ended September 30, 2007 that materially affected, or were reasonably likely to materially affect, our internal controls over financial reporting.

PART II -   OTHER INFORMATION

ITEM 1. 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 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

48

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

None.

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits

Exhibit Number	Description of Exhibit
10.1(1)	Master Services Agreement by and between Eurobancshares, Inc. and Telefonica USA, Inc. as of August 6, 2007
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.

(1) Confidential materials deleted and filed separately with the Securities and Exchange Commission.

49

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	EUROBANCSHARES, INC.
Date: November 9, 2007	By:	/s/ Rafael Arrillaga Torréns, Jr
		Rafael Arrillaga Torréns, Jr. Chairman of the Board, President and Chief Executive Officer

	By:	/s/ Yadira R. Mercado
Date:  November 9, 2007		Yadira R. Mercado Chief Financial Officer

50

EX-10.1

“** Confidential Treatment Requested”

Indicates portions of this document that have been deleted and have been separately filed with the Securities and Exchange Commission.

MASTER SERVICES AGREEMENT

by and between

Eurobancshares, Inc., a Commonwealth of Puerto Rico Corporation

and

Telefonica USA, Inc., a Florida corporation authorized to do business in Puerto Rico, d/b/a

Telefonica Empressas as of

August 6, 2007

TABLE OF SCHEDULES

Schedule 3.7	Security Requirements
Schedule 5.1	Account Governance
Schedule 5.7	Subcontractors
Schedule 5.8	Change Control Procedures
Schedule 6.7	Benchmark Methodology
Schedule 7.1	Affiliates
Schedule 14.1	Insurance
Schedule 15.6	Exit Rights
Schedule 16.1	Dispute Resolution Procedure
Schedule 17.1	Disaster Recovery Plan
Schedule 18.1	Affected Employees Provisions

(i)

MASTER SERVICES AGREEMENT

This MASTER SERVICES AGREEMENT (this “Agreement”) is entered into as of August 6, 2007 (the “Effective Date”), by and between Eurobancshares, Inc., a Commonwealth of Puerto Rico corporation (collectively, “Company”), and Telefonica USA, Inc., a Florida corporation authorized to do business in Puerto Rico, d/b/a Telefonica Empressas (“Service Provider”). Terms used in this Agreement are either defined in the context in which they are used or in Article XX hereto.

In consideration of the mutual covenants and agreements contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Company and Service Provider agree as follows:

ARTICLE I

TERM AND RENEWAL

1.1. Term and Renewal. The term of this Agreement (the “Agreement Term”) will commence on the Effective Date, and shall continue for the longer of five (5) years or so long as any Statement of Work (each a “SOW”) hereunder is in effect. The term of a SOW for In-Scope Services under this Agreement (the “SOW Term”) will be for the period set forth therein.

ARTICLE II

TRANSITION

2.1. Service Commencement.As of the applicable SOW Effective Date, and following completion of the Transition in accordance with this Article II, Service Provider shall assume operational responsibility for, and commence providing, the In-Scope Services covered by such SOW.

2.2. Transition Services. Commencing on the SOW Effective Date of the applicable SOW and during the term of the Transition Period for such SOW, Service Provider will perform the services (the “Transition Services”) set forth in the written transition plan for a SOW, which plan shall be attached as a Schedule to such SOW (the “Transition Plan”), in order to facilitate the transition of operational responsibilities (the “Transition”).The Transition Plan shall constitute part of the applicable SOW. Each Transition Plan shall include a description of the applicable Transition Services, each party’s responsibilities with respect to the Transition Services, the applicable Service Charges, and the applicable term for such Transition Services. If applicable, each Transition Plan shall also address the transition of the Services from Company Facilities (as defined in Section 3.9) to Service Provider facilities.

2.3 Company’s failure to perform a duty, obligation or responsibility expressly set forth in this Agreement or a SOW related to the Transition Services (a “Responsibility”)will excuse Service Provider’s obligation to perform its corresponding obligations under this Agreement or a SOW only if Service Provider provides Notice to Company of such failure and demonstrates that: (i) Company’s failure was the direct cause of Service Provider’s inability to perform; and (ii) Service Provider could not have continued performance by using reasonable methods, activities and procedures that are different than those procedures set forth in the applicable SOW. In the event of (i) and (ii), Service Provider will be excused from performance of the Services impacted by Company’s failure to perform only to the extent that, and for so long as, Company’s failure to perform its Responsibilities prevents Service Provider’s performance, and provided that Service Provider takes reasonable steps to mitigate the effects of Company’s failure to perform. Notwithstanding anything to the contrary in this Section 2.3, Company acknowledges that Service Provider shall not be required to incur any additional costs, including without limitation, third party costs, or commit Company to incur third party costs, in order to satisfy its obligations in either of the foregoing two (2) sentences.

Confidential

ARTICLE III

SERVICES

3.1. In-Scope Services. Commencing on the applicable SOW Effective Date and during the remainder of the SOW Term, Service Provider shall provide to Company, and Company shall obtain from Service Provider, the services set forth from time to time on the SOW(s) under this Agreement (the “In-Scope Services”). Each SOW shall include a description of the applicable In-Scope Services, the Service Level Agreement applicable to the performance of such In-Scope Services, each party’s responsibilities with respect to the In-Scope Services, the Charges Schedule applicable to such In-Scope Services and other terms specific to such In-Scope Services.Except as set forth on the Charges Schedule to a SOW, none of the In-Scope Services will be subject to minimum commitments.

3.2. Company Contractors and Alternative Sourcing. If Company contracts with a Third Party to perform any services or provide any functionality that in any way impact or are impacted by the In-Scope Services, Service Provider will cooperate in good faith with Company and any such Third Party to the extent reasonably requested by Company.

3.3. Inherent Services. If any services, functions or responsibilities not specifically described in this Agreement or a SOW are required for the proper performance and provision of the Services as carried out by Company prior to each SOW Effective Date, or are an inherent part of or necessary sub-task included within the Services, they will be deemed to be implied by and included within the scope of the Services to the same extent and in the same manner as if specifically described in a SOW (“Inherent Services”). Unless otherwise expressly provided in this Agreement, Service Provider will furnish all necessary management, supervision, labor, facilities, furniture, computer and telecommunications equipment, software, supplies and materials necessary to provide the Services.

3.4. Compliance with Company Policies. In providing Services to Company, and without limiting or modifying in any respect the Service Provider’s Service obligations (including pursuant to the Service Level Agreement), Service Provider shall comply, and shall cause each of its employees and subcontractors to comply at all times, with Company corporate policies that are of general application to Company contractors that have been communicated to Service Provider in writing or that Service Provider has otherwise agreed to comply with.

3.5. Regulatory Compliance.

(a) Company will obtain and maintain all Governmental Approvals applicable to Company in the conduct of its businesses and will identify, interpret and comply, and cause its employees, agents and subcontractors (other than Service Provider), to comply, in all material respects with the Laws applicable to Company’s business and operations reasonably related to Company’s receipt and use of the Services (the “Company Regulatory Requirements”). Company Regulatory Requirements also include any guidance, bulletins, white papers, pronouncements, reports or similar communications issued by any Governmental Authority or applicable self-regulatory or industry body, whether or not such items or materials have the force of Law, to the extent determined by Company in its discretion.

Confidential

2

(b) As part of the In-Scope Services, Service Provider will obtain and maintain all Governmental Approvals applicable to Service Provider in the conduct of its business and identify, interpret and comply, and cause its employees, agents and subcontractors to comply, in all material respects with all Laws applicable to Service Provider’s provision of the Services, including all Laws affecting Service Provider’s performance under this Agreement or relating to Service Provider’s employment of its employees, its qualifications and ability to do business and to provide the Services contracted for herein, and its operation of owned and leased facilities. The obligations set forth in this paragraph (b) are collectively, the “Service Provider Regulatory Requirements.”

(c) In addition Service Provider will, and will cause its employees, agents and subcontractors to: (i) provide all assistance reasonably related to the In-Scope Services necessary to enable Company to comply with the Company Regulatory Requirements; and (ii) comply with all Company Regulatory Requirements reasonably relating to the provision or receipt of the In-Scope Services of which Company has made Service Provider aware. The obligations set forth in this paragraph (c) are collectively, “Compliance Assistance”) and shall be further subject to Section 3.6 hereof.

(d) In addition, Company will, and will cause its employees, agents and subcontractors (other than Service Provider) to: (i) notwithstanding anything to the contrary set forth herein or in any SOW, upon Company’s request, provide all assistance reasonably related to the In-Scope Services necessary to enable Service Provider to comply with the Service Provider Regulatory Requirements; and (ii) comply with all Service Provider Regulatory Requirements reasonably relating to the provision or receipt of the In-Scope Services, provided that (a) Company has been given Notice regarding the Service Provider Regulator Requirements, and (b) the obligations of Company set forth in this Section 3.5(d) do not cause a disruption to Company’s business or operations.

(e) If either party receives an official charge of non-compliance from a Governmental Authority with respect to the performance of either party’s obligations under this Agreement, the party receiving such Notice will promptly notify the other party of such charge in writing. Service Provider shall be responsible for any fines and penalties imposed on Service Provider or Company arising from any failure by Service Provider, its affiliates, agents or subcontractors to comply with the Service Provider Regulatory Requirements or with any Company Regulatory Requirements for which Service Provider has responsibility pursuant to Section 3.5, except to the extent that such noncompliance was caused by an act, omission or breach of this Agreement by Company, its affiliates, agents or subcontractors. Company shall be responsible for any fines and penalties imposed on Service Provider or Company arising from any failure by Company or its agents or subcontractors to comply with the Company Regulatory Requirements (except to the extent outsourced to Service Provider pursuant to Section 3.5(c)), except to the extent that such noncompliance was caused by an act, omission or breach of this Agreement by Service Provider, its affiliates, agents or subcontractors.

3.6. Required Changes to In-Scope Services. Service Provider will modify its provision of the In-Scope Services if necessary to (i) comply with changes in the Service Provider Regulatory Requirements, Company Regulatory Requirements (as communicated by Company to Service Provider in writing), or any other applicable Laws, or (ii) provide the Compliance Assistance. Where any change in Law or any Service Provider Regulatory Requirement or Company Regulatory Requirement, or the provision of Compliance Assistance, requires a change in the In-Scope Services, (A) Service Provider will be financially responsible for modifications to the In-Scope Services it is required to make resulting from changes in Service Provider Regulatory Requirements and shall not impose any additional Service Charges on Company for such changes; and (B) Company shall be responsible for additional Service Charges associated with (I) Service Provider’s modifications to the In-Scope Services it is required to make resulting from changes in Company Regulatory Requirements, provided, however if a change in Company Regulatory Requirements affects other Service Provider customers, then Service Provider will use reasonable efforts to spread that cost of modifications to its performance of services across its affected customers and Company will pay only its pro rata share associated with such modifications, and (II) the provision of Compliance Assistance. Notwithstanding anything to the contrary in the foregoing sentence, Company acknowledges that certain cost sharing activities as referenced in the preceding sentence may not be achieved without the cooperation of other Service Provider customers, over which Service Provider has no control. The parties shall use the Change Control Procedures to document any and all Changes to the In-Scope Services resulting from any Changes described in this Section or from any other Changes required pursuant to any other Laws. Service Provider expressly acknowledges and agrees that any Changes that are required by changes in Laws are mandatory and Service Provider has no discretion whether or not to accept the Change, provided that Company agrees to pay any applicable additional Service Charges in accordance with this Section associated with implementing such Change.

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3.7. Security Requirements.

(a) Safeguards. Service Provider shall establish an information security program with respect to Company Data and Confidential Information (both of which are defined below) which: (i) ensures the security and confidentiality of such materials and information; (ii) protects against any anticipated threats or hazards to the security or integrity of such materials and information, and (iii) protects against any unauthorized use of or access to such materials and information, including access or use that could result in substantial harm or inconvenience to any of Company’s customers, consumers, or employees. Service Provider shall also establish and maintain network and internet security procedures, protocols, security gateways and firewalls with respect to such materials and information. All of the foregoing shall be in accordance with the attached Schedule 3.7, no less rigorous than those safeguards and procedures maintained by Company prior to the Effective Date which have been communicated by Company to Service Provider in writing and those maintained by Service Provider for its own data and information of a similar nature.

(b) Physical Security. Service Provider will maintain and enforce at any site from which In-Scope Services are rendered safety and security procedures that are in accordance with the attached Schedule 3.7 and the most rigorous industry standards and at least as rigorous as those procedures in effect at sites from which Company provided such services as of the Effective Date and which procedures have been communicated by Company to Service Provider in writing. In addition, Service Provider will comply with all reasonable requirements of Company with respect to security at such sites.

(c) Security Assessment. Without limiting the generality of the foregoing, Service Provider’s information security policies shall provide for (i) regular assessment and re-assessment of the risks to the security of Company Data and systems acquired or maintained by Service Provider and its agents and contractors in connection with rendering the In-Scope Services, including (a) identification of internal and external threats that could result in a Security Breach (as defined below), (b) assessment of the likelihood and potential damage of such threats, taking into account the sensitivity of such data and systems, and (c) assessment of the sufficiency of policies, procedures, and information systems of Service Provider and its agents and subcontractors, and other arrangements in place, to control risks; and (ii) protection against such risks.

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(d) Security Breach. “Security Breach” means (A) any circumstance pursuant to which applicable Law requires notification of such breach to be given to affected parties or other activity in response to such circumstance; or (B) any actual, attempted, suspected, threatened, or reasonably foreseeable circumstance that compromises, or could reasonably be expected to compromise, either Physical Security or Systems Security (as such terms are defined below) in a fashion that either does or could reasonably be expected to permit unauthorized Processing, use, disclosure or acquisition of or access to any Company Data or Confidential Information. “Physical Security” means physical security at any site or other location housing systems maintained by Service Provider or its agents or subcontractors in connection with the In-Scope Services. “Systems Security” means security of computer, electronic or telecommunications systems of any variety (including data bases, hardware, software, storage, switching and interconnection devices and mechanisms), and networks of which such systems are a part or communicate with, used directly or indirectly by Service Provider or its agents or subcontractors in connection with the In-Scope Services. “Processing” means any operation or set of operations performed upon Company Data or Confidential Information, whether or not by automatic means, such as creating, collecting, procuring, obtaining, accessing, recording, organizing, storing, adapting, altering, retrieving, consulting, using, disclosing or destroying.

(e) Breach Notification. In the event Service Provider becomes aware of any Security Breach, Service Provider shall, (i) immediately notify Company’s Chief Compliance Officer of such Security Breach and perform a root cause analysis thereon, (ii) investigate such Security Breach, (iii) provide a remediation plan, acceptable to Company, to address the Security Breach and prevent any further incidents, (iv) conduct a forensic investigation to determine what systems, data and information have been affected by such event; and (v) cooperate with Company, any law enforcement or regulatory officials, credit reporting companies, and credit card associations investigating such Security Breach. Subsequent to the initial response to any Security Breach as set forth above, the parties shall cooperate in good faith to determine financial responsibility for such event, as follows. If the Security Breach is a result of an act or omission of Service Provider other than in accordance with the terms of this Agreement, including the applicable SOW, such corrective actions shall be provided by Service Provider at its own expense. If the Security Breach does not result from an act or omission of Provider other than in accordance with the terms of this Agreement, including the applicable SOW, such corrective actions shall be provided pursuant to the Change Control Procedures. Without limiting the foregoing, Company shall make the final decision on notifying Company’s customers, employees, service providers and/or the general public of such Security Breach, and the implementation of the remediation plan. If a notification to a customer is required under any Law or pursuant to any of Company’s privacy or security policies, then notifications to all customers who are affected by the same event (as reasonably determined by Company) shall be considered legally required. Any changes to the Services necessary as a result of such Security Breach which constitute Additional Services (as defined in the Charges Schedule) shall be subject to the Change Control Procedures.

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(f) Notification Related Costs. In addition to any other obligations or liabilities of Service Provider in connection therewith, if the Security Breach is a result of an act or omission of Provider other than in accordance with the terms of this Agreement, including the applicable SOW, Service Provider shall reimburse Company for all reasonable out of pocket Notification Related Costs incurred by Company arising out of or in connection with any such Security Breach resulting in a requirement for legally required notifications (as determined in accordance with the previous sentence). “Notification Related Costs” shall include Company’s external costs associated with addressing and responding to the Security Breach, including but not limited to: (i) preparation and mailing or other transmission of legally required notifications; (ii) preparation and mailing or other transmission of such other communications to customers, agents or others as Company deems reasonably appropriate; (iii) establishment of a call center or other communications procedures in response to such Security Breach (e.g., customer service FAQs, talking points and training); (iv) public relations and other similar crisis management services; (v) legal and accounting fees and expenses associated with Company’s investigation of and response to such event; and (vi) costs for commercially reasonable credit reporting services that are associated with legally required notifications or are advisable under the circumstances. In the event that the parties disagree as to the cause of any Security Breach, such disagreement shall be resolved through the Dispute Resolution Procedures.

(g) Intrusion Detection/Interception. Service Provider will provide Company and its representatives with access, upon reasonable advance notice and during normal business hours, to Service Provider’s test results, systems, policies and procedures relating to intrusion detection and interception with respect to the Service Provider systems used to provide the Services for the purpose of examining and assessing, or having examined and assessed, those test results, systems, policies and procedures. Service Provider will also permit Company and its representatives the ability to conduct internal and external intrusion detection, interception testing and other assessment and examination of Service Provider’s systems as reasonably necessary to comply with Company’s regulatory obligations and confirm compliance with each of Service Provider’s activities pursuant to this Section 3.7, provided that any such assessments or examinations will be conducted in a manner that does not unreasonably disrupt or delay Service Provider’s performance of the Services hereunder or any other services for its other customers.

3.8. Service Locations. The In-Scope Services will be provided from those Service Provider location(s) specified in the applicable SOW (each, a “Service Location”). Service Provider will not, without the express written Consent of Company, Change, consolidate, eliminate or add to the Service Locations, or reallocate the volume or nature of work processed between Service Locations.

3.9 Company Facilities. If required by a SOW, Company shall provide to Service Provider the office space at the Company locations identified as Company Facilities in such SOW (the “Company Facilities”), as the same may be changed by Company from time to time throughout the applicable SOW Term, in accordance with the terms and conditions set forth in this Section 3.9, or in accordance with the specific terms and conditions set forth in such SOW. Subject to the terms and conditions set forth in this Section 3.9, all decisions regarding the allocation of office space at Company Facilities to Service Provider shall be made by Company.

(a)With respect to such Company Facilities, Service Provider shall have the same privileges regarding use thereof (such as heating, lights, air conditioning (‘HVAC’) systems, as do any other tenants of Company. Except as otherwise set forth in a SOW, Company shall be responsible for providing, at its own expense, all other facilities and support Service Provider’s needs at the Company Facilities to provide the Services, including office-related equipment (i.e., personal computers, printers, fax machines and copiers), office supplies, and local and long distance telephony.

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(b)Subject to the terms of the applicable SOW, Company shall be fully responsible for all costs and expenses of applicable facilities leases, related leasehold improvements, and utilities with respect to Company Facilities, and shall pay all Company Facilities landlords and utility providers directly.

(c)The Company Facilities shall be made available to Service Provider on an “AS IS, WHERE IS” basis, with no warranties whatsoever.

(d)Company and Company Affiliates, and agents and representatives of each, shall have the right to enter into any portion of Company Facilities at any time for any reason, including, without limitation, for the purpose of inspecting Company Facilities, showing Company Facilities, or performing services related to Company Facilities.

(e)Service Provider agrees that Service Provider and Service Provider personnel will at all times comply with all leases and other agreements applicable to its occupation and use of the Company Facilities pursuant to the terms of this Agreement.

(f)The transition of the Services from Company Facilities to Service Provider facilities shall be set forth in the Transition Plan applicable to the SOW for such Services.

3.10 Company Resources.

(a)Service Provider shall use Company Facilities, Company Software (except for Software licensed or sublicensed to Company by Service Provider), Company equipment (except for equipment provided to Company by Service Provider) and related Company-owned resources (collectively, “Company Resources”) for the sole and exclusive purpose of providing the Services, unless in its sole discretion Company pre-approves another use in writing in a SOW or through the Change Control Procedures. The use of Company Facilities by Service Provider shall not constitute a leasehold or other property interest in favor of Service Provider.

(b)Service Provider shall be responsible for any damage (normal wear and tear excepted) to Company Resources resulting from the abuse, misuse, neglect, or negligent acts or omissions of Service Provider or other failure to comply with the obligations respecting Company Resources.

(c)Service Provider shall keep Company Resources in good order (normal wear and tear excepted), not commit or permit waste or damage to Company Resources or use Company Resources for any unlawful purpose or act, and shall comply with Company’s standard policies and procedures (including applicable leases) regarding access to and use of Company Resources which have been communicated by Company to Service Provider in writing, including procedures for the physical security of Company Facilities.

(d)Service Provider shall not make improvements or changes involving structural, mechanical or electrical alterations to Company Facilities without Company’s prior written approval. At Company’s election, any improvements or fixtures to Company Facilities shall become the property of Company. If Company does not elect to take title thereto, Provider shall remove the same at the end of the use of Company Facilities and shall repair any damage caused by such removal.

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(e)When Company Resources are no longer required for performance of the Services, Provider shall return them to Company in substantially the same condition as when Provider began use of them (normal wear and tear excepted).

3.11Dedicated Environment. For purposes of the initial SOW entered into as of the date hereof, all hardware and software provided by Company at any time during the term of such SOW shall be dedicated solely to Company; any hardware and software provided by Service Provider may be shared with other Service Provider customers, but shall be logically partitioned so that there is no intermingling of Company Data or Confidential Information with that of other Service Provider customers and no other Service Provider customers or others shall have the ability to access such information or data.

ARTICLE IV

SERVICE PROVIDER PERFORMANCE METRICS

4.1. Service Level Agreement. Service Provider will perform the In-Scope Services at all times during the SOW Term and any Termination Assistance Period in accordance with specific performance standards identified by Company in each of the SOWs (the “Service Level Agreement”). The Service Level Agreement will indicate the level of performance Service Provider must achieve for each service metric (the “Service Level”). Service Provider shall perform all In-Scope Services without an expressly defined Service Level Agreement at a level of accuracy, completeness, availability, timeliness, quality, responsiveness and performance that equals or exceeds the level of performance by Company or any Third Party providing such services for Company immediately before the applicable SOW Effective Date (in the case of In-Scope Services).

4.2. Service Level Measurement. Beginning on the SOW Effective Date, Service Provider shall implement and operate all measurement and monitoring tools and procedures required to measure and report its performance relative to the applicable Service Level Agreement. Each Service Level Agreement will be measured on at least a monthly basis, unless otherwise indicated. Service Provider shall provide, as part of Service Provider’s monthly performance reports, a set of hard (if requested by Company) and soft-copy reports to verify Service Provider’s performance and compliance with the Service Level Agreement (“Performance Reports”).

4.3. Service Level Failures. Service Provider’s failure to meet the Service Level for any Service Level Agreement shall entitle Company to receive credits against Service Charges in the form of Service Level Credits in accordance with this Section if such Service Level Agreement has Service Level Credits associated with it.

(a) Calculation of Service Level Credits. Service Provider will provide to Company a Service Level Credit Report resulting from Service Provider’s failure to meet any Service Level for any Critical Performance Indicator (each, a “Performance Failure”). Service Level Credits will be calculated each month for Performance Failures, and determined pursuant to the applicable SOW, referencing the Critical Performance Indicator to which the Performance Failure relates.

(b) Issuance of Credits. Company will review the report of Service Level Credits (if any) issued by Service Provider each month and notify Service Provider, within 30 days, of any issues with such report and/or its election to receive such credits on the next issued invoice following such notification from Company.  If Company so elects, Service Provider will reduce the amount payable by Company on the next Invoice by the amount of Service Level Credits Company received during the applicable month.  Service Level Credits for a given month shall not exceed the total monthly bill payable by Company for any applicable period.

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(c) Root Cause Analysis. Service Provider will be required to conduct, at its expense, a root cause analysis for each failure to meet any Service Level. Upon determination of the cause of such failure, Service Provider will provide to Company an additional report that details the results of the root cause analysis, and which details any measures that should be taken to minimize the possibility that such failures will re-occur. To the extent that the root cause analysis indicates that Service Provider’s failure to meet the Service Level was caused by Service Provider, Service Provider will correct the problem at no additional cost to Company and ensure that there will be no re-occurrence of such failures.

ARTICLE V

RELATIONSHIP MANAGEMENT

5.1. Account Governance. Company’s account will be governed in accordance with Schedule 5.1(“Account Governance Schedule”). The In-Scope Services shall include all Service Provider obligations set forth in Schedule 5.1, and all other project management, governance and related management activities described herein and in the SOWs or Schedules hereto, and shall be performed by Service Provider at no additional cost to Company.

5.2. Service Provider Project Manager. During the Agreement Term, Service Provider will designate a senior-level individual who will be primarily dedicated to Company’s account (the “Service Provider Project Manager”). The Service Provider Project Manager may be replaced by Service Provider from time to time during this Agreement. In addition, the Service Provider Project Manager (i) must be approved by Company, (ii) will be the primary contact for Company in dealing with Service Provider under this Agreement, (iii) will have overall responsibility for managing and coordinating the delivery of the Services, (iv) will meet regularly with the Company Contract Manager, and (v) will have the power and authority to make decisions with respect to actions to be taken by Service Provider in the ordinary course of day-to-day management of Company’s account in accordance with this Agreement.

5.3. Company Contract Manager. During the Agreement Term, Company will designate a senior level individual (i) who will serve as Company’s primary contact for Service Provider in dealing with Company under this Agreement, and (ii) who will have the power and authority to make decisions with respect to actions to be taken by Company in the ordinary course of day-to-day management of this Agreement (the “Company Contract Manager” (may also be referred to in the SOWs as “Company Project Manager”)). Company may from time to time replace the individual serving as the Company Contract Manager by providing Notice to Service Provider.

5.4. Reports. Service Provider will provide those reports identified in this Agreement, in the SOWs , together with such additional reports as agreed by the Contract Managers from time to time during the Agreement Term (“Reports”), in accordance with the requirements set forth herein and in the SOWs . Reports and other documentation must be available in both print (only if requested by Company) and electronic formats at least five (5) Business Days prior to any meeting at which such Reports will be discussed. With regard to Reports documenting Service Provider’s performance, Service Provider will set forth any deviations from the performance requirements and include a plan for corrective action.

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5.5. Annual Review. On an annual basis during the Agreement Term, the Contract Managers shall conduct an annual performance review attended by certain of the senior management of each party (the “Annual Review”). The parties contemplate that such Annual Review will include at least the following:

(a) Review of the previous year’s periodic Performance Reports prepared by Service Provider;

(b) Review and adjustment of the Service Level Agreement requirements and the associated performance measures and metrics pursuant to Article IV;

(c) Adjustments to the Service Charges in accordance with the Charges Schedule; and

(d) Review of emergency response and disaster recovery plans that have been adopted and implemented by Service Provider for the Services.

Any adjustments undertaken pursuant to this Section shall be governed by Section 5.8.

5.6. Review Meetings. During the Agreement Term, the Service Provider Project Manager and the Company Contract Manager (and any other appropriate operational personnel) shall meet periodically, at such intervals and at such times and locations as set forth in the Account Governance Schedule or as reasonably requested by Company, but in no event less than once per calendar quarter, to review their respective performance under this Agreement and to discuss planned or anticipated activities that may adversely affect performance or any Changes.

5.7. Service Provider Subcontractors. Service Provider may not subcontract any of the Services without Company’s prior written Consent, provided, however the subcontractors listed on Schedule 5.7 hereto are pre-approved subcontractors for the purposes of this Section 5.7 and that Service Provider may utilize an Affiliate to provide the Services. Service Provider may also retain a Third Party in certain circumstances to perform Services as set forth in Section 17.1(b). The following shall apply to any permitted subcontractor relationship hereunder:

(a) Service Provider is responsible for the performance of all Service Provider subcontractors, and Service Provider will continually monitor and manage such Service Provider subcontractors. Service Provider will remain Company’s sole point of contact regarding the Services. Company may require that any Service Provider subcontractor be terminated on reasonable written notice.

(b) Service Provider will provide in its agreements with Service Provider subcontractors such written provisions as are sufficient to enable Service Provider to comply with the provisions of this Agreement. Such provisions will include the subcontractor’s obligation to keep confidential Company’s Confidential Information and to assign to Company any Intellectual Property Rights to the extent that such rights are to be assigned to or owned by Company pursuant to the terms of this Agreement.

5.8. Change Control Procedures. The procedures (the “Change Control Procedures”) that will govern (i) the manner in which a party may propose or request modifications to this Agreement, its Schedules or any other attachments, (ii) the process to be followed by the parties in analyzing the effects of, and deciding whether to adopt, any such modifications, and (iii) the manner in which any agreed upon modifications are to be reflected in this Agreement, are set forth in Schedule 5.8. All modifications to this Agreement, its Schedules or any other attachments hereto require the prior written approval of the Company Contract Manager or his or her designee.

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ARTICLE VI

PAYMENT

6.1. Service Charges. In consideration for the performance of the Services, Company shall pay to Service Provider the charges for the Services (the “Service Charges”) specified in the Transition Plan and SOWs hereunder (collectively, the “Charges Schedule”). Except as otherwise expressly stated or provided for in this Agreement or an SOW, as same may be amended pursuant to the Change Control Procedures, Company will not be obligated to pay Service Provider any amounts in addition to the Service Charges for Service Provider’s performance of the Services.

6.2. Reimbursement of Expenses. All pass through chargesrelated to the Services are either set forth in the applicable Charges Schedule or will be agreed to in advance by the parties in writing.Except as expressly provided in this Agreement, all expenses that Service Provider incurs in performing the Services are included in Service Provider’s charges and rates set forth in this Agreement or in the Charges Schedule. Accordingly, such Service Provider expenses are not separately reimbursable by Company.

6.3. Invoices; Method of Payment. Service Provider shall render an invoice substantially in the form attached to the Charges Schedule (“Invoice”) in accordance with the invoicing procedures set forth in the Charges Schedule on or after the first business day of each calendar month which shall reflect (i) the current month’s Service Charges, (ii) any pass through charges under the Charges Schedule accrued during the preceding month, (iii) when applicable pursuant to the Service Level Agreement, any Service Level Credits, and (iv) such other amounts as may from time to time arise under this Agreement that may appropriately be reflected on Invoices hereunder. Each Invoice will include such detail as reasonably requested by Company to satisfy Company’s internal accounting and chargeback requirements and as set forth in the Charges Schedule (which detail shall also be provided in electronic format compatible with Company’s financial computer systems). All amounts due to Service Provider and set forth on a valid Invoice delivered pursuant to this Section shall be due and payable within thirty (30) days of Company’s receipt of such Invoice. Any amounts not paid when due shall accrue interest at the rate of twelve percent (12%) per annum (or, if lower, the maximum rate permitted by applicable law).

6.4. Unused Credits. Any unused credits against future payments or other undisputed amounts owed to either party by the other pursuant to this Agreement will be paid to the applicable party within forty-five (45) days after the expiration or termination of this Agreement.

6.5. Disputed Charges. Company may withhold payment to Service Provider of amounts that Company reasonably and in good faith disputes. Any amounts (or portions thereof) not so disputed otherwise will be paid by the applicable payment due date as otherwise provided for in this Agreement. Company shall notify Service Provider in writing on or before the payment due date of any disputed charges for which it is withholding payment. Notwithstanding Section 6.3, Company shall not be required to pay the disputed portion of an Invoice unless and until the parties have successfully resolved the dispute in accordance with the Dispute Resolution Procedures.

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6.6. Taxes. Company shall be solely responsible for all indirect Taxes (including but not limited to; Sales and Use Tax, Communications Services Tax and Value Added Tax) imposed on, based on, or measured by any consideration for, arising from, or due in connection with any provision of Services by Service Provider to Company pursuant to this Agreement.  Should any amounts due under this Agreement be subject to withholding or retention tax, Company shall notify Service Provider prior to the withholding and provide Service Provider with the adequate certifications that the withholding amounts were remitted to the proper taxing authorities.  Company shall not be responsible for reporting and/or paying any income, franchise, real property, personal property or ad valorem taxes due and assessed on Service Provider.  The Parties agree to work together throughout the term of this Agreement in order to establish and maintain the most advantageous tax consequences within the parameters of all applicable laws.

6.7. Benchmarking. Beginning on the third (3^rd) anniversary the Effective Date, and thereafter from time to time during the Agreement Term, but not more often than once every twelve (12) months, Company may, at its sole cost and expense, measure the Service Charges and Service Levels under this Agreement as compared to other organizations receiving similar services (a “Benchmark”). The Benchmark will be based upon and consistent with, in all material respects, the benchmarking methodology, principles and approach (the “Benchmark Methodology”) as set forth in Schedule 6.7. The Parties will cooperate with each other and the selected benchmarker to facilitate the Benchmark, which will include performing their respective responsibilities set forth in the Benchmark Methodology and providing the benchmarker with all information reasonably requested in accordance with the terms of the Benchmark Methodology. If Service Provider is required to deploy resources to participate in the Benchmark in addition to those that are required to render the Services in accordance with the terms hereof, Company and Service Provider shall mutually determine in good faith such additional payments as may be required in connection with such additional resources.

ARTICLE VII

COMPANY AFFILIATES

7.1. Services to Company Affiliates. Service Provider will provide the Services to Company and its current Affiliates that are forth on Schedule 7.1 hereto (and their successors). Company and the applicable Affiliate shall be jointly and severally liable for the failure of any such Affiliate to perform its obligations and duties with respect to Services provided by Service Provider to such Affiliate.

7.2. Mergers and Acquisitions. If Company merges with or otherwise acquires a Person which is a Third Party (a “Company Acquisition”), then if requested by Company in its sole discretion, such entity will become subject to this Agreement, with all rights and benefits and subject to all obligations of Company under this Agreement, on the date specified by Company. In the event of a Company Acquisition, the parties will renegotiate in good faith, the affected Service Chargesto account for any increased volume, all in accordance with the Change Control Procedures, provided, however, that in no event shall a Company Acquisition give rise to any right by Company to terminate this Agreement.

7.3. Divestitures. If Company transfers by sale, dividend to its shareholders, or otherwise, any shares of the common stock, or all or substantially all of the assets of any Affiliate, or any line of business, business unit or division of Company or any Affiliate of Company (a “Divested Entity”), and such Divested Entity does not remain an Affiliate of Company, Service Provider shall, if requested by Company, provide the Services directly to the Divested Entity at the then-current Service Charges for a period of the lesser of (i) the remaining SOW Term of the applicable Statement(s) of Work, (ii) twelve (12) months from the date of the closing of any such disposition (inclusive of any Termination Assistance Services provided by Service Provider to Company), or (iii) until such time as Service Provider and such Divested Entity, or the Divested Entity and a Third Party enter into a separate agreement (the “Divestiture Service Period”). If the twelve (12) month period of Services to the Divested Entity expires causing the portion of the SOW applicable to the Divested Entity to terminate prior to the date on which the overall SOW would have otherwise terminated, the Divested Entity shall pay a pro-rata portion of the Termination for Convenience Fee which would have been due for early termination of the SOW otherwise due pursuant to Section 15.1 hereof. Company shall be liable for making payment of any amounts unpaid by the Divested Entity in connection with this Section 7.3.

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ARTICLE VIII

REPRESENTATIONS, WARRANTIES AND COVENANTS

8.1. Representations, Warranties and Covenants. Service Provider hereby represents, warrants and covenants to Company as follows:

(a) Organization; Power. As of the Effective Date, Service Provider (i) is duly organized, validly existing and in good standing under the laws of Florida, and (ii) has the power to own its property and the authority to carry on the business as conducted as of the Effective Date.

(b) Consents. Except as otherwise provided in this Agreement, no authorizations or other consents, approvals or notices of or to any Person are required in connection with (i) the execution, delivery and performance by Service Provider of this Agreement, (ii) the development, implementation or operation of the software, computer and telecommunications equipment and systems necessary for Service Provider to perform the Services in accordance with the applicable provisions of this Agreement and in compliance with all applicable Laws and Regulatory Requirements, or (iii) the validity and enforceability of this Agreement.

(c) Performance Warranty. The Services will conform in all material respects to the description of the Services set forth in each SOW, or if not addressed in the applicable SOW, in accordance with general industry standards.

8.2. Disclaimer of Warranties. Except as otherwise expressly provided in this Agreement or in any SOW, the parties make no representations, warranties or conditions, express or implied, regarding any matter, including the merchantability, suitability, non-infringement, fitness for a particular use or purpose, or results to be derived from the use of any service, software, hardware, deliverables, work product or other materials provided under this Agreement.

ARTICLE IX

CONFIDENTIALITY; SAFEGUARDING OF DATA

9.1. Confidentiality.

(a) Confidential Information Defined. In connection with this Agreement, each of the parties has disclosed and may continue to disclose to the other party information that relates to the disclosing party’s, or one or more of the disclosing party’s Affiliates’, business, affairs, customers, claimants, employees, service providers, financial condition, marketing or development plans, strategies, inventions, discoveries, ideas, concepts, processes, techniques, methodologies, know-how, forecasts and forecast assumptions and volumes, performance, or operations that such party treats as confidential or proprietary. Except as otherwise specifically agreed in writing by the parties, Service Provider and Company each agree that (i) all information communicated to Service Provider by Company and identified as confidential or proprietary, whether before or after the Effective Date, (ii) all information identified as confidential or proprietary to which Service Provider has access in connection with the Services, whether before or after the Effective Date, (iii) all information communicated to Service Provider that reasonably should have been understood, because of the circumstances of disclosure or the nature of the information itself, to be proprietary and confidential to Company, (iv) all Company Data, (v) all information concerning any breach under or dispute regarding this Agreement or provided or obtained in connection with the Dispute Resolution Procedure, (vi) all information that represents the confidential information of a Third Party and has been disclosed to a party subject to an obligation of confidentiality, and (vii) the existence, terms and conditions of this Agreement and all matters related thereto (collectively, the “Confidential Information”), will be and will be deemed to have been received in confidence and will be used only for purposes of this Agreement.

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(b) Use of Confidential Information. Neither party will disclose, license, allow access to, sell, assign, lease or otherwise commercially exploit the Confidential Information of the other party, except as permitted under Sections 9.1(c) or 9.1(d). All Confidential Information will be held and protected by the recipient in strict confidence and will be used and disclosed by the recipient only as required to render performance or to exercise rights and remedies under this Agreement, but only in strict compliance with the terms of this Article. In the event of any disclosure or loss of, or inability to account for any material Confidential Information of the disclosing party, the recipient will promptly, at its own expense: (i) notify the disclosing party in writing, (ii) take such actions as may be necessary or reasonably requested by the disclosing party to minimize any violation of the terms of this Section 9.1; and (iii) cooperate in all reasonable respects with the disclosing party to minimize any violation and any damage resulting therefrom.

(c) Permitted Disclosures. Each party may disclose relevant aspects of the other party’s Confidential Information to its employees, Affiliates, legal representatives, accountants, tax advisors, subcontractors and agents on a need-to-know basis; provided, however, that such party shall use reasonable efforts to ensure that such employees, Affiliates, legal representatives, accountants, tax advisors, subcontractors or agents comply with these confidentiality provisions.

(d) Required Disclosures. Each party may disclose Confidential Information required to be disclosed by Law, judicial or arbitration process, or by Governmental Authorities, provided that the receiving party: (i) promptly notifies the other party of the terms and the circumstances of that request, if legally permitted to do so; (ii) consults with the other party, and cooperates with the other party’s reasonable requests to resist or narrow that request; (iii) furnishes only information that, according to written advice (which need not be a legal opinion) of its legal counsel, that party is legally compelled to disclose; and (iv) uses reasonable efforts to obtain an order or other reliable assurance that confidential treatment will be accorded the information disclosed.

(e) Return of Confidential Information. Neither party may withhold the Confidential Information of the other party or refuse for any reason (including due to the other party’s actual or alleged breach of this Agreement) to promptly return to the other party its Confidential Information (including copies thereof) if requested to do so. Upon expiration or any termination of this Agreement and completion of a party’s obligations under this Agreement, each party shall, upon the request of the other, return or destroy all documentation in any medium that contains or refers to the other party’s Confidential Information, and retain no copies. Subject to the foregoing confidentiality obligations, Company may retain copies of the Confidential Information of Service Provider to the extent required for Company’s continuing operations or internal business purposes.

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(f) Exclusions. This Section 9.1 will not apply to any particular information that either party can demonstrate (i) was, at the time of disclosure to it, in the relevant public domain; (ii) after disclosure to it, is published or otherwise becomes part of the relevant public domain through no fault of the receiving party; (iii) was rightfully in the possession of the receiving party at the time of disclosure to it and was not the subject of a pre-existing confidentiality obligation; (iv) was received after disclosure to it from a Third Party who had a lawful right to disclose such information to it; or (v) was independently developed by the receiving party without use of or reference to the Confidential Information of the disclosing party.

9.2. Company Data. As between the parties, Company will be the sole and exclusive owner of all Company Data. Service Provider shall utilize the Company Data solely for purposes of this Agreement. All access to Company Data will be subject to the confidentiality provisions set forth in Section 9.1; provided, however, the exclusions set forth in Section 9.1(f) do not apply to Consumer Information. Without Company’s Consent (in its discretion), the Company Data shall not be (i) used by Service Provider or Service Provider Representatives other than in connection with providing the Services, (ii) aggregated or commingled by Service Provider or Service Provider Representatives with Service Provider or Third Party data, (iii) disclosed, sold, assigned, leased or otherwise provided to Third Parties by Service Provider or Service Provider Representatives, or (iv) commercially exploited by or on behalf of Service Provider or Service Provider Representatives.

9.3. Irreparable Harm. The parties acknowledge that any disclosure or misappropriation of Company Data or Confidential Information in violation of this Agreement could cause irreparable harm, the amount of which may be extremely difficult to estimate, thus making any remedy at law or in damages inadequate. Each party therefore agrees that the other party will have the right to apply to any court of competent jurisdiction for a temporary or provisional order restraining any breach or impending breach of Section 9.1 or 9.2, without the necessity of posting bond. This right will be in addition to any other remedy available under this Agreement.

ARTICLE X

PROPRIETARY RIGHTS

10.1. Ownership of Work Product.

(a) Service Provider agrees to disclose and promptly furnish to Company any and all technical information, computer or other specifications, documentation, works of authorship or other creative works, ideas, knowledge, or data, written, oral or otherwise expressed, originated by Service Provider or by one or more of Service Provider’s employees, subcontractors, consultants, representatives or agents (“Service Provider Representatives”) as a result of work performed under or in anticipation of this Agreement which is identified as Work Product to be owned by Company in an SOW pursuant to the terms of this provision (“Work Product”). Company shall own all right, title and interest in and to the Work Product created hereunder, including all Intellectual Property Rights therein. Service Provider expressly acknowledges that the parties have agreed that all aspects of the Work Product and all work in process in connection therewith are to be considered “works made for hire” within the meaning of the United States Copyright Act of 1976, as amended (the “Copyright Act”), and that Company is to be the “author” within the meaning of such Act. All such copyrightable Work Product, as well as all copies of such Work Product in whatever medium fixed or embodied, shall be owned exclusively by Company as its creation, and Service Provider hereby expressly disclaims any interest in any of them. Unless a SOW or Schedule sets forth otherwise in connection with such Work Product, Company hereby grants to Service Provider a fully paid-up, non-exclusive license to use, display, copy and make derivative works of the Work Product solely for the purpose of providing the Services to Company under this Agreement. Notwithstanding the foregoing, the Parties agree that Work Product shall not include tangible and intangible materials and information that relate solely to Service Provider’s technological and business infrastructure used to deliver the Services to Company and other Service Provider customers, which materials and information are (i) not developed for or on behalf of Company, or (ii) do not incorporate, refer to, or rely on Company Confidential Information, Company Data, Company Software, or Intellectual Property Rights of Company.

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(b) In the event (and to the extent) that the Work Product created by Service Provider and its Service Provider Representatives hereunder or any part or element thereof is found as a matter of law not to be a “work made for hire” within the meaning of the Act, Service Provider hereby irrevocably conveys and assigns (and in the case of Work Product not yet developed, hereby covenants upon their development to irrevocably convey and assign) to Company the sole and exclusive right, title and interest in the ownership to all such Work Product, and all copies of any of them, without further consideration, and agrees to assist Company to register, and from time to time to enforce, all Intellectual Property Rights and other rights and protections relating to the Work Product created hereunder in any and all countries.

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10.2. Pre-existing Materials. If the Work Product includes or requires the use of inventions or materials previously made, developed or copyrighted by Service Provider or others, and not originated or developed hereunder (“Pre-existing Materials”), then Service Provider grants and agrees to grant to Company an unrestricted, royalty-free license to make, use, sell, have made, copy, modify, distribute, display and perform the inventions, information or other aspects of the Pre-existing Materials, but only to the extent necessary to make, use, sell, have made, copy, modify, distribute, display and perform the Work Product originated or developed as a result of the work performed under or in anticipation of this Agreement.

10.3. Knowledge Capital. Nothing in this Agreement will preclude Service Provider from marketing, developing or using for itself or others, services or products that are the same as or similar to those provided to Company or its Affiliates by Service Provider pursuant to this Agreement, as long as such services or products do not include any Company Software, Company Confidential Information, Company Data, Work Product, Intellectual Property Rights of Company, or any other proprietary information belonging to Company. Each party will continue to be free to use its general knowledge, skills and experience, and to use and disclose any generalized ideas, concepts, know-how, and techniques that are acquired or used during the course of the Agreement, so long as they acquire and apply such information without the use or disclosure or any confidential or proprietary information belonging to the other party. This Section 10.3 will not diminish either party’s obligations regarding Confidential Information under Article IX.

ARTICLE XI

AUDIT RIGHTS

11.1. Service Provider Records. Service Provider shall maintain, at all times during the Agreement Term and at no additional charge to Company, complete and accurate records and supporting documentation pertaining to: (i) all Service Charges and financial matters under this Agreement, in all cases prepared in accordance with generally accepted accounting principles; (ii) all other transactions, reports, filings, returns, analyses, Work Product, data and/or information created, generated, collected, processed or stored by Service Provider and/or Service Provider’s subcontractors in the performance of the Services; and (iii) all controls relevant to Service Provider’s internal controls and Company’s control over the activities of Service Provider (collectively, “Service Provider Records”), all in a manner sufficient to permit the audits in accordance with this Article XI.

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11.2. Operational Audits. Not more than once per calendar year or at any such time as Company has a reasonable good faith concern that a breach of this Agreement may have occurred, Service Provider shall provide to Company and to internal and external auditors, inspectors, regulators and other representatives that Company may designate from time to time (“Company Auditors”) access in accordance with Section 11.6 to perform operational audits and inspections of Service Provider, its subcontractors and their respective facilities (“Operational Audits”), to: (i) verify the integrity of the Company Data, (ii) examine the systems that process, store, support and transmit that data and examine any summaries of external Third Party data processing audits or reviews, (iii) verify whether the Services comply with Regulatory Requirements; (iv) examine the controls (e.g., financial and accounting controls, organizational controls, input/output controls, system modification controls, processing controls, system design controls, and logical and physical access controls) and conduct walkthroughs (as defined by the PCAOB or any other governing body); (v) examine the security, disaster recovery and back-up practices and procedures; (vi) verify the integrity of the Service Provider’s Performance Reports; (vii) examine Service Provider’s development of Work Product; and (viii) facilitate Company’s compliance with Company Regulatory Requirements.

11.3. Financial Audits. Not more than once per calendar year or at any such time as Company has a reasonable good faith concern that a breach of this Agreement may have occurred, Service Provider shall provide to Company and Company Auditors access in accordance with Section 11.6 to perform financial audits and inspections (“Financial Audits”) to (i) verify the accuracy and completeness of Service Provider Records, and (ii) verify the accuracy and completeness of Service Provider’s Invoices and Service Charges. If an Audit reveals that errors have been made in connection with the Service Charges and Taxes, then the parties will work together to correct the error and any overpayments revealed by the Audit will be promptly paid by Service Provider or credited to Company.

11.4. Regulatory Audits. Upon written request made by a Governmental Authority to Service Provider or to Company, or by Company in response to a Governmental Authority request or circumstance related to Company Regulatory Obligations, Service Provider will promptly make available to the Governmental Authority or Company Auditors Service Provider Records and other information relating to Service Provider’s and its subcontractors’ compliance with the Regulatory Requirements and, if so requested, provide the requesting Governmental Authority or Company Auditors access in accordance with Section 11.6 to examine Service Provider’s or its subcontractors’ compliance with the Regulatory Requirements and for purposes of facilitating Company’s compliance with applicable Company Regulatory Requirements (“Regulatory Audits”).

11.5. Service Provider Audits and Reporting. As part of the Services, Service Provider will supply Company with an annual SAS 70 Type II audit report (“Service Provider Audits”), performed as of with a final date after September 30 of each calendar year up to and including December 31 of each calendar year) . If such report is dated prior to December 31 in any given calendar year, Service Provider shall provide a letter or other statement reasonably acceptable to Company updating such report effective as of December 31 of such year. Service Provider Audits shall include an audit of any applicable Service Provider subcontractors. Company shall be entitled to provide input and assist in defining the scope of the Service Provider Audits, as they apply to the Services and Company audit requirements.

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11.6. General Principles Regarding Audits.

(a) Access. Service Provider shall provide Company and Company Auditors and requesting Governmental Authorities with reasonable access at reasonable times and after reasonable Notice to: (i) the parts of any Service Location at which the Service Provider is providing the Services; (ii) systems and assets used by Service Provider to provide the Services; (iii) Service Provider personnel providing the Services; (iv) Service Provider subcontractors and agents who perform any portion of the Services (including to such entity’s personnel, facilities, records, systems, controls, processes and procedures); and (v) all Service Provider Records. Company Audits will be conducted in a manner that does not unreasonably disrupt or delay Service Provider’s performance of the Services hereunder or any other services for its other customers.

(b) Copies of Audit Reports; Notice of Deficiency. Upon completion of any Service Provider Audit, Service Provider shall provide Company and, upon request, Company Auditors: (1) a copy of the Service Provider Audit reports, and (2) written notice of any deficiencies or material weaknesses found and/or reported as a result of the Service Provider Audit. Upon completion of any Operational Audit, Regulatory Audits and/or Financial Audit (collectively, “Company Audits”), Company shall notify Service Provider of any deficiencies or material weaknesses found as a result of the Company Audit, and provide Service Provider with copies of portions of Company Audit reports reflecting or based upon information obtained from Service Provider.

11.7. Action Plan. As part of the Services, in the event any Audit reveals a deficiency or material weakness, Service Provider shall promptly provide Company and Company Auditors with a plan of action to correct the deficiency or material weakness, which plan of action shall be subject to Company’s written approval and shall, at a minimum, include: (1) details of actions to be taken by Service Provider and/or its subcontractors to correct the deficiency or material weakness, and (2) target dates for successful correction of the deficiency or material weakness (“Action Plan”). Service Provider shall also provide Company with Notice of Service Provider’s successful completion of each action identified in the Action Plan.

11.8. Cost of Audits. The costs of Audits shall be borne as follows: (i) Service Provider shall be responsible for its costs to perform (including any Service Provider subcontractors’ costs) the Service Provider Audits and for Service Provider’s and Service Provider subcontractors’ reasonable cooperation and provision of access for Company Audits; and (ii) Company shall be responsible for all costs associated with Company Audits (other than Service Provider’s reasonable cooperation and provision of access), except as provided for in Section 11.3.

ARTICLE XII

INDEMNIFICATION

12.1. Indemnification by Service Provider. Service Provider shall indemnify, defend and hold harmless Company, Company Affiliates and their respective directors, officers, employees, subcontractors and agents (collectively, the “Company Indemnitees”) from and against any and all Indemnifiable Losses incurred or suffered in respect of Third Party Claims (except in the case of paragraph (a), (b) or (c), in which the claim may also be made by any of the Company Indemnitees), whether based in whole or in part in contract, tort, negligence, statute or otherwise, arising from any of the following:

(a) the death of or bodily injury to any third party or to any employee of Company or any Company Affiliate (or their respective subcontractors);

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(b) the loss of or damage to the real or tangible personal property (whether owned or leased) of any third party or any Company Indemnitee;

(c) Service Provider’s failure to pay and discharge any Taxes (including interest and penalties) for which Service Provider is responsible pursuant to the provisions of this Agreement, including any Taxes resulting from Service Provider’s failure to pay, deduct or withhold Taxes with respect to any personnel, agents, subcontractors or suppliers of any of the Service Provider Entities;

(d) any breach by Service Provider of its representations, warranties or covenants set forth in this Agreement, except pursuant to Section 8.1(c); or

(e) any act or omission of any Service Provider Entity in its capacity as an employer of a Person and arising out of or relating to (i) federal, state or other Laws or regulations for the protection of Persons who are members of a protected class or category of Persons, (ii) sexual discrimination or harassment, and (iii) any other aspect of the employment relationship or its termination (including claims for breach of an express or implied contract of employment) which arose when the Person asserting the Third Party Claim was or purported to be an employee of the Service Provider Entity.

12.2. Indemnification by Company. Company shall indemnify, defend and hold harmless Service Provider, Service Provider Affiliates, and their respective directors, officers, employees, subcontractors and agents (collectively, the “Service Provider Indemnitees”) from and against any and all Indemnifiable Losses incurred or suffered in respect of Third Party Claims (except when the claim may also be made by any of the Service Provider Indemnitees), whether based in whole or in part in contract, tort, negligence, statute or otherwise, arising from any of the following:

(a) the death of or bodily injury to any third party or to any employee of Service Provider or any Service Provider Affiliate (or their respective subcontractors);

(b) the loss of or damage to the real or tangible personal property (whether owned or leased) of any third party or any Service Provider Indemnitee;

(c) Company’s failure to pay and discharge any Taxes (including interest and penalties) for which Company is responsible pursuant to the provisions of this Agreement, including any Taxes resulting from Company’s failure to pay, deduct or withhold Taxes with respect to any personnel, agents, subcontractors or suppliers of any of the Service Provider Entities;

(d) any breach by Company of its representations, warranties or covenants set forth in this Agreement, except pursuant to Section 8.1(c); or

(e) any act or omission of any Company Entity in its capacity as an employer of a Person and arising out of or relating to (i) federal, state or other Laws or regulations for the protection of Persons who are members of a protected class or category of Persons, (ii) sexual discrimination or harassment, and (iii) any other aspect of the employment relationship or its termination (including claims for breach of an express or implied contract of employment) which arose when the Person asserting the Third Party Claim was or purported to be an employee of the Company Entity.

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12.3. Infringement Indemnity. Service Provider shall indemnify, defend and hold harmless the Company Indemnitees from and against any and all Indemnifiable Losses arising from Third Party Claims that any Work Product or Services or any other item, information, system, deliverable, software or service provided or used under this Agreement by Service Provider (or any Service Provider agent, contractor, subcontractor or representative) (except for Company Software or hardware provided by Company hereunder), or Company’s use thereof (or access or other rights thereto) in connection with the Services, infringes or misappropriates the Intellectual Property Rights of a Third Party; provided however, Service Provider shall not have such an obligation to indemnify to the extent that such infringement or misappropriation is caused by (i) specifications provided by Company, except to the extent that Service Provider knew that compliance with such specifications would lead to or result in such infringement or misappropriation; (ii) Company’s use of such item in combination with any product or equipment not owned, provided, developed or authorized by Service Provider, except where Service Provider knew that such combination would be used by Company and did not object.If any deliverable or item provided by Service Provider hereunder is held to constitute, or in Service Provider’s reasonable judgment is likely to constitute, an infringement or misappropriation, Service Provider will in addition to its indemnity obligations, at its expense and option, and after consultation with Company regarding Company’s preference in such event, either: (A) procure the right for Company Indemnitees to continue using such deliverable or item; (B) replace such deliverable or item with a non-infringing equivalent, provided that such replacement does not result in a degradation of the functionality, performance or quality of the deliverable or item; (C) modify such deliverable or item, or have such deliverable or item modified, to make it non-infringing, provided that such modification does not result in a degradation of the functionality, performance or quality of the deliverable or item; or (D) create a feasible workaround that would not have any adverse impact on Company.

12.4. Indemnification for Third Party Claims. The following procedures shall apply with respect to indemnification for Third Party Claims arising in connection with this Agreement:

(a) Promptly after receipt by a party (the “Indemnified Party”) of notice of the assertion or the commencement of any Third Party Claim with respect to any matter within the scope of Sections 12.1, 12.2 or 12.3 (as applicable), the Indemnified Party shall give Notice thereof to the other party (the “Indemnifying Party”) and shall thereafter keep the Indemnifying Party reasonably informed with respect thereto; provided, however, that the failure of the Indemnified Party to give the Indemnifying Party such prompt Notice will not relieve the Indemnifying Party of its obligations hereunder except to the extent such failure results in prejudice to the Indemnifying Party’s defense of such Third Party Claim. Within fifteen (15) days following receipt of Notice from the Indemnified Party relating to any Third Party Claim, but no later than ten (10) days before the date on which any response to a writ, statement of claim, complaint or summons is due, the Indemnifying Party shall notify the Indemnified Party in writing that the Indemnifying Party shall assume control of the defense and settlement of such Third Party Claim (the “Assumption Notice”).

(b) If the Indemnifying Party delivers the Assumption Notice relating to any Third Party Claim within the required notice period, and if the Third Party Claim seeks only monetary relief against the Indemnified Party, and for so long as the Indemnifying Party diligently conducts the defense of such Third Party Claim, the Indemnifying Party will be entitled to have sole control over the defense and settlement of such Third Party Claim; provided, however, that the Indemnified Party will be entitled to participate in the defense of such Third Party Claim and to employ counsel at its own expense to assist in the handling of such Third Party Claim.

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(c) If the Indemnifying Party fails or chooses not to assume the defense of any such Third Party Claim within the prescribed period of time, then the Indemnified Party may assume the defense of any such Third Party Claim at the cost and expense of the Indemnifying Party.

(d) The Indemnifying Partymay compromise, settle or resolve a Third Party Claim without the Indemnified Party’s Consent if the compromise, settlement or resolution involves only the payment of money by the Indemnifying Party (whether on its own behalf or on behalf of the Indemnified Party) and the Third Party claimant provides the Indemnified Party a release from all liability regarding the Third Party Claim. Otherwise, the Indemnifying Party may not compromise, settle or resolve the Third Party Claim without the Indemnified Party’s Consent.

ARTICLE XIII

LIMITATION OF LIABILITY

13.1. Limitation on Consequential Damages. EXCEPT FOR APPLICABLE DAMAGES RELATING TO SERVICE PROVIDER’S ATTEMPTED TERMINATION OF THIS AGREEMENT OTHER THAN IN ACCORDANCE WITH ITS TERMS AND CONDITIONS, OR ABANDONMENT OF THIS AGREEMENT AS SET FORTH IN SECTION 15.6 HEREOF AND DAMAGES RELATING TO SERVICE PROVIDER’S FRAUD, MISREPRESENTATION OR FAILURE TO PROVIDE TERMINATION ASSISTANCE SERVICES IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT, NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY LOSS OF PROFITS OR INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER ARISING FROM OR RELATED TO THIS AGREEMENT, REGARDLESS OF THE TYPE OF CLAIM, WHETHER IN CONTRACT, TORT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY, WHETHER OR NOT FORESEEABLE, AND REGARDLESS OF THE CAUSE OF SUCH DAMAGES EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES IN ADVANCE.

13.2. Limitation on Direct Damages.

(a) The liability of Service Provider to Company for any direct damages resulting from, arising out of or relating to this Agreement, whether based upon an action or claim in contract, equity, negligence, tort or otherwise, will not exceed an amount equal to $**, except Service Provider’s liability for such damages arising from a breach of Service Provider’s obligations under Sections 3.4, 3.5, 3.6 or 3.7 will not exceed $** (the “Service Provider Damages Limitation”). Notwithstanding the foregoing, the Service Provider Damages Limitation shall not apply to: (1) any breach by Service Provider of the terms of Sections 9.1 or 9.2; (2) claims relating to Service Provider’s willful or intentional misconduct, fraud or gross negligence; (3) claims for injury to Person or property; (4) claims for indemnification under Sections 12.1 or 12.3; (5) Service Provider’s failure to provide Termination Assistance Services; and (6) Service Provider’s wrongful termination of this Agreement. In connection with Sections 3.4, 3.5, 3.6 and 3.7 hereof, Company acknowledges that Service Provider cannot and does not guarantee that no Security Breach will occur, despite its compliance with such sections and other relevant provisions of this Agreement.

** Confidential Treatment Requested.

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(b) The liability of Company to Service Provider, whether based upon an action or claim in contract, equity, negligence, tort or otherwise, will not exceed, in any year, an amount equal to ** during the ** prior to the assertion of the claim (“Company Damages Limitation). Notwithstanding the foregoing, the Company Damages Limitation shall not apply to: (1) any breach by Company of the terms of Section 9.1; (2) claims for indemnification under Sections 12.2.

13.3. Cumulative Remedies. Except for Service Levels specifically identified on a Service Level Agreement as an “Exclusive Remedy Service Level”, no remedy or election under this Agreement will be deemed exclusive, but will be cumulative with, in addition to and not in lieu of any other remedies available to either party at law, in equity or otherwise. In the case of a breach of any provision of an Exclusive Remedy Service Level, the Service Level Credit for such Exclusive Remedy Service Level shall be the sole and exclusive remedy of Company for Service Provider’s breach of such Service Level Agreement.

ARTICLE XIV

INSURANCE

14.1. Insurance Coverage. During the Agreement Term, Service Provider shall obtain and maintain at its expense those insurance policies with the minimum insurance limits set forth in the attached Schedule 14.1.

ARTICLE XV

TERMINATION

15.1. Termination for Convenience. Company may at any time terminate (a) this Agreement or (b) one or more Service, for convenience by providing Service Provider with ** prior written Notice of its intent to terminate and paying Service Provider certain termination fees as follows: (i) in the case of the termination of this Agreement as a whole for convenience, Company shall pay Service Provider an amount that equals ** billed by Service Provider under the applicable SOW (the “Termination for Convenience Fee”) for each month remaining in the Term.  Company will be under no further obligation to pay any Service Charges from and after the date of termination, except for those Charges required for Termination Assistance Services pursuant to Section 15.4 (Termination Assistance); and (ii) in the case of the termination for convenience for less than the Agreement as a whole, Company shall pay Service Provider ** to reflect the Services being terminated, and Company will be under no further obligation to pay any Service Charges from and after the date of termination with respect to the terminated Services, except for those Service Charges required for Termination Assistance Services pursuant to Section 15.4.

15.2. Termination for Cause. Company may terminate this Agreement as a whole or any Statement(s) of Work, for cause and without the payment of any termination fees, penalties or charges:

(a) Immediately upon Notice to Service Provider by Company, if Service Provider breaches any of its material duties or obligations under this Agreement and does not cure such breach within ** days after Notice thereof (identifying the basis for such Notice).

** Confidential Treatment Requested.

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(b) Immediately upon Notice to Service Provider by Company, if Service Provider commits a series of non-material or persistent breaches of which it has received notice from Company in each case, that Company perceives in the aggregate to have a significant adverse impact on the Services and fails to cure such breaches within ** days after Notice thereof (identifying the basis for such Notice).

(c) If Service Provider (i) becomes or is declared insolvent, or is unable to pay its debts; (ii) enters into an agreement for the cancellation, extension, or readjustment of substantially all of its obligations; (iii) enters into or files a petition, arrangement, application, action or other proceeding seeking the appointment of a trustee or liquidator of or a receivership for all or a substantial part of its assets and relief or protection under applicable bankruptcy laws, (iv) suffers the appointment of a receiver-manager or other third party with similar power over the assets; or (v) has proceedings seeking any such appointment in clauses (iii) or (iv) commenced against it which are not terminated or dismissed within ninety (90) days of such commencement, then Company may, by giving Notice of termination to Service Provider, terminate this Agreement as of a date specified in such Notice of termination.

(d) If Service Provider incurs Damages to Company in excess of the Service Provider Damages Limitation set forth in Section 13.2(a), as such Damages are either finally adjudicated or agreed to by the parties, immediately upon Notice to Service Provider by Company.

(e) If Company has not, pursuant to the Transition Plan, accepted all In-Scope Services by **.

(f) Upon the occurrence of any one of the following events (each, a “Service Level Termination Event”):

(i) Service Provider’s failure to meet a Service Level for ** consecutive months or ** months out of any ** month period.

(ii) Service Provider’s failure to meet the Increased Impact Level for ** consecutive months or ** months out of any ** month period.

For purposes of determining whether a Service Level Termination Event has occurred, Service Level Credits earned shall include all Service Level Credits incurred, regardless of whether such Service Level Credits are actually paid or credited to Company.

15.3Termination for Cause. Service Provider may terminate this Agreement as a whole for cause and without the payment of any termination fees, penalties or charges:

(e) Immediately upon Notice to Company ** days after Company’s receipt of the second written notice of failure to pay from Service Provider, provided in accordance with the following. Such notices of non-payment shall be in writing, with an additional copy to the Chief Executive Officer of Company, including identification of all unpaid and undisputed amounts, and Service Provider’s intention to terminate this Agreement if payment is not received, with the first of such notices due at least ** days after such payment was due and an additional notice of the same type at least ** days after the delivery of the initial notice.

** Confidential Treatment Requested.

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(f) If Company (i) becomes or is declared insolvent, or is unable to pay its debts; (ii) enters into an agreement for the cancellation, extension, or readjustment of substantially all of its obligations; (iii) enters into or files a petition, arrangement, application, action or other proceeding seeking the appointment of a trustee or liquidator of or a receivership for all or a substantial part of its assets and relief or protection under applicable bankruptcy laws, (iv) suffers the appointment of a receiver-manager or other third party with similar power over the assets; or (v) has proceedings seeking any such appointment in clauses (iii) or (iv) commenced against it which are not terminated or dismissed within ninety (90) days of such commencement, then Service Provider may, by giving Notice of termination to Company, terminate this Agreement as of a date specified in such Notice of termination.

15.3. Termination for Force Majeure Event. If any Force Majeure Event lasts longer than ** consecutive days, and substantially prevents, hinders or delays Service Provider’s performance of any of the Services, then Company may immediately terminate this Agreement as a whole, or by affected Statement(s) of Work, without obligation to pay any termination fees, penalties or charges.

15.4. Termination Assistance.

(a) For a period of at least ** months but no more than ** months following expiration or any termination of this Agreement or any SOW(the “Termination Assistance Period”), Service Provider will perform, at the request of Company, the terminated or expired In-Scope Services and provide to Company or a Successor Service Provider any and all cooperation, assistance and services reasonably requested by Company to allow the terminated or expired In-Scope Services to continue without interruption or adverse effect, to mitigate any disruption to Company’s business, and to facilitate the orderly transfer of responsibility for the terminated or expired In-Scope Services to Company or to one or more Successor Service Providers (collectively, the “Termination Assistance Services”).

(b) During the Termination Assistance Period, Company will pay Service Provider: (i) for continued performance of the expired or terminated In-Scope Services, the Service Charges applicable to those In-Scope Services as set forth in the Charges Schedule, provided that in the event of Termination Assistance Services upon expiration of the Agreement, the Service Charges applicable to the expired In-Scope Services at the end of the applicable SOW Term or any extension period to the SOW Term will apply; and (ii) for activities associated with the transition of In-Scope Services to Company or a Successor Service Provider that are not within the scope of the In-Scope Services, on a time and materials basis at the then-current hourly rates.

(c) The terms of this Agreement will govern the provision of In-Scope Services and the conduct of the parties during the Termination Assistance Period. Without limiting the generality of the foregoing, the Service Level Agreement and Service Level Credits will also continue to apply during the Termination Assistance Period.

15.5. License Termination and Exit Rights. Upon the expiration or termination of this Agreement and any Termination Assistance Services for any reason, the licenses granted to Service Provider pursuant to this Agreement shall automatically terminate and Service Provider and Company further agree to implement, respectively, those items and matters set forth on Schedule 15.6 attached hereto.

** Confidential Treatment Requested.

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15.6. Abandonment of Agreement. Service Provider acknowledges that its abandonment of this Agreement could cause irreparable harm, the amount of which may be extremely difficult to estimate, thus making any remedy at law or in damages inadequate. Service Provider therefore agrees that Company will have the right to apply to any court of competent jurisdiction for a temporary or provisional order restraining any such abandonment of this Agreement by Service Provider, without the necessity of posting bond. This right will be in addition to any other remedy available under this Agreement.

15.7. Survival of Provisions. Upon the expiration or termination of this Agreement for any reason, the provisions of Articles VIII, IX, X, XI, XII, XIII, XIV, XV, XVI, XVII, and IX and Sections 6.3, 6.4, 6.5 and 6.6 shall survive indefinitely.

ARTICLE XVI

DISPUTES

16.1. Disputes In General. The Parties will resolve all Disputes in accordance with the procedures described in Schedule 16.1(the “Dispute Resolution Procedures”).

16.2. Continued Performance. Except where prevented from doing so by the matter in Dispute, Service Provider agrees to continue performing its obligations under this Agreement while any good faith Dispute is being resolved unless and until such obligations are terminated by the termination or expiration of this Agreement.

ARTICLE XVII

BUSINESS CONTINGENCIES

17.1. Disaster Recovery Services.

(a) Disaster Recovery Plan. Throughout the term of this Agreement, as part of the Services, Service Provider shall maintain a disaster recovery plan appropriate to the provision of the In-Scope Services and as attached hereto as Schedule 17.1, (the “Disaster Recovery Plan”) and the capacity to execute and perform such plan. Service Provider will perform testing of the Disaster Recovery Plan at least once each year in accordance with the Charges Schedule, and will provide the test results to Company.

(b) Disaster Recovery Procedures. Upon Service Provider’s determination of a disaster or the possibility of the occurrence of a disaster situation, Service Provider will promptly notify Company and institute the Disaster Recovery Plan. During a disaster, Service Provider will not give greater priority to any of its other customers in its recovery efforts than it gives to Company. Either party may retain a Third Party to provide In-Scope Services in the event that a disaster lasts in excess of ** consecutive hours, or more than ** hours during any ** day period, and Service Provider will be liable for payment for such replacement services from the Third Party for so long as the disaster continues. Company will continue to pay Service Provider the appropriate Service Charges for the In-Scope Services during such time and in accordance with the Charges Schedule.

** Confidential Treatment Requested.

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17.2. Force Majeure.

(a) If Service Provider is rendered unable, wholly or in part, by a Force Majeure Event, to carry out some or all of its obligations under this Agreement or a Statement(s) of Work, then during the continuance of such inability, the obligation of the Service Provider to perform the obligations so affected shall be suspended. The Service Provider shall promptly notify Company verbally (to be confirmed in writing within twenty-four (24) hours of the inception of the event) of the occurrence of the Force Majeure Event, which Notice shall include information with respect to the nature, cause and date of commencement of the occurrence(s), and the anticipated scope (and the obligations, the performance of which are thereby delayed) and duration of the delay. The Service Provider shall continue to use commercially reasonable efforts to mitigate the impact or consequence of the event on the unaffected party and to recommence performance whenever and to whatever extent possible without delay. Upon the conclusion of a Force Majeure Event, the affected party shall, with all reasonable dispatch, take all necessary steps to resume the obligation(s) previously suspended. Notwithstanding the foregoing, Service Provider’s performance of any of its obligations under this Agreement shall not be suspended or excused pursuant to this Section 17.2 if Service Provider could end or reduce the effect of the Force Majeure Event by complying with a provision in the Disaster Recovery Plan. Subject to paragraph (c) below, in the event of any Force Majeure Event, Company shall not pay any Service Charges in respect of the Services so affected.

(b) If a Force Majeure Event substantially prevents, hinders or delays Service Provider’s performance of any In-Scope Services for more than ** consecutive hours, or more than ** hours in a ** period, then Company may procure replacement services from an alternate source, and Service Provider will be liable for payment for such replacement services from the alternate source for so long as the delay in performance continues.

ARTICLE XVIII

AFFECTED EMPLOYEES

18.1 Affected Employees. Company may agree in any SOW to provide Service Provider with the opportunity to offer employment to certain of the employees of Company in connection with the execution of the Agreement and one or more SOW (the “Affected Employees”). In such event, the relevant SOW shall incorporate the provisions set forth in the “Affected Employees Provisions” Schedule 18.1 and such other provisions as may be agreed by the Parties.

ARTICLE XIX

MISCELLANEOUS

19.1. Assignment. This Agreement will be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Except as provided in Article VII, neither party shall assign this Agreement or any part hereof or any benefit or interest herein without the prior written Consent of the other party, except that Company may assign its rights and delegate its duties and obligations under this Agreement to one or more of its Affiliates and/or as part of the sale or transfer of all or substantially all of its assets and business, including by merger or consolidation to a Person that assumes and has the ability to perform Company’s duties and obligations under this Agreement. Any attempted assignment or delegation of any rights, duties, or obligations in violation of this Sectionwill be invalid and without effect.

** Confidential Treatment Requested.

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19.2. General Principles Regarding Service Provider Personnel. The personnel assigned to the Company account will be and remain employees of Service Provider, and Service Provider will provide for and pay the compensation and other benefits of such personnel, including salary, health, accident and workers’ compensation benefits and all taxes and contributions that an employer is required to pay (or withhold) with respect to the employment of employees.

19.3. Relationship of Parties. In connection with this Agreement, each party is an independent contractor; each has sole authority and control of the manner of, and is responsible for, its performance of this Agreement. This Agreement does not and shall not be deemed to create a joint venture, partnership, fiduciary or agency relationship between the parties for any purpose. Neither party may create or incur any liability or obligation for or on behalf of the other party, except as described in this Agreement.

19.4. Notice. Wherever under this Agreement one party is required or permitted to give notice to the other party (and no specific person is named as the appropriate recipient of such notice), such notice (“Notice”) shall be in writing and shall be delivered personally, sent by nationally recognized express courier or sent by registered or certified mail (return receipt requested and postage prepaid). Any such Notice shall be deemed given when actually received and shall be addressed as follows:

In the case of Company:

Eurobancshares, Inc.

Carr #1

Km. 24.5

San Juan, Puerto Rico 00920

Attn: Noel Aponte, CIO-VP, IT

with a copy (which shall not constitute effective notice) to:

Eurobancshares, Inc.

Carr #1

Km. 24.5

San Juan, Puerto Rico 00920

Attn: Felix Leon, Chief Operating Officer

and with a copy (which shall not constitute effective notice) to:

Hunton & Williams LLP

1445 Ross Avenue

Suite 3700

Dallas, Texas 75202-2799

Attn: Peter G. Weinstock

Telecopy: (214) 468-3599

In the case of Service Provider:

Telefonica Empresas

Metro Office Park

17 Street 2 Suite 600

Guaynabo, PR 00968 

Telecopy: 1-787-273-5561 Fax

Attn: Adolfo Montenegro, Vice President - GM

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with a copy (which shall not constitute effective notice) to:

Telefonica

1111 Brickell Ave

10^th Floor

Miami, FL, 33131

Telecopy: 1-305-925-5238

Attn: Joanna Romano, Legal Director

Either party from time to time may change its address or designee for notification purposes by giving the other party Notice of the new address (which new address must be within the United States) or designee and the date upon which such change will become effective.

19.5. Severability. If any term, provision, or restriction of this Agreement or any schedule hereto is held by a court or panel of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement and such schedules shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and applicable term, provision or restriction of this Agreement will be deemed to be restated to reflect the original intentions of the parties as nearly as possible in accordance with applicable law.

19.6. No Third Party Beneficiaries. Nothing contained in this Agreement is intended or shall be construed to confer upon any Person (other than the parties hereto and the Company Indemnitees specifically identified in Article VII, and Company’s Affiliates entitled to receive Services hereunder) any rights, benefits or remedies of any kind or character whatsoever, or to create any obligations of a party to any such Person, including to any suppliers, customers or subcontractors of a party.

19.7. Publicity. Service Provider shall not make any press releases, public announcements or similar public disclosure relating to this Agreement or its subject matter, including promotional or marketing material without Company’s Consent.

19.8. Amendment; Waiver. Other than in accordance with the Change Control Procedures, this Agreement may not be modified or amended except by a written instrument executed by or on behalf of each of the parties to this Agreement. Unless otherwise expressly provided in this Agreement, a delay or omission by either party in exercising any right or power under this Agreement will not be construed to be a waiver thereof. No waiver of any breach of any provision of this Agreement will constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provision hereof.

19.9. Entire Agreement. This Agreement (including the Schedules hereto and the SOWs hereunder, each of which is incorporated herein by reference) constitute the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings, whether written or oral, among the parties with respect to such subject matter.

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19.10. Governing Law. This Agreement will be governed by and construed in accordance with the substantive laws of the state of Florida, without giving effect to any choice-of-law rules that may require the application of the laws of another jurisdiction. Subject to the Dispute Resolution Procedures set forth in Article XVI above, the parties consent to venue in the Commonwealth of Puerto Rico and to the nonexclusive jurisdiction of the United States District Court for the Commonwealth of Puerto Rico and of any court situated in San Juan, Puerto Rico, for all litigation which may be brought with respect to the terms of, and the transactions and relationships contemplated by, this Agreement. The parties further consent to the jurisdiction of any court located within a district that encompasses assets of a party against which a judgment or award has been rendered for the enforcement of such judgment or award against the assets of such party.

19.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one instrument binding on the parties, notwithstanding that both parties are not signatories to the original or the same counterpart

ARTICLE XX

TRANSFER AND MANAGEMENT OF THIRD PARTY SERVICE CONTRACTS

20.1 Transfer and Management of Third Party Agreements. Certain SOWs may require the transfer of Company equipment, software, or third party agreements to the Service Provider and/or the management of Company equipment, software or third party agreements by the Service Provider. All such transfer or management responsibilities will be identified in the particular SOW, and the SOW shall contain additional terms and conditions with respect to such assets.

ARTICLE XX

DEFINITIONS

“Affiliate” means, with respect to any Person directly or indirectly controlling, controlled by or under common control with such Person.

“Agreement” has the meaning set forth in the introductory paragraph.

“Audit” means, collectively and individually, Company Audits, Service Provider Audits, Operational Audits, Financial Audits and Regulatory Audits.

“Business Day” means each Monday through Friday, other than national holidays recognized by Company.

“Change” means: (1) any change to (a) the Services or any of the processes or procedures used to perform the Services, or (b) the Service Level Agreement; (2) any change to (a) the Service Locations, (b) the Security Requirements, Company Regulatory Requirements, Service Provider Regulatory Requirements, or (c) the Disaster Recovery Plan; (3) any change that disrupts the provision of the Services; or (4) any amendment, modification, addition or deletion proposed by a party to this Agreement.

“Company Data” means the following data, whether provided or produced before, on, or after the Effective Date:

(a) All data that is provided by or on behalf of Company to Service Provider in order for Service Provider to provide the In-Scope Services, including keyed input and electronic capture of information by the In-Scope Services;

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(b) All data that is provided by or on behalf of Service Provider to Company by means of the In-Scope Services, including reports;

(c) Consumer Information; and

(d) All data that is produced by means of the In-Scope Services as an intermediate step in using or producing any of the Company Data, including databases and files containing Company Data.

“Company Software” shall have the meaning given in Statement of Work Number 1.

“Consent” means consent, approval, authorization, clearance, exemption, waiver, or similar affirmation by a party given in accordance with the Agreement.

“Consumer Information” shall mean all records, files, reports and other data relating to Company’s customers provided to Service Provider by or on behalf of Company, its Affiliates or business partners, or otherwise collected or obtained by Service Provider, in connection with the In-Scope Services, including but not limited to, customer accounts, customer names, addresses and social security numbers, as well as any information derived therefrom.

“Contract Managers” means the Service Provider Project Manager and Company Contract Manager.

“Dispute” means any dispute, claim or controversy of any kind or nature arising under or in connection with the Services or otherwise in connection with the Agreement or the transactions contemplated thereby (including disputes as to the Services, billing, or the creation, validity, interpretation, breach or termination of the Agreement).

“Force Majeure Event” means an event(s) meeting both of the following criteria:

(a) Caused by any of the following: (w) catastrophic weather conditions or other extraordinary elements of nature or acts of God; (x) acts of war (declared or undeclared), acts of terrorism, insurrection, riots, civil disorders, rebellion or sabotage; (y) failures of telecommunications providers or other utilities; and (z) changes in Law or acts of or failure to act by any federal, provincial, local or foreign Governmental Authority; provided, however, that the parties expressly acknowledge and agree that Force Majeure Events do not include (i) vandalism, (ii) Service Provider’s inability to obtain hardware, software, on its own behalf or on behalf of Company, or its inability to obtain or retain sufficient qualified personnel, (iii) the non-performance of subcontractors or agents relied on for the delivery of the Services, or (iv) any failure to perform caused solely as a result of a party’s lack of funds or financial ability or capacity to carry on business; and

(b) The non-performing party is without fault in causing or failing to prevent the occurrence of such event, and such occurrence cannot be circumvented by reasonable precautions and could not have been prevented or circumvented through the use of commercially reasonable alternative sources, workaround plans or other means (including, with respect to Service Provider, by Service Provider meeting its security and disaster recovery obligations described in this Agreement).

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“Governmental Approval” means any license, consent, permit, approval, or authorization of any Governmental Authority, or any notice to any Governmental Authority, the granting of which is required by Law, Service Provider Regulatory Requirements or Company Regulatory Requirements, for the consummation of the transactions contemplated by this Agreement.

“Governmental Authority” means any nation or government, any federal, state, province, territory, city, town, municipality, county, local or other political subdivision thereof or thereto, any quasi-governmental authority, and any court, tribunal, arbitral body, taxation authority, department, commission, board, bureau, agency, instrumentality thereof or thereto or otherwise which exercises executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

“Increased Impact Level” shall mean those Service Levels identified as such on a Service Level Agreement.

“Indemnifiable Loss” means losses, claims, obligations, demands, assessments, fines and penalties (whether civil or criminal), liabilities, expenses and costs (including reasonable fees and disbursements of legal counsel, accountants and other advisors or consultants) actually suffered or incurred by a Person relating to any act or omission of a party for which the other party may seek indemnification under the Agreement.

“Intellectual Property Rights” means all intellectual property rights, including (i) any patent, patent application, trademark (whether registered or unregistered), trademark application, trade name, service mark (whether registered or unregistered), service mark application, copyright (whether registered or unregistered), copyright application, trade secret, Confidential Information, know-how, process, technology, development tool, ideas, concepts, design right, moral right, data base right, methodology, algorithm or invention, (ii) any right to use or exploit any of the foregoing, and (iii) any other proprietary right or intangible asset (including software).

“Law” means all applicable laws (including those arising under common law), statutes, codes, rules, regulations, reporting or licensing requirements, ordinances and other pronouncement having the effect of law of the United States, Puerto Rico, any foreign country or any domestic or foreign state, county, city or other political subdivision, including those promulgated, interpreted or enforced by any governmental or regulatory authority.

“Liabilities” means any direct or indirect indebtedness, guaranty, endorsement, claim, loss, damage, penalty, deficiency, assessment, Taxes, cost, expense (including reasonable attorneys’ fees and reasonable costs of investigation litigation and settlement), obligation, disgorgement or responsibility, fixed or unfixed, known or unknown, asserted or unasserted, liquidated or unliquidated, secured or unsecured.

“Losses” means all Liabilities, judgments, claims, settlements, losses, damages, charges, liens, Taxes, penalties, obligations and expenses.

“PCAOB” means the Public Company Accounting Oversight Board.

“Person” means an individual, corporation, limited liability company, partnership, trust, association, joint venture, unincorporated organization or entity of any kind or nature, or a Governmental Authority.

“Regulatory Requirements” means the Service Provider Regulatory Requirements and the Company Regulatory Requirements.

“Security Requirements” means the security requirements set forth in Section 3.7.

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“Service Acceptance Date”the date when Company accepts an In-Scope Service in accordance with the Transition Plan.

“Service Level Credit” means the credit due to Company in the event of a Performance Failure, as calculated in accordance with Section 4.3(a).

“Service Provider Entity” means Service Provider, any Service Provider Affiliate or any subcontractor of Service Provider or any Service Provider Affiliate, or any of their respective employees or agents.

“Services” means, collectively, (i) the Transition Services in accordance with Article II, (ii) the In-Scope Services in accordance with Section 3.1, (iii) the Termination Assistance Services in accordance with Section 15.4, and (iv) any other services referenced or set forth in this Agreement.

“Software”or “software” means any computer programming code consisting of instructions or statements in a form readable by individuals (source code) or machines (object code), and documentation and supporting materials therefor, in any form or medium, including electronic media.

“SOW Effective Date” means, with respect to a SOW, the effective date of such SOW, as set forth on such SOW.

“Statement(s) of Work” means the statements of work attached hereto describing the In-Scope Services as set forth in Section 3.1 and any additional statements of work expressly referencing this Agreement, describing new services, agreed upon and duly executed by the parties during the Agreement Term, and attached hereto.

“Successor Service Provider” means a Person that provides services to Company similar to the In-Scope Services following the termination or expiration of the Agreement.

“Tax” or “Taxes” means any federal, state, provincial, county, municipal, local, or foreign tax, charge, fee, levy, impost, duty, or other assessment, including income, gross receipts, excise, employment, sales, use, consumption, transfer, recording, license, goods and services, harmonized sales, payroll, franchise, severance, documentary, stamp, occupation, windfall profits, environmental, federal highway use, commercial rent, customs duty, capital stock, paid-up capital, profits, withholding, Social Security, single business, unemployment, disability, real property, personal property, registration, ad valorem, value added, alternative or add-on minimum, estimated, or other tax or governmental fee of any kind whatsoever, imposed or required to be withheld by any Governmental Authority that is currently in effect or may become effective during the Agreement Term, including any interest, penalties, and additions imposed thereon or with respect thereto.

“Third Party” means a Person other than a party.

“Third Party Claim” means any claim, demand, action, cause of action or other proceeding asserted by a Person other than a party or such party’s Affiliates, whether by legal process or otherwise.

“Transition Period” means, with respect to a Service, the period of time beginning on the applicable SOW Effective Date for the Service and ending on the applicable Service Acceptance Date.

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IN WITNESS WHEREOF, this Agreement has been duly executed by and on behalf of the parties hereto as of the Effective Date.

Eurobancshares, Inc.
By:	/s/ Rafael Arrillaga Torrens, Jr.
Name:	Rafael Arrillaga Torrens, Jr.
Title:	President and CEO

Telefonica USA, Inc.
By:	/s/ Pete R. Pizarro
Name:	Pete R. Pizarro
Title:	CEO

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EX-31.1

Exhibit 31.1

RULE 13a-14(a) CERTIFICATION

EUROBANCSHARES, INC.

a Puerto Rico corporation

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Rafael Arrillaga Torréns, Jr., Chief Executive Officer of EuroBancshares, Inc., a Puerto Rico corporation, do hereby certify that:

(1) I have reviewed this Quarterly Report on Form 10-Q of EuroBancshares, Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by this report based on such evaluation; and

(d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2007	By:	/s/ Rafael Arrillaga Torréns, Jr.
		Rafael Arrillaga Torréns, Jr. Chief Executive Officer

EX-31.2

Exhibit 31.2

RULE 13a-14(a) CERTIFICATION

EUROBANCSHARES, INC.

a Puerto Rico corporation

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Yadira R. Mercado, Chief Financial Officer of EuroBancshares, Inc., a Puerto Rico corporation, do hereby certify that:

(1)   I have reviewed this Quarterly Report on Form 10-Q of EuroBancshares, Inc.;

(2)   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;

(3)   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) , and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by this report based on such evaluation; and

(d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2007	By:	/s/ Yadira R. Mercado
		Yadira R. Mercado Chief Financial Officer

EX-32.1

Exhibit 32.1

SECTION 906 CERTIFICATION

In connection with the Quarterly Report on Form 10-Q of EuroBancshares, Inc. (the “Company”) for the quarterly period ended September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rafael Arrillaga Torréns, Jr., Chief Executive Officer of the Company, do hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	EUROBANCSHARES, INC.
Date: November 9, 2007	By:	/s/ Rafael Arrillaga Torréns, Jr.
		Rafael Arrillaga Torréns, Jr. Chief Executive Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to EuroBancshares, Inc. and will be retained by EuroBancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

SECTION 906 CERTIFICATION

In connection with the Quarterly Report on Form 10-Q of EuroBancshares, Inc. (the “Company”) for the quarterly period ended September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Yadira R. Mercado, Chief Financial Officer of the Company, do hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	EUROBANCSHARES, INC.
Date: November 9, 2007	By:	/s/ Yadira R. Mercado
		Yadira R. Mercado Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to EuroBancshares, Inc. and will be retained by EuroBancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.