**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **FORM
        10 - K/A**
  **AMENDMENT
        NO. 2 TO FORM 10-K**
  **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(D)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
  **For
        the fiscal year ended December 31, 2004**
  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.
                  Employerincorporation
                  or organization)
              
              Identification
                  No.)270
                  Muñoz Rivera Avenue, San Juan, Puerto Rico 00918(Address
                  of principal executive offices, including zip code)(787)
                  751-7340(Registrant’s
                  telephone number, including area code)Securities
                  registered pursuant to Section 12(b) of the Act: NoneSecurities
                  registered pursuant to Section 12(g) of the Act:Common
                  Stock, par value$1.00
                  per share
 Indicate
        by check mark whether the registrant: (1) 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 (2) has been subject to such filing requirements
        for
        the past 90 days.
 Yes
xNo
o
  Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of the Form 10-K or any amendment of
        this
        Form 10-K. o
  Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act.)
 Yes
oNo
x
  As
        of
        June 30, 2004, the last business day of the registrant’s most recently completed
        second fiscal quarter, the aggregate market value of the shares of Common
        Stock
        held by non-affiliates, based on the estimated value of the Common Stock
        on our
        records on such date, was approximately $47.6 million.
  The
        number of shares outstanding of the issuer’s Common Stock as of March 28, 2005,
        was 19,564,086 shares.
 
  **Documents
        Incorporated by Reference**
  Portions
        of the Company’s Proxy Statement relating to the 2005 Annual Meeting of
        Stockholders, which will be filed within 120 days after December 31, 2004,
        are
        incorporated by reference into Part III, Items 10-14 of this Form 10-K.
            
  **EUROBANCSHARES,
          INC.**
  INDEX
  PAGE
 EXPLANATORY
                    NOTE
                1PART
                    I
                1Item
                    1. Business.
                1SIGNATURES
                28
 
 
   i
  **EXPLANATORY
          NOTE**
  This
          Amendment No. 2 on Form 10-K/A amends the registrant’s Annual Report on Form
          10-K, as filed by the registrant with the Securities and Exchange Commission
          on
          March 31, 2005 (the “Original Form 10-K”), and is being filed solely to amend
          Part I, Item 1 “Business” to correct certain information contained in a table
          presenting the dollar volume of mortgage originations by Eurobank and the
          end of
          period balances of mortgages for the periods presented therein that were
          erroneously reported due to an error experienced in the Edgarization process
          of
          the Original Form 10-K.
  In
          addition, we have filed the following exhibits herewith:
  **Exhibit
                    Number**
                
                **Description
                    of Exhibit**31.1
                
                Rule
                    13a-14(a) Certification of Chief Executive Officer31.2
                
                Rule
                    13a-14(a) Certificate of Chief Financial Officer32.1
                
                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
                    200232.2
                
                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
 
 Except
          as
          otherwise stated herein, no other information contained in the Original
          Form
          10-K, as amended by Amendment No. 1 on Form 10-K/A, is amended by this
          Amendment
          No. 2 on Form 10-K/A. This Amendment No. 2 on Form 10-K/A continues to
          reflect
          circumstances as of the date of the Original Form 10-K/A and does not reflect
          events occurring after the filing of the Original Form 10-K or modify or
          update
          those disclosures in any way.
  **PART
          I**
  **ITEM
                    1.**
                **Business.**
  **Overview**
  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 subsidiary, EuroSeguros.
          As
          of December 31, 2004, we had, on a consolidated basis, total assets of
          $2.1
          billion, net loans and leases of $1.4 billion, total deposits of $1.4 billion,
          and stockholders’ equity of $158.3 million. On May 3, 2004, we acquired all of
          the capital stock of The Bank & Trust of Puerto Rico (BankTrust), a
          commercial bank headquartered in San Juan, Puerto Rico with approximately
          $522.0
          million in assets.
  Eurobank
          is a full-service Puerto Rico commercial bank with 21 branches located
          throughout the Island. The Bank is engaged in substantially all of the
          business
          operations customarily conducted by independent financial institutions
          in Puerto
          Rico and the United States, including the acceptance of checking, savings
          and
          time deposits and the making of commercial and consumer loans, mortgage
          loans,
          real estate loans, lease financing, and other installment and term loans.
          Eurobank also offers trust and wealth management services. As a traditional
          commercial bank, Eurobank earns interest on loans, leases and investment
          securities that are funded by customer deposits, borrowings, retained earnings
          and equity. The difference between the interest received and the interest
          paid
          has historically comprised the majority of our earnings.
  We
          are a
          relationship-driven financial services company focused on providing personalized
          banking services. We established our position in the small and middle market
          business community as a secondary alternative to our larger competitors,
          who we
          believed were under-serving the market. Today, we compete head to head
          with all
          Puerto Rico commercial banks for the primary banking relationship of these
          customers. Our personalized customer service and experienced and focused
          management team are at the core of our strategy. While we have grown in
          size, we
          remain focused on providing services with a personal touch. Additionally,
          we
          have sought to further develop our footprint throughout the entire Island
          by
          opening branches along the main vehicular arteries that circle Puerto Rico.
          By
          the year 2007, we intend to have a branch located within a convenient drive
          of
          approximately 80% of the population of Puerto Rico, achievable with a 27
          branch
          network.
 1
  Our
          niche
          is to provide one-on-one services to small and mid-sized commercial businesses
          in Puerto Rico. Most of these businesses are involved in service industries,
          wholesale and retail distribution, dairy farming, construction, manufacturing,
          transportation and professional services, and have annual sales between
          $2.0 and
          $40.0 million. However, we also provide responsive customer service and
          convenient banking products to smaller companies with sales ranging from
          $500,000 to $2.0 million, consisting of lawyers, healthcare providers,
          CPAs,
          engineers and small contractors. While we do not mass market to the retail
          segment, we do provide retail banking services to the owners and families
          of our
          targeted commercial and small business customers, their employees and
          individuals who reside or work near our branch offices. These customers
          are
          usually also depositors of Eurobank. We seek to provide all of our customers
          with quick, responsive service and foster a culture in which customers
          are
          valued and respected.
  We
          target
          experienced real estate developers and provide them with acquisition development
          and construction loans. We place particular emphasis on single-family homes,
          townhouses and walk-up developments throughout the Island. We also finance
          commercial real estate development and construction projects, particularly
          if
          they are owner-occupied, generally limiting our maximum credit exposure
          to $7.5
          million for these types of credits. Under the tradename “EuroMortgage,” we
          support these activities by providing financing to the purchasers of these
          real
          estate units. In addition, through a staff of salespeople, today we also
          provide
          mortgages to our branch customers and the general public. On a selective
          basis,
          we provide financing to owner-occupied properties and to a lesser extent
          to
          income producing properties.
  In
          1999
          under the tradename “EuroLease,” we began providing open-end lease financing
          pursuant to which the lessee is responsible for the residual value, if
          any, of
          the leased asset. This short to medium-term fixed rate financing blends
          well
          with our primarily floating rate commercial loan portfolio.
  Long-term,
          it is our objective to leverage our relationships with our primary customers
          by
          cross-selling to them a complete array of banking products and services
          directly
          or through third-party providers. Through our trust department, EuroSeguros,
          and
          under the tradename “Eurofinancial,” we seek to assist our customers with a full
          array of wealth management products and services.
  **Our
          Strategic Plan**
  Our
          primary business objectives are to enhance our profitability and to establish
          Eurobank as the premier small and middle market commercial bank in Puerto
          Rico.
          Our core customers are small and mid-sized businesses, real estate development
          companies and the owners, executives and employees of these businesses.
          Our
          success is largely based on our personalized service philosophy. We specifically
          target customers who want to deal directly with people they know and trust.
          As
          convenience remains an overriding factor in customer choice, we have continued
          to establish de novo branches throughout the Island to provide such convenience,
          and at the same time we have continued to enhance our technology
          platform.
  We
          have
          developed a strategy that focuses on providing superior service through
          highly
          qualified and relationship-oriented employees who are committed to their
          respective communities. Through this strategy we intend to grow our business,
          expand our customer base and improve profitability. We believe this strategy
          has
          already proven successful as evidenced by our four-year compounded annual
          growth
          in earnings of 54.08% and diluted earnings per share of 34.27% from 2000
          to
          2004. The key elements of our strategy are:
  ·
                *Focus
                    on Our Targeted Customers*.
                    We focus our time and resources on the following types of customers:
                    small
                    and mid-sized businesses, real estate development companies and
                    the
                    owners, executives and employees of these businesses. In this
                    regard, we
                    seek to leverage our business banking relationships by cross-selling
                    to
                    the personal financial needs of these business owners, executives
                    and
                    employees.
  ·
                *Provide
                    Superior and Convenient Service to Our Customers.*We
                    strive to provide superior customer service through convenient
                    access to
                    Eurobank’s branches and personalized relationship banking. We have 21
                    branch offices strategically located throughout Puerto Rico.
                    Eurobank
                    intends to open six additional branches by the end of 2007. After
                    the
                    addition of these new branch offices, we will have a branch office
                    located
                    within a convenient drive of approximately 80% of the Island’s population.
                    Under our business model we provide each commercial customer
                    with its own
                    relationship manager for all its banking needs. These relationship
                    managers and our executive management team regularly visit customers
                    at
                    their places of business.
  2
  ·
                *Hire
                    and Retain Well-Trained and Qualified Employees.*We
                    are continuing to grow our franchise by providing superior customer
                    service through committed, qualified and relationship-oriented
                    employees.
                    We seek to hire experienced and qualified employees that prefer
                    our
                    relationship banking approach. These employees are specifically
                    incented
                    through our compensation program to leverage our commercial relationships
                    by cross-selling our products and services to the owners, executives
                    and
                    employees of our business
                    customers.
  ·
                *Use
                    the Lease Financing Business to Mitigate Interest Rate
                    Risk.*We
                    use our lease financing business to mitigate our interest rate
                    risk by
                    offsetting the variable rate nature of our commercial loan portfolio
                    with
                    a short to medium-term fixed rate product. We plan to maintain
                    the
                    approximate size of the lease portfolio relative to the size
                    of the total
                    loan portfolio, while increasing the volume of leases originated
                    for
                    resale to other financial
                    institutions.
  ·
                *De
                    Novo Branching and Acquisitions.*We
                    seek to increase our presence throughout the Island through selective
                    acquisitions and the opening of de novo branches in attractive
                    locations.
                    Our de novo expansion outside of the San Juan metropolitan market
                    has
                    followed Puerto Rico’s primary traffic arteries to areas that have been
                    growing.
  ·
                *Maximize
                    Growth of our International Banking Entity.*Because
                    EBS Overseas, Eurobank’s IBE subsidiary, is generally not subject to
                    federal or Puerto Rico income tax, we will seek to maximize the
                    growth of
                    this IBE as interest rates and applicable law
                    permit.
  **Our
          De Novo Branch and Acquisition Strategy**
  Our
          growth strategy is concentrated on increasing our banking presence throughout
          the island of Puerto Rico. Our recent expansion has been the result of
          internal
          growth, acquisitions and the opening of de novo branch offices. Consistent
          with
          our operating philosophy and growth strategy, we regularly evaluate
          opportunities to acquire other banks or bank branches, expand our market
          coverage and share through de novo branching and enhance our product and
          service
          offerings. Eurobank’s expansion out of the San Juan metropolitan area has
          followed Puerto Rico’s primary traffic arteries to new locations poised for
          growth. We believe that the Puerto Rico banking environment, which is dominated
          by large banks, has afforded us a continuing opportunity to gain new customer
          relationships and to expand existing relationships. The growth in our branch
          network has expanded our presence throughout the Island and increased our
          customer base, providing tangible benefits that include an increase of
          total
          deposits of 43.11%, core deposits of 25.93% and earnings of 129.89% for
          the year
          ended 2004 compared to the levels for the year ended 2003. Each branch
          now has
          the ability to sell not only traditional products such as commercial credit,
          leasing, construction, mortgages, consumer credit and personal secured
          loans,
          but also to cross-sell our entire product line, including insurance through
          EuroSeguros, and investment products through our trust department and through
          Eurofinancial account representatives.
  *De
          Novo Branches*
  During
          the past three years, we have opened four new banking offices in Humacao,
          Manatí, Mayagüez and Luquillo. Furthermore, in March 2004, we opened our newest
          branch in Hatillo, Puerto Rico. We are currently planning to open branches
          in
          the following municipalities: Aguadilla, Cabo Rojo/San Germán, Yauco, Canóvanas
          and Cayey. Our newer branches are located along the major vehicular arteries
          that encircle the island of Puerto Rico. By the year 2007, we expect to
          have a
          branch located within a convenient drive of approximately 80% of the population
          of Puerto Rico.
  *Mergers
          and Acquisitions*
  Since
          1997, we have completed acquisitions of three banks in Puerto Rico with
          combined
          assets of approximately $679.4. million. In the early 1990s, we acquired
          two
          branches from Banco Financiero and certain assets and liabilities of a
          failed
          bank from the FDIC. The following is a summary of our material acquisitions
          since 1997.
  3
 *BankTrust
          Acquisition*
  On
          May 3,
          2004, we acquired all of the capital stock of BankTrust, a Puerto Rico
          chartered
          commercial bank, through the merger of BankTrust with and into Eurobank.
          The
          aggregate purchase price for the capital stock of BankTrust was $23.4 million,
          and consisted of the issuance of 683,304 shares of our common stock, 430,537
          shares of our Series A Preferred Stock, and $6.5 million in cash. There
          were no
          changes in our Board of Directors or our senior management team as a result
          of
          the BankTrust acquisition. We funded a portion of the purchase price with
          proceeds we received from the issuance of 733,316 shares of our common
          stock at
          $8.13 per share in a private placement of our common stock to our existing
          stockholders and option holders. In connection with the private placement
          and
          the acquisition of BankTrust, our Board of Directors engaged an independent
          third-party financial advisor, Feldman Financial Advisors, Inc., to determine
          the fairness, from a financial point of view, to our stockholders of the
          merger
          consideration paid to BankTrust’s stockholders and the terms of the private
          placement. The acquisition was accounted for using the purchase method
          of
          accounting under generally accepted accounting principles.
  BankTrust
          provided a broad range of financial products and services to its customers,
          including commercial, mortgage and personal loans, financial leases, checking
          and savings accounts, asset management and trust services. BankTrust operated
          five branch offices — two were located in San Juan and the other three were
          located in Guaynabo, Mayagüez and Ponce. BankTrust also had one loan production
          office in San Juan and operated an IBE under the name “BT International.” As of
          June 1, 2004, we had closed four of the five BankTrust branches, as well
          as the
          loan production office, and consolidated these operations into our existing
          branch network. Eurobank will continue to operate BT International as a
          division
          of Eurobank and the Guaynabo branch office as a branch of Eurobank. Prior
          to our
          acquisition, BankTrust was operating under a cease and desist order issued
          by
          the FDIC and the Commissioner of Financial Institutions of Puerto Rico
          dated as
          of September 16, 2003, that imposed certain compliance and reporting
          requirements upon BankTrust. The cease and desist order included various
          requirements and limitations that affected BankTrust’s operations. One of the
          principal requirements of the cease and desist order was that BankTrust
          achieve
          a leverage capital ratio equal to or greater than 5.5% of its assets on
          or
          before October 31, 2003, and a requirement that BankTrust achieve a leverage
          capital ratio equal to or greater than 6.0% of its assets on or before
          December
          31, 2003 and thereafter maintain such leverage capital ratio of 6.0% or
          greater.
          BankTrust was unable to raise additional capital through an equity offering
          made
          in October of 2003. As of December 31, 2003, BankTrust was unable to achieve
          the
          6% leverage capital ratio required under the cease and desist order. On
          that
          date, BankTrust had a 5.2% leverage capital ratio, and its external auditors
          had
          expressed substantial doubt about BankTrust’s ability to continue as a going
          concern. However, as a result of our acquisition of BankTrust, the cease
          and
          desist order was lifted, and we do not anticipate that the prior existence
          of
          the cease and desist order will have any effect on our operations. As of
          March
          31, 2004, BankTrust had total assets of $550.4 million, total deposits
          of $415.1
          million, stockholders’ equity of $41.7 million and $326.5 million in assets
          under management. On the closing date, the estimated fair value of the
          assets
          acquired was $522.0 million and the estimated fair value of the deposits
          and
          other liabilities assumed was $492.9 million.
  The
          BankTrust acquisition is consistent with our growth strategy. Its product
          offering and customer mix complement our existing product offering and
          customer
          mix. We believe the acquisition affords us certain revenue synergies. A
          substantial portion of the assets we acquired are of high quality with
          yields
          that are at or above market rates. Likewise, we have the opportunity to
          cross-sell our other products and services to the newly acquired customers
          of
          BankTrust. This acquisition also provides us with a significant trust and
          wealth
          management group that enhances our own efforts in this area. We believe
          that
          this will allow us to grow our trust business faster than if we had grown
          it
          organically.
  In
          connection with the BankTrust acquisition, we retained 41 of the 180 BankTrust
          employees and closed four of the five branches, which should result in
          immediate
          cost savings to us. Under the terms of the merger agreement, a substantial
          portion of the costs and expenses associated with the branch closings,
          the
          liquidation of its operations, and employee reductions were effectively
          borne by
          the stockholders of BankTrust through a reduction in the aggregate purchase
          price. These costs and expenses also included prepayment penalties and
          fees on
          all FHLB advances BankTrust had prior to closing. In addition, a substantial
          portion of the problem assets of BankTrust were transferred to a special
          purpose
          vehicle immediately prior to closing for the benefit of the BankTrust
          stockholders. These problem assets were comprised primarily of (1) loans
          and
          leases generated by BankTrust that we identified as having additional loss
          potential, (2) loans and leases related to boat financing, automobile or
          equipment leasing and personal installment loans financing, that were in
          nonaccrual status and/or were 90 days past due as of the effective date
          of our
          acquisition of BankTrust, and (3) loans and leases previously charged off
          by
          BankTrust. In addition, BankTrust transferred the following assets to the
          special purpose vehicle under the terms of the merger agreement:
  ·
                sufficient
                    funds to pay lease payments on BankTrust’s operating leases until their
                    expiration date;
  4
  ·
                certain
                    furniture and equipment of BankTrust;
  ·
                certain
                    causes of action of BankTrust; and
  ·
                $200,000
                    in cash.
  On
          the
          effective date of the merger, the special purpose vehicle entered into
          an
          indemnification and security agreement with us for the purpose of securing
          the
          indemnification obligations of BankTrust to us under the merger agreement,
          (1)
          up to an aggregate limit of $1.0 million ($500,000 with respect to any
          claims
          brought or notified in writing after six months following the effective
          date of
          the merger), with respect to a breach by BankTrust of the representations,
          warranties, covenants and other agreements set forth in the merger agreement
          and
          the other agreements contemplated by the merger agreement, (2) without
          limit as
          to amount, with respect to losses resulting from certain third party actions,
          and (3) up to an amount agreed upon by a majority of the members of a joint
          committee comprised of certain of our officers and certain officers of
          BankTrust
          on or before six months after the effective date of the merger or, absent
          such
          agreement, an amount established by a third party acceptable to a majority
          of
          the members of the joint committee on or before six months after the effective
          date of the merger, with respect to certain specified matters. We do not
          hold
          any equity interest in the special purpose vehicle.
  The
          indemnification and security agreement terminates one year following the
          effective date of the merger, except with respect to claims brought or
          notified
          by us in writing to the special purpose vehicle prior to the first anniversary
          of the effective date of the merger. In the event that, prior to the first
          anniversary of the effective date of the merger, we or our related parties
          incur
          a loss, bring a claim, or give notice of a potential third party claim
          or a
          claim resulting from a breach by BankTrust of any of the representations,
          warranties, covenants and other agreements set forth in the merger agreement
          and
          the other agreements contemplated in the merger agreement, then the special
          purpose vehicle will pay to us, from its reserve account and from any other
          assets of the special purpose vehicle, an amount equal to all costs, expenses,
          fees and losses incurred in connection with such claim. Upon the final
          resolution of all such claims and potential claims, any remaining funds
          in the
          reserve account of the special purpose vehicle will be released and will
          be
          available for distribution to the stockholders of the special purpose
          vehicle.
  *Banco
          Financiero de Puerto Rico and Banco del Comercio de Puerto Rico
          Acquisitions*
  On
          December 15, 2002, we acquired all of the issued and outstanding capital
          stock
          of Banco Financiero de Puerto Rico for an aggregate purchase price of $1.5
          million, consisting of the issuance of common stock valued at $1.2 million
          and
          $326,000 in cash. Banco Financiero was merged with and into Eurobank. Banco
          Financiero operated through three branch offices in Ponce, Puerto Rico.
          The
          acquisition was accounted for using the purchase method of accounting under
          generally accepted accounting principles. The estimated fair value of the
          assets
          acquired and liabilities assumed of $2.8 million exceeded the acquisition
          price
          of $1.8 million including additional cost associated with the acquisition
          of
          $214,000. The Banco Financiero acquisition was accretive to our earnings
          for the
          year ended December 31, 2003, as we reduced the pre-closing level of noninterest
          expense associated with its operations by more than 75.0% within the first
          60
          days after closing.
  On
          October 26, 1997, we acquired all of the issued and outstanding capital
          stock of
          Banco del Comercio de Puerto Rico through a share exchange and the merger
          of
          Banco del Comercio with and into Eurobank. Prior to our acquisition, Banco
          del
          Comercio operated six branch offices in the San Juan, Carolina and Caguas
          regions. On the closing date, the net book value of the assets and liabilities
          of Banco del Comercio were $69.3 million and $65.6 million, respectively.
          The
          acquisition was accounted for as a pooling of interests under generally
          accepted
          accounting principles. The Banco del Comercio acquisition was accretive
          to our
          earnings for the year ended December 31, 1998, as we reduced the pre-closing
          level of noninterest expense associated with its operations by more than
          70.0%
          within the first 60 days after closing.
  Both
          Banco Financiero and Banco del Comercio were also operating subject to
          cease and
          desist orders issued by the FDIC prior to their acquisition by Eurobank.
          Nevertheless, we were able to integrate the operations of both banks with
          our
          operations and, in both instances, achieve significant cost savings within
          a
          short period of time after the respective closing dates of each
          acquisition.
 5
  Because
          both Banco Financiero and Banco del Comercio were classified as
“undercapitalized” under applicable capital adequacy guidelines, the cease and
          desist orders of these institutions were similar in scope. The directives
          of the
          cease and desist orders provided, among other measures, emphasis on
          capitalization requirements and mandated several procedures to strengthen
          the
          lending practices and the respective loan portfolios. The directives required
          the board of directors of each institution to revise and implement acceptable
          policies and procedures for liquidity, and for guidance and control over
          internal controls and procedures. Moreover, they also required the development
          of a written earnings plan, elimination and correction of all violations
          of law,
          to attain and thereafter maintain a leverage capital ratio of 6.0%, and
          the
          implementation of policies to ensure the effective guidance and control
          of the
          lending and collection functions. Except with respect to the requisite
          capital
          ratio requirements, each of Banco Financiero and Banco del Comercio generally
          were in compliance with most of the directives of their respective cease
          and
          desist orders.
  No
          particular corrective actions were necessary at the time of the acquisitions
          because the operations of Banco Financiero and Banco del Comercio were
          fully and
          completely integrated into our policies, controls and procedures under
          the
          guidance of our management team. These acquisitions had no impact on our
          operations, liquidity or capital. However, our asset quality was slightly
          impacted by the increase in nonperforming loans and corresponding delinquency.
          While in the years immediately after each acquisition the volume of net
          charge-offs increased, the increased income generated by these acquisitions
          was
          more than sufficient to offset the increases in net charge-offs.
  **Products
          and Services**
  Eurobank
          is engaged in substantially all of the business operations customarily
          conducted
          by independent financial institutions in Puerto Rico, including the acceptance
          of checking, savings and time deposits and the making of commercial and
          consumer
          loans, mortgage loans, real estate loans, lease financing, and other installment
          and term loans. Eurobank also offers trust and wealth management services.
          We
          provide our customers with internet banking, electronic funds transfers
          through
          ACH services, cash management, vault services, loan and deposit sweep accounts
          and lock box services. While we offer a wide variety of financial services
          to
          our customers, our primary products and services are grouped in the following
          categories: commercial banking, leasing (“EuroLease”), mortgage banking
          (“EuroMortgage”), and trust and wealth management. In addition, we provide
          automobile, property and casualty, and guaranteed auto protection insurance
          to
          customers in our market area through our other wholly owned subsidiary,
          EuroSeguros. The following provides a summary description of our core products
          and services:
  *Commercial
          Banking*
  Eurobank
          markets commercial banking products and services primarily to small and
          mid-sized businesses located in Puerto Rico. Commercial banking products
          and
          services offered include commercial loans, residential construction loans
          and,
          to a lesser extent, consumer credit and personal secured loans, as well
          as a
          broad range of deposit products and other non-deposit banking services,
          including internet banking and cash management services tailored to meet
          the
          needs of these businesses.
  While
          we
          market a wide range of commercial banking products and services, emphasis
          is
          placed on our loan products. Each commercial lending branch has senior
          management with extensive lending experience. These managers exercise
          substantial authority over credit presentation and pricing initiatives,
          subject
          to centralized loan approvals for most secured credits over $100,000 and
          unsecured credits over $50,000. This decentralized management approach,
          coupled
          with continuity of service by the same staff members, enables us to develop
          long-term customer relationships, maintain high quality service and respond
          quickly to customer needs. The centralized approval process, however, provides
          credit control. We believe that our emphasis on local relationship banking,
          together with a conservative approach to lending, are important factors
          in our
          success and growth. As a result of the development of broad banking
          relationships with customers and the convenience and service of our banking
          offices, we have experienced growth in core deposits.
  We
          centralize most credit and support functions in order to achieve credit
          quality
          consistency and cost efficiencies in the delivery of products and services
          by
          each banking office. The central office provides services such as data
          processing, bookkeeping, accounting, treasury management, credit approval,
          loan
          review, compliance, risk management and internal auditing to enhance our
          delivery of quality service. We also provide overall direction in the areas
          of
          credit policy and administration, strategic planning, marketing, investment
          portfolio management and other financial and administrative services. The
          branch
          offices work closely with our central office to develop new products and
          services needed by our customers and to introduce enhancements to existing
          products and services.
 6
  *Construction
          and Commercial Loans*
  In
          the
          commercial banking area, Eurobank focuses on providing commercial and
          construction loans to local businesses. These business generally have annual
          sales ranging from $2.0 million to $40.0 million, and financing requirements
          between $1.0 million and $10.0 million.
  At
          December 31, 2004, construction loans totaled $80.5 million, or 5.8% of
          our
          gross loan and lease portfolio. We seek to market our construction loans
          to
          experienced developers who develop residential units throughout the Island
          in
          the $125,000 to $185,000 price range and whose peak maximum credit needs
          for a
          particular project generally are less than $7.5 million. Construction loans
          generally have terms of 18 months, with options to extend for additional
          periods
          to complete construction and sale of the units. We usually require a 20.0%
          equity capital investment by the developer and loan-to-value ratios of
          not more
          than 80.0% of anticipated completion value.
  
 At
          December 31, 2004, commercial loans totaled $706.0 million, or 51.2% of
          our
          gross loan and lease portfolio. Commercial loans include lines of credit
          and
          commercial term loans to finance operations and to provide working capital
          for
          specific purposes, such as to finance the purchase of assets, equipment
          or
          inventory. Since a borrower’s cash flow from operations is generally the primary
          source of repayment, our analysis of the credit risk focuses heavily on
          the
          borrower’s debt repayment capacity.
  Lines
          of
          credit are extended to businesses based on the financial strength and integrity
          of the borrower and are secured primarily by real estate, accounts receivable
          and inventory, and have a maturity of one year or less. Such lines of credit
          bear an interest rate that floats with our base rate, the prime rate, LIBOR
          or
          another established index.
  Commercial
          term loans are typically made to finance the acquisition of fixed assets,
          provide permanent working capital or to finance the purchase of businesses.
          Commercial term loans generally have terms from one to five years. They
          may be
          collateralized by the asset being acquired or other available assets and
          bear
          interest rates that either float with Eurobank’s base rate, prime rate, LIBOR or
          another established index or is fixed for the term of the loan.
  Over
          the
          last five years, our commercial and construction loans have grown 41.01%
          on a
          compounded basis. The following table shows end of period balances of commercial
          and construction loans for the periods indicated below:
  **As
                    of December 31,****2004**
                
                **2003**
                
                **2002**
                
                **2001**
                
                **2000**$
                786,438
                
                $
                525,251
                
                $
                435,322
                
                $
                276,447
                
                $
                198,923
 
 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 loans in excess of $100,000 for secured credits and $50,000 for unsecured
          credits; (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*
  Although
          Eurobank focuses on marketing commercial loans to local businesses, it
          also
          provides consumer credit and personal secured loans to the owners and employees
          of these businesses. At December 31, 2004, consumer loans totaled $74.8
          million,
          or 5.4% of our gross loan and lease portfolio. Our consumer loan portfolio
          is
          subject to certain risks, including: (1) amount of credit offered to consumers
          in the market; (2) interest rate increases; and (3) consumer bankruptcy
          laws
          which allow consumers to discharge certain debts. We attempt to reduce
          the
          exposure to such risks through the direct approval of all consumer loans
          by: (1)
          reviewing each loan request and renewal individually; (2) utilizing a
          centralized approval system for loans in excess of $25,000; (3) strictly
          adhering to written credit policies; and (4) conducting an independent
          credit
          review.
 7
  The
          only
          major consumer loan category acquired from BankTrust not previously marketed
          by
          Eurobank was BankTrust’s boat financing portfolio, which amounted to $45.9
          million as of December 31, 2004. In 2004, the total loss on the sale of
          repossessed boats at the date of repossession was approximately $39,000.
          We did
          not have any marine loans during 2003 and 2002.
  *Leasing
          Activities*
  We
          entered the leasing business in order to assist us in managing our interest
          rate
          risk. We determined that a short to medium-term fixed rate product, such
          as
          lease financings, was needed to mitigate our interest rate risk resulting
          from
          our high volume of variable rate commercial loans. Our entry into the lease
          financing market was facilitated by our ability to attract a veteran management
          team, low entry costs and the opportunity to gain market share.
  Under
          the
          trade name “EuroLease,” Eurobank offers open-ended leases pursuant to which the
          lessee is responsible for the residual value of the leased unit. At December
          31,
          2004, we held $459.3 million in leases, representing 33.3% of our gross
          loan and
          lease portfolio. During 2004, approximately 98.3% of all originations were
          automobile leases. The remaining originations were primarily medical equipment
          and construction equipment leases. While the granting of leases is governed
          by
          many aspects of our general credit policies and procedures, due to the
          nature of
          the exposure, additional specific parameters are applied to leases. Our
          automobile leasing is done by way of finance leases, where the lessee is
          responsible for any residual at the end of the lease term. Practically
          all
          automobile leasing in Puerto Rico is done in this manner and the large
          majority
          of banks compete in this market. Although we believe that the risk in this
          product is generally higher than commercial lending, we believe the higher
          risks
          are acceptable due to the obligation of the lessee for the residual value,
          the
          numerous risk mitigation parameters that we utilize in the credit underwriting
          process and the higher yields we earn on lease products. All lease requests
          are
          reviewed by our credit department and are subjected to numerous credit
          tests.
          There are varying levels of credit approval authority within the department,
          although none is as high as the approval authority of the senior leasing
          officer, who has the authority to approve aggregate credit extensions of
          up to
          $125,000 to any one borrower. We apply the same “total to one borrower” concept
          in the commercial lending area as well. Additional risk mitigation is practiced
          through a series of parameters and controls, which include but are not
          limited
          to, minimum dollar amounts on new vehicle leases, maximum amounts on residuals,
          maximum terms, obligatory insurance, minimum income parameters, maximum
          debt
          service-to-income parameters, certain credit history parameters, down payments
          and employment history parameters.
  Approximately
          65.81% of our new automobile leases are financed on a no residual value
          basis
          because the automobiles are transferred to the lessee at the end of the
          lease
          term. For those that do have a residual value, the lessee is contractually
          responsible for the full residual amount at the end of the lease term.
          We do not
          have the risk of fluctuations in automobile values relative to residual
          value.
          Instead, our risk is a credit risk regarding whether the lessee will perform
          on
          its obligation to purchase the automobile at the end of the contract at
          residual
          value. In addition, in some instances EuroLease will refinance the automobile
          purchased at the residual value.
  New
          automobile leases are offered for terms of up to 72 months. Leases with
          terms of
          72 months will be financed based on no residual value. Lessees may also
          choose a
          60-month lease term, in which case we offer financing with a maximum of
          a 35.0%
          residual value. This higher residual value product is usually offered only
          on
          high-end European and Japanese automobiles based on historical used automobile
          resale values.
  Under
          current Puerto Rican law, the lessee is deemed to be the title holder of
          a
          leased automobile and therefore is responsible for all tort liability associated
          with the operation and possession of the automobile.
  We
          have
          developed procedures designed to facilitate the success of our lease financing
          business. Our salespeople generate the leases at the automobile dealer
          level. We
          are highly selective with respect to our customers, and are aided in this
          selection by referrals from the automobile dealers. We also market this
          service
          to our targeted customers. While most of our leases are for automobiles,
          in some
          cases we have been willing to provide equipment lease financing for our
          commercial customers.
 8
  We
          believe the collection process is an integral component to a successful
          leasing
          business. Our collection efforts with respect to leases start 10 days after
          the
          due date of each lease. A collections staff of seven internal collectors,
          three
          outside collectors, and four collection officers is managed by two Collections
          Managers and five supervisors. Our internal collectors are responsible
          for all
          efforts to collect on leases under 30 days past due. If a customer cannot
          be
          reached by phone, the account is then assigned to the outside collectors
          staff.
          When the account reaches 60 days past due, repossession efforts are started.
          If
          a customer does not deliver the automobile voluntarily, the case is referred
          to
          our outside collections lawyers. Most of our repossessions are voluntary.
          Court
          proceedings for repossession take approximately 60 days. Once repossessed,
          vehicles and equipment are initially recorded at the lower of fair value
          or book
          value at the date of repossession, establishing a new cost basis. Any resulting
          loss is charged to the allowance for loan and lease losses. A valuation
          of
          repossessed assets is made quarterly after its repossession. Additional
          declines
          in value after repossession, if any, are charged to current operations.
          Gains or
          losses on disposition of repossessed assets and related maintenance expenses
          are
          included in current operations. The total loss on the sale of repossessed
          vehicles and equipment as a percentage of the lease balance at the date
          of
          repossession was 16.0% in 2004, 14.2% in 2003, and 7.5% in 2002. The increase
          in
          our loss on the sale of repossessed vehicles and equipment as a percentage
          of
          the lease balance at the date of repossession for the last three years
          was due
          in part to increases in the size of our lease portfolio, which increased
          our
          volume of repossessed assets. The increased volume of repossessed assets
          resulted in more aggressive disposition efforts, a strategy that permitted
          us to
          move inventory at a faster pace decreasing our balance of repossessed assets,
          but increasing our total losses per unit. Repossessed vehicles and equipment
          were $2.9 million, $3.6 million and $5.7 million for the years ended December
          31, 2004, 2003 and 2002, respectively. The ratio of loss on the sale of
          repossessed assets to our leasing portfolio calculated using the year end
          balance was 0.68% in 2004, 0.82% in 2003, and 0.51% in 2002. These fluctuations
          were mainly due to aforementioned aggressive efforts and the increase in
          our
          lease portfolio from $256.1 million at the end of fiscal 2002 to
          $459.3 million at the end of fiscal 2004, an increase of
          79.3%.
  The
          following table sets forth the dollar volume of leases originated by Eurobank
          and the end of period balances of leases for the periods indicated
          below:
  **As
                    of or for the Year Ended December 31,****2004**
                
                
                **2003**
                
                
                **2002**
                
                
                **2001**
                
                
                **2000**Originations
                
                $
                257,808
                
                $
                185,321
                
                $
                138,992
                
                $
                78,835
                
                $
                64,138End
                    of period balance
                
                $
                459,251
                
                $
                315,935
                
                $
                256,087
                
                $
                138,629
                
                $
                80,270
 
 Eurobank
          intends to continue to increase its lease origination volume by expanding
          the
          number of full-time representatives and increasing its marketing efforts
          to its
          existing portfolio of more than 17,000 lease customers. It also intends
          to focus
          on improving the overall quality and service to its network of dealers.
          We seek
          to avoid an excess concentration of leases as a percentage of interest-earning
          assets. We plan to maintain the approximate size of the lease portfolio
          relative
          to the size of the total loan portfolio, while increasing the volume of
          leases
          originated for resale to other financial institutions. Typically, we retain
          the
          right to service the leases we sell. During 2004, we sold approximately
          $30.0
          million in leases. For more information regarding the accounting treatment
          of
          these servicing assets, see “ *Management’s
          Discussion and Analysis of Financial Condition and Results of Operations
—
Critical Accounting Policies — Servicing Assets,* ”
and
          “ *Note
          2 — Summary of Significant Accounting Policies* ”
to
          our
          consolidated financial statements.
  *Mortgage
          Banking*
  Under
          the
          tradename “EuroMortgage,” Eurobank offers Federal National Mortgage Association,
          or FNMA, Veterans Affairs, or VA, and Federal Housing Administration, or
          FHA,
          and Freddie Mac loans, as well as conforming and non-conforming mortgage
          loans.
          In 2004 and 2003, Eurobank increased mortgage production significantly,
          taking
          advantage of prevailing low mortgage rates to continue boosting loan
          originations, as well as refinancing existing mortgages. We are an approved
          seller/servicer for FNMA and Freddie Mac. Eurobank has continued to make
          inroads
          in the market by providing for the efficient and expeditious turnaround
          of new
          loan applications and by establishing certain strategic relationships that
          allow
          access to secondary mortgage markets on a best price basis. At December
          31,
          2004, mortgage loans totaled $51.7 million, representing 3.7% of our gross
          loan
          and lease portfolio.
  Our
          targeted market for mortgage banking is the financing of the homes or units
          financed by our construction lending department. We also provide mortgage
          banking services to our retail customers and to the owners, executives
          and
          employees of our targeted commercial customers. In addition, our salespeople
          engage in marketing and direct selling efforts to the general community.
          All
          mortgages originated by Eurobank are fixed-rate mortgages with a maximum
          term of
          30 years. A majority of the mortgage loans we originate are sold into the
          secondary market with servicing released. We have been authorized by FNMA
          and
          Freddie Mac to create mortgage loan pools to be sold in the secondary market
          or
          marketed in connection with our wealth management activities. However,
          as of
          December 31, 2004, we had not created any such pool. It is our intention
          to
          create such pools in the future.
 9
  The
          following table sets forth the dollar volume of mortgage originations by
          Eurobank and the end of period balances of mortgages for the periods indicated
          below:
  **As
                    of or for the Year Ended December 31,****2004**
                
                **2003**
                
                **2002**
                
                **2001**
                
                **2000**Originations
                
                $
                28,028
                
                $
                53,880
                
                $
                32,635
                
                $
                30,862
                
                $
                15,701End
                    of period balance
                
                $
                51,730
                
                $
                15,941
                
                $
                34,198
                
                $
                18,567
                
                $
                15,117
  Our
          strategy is to sell conforming FNMA and Freddie Mac mortgages either as
          whole
          loans or in the form of mortgage-backed securities. We also sell the servicing
          rights to the mortgage loans that we originate except for those mortgage
          loans
          we hold for long-term investment.
  Our
          portfolio of mortgage loans is subject to certain risks, including: (1)
          a
          possible downturn in the Puerto Rico economy affecting real estate values;
          (2)
          interest rate increase; (3) the deterioration of a borrower’s or guarantor’s
          financial capabilities; and (4) environmental risks, including natural
          disasters. We attempt to reduce the exposure to such risks through: (1)
          reviewing each loan request and renewal individually; (2) utilizing a
          centralized approval system for loans in excess of $400,000; (3) strictly
          adhering to written loan policies; and (4) conducting an independent credit
          review. In general, we receive and review financial statements of borrowing
          customers on an ongoing basis during the term of the relationship and respond
          to
          any deterioration noted.
  *Trust
          and Wealth Management*
  In
          2002,
          we established Eurobank’s trust and wealth management business to cross-sell
          retirement benefits, personal trust and wealth management services to the
          owners, executives and employees of our business customers. As of December
          31,
          2004, Eurobank had approximately $283.2 million in trust assets under
          management, including $269.1 million of trust assets which were acquired
          in the
          BankTrust merger. Historically, the revenues associated with our trust
          and
          wealth management group have not been material, but as a result of the
          BankTrust
          acquisition, we expect a significant increase in revenues generated by
          this
          group.
  As
          part
          of our trust and wealth management business, we began offering brokerage
          services under the tradename “Eurofinancial” during the fourth quarter of 2002.
          We offer a full array of investment products and services through a third-party
          broker dealer in order to serve our customers’ investment needs. This is part of
          our strategy of creating financial centers in which each customer may access
          a
          variety of integrated financial products and services. Investment products
          are
          offered through an association with Financial Networks, Inc., a registered
          broker-dealer. In relation to our wealth management efforts, we offer financial
          planning and investment management/brokerage services through third-party
          providers to the owners or executives of our targeted customers. During
          2004 and
          2003, we sold approximately $18.9 million and $7.0 million, respectively,
          in
          investments to our customers. We currently employ three registered
          brokers.
  *Insurance*
  EuroSeguros,
          our general insurance agency, was organized in the fourth quarter of 2002
          as a
          wholly owned subsidiary of EuroBancshares. EuroSeguros primarily offers
          automobile, property and casualty, and guaranteed auto protection insurance
          to
          customers in our market area. While EuroSeguros represents several insurance
          companies in Puerto Rico, it primarily offers its insurance products through
          its
          association with Marsh-Saldaña, Inc., Puerto Rico’s largest insurance brokerage
          firm, and a subsidiary of Marsh & McLennan, Inc. EuroSeguros is licensed and
          regulated by the Office of the Commissioner of Insurance of Puerto
          Rico.
  EuroSeguros’
          goals for the year 2005 are to expand to offer title insurance products
          and to
          continue to work closely with Eurobank’s mortgage customers, leasing customers
          and branch professionals, while continuing to enhance personalized service
          to
          all of these customers.
 10
  **International
          Banking Entities**
  During
          the first six months of 2004, we transferred all of the assets and liabilities
          of Eurobank International, an IBE that operated as a division of Eurobank,
          to a
          recently organized IBE subsidiary of Eurobank, EBS Overseas, Inc. We also
          have
          an IBE that operates as a division of Eurobank under the name BT International.
          This IBE was acquired in connection with the acquisition of BankTrust.
          We have
          continued to operate BT International as a division of Eurobank and do
          not have
          immediate plans to transfer its assets to our subsidiary, EBS Overseas,
          Inc.
  IBEs
          are
          limited under the IBE Act with respect to the types of activities they
          can
          undertake. In general, IBEs may accept deposits or borrow money from other
          IBEs
          and from “foreign persons.” For purposes of the IBE Act, a “foreign person” is
          defined as anyone who is not a resident of Puerto Rico. IBEs are also permitted
          to engage in any activity that is financial in nature outside of Puerto
          Rico
          that is permissible for a bank holding company or a foreign office or subsidiary
          of a United States bank under applicable United States law. Typically,
          we borrow
          funds in the United States in the form of repurchase obligations or brokered
          deposits (considered foreign under the IBE Act) and invest those funds
          primarily
          in United States Treasury Obligations, U.S. Government Agencies Obligations,
          U.S. Government Sponsored Agencies Obligations, Mortgage Back Securities
          issued
          or guaranteed by U.S. Government Agencies or U.S. Government Sponsored
          Agencies
          and obligations issued by U.S. Corporations. The income earned from this
          activity is tax exempt. For more information regarding the regulation of
          IBEs,
          see the section of this prospectus captioned *“Supervision
          and Regulation — International Banking Center Regulatory
          Act.”*
  EBS
          Overseas, Inc. is authorized to invest in notes and bonds issued by the
          U.S. government, the Commonwealth of Puerto Rico, other foreign governments
          and their agencies, and U.S. and foreign corporations. As of December 31,
          2004, EBS Overseas’ investment portfolio consisted of the following: 57.3% in
          mortgage-backed securities issued or guaranteed by government or government
          sponsored agencies, 18.5% in U.S. Treasury obligations, 13.6% in
          U.S. government agency obligations, 10.1% in mortgage-backed securities
          issued by U.S. corporations, and 0.5% in Puerto Rico Public Authorities.
  We
          have
          structured EBS Overseas’ investment portfolio so that it can perform well in
          different interest rate environments. The interest and market risk of EBS
          Overseas’ investment portfolio is generally lower than that of other IBEs in
          Puerto Rico. The typical IBE investment portfolio includes debt securities
          with
          maturities of up to 10 years and mortgage-backed securities with expected
          average maturities of up to 12 years funded primarily with short-term
          brokerage deposits and loans secured by repurchase obligations. The maturities
          on debt obligations in EBS Overseas’ investment portfolio range from 1.5 to 7
          years with an estimated average maturity as of December 31, 2004 of
          20 months. The estimated maturities of mortgage-backed securities in the
          portfolio also range from 1.5 to 7 years, with an average maturity as of
          December 31, 2004 of approximately 39 months.
  As
          of
          December 31, 2004, EBS Overseas had total assets of approximately
          $477.4 million, repurchase obligations of approximately
          $286.6 million, borrowings from BT International of approximately
          $180.0 million and stockholders’ equity of approximately
          $10.0 million. Further, as of December 31, 2004, BT International had
          total assets of approximately $280.5 million, deposits of approximately
          $122.0 million, repurchase agreements and other borrowings of approximately
          $157.2 million and stockholders’ equity attributable to the IBE of
          approximately $600,000.
  **Eurobank
          Statutory Trust I and II**
  On
          November 11, 2001, Eurobank Statutory Trust I, a special purpose statutory
          trust
          subsidiary of EuroBancshares, was formed for the purpose of issuing $25.0
          million in trust preferred securities, which were issued on December 18,
          2001.
          On December 10, 2002, Eurobank Statutory Trust II, a special purpose statutory
          trust subsidiary of EuroBancshares was formed for the purpose of issuing
          $20.0
          million in trust preferred securities, which were issued on December 19,
          2002.
          For additional information, see the sections of this Annual Report on Form
          10-K
          captioned *“Management’s
          Discussion and Analysis of Financial Condition and Results of Operations
— Other
          Sources of Funds.”*
  **Market**
  We
          consider our primary market area to be the island of Puerto Rico. We serve
          this
          market through our main office and branches in the greater metropolitan
          area of
          San Juan and our branches in Bayamón, Caguas, Carolina, Cidra, Condado,
          Guaynabo, Hatillo, Ponce, Humacao, Luquillo, San Lorenzo, Manatí and Mayagüez,
          Puerto Rico. Puerto Rico is the fourth largest of the Caribbean Islands
          and is
          located approximately 1,100 miles southeast of Miami. It is approximately
          100
          miles long and 35 miles wide.
 11
  Puerto
          Rico came under United States sovereignty in 1898 and obtained commonwealth
          status in 1952. Puerto Ricans have been citizens of the United States since
          1917. The United States and Puerto Rico share a common defense, market
          and
          currency. The Commonwealth of Puerto Rico exercises virtually the same
          control
          over its internal affairs as do the fifty states. Most federal taxes, except
          those such as Social Security taxes which are imposed by mutual consent,
          are not
          levied in Puerto Rico. No federal income tax is collected from Puerto Rico
          residents on income earned in Puerto Rico, except for certain federal employees
          who are subject to taxes on their salaries. According to the United States
          Census Bureau, the population of Puerto Rico was 3.8 million in 2000, compared
          to 3.5 million in 1990. As of 2000, the population of San Juan, the Island’s
          capital and largest city, was approximately 434,000.
  The
          economy of Puerto Rico is closely linked to that of the United States.
          As such,
          factors affecting the United States economy usually have a significant
          impact on
          the performance of the Puerto Rico economy. These include exports, direct
          investment, the amount of federal transfer payments, the level of interest
          rates, the level of oil prices, and the rate of inflation and tourist
          expenditures. Consequently, the economic slowdowns in the United States
          in 2001
          and 2002 and the subsequent recovery in 2003, which continued in 2004,
          have also
          been reflected in the Puerto Rico economy. During the fiscal year 2003,
          preliminary reports of the Puerto Rico Planning Board indicated that the
          economy
          registered an increase of 1.9% in real gross product. Gross product was
          $47.4
          billion in fiscal year 2003 compared to $45.0 billion in fiscal year 2002.
          According to the Puerto Rico Department of Labor and Human Resources, the
          average unemployment rate in Puerto Rico was 12.0% in fiscal year 2003.
          However,
          this figure does not take into account the self-employment rate of individuals
          in Puerto Rico which is estimated to be approximately 15.0%, more than
          double
          the level in the United States.
  The
          dominant sectors of the Puerto Rico economy are manufacturing and services.
          The
          manufacturing sector has undergone fundamental changes over the years as
          a
          result of increased emphasis on higher wages, high technology industries,
          such
          as pharmaceuticals, biotechnology, electronics, computers, microprocessors,
          professional and scientific instruments and certain high technology machinery
          and equipment. The services sector, including finance, insurance, real
          estate,
          wholesale and retail trade and tourism, also plays a major role in the
          economy.
          It ranks second only to manufacturing in contribution to the gross domestic
          product and leads all sectors in providing employment. The other material
          sectors of the Puerto Rican economy include government, transportation
          and
          agriculture.
  As
          of
          December 31, 2004, there were 14 FDIC insured commercial bank and trust
          companies operating in Puerto Rico. Total assets of these institutions
          as of
          December 31, 2004 were $94.3 billion. As of December 31, 2004, there were
          36
          International Banking Entities operating in Puerto Rico licensed to conduct
          offshore banking transactions, with total assets of $66.8 billion. As of
          December 31, 2004, Eurobank held 3.0% of the deposits held by FDIC insured
          financial institutions in Puerto Rico.
  **Environmental
          Compliance**
  In
          addition to our obligations under environmental laws with respect to property
          that we own, there are several federal and state statutes that govern the
          rights
          and obligations of financial institutions with respect to environmental
          issues.
          In addition to being directly liable under these statutes for its own conduct,
          a
          financial institution may also be held liable under certain circumstances
          for
          the actions of borrowers or other third parties on property that collateralizes
          a loan held by the institution. This potential liability may far exceed
          the
          original amount of the loan made by the financial institution, which is
          secured
          by the property. Currently, we are not a party to any legal proceedings
          involving potential liability under applicable environmental laws.
  **Employees**
  We
          had
          approximately 464 full-time equivalent employees as of December 31, 2004.
          Our
          future success will depend in part on our ability to attract, retain and
          motivate highly qualified management and other personnel. We provide health,
          life and disability coverage for our employees and make contributions on
          behalf
          of eligible employees under a plan intended to qualify as a simplified
          employee
          pension plan under the Puerto Rico Internal Revenue Code. Our employees
          are not
          represented by a collective bargaining agreement and we have never experienced
          a
          strike or similar work stoppage. We consider our relationship with our
          employees
          to be good.
 12
  **Available
          Information**
  Our
          Internet website address is www.eurobankpr.com .
          We make
          available free of charge on or through our website our annual report on
          Form
          10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
          amendments to those reports filed or furnished pursuant to Section 13(a)
          or
          15(d) of the Securities and Exchange Act of 1934, as amended, as soon as
          reasonably practicable after such material is electronically filed with
          or
          furnished to the Securities and Exchange Commission. However, the information
          found on our website is not part of this or any other report.
  **SUPERVISION
          AND REGULATION**
  This
          following is a summary description of the relevant laws, rules and regulations
          governing banks and bank and financial holding companies. The descriptions
          of,
          and references to, the statutes and regulations below are brief summaries
          and do
          not purport to be complete. The descriptions are qualified in their entirety
          by
          reference to the specific statutes and regulations discussed.
  **General**
  The
          supervision and regulation of bank holding companies and their subsidiaries
          are
          intended primarily for the protection of depositors, the deposit insurance
          funds
          of the FDIC and the banking system as a whole, and not for the protection
          of the
          bank holding company stockholders or creditors. The banking agencies have
          broad
          enforcement power over bank holding companies and banks, including the
          power to
          impose substantial fines and other penalties for violations of laws and
          regulations.
  Legislation
          is from time to time introduced in Congress and Puerto Rico’s legislature,
          including proposals to overhaul the bank regulatory system, expand the
          powers of
          depository institutions and limit the investments that depository institutions
          may make with insured funds. Such legislation may change applicable statutes
          and
          the operating environment of EuroBancshares and Eurobank in substantial
          and
          unpredictable ways. We cannot determine the ultimate effect that future
          legislation or implementing regulations would have upon the financial condition
          and results of operations of EuroBancshares or Eurobank, or any of their
          subsidiaries.
  **EuroBancshares**
  EuroBancshares
          is a financial holding company registered under the Bank Holding Company
          Act,
          and is subject to supervision, regulation and examination by the Federal
          Reserve
          Board. The Bank Holding Company Act and other federal laws subject bank
          holding
          companies to particular restrictions on the types of activities in which
          they
          may engage, and to a range of supervisory requirements and activities,
          including
          regulatory enforcement actions for violations of laws and
          regulations.
  *Regulatory
          Restrictions on Dividends; Source of Strength*
  EuroBancshares
          is regarded as a legal entity separate and distinct from its other subsidiaries.
          The principal source of our revenue is dividends received from Eurobank.
          Various
          federal and state statutory provisions limit the amount of dividends Eurobank
          can pay to EuroBancshares without regulatory approval. It is the policy
          of the
          Federal Reserve Board that bank holding companies should pay cash dividends
          on
          common stock only out of income available over the past year and only if
          prospective earnings retention is consistent with the organization’s expected
          future needs and financial condition. The policy provides that bank holding
          companies should not maintain a level of cash dividends that undermines
          the bank
          holding company’s ability to serve as a source of strength to its banking
          subsidiaries.
  Under
          Federal Reserve Board policy, a bank holding company is expected to act
          as a
          source of financial strength to each of its banking subsidiaries and commit
          resources to their support. Such support may be required at times when,
          absent
          this Federal Reserve Board policy, a holding company may not be inclined
          to
          provide it. As discussed below, a bank holding company, in certain
          circumstances, could be required to guarantee the capital plan of an
          undercapitalized banking subsidiary.
  In
          the
          event of a bank holding company’s bankruptcy under Chapter 11 of the United
          States Bankruptcy Code, the trustee will be deemed to have assumed, and
          is
          required to cure immediately, any deficit under any commitment by the debtor
          holding company to any of the federal banking agencies to maintain the
          capital
          of an insured depository institution, and any claim for breach of such
          obligation will generally have priority over most other unsecured
          claims.
 13
  *Activities* *“Closely
          Related” to Banking*
  The
          Bank
          Holding Company Act prohibits a bank holding company, with certain limited
          exceptions, from acquiring direct or indirect ownership or control of any
          voting
          shares of any company which is not a bank or from engaging in any activities
          other than those of banking, managing or controlling banks and certain
          other
          subsidiaries, or furnishing services to or performing services for its
          subsidiaries. One principal exception to these prohibitions allows the
          acquisition of interests in companies whose activities are found by the
          Federal
          Reserve Board, by order or regulation, to be so closely related to banking
          or
          managing or controlling banks, as to be a proper incident thereto. These
          activities include, among other things, numerous services and functions
          performed in connection with lending, investing, and financial counseling
          and
          tax planning. In approving acquisitions by bank holding companies of companies
          engaged in banking-related activities, the Federal Reserve Board considers
          a
          number of factors, and weighs the expected benefits to the public (such
          as
          greater convenience and increased competition or gains in efficiency) against
          the risks of possible adverse effects (such as undue concentration of resources,
          decreased or unfair competition, conflicts of interest, or unsound banking
          practices). The Federal Reserve Board is also empowered to differentiate
          between
          activities commenced *de
          novo* and
          activities commenced through acquisition of a going concern.
  *Gramm-Leach
          Bliley Act; Financial Holding Companies*
  The
          Gramm-Leach-Bliley Financial Modernization Act of 1999, revised and expanded
          the
          provisions of the Bank Holding Company Act by including a new section that
          permits a bank holding company to elect to become a financial holding company
          to
          engage in a full range of activities that are “financial in nature.” The
          qualification requirements and the process for a bank holding company that
          elects to be treated as a financial holding company require that all of
          the
          subsidiary banks controlled by the bank holding company at the time of
          election
          to become a financial holding company must be and remain at all times
“well-capitalized” and “well managed.” EuroBancshares made an election to become
          a financial holding company on September 20, 2002.
  The
          Gramm-Leach-Bliley Act further requires that, in the event that the bank
          holding
          company elects to become a financial holding company, the election must
          be made
          by filing a written declaration with the appropriate Federal Reserve Bank
          that:
  ·
                states
                    that the bank holding company elects to become a financial holding
                    company;
  ·
                provides
                    the name and head office address of the bank holding company
                    and each
                    depository institution controlled by the bank holding
                    company;
  ·
                certifies
                    that each depository institution controlled by the bank holding
                    company is
                    “well-capitalized” as of the date the bank holding company submits its
                    declaration;
  ·
                provides
                    the capital ratios for all relevant capital measures as of the
                    close of
                    the previous quarter for each depository institution controlled
                    by the
                    bank holding company; and
  ·
                certifies
                    that each depository institution controlled by the bank holding
                    company is
                    “well managed” as of the date the bank holding company submits its
                    declaration.
  The
          bank
          holding company must have also achieved at least a rating of “satisfactory
          record of meeting community credit needs” under the Community Reinvestment Act
          during the institution’s most recent examination.
  Financial
          holding companies may engage, directly or indirectly, in any activity that
          is
          determined to be:
  ·
                financial
                    in nature;
  ·
                incidental
                    to such financial activity; or
  14
  ·
                complementary
                    to a financial activity provided it “does not pose a substantial risk to
                    the safety and soundness of depository institutions or the financial
                    system generally.”
  The
          Gramm-Leach-Bliley Act specifically provides that the following activities
          have
          been determined to be “financial in nature”: lending, trust and other banking
          activities; insurance activities; financial or economic advisory services;
          securitization of assets; securities underwriting and dealing; existing
          bank
          holding company domestic activities; existing bank holding company foreign
          activities and merchant banking activities. In addition, the Gramm-Leach-Bliley
          Act specifically gives the Federal Reserve Board the authority, by regulation
          or
          order, to expand the list of “financial” or “incidental” activities, but
          requires consultation with the United States Treasury Department, and gives
          the
          Federal Reserve Board authority to allow a financial holding company to
          engage
          in any activity that is “complementary” to a financial activity and does not
“pose a substantial risk to the safety and soundness of depository institutions
          or the financial system generally.”
  *Privacy
          Policies*
  Under
          the
          Gramm-Leach-Bliley Act, all financial institutions are required to adopt
          privacy
          policies, restrict the sharing of nonpublic customer data with nonaffiliated
          parties and establish procedures and practices to protect customer data
          from
          unauthorized access. EuroBancshares and its subsidiaries have established
          policies and procedures to assure our compliance with all privacy provisions
          of
          the Gramm-Leach-Bliley Act.
  *Safe
          and Sound Banking Practices*
  Bank
          holding companies are not permitted to engage in unsafe and unsound banking
          practices. The Federal Reserve Board’s Regulation Y, for example, generally
          requires a holding company to give the Federal Reserve Board prior notice
          of any
          redemption or repurchase of its own equity securities, if the consideration
          to
          be paid, together with the consideration paid for any repurchases or redemptions
          in the preceding year, is equal to 10% or more of the company’s consolidated net
          worth. The Federal Reserve Board may oppose the transaction if it believes
          that
          the transaction would constitute an unsafe or unsound practice or would
          violate
          any law or regulation. Depending upon the circumstances, the Federal Reserve
          Board could take the position that paying a dividend would constitute an
          unsafe
          or unsound banking practice.
 The
            Federal Reserve Board has broad authority to prohibit activities of bank
            holding
            companies and their nonbanking subsidiaries which represent unsafe and
            unsound
            banking practices or which constitute violations of laws or regulations,
            and can
            assess civil money penalties for certain activities conducted on a knowing
            and
            reckless basis, if those activities caused a substantial loss to a depository
            institution. The penalties can be as high as $1 million for each day
            the
            activity continues.
  *Annual
            Reporting; Examinations*
  We
            are
            required to file annual reports with the Federal Reserve Board, and such
            additional information as the Federal Reserve Board may require pursuant
            to the
            Bank Holding Company Act. The Federal Reserve Board may examine a bank
            holding
            company or any of its subsidiaries, and charge the company for the cost
            of such
            the examination.
  *Capital
            Adequacy Requirements*
  The
            Federal Reserve Board has adopted a system using risk-based capital guidelines
            to evaluate the capital adequacy of bank holding companies having $150.0
            million
            or more in assets on a consolidated basis. EuroBancshares currently has
            consolidated assets in excess of $150.0 million is therefore subject
            to the
            Federal Reserve Board’s capital adequacy guidelines.
  Under
            the
            guidelines, specific categories of assets are assigned different risk
            weights,
            based generally on the perceived credit risk of the asset. These risk
            weights
            are multiplied by corresponding asset balances to determine a “risk-weighted”
asset base. The guidelines require a minimum total risk-based capital
            ratio of
            8.0% (of which at least 4.0% is required to consist of Tier 1 capital
            elements).
            Total capital is the sum of Tier 1 and Tier 2 capital. To be considered
            “well-capitalized,” a bank holding company must maintain, on a consolidated
            basis, (i) a Tier 1 risk-based capital ratio of at least 6.0%, and (ii)
            a total
            risk-based capital ratio of 10.0% or greater. As of December 31, 2004,
            our Tier
            1 risk-based capital ratio was 12.73% and its total risk-based capital
            ratio was
            13.94%. Thus, EuroBancshares is considered “well-capitalized” for regulatory
            purposes.
 15
  In
            addition to the risk-based capital guidelines, the Federal Reserve Board
            uses a
            leverage ratio as an additional tool to evaluate the capital adequacy
            of bank
            holding companies. The leverage ratio is a company’s Tier 1 capital divided by
            its average total consolidated assets. Certain highly-rated bank holding
            companies may maintain a minimum leverage ratio of 3.0%, but other bank
            holding
            companies are required to maintain a leverage ratio of at least 4.0%.
            As of
            December 31, 2004, our leverage ratio was 9.91%.
  The
            federal banking agencies’ risk-based and leverage ratios are minimum supervisory
            ratios generally applicable to banking organizations that meet certain
            specified
            criteria. The federal bank regulatory agencies may set capital requirements
            for
            a particular banking organization that are higher than the minimum ratios
            when
            circumstances warrant. Federal Reserve Board guidelines also provide
            that
            banking organizations experiencing internal growth or making acquisitions
            will
            be expected to maintain strong capital positions, substantially above
            the
            minimum supervisory levels, without significant reliance on intangible
            assets.
  *Imposition
            of Liability for Undercapitalized Subsidiaries*
  Bank
            regulators are required to take “prompt corrective action” to resolve problems
            associated with insured depository institutions whose capital declines
            below
            certain levels. In the event an institution becomes “undercapitalized,” it must
            submit a capital restoration plan. The capital restoration plan will
            not be
            accepted by the regulators unless each company having control of the
            undercapitalized institution guarantees the subsidiary’s compliance with the
            capital restoration plan up to a certain specified amount. Any such guarantee
            from a depository institution’s holding company is entitled to a priority of
            payment in bankruptcy.
  The
            aggregate liability of the holding company of an undercapitalized bank
            is
            limited to the lesser of 5% of the institution’s assets at the time it became
            undercapitalized or the amount necessary to cause the institution to
            be
“adequately capitalized.” The bank regulators have greater power in situations
            where an institution becomes “significantly” or “critically” undercapitalized or
            fails to submit a capital restoration plan. For example, a bank holding
            company
            controlling such an institution can be required to obtain prior Federal
            Reserve
            Board approval of proposed dividends, or might be required to consent
            to a
            consolidation or to divest the troubled institution or other
            affiliates.
  *Acquisitions
            by Bank Holding Companies*
  The
            Bank
            Holding Company Act requires every bank holding company to obtain the
            prior
            approval of the Federal Reserve Board before it may acquire all, or
            substantially all, of the assets of any bank, or ownership or control
            of any
            voting shares of any bank, if after such acquisition it would own or
            control,
            directly or indirectly, more than 5% of the voting shares of such bank.
            In
            approving bank acquisitions by bank holding companies, the Federal Reserve
            Board
            is required to consider the financial and managerial resources and future
            prospects of the bank holding company and the banks concerned, the convenience
            and needs of the communities to be served, and various competitive
            factors.
  *Control
            Acquisitions*
  The
            Change in Bank Control Act prohibits a person or group of persons from
            acquiring
“control” of a bank holding company unless the Federal Reserve Board has been
            notified and has not objected to the transaction. Under a rebuttable
            presumption
            established by the Federal Reserve Board, the acquisition of 10% or more
            of a
            class of voting stock of a bank holding company with a class of securities
            registered under Section 12 of the Exchange Act would, under the circumstances
            set forth in the presumption, constitute acquisition of control.
  In
            addition, any company is required to obtain the approval of the Federal
            Reserve
            Board under the Bank Holding Company Act before acquiring 25% (5% in
            the case of
            an acquiror that is a bank holding company) or more of the outstanding
            common
            stock of the company, or otherwise obtaining control or a “controlling
            influence” over the company.
 16
  *Cross-guarantees*
  Under
            the
            Federal Deposit Insurance Act, or FDIA, a depository institution (which
            definition includes both banks and savings associations), the deposits
            of which
            are insured by the FDIC, can be held liable for any loss incurred by,
            or
            reasonably expected to be incurred by, the FDIC in connection with (1)
            the
            default of a commonly controlled FDIC-insured depository institution
            or (2) any
            assistance provided by the FDIC to any commonly controlled FDIC-insured
            depository institution “in danger of default.” “Default” is defined generally as
            the appointment of a conservator or a receiver and “in danger of default” is
            defined generally as the existence of certain conditions indicating that
            default
            is likely to occur in the absence of regulatory assistance. In some
            circumstances (depending upon the amount of the loss or anticipated loss
            suffered by the FDIC), cross-guarantee liability may result in the ultimate
            failure or insolvency of one or more insured depository institutions
            in a
            holding company structure. Any obligation or liability owed by a subsidiary
            bank
            to its parent company is subordinated to the subsidiary bank’s cross-guarantee
            liability with respect to commonly controlled insured depository institutions.
            Eurobank is currently the only FDIC-insured depository institution subsidiary
            of
            EuroBancshares.
  Because
            EuroBancshares is a legal entity separate and distinct from Eurobank,
            its right
            to participate in the distribution of assets of any subsidiary upon the
            subsidiary’s liquidation or reorganization will be subject to the prior claims
            of the subsidiary’s creditors. In the event of a liquidation or other resolution
            of Eurobank, the claims of depositors and other general or subordinated
            creditors of Eurobank would be entitled to a priority of payment over
            the claims
            of holders of any obligation of Eurobank to its shareholders, including
            any
            depository institution holding company (such as EuroBancshares) or any
            shareholder or creditor of such holding company.
  *USA
            Patriot Act*
  On
            October 26, 2001, President Bush signed into law comprehensive anti-terrorism
            legislation known as the USA Patriot Act. Title III of the USA Patriot
            Act
            requires financial institutions to help prevent, detect and deter international
            money laundering and the financing of terrorism. The effectiveness of
            a
            financial institution in combating money laundering activities is a factor
            to be
            considered in any application submitted by the financial institution
            under the
            Bank Merger Act or the Bank Holding Company Act, which acts apply to
            Eurobank
            and EuroBancshares, respectively. EuroBancshares and its subsidiaries,
            including
            Eurobank, have adopted systems and procedures to comply with the USA
            Patriot Act
            and regulations adopted thereunder by the Secretary of the
            Treasury.
  *Sarbanes-Oxley
            Act of 2002*
  In
            July 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002,
            or the Sarbanes-Oxley Act, which implemented legislative reforms intended
            to
            address corporate and accounting fraud. The Sarbanes-Oxley Act contains
            reforms
            of various business practices and numerous aspects of corporate governance.
            Most
            of these requirements have been implemented pursuant to regulations issued
            by
            the SEC. The following is a summary of certain key provisions of the
            Sarbanes-Oxley Act.
  In
            addition to the establishment of a new accounting oversight board that
            enforces
            auditing, quality control and independence standards and is funded by
            fees from
            all registered public accounting firms and publicly traded companies,
            the
            Sarbanes-Oxley Act places restrictions on the scope of services that
            may be
            provided by accounting firms to their public company audit clients. Any
            non-audit services being provided to a public company audit client requires
            pre-approval by the client’s audit committee. Also, the Sarbanes-Oxley Act makes
            certain changes to the requirements for partner rotation after a period
            of time.
            The Sarbanes-Oxley Act requires chief executive officers and chief financial
            officers, or their equivalent, to certify to the accuracy of periodic
            reports
            filed with the SEC, subject to civil and criminal penalties if they knowingly
            or
            willingly violate this certification requirement. Furthermore, counsel
            is
            required to report evidence of a material violation of securities laws
            or a
            breach of fiduciary duties to the company’s chief executive officer or its chief
            legal officer, and, if such officer does not appropriately respond, to
            report
            such evidence to the audit committee or other similar committee of the
            board of
            directors or the board itself.
  Under
            this law, longer prison terms apply to corporate executives who violate
            federal
            securities laws; the period during which certain types of suits can be
            brought
            against a company or its officers is extended and bonuses issued to top
            executives prior to restatement of a company’s financial statements are now
            subject to disgorgement if such restatement was due to corporate misconduct.
            Executives are also prohibited from insider trading during retirement
            plan
“blackout” periods, and loans to company executives (other than loans by
            financial institutions permitted by federal rules or regulations) are
            restricted. In addition, the legislation accelerates the time frame for
            disclosures by public companies, as they must immediately disclose any
            material
            changes in their financial condition or operations. Directors and executive
            officers required to report changes in ownership in a company’s securities must
            now report any such change within two business days of the change.
 17
  The
            Sarbanes-Oxley Act increases responsibilities and codifies certain requirements
            relating to audit committees of public companies and how they interact
            with the
            company’s registered public accounting firm. Audit committee members must be
            independent and are barred from accepting consulting, advisory or other
            compensatory fees from the company. In addition, companies are required
            to
            disclose whether at least one member of the committee is a “financial expert”
(as such term is defined by the SEC) and if not, why not. A company’s registered
            public accounting firm is prohibited from performing statutorily mandated
            audit
            services for a company if the company’s chief executive officer, chief financial
            officer, controller, chief accounting officer or any person serving in
            equivalent positions had been employed by such firm and participated
            in the
            audit of such company during the one-year period preceding the audit
            initiation
            date. The Sarbanes-Oxley Act also prohibits any officer or director of
            a company
            or any other person acting under their direction from taking any action
            to
            fraudulently influence, coerce, manipulate or mislead any independent
            public or
            certified accountant engaged in the audit of the company’s financial statements
            for the purpose of rendering the financial statements materially
            misleading.
  The
            Sarbanes-Oxley Act also has provisions relating to inclusion of certain
            internal
            control reports and assessments by management in the annual report to
            stockholders. Commencing with its 2005 annual report, Eurobancshares
            will be
            required to include an internal control report containing management’s
            assertions regarding the effectiveness of its internal control structure
            and
            procedures over financial reporting. The internal control report must
            include
            statements regarding management’s responsibility for establishing and
            maintaining adequate internal control over financial reporting; management’s
            assessment as to the effectiveness of the company’s internal control over
            financial reporting, based on management’s evaluation of it  as of
            year-end; and of the framework used as criteria for evaluating the effectiveness
            of the company’s internal control over financial reporting. The law also
            requires the company’s registered public accounting firm that issues the audit
            report to attest to, and report on, management’s assessment of the company’s
            internal controls over financial reporting in accordance with standards
            for
            attestation engagements issued or adopted by the Public Company Accounting
            Oversight Board.
  **Eurobank**
  Eurobank
            is subject to extensive regulation and examination by the Commissioner
            of
            Financial Institutions of Puerto Rico and the FDIC, which insures its
            deposits
            to the maximum extent permitted by law, and is subject to certain Federal
            Reserve Board regulations of transactions with its affiliates. The federal
            and
            Puerto Rico laws and regulations which are applicable to Eurobank, regulate,
            among other things, the scope of its business, its investments, its reserves
            against deposits, the timing of the availability of deposited funds and
            the
            nature and amount of and collateral for certain loans. In addition to
            the impact
            of such regulations, commercial banks are affected significantly by the
            actions
            of the Federal Reserve Board as it attempts to control the money supply
            and
            credit availability in order to influence the economy.
  *Transactions
            with Affiliates*
  There
            are
            various statutory and regulatory limitations, including those set forth
            in
            sections 23A and 23B of the Federal Reserve Act and Regulation W, governing
            the
            extent to which Eurobank will be able to purchase assets from or securities
            of
            or otherwise finance or transfer funds to EuroBancshares or its nonbanking
            subsidiaries. Among other restrictions, such transfers by Eurobank to
            EuroBancshares or any of its nonbanking subsidiaries generally will be
            limited
            to 10.0% of Eurobank’s capital and surplus and, with respect to EuroBancshares
            and all such nonbanking subsidiaries, to an aggregate of 20.0% of Eurobank’s
            subsidiary’s capital and surplus. Furthermore, loans and extensions of credit
            are required to be secured in specified amounts and are required to be
            on terms
            and conditions consistent with safe and sound banking practices.
  In
            addition, any transaction by a bank with an affiliate and any sale of
            assets or
            provision of services to an affiliate generally must be on terms that
            are
            substantially the same, or at least as favorable, to the bank as those
            prevailing at the time for comparable transactions with nonaffiliated
            companies.
  *Loans
            to Insiders*
  Sections
            22(g) and (h) of the Federal Reserve Act and its implementing regulation,
            Regulation O, place restrictions on loans by a bank to executive officers,
            directors, and principal stockholders. Under Section 22(h), loans to
            a director,
            an executive officer and to a greater than 10% stockholder of a bank
            and certain
            of their related interests, or insiders, and insiders of affiliates,
            may not
            exceed, together with all other outstanding loans to such person and
            related
            interests, the bank’s loans-to-one-borrower limit (generally equal to 15% of the
            institution’s unimpaired capital and surplus). Section 22(h) also requires that
            loans to insiders and to insiders of affiliates be made on terms substantially
            the same as offered in comparable transactions to other persons, unless
            the
            loans are made pursuant to a benefit or compensation program that (i)
            is widely
            available to employees of the bank and (ii) does not give preference
            to insiders
            over other employees of the bank. Section 22(h) also requires prior Board
            of
            Directors approval for certain loans, and the aggregate amount of extensions
            of
            credit by a bank to all insiders cannot exceed the institution’s unimpaired
            capital and surplus. Furthermore, Section 22(g) places additional restrictions
            on loans to executive officers.
 18
  *Dividends*
  The
            ability of Eurobank to pay dividends on its common stock is restricted
            by the
            Puerto Rico Banking Act of 1933, as amended, the FDIA and FDIC regulations.
            In
            general terms, the Puerto Rico Banking Act provides that when the expenditures
            of a bank are greater than receipts, the excess of expenditures over
            receipts
            shall be charged against the undistributed profits of the bank and the
            balance,
            if any, shall be charged against the required reserve fund of the bank.
            If there
            is no sufficient reserve fund to cover such balance in whole or in part,
            the
            outstanding amount shall be charged against the bank’s capital account. The
            Puerto Rico Banking Act provides that until said capital has been restored
            to
            its original amount and the reserve fund to 20% of the original capital,
            the
            bank may not declare any dividends. In general terms, the FDIA and the
            FDIC
            regulations restrict the payment of dividends when a bank is undercapitalized,
            when a bank has failed to pay insurance assessments, or when there are
            safety
            and soundness concerns regarding a bank.
  The
            payment of dividends by Eurobank may also be affected by other regulatory
            requirements and policies, such as maintenance of adequate capital. If,
            in the
            opinion of the regulatory authority, a depository institution under its
            jurisdiction is engaged in, or is about to engage in, an unsafe or unsound
            practice (that, depending on the financial condition of the depository
            institution, could include the payment of dividends), such authority
            may
            require, after notice and hearing, that such depository institution cease
            and
            desist from such practice. The Federal Reserve Board has issued a policy
            statement that provides that insured banks and bank holding companies
            should
            generally pay dividends only out of operating earnings for the current
            and
            preceding two years. In addition, all insured depository institutions
            are
            subject to the capital-based limitations required by the Federal Deposit
            Insurance Corporation Improvement Act of 1991.
  *FDIC
            Capital Requirements*
  Eurobank
            is also subject to certain restrictions on the payment of dividends as
            a result
            of the requirement that it maintain adequate levels of capital in accordance
            with guidelines promulgated from time to time by applicable
            regulators.
  The
            FDIC
            and the Commissioner of Financial Institutions of Puerto Rico monitor
            the
            capital adequacy of Eurobank by using a combination of risk-based guidelines
            and
            leverage ratios. The agencies consider the bank’s capital levels when taking
            action on various types of applications and when conducting supervisory
            activities related to the safety and soundness of individual banks and
            the
            banking system.
  Under
            the
            risk-based capital guidelines, a risk weight factor of 0% to 100% is
            assigned to
            each category of assets based generally on the perceived credit risk
            of the
            asset class. The risk weights are then multiplied by the corresponding
            asset
            balances to determine a “risk-weighted” asset base. At least half of the
            risk-based capital must consist of core (Tier 1) capital, which is comprised
            of:
  ·
                  common
                      stockholders’ equity (includes common stock and any related surplus,
                      undivided profits, disclosed capital reserves that represent
                      a segregation
                      of undivided profits, and foreign currency translation adjustments;
                      less
                      net unrealized losses on marketable equity
                      securities);
  ·
                  certain
                      noncumulative perpetual preferred stock and related surplus;
                      and
  ·
                  minority
                      interests in the equity capital accounts of consolidated subsidiaries,
                      and
                      excludes goodwill and various intangible
                      assets.
  19
 The
            remainder, supplementary (Tier 2) capital, may consist of:
  ·
                  allowance
                      for loan and lease losses, up to a maximum of 1.25% of risk-weighted
                      assets;
  ·
                  certain
                      perpetual preferred stock and related surplus;
  ·
                  hybrid
                      capital instruments;
  ·
                  perpetual
                      debt;
  ·
                  mandatory
                      convertible debt securities;
  ·
                  term
                      subordinated debt;
  ·
                  intermediate-term
                      preferred stock; and
  ·
                  certain
                      unrealized holding gains on equity securities.
  “Total
            risk-based capital” is determined by combining core capital and supplementary
            capital.
  Under
            the
            regulatory capital guidelines, Eurobank must maintain a total risk-based
            capital
            to risk-weighted assets ratio of at least 8.0%, a Tier 1 capital to
            risk-weighted assets ratio of at least 4.0%, and a Tier 1 capital to
            adjusted
            total assets ratio of at least 4.0% (3.0% for banks receiving the highest
            examination rating) to be considered adequately capitalized. See discussion
            in
            the section below captioned *“The
            FDIC Improvement Act.”*
  *FIRREA*
  The
            Financial Institutions Reform, Recovery and Enforcement Act of 1989,
            or FIRREA,
            includes various provisions that affect or may affect Eurobank. Among
            other
            matters, FIRREA generally permits bank holding companies to acquire healthy
            thrifts as well as failed or failing thrifts. FIRREA removed certain
            cross-marketing prohibitions previously applicable to thrift and bank
            subsidiaries of a common holding company. Furthermore, a multi-bank holding
            company may now be required to indemnify the federal deposit insurance
            fund
            against losses it incurs with respect to such company’s affiliated banks, which
            in effect makes a bank holding company’s equity investments in healthy bank
            subsidiaries available to the FDIC to assist such company’s failing or failed
            bank subsidiaries.
  In
            addition, pursuant to FIRREA, any depository institution that has been
            chartered
            less than two years, is not in compliance with the minimum capital requirements
            of its primary federal banking regulator, or is otherwise in a troubled
            condition must notify its primary federal banking regulator of the proposed
            addition of any person to the Board of Directors or the employment of
            any person
            as a senior executive officer of the institution at least 30 days before
            such
            addition or employment becomes effective. During such 30-day period,
            the
            applicable federal banking regulatory agency may disapprove of the addition
            of
            employment of such director or officer. Eurobank is not subject to any
            such
            requirements.
  FIRREA
            also expanded and increased civil and criminal penalties available for
            use by
            the appropriate regulatory agency against certain “institution-affiliated
            parties” primarily including (i) management, employees and agents of a financial
            institution, as well as (ii) independent contractors such as attorneys
            and
            accountants and others who participate in the conduct of the financial
            institution’s affairs and who caused or are likely to cause more than minimum
            financial loss to or a significant adverse affect on the institution,
            who
            knowingly or recklessly violate a law or regulation, breach a fiduciary
            duty or
            engage in unsafe or unsound practices. Such practices can include the
            failure of
            an institution to timely file required reports or the submission of inaccurate
            reports. Furthermore, FIRREA authorizes the appropriate banking agency
            to issue
            cease and desist orders that may, among other things, require affirmative
            action
            to correct any harm resulting from a violation or practice, including
            restitution, reimbursement, indemnifications or guarantees against loss.
            A
            financial institution may also be ordered to restrict its growth, dispose
            of
            certain assets or take other action as determined by the ordering agency
            to be
            appropriate.
 20
  *The
            FDIC Improvement Act*
  The
            Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA,
            made a
            number of reforms addressing the safety and soundness of the deposit
            insurance
            system, supervision of domestic and foreign depository institutions,
            and
            improvement of accounting standards. This statute also limited deposit
            insurance
            coverage, implemented changes in consumer protection laws and provided
            for
            least-cost resolution and prompt regulatory action with regard to troubled
            institutions.
  FDICIA
            requires every bank with total assets in excess of $500 million to have
            an
            annual independent audit made of the bank’s financial statements by a certified
            public accountant to verify that the financial statements of the bank
            are
            presented in accordance with generally accepted accounting principles
            and comply
            with such other disclosure requirements as prescribed by the FDIC.
  FDICIA
            also places certain restrictions on activities of banks depending on
            their level
            of capital. FDICIA divides banks into five different categories, depending
            on
            their level of capital. Under regulations adopted by the FDIC, a bank
            is deemed
            to be “well-capitalized” if it has a total Risk-Based Capital Ratio of 10.0% or
            more, a Tier 1 Capital Ratio of 6.0% or more and a Leverage Ratio of
            5.0% or
            more, and the bank is not subject to an order or capital directive to
            meet and
            maintain a certain capital level. Under such regulations, a bank is deemed
            to be
“adequately capitalized” if it has a total Risk-Based Capital Ratio of 8.0% or
            more, a Tier 1 Capital Ratio of 4.0% or more and a Leverage Ratio of
            4.0% or
            more (unless it receives the highest composite rating at its most recent
            examination and is not experiencing or anticipating significant growth,
            in which
            instance it must maintain a Leverage Ratio of 3.0% or more). Under such
            regulations, a bank is deemed to be “undercapitalized” if it has a total
            Risk-Based Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of
            less than
            4.0% or a Leverage Ratio of less than 4.0%. Under such regulations, a
            bank is
            deemed to be “significantly undercapitalized” if it has a Risk-Based Capital
            Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than 3.0% and
            a Leverage
            Ratio of less than 3.0%. Under such regulations, a bank is deemed to
            be
“critically undercapitalized” if it has a Leverage Ratio of less than or equal
            to 2.0%. In addition, the FDIC has the ability to downgrade a bank’s
            classification (but not to “critically undercapitalized”) based on other
            considerations even if the bank meets the capital guidelines. According
            to these
            guidelines, Eurobank was classified as “well-capitalized” as of December 31,
            2004.
  In
            addition, if a state non-member bank is classified as undercapitalized,
            the bank
            is required to submit a capital restoration plan to the FDIC. Pursuant
            to
            FDICIA, an undercapitalized bank is prohibited from increasing its assets,
            engaging in a new line of business, acquiring any interest in any company
            or
            insured depository institution, or opening or acquiring a new branch
            office,
            except under certain circumstances, including the acceptance by the FDIC
            of a
            capital restoration plan for the bank.
  Furthermore,
            if a state non-member bank is classified as undercapitalized, the FDIC
            may take
            certain actions to correct the capital position of the bank; if a bank
            is
            classified as significantly undercapitalized or critically undercapitalized,
            the
            FDIC would be required to take one or more prompt corrective actions.
            These
            actions would include, among other things, requiring: sales of new securities
            to
            bolster capital; improvements in management; limits on interest rates
            paid;
            prohibitions on transactions with affiliates; termination of certain
            risky
            activities and restrictions on compensation paid to executive officers.
            If a
            bank is classified as critically undercapitalized, FDICIA requires the
            bank to
            be placed into conservatorship or receivership within ninety days, unless
            the
            FDIC determines that other action would better achieve the purposes of
            FDICIA
            regarding prompt corrective action with respect to undercapitalized banks.
  The
            capital classification of a bank affects the frequency of examinations
            of the
            bank and impacts the ability of the bank to engage in certain activities
            and
            affects the deposit insurance premiums paid by such bank. Under FDICIA,
            the FDIC
            is required to conduct a full-scope, on-site examination of every bank
            at least
            once every twelve months. An exception to this rule is made, however,
            that
            provides that banks (i) with assets of less than $100 million, (ii) are
            categorized as “well-capitalized,” (iii) were found to be well managed and its
            composite rating was outstanding and (iv) has not been subject to a change
            in
            control during the last twelve months, need only be examined by the FDIC
            once
            every eighteen months.
  *Brokered
            Deposits*
  Under
            FDICIA, banks may be restricted in their ability to accept brokered deposits,
            depending on their capital classification. “Well-capitalized” banks are
            permitted to accept brokered deposits, but all banks that are not
            well-capitalized are not permitted to accept such deposits. The FDIC
            may, on a
            case-by-case basis, permit banks that are adequately capitalized to accept
            brokered deposits if the FDIC determines that acceptance of such deposits
            would
            not constitute an unsafe or unsound banking practice with respect to
            the bank.
            Deposits obtained from financial intermediaries, so-called “brokered deposits,”
represented approximately 36.3% of Eurobank’s total deposits as of December 31,
            2004. As previously mentioned, Eurobank is currently well-capitalized
            and
            therefore is not subject to any limitations with respect to its brokered
            deposits.
 21
  *Federal
            Limitations on Activities and Investments*
  The
            equity investments and activities as a principal of FDIC-insured state-chartered
            banks such as Eurobank are generally limited to those that are permissible
            for
            national banks. Under regulations dealing with equity investments, an
            insured
            state bank generally may not directly or indirectly acquire or retain
            any equity
            investment of a type, or in an amount, that is not permissible for a
            national
            bank.
  *FDIC
            Deposit Insurance Assessments*
  In
            addition, under FDICIA, the FDIC is authorized to assess insurance premiums
            on a
            bank’s deposits at a variable rate depending on the probability that the deposit
            insurance fund will incur a loss with respect to the bank. (Under prior
            law, the
            deposit insurance assessment was a flat rate, regardless of the likelihood
            of
            loss.) In this regard, the FDIC has issued regulations that provide for
            a
            transitional risk-based deposit assessment that determines the deposit
            insurance
            assessment rates on the basis of the bank’s capital classification and
            supervisory evaluations. Each of these categories have three subcategories,
            resulting in nine assessment risk classifications. The three subcategories
            with
            respect to capital are “well-capitalized,” “adequately capitalized” and “less
            than adequately capitalized” (which would include “undercapitalized,”
“significantly undercapitalized” and “critically undercapitalized” banks). The
            three subcategories with respect to supervisory concerns are “healthy,”
“supervisory concern” and “substantial supervisory concern.” A bank is deemed
“healthy” if it is financially sound with only a few minor weaknesses. A bank is
            deemed subject to “supervisory concern” if it has weaknesses that, if not
            corrected, could result in significant deterioration of the bank and
            increased
            risk to the Bank Insurance Fund, or BIF. A bank is deemed subject to
            “substantial supervisory concern” if it poses a substantial probability of loss
            to the BIF.
  On
            June
            30, 1996, the Deposit Insurance Funds Act of 1996, or DIFA, was enacted
            and
            signed into law as part of the Economic Growth and Regulatory Paperwork
            Reduction Act of 1996. DIFA established the framework for the eventual
            merger of
            the BIF and the Savings Association Insurance Fund, or SAIF, into a single
            Deposit Insurance Fund. It repealed the statutory minimum premium and,
            under
            implementing FDIC regulations promulgated in 1997, premiums assessed
            by both the
            BIF and the SAIF are to be assessed using the matrix described above
            at a rates
            between 0 cents and 27 cents per $100 of deposits.
  DIFA
            also
            separated, effective January 1, 1997, the Financing Corporation, or FICO,
            assessment to service the interest on its bond obligations from the BIF
            and SAIF
            assessments. The amount assessed on individual institutions by the FICO
            will be
            in addition to the amount, if any, paid for deposit insurance according
            to the
            FDIC’s risk-related assessment rate schedules. The FICO rate may be adjusted
            quarterly to reflect changes in assessment bases for the BIF and the
            SAIF.
            Accordingly, Eurobank may be subject to two separate premiums (for servicing
            interest on bond obligations and for the BIF/SAIF insurance), if such
            premiums
            are assessed.
  The
            FDIC
            may terminate the deposit insurance of any insured depository institution,
            including Eurobank, if it determines after a hearing that the institution
            has
            engaged or is engaging in unsafe or unsound practices, is in an unsafe
            or
            unsound condition to continue operations, or has violated any applicable
            law,
            regulation, order or any condition imposed by an agreement with the FDIC.
            It
            also may suspend deposit insurance temporarily during the hearing process
            for
            the permanent termination of insurance, if the institution has no tangible
            capital. If insurance of accounts is terminated, the accounts at the
            institution
            at the time of the termination, less subsequent withdrawals, shall continue
            to
            be insured for a period of six months to two years, as determined by
            the FDIC.
            Management is aware of no existing circumstances which would result in
            termination of Eurobank’s deposit insurance.
  *Check
            Clearing for the 21* *st* *Century Act*
  On
            October 28, 2003, President Bush signed into law the Check Clearing for
            the
            21 st Century
            Act, also known as Check 21. The new law, which was not effective until
            October
            28, 2004, gives “substitute checks,” such as a digital image of a check and
            copies made from that image, the same legal standing as the original
            paper
            check. Some of the major provisions include:
 22
  ·
                  allowing
                      check truncation without making it
                      mandatory;
  ·
                  demanding
                      that every financial institution communicate to accountholders
                      in writing
                      a description of its substitute check processing program and
                      their rights
                      under the law;
  ·
                  legalizing
                      substitutions for and replacements of paper checks without
                      agreement from
                      consumers;
  ·
                  retaining
                      in place the previously mandated electronic collection and
                      return of
                      checks between financial institutions only when individual
                      agreements are
                      in place;
  ·
                  requiring
                      that when accountholders request verification, financial institutions
                      produce the original check (or a copy that accurately represents
                      the
                      original) and demonstrate that the account debit was accurate
                      and valid;
                      and
  ·
                  requiring
                      recrediting of funds to an individual’s account on the next business day
                      after a consumer proves that the financial institution has
                      erred.
  This
            new
            legislation will likely affect bank capital spending as many financial
            institutions assess whether technological or operational changes are
            necessary
            to stay competitive and take advantage of the new opportunities presented
            by
            Check 21.
  *Community
            Reinvestment Act*
  Under
            the
            Community Reinvestment Act, or CRA, as implemented by the Congress in
            1977, a
            financial institution has a continuing and affirmative obligation, consistent
            with its safe and sound operation, to help meet the credit needs of its
            entire
            community, including low and moderate income neighborhoods. The CRA does
            not
            establish specific lending requirements or programs for financial institutions
            nor does it limit an institution’s discretion to develop the types of products
            and services that it believes are best suited to its particular community,
            consistent with the CRA. The CRA requires federal examiners, in connection
            with
            the examination of a financial institution, to assess the institution’s record
            of meeting the credit needs of its community and to take such record
            into
            account in its evaluation of certain applications by such institution.
            The CRA
            also requires all institutions to make public disclosure of their CRA
            ratings.
            EuroBancshares has a Compliance Committee, which oversees the planning
            of
            products, and services offered to the community, especially those aimed
            to serve
            low and moderate income communities. The FDIC rated Eurobank as “satisfactory”
in meeting community credit needs under the CRA at its most recent examination
            for CRA performance.
  *Consumer
            Laws and Regulations*
  In
            addition to the laws and regulations discussed herein, Eurobank is also
            subject
            to certain consumer laws and regulations that are designed to protect
            consumers
            in transactions with banks. While the list set forth herein is not exhaustive,
            these laws and regulations include the Truth in Lending Act, the Truth
            in
            Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability
            Act, the Equal Credit Opportunity Act, and the Fair Housing Act, among
            others.
            These laws and regulations mandate certain disclosure requirements and
            regulate
            the manner in which financial institutions must deal with customers when
            taking
            deposits or making loans to such customers. Eurobank must comply with
            the
            applicable provisions of these consumer protection laws and regulations
            as part
            of its ongoing customer relations.
  *Interstate
            Branching*
  Effective
            June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency
            Act of
            1994 amended the FDIA and certain other statutes to permit state and
            national
            banks with different home states to merge across state lines, with approval
            of
            the appropriate federal banking agency, unless the home state of a participating
            bank had passed legislation prior to May 31, 1997 expressly prohibiting
            interstate mergers. Under the Riegle-Neal Act amendments, once a state
            or
            national bank has established branches in a state, that bank may establish
            and
            acquire additional branches at any location in the state at which any
            bank
            involved in the interstate merger transaction could have established
            or acquired
            branches under applicable federal or state law. If a state opts out of
            interstate branching within the specified time period, no bank in any
            other
            state may establish a branch in the state which has opted out, whether
            through
            an acquisition or de novo.
 23
  For
            purposes of the Riegle-Neal Act’s amendments to the FDIA, Eurobank is treated as
            a state bank and is subject to the same restrictions on interstate branching
            as
            other state banks. However, for purposes of the International Banking
            Act of
            1978, Eurobank is considered to be a foreign bank and may branch interstate
            by
            merger or de novo to the same extent as a domestic bank in Eurobank’s home
            state. It is not yet possible to determine how these statutes will be
            harmonized, with respect either to which federal agency will approve
            interstate
            transactions or to which “home state” determination rules will
            apply.
  Eurobank
            currently does not have any branches outside Puerto Rico.
  *Federal
            Home Loan Bank System*
  The
            FHLB
            system, of which Eurobank is a member, consists of 12 regional FHLBs
            governed
            and regulated by the Federal Housing Finance Board. The FHLBs serve as
            reserve
            or credit facilities for member institutions within their assigned regions.
            They
            are funded primarily from proceeds derived from the sale of consolidated
            obligations of the FHLB system. They make loans ( *i.e.* ,
            advances) to members in accordance with policies and procedures established
            by
            the FHLB and the boards of directors of each regional FHLB.
  As
            a
            system member, Eurobank is entitled to borrow from the FHLB of New York,
            or
            FHLB-NY, and is required to own capital stock in the FHLB-NY in an amount
            equal
            to the greater of 1% of the aggregate of the unpaid principal of its
            home
            mortgage loans, home purchase contracts, and similar obligations at the
            beginning of each fiscal year, which for this purpose is deemed to be
            not less
            than 30% of assets or 5% of the total amount of advances by the FHLB-NY
            to
            Eurobank. Eurobank is in compliance with the stock ownership rules described
            above with respect to such advances, commitments and letters of credit
            and home
            mortgage loans and similar obligations. All loans, advances and other
            extensions
            of credit made by the FHLB-NY to Eurobank are secured by a portion of
            the its
            mortgage loan portfolio, certain other investments and the capital stock
            of the
            FHLB-NY held by Eurobank.
  **Mortgage
            Banking Operations**
  Eurobank
            is subject to the rules and regulations of FHA, VA, FNMA, FHLMC and GNMA
            with
            respect to originating, processing, selling and servicing mortgage loans
            and the
            issuance and sale of mortgage-backed securities. Those rules and regulations,
            among other things, prohibit discrimination and establish underwriting
            guidelines which include provisions for inspections and appraisals, require
            credit reports on prospective borrowers and fix maximum loan amounts
            and, with
            respect to VA loans, fix maximum interest rates. Mortgage origination
            activities
            are subject to, among others, the Equal Credit Opportunity Act, Federal
            Truth-in-Lending Act and the Real Estate Settlement Procedures Act and
            the
            regulations promulgated thereunder which, among other things, prohibit
            discrimination and require the disclosure of certain basic information
            to
            mortgagors concerning credit terms and settlement costs. Eurobank is
            also
            subject to regulation by the Commissioner of Financial Institutions of
            Puerto
            Rico, with respect to, among other things, the establishment of maximum
            origination fees on certain types of mortgage loan products.
  *Puerto
            Rico Regulation*
  As
            a
            commercial bank organized under the laws of Puerto Rico, Eurobank is
            subject to
            the supervision, examination and regulation of the Commissioner of Financial
            Institutions of Puerto Rico, pursuant to the Puerto Rico Banking Act
            of 1933, as
            amended. Certain of those activities are described in this *“Supervision
            and Regulation”* section
            above.
  *Puerto
            Rico Banking Law*
  Section
            12 of the Puerto Rico Banking Law requires the prior approval of the
            Commissioner of Financial Institutions of Puerto Rico with respect to
            a transfer
            of capital stock of a bank that results in a change of control of the
            bank.
            Under Section 12, a change of control is presumed to occur if a person
            or group
            of persons acting in concert, directly or indirectly, acquire more than
            5.0% of
            the outstanding voting capital stock of the bank. The Commissioner of
            Financial
            Institutions of Puerto Rico has interpreted the restrictions of Section
            12 as
            applying to acquisitions of voting securities of entities controlling
            a bank,
            such as a bank holding company. Under the Puerto Rico Banking Law, the
            determination of the Commissioner of Financial Institutions of Puerto
            Rico
            whether to approve a change of control filing is final and non-
            appealable.
 24
  Section
            16 of the Puerto Rico Banking Law requires every bank to maintain a legal
            reserve which shall not be less than 20% of its demand liabilities, except
            government deposits (federal, state and municipal) which are secured
            by actual
            collateral. The reserve is required to be composed of any of the following
            securities or combination thereof: (1) legal tender of the United States;
            (2)
            checks on banks or trust companies located in any part of Puerto Rico,
            to be
            presented for collection during the day following that on which they
            are
            received; (3) money deposited in other banks or depository institutions,
            subject
            to immediate collection; (4) federal funds sold to any Federal Reserve
            Bank and
            securities purchased under agreement to resell executed by the bank with
            such
            funds that are subject to be repaid to the bank on or before the close
            of the
            next business day and (5) any other asset that the Commissioner of Financial
            Institutions of Puerto Rico determines from time to time.
  Section
            17 of the Puerto Rico Banking Law permits Puerto Rico commercial banks
            to make
            unsecured loans to any one person, firm, partnership or corporation,
            up to an
            aggregate amount of 15.0% the sum of (i) paid-in capital; (ii) reserve
            fund of
            the commercial bank; (iii) 50.0% of the commercial bank’s retained earnings and
            (iv) any other components that the Commissioner of Financial Institutions
            of
            Puerto Rico may determine from time to time. As of December 31, 2004,
            the legal
            lending limit for Eurobank under this provision was approximately $17.1
            million.
            If such loans are secured by collateral worth at least 25.0% more than
            the
            amount of the loan, the aggregate maximum amount may reach one-third
            of the sum
            of Eurobank’s paid-in capital, reserve fund, retained earnings and any other
            components that the Commissioner of Financial Institutions of Puerto
            Rico may
            determine from time to time. As of December 31, 2004, the legal lending
            limit
            for Eurobank under this provision was approximately $37.6 million. There
            are no
            restrictions under Section 17 of the Puerto Rico Banking Law on the amount
            of
            loans which are fully secured by bonds, securities and other evidences
            of
            indebtedness of the Government of the United States, of the Commonwealth
            of
            Puerto Rico, or by bonds, not in default, of authorities, instrumentalities
            or
            dependencies of the Commonwealth of Puerto Rico or its
            municipalities.
  Section
            17 of the Puerto Rico Banking Law also prohibits Puerto Rico commercial
            banks
            from making loans secured by their own stock and from purchasing their
            own
            stock, unless such purchase is necessary to prevent losses because of
            a debt
            previously contracted in good faith. The stock so purchased by the Puerto
            Rico
            commercial bank must be sold by the bank in a public or private sale
            within one
            year from the date of purchase.
  Section
            27 of the Puerto Rico Banking Law also requires that at least 10.0% of
            the
            yearly net income of a Puerto Rico commercial bank be credited to a reserve
            fund
            until the amount deposited to the credit of the reserve fund is equal
            to 100.0%
            of total paid-in capital (common and preferred) of the commercial bank.
            As of
            December 31, 2004, Eurobank had $4.7 million in its reserve fund.
  Section
            27 of the Puerto Rico Banking Law also provides that when the expenditures
            of a
            Puerto Rico commercial bank are greater than receipts, the excess of
            the
            expenditures over receipts shall be charged against the undistributed
            profits of
            the bank, and the balance, if any, shall be charged against the reserve
            fund, as
            a reduction thereof. If there is no reserve fund sufficient to cover
            such
            balance in whole or in part, the outstanding amount shall be charged
            against the
            capital account and no dividends shall be declared until said capital
            has been
            restored to its original amount and the reserve fund to 20% of the original
            capital of the bank.
  Section
            14 of the Puerto Rico Banking Law authorizes Eurobank to conduct certain
            financial and related activities directly or through subsidiaries, including
            lease financing of personal property, operating small loans companies
            and
            mortgage loans activities. Eurobank recently organized an IBE subsidiary,
            EBS
            Overseas.
  *Puerto
            Rico Usury Law*
  The
            rate
            of interest that Eurobank may charge on real estate and other types of
            loans to
            individuals in Puerto Rico is subject to Puerto Rico’s usury law. That law is
            administered by the Finance Board, which consists of the Secretaries
            of the
            Treasury, Commerce and Consumer Affairs Departments, the Commissioner
            of
            Financial Institutions of Puerto Rico, the President of the Planning
            Board, the
            President of the Government Development Bank for Puerto Rico, the Secretary
            of
            Economic Development and Commerce Department and a representative of
            the private
            financial industry. The Finance Board promulgates regulations which specify
            maximum rates on various types of loans to individuals and revises those
            regulations periodically as general interest rates change.
  Among
            the
            most important regulations enforced on interest rates are Regulations
            5722, 5782
            and 6070. Pursuant to Regulation 5782, there is no limitation on interest
            rates
            that may be charged on small personal loans. The same rule applies to
            retail
            installment sale contracts and credit card loans as provided by Regulation
            6070.
            The rates on these loans are established as a result of the market and
            competition.
 25
 Interest
            rates that may be charged on personal loans, personal lines of credit,
            cash
            advances on credit cards, commercial loans or commercial lines of credit
            and
            residential and commercial mortgage loans are not restricted by Regulation
            5722.
            The rates on these loans are established as a result of the market and
            competition. Regulation 5722 does establish restrictions on prepayment
            penalties
            and late charges for all loans, except commercial loans.
  **International
            Banking Center Regulatory Act** ****
  We
            recently transferred all of the assets and liabilities of our IBE Eurobank
            International, which operated as a division of Eurobank, to a recently
            organized
            IBE subsidiary of Eurobank, EBS Overseas. We also have an IBE that operates
            as a
            division of Eurobank under the name BT International. We acquired this
            IBE in
            connection with the acquisition of BankTrust. Due to statutory limitations
            on
            the amount of assets that can be transferred to subsidiary IBEs while
            still
            preserving tax benefits, we will continue to operate the acquired IBE
            as a
            division of Eurobank and will not immediately transfer its assets to
            our new
            subsidiary IBE, EBS Overseas.
  The
            business and operations of our IBEs are subject to supervision and regulation
            by
            the Commissioner of Financial Institutions of Puerto Rico. Under the
            IBE Act, no
            sale, encumbrance, assignment, merger, exchange or transfer of shares,
            interest
            or participation in the capital of an IBE may be initiated without the
            prior
            approval of the Commissioner of Financial Institutions of Puerto Rico,
            if by
            such transaction a person would acquire, directly or indirectly, control
            of 10%
            or more of any class of stock, interest or participation in the capital
            of the
            IBE. The IBE Act and the regulations issued thereunder by the Commissioner
            of
            Financial Institutions of Puerto Rico limit the business activities that
            may be
            carried out by an IBE. Such activities are limited in part to persons
            and assets
            located outside of Puerto Rico. The IBE Act provides further that every
            IBE must
            have not less than $300,000 of unencumbered assets or acceptable financial
            guarantees.
  Pursuant
            to the IBE Act and the IBE regulations, our IBEs must maintain books
            and records
            of all their transactions in the ordinary course of business. The IBEs
            are also
            required to submit to the Commissioner of Financial Institutions of Puerto
            Rico
            quarterly and annual reports of their financial condition and results
            of
            operations, including annual audited financial statements.
  The
            IBE
            Act empowers the Commissioner of Financial Institutions of Puerto Rico
            to revoke
            or suspend, after notice and hearing, a license issued thereunder if,
            among
            other things, the IBE fails to comply with the IBE Act, the IBE regulations
            or
            the terms of its license, or if the Commissioner of Financial Institutions
            of
            Puerto Rico finds that the business or affairs of the IBE are conducted
            in a
            manner that is not consistent with the public interest.
  IBEs
            generally are exempt from taxation under United States federal law and
            Puerto
            Rico law. Recently, the Legislature of Puerto Rico and the Governor of
            Puerto
            Rico approved a law amending the IBE Act. This law imposes income taxes
            at
            normal statutory rates on each IBE that operates as a unit of a bank,
            if the
            IBE’s net income generated after December 31, 2003 exceeds 40% of the bank’s net
            income in the taxable year commenced on July 1, 2003, 30% of the bank’s net
            income in the taxable year commencing on July 1, 2004, and 20% of the
            bank’s net
            income in the taxable year commencing on July 1, 2005, and thereafter.
            It does
            not impose income taxation on an IBE that operates as a subsidiary of
            a bank.
            Thus, only BT International, which operates as a division of Eurobank
            rather
            than a subsidiary, is impacted by the new law. However, we cannot give
            you any
            assurance that the IBE Act will not be modified in the future in a manner
            to
            reduce the tax benefits available to EBS Overseas. A reduction of such
            tax
            benefits may reduce our earnings.
  **EuroSeguros,
            Inc.**
  EuroSeguros
            is a wholly owned subsidiary of EuroBancshares and is registered as a
            corporate
            agent and general agency with the Office of the Commissioner of Insurance
            of the
            Commonwealth of Puerto Rico. EuroSeguros is subject to regulation by
            the
            Commissioner of Insurance relating to, among other things, licensing
            of
            employees, sales practices, charging of commissions and obligations to
            customers.
  **Future
            Legislation and Economic Policy**
  Management
            of EuroBancshares and Eurobank cannot predict what other legislation
            or economic
            and monetary policies of the various regulatory authorities might be
            enacted or
            adopted or what other regulations might be adopted or the effects thereof.
            Future legislation and policies and the effects thereof might have a
            significant
            influence on overall growth and distribution of loans, investments and
            deposits
            and affect interest rates charged on loans or paid from time and savings
            deposits. Such legislation and policies have had a significant effect
            on the
            operating results of commercial banks in the past and are expected to
            continue
            to do so in the future.
 26
 **SIGNATURES**
  Pursuant
              to the requirements of Section 13 or 15(d) 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:
                      March 8, 2006
                    By:
                    /s/ Rafael
                      Arrillaga Torréns, Jr.Rafael
                      Arrillaga Torréns, Jr.Chairman
                      of the Board, President and Chief Executive
                      Officer
  Pursuant
              to the requirements of the Securities Act of
              1934, this report has been signed below by the following persons on
              behalf of
              the registrant and in the capacities and on the dates indicated.
  Date: March 8,
                      2006
                    By:
                    /s/ Rafael
                      Arrillaga Torréns, Jr.Rafael
                      Arrillaga Torréns, Jr.Chairman
                        of the Board, President and Chief Executive
                        Officer (principal executive
                        officer)
  Date: March 8,
                      2006
                    By:
                    /s/ Yadira
                      R.
                      MercadoYadira
                      R. MercadoExecutive
                      Vice President and Chief Financial Officer (principal
                      financial officer and principal accountingofficer)
  Date: March 8,
                      2006
                    By:
                    /s/
                      Pedro Feliciano BenítezPedro
                      Feliciano BenítezDirector
  Date: March 8,
                      2006
                    By:
                    /s/
                      Juan
                      Ramón Gómez-Cuétara AguilarJuan
                      Ramón Gómez-Cuétara AguilarDirector
  Date: March 8,
                      2006
                    By:
                    /s/ Antonio
                      R. Pavía BibiloniAntonio
                      R. Pavía BibiloniDirector
  Date: March 8,
                      2006
                    By:
                    /s/ Plácido
                      González CórdovaPlácido
                      González CórdovaDirector
  Date: March 8,
                      2006
                    By:
                    /s/ Jorge
                      Calderón DrowettJorge
                      Calderón DrowettDirector
  Date: March 8,
                      2006
                    By:
                    /s/ Ricardo
                      Levy EcheandíaRicardo
                      Levy EcheandíaDirector
  Date: March 8,
                      2006
                    By:
                    /s/ Diana
                      López-FelicianoDiana
                      López-FelicianoDirector
  Date: March 8,
                      2006
                    By:
                    /s/ William
                      Torres TorresWilliam
                      Torres TorresDirector
  27