UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934

For Fiscal Year ended December 31, 2009

Commission File: 001-15849

SANTANDER BANCORP

(Exact name of Corporation as specified in its charter)

Incorporated in the Commonwealth of Puerto Rico
I.R.S. Employer Identification No. 66-0573723
B7 Tabonuco Street, 18th Floor, San Patricio,
Guaynabo, Puerto Rico 00968-3028
Telephone Number: (787) 777-4100

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:


Title of each class		Name of each exchange on which registered

Common Stock, $2.50 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).

Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act).

Yes o No þ

Indicate by check mark whether the Corporation (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (for such shorter period that the Corporation was required to file such reports) and has been subject to such filing requirement for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or non-accelerated filer (as defined in Rule 12b-2 of the Act).


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

As of December 31, 2009 the Corporation had 46,639,104 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the Corporation was $53,868,504 based upon the reported closing price of $12.28 on the New York Stock Exchange on that date.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Corporation’s Proxy Statement relating to the 2010 Annual Meeting of Stockholders of the Corporation to be held on or about April 26, 2010, are incorporated herein by reference to Item 10 through 14 of Part III.

SANTANDER BANCORP


CONTENTS

PART I			3

	Item 1.	Business	3
	Item 1A.	Risk Factors	20
	Item 1B.	Unresolved Staff Comments	23
	Item 2.	Properties	23
	Item 3.	Legal Proceedings	23
	Item 4.	Submission of Matters to a Vote of Security Holders	23

PART II			23

	Item 5.	Market for Registrant’s Common Equity, Related Stockholders’ Matters and Issuer Purchases of Equity Securities	23
	Item 6.	Selected Financial Data	25
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	62
	Item 8.	Financial Statements and Supplementary Data	84
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	145
	Item 9A.	Controls and Procedures	145
	Item 9B.	Other Information	145

PART III			146

	Item 10.	Directors, Executive Officers and Corporate Governance	146
	Item 11.	Executive Compensation	146
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	146
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	146
	Item 14.	Principal Accountant Fees and Services	146

PART IV			147

	Item 15.	Exhibits, Financial Statement Schedules	147

SIGNATURES			148

EXHIBIT INDEX			149
EX-12
EX-21
EX-31.1
EX-31.2
EX-32.1

Santander BanCorp

PART I

ITEM 1. BUSINESS

General

Santander BanCorp (the “Corporation”) is a publicly owned financial holding company, registered under the Bank Holding Company Act of 1956, (“BHC Act”) as amended and, accordingly, subject to the supervision and regulation by the Federal Reserve Board. The Corporation was incorporated under the laws of the Commonwealth of Puerto Rico (“Puerto Rico” or the “Island”) to serve as the financial holding company for Banco Santander Puerto Rico (“Banco Santander” or the “Bank”).

Banco Santander, S.A., (SAN.MC, STD.N), (‘Santander Group”) is a retail and commercial bank, based in Spain, with presence in 10 main markets. At the end of 2009, Santander was the largest bank in the euro zone by market capitalization and third in the world by profit. Founded in 1857, Santander had EUR 1,245 billion in managed funds at the end of 2009. After the acquisition of Sovereign Bancorp in the U.S. during January 2009, Santander has 90 million customers, 13,660 branches -more than any other international bank- and 170,000 employees. It is the largest financial group in Spain and Latin America, with leading positions in the United Kingdom and Portugal and a broad presence in Europe through its Santander Consumer Finance arm. In 2009, Santander registered €8,943 million in net attributable profit.

The Corporation offers a full range of financial services through its subsidiaries Banco Santander Puerto Rico, including mortgage banking, Santander Securities Corporation, Santander Insurance Agency, Inc., Santander International Bank of Puerto Rico, Inc., Santander Asset Management Corporation, Santander Financial Services, Island Insurance Corporation, currently inactive, and Santander PR Capital Trust I. As of December 31, 2009, the Corporation had, on a consolidated basis, total assets of $6.8 billion, total net loans of $5.3 billion, total deposits of $4.4 billion and stockholder’s equity of $595.9 million. The Corporation also had $13.5 billion of customer financial assets under management.

Banco Santander Puerto Rico

The Corporation’s main subsidiary, Banco Santander Puerto Rico, is one of the Island’s largest financial institutions (based on number of branches and customer deposits as reported with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Commissioner of Financial Institutions of Puerto Rico) with a network of 54 branches and 145 ATMs, representing one of the largest branch franchises in Puerto Rico. As of December 31, 2009, the Bank had total assets of approximately $6.6 billion, total deposits of $4.5 billion and stockholders’ equity of $641.4 million.

The Bank provides a wide range of financial products and services to a diverse customer base that includes small and medium-size businesses, large corporations and individuals, including mortgage banking services. The Bank also provides specialized products and services to foreign customers through its wholly owned subsidiary, Santander International Bank of Puerto Rico, Inc. (“Santander International Bank”), an international banking entity organized under the International Banking Center Regulatory Act of Puerto Rico (“IBC Act”).

Santander International Bank of Puerto Rico, Inc.

Santander International Bank of Puerto Rico, Inc. is a wholly owned subsidiary of Banco Santander Puerto Rico, organized during 2001 to operate as an international banking entity under the International Banking Center Regulatory Act of Puerto Rico. Santander International Bank was created for the purpose of providing specialized products and services to foreign customers.

Santander Securities Corporation

Santander Securities Corporation (“Santander Securities”) is the second largest securities broker-dealer (based on broker-dealer customer assets and mutual funds managed as reported with the SEC and the Office of the Commissioner of Financial Institutions of Puerto Rico) in Puerto Rico with approximately $9.4 billion in assets under management, composed of over $5.5 billion in customer assets at the retail broker-dealer and $3.9 billion in managed gross assets and institutional accounts at its wholly owned subsidiary, Santander Asset Management. Santander Securities has three offices islandwide and an office in Miami, Fl.

Santander Asset Management Corporation

Santander Asset Management Corporation (“Santander Asset Management” or “SAM”) is a wholly owned subsidiary of Santander Securities created for the purpose of managing assets for Puerto Rico investment companies (mutual funds) and institutional accounts. The funds managed by Santander Asset Management invest primarily in fixed-income securities, including Puerto Rico and U.S. Government securities, mortgage-backed and asset-backed securities and municipal obligations. Santander Asset Management also services its institutional accounts, which consist primarily of university endowments, insurance companies, governmental agencies, pension funds and individual investors.

Santander Insurance Agency, Inc.

The Corporation’s subsidiary, Santander Insurance Agency, Inc. (“Santander Insurance”) was established in October 2000 as the first financial holding company insurance operation to receive approval from the Commissioner of Insurance of Puerto Rico (“Insurance Commissioner”). This was a result of the Gramm-Leach-Bliley Act of 1999 (“Gramm-Leach-Bliley Act”) that authorized financial holding companies to enter into the insurance business. Santander Insurance Agency offers a growing base of products, including life, disability, unemployment and title insurance as a corporate agent, and also operates as a general agent offering bid, payment and performance bonds, and insurance to cover equipment and auto leases.

Santander Financial Services, Inc.

Santander Financial Services, Inc. (“Santander Financial Services” or “Island Finance”) is the largest consumer finance company in Puerto Rico (as reported with the Office of the Commissioner of Financial Institutions). Island Finance is a well established consumer finance business in Puerto Rico. The brand has operated in Puerto Rico for over 40 years, is one of the most recognized brand names in consumer finance and commands a 43% market share as of September 30, 2009 (as reported with the Office of the Commissioner of Financial Institutions). The acquisition of Island Finance in 2006 boosted the Corporation’s business footprint by adding 60 consumer retail branches and close to 123,000 clients. Santander Financial Services, Inc. through, Island Finance provides mainly consumer loans and real estate-secured loans to customers.

Island Insurance Corporation

In July 2006, the Corporation acquired Island Insurance Corporation, a Puerto Rico life insurance company, duly licensed by the Puerto Rico Commissioner of Insurance. This corporation is currently inactive.

Santander PR Capital Trust I

A statutory trust organized under the Statutory Trust Act of the state of Delaware. It was formed for the purpose of issuing trust redeemable preferred securities issued pursuant to the acquisition of Island Finance in 2006.

Operations

The Corporation operates a client-oriented, full-service bank, offering products and services in the areas of commercial, mortgage and consumer banking. Insurance, securities and asset management services are also offered through the Corporation’s various subsidiaries. The Corporation organizes its operations in five reportable segments: Commercial Banking, Mortgage Banking, Consumer Finance, Treasury and Investments, and Wealth Management.

While the Bank offers a wide variety of financial services to its customers, its primary products and services are grouped into the following categories:

Commercial Banking. The Corporation’s integrated business model is built upon the strength of its commercial banking franchise and its distribution capabilities. This segment’s goal is to be an agile client-service organization with the primary focus on satisfying the total financial needs of its customers through specialized retail and wholesale banking services. These two units of the commercial banking segment are closely interrelated and are differentiated mostly by the composition of their respective client-bases.

Retail Banking. The Retail Banking unit serves individual clients and small-and medium-sized businesses providing them with a full range of financial products and services through branches across Puerto Rico. Each branch represents an important vehicle for distributing the retail banking solutions. Branch personnel promote cross selling of financial products and coordinate service delivery.

Wholesale Banking. The Wholesale Banking unit serves major corporate and institutional clients including the public sector, not-for-profit organizations and specialized industries such as universities, healthcare and financial institutions. This unit also houses certain specialized services such as construction lending, international commerce and cash management. Wholesale banking also calls into play the substantial resources of our worldwide operations, when such involvement is deemed appropriate or necessary to achieve the client’s financial objectives. Wholesale banking clients are offered a full array of commercial banking products and services, including cash management, bank card products, letters of credit and a variety of other foreign trade-related services. This unit works closely with retail banking branch personnel when its specialized services are required.

Mortgage Banking. Through Santander Mortgage Corporation up to December 31, 2007 and as a Bank’s division thereafter, this business segment, the fifth largest mortgage loan originator (based on information on mortgage production obtained from the Office of the Commissioner of Financial Institutions of Puerto Rico) and servicer in Puerto Rico, originates, sells, and services a variety of residential mortgage loans. Total mortgage loan originations amounted to $195.5 million in 2009, the mortgage loan portfolio reached $2.4 billion by year-end and the mortgage servicing portfolio consisted of $1.4 billion serviced for other institutions.

Consumer Finance. The Island Finance operation provides consumer loans and real estate-secured loans through its 60 consumer retail branches in Puerto Rico. Island Finance provides lending to near prime or “Band C” borrowers (individuals with Fair Isaac Corporation (“Fico Scores”) of 620 or less among other factors), which represent approximately of 27.5% of total loan portfolio.

Treasury and Investments. The Corporation’s Treasury Department handles its investment portfolio and liquidity position. It also focuses on offering another level of financial service to our clients in the form of derivative instruments that can protect the owner of small and medium-sized business from the impact of interest rate fluctuations.

Wealth Management. The Corporation’s Wealth Management segment includes the operations of its subsidiary Santander Securities. Santander Securities offers a complete range of products and services as part of an overall wealth management program that includes asset management and other trust services. The combination of Santander Asset Management products and Santander Securities’ distribution capabilities has allowed Santander Group to provide a diverse range of high quality investment alternatives in the Puerto Rico market.

The principal offices of the Corporation are located at B7 Tabonuco Street, 18th Floor, San Patricio, Guaynabo, Puerto Rico, and the main telephone number is (787) 777-4100. The Corporation’s Internet web site is http://www.santandernet.com.

Forward Looking Statements

When used in this Form 10-K or future filings by Santander BanCorp with the Securities and Exchange Commission, in the Corporation’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the word of phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “is anticipated”, “estimate”, “project”, “believe” , or similar expressions are intended to identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities, competitive and regulatory factors and legislative changes, could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from those anticipated or projected. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

REGULATION AND SUPERVISION

Overview

The Corporation and its banking subsidiary are subject to extensive federal and Puerto Rico banking regulations that impose restrictions on and provide for general regulatory oversight of the Corporation and its operations. Set forth below is a summary description of material laws and regulations that relate to the operations of the Corporation and its subsidiaries, including the Bank. This summary description does not purport to be complete and is qualified in its entirety by reference to the full text of the particular statutes and regulations described. Supervision, regulation and examination of banks by regulatory agencies are intended primarily for the protection of depositors, the deposit insurance fund of the FDIC, other clients of the institution and the banking system as a whole, and not for the benefit of the Corporation’s shareholders.

Future changes in laws, regulations or policies that impact the Corporation and its subsidiaries, including the Bank, cannot be predicted and may have a material effect on our business and earnings. Legislation relating to banking and other financial services has been introduced from time to time in Congress and is likely to be introduced in the future. If enacted, such legislation could significantly change the competitive environment in which the Corporation and its subsidiaries operate. The Corporation cannot predict whether these or any other proposals will be enacted or the ultimate impact of any such legislation on our competitive situation, financial condition or results of operations.

Holding Company Operations — Federal Regulation

General

The BHC Act and the Gramm-Leach-Bliley Act (“GLB Act”). The Corporation is a bank holding company registered under the BHC Act and subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company, the Corporation is required to file periodic and annual reports with the Federal Reserve and other information concerning its own business operations and those of its subsidiaries. The BHC Act subjects 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. The BHC Act requires that a bank holding company obtain prior Federal Reserve Board approval before: (i) acquiring direct or indirect ownership or control of more than 5% of any class of the voting shares of any bank; (ii) acquiring all or substantially all of the assets of any bank; or (iii) merging or consolidating with another bank holding company. The Federal Reserve Board also has authority to issue cease and desist orders against holding companies and their non-bank subsidiaries.

The BHC Act prohibits a bank holding company, with limited exceptions, from engaging in any business other than the business of banking, or of managing or controlling banks, and to any other activity that the Federal Reserve deems to be so closely related to banking as to be a proper incident thereto.

Enacted in 1999, the GLB Act revised and expanded the existing provisions of the BHC Act by permitting a bank holding company to elect to become a “financial holding company” to engage in a full range of financial activities. The law eliminated the legal barriers to affiliations among banks and securities firms, insurance companies and other financial services companies. The law reserved the role of the Federal Reserve as the supervisor for bank holding companies. At the same time, it also provided a system of functional regulation which is designed to utilize the various existing federal and state regulatory bodies. The qualification requirements provide that in order for a bank holding company to elect to be treated as a financial holding company (and to maintain such treatment), all 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.” Under the law, financial holding companies and banks that desire to engage in new financial activities are required to have a “satisfactory” or better Community Reinvestment Act (“CRA”) rating when they commence the new activity. On May 15, 2000, the Corporation elected to become a financial holding company under the provisions of the GLB Act.

Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or to the financial system generally. The GLB Act, specifically provides that the following activities have been determined to be “financial in nature”: (a) lending, trust and other banking activities; (b) insurance activities; (c) financial or economic advice or services; (d) pooled investments; (e) securities underwriting and dealing; (f) existing bank holding company domestic activities; (g) existing bank holding company foreign activities; and (h) merchant banking activities. Santander Insurance Agency, which is a wholly-owned subsidiary of the Corporation, offers

insurance agency services. Santander Securities, which is also a wholly-owned subsidiary of the Corporation, offers securities brokerage, dealing and underwriting services.

In addition, the GLB Act specifically gives the Federal Reserve the authority, by regulation or order, to expand the list of “financial” or “incidental” activities, but requires consultation with the U.S. Treasury, and gives the Federal Reserve 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.”

Under the GLB Act, if the Corporation fails to continue to meet any of the requirements for financial holding company status, the Corporation must enter into an agreement with the Federal Reserve to comply with all applicable requirements. If the Corporation is unable to cure such deficiencies within certain prescribed periods of time, the Federal Reserve could require the Corporation to divest control of its depository institution subsidiaries or alternatively cease conducting financial activities that are not permissible for bank holding companies that are not financial holding companies.

Under Federal Reserve policy, a bank holding company such as the Corporation is expected to act as a source of financial strength for its banking subsidiary and is required to commit resources to support the Bank. Moreover, an obligation to support the Bank may be required at times when, absent such policy, the Corporation might not be inclined to provide it. In addition, any capital loans by a bank holding company to any of its subsidiary banks must be subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to the federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. The Bank is currently the only subsidiary depository institution of the Corporation.

The GLB Act also modified other laws, including laws related to financial privacy and community reinvestment. These financial privacy provisions generally prohibit financial institutions, including the Corporation’s bank subsidiary, from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to “opt out” of the disclosure.

USA Patriot Act

The USA Patriot Act of 2001 (the “USA Patriot Act”) was enacted in response to the terrorist attacks that occurred on September 11, 2001. The statute amended the Bank Secrecy Act and broadened the application of anti-money laundering regulations to apply to additional types of financial institutions, such as broker-dealers, and strengthened the ability of the U.S. government to prosecute international money laundering and the financing of terrorism. Under the statute, all financial institutions, including the Corporation and the Bank, are required in general to verify the identity of clients, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial institutions, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the GLB Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing.

The U.S. Treasury Department (“U.S. Treasury”) has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and financing of terrorists.

Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institution. The Corporation and its subsidiaries have adopted policies, procedures and controls designed to comply with the USA Patriot Act and regulations adopted thereunder by the U.S. Treasury.

Privacy Policies

The GLB Act requires financial institutions to adopt and implement policies and procedures regarding the disclosure of non-public personal information about consumers to non-affiliated third parties and the protection of customer data from unauthorized access. In general, the statute requires explanations to consumers on policies and procedures regarding the disclosure of such non-public personal information, and, except as otherwise required by law, prohibits disclosing such information except as provided in the institution’s policies and procedures. The Corporation and its subsidiaries have adopted

policies and procedures in order to comply with the privacy provisions of the GLB Act, pursuant to which all its existing and new customers are notified of the privacy policies.

Dividend Restrictions

The Corporation is a legal entity separate and distinct from the Bank and our other subsidiaries and affiliated entities. The principal sources of our cash flow, including cash flow to pay dividends to our shareholders, are dividends that the Bank and our other subsidiaries pay us as their sole shareholder. Various statutory and regulatory limitations limit the amount of dividends that the Bank can pay the Corporation, as well as to the dividends that the Corporation can pay to its shareholders. The policy of the Federal Reserve that a bank holding company should serve as the source of strength to its subsidiary banks also results in the position of the Federal Reserve that a bank holding company should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of its bank subsidiaries or that can be funded through additional borrowings or other arrangements that may undermine the bank holding company’s ability to serve as such a source of strength.

The Federal Reserve Board and the FDIC have also issued policy statements that provide that bank holding companies and their insured banks should generally pay dividends only out of current operating earnings. The Federal Reserve has indicated that in the current financial and economic environment bank holding companies should carefully review their dividend policy and has discouraged dividend pay-out ratios that are at the 100% or higher level unless the asset quality and the capital of the institution are very strong.

The Corporation’s ability to pay dividends is also subject to the provisions of Puerto Rico corporations’ law which requires that dividends be paid out only from the Corporation’s net assets in excess of capital or in the absence of such excess, from the Corporation’s net earnings for such fiscal year and/or the preceding fiscal year.

The ability of the Bank to declare and pay dividends on its common stock is restricted by the Puerto Rico Banking Law. In general terms, the Puerto Rico Banking Law provides that when the expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be charged against undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If there is an insufficient reserve fund to cover such balance in whole or in part, the outstanding amount shall be charged against the bank’s capital account. The Bank may not declare any dividends under the statute until its capital has been restored to its original amount and the reserve fund to 20% of the original capital.

In light of the continuing challenging general economic conditions in Puerto Rico and the global capital markets, in August 2008 the Board of Directors of the Corporation voted to discontinue the payment of the quarterly cash dividend on the Corporation’s common stock to strengthen the institution’s core capital position. The Corporation may use a portion of the funds previously paid as dividends to reduce its outstanding debt. The Corporation’s decision is part of the significant actions it has proactively taken in order to face the on-going challenges presented by the Puerto Rico economy, which among others, include: maintaining an on-going strict control on operating expenses; an efficiency plan driven to lower its current efficiency ratio; and merging its mortgage banking and commercial banking subsidiaries.

The payment of dividends by the Corporation, or by the Bank, may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The FDIC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Moreover, under the FDIA, a depository institution may not pay any dividend if payment would cause the depository institution to become undercapitalized or if it already is undercapitalized.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank (“FHLB”) system. The FHLB system consists of twelve regional FHLBs governed and regulated by the Federal Housing Finance Board. Among other benefits, each FHLB serves as reserve or central bank for its member institutions within its assigned region. Each FHLB is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. Each make available loans or advances to its members in accordance with policies and procedures established by the FHLB system and the boards of directors of each regional FHLB.

The Bank is a member of the FHLB of New York. As such, the Bank is required to own capital stock in that FHLB in an amount equal to the greater of: (i) 1.0% of the aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year, or (ii) 5.0% of its FHLB outstanding advances or borrowings. At December 31, 2009, the Bank met the required investment in FHLB stock, holding $55.4 million in

capital stock of the FHLB of New York. All loans, advances and other extensions of credit made by the FHLB of New York to the Bank are secured by a portion of the Bank’s mortgage loan portfolio, certain other investments and the FHLB capital stock owned by the Bank.

Limitations on Transactions with Affiliates

Transactions between depository institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act and Regulation W adopted by the Federal Reserve, which codifies prior regulations under Sections 23A and 23B and provides interpretative guidance with respect to affiliate transactions. An affiliate of a depository institution is any company or entity, which controls, is controlled by or is under common control with the depository institution. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company (or by the ultimate parent company of such bank holding company) are affiliates of the depository institution. In general, subject to certain specified exemptions, under Section 23A, depository institutions and their subsidiaries are limited in their ability to engage in “covered transactions” with any one affiliate to an amount equal to 10% of the depository institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. Affiliate transactions are also subject to Section 23B which generally requires that all such transactions be on terms substantially the same, or at least as favorable, to the depository institution or subsidiary as those prevailing at the time for comparable transactions with non-affiliated persons. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions. In addition, loans or other extensions of credit by the depository institution to the affiliate are required to be collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve Act.

Loans to Insiders

Sections 22(h) and (g) of the Federal Reserve Act and its implementing regulation, Regulation O, restrict 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. In addition, the aggregate amount of extensions of credit by a depository institution to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.

Capital Requirements

The Federal Reserve has adopted capital risked-based guidelines to evaluate the capital adequacy of bank holding companies. Under these guidelines, specific categories of assets are assigned different risk weights based generally on the perceived credit risk of the asset, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of assets which are typically held by a bank holding company, including multi-family residential and commercial real estate loans, commercial business loans and commercial loans. These risks weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. The Federal Reserve capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8.0% of total risk-adjusted assets, with at least 4.0% consisting of Tier I or core capital and the rest consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common stockholders’ equity and perpetual preferred stock, subject to limitations on the kind and amount of such perpetual preferred stock which may be included as Tier I capital, less goodwill and, with certain exceptions, intangibles. Tier II capital generally consists of hybrid capital instruments, perpetual preferred stock which is not eligible to be included as Tier I capital, term subordinated debt and intermediate-term preferred stock, and, subject to limitations, generally allowances for loan losses. Total capital is the sum of Tier I and Tier II capital. As of December 31, 2009, the Corporation’s Tier I risk-based capital ratio was 10.6% and our total risk-based capital ratio was 15.55%.

In addition to the risk-based capital guidelines, the Federal Reserve requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital to total consolidated assets of 3.0%. Total consolidated assets for purposes of this calculation do not include goodwill and any other intangible assets and investments that the Federal Reserve determines should be deducted from Tier I capital. Certain top-rated bank holding companies without supervisory, financial or operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth may maintain a minimum

leverage capital ratio of 3.0%. Other bank holding companies are required to maintain a leverage capital ratio of at least 4.0%. As of December 31, 2009, the Corporation’s leverage capital ratio was 7.98%.

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 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.

The Basel Committee on Banking Supervision proposed new risk-based international capital standards (“Basel II”) in June 2004, and the new framework is currently being evaluated and implemented by bank supervisory authorities worldwide. Basel II is an effort to update the original international bank capital accord (“Basel I”), which has been in effect since 1988. Basel II is intended to improve the consistency of capital regulations internationally, make regulatory capital more risk sensate, and promote enhanced risk-management practices. A definitive final rule for implementing the advanced approaches of Basel II in the United States, which applies only to certain large or internationally active or “core” banking organizations (defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more) became effective on April 1, 2008. Other U.S. banking organizations may elect to adopt the requirements of this rule (if they meet applicable qualification requirements), but are not required to comply. The rule also allows a banking organization’s primary federal supervisor to determine that application of the rule would not be appropriate in light of the bank’s asset size, level of complexity, risk profile or scope of operations.

To correct differences between core and non-core banking organizations, Basel IA was proposed in late 2006 presenting modifications to the general risk-based capital rules for non-core banking organizations that do not adopt the advanced approaches. After considering the comments on both the Basel IA and the advanced approaches, in July 2008, the agencies proposed a new rule that would provide all non-core banking organizations with an option to adopt the standardized approach under Basel II. This alternative provides a more risk sensitive capital framework to institutions not adopting the advanced approaches without unduly increasing regulatory burden. Comments on the proposed rule were due to the agencies by October 27, 2008, but a definitive final rule has not been issued. The proposed rule, if adopted, will replace the Basel IA approach.

In light of the weaknesses revealed by the financial market crisis, in January 2009, the Basel Committee on Banking Supervision issued a consultative package proposing enhancements to strengthen the regulation and supervision of internationally active banks. The proposed enhancements will help ensure that the risks inherent in banks’ portfolios related to trading activities, securitizations and exposures to off-balance sheet vehicles are better reflected in minimum capital requirements, risk management practices and accompanying disclosures to the public.

The Corporation does not meet the criteria in the new U.S. rules which would make adoption of the new Basel II rules mandatory.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 (“SOA”) was enacted to address corporate and accounting improprieties. SOA contains reforms of various business practices and numerous aspects of corporate governance. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The SOA includes additional public disclosure requirements and new corporate governance rules.

SOA addresses, among other matters: (i) expansion of the authority and responsibilities of audit committees, (ii) certification of financial statements by the chief executive officer and the chief financial officer, (iii) the forfeiture of bonuses or other incentive base compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve-month period following initial publication of any financial statements that later require restatement, (iv) a prohibition on insider trading during pension plan black-out periods, (v) disclosure of off-balance sheet transactions, (vi) a prohibition on personal loans to directors and officers, (vii) expedited filing requirements for Form 4’s, (viii) disclosure of a code of ethics and filing of a Form 8-K for a change or waiver of such code and protection for whistleblowers and informants, (ix) “real time” filing of periodic reports, (x) the formation of an independent accounting oversight board (“PCAOB”) to oversee the audit of public companies and auditors who perform such audits, (xi) auditor independence provisions which restrict the non-audit services that independent accountants may provide to their audit clients, and (xii) various increased criminal penalties for fraud and other violations of securities laws.

Change of Control

Federal law restricts the amount of voting stock of a bank holding company and a state bank that a person may acquire without the prior approval of banking regulators. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Regulations pursuant to the BHC Act and the Change in Bank Control Act generally require prior FDIC and Federal Reserve approval for an acquisition of control of an insured institution or its holding company, respectively, by any person or persons acting in concert. Control is deemed to exist if, among other things, a person (or persons acting in concert) acquires more than 25% of any class of voting stock of an insured institution or its holding company. Control is presumed to exist subject to rebuttal, if a person (or persons acting in concert) acquires more than 10% of any class of voting stock and either (i) the company has securities registered under Section 12 of the Exchange Act, or (ii) no person will own, control or hold the power to vote a greater percentage of that class of voting securities immediately after the transaction. The concept of acting in concert is very broad and also is subject to certain rebuttable presumptions, including among others, that relatives, business partners, management officials, affiliates and others are presumed to be acting in concert with each other and their businesses. The FDIC’s regulations implementing the Change in Bank Control Act are generally similar to those described above.

The Banking Law requires the approval of the Commissioner for changes in control of a Puerto Rico bank. See “Banking Operations-Puerto Rico Regulation.”

Banking Operations

General

The Bank is a Puerto Rico corporation chartered as a commercial bank under the Banking Law of Puerto Rico. The Bank is a “state bank” and an “insured depository institution” under the Federal Deposit Insurance Act (“FDIA”), and a “foreign bank” within the meaning of the International Banking Act of 1978. The Bank is not a member of the Federal Reserve System, making it primarily subject to regulation and supervision by the Commissioner and the FDIC. The federal and Puerto Rico laws and regulations that apply to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the types and amounts of loans that may be granted and the interest that they may charge, the timing of the availability of deposited funds, the nature and amount of and collateral for certain loans and the types of services they may offer. As a creditor and financial institution, the Bank is subject to consumer laws and regulations promulgated by the Federal Reserve, which also affect its operations. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve as it attempts to control the money supply and credit availability in order to influence the economy.

The Bank is subject to periodic examinations by the Commissioner and the FDIC. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banks and their affiliates. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound banking practices. In addition, certain actions are required by statute and implementing regulations. Other actions or inaction may provide the basis for enforcement action, including misleading or untimely reports filed by a bank with regulatory authorities.

FDIC Capital Requirements

The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks, like the Bank, that are not members of the Federal Reserve System. For purposes of the FDIA, Puerto Rico is treated as a state and the Bank as such is a state-chartered non-member bank. These requirements are substantially similar to those adopted by the Federal Reserve regarding bank holding companies, as described above. The FDIA, among other things, requires federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. The relevant capital measures are the total risk-based capital ratio, the Tier I risk-based capital ratio and the leverage ratio. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. The federal banking agencies have specified by regulation

the relevant capital for each category. A well capitalized depository institution, for example, must maintain a leverage ratio of at least 5.0%, a Tier I risk-based capital ratio of at least 6.0% and a total risk-based capital ration of at least 10.0% and not be subject to any written agreement or directive to meet and maintain a specific capital level.

An institution that is categorized as undercapitalized, significantly undercapitalized or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking regulator. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

Failure to meet capital guidelines could subject an insured bank like the Bank to a variety of prompt corrective actions and enforcement remedies under the FDIA, including, with respect to an insured bank, the termination of deposit insurance by the FDIC, and to certain restrictions on its business. In general terms, undercapitalized depository institutions are prohibited from making any capital distributions (including dividends), are subject to restrictions on borrowing from the Federal Reserve System, and are subject to growth limitations and are required to submit capital restoration plans.

At December 31, 2009, the Bank met the capital requirements of a well capitalized institution.

An institution’s capital category, as determined by applying the prompt corrective action provisions of law, may not constitute an accurate representation of the overall financial condition or prospects of the institution. The capital condition of the Bank should be considered in conjunction with other available information regarding the Corporation’s financial condition and results of operations.

FDIC Deposit Insurance Assessments

Banco Santander is subject to FDIC deposit insurance assessments. On February 8, 2006, the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”) was signed by the President. The Reform Act provided for the merger of the Bank Insurance Fund (“BIF”) and Savings Association Insurance Fund (“SAIF”) into a single Deposit Insurance Fund (“DIF”), increase in the maximum amount of FDIC insurance coverage for certain retirement accounts, and possible “inflation adjustments” in the maximum amount of coverage available with respect to other insured accounts. In addition, it granted a one-time initial assessment credit to recognize institutions’ past contributions to the fund.

On October 3, 2008, President George W. Bush signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”), which temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective upon the President’s signature. On September 9, 2009, the FDIC Board of Directors approved a rule to finalize: (1) the deposit insurance coverage regulations to reflect the extension of the temporary increase in the standard maximum deposit insurance amount (SMDIA) to $250,000 through December 31, 2013.

The deposits of Banco Santander are insured up to the applicable limits by the DIF of the FDIC and are subject to the deposit insurance assessments to maintain the DIF. Banco Santander Puerto Rico paid $7.2 million of regular insurance premium to the FDIC during 2009.

Under the Reform Act, the FDIC made significant changes to its risk-based assessment system so that effective January 1, 2007, the FDIC imposes insurance premium based upon a matrix that is designed to more closely tie what banks pay for deposit insurance to the risk they pose. The new FDIC risk-based assessment system imposes premium based upon factors that vary depending upon the size of the bank. These factors are: for banks with less than $10 billion in assets-capital level, supervisory rating, weighted average CAMELS component rating, and certain financial ratios; and for banks with $10 billion up to $30 billion in assets-capital level, supervisory rating, weighted average CAMELS component rating, certain financial ratios and (if at least one is available) long-term debt issuer ratings, and additional risk information; and for banks with over $30 billion in assets- capital level, supervisory rating, weighted average CAMELS component rating, debt issuer ratings (unless none are available in which case certain financial ratios are used), and additional risk information. The FDIC subsequently adopted a new base schedule of rates that the FDIC can adjust up or down, depending on the revenue needs of the DIF, and set initial premiums that range from 5 cents per $100 of domestic deposits for the banks in the lowest risk category to 43 cent per $100 of domestic deposits for banks in the highest risk category. This assessment system resulted in a 2008 annual assessment rate on the deposits of Banco Santander of 7 cents per $100 of deposits. Effective January 1, 2009, FDIC increased assessment rates uniformly by 7 basis points (annual rate) for the first quarter 2009 assessment period only. Annual rates applicable to the first quarter 2009 assessments, which would was collected at the end of June 2009, are based on: (i) risk

category I: 12 — 14 basis points; (ii) risk category II: 17 basis points; (iii) risk category III: 35 basis points; and (iv) risk category IV: 50 basis points.

On November 21, 2008, the Board of Directors of the FDIC approved the Temporary Liquidity Guarantee Program (“TLGP”) to strengthen confidence and encourage liquidity in the banking system. The TLGP is comprised of the Debt Guarantee Program (“DGP”) and the Transaction Account Guarantee Program (“TAGP”). The DGP guarantees all newly issued senior unsecured debt (e.g., promissory notes, unsubordinated unsecured notes and commercial paper) up to prescribed limits issued by participating entities, including bank holding companies, beginning on October 14, 2008 and continuing through October 31, 2009. For eligible debt issued by that date, the FDIC will provide the guarantee coverage until the earlier of the maturity date of the debt or June 30, 2012. The TAGP offers a full guarantee for non interest-bearing transaction deposit accounts held at FDIC-insured depository institutions. The unlimited deposit coverage is voluntary for eligible institutions and is in addition to the $250,000 FDIC deposit insurance per depositor that was included as part of the EESA. The TAGP coverage became effective on October 14, 2008 and will continue for participating institutions until December 31, 2009. Participants in the DGP program have a fee structure based on a sliding scale, depending on length of maturity. Shorter-term debt has a lower fee structure and longer-term debt have a higher fee. The range is 50 basis points on debt of 180 days or less, and a maximum of 100 basis points for debt with maturities of one year or longer, on an annualized basis. Any eligible entity that has not chosen to opt out of the TAGP is assessed, on a quarterly basis, an annualized 10 cents per $100 fee on balances in non interest bearing transaction accounts that exceed the existing deposit insurance limit of $250,000. The Corporation is only participating on the “TAGP” program.

On May 22, 2009, the Board of Directors of the FDIC adopted a final rule to impose an emergency special assessment of 5 cents per $100 based on factors such as capital level, supervisory rating, certain financial ratios and risk information on each insured depository institution assets minus Tier 1 capital as of June 30, 2009. The amount of special assessment for any institution will no exceed 10 basis points times the institution’s assessment base for the second quarter 2009. The special assessment was collected on September 30, 2009. The Corporation paid $3.2 million of this emergency special assessment.

The FDIC amended its regulations requiring insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. The prepaid assessment for these periods was collected on December 31, 2009, along with each institution’s regular quarterly risk-based deposit insurance assessment for the third quarter of 2009. For purposes of estimating an institution’s assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, and calculating the amount that an institution prepaid on December 31, 2009, the institution’s assessment rate was its total base assessment rate in effect on September 30, 2009. On September 29, 2009, the FDIC increased annual assessment rates uniformly by 3 basis points beginning in 2011. As a result, an institution’s total base assessment rate for purposes of estimating an institution’s assessment for 2011 and 2012 will be increased by an annualized 3 basis points beginning in 2011. Again, for purposes of calculating the amount that an institution prepaid on December 30, 2009, an institution’s third quarter 2009 assessment base will be increased quarterly at a 5 percent annual growth rate through the end of 2012. The FDIC will begin to draw down an institution’s prepaid assessments on March 30, 2010, representing payment for the regular quarterly risk-based assessment for the fourth quarter of 2009.

As of December 31, 2009, the Corporation had a prepaid of $25.8 of estimated quarterly risk-based deposit insurance assessment. Events during the prepayment period, such as slower deposit growth or changes in CAMELS ratings, may cause an institution’s actual assessments to differ from the pre-paid amount. Assessment billing will account for events that occur during the prepayment period and may result in an institution either paying assessments in cash before the prepayment period has concluded or ultimately receiving a rebate of unused amounts.

The Deposit Insurance Funds Act of 1996 separated the Financing Corporation (“FICO”) assessment to service the interest on its bond obligations from the DIF assessment. The amount assessed on individual institutions by the FICO is in addition to the amount, if any, paid for deposit insurance according to the FDIC’s risk-related assessment rate schedules. The FICO assessment rate for the fourth quarter of 2009 was $1.06 per $100 of DIF-assessable deposits. As of December 31, 2009, the Bank had a DIF deposit assessment base of approximately $4.5 billion.

The FDIC may terminate its insurance of deposits if it finds after a hearing that the depository 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, rule, order or 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.

Community Reinvestment Act

The Bank has a responsibility under the CRA and related regulations, to help meet the credit needs of its entire community, including low-and moderate-income neighborhoods consistent with safe and sound banking practice. The CRA does not establish specific lending requirements or programs for such banks 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 each federal banking agency, in connection with its examination of an insured depository institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community. An institution’s failure to comply with the provisions of the CRA could lead to potential penalties, including regulatory denials of applications to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or purchase other financial institutions. The CRA also requires that all institutions make public disclosure of their CRA ratings. The Bank received a rating of “outstanding” from the FDIC on its last CRA examination report dated August 2008.

Office of Foreign Assets Control Regulation

The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are generally known as the “OFAC” rules as they are administered by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they may contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

Brokered Deposits

FDIC regulations adopted under the FDIA govern the receipt of brokered deposits by banks. Well capitalized institutions such as the Bank are not subject to limitations on brokered deposits, while adequately capitalized institutions are able to accept, renew or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. The Bank does not believe the brokered deposits regulation has had or will have a material effect on the funding or liquidity of the Bank.

Federal Limitations on Activities and Investments

The activities and equity investments of FDIC-insured, state-chartered banks (which under the FDIA include banking institutions incorporated under the laws of Puerto Rico) are generally limited to those permitted under applicable state laws and 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. However, an insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, [(ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures director’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and][confirm source] (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met. In addition, an insured state-chartered bank may not, directly or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank that is directly or indirectly engaged in any activity that is not permitted for a national bank must cease such impermissible activity.

Interstate Branching

Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) 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. States are also allowed to permit de novo interstate branching. Under the Riegle-Neal Act amendments, once a state or national bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching (if permitted under state laws) may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opted out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo.

For purposes of the Riegle-Neal Act’s amendments to the FDIA, the Bank is treated as a state bank and is subject to the same restriction on interstate branching as other state banks. However, for purposes of the IBA, the Bank 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 the Bank’s home state.

Banking Operations-Puerto Rico Regulation

General

As a commercial bank organized under the laws of Puerto Rico, the Bank is subject to the supervision, examination and regulation of the Commissioner, pursuant to the Puerto Rico Banking Act of 1933, as amended (the “Banking Law”). The Banking Law contains provisions governing the incorporation and organization, rights and responsibilities of directors, officers and stockholders as well as the corporate powers, lending limitations, capital requirements, investment requirements and other aspects of the Bank and its affairs. In addition, the Commissioner is given extensive rule making power and administrative discretion under the Banking Law.

Section 12 of the Banking Law requires the prior approval of the Commissioner 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 a group of persons acting in concert, directly or indirectly, acquire more than 5% of the outstanding voting capital stock of the bank. The Commissioner 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 Banking Law, the determination of the Commissioner whether to approve a change of control filing is final and non-appealable.

Section 16 of the Banking Law requires every bank to maintain a legal reserve which, except as otherwise provided by the Commissioner, may not be less than 20% of its demand liabilities, excluding 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 a combination thereof: (1) legal tender of the United States; (2) checks on banks or trust companies located in Puerto Rico, to be presented for collection on the day after the day 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 to the extent such funds 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 determines from time to time.

Section 17 of the Banking Law permits Puerto Rico commercial banks to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of 15% the sum of: (i) paid-in capital; (ii) reserve fund of the commercial bank; and (iii) any other components that the Commissioner may determine from time to time. As of December 31, 2009, the legal lending limit for the Bank under this provision was approximately $66.2 million. If such loans are secured by collateral worth at least 25% more than the amount of the loan, the aggregate maximum amount may reach one third of the sum of the Bank’s paid-in capital, reserve fund, retained earnings and any such other components approved by the Commissioner. If the bank is well capitalized and had been rated 1 in the last examination performed by the Commissioner or any regulatory agency, its legal lending limit shall also include 15% of 50% of its undivided profits and for loans secured by collateral worth at least 25% more than the amount of the loan, the capital of the bank shall also include 33 1/3% of 50% of its undivided profits. Institutions rated 2 in their last regulatory examination may include this additional component in their legal lending limit only with the prior authorization of the Commissioner. There are no restrictions under Section 17 of the Banking Law on the amount of loans

which are wholly secured by bonds, securities and other evidences of indebtedness of the Governments of the United States or 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 Banking Law also prohibits banks from making loans secured by their own stock, and from purchasing their own stock in connection therewith, unless such purchase is necessary to prevent losses because of a debt previously contracted in good faith. The stock so purchased by a bank must be sold by it in a public or private sale within one year from the date of purchase.

Section 27 of the Banking Law requires that at least 10% of the yearly net income of the Bank be credited annually to a reserve fund until the amount deposited to the credit of the reserve fund is equal to the total paid-in capital on common and preferred stock of the Bank. As of December 31, 2009, the Bank transfer $2.6 million to Reserve Fund.

Section 27 of the Banking Law also provides that when the expenditures of a bank are greater than receipts, the excess of the expenditures over receipts must 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 the reserve fund is not sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the capital account and no dividends may be declared until 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 Banking Law authorizes the Bank to conduct certain financial and related activities directly or through subsidiaries, including finance leasing of personal property, operating small loans companies and mortgage loans activities. The Bank currently has one wholly-owned subsidiary, Santander International Bank, an international banking entity operating under the International Banking Center Regulatory Act of Puerto Rico (the “IBC Act”).

The Finance Board, which is composed of the Commissioner, the Secretary of the Treasury, the Secretary of Economic and Commercial Development, the Secretary of Consumer Affairs, the President of the Economic Development Bank, the President of the Planning Board, the President of the Government Development Bank for Puerto Rico, the Executive President of the Public Corporation for the Supervision and Insurance of Cooperatives and the Insurance Commissioner, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in Puerto Rico. The current regulations of the Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses, including real estate development loans but excluding certain other personal and commercial loans secured by mortgages on real estate properties and finance charges on retail installment sales and for credit card purchases, is to be determined by free competition. Regulations adopted by the Finance Board deregulated the maximum finance charges on retail installment sales contracts, and for credit card purchases. These regulations do not set a maximum rate for charges on retail installment sales contracts and for credit card purchases and set aside previous regulations which regulated these maximum finance charges. Furthermore, there is no maximum rate set for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and insurance premiums.

IBC Act

Santander International Bank, an international banking entity (“IBE”), is subject to supervision and regulation by the Commissioner under the IBC Act. Under the IBC 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, if by such transaction a person or persons acting in concert would acquire, directly or indirectly, control of 10% or more of any class of stock, interest or participation in the capital of the IBE. Such authorization must be requested at least 30 days prior to the transaction. The IBC Act and the regulations issued thereunder by the Commissioner limit the business activities that may be carried out by an IBE. The activities of Santander International Bank are limited to dealing with persons and assets located outside Puerto Rico. The IBC Act further provides that every IBE must have not less than $300,000 of unencumbered assets or acceptable financial securities in Puerto Rico.

Under the IBC Act, without the prior approval of the Office of the Commissioner, Santander International Bank may not amend its articles of incorporation or issue additional shares of capital stock or other securities convertible into additional shares of capital stock unless such shares are issued directly to the shareholders of Santander International Bank previously identified in the application to organize the IBE, in which case notification to the Commissioner must be given within ten (10) business days following the date of the issue.

Pursuant to the IBC Act, Santander International Bank must maintain its original accounting books and records in its principal place of business in Puerto Rico. Santander International Bank is also required to submit to the Commissioner quarterly and annual reports of its financial condition and results of operations, including annual audited financial statements.

The IBC Act empowers the Commissioner to revoke or suspend, after notice and hearing, a license issued to an international banking entity if, among other things, the IBE fails to comply with the IBC Act, the regulations issued thereunder, or the terms of its license, or if the Commissioner finds that the business of the IBE is conducted in a manner not consistent with the public interest.

Mortgage Banking Operations

The mortgage banking business conducted by the Bank is subject to the rules and regulations of FHA, VA, FNMA, FHLMC, HUD 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, required credit reports on prospective borrowers and fix maximum loan amounts and, with respect to VA loans, fix maximum interest rates. Moreover, mortgages lenders are required annually to submit to FHA, VA, FNMA, FHLMC, GNMA and HUD, audited financial statements, and each regulatory entity has its own financial requirements. Our mortgage banking business is also subject to supervision and examination by FHA, VA, FNMA, FHLMC, GNMA and HUD at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the regulations promulgated thereunder.

Mortgage loan production activities are subject to the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder. This Act contains disclosure requirements designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to compare credit terms. The Truth-in-Lending Act provides consumers with a three-day right to cancel certain credit transactions, including the refinancing of any mortgage or junior mortgage on a consumer’s primary residence.

The Bank is required to comply with the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit lenders from discriminating against applicants on the basis of race, color, sex, age or marital status, and restrict creditors from obtaining certain types of information from loan applicants. These requirements mandate certain disclosures by lenders regarding consumer rights and require lenders to advice applicants of the reasons for any credit denial. In instances where the applicant is denied credit or the rate or charge for the loan increases as a result of information obtained from a consumer credit agency, another statute, The Fair Credit Reporting Act of 1970, as amended, requires that the lenders supply the applicant with the name and address of the reporting agency. The Real Estate Settlement Procedures Act imposes, among other things, limits on the amount of funds a borrower can be required to deposit in any escrow account for the payment of taxes, insurance premiums and other taxes.

The mortgage banking operation is licensed by the Commissioner under the Puerto Rico Mortgage Banking Law (the “Mortgage Banking Law”), and as such is subject to regulation by the Commissioner, with respect to, among other things, licensing requirements, maximum origination fees on certain types of mortgage loans products, and the recordkeeping, examination and reporting requirements under that statute. The authorization to act as a mortgage banking institution under the Mortgage Banking Law must be renewed each year. Although the Bank believes that it is in compliance in all material respects with applicable Federal and Puerto Rico laws, rules and regulations related to its mortgage banking business, there can be no assurance that more restrictive laws or rules will not be adopted in the future, which could make compliance more difficult or expensive, restricting the Bank’s ability to originate or sell mortgage loans or sell mortgage-backed securities, further limit or restrict the amount of interest and other fees earned from the origination of mortgage loans, or otherwise adversely affect the business or prospects of the Bank.

The Mortgage Banking Law requires the prior approval of the Commissioner for the acquisition of control of any mortgage banking institution licensed under such law. For purposes of the Mortgage Banking Law, the term “control” means the power to direct or influence decisively, directly or indirectly, the management or policies of a mortgage banking institution. The Mortgage Banking Law provides that a transaction that results in the holding of less than 10% of the outstanding voting securities of a mortgage banking institution shall not be considered a change in control.

Broker-Dealer Operations

Santander Securities is registered as a broker-dealer with the SEC and the Commissioner, and is also a member of the Financial Industry Regulatory Authority (“FINRA”). As a registered broker-dealer, it is subject to regulation, examination and supervision by the SEC, the Commissioner and FINRA which can affect its manner of operation and profitability. Such regulations cover a broad range of subject matters. Rules and regulations for registered broker-dealers cover such issues as: net capital requirements; sales and trading practices; use of client funds and securities; the conduct of directors, officers and employees; record-keeping and recording; supervisory procedures to prevent improper trading on material non-public information; qualification and licensing of sales personnel; and limitations on the extension of credit in securities transactions.

Santander Securities is subject to the net capital rule of the Exchange Act, which specify minimum net capital requirements for registered broker-dealers. The net capital requirements are designed to ensure that broker-dealers maintain regulatory capital in relation to their liabilities and the size of their customer business. If Santander Securities fails to maintain its minimum required net capital, it would be required to cease executing customer transactions until it came back into compliance. This could result in Santander Securities losing its FINRA membership, its registration with the SEC, or require a complete liquidation. As of December 31, 2009, Santander Securities was in compliance with the required net capital under the rule.

The SEC’s risk assessment rules also apply to Santander Securities as a registered broker-dealer. These rules require broker-dealers to maintain and preserve records and certain information, describe risk management policies and procedures, and report on the financial condition of affiliates whose financial and securities activities are reasonably likely to have a material impact on the financial and operational condition of the broker-dealer.

Insurance Operations

Santander Insurance Agency is licensed as a corporate agent and general agency by the Office of the Commissioner of Insurance of Puerto Rico (the “Insurance Commissioner”). As such, Santander Insurance Agency is subject to regulation, examination and supervision by the Insurance Commissioner. The applicable regulations relate to, among other things, licensing of employees, sales practices, charging of commissions and obligations to customers.

Island Insurance Corporation is licensed as an insurance company with the Insurance Commissioner. Island Insurance Corporation is subject to regulation, examination and supervision by the Insurance Commissioner. As of December 31, 2009, this corporation was inactive.

Recent Puerto Rico Legislation

On March 9, 2009, the Governor of Puerto Rico signed Law 7 (“Law 7”) which seeks to increase the tax revenues of the Puerto Rico Government with certain permanent and temporary measures. Law 7 includes the following amendments: (i) for taxable years commenced after December 31, 2008 and before January 1, 2012, taxable corporations (such as the Corporation and the Bank) would be subject to a separate tax of 5% based on their total tax liability; (ii) for taxable years commenced after December 31, 2008 and before January 1, 2012, international banking entities that do not operate as bank units would be subject to a 5% income tax on their entire net income computed in accordance with the Puerto Rico Internal Revenue Code of 1994, as amended (the “PR Code”); (iii) certain income tax credits granted to financial institutions in relation to financing provided for the acquisition of new or existing homes may no longer generate a tax refund for any taxable year commenced on or before December 31, 2010 and after such date, this refundable tax credit will not generate interest for the period elapsed between the claim of refund and its payment by the Puerto Rico Treasury Department (as further discussed below); (iv) certain income tax credits granted to developers of projects in designated urban areas which serve as source of repayment for construction loans will not be available during the taxable years commenced after December 31, 2008 and before January 1, 2012; and (v) net income subject to alternative minimum tax in the case of individuals (“AMT”) now includes various categories of exempt income and income subject to preferential tax rates under the PR Code (as further discussed below).

Shareholders of the Corporation will now have to take into consideration for purposes of computing their AMT income subject to preferential tax rates such as: (i) long-term capital gains on the sale of their Corporation stock which enjoys a preferential tax rate of 10% under PR Code Section 1014; (ii) dividends from the Corporation that are taxable at the rate of 10% under PR Code Section 1012; (iii) interest on bank deposits and individual retirement accounts subject to the special 10% and 17% preferential income tax rates, respectively; and (iv) interest from notes or bonds eligible for the special 10% tax rate provided by Section 1013A of the PR Code. These changes may affect this income by subjecting it to AMT. The AMT top rate of 20% starts on alternative minimum taxable income in excess of $175,000. Also, the vast majority of tax-exempt income covered by Section 1022 of the PR Code and other special laws is subject to AMT pursuant to the provisions of Law 7. A notable

exception is the interest income derived from U.S. and Puerto Rico Government obligations which continues to be exempt for AMT purposes even after the enactment of Law 7.

On December 2007, the Governor of Puerto Rico signed Law 197 (“Law 197”) which provided certain credits when individuals purchase certain new or existing homes. The maximum amount of credits under Law 197 amounted to $220,000,000 and such amount was reached before its December 31, 2008 sunset. The incentives under Law 197 were as follows: (a) for a new constructed home constituting the individuals principal residence, a credit equal to 20% of the sales price or $25,000, whichever is lower; (b) for new constructed homes that will not constitute the individuals principal residence, a credit of 10% of the sales price or $15,000, whichever is lower; and (c) for existing homes a credit of 10% of the sales price or $10,000, whichever is lower.

The income tax credit provided under Law 197 may be used against income taxes, including estimated taxes, for years commencing after December 31, 2007 in three installments, subject to certain limitations, between January 1, 2008 and June 30, 2011; the credit may be ceded, sold or otherwise transferred to any other person. Any tax credit not used in a given tax year, as certified by the Secretary of Treasury, may be claimed as a refund but only for taxable years commenced after December 31, 2010 and after such date, this refundable tax credit will not generate interest for the period elapsed between the claim of refund and its payment by the Puerto Rico Treasury Department.

Employees

As of December 31, 2009, the Corporation and its subsidiaries have approximately 1,764 employees. None of its employees are represented by a collective bargaining group. The Corporation considers its employee relations to be good.

Availability at our website

We make available free of charge, through our investor relations section at our internet website, www.santandernet.com, our Form 10-K, Form 10-Q and Form 8-K reports and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

ITEM 1A. RISK FACTORS

The Corporation is subject to risk in several areas. Discussed below, and elsewhere in this report, are the various risk factors that could cause the Corporation’s financial condition and results of operations to vary significantly from period to period. Please refer to the “Regulation and Supervision” section of this report for more information about legislative and regulatory risks. Also refer to the MD&A section, Quantitative and Qualitative Disclosures about Market Risk, and the Financial Statements and Supplementary Data sections in this report for additional information about credit, interest rate and market risks. Any factor described below or elsewhere in this report or in our 2009 Annual Report to Stockholders could, by itself or together with one or more other factors, have a material adverse effect on the Corporation’s financial condition and results of operations.

General business, economic and political conditions. The Corporation’s businesses and earnings are affected by general economic and political conditions in Puerto Rico and the United States of America. General business and economic conditions that could affect the Corporation include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States and Puerto Rico economies. A period of reduced economic growth or a recession has historically resulted in a reduction in lending activity and an increase in the rate of defaults on loans. A recession may have an adverse impact on net interest income and fee income. The Corporation may also experience significant losses on the loan portfolio due to defaults as customers become unable to meet their obligations, which would result in an adverse effect on earnings as higher reserves for loan losses would be required. Geopolitical conditions can also affect the Corporation’s earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, could affect the general business and economic conditions in Puerto Rico, United States and abroad.

The Corporation’s financial activities and credit exposure are concentrated in Puerto Rico. As a result, the Corporation’s financial condition and results of operations are highly dependent on economic conditions in Puerto Rico. An extended economic slowdown, adverse political or economic developments or natural disasters such as hurricanes, affecting Puerto Rico could result in a reduction in lending activities and an increase in the level of non-performing assets and charge offs, all of which would adversely affect the Corporation’s profitability.

Competition. The Corporation operates in a highly competitive environment in Puerto Rico composed of other local and international banks as well as mortgage banking companies, insurance companies and brokers-dealers. Increased competition could require that the Corporation lower rates charged on loans or increase rates offered on deposits, which could adversely affect profitability.

The Corporation’s business model is based on a diversified mix of businesses that provide a broad range of financial products and services, delivered through multiple distribution channels. The Corporation’s success depends, in part, on its ability to adapt its products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices. This can reduce the Corporation’s net interest margin and income from fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, could require the Corporation to incur in substantial expenditures to modify or adapt its existing products and services in order to remain competitive. The Corporation is at risk of not being successful or timely in introducing new products and services, responding or adapting to changes in consumer spending and saving habits, achieving market acceptance of its products and services, or developing and maintaining loyal customers.

Interest rate risk. Net interest income is the interest earned on loans, securities and other assets minus the interest paid on deposits, long-term and short-term debt and other liabilities. Net interest income is the difference between the yield on assets and the rate paid on deposits and other sources of funding. These rates are highly sensitive to many factors beyond the Corporation’s control, including general economic conditions and the policies of various governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the prepayment speed of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding. The impact of these changes may be magnified if the Corporation does not effectively manage the relative sensitivity of its assets and liabilities to changes in market interest rates.

Changes in interest rates could adversely affect net interest margin. Although the yield earned on assets and funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing the Corporation’s net interest margin to expand or contract. The Corporation’s liabilities tend to be shorter in duration than its assets, so they may adjust faster in response to changes in interest rates.

Changes in the slope of the “yield curve” — or the spread between short-term and long-term interest rates — could also reduce the Corporation’s net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. However, since the Corporation’s liabilities tend to be shorter in duration than its assets, they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, the Corporation’s funding costs may rise faster than the yield earned on its assets causing net interest margin to contract until the yield catches up.

The Corporation assesses its interest rate risk by estimating the effect on earnings under various scenarios that differ based on assumptions about the direction, magnitude and speed of interest rate changes and the slope of the yield curve. Some interest rate risk is hedged with derivatives. However, not all interest rate risk is hedged. There is always the risk that changes in interest rates could reduce net interest income and earnings in material amounts, especially if actual conditions turn out to be materially different than what the Corporation expected. For example, if interest rates rise or fall faster than the Corporation assumed, or the slope of the yield curve changes, the Corporation may incur significant losses on debt securities held as investments. To reduce interest rate risk, the Corporation may rebalance its investment and loan portfolios, refinance its debt and take other strategic actions. Certain losses or expenses may be incurred when such strategic actions are taken. Refer to the “Risk Management — Asset Liability Management” section of the MD&A.

Credit Risk. When the Corporation lends money or commits to lend money or enters into a contract with a counterparty, it incurs credit risk, or the risk of losses if borrowers do not repay their loans or counterparties fail to perform according to the term of their contract. The Corporation allows for and reserves against credit risks based on its assessment of credit losses inherent in its loan portfolio (including unfunded credit commitments). The process for determining the amount of the allowance for loan losses is critical to the Corporation’s financial condition and results of operations. It requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of borrowers to repay their loans. As is the case with any such assessments, there is always the chance that the Corporation will fail to identify the proper factors or that it will fail to accurately estimate the impacts of factors that are identified.

For further discussion of credit risk and the Corporation’s credit risk management policies and procedures, refer to “Credit Risk Management and Loan Quality” in the MD&A.

Changes in market prices of managed assets. The Corporation earns fee income from managing assets for others and providing brokerage services. Since investment management fees are often based on the value of assets under management, a fall in the market prices of those assets could reduce the Corporation’s fee income. Changes in stock market prices could affect the trading activity of investors, reducing commissions and other fees earned from the brokerage business.

Changes in accounting standards. The Corporation’s accounting policies are fundamental to understanding its financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the value of assets or liabilities and financial results. Several of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. For a description of the Corporation’s critical accounting policies, refer to “Critical Accounting Policies” in the MD&A.

From time to time the Financial Accounting Standards Board (FASB), the SEC and other regulatory bodies, change the financial accounting and reporting standards that govern the preparation of external financial statements. These changes are beyond the Corporation’s control, can be difficult to predict and could materially impact how it reports financial condition and results of operations. In some cases, the Corporation could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Federal and state regulations. The Corporation, the banking and non banking subsidiaries are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of its operations. These regulations protect depositors, federal deposit insurance funds, consumers and the banking system as a whole, not stockholders. The Corporation and its non banking subsidiaries are also heavily regulated by securities regulators. This regulation is designed to protect investors in securities we sell or underwrite. Congress and state legislatures and foreign, federal and state regulatory agencies continually review laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including interpretation or implementation of statutes, regulations or policies, could affect the Corporation in substantial and unpredictable ways including limiting the types of financial services and products it may offer and increasing the ability of non banks to offer competing financial services and products. Implementation of regulatory changes could also be costly to the Corporation.

Governmental fiscal and monetary policy. The Corporation’s earnings are affected by domestic and international monetary policy. For example, the Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. These policies, to a large extent, determine the Corporation’s cost of funds for lending and investing and the returns earned on those loans and investments, both of which affect net interest margin. These policies can also affect the value of financial instruments, such as debt securities and mortgage servicing rights as well as affecting as borrowers by potentially increasing the risk that they may fail to repay their loans.

The Corporations earnings are also affected by the fiscal policies that are adopted by various governmental authorities of Puerto Rico and the United States. Changes in tax laws can have a potentially adverse impact on the Corporation’s earnings.

Changes in domestic and international monetary and fiscal policies are beyond the Corporation’s control and are difficult to predict.

Liquidity risk. Liquidity is essential to business and could be impaired by an inability to access the capital markets or unforeseen outflows of cash. This situation may arise due to circumstances that the Corporation may be unable to control, such as a general market disruption. The Corporation’s credit ratings are important to its liquidity. A reduction in credit ratings could adversely affect its liquidity and competitive position, increase borrowing costs, limit access to the capital markets. For a further discussion of the Corporation’s liquidity, refer to “Liquidity Risk” in the MD&A.

Operational risk. The Corporation is exposed to operational risk. In its daily operations, the Corporation relies on the continued efficacy of its technical and telecommunication systems, operational infrastructure, relationships with third parties and the vast array of associates and key executives in its day to day and ongoing operations. Failure by any or all of these resources subjects the Corporation to risks that may vary in size, scale and scope. This includes but is not limited to operational or technical failures, ineffectiveness or exposure due to interruption in third party support as expected, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors (including clerical or recordkeeping errors), as well as, the loss of key individuals or failure on the part of the key individuals to perform properly.

Reputational risk. The Corporation is subject to reputational risk, or the risk to earnings and capital from negative public opinion. The Corporation’s ability to attract and retain customers and employees could be adversely affected to the extent its reputation is damaged. The Corporation’s failure to address, or to appear to fail to address various issues that could give rise to reputational risk could cause harm to the Corporation and its business prospects and could lead to litigation and regulatory action. These issues include, but are not limited to, appropriately addressing potential conflicts of interest; legal and regulatory requirements; ethical issues; money laundering ; privacy; properly maintaining customer and associated personal information; record keeping; sales and trading practices; and the proper identification of the legal, reputational, credit, liquidity, and market risks inherent in its products.

Merger risk. There are significant risks associated with mergers. Future business acquisitions could be material to the Corporation and could require the issuance of additional capital or incurring of debt. In that event, the Corporation could become more susceptible to economic downturns and competitive pressures. Merger risk includes the possibility that projected growth opportunities and cost savings fail to be realized, and that the integration process results in the loss of key employees, or that the disruption of ongoing business from the merger could adversely affect the Corporation’s ability to maintain relationships with customers.

Litigation risk. The volume of claims and the amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remains high. Substantial legal liability or significant regulatory action against the Corporation could have material adverse financial effects or cause significant reputational harm to the Corporation, which could result in serious financial consequences.

Current Economic Condition of the Commonwealth of Puerto Rico. Puerto Rico’s economy continues immersed on a prolonged and profound economic recession already in its fourth year of duration. The weakness in the labor market persists with a loss of more than 39,000 jobs between January and November of 2009 when compared to the same period in 2008. The unemployment rate continued to grow as the rate of unemployed increased from 12.4% in November 2008 to 15.9% in November 2009. Total investment in construction continued in negative territory as the development of new residential projects remained halted due to an oversupply of housing units in the residential market. As of September 2009, the sale of new housing units declined by 4,175 units or 53% to 3,718 units when compared to the same period in 2008. Currently, the excess housing inventory is expected to last for the next couple of years with much of the problem concentrating in the high-end segment of the market. Other construction data as of October 2009 shows, for instance, that the value of construction permits and cement sales declined 32.5% and 30.0% respectively when compared to accumulated figures for the same period in

2008. On the other hand, sustained inflationary pressure and continuous employment layoffs have seriously eroded consumer purchasing power and confidence level, leading to continue deterioration in the commercial activity. As a result, retail sales adjusted for inflation weakened with total sales declining 2.5% in the third quarter of 2009 when compared to the third quarter of 2008. As these events unveil, the financial conditions of consumers and businesses deteriorated rapidly, leading to 26.3% growth in total bankruptcies between 2008 and 2009 and to a rapid deterioration in asset quality in Puerto Rico’s financial system.


ITEM 1B.		UNRESOLVED STAFF COMMENTS

None


ITEM 2.		PROPERTIES

As of December 31, 2009, the Corporation owned nineteen facilities, which consisted of eleven branches and eight parking lots. The Corporation occupies one hundred twenty-two leased branch premises, while warehouse space is rented in one location. In addition, office spaces are rented at Torre Santander building in Hato Rey Puerto Rico, at the Santander Tower in Galeria San Patricio building, in Guaynabo, Puerto Rico, at Professional Office Park IV building, in Río Piedras, Puerto Rico and at the Operational Center in Hato Rey, Puerto Rico. The Corporation’s management believes that each of its facilities is well maintained and suitable for its purpose.


ITEM 3.		LEGAL PROCEEDINGS

The Corporation is involved as plaintiff or defendant in a variety of routine litigation incidental to the normal course of business. Management believes, based on the opinion of legal counsel, that it has adequate defense with respect to such litigation and that any losses therefrom would not have a material adverse effect on the consolidated results of operations or consolidated financial condition of the Corporation.

Management believes that there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation or its subsidiary is a party or of which any of their property is subject.


ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II


ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

Santander BanCorp’s Common Stock, $2.50 par value (the “Common Stock”), is traded on the New York Stock Exchange (the “NYSE”) under the symbol “SBP”, and on the Madrid Stock Exchange (LATIBEX) under the symbol “XSBP”, respectively. The table below sets forth, for the calendar quarters indicated, the high and low sales prices on the NYSE during such periods.


					Cash		Book
					Dividends		Value
Period	High		Low		per Share		per Share
2009
1st Quarter	$	13.49	$	5.74	$	—	$	11.70
2nd Quarter		8.13		6.18		—		11.99
3rd Quarter		10.80		5.18		—		12.34
4th Quarter		13.12		9.58		—		12.78

2008
1st Quarter	$	14.56	$	7.06	$	0.10	$	12.15
2nd Quarter		15.00		9.23		0.10		12.03
3rd Quarter		15.50		9.63		—		11.91
4th Quarter		14.50		6.63		—		11.83

As of December 31, 2009 the approximate number of record holders of the Corporation’s Common Stock was 110, which does not include beneficial owners whose shares are held in record names of brokers and nominees. The last sales price for the Common Stock as quoted on the NYSE on such date was $12.28 per share representing a market capitalization of $572.7 million as of December 31, 2009.

Dividend Policy and Dividends Paid

The payment of dividends by the Corporation will depend on the earnings, cash position and capital needs of the Bank, its subsidiaries, general business conditions and other factors deemed relevant by the Corporation’s Board of Directors. The ability of the Corporation to pay dividends may be restricted also by various regulatory requirements and policies of regulatory agencies having jurisdiction over the Corporation and the Bank.

Dividends on the Corporation’s common stock are payable when, as and if declared by the Board of Directors of the Corporation, out of funds legally available therefore. The Corporation declared a cash dividend of $0.20 per common share to all stockholders for a total payment of $9.3 million during the year ended December 31, 2008 resulting in an annualized dividend yield of 1.6%. In light of the continuing challenging general economic conditions in Puerto Rico and the global capital markets, the Board of Directors of the Corporation voted during August 2008 to discontinue the payment of the quarterly cash dividend on the Corporation’s common stock to strengthen the institution’s core capital position. The Corporation may use a portion of the funds previously paid as dividends to reduce its outstanding debt. The Corporation’s decision is part of the significant actions it has proactively taken in order to face the on-going challenges presented by the Puerto Rico economy, which among others, include: selling the merchant business to an unrelated third party; maintaining an on-going strict control on operating expenses; an efficiency plan driven to lower its current efficiency ratio; and merging its mortgage banking and commercial banking subsidiaries. While each of the Corporation and its banking subsidiary remain above well capitalized ratios, this prudent measure will preserve and continue to reinforce the Corporation’s capital position.

Stock Performance Graph

The graph below shows the cumulative stockholder return of the Common Stock of the Corporation during the measurement period. The graph compares the return of the Common Stock of the Corporation (identified by its official symbol as “SBP”) to the cumulative return of the Puerto Rico Stock Index (PRSI) and the S&P Small Cap Commercial Bank Index (S6CBNK). The performance of the Common Stock and the mentioned indexes are valued using a base value of 100. The Common Stock value as of December 31, 2009 was $12.28. The Board of Directors of the Corporation acknowledges that the market price of the Common Stock is influenced by numerous factors. The stock price shown in the graph is not necessarily indicative of future performance. This stock performance graph should not be deemed to be soliciting material under the proxy rules or incorporated by reference into any filing under the Securities Act or the Exchange Act, unless the Corporation specifically states otherwise.


ITEM 6.		SELECTED FINANCIAL DATA

The following table presents selected consolidated and other financial and operating information for the Corporation and subsidiaries and certain statistical information as of the dates and for the periods indicated. This information should be read in conjunction with the Corporation’s consolidated financial statements and the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations “ and “Selected Statistical Information” appearing elsewhere in this Annual Report. The selected Balance Sheet and Statement of Operations data as of and for the year ended December 31, 2009, 2008, 2007, 2006 and 2005 have been derived from the Corporation’s consolidated audited financial statements.

Santander BanCorp and Subsidiaries
Selected Financial Data


	Year ended December 31,
	2009			2008			2007			2006		2005
	(Dollars in thousands, except per data share)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Interest income	$	482,158		$	600,771		$	674,210		$	618,320	$	439,605
Interest expense		130,431			244,449			362,531			327,714		212,583


Net interest income		351,727			356,322			311,679			290,606		227,022
Security gains		9,251			5,154			1,265			—		17,842
Loss on extinghuishment of debt		(9,600	)		—			—			—		(5,959	)
Broker-dealer, asset management and insurance fees		62,688			74,808			68,265			56,973		53,016
Other income		60,107			67,873			78,590			61,496		60,459
Operating expenses		269,067			324,627			344,016			277,783		221,386
Provision for loan losses		152,496			175,523			147,824			65,583		20,400
Income tax (benefit) provision		11,335			(6,524	)		4,204			22,540		30,788

Net income (loss)	$	41,275		$	10,531		$	(36,245	)	$	43,169	$	79,806

PER COMMON SHARE DATA
Net income (loss)	$	0.88		$	0.23		$	(0.78	)	$	0.93	$	1.71
Book value	$	12.78		$	11.83		$	11.50		$	12.42	$	12.19
Outstanding shares:
Average		46,639,104			46,639,104			46,639,104			46,639,104		46,639,104
End of period		46,639,104			46,639,104			46,639,104			46,639,104		46,639,104
Cash Dividend per Share	$	—		$	0.20		$	0.64		$	0.64	$	0.64
AVERAGE BALANCES
Loans held for sale and loans, net of allowance for loan losses	$	5,529,239		$	6,584,842		$	6,900,764		$	6,439,205	$	5,871,433
Allowance for loan losses		191,738			175,100			125,897			87,465		67,956
Earning assets		6,375,311			8,014,368			8,530,213			8,262,748		7,882,180
Total assets		7,112,754			8,740,670			9,199,712			8,820,630		8,285,992
Deposits		4,645,829			5,558,667			5,221,999			5,054,687		5,082,520
Borrowings		1,565,983			2,314,535			3,093,947			2,876,720		2,415,172
Common equity		569,700			564,238			573,536			563,593		576,226
PERIOD END BALANCES
Loans held for sale and loans, net of allowance for loan losses	$	5,273,170		$	5,967,958		$	6,911,380		$	6,836,693	$	5,954,890
Allowance for loan losses		197,303			191,889			166,952			106,863		66,842
Earning assets		6,124,895			7,186,973			8,519,773			8,598,703		7,933,139
Total assets		6,766,436			7,897,576			9,160,213			9,188,168		8,271,948
Deposits		4,395,560			5,014,902			5,160,703			5,313,974		5,224,650
Borrowings		1,506,754			1,939,384			3,138,730			2,954,515		2,212,245
Common equity		595,897			551,636			536,536			579,220		568,527

Continued on the following page

Continued from the previous page


	Year ended December 31,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
SELECTED RATIOS
Performance:
Net interest margin (1)		5.56	%		4.50	%		3.74	%		3.63	%		3.02	%
Efficiency ratio (2)		56.77	%		60.39	%		66.32	%		66.82	%		62.97	%
Return on average total assets		0.58	%		0.12	%		(0.39	)%		0.49	%		0.96	%
Return on average common equity		7.25	%		1.87	%		(6.32	)%		7.66	%		13.85	%
Dividend payout		0.00	%		86.96	%		(82.05	)%		68.82	%		37.43	%
Average net loans/average total deposits		119.02	%		118.46	%		132.15	%		127.39	%		115.52	%
Average earning assets/average total assets		89.63	%		91.69	%		92.76	%		93.68	%		95.13	%
Average stockholders’ equity/average assets		8.01	%		6.46	%		6.24	%		6.39	%		6.95	%
Fee income to average assets		1.44	%		1.37	%		1.26	%		1.20	%		1.15	%
Capital:
Tier I capital to risk-adjusted assets		10.60	%		8.41	%		7.42	%		7.87	%		9.09	%
Total capital to risk-adjusted assets		15.55	%		12.83	%		10.55	%		10.93	%		12.30	%
Leverage Ratio		7.98	%		6.10	%		5.38	%		5.81	%		6.50	%
Asset quality:
Non-performing loans to total loans		5.30	%		3.45	%		4.16	%		1.54	%		1.22	%
Annualized net charge-offs to average loans		2.57	%		2.23	%		1.25	%		0.93	%		0.38	%
Allowance for loan losses to period-end loans		3.61	%		3.12	%		2.36	%		1.54	%		1.11	%
Allowance for loan losses to non-performing loans		68.07	%		90.21	%		56.70	%		100.01	%		90.72	%
Allowance for loan losses to non-performing loans plus accruing loans past-due 90 days or more		65.54	%		84.84	%		55.36	%		83.62	%		87.17	%
Non-performing assets to total assets		4.79	%		2.97	%		3.39	%		1.23	%		0.92	%
Recoveries to charge-offs		3.25	%		2.52	%		3.97	%		9.30	%		18.28	%
EARNINGS TO FIXED CHARGES:
Excluding interest on deposits		1.94	x		1.04	x		0.82	x		1.42	x		2.19	x
Including interest on deposits		1.39	x		1.02	x		0.91	x		1.20	x		1.51	x
OTHER DATA AT END OF PERIOD
Customer financial assets under management	$	13,501,000		$	13,413,000		$	13,263,000		$	14,154,000		$	12,960,000

Full services branches		54			57			61			61			64
Consumer retail branches		60			64			68			70			—

Total branches		114			121			129			131			64
ATMs		145			169			140			144			149


(1)		On a tax equivalent basis.

(2)		Operating expenses less provision for claim receivable in 2008 and intangibles impairment charges in 2007 divided by net interest income on a tax equivalent basis, plus other income excluding securities gains and losses, gain on equity securities, gain on sale of POS and Trust division in 2007, gain on sale of FDIC assessment credits and gain on tax credit purchased in 2006, loss on early termination on repurchase agreements..


ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Description of the Business

Santander BanCorp and subsidiaries is a diversified financial holding company headquartered in San Juan, Puerto Rico, offering a full range of financial products and services to consumers and commercial customers through its subsidiaries. The Corporation’s subsidiaries are engaged in the following businesses:

•		Commercial Banking — Banco Santander Puerto Rico

•		Mortgage Banking — Banco Santander Puerto Rico (Santander Mortgage Corporation during 2007 and prior, which was merged into the Bank at January 1, 2008)

•		Securities Brokerage and Investment Banking — Santander Securities Corporation

•		Asset Management — Santander Asset Management Corporation

•		Consumer Finance — Santander Financial Services, Inc.

•		Insurance — Santander Insurance Agency, Inc. and Island Insurance Corporation

•		International Banking — Santander International Bank of Puerto Rico, Inc.

Basis of Presentation

The Corporation’s financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and with general practices within the financial services industry, which are described in the notes to the consolidated financial statements. In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting policies that are critical to the overall financial statements are fully described in the “Critical Accounting Policies” section below.

Forward-Looking Statements

This discussion of financial results contains forward-looking statements about the Corporation. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words or phrases like “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, “believe”, or similar expressions and are intended to identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

The future results of the Corporation could be affected by subsequent events and could differ materially from those expressed in forward-looking statements. If future events and actual performance differ from the Corporation’s assumptions, the actual results could vary significantly from the performance projected in the forward-looking statements. The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities, competitive and regulatory factors and legislative changes, could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from those anticipated or projected. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Overview of Management’s Discussion and Analysis of Financial Condition and Results of Operations

This overview of management’s discussion and analysis highlights selected information in this document and may not contain all of the information that is important to the reader. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire document. All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.

The Corporation, similarly to other financial institutions, is subject to certain risks, many of which are beyond management’s control, though efforts and initiatives are undertaken to manage those risks in conjunction with return optimization. Among the risks being managed are: (1) market risk, which is the risk that changes in market rates and prices will adversely affect the

Corporation’s financial condition or results of operations, (2) liquidity risk, which is the risk that the Corporation will have insufficient cash or access to cash to meet operating needs and financial obligations, (3) credit risk, which is the risk that loan customers or other counterparties will be unable to perform their contractual obligations, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. In addition, the Corporation is subject to legal, compliance and reputational risks, among others.

As a provider of financial services, the Corporation’s earnings are significantly affected by general economic and business conditions. Credit, funding, including deposit origination and fee income generation activities are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products. The Corporation constantly monitors general business and economic conditions, industry-related trends and indicators, competition from traditional and non-traditional financial services providers, interest rate volatility, indicators of credit quality, demand for loans and deposits, operational efficiencies, including systems, revenue and profitability improvement and regulatory changes in the financial services industry, among others. The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial services providers could adversely affect the Corporation’s profitability.

Overview of Financial Results

The Corporation reported a significant increase in net income of $30.7 million or 291.9% to reach $41.3 million for the year ended December 31, 2009 over the net income of $10.5 million for the year ended December 31, 2008. The Corporation reported $0.88 and $0.23 earning per share for the year ended December 31, 2009 and 2008, respectively. The increase in net income was principally due to decreases of $55.6 million and $23.0 million in operating expenses and provision for loans losses, respectively, partially offset by $25.4 million decrease in other income and $17.9 million increase in provision for income tax.

Return on average assets (ROA) of 0.58% and return on average common equity (ROE) of 7.25% reflected improvements of 46 basis points and 538 basis points, respectively, for the year ended December 31, 2009 compared to the year ended December 31, 2008.

The efficiency ratio (on a tax-equivalent basis) also reflected an improvement of 362 basis points to reach 56.77% for the year ended December 31, 2009 from 60.39% for 2008.

The Corporation’s financial results for the year ended December 31, 2009 were impacted by the following:

	•		The net interest margin, on a tax equivalent basis, was 5.56%, a 106 basis points of improvement over 4.50% for the year ended December 31, 2008;

	•		The provision for loan losses decreased $23.0 million or 13.1% for the year ended December 31, 2009 compared to the same period in 2008. The provision for loan losses represented 103.7% of the net charge-offs for the year ended December 31, 2009 versus 116.6% for the year ended December 31, 2008;

	•		The allowance for loan losses of $197.3 million as of December 31, 2009 represented 3.61% of total loans, 68.07% of non-performing loans and 230.74% of non-performing loans excluding loans secured by real estate. As of December 31, 2008, the allowance for loan losses was $191.9 million, represented 3.12% of total loans, 90.21% of non-performing loans and 225.06% of non-performing loans excluding loans secured by real estate;

	•		Non-interest income decreased $25.4 million or 17.2% for the year ended December 31, 2009 as compared to the same period in 2008. Non-interest income was impacted principally by:

	(i)		a gain of $9.3 million on investment securities available for sale partially offset by a loss of $9.6 million on the early termination of a repurchase agreement, compared with a gain of $5.2 million for the same period in the prior year;

	(ii)		a decrease in broker-dealer, asset management and insurance fees of $12.1 million;

	(iii)		a gain of $3.3 million on the sale of a portion of the Corporation’s investment in Visa, Inc. during the third quarter of 2009 compared with a gain of $8.6 million during the first quarter 2008 in connection with Visa’s initial public offering;

	(iv)		a loss of $7.3 million on derivatives and other financial instruments compared with a gain of $3.3 million for the same period in prior year,

	(v)		an unfavorable valuation adjustment of $7.4 million for loans held for sale recorded during 2008.

•

Operating expenses reflected a decrease of $55.6 million or 17.1% when with the figures reported in 2008. This decrease was affected principally by:

	(i)		$24.8 million decrease in salaries and other employee benefits partially offset by increases of $4.5 million in incentive stock plan expense and a decrease of $2.3 million in expense from loan origination cost being deferred;

	(ii)		a provision for claim receivable of $25.1 million from Lehman Brother Inc (LBI) recognized during the third quarter of 2008;

	(iii)		decreases of $7.5 million in professional fees, $2.8 million in business promotion, $2.4 million in occupancy cost, $2.1 in insurance expense and $1.2 million in EDP and technical services and amortization

	(iv)		partially offset by $6.6 million increase in FDIC assessment due to the assessment systems implemented under the Federal Deposit Insurance Reform Act of 2005 including the emergency special assessment recognized on September 30, 2009.

•

During 2009, the Corporation sold certain loans, including some classified as impaired, to an affiliate for $142.0 million in cash. These loans had a net book value of $142.0 million comprised of an outstanding principal balance of $149.2 million and a specific valuation allowance of $7.2 million. The type of loans by net book value was $65.5 million in construction loans, $61.2 million in commercial loans and $15.3 million in mortgage loans. No gain or loss was recognized on these transactions

The Corporation’s principal source of revenues is net interest income, which is the difference between the interest earned on loans and investments and the interest paid on customer deposits and other interest-bearing liabilities. Net interest income represents approximately 74.2% and 70.7% of the Corporation’s total net revenues (defined as net interest income plus other income) for 2009 and 2008, respectively. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on these balances.

Lending activities are one of the most important aspects of the Corporation’s operations. The economic environment and uncertainties in Puerto Rico caused reduced lending activity and impacted the quality of the Corporation’s loan portfolio increasing the delinquency rates and charge offs. The net loan portfolio, including loans held for sale, decreased $0.7 billion, or 11.6% reaching $5.3 billion at December 31, 2009, compared to $6.0 billion at December 31, 2008. As of December 31, 2009, the allowance for loan losses reached $197.3 million, $5.4 million or 2.8% increase. The allowance for loan losses comprised $133.9 million related to the commercial banking portfolio and $63.4 million related to the consumer finance portfolio. The ratio of allowance for loan losses to total loans increased to 49 basis points to 3.61% at December 31, 2009 from 3.12% at December 31, 2008.

Although the Corporation has diversified its sources of revenue, interest income from the loan portfolio continues to account for the majority of total revenues, representing 76.1% and 73.2% of total gross revenues for 2009 and 2008, respectively. As a result, the primary influence on the Corporation’s operating results is the demand for loans in Puerto Rico, which is significantly affected by economic conditions, competition, the demand and supply of housing, the fiscal policies of the federal and Puerto Rico governments and interest rate levels. Changes in interest rates, the Corporation’s principal market risk, can significantly impact its results of operations by affecting net interest income and the gains or losses realized on the sale of loans

and securities. As described under “Risk Management”, the Corporation uses derivative instruments to hedge, to a limited extent, its interest rate risk in order to protect its net interest income under different interest rate scenarios.

Broker-dealer, asset management and insurance fees accounted for 51.2% and 50.6% of the Corporation’s other income and 10.4% and 10.0% of its total revenues for 2009 and 2008, respectively. The Corporation also earns revenues from other sources that are not as dependent on interest levels, such as bank service fees on deposit accounts and credit card fees. Other income, including broker-dealer, asset management and insurance fees, accounted for 20.3% and 19.8% of total revenues for 2009 and 2008, respectively.

Deposits at December 31, 2009 were $4.4 billion, reflecting a decrease of $619.3 million or 12.4% compared to deposits of $5.0 billion as of December 31, 2008.

Total borrowings at December 31, 2009 (comprised of federal funds purchased and other borrowings, Federal Home Loan Bank Advances, commercial paper issued, term and capital notes) reflected a decrease of $432.6 million or 22.3% to $1.5 billion at December 31, 2009 compared with $1.9 billion at December 31, 2008.

As of December 31, 2009 and 2008, the Corporation had $13.5 billion and $13.4 billion in customer financial assets under management, respectively. This is a significant part of the financial assets of Puerto Rico households and reflects the Corporation’s strong positioning in its primary market. Customer financial assets under management include bank deposits (excluding brokered deposits), broker-dealer customer accounts, mutual fund assets managed, and trust, institutional and private accounts under management.

SBP common stock price per share was $12.28 as of December 31, 2009 resulting in a market capitalization of $0.6 billion (including affiliated holdings).

During 2009, Santander BanCorp did not declared nor paid dividends per common share to its shareholders of record.

Critical Accounting Policies

The consolidated financial statements of Santander BanCorp are prepared in accordance with accounting principles generally accepted in the United States of America and with general practices within the financial services industry. In preparing the consolidated financial statements, management is required to make judgments, involving significant estimates and assumptions, in the application of its accounting policies about matters that are inherently uncertain. Management arrives at these estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, considering the facts and circumstances at a specific point in time. Changes in those facts and circumstances could produce actual results that differ from those estimates. Detailed below is a discussion of the Corporation’s critical accounting policies. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. For a complete discussion of the Corporation’s significant and critical accounting policies refer to the notes to the consolidated financial statements and the discussion throughout this document which should be read in conjunction with this section.

Current Accounting Developments

The Corporation’s consolidated financial statements provide a complete discussion of the recently issued accounting pronouncements adopted by the Corporation. Refer to Note 1 to the condensed consolidated financial statements.

Allowance for Loan Losses. The Corporation assesses the overall risks in its loan portfolio and establishes and maintains an allowance for probable losses thereon. The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on the evaluation of known and inherent risks in the Corporation’s loan portfolio. The Corporation’s management evaluates the adequacy of the allowance for loan losses on a monthly basis.

The determination of the allowance for loan losses is one of the most complex and critical accounting estimates the Corporation’s management makes. The allowance for loan losses is composed of three different components. An asset-specific reserve based on the provisions of accounting standard FASB ASC Topic 310 “Receivables”, an expected loss estimate based on the provisions of FASB ASC Topic 450 “Contingencies”, and an unallocated reserve based on the effect of probable economic deterioration above and beyond what is reflected in the asset-specific component of the allowance.

impaired when interest and/or principal is past due 90 days or more, or, when based on current information and events it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. The asset-specific reserve on each individual loan identified as impaired is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the Corporation may measure impairment based on the loan’s observable market price, or the fair value of the collateral, net of estimated disposal costs, if the loan is collateral dependent. Most of the asset-specific reserves of the Corporation’s impaired loans are measured on the basis of the fair value of the collateral. The fair value of the collateral is determined by external valuation specialists and since these values cannot be observed or corroborated with market data, they are classified as Level 3 and presented as part of non-recurring measurement disclosures. The Corporation requests updated appraisal reports for loans that are considered impaired, either annually or every two years depending on the total exposure of the borrower and the type of loan. As a general procedure, the Corporation internally reviews appraisals as part of the underwriting and approval process and also for credits considered impaired.

A reserve for expected losses is determined under the provisions of FASB ASC Topic 450 for all loans not evaluated individually for impairment. Effective July 1, 2009, the Corporation revised its quantitative methodology for estimating the allowance for loan losses for the consumer and consumer finance portfolios. Through the end of the second quarter ended June 30, 2009, the Corporation’s quantitative methodology for estimating the allowance for loan losses for the consumer and consumer finance portfolios was based on a historical loss rate analysis, which relied on historical loss experience over a defined period for pools of loans with common characteristics. The revised quantitative methodology is based on a migration analysis/roll rate and considers both historical loss rates and loss rates based on the likelihood of credit deterioration (expectation of current loans becoming delinquent in monthly increments until they default and are charged-off). The loss factor estimated based on this methodology may be adjusted to incorporate seasonality attributes as well as to reflect recent economic or business trends that may affect the collectability of the portfolio. The loss factor is then applied to the outstanding portfolio at period end to estimate the amount of expected charge offs and the provision for loan losses required to support an adequate allowance for loan losses. The Corporation’s decision to revise and improve its methodology was made after a thorough evaluation of the reliability of the revised methodology including a back testing analysis. Management believes that the revised quantitative methodology provides a more reliable estimate of probable losses on its existing consumer and consumer finance portfolios.

An additional, or unallocated, reserve is maintained to cover the effect of probable economic deterioration above and beyond what is reflected in the asset-specific component of the allowance. This component represents management’s view that given the complexities of the lending portfolio and the assessment process, including the inherent imprecision in the financial models used in the loss forecasting process, there are estimable losses that have been incurred but not yet specifically identified, and as a result not fully provided for in the asset-specific component of the allowance. The level of the unallocated reserve may change periodically after evaluating factors impacting assumptions used in the calculation of the asset specific component of the reserve.

The underlying assumptions, estimates and assessments used by management to determine the components of the allowance for loan losses are periodically evaluated and updated to reflect management’s current view of overall economic conditions and other relevant factors impacting credit quality and inherent losses. Changes in such estimates could significantly impact the allowance and provision for loan losses. The Corporation could experience loan losses that are different from the current estimates made by management. Based on current and expected economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses, management considers that the Corporation has established an adequate position in its allowance for loan losses. Refer to the Non-performing Assets and Past Due Loans section for further information.

Transfers of Financial Assets. The Corporation occasionally engages in transfers of financial assets and accounts for them in accordance with the provisions of FASB ASC Topic 860, “Transfer and Servicing”. This Topic provides that a transfer of financial assets in which the transferor surrenders control over those financial assets shall be accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. A transferor has surrendered control if all of the following conditions are met: (a) the transferred assets have been isolated from the transferor—put presumptively beyond the reach of creditors, even in bankruptcy; (b) each transferee has the right to pledge or exchange the assets it received and no condition constrains the transferee from taking advantage of its right to pledge or exchange; and (c) the transferor does not maintain effective control over the transferred assets through either (i) an agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity or (ii) the ability to unilaterally cause the holder to return specified assets, other than through a cleanup call. In accordance with FASB ASC Topic 860, a gain or loss on the sale is recognized based on the carrying amount of the financial assets involved in the transfer, allocated between the assets transferred and the retained interests based on their relative fair value at the date of transfer. When the Corporation transfers financial assets and the transfer fails any one of the FASB ASC Topic 860 sales criteria, the Corporation is not permitted to derecognize the transferred financial assets and the transaction is accounted for as a secured borrowing.

Income taxes. In preparing the consolidated financial statements, the Corporation is required to estimate income taxes. This involves an estimation of current income tax expense together with an assessment of temporary differences resulting from

differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Corporation to assume certain positions based on its interpretation of current tax regulations. The Corporation accounts for uncertain tax positions in accordance with FASB ASC Topic 740, “Income Tax”. Accordingly, the Corporation reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Corporation recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Changes in assumptions affecting estimates may be required in the future and estimated tax liabilities may need to be increased or decreased accordingly. The accrual for uncertain tax positions is adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Corporation’s effective tax rate includes the impact of tax contingency accruals and changes to such accruals, including related interest and penalties, as considered appropriate by management. When particular matters arise, a number of years may elapse before such matters are audited by the taxing authorities and finally resolved. Favorable resolution of such matters or the expiration of the statute of limitations may result in the release of uncertain tax positions, which are recognized as a reduction to the Corporation’s effective rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective rate and may require the use of cash in the year of resolution.

The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Corporation’s net deferred tax assets assumes that the Corporation will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change, the Corporation may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of operations. Management evaluates its deferred tax assets on a quarterly basis and assesses the need for a valuation allowance. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in the Corporation’s tax provision in the period of change. Based upon the level of historical taxable income and projections for future taxable income, management believes it is more likely than not, the Corporation will not realize the benefits of the deferred tax assets related to Santander Financial Services, Inc and Santander Bancorp (parent company only) amounting to $14.5 million and $0.1 million, respectively, at December 31, 2009 and $20.6 million and $0.1 million, respectively, at December 31, 2008. Accordingly, deferred tax asset valuation allowances of $14.5 million and $0.1 million at December 31, 2009 and $20.6 million and $0.1 million at December 31, 2008, for Santander Financial Services, Inc and Santander Bancorp (parent company only), respectively, were recorded.

The Corporation accounts for uncertain tax positions in accordance with FASB ASC Topic 740. Accordingly, the Corporation reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Corporation recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

Goodwill and other intangible assets. The Corporation accounts for goodwill in accordance with FASB ASC Topic 350 “Intangible-Goodwill and Others.” The reporting units are tested at least annually to determine whether their carrying value exceeds their fair market value. Should this be the case, the value of goodwill or indefinite-lived intangibles may be impaired and written down. Goodwill and other indefinite lived intangible assets are also tested for impairment on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. If there is a determination that the fair value of the goodwill or other identifiable intangible asset is less than the carrying value, an impairment loss is recognized in an amount equal to the difference. Impairment losses, if any, are reflected in other operating expenses in the consolidated statement of operations.

Tangible and intangible assets with finite useful lives are amortized over their estimated useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue. If circumstances and conditions indicate deterioration in the value of tangible assets and intangible assets with finite useful lives, the book value would be adjusted and a loss would be recognized in current operations.

The Corporation uses judgment in assessing goodwill and intangible assets for impairment. Estimates of fair value are based on projections of revenues, operating costs and cash flows of each reporting unit considering historical and anticipated future results, general economic and market conditions as well as the impact of planned business or operational strategies. The valuations employ a combination of present value techniques to measure fair value and consider market factors. Generally, the Corporation engages third party specialists to assist with its valuations. Additionally, judgment is used in determining the useful lives of finite-lived intangible assets. Changes in judgments and projections could result in a significantly different estimate of the fair value of the reporting units and could result in an impairment of goodwill.

As a result of the purchase price allocations from prior acquisitions and the Corporation’s decentralized structure, goodwill is included in multiple reporting units. Due to certain factors such as the highly competitive environment, cyclical nature of the business in some of the reporting units, general economic and market conditions as well as planned business or operational

strategies, among others, the profitability of the Corporation’s individual reporting units may periodically suffer from downturns in these factors. These factors may have a relatively more pronounced impact on the individual reporting units as compared to the Corporation as a whole and might adversely affect the fair value of the reporting units. If material adverse conditions occur that impact the Corporation’s reporting units, the Corporation’s reporting units, and the related goodwill would need to be written down to an amount considered recoverable.

The Corporation’s goodwill consists of $10.5 million that resulted from the acquisition by the Bank of Banco Central Hispano Puerto Rico, $24.3 million that resulted from the acquisition by Santander Securities of Merrill Lynch’s retail brokerage business in Puerto Rico and $86.7 million that resulted from the acquisition of Island Finance.

The value of the goodwill is supported ultimately by revenue from the commercial banking segment, the wealth management segment and the consumer finance segment. A decline in earnings as a result of a lack of growth, or our inability to deliver cost effective services over sustained periods, could lead to a perceived impairment of goodwill, which would be evaluated and, if necessary be recorded as a write-down in the consolidated statement of operations.

On an annual basis, or more frequently if circumstances dictate, management reviews goodwill and evaluates events or other developments that may indicate impairment in the carrying amount. The evaluation for potential impairment is inherently complex, and involves significant judgment in the use of estimates and assumptions.

To determine the fair value of the reporting units being evaluated for goodwill impairment, the Corporation uses the assistance of an independent consultant. The determination of the fair value of the reporting units (acquired segments) involves the use of estimates and assumptions including expected results of operations, an assumed discount rate and an assumed growth rate for the reporting units. Specifically, the independent valuation specialist prepared analyses regarding the fair value of equity of the Corporation’s reporting units, Commercial Banking, Wealth Management and Consumer Finance. The consultant may use up to three separate valuation approaches:

Market Multiple Approach: provides indications of value based upon comparisons of the reporting unit to market values and pricing evidence of public companies in the same or similar lines of businesses. Market ratios (pricing multiples) and performance fundamentals relating the public companies’ stock prices (equity) or enterprise values to certain underlying fundamental data are applied to the reporting unit to determine indications of its fair value.

Comparable Transaction Approach: includes an examination of recent transactions in which companies involved in the same or similar lines of business to the reporting unit were acquired. Acquisition values and pricing evidence are used in much the same manner as the Market Multiple Approach for indication of the reporting unit’s fair value.

Discounted Cash Flow Approach: calculates the present value of the projected future cash flows to be generated by the reporting unit using appropriate discount rates. The discount rates are intended to reflect all associated risks of realizing the projected future cash flows. Terminal values are computed as of the end of the last period for which cash flows are projected to determine an estimate of the values of the reporting unit as of that future point in time. Discounting the terminal values back to the present and adding the present values of the future cash flows yields indications of the reporting unit’s fair value.

Events that may indicate goodwill impairment include significant or adverse changes in the business, economic or political climate; unanticipated competition; adverse action or assessment by a regulator; plans for disposition of a segment; among others. In assessing the recoverability of goodwill and other intangibles, the Corporation must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Corporation may be required to record impairment charges for these assets not previously recorded. The key assumptions used by management to determine the fair value of the reporting units include company specific risk elements that are consistent with the risks inherent in its current business models for each reporting unit. Changes in judgment and estimates could result in a significantly different estimate of the fair value of the reporting units and could result in an impairment of goodwill and other intangibles.

Pension and Other Postemployment Benefits. The determination of the Corporation’s obligation and expense for pension and other postretirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 19 to the consolidated financial statements and include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in healthcare costs. Management

participates in the determination of these factors, which normally undergo evaluation against industry assumptions, among other factors. In accordance with accounting principles generally accepted in the United States of America, actual results that differ from the Corporation’s assumptions are accumulated and amortized over future periods and therefore, generally affect recognized expense and recorded obligation in such future periods. The Corporation uses an independent actuarial firm for the determination of the pension and post-retirement benefit costs and obligations.

The FASB ASC Topic 715, “Compensation — Retirement Benfits” requires recognition of a plan’s over-funded or under-funded status as an asset or liability with an offsetting adjustment to accumulated other comprehensive income (AOCI). Actuarial gains or losses, prior service costs and transition assets or obligations will be subsequently recognized as components of net periodic benefit costs. Additional minimum pension liabilities (AMPL) and related intangible assets are derecognized upon adoption of the standard.

In developing the expected return on plan assets, the Corporation considers the asset allocation, historical returns on the types of assets held in the pension trust, the current economic environment, as well as input from the actuaries, financial analysts and the Corporation’s long-term inflation assumptions and interest rate scenarios. The expected rate of return for plan assets was set at 7.5% for the year ended December 31, 2009 and 2008 and 8.5% for the year ended December 31, 2007. In selecting a discount rate, the Corporation considers the long-term corporate bond yield as a guide. At December 31, 2009, 2008 and 2007, the discount rate was 5.91%, 6.00% and 6.50%, respectively, for the Corporation’s Plan and 5.80%, 6.00% and 5.75%, respectively, for the Banco Central Hispano (BCH)’s Plan.

Management believes that the assumptions made are appropriate; however, significant differences in actual experience or significant changes in assumptions may materially affect pension obligations and future expense.

Fair Value Measurement. Effective January 1, 2008, the Corporation adopted FASB ASC Topic 820, for all financial instruments accounted for at fair value on a recurring basis. Adoption of FASB ASC Topic 820 did not have a material effect on the Corporation’s financial position and results of operations. Illiquidity in the credit markets contributed to the amount of our reported Level 3 instruments, primarily in our trading and loan portfolios. In conjunction with the adoption FASB ASC Topic 820, effective January 1, 2008, the Corporation adopted FASB ASC Topic 825 which provides an option for most financial assets and liabilities to be reported at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. The election is made at the initial adoption, at the acquisition of a financial asset, financial liability or a firm commitment and it may not be revoked. Under the FASB ASC Topic 825 transition provisions, the Corporation has elected to report certain callable brokered certificates of deposits and subordinated notes at fair value with future changes in value reported in earnings. FASB ASC Topic 825 provides an opportunity to mitigate volatility in reported earnings as well as reducing the burden associated with complex hedge accounting requirements.

The Corporation’s estimates of fair value for financial instruments are based on the framework established in FASB ASC Topic 820. The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated willing parties, i.e., not in a forced transaction. The disclosure of fair value estimates in the FASB ASC Topic 820 hierarchy is based on whether the significant inputs into the valuation are observable. In determining such estimates and the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets, the lowest priority to unobservable inputs that reflect the Corporation’s market assumptions. FASB ASC Topic 820 requires the use of observable inputs when available. Additionally, the level at which a financial instrument is reported is based on the lowest level of any significant input into the estimation of fair value. The three levels of the hierarchy are as follows:

	–		Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Corporation has the ability to access.

	–		Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

	–		Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Corporation’s own assumptions about the assumptions that market participants would use.

The Corporation uses quoted market prices, when available, to determine estimates of fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. When quoted market prices are unavailable, the Corporation obtains fair value

estimates from a nationally recognized pricing service that determines fair value estimates based on objectively verifiable information: relevant market information, relevant credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities additional inputs may be necessary. The Corporation reviews the estimates of fair value provided by the pricing service and compares the estimates to the Corporation’s knowledge of the market to determine if the estimates obtained are representative of the prices in the market. The Corporation will challenge any prices deemed not to be representative of fair value. The fair value estimates provided from this pricing service are included in the amount disclosed in Level 2 of the hierarchy.

If quoted market prices and an estimate from a pricing service are unavailable, the Corporation produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. See Note 24 to the accompanying consolidated financial statements for further information related to valuation methods used by the Corporation for each type of financial instruments that are carried at fair value.

The Corporation employs control processes to validate the fair value of its financial instruments. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied, and the assumptions are reasonable. These control processes include validation and corroboration procedures over the quotes and prices obtained from brokers and counterparties, as well as reviews of the pricing models’ appropriateness by the personnel with relevant expertise, which are independent from the trading desks on a quarterly basis. In addition, the Corporation is considering recently executed comparable transaction and other observable market data for purposes of validating assumptions used in the models.

The Corporation understands that any increases and/or decreases in the aggregate fair value of its assets and liabilities will not materially affect its liquidity and capital resources.

Results of Operations

The following financial discussion is based upon and should be read in conjunction with the Corporation’s consolidated financial statements for the years ended December 31, 2009, 2008, and 2007.

The following table sets forth the principal components of the Corporation’s net income (loss) for the years ended December 31, 2009, 2008 and 2007 and other selected financial information.


	2009			2008			2007
	(Dollars in thousands)
Components of net income (loss):
Net interest income	$	351,727		$	356,322		$	311,679

Provision for loan losses		(152,496	)		(175,523	)		(147,824	)
Other income		122,446			147,835			148,120
Other operating expenses		(269,067	)		(324,627	)		(344,016	)
Provision (benefit) for income tax		11,335			(6,524	)		4,204

Net income (loss)	$	41,275		$	10,531		$	(36,245	)


Other selected financial information:
EPS	$	0.88		$	0.23		$	(0.78	)
ROA		0.58	%		0.12	%		(0.39	)%
ROE		7.25	%		1.87	%		(6.32	)%
Net interest margin, on a tax equivalent basis		5.56	%		4.50	%		3.74	%
Efficiency Ratio (*)		56.77	%		60.39	%		66.32	%


(*)		Operating expenses less provision for claim receivable in 2008 and intangibles impairment charges in 2007 divided by net interest income on a tax equivalent basis plus other income excluding securities gain and losses, gain on equity securities, gain on sale of POS and Trust division in 2007 and loss on early termination on repurchase agreements.

2009 compared to 2008. The Corporation’s net income increased $30.7 million or 291.9% for the year ended December 31, 2009 compared to figures reported in 2008. This increase was mainly due to reductions of $55.6 million or 17.1% in other operating expense and $23.0 million or 13.1% in provision for loan losses. These decreases were partially offset by a $25.4 million or 17.2% decrease in other income and $17.9 million or 273.5% increase in provision for income tax. The decrease in operating expenses was principally due to a provision for claim receivable of $25.1 million recognized during the third quarter of 2008 which represent the excess of the value of the securities held by LBI over the amount owned by the Corporation under the securities sold under agreement to repurchase, $18.1 million decrease in salaries and other employee benefits and $12.4 million decrease in other operating expenses. The $25.4 million decrease in other income was mainly due to a decrease of $10.6 million in loss on derivatives and other financial instrument at fair value and a decrease of $12.2 million in broker-dealer, asset management and insurance fees.

2008 compared to 2007. The Corporation’s net income increased $46.8 million or 129.1% for the year ended December 31, 2008 compared to figures reported in 2007. This increase was mainly due to an increase of $44.6 million or 14.3% in other net interest income, a decrease in other operating expenses of $19.4 million or 5.6% and a decrease in provision for income tax of $10.7 million or 255.2%. These increases were offset by an increase the provision for loan losses of $27.7 million or 18.7%. The increase in net interest income was due to an improvement of 76 basis points in net interest margin, on a tax equivalent basis. The decrease in operating expenses was principally due to a $43.3 million related to goodwill and other intangible assets impairment charges recognized during 2007, a $16.0 million decrease in stock incentive compensation expense sponsored by Santander Group, a provision for claim receivable of $25.1 million recognized during 2008, a $7.8 million increase in professional fees, a $6.9 million increase in salaries and other personnel expenses, a $3.9 million increase in occupancy cost, a $3.8 million increase in FDIC assessment offset by a decrease of $9.0 million in business promotion and a decrease of $1.8 million in repossessed asset provision and expenses.

Net Interest Income

The Corporation reported net interest income of $351.7 million, $356.3 million and $311.7 million for the years ended December 31, 2009, 2008, and 2007, respectively.

To facilitate the comparison of assets with different tax attributes, the interest income on tax-exempt assets under this heading and under the heading “Change in Interest Income and Interest Expense—Volume and Rate Analysis,” has been adjusted by an amount equal to the income taxes which would have been paid had the interest income been fully taxable. This tax equivalent adjustment is derived using the applicable statutory tax rate and resulted in an adjustment of $2.8 million in 2009, 4.7 million in 2008 and $7.5 million in 2007.

The following table sets forth the principal components of the Corporation’s net interest income for the years ended December 31, 2009, 2008 and 2007.


	2009			2008			2007
	(Dollars in thousands)
Interest income — tax equivalent basis	$	484,949		$	605,445		$	681,755
Interest expense		(130,431	)		(244,449	)		(362,531	)

Net interest income — tax equivalent basis	$	354,518		$	360,996		$	319,224

Net interest margin — tax equivalent basis (1)		5.56	%		4.50	%		3.74	%


(1)		Net interest margin for any period equals tax-equivalent net interest income divided by average interest-earning assets for such period.

2009 compared to 2008. For the year ended December 31, 2009, net interest margin, on a tax equivalent basis, was 5.56% compared to net interest margin, on a tax equivalent basis, of 4.50% for the same period in 2008. This increase of 106 basis points in net interest margin, on a tax equivalent basis, was mainly due to a decrease of 106 basis points in the cost of average interest bearing liabilities accompanying of $1.6 billion decrease in average interest bearing liabilities, resulting in a decrease of $114.0 million in interest expense. The reduction of $114.0 million or 46.7% in interest expense was principally due to the significant reductions of 115 basis points in the cost of funds of average interest-bearing deposits from 3.16% for the year ended December 31, 2008 to 2.01% for the year ended December 31, 2009 reflecting the repricing of interest bearing deposits as a result of Federal Reserve’s interest rate cuts during 2008. The yield on average interest earning assets increase 5 basis points when compare with prior year. Interest income, on a tax equivalent basis, decrease $120.5 million mainly due to $1.6 billion decrease in average interest earning assets. The decrease of $120.5 million in interest income, on a tax equivalent basis, was due principally to decreases of $89.1 million and $26.6 million in interest income on average loans and average investment securities, respectively.

For the year ended December 31, 2009 average interest earning assets decreased $1.6 billion or 20.5%. The decrease in average interest earning assets compared to the previous year was driven by decreases of $1.1 billion or 16.0% in average net loans, $553.5 million or 48.3% in average investment securities and $30.0 million or 10.5% in average interest bearing deposits. The decrease in average net loans was mainly due to the sale of commercial and construction loans, including some classified as impaired, to an affiliate and repayments on loans, net of originations. The average commercial and construction loans reflected a decrease of $413.6 million or 17.0% and $279.0 million or 73.5%, respectively, for the year ended December 31, 2009 when compared with the same period in 2008 mainly due to the sale of loans to an affiliate and net repayments during the period. There was a decrease in average mortgage loans mainly due to a reduction in mortgage loans origination of $150.3 million when compared with the same period in prior year. There was a decrease in average consumer loans (including consumer finance) of $146.7 million or 12.1% which comprised $110.4 million and $36.3 million decreases in average personal loans and consumer finance, respectively. Also, average leasing portfolio experienced a decrease of $29.2 million or 38.3% was reported since the Corporation has strategically reduced this line of lending.

The decrease in average interest earning assets, also, was impacted by a reduction in average investment securities of $553.5 million or 48.3% mainly due to a sale of investment securities available for sale of $495.4 million during 2009.

The average interest-bearing liabilities decreased $1.6 billion or 22.7% for the year ended December 31, 2009 driven by decreases in average interest bearing deposits and average borrowings of $872.0 million and $748.6 million, respectively, when compared to the year ended December 31, 2008. The decrease or $872.0 million in average interest-bearing deposits was composed of $837.9 million decrease in average brokered deposits and $160.9 million decrease in average other time deposits offset by an increase of $126.8 million average savings and NOW accounts. The $748.6 million decrease in average borrowings was impacted by a reduction in average securities sold under agreements to repurchase of $447.0 million mainly caused the early termination of repurchase agreements of $375 million that were funding investment securities sold during the first quarter of 2009, a decrease in average federal funds and other borrowings of $175.3 million mainly due to the repayment of the outstanding indebtedness incurred under a bridge facility agreement among the Corporation, SFS and National Australia Bank Limited during 2008, a reduction of $119.0 million in average commercial paper and a decrease in average Federal Home Loan Bank Advances (“FHLB”) of $66.0 million for the year ended December 31, 2009 compared with the same period in 2008. These decreases were partially offset by an increase of $58.2 million in average subordinated capital notes due to a subordinated purchase agreement undertook with an affiliate.

2008 compared to 2007. For the year ended December 31, 2008, net interest margin, on a tax equivalent basis, was 4.50% compared with 3.74% for the same period in 2007. The increase of 76 basis points in net interest margin was mainly due to a decrease of 133 basis points in the cost of interest-bearing liabilities together with a decrease of $489.2 million in average interest-bearing liabilities. The Corporation also experienced a decrease in the yield of interest-earning assets of 44 basis points and $515.8 million decrease in average interest-earnings assets. Net Interest income, on a tax equivalent basis, reflected an increase of $41.8 million or 13.1% resulting from a decrease of $118.1 million or 32.6% in interest expense due to a $77.9 million decrease in interest expense in average borrowings (including average term notes and average subordinated notes) offset by a decrease of $76.3 million or 11.2% in interest income, on a tax equivalent basis mainly due to a $53.0 million decrease in interest income on average loans.

The 44 basis points reduction in the yield on the average interest-earnings assets was due to changes in the mix in the interest-earning assets and the repricing of the interest rate during 2008. There was a reduction of $53.0 million or 8.8% in interest income on average net loans accompanied by a $21.9 million or 30.7% decrease in interest income on average investment securities.

Average interest-earning assets decreased $515.8 million or 6.1% to $8.0 billion at December 31, 2008 compared with December 31, 2007. The decrease in average interest-earning assets was driven by decreases in average investment securities of $330.7 million and average net loans of $315.9 million partially offset by a $130.8 million increase in average interest-bearing deposits. The decrease of $330.7 million in average investment securities was due to a $346.7 million sale of investment securities available for sale during the year ended December 31, 2008, which includes $221.4 million of investment securities pledged as collateral to securities sold under agreements to repurchase with LBI. The decrease of $315.9 million in average net loans was driven by a $74.3 million decrease in average commercial loans and $101.3 million decrease in average construction loans principally due to the sale of certain loans, including some classified as impaired, to an affiliate during the period. There were decreases of $36.1 million in average leasing portfolio since the Corporation has strategically reduced this line of lending, of $29.7 million in average mortgage loans and $25.3 million in average consumer loans which comprised a $48.0 million decrease in average personal loans and a $12.2 million decrease in average consumer finance offset by a $34.9 million increase in average credit cards.

There was a reduction of 133 basis points in the average cost of interest-bearing liabilities. The Corporation’s interest expense on average interest-bearing liabilities reflected a decreased of 32.6% to $244.5 million for year ended December 31, 2008 from $362.5 million for the same period in 2007. This reduction was due to a decrease in interest expense on average borrowings (including average term notes and average subordinated notes) of $77.9 million or 45.8% for the year ended December 31, 2008 compared to December 31, 2007 and a decrease in interest expense on total average interest-bearing deposits of $40.2 million or 20.9%. There were decreases in interest expense on average time deposits and average savings and NOW accounts of $23.4 million and $16.8 million, respectively, in 2008 compared to the same period in 2007.

Average interest-bearing liabilities reached $7.1 billion as of December 31, 2008, reflecting a decrease of $489.2 million or 6.4% when compared to figures reported in 2007. The reduction in average interest-bearing liabilities was mainly due to a decrease in average borrowings (including term and subordinated notes) of 779.4 million or 25.2% to $2.3 billion in 2008 from $3.1 billion in 2007. The reduction in average borrowings (including term and subordinated notes) was mainly to the payment of the $700 million outstanding indebtedness incurred under the bridge facility agreement among the Corporation, SFS and National Australia Bank Limited during the first quarter of 2008 and the cancellation on September 19, 2008 of $200 million of securities sold under agreements to repurchase with LBI as result of bankruptcy of its parent LBHI. Also, there were decreases in average commercial paper and average term notes of $169.9 million or 44.8% and $18.5 million or 48.5%, respectively, when compared with the same period in prior year. These decreases were partially offset by an increase in average Federal Home Loan Bank Advances of $177.8 million or 18.8%. Average interest-bearing deposits increased $290.2 million or 6.4% to reach $4.8 billion as of December 31, 2008 and include an increase in average other time deposits of $330.8 million or 23.3% offset by decreases of $24.5 million and $16.0 million in average savings and Now accounts and average brokered deposits, respectively, when compared with the figures reported in the prior year. The increase in average interest bearing deposits is mainly due to a certificate of deposit in the amount of $630 million held by Banco Santander, S.A. in Banco Santander Puerto Rico during the first quarter of 2008.

The following table shows average balances and, where applicable, interest amounts earned on a tax-equivalent basis and average rates for the Corporation’s assets and liabilities and stockholders’ equity for the years ended December 31, 2009, 2008 and 2007.


	Year ended December 31,
	2009								2008								2007
	Average					Average			Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
									(Dollars in thousands)
Assets
Interest-earning assets:
Interest bearing deposits	$	240,496		$	541		0.22	%	$	81,851		$	1,063		1.30	%	$	85,278		$	3,343		3.92	%
Federal funds sold and securities purchased under agreements to resell		14,053			67		0.48	%		202,658			4,333		2.14	%		68,477			3,456		5.05	%

Total interest-bearing deposits		254,549			608		0.24	%		284,509			5,396		1.90	%		153,755			6,799		4.42	%

U.S.Treasury securities		133,740			1,255		0.94	%		42,604			1,028		2.41	%		91,384			4,090		4.48	%
Obligations of other U.S. government agencies and corporations		45,343			1,517		3.35	%		417,457			14,122		3.38	%		635,219			29,561		4.65	%
Corporate Bonds		89,543			1,619		1.81	%
Obligations of the government of Puerto Rico and political subdivisions		147,753			9,565		6.47	%		100,610			5,633		5.60	%		95,781			5,113		5.34	%
Collateralized mortgage obligations and mortgage backed securities		118,946			6,050		5.09	%		519,311			24,752		4.77	%		588,719			28,422		4.83	%
Other		56,198			2,750		4.89	%		65,035			3,820		5.87	%		64,591			4,076		6.31	%

Total investment securities		591,523			22,756		3.85	%		1,145,017			49,355		4.31	%		1,475,694			71,262		4.83	%

Loans :
Commercial		2,017,909			92,424		4.58	%		2,431,527			137,263		5.65	%		2,505,825			172,671		6.89	%
Construction		100,819			2,942		2.92	%		379,857			16,363		4.31	%		481,174			38,479		8.00	%
Consumer		503,112			79,624		15.83	%		613,499			86,960		14.17	%		626,580			79,531		12.69	%
Consumer Finance		559,823			133,638		23.87	%		596,129			141,701		23.77	%		608,366			139,075		22.86	%
Mortgage		2,492,276			149,841		6.01	%		2,662,726			163,360		6.14	%		2,692,448			166,192		6.17	%
Lease financing		47,038			3,116		6.62	%		76,204			5,047		6.62	%		112,268			7,746		6.90	%

Gross loans		5,720,977			461,585		8.07	%		6,759,942			550,694		8.15	%		7,026,661			603,694		8.59	%
Allowance for loan losses		(191,738	)							(175,100	)							(125,897	)

Loans, net		5,529,239			461,585		8.35	%		6,584,842			550,694		8.36	%		6,900,764			603,694		8.75	%

Total interest-earning assets/ interest income (tax-equivalent basis)		6,375,311			484,949		7.61	%		8,014,368			605,445		7.55	%		8,530,213			681,755		7.99	%

Total non-interest-earning assets		737,443								726,302								669,499

Total assets	$	7,112,754							$	8,740,670							$	9,199,712


Liabilities and stockholders’ equity
Interest-bearing liabilities:
Savings and NOW accounts	$	1,817,911		$	19,016		1.05	%	$	1,691,094		$	34,944		2.07	%	$	1,715,631		$	51,785		3.02	%
Other time deposits		1,589,018			42,932		2.70	%		1,749,942			56,905		3.25	%		1,419,185			65,810		4.64	%
Brokered deposits		547,419			17,525		3.20	%		1,385,318			60,603		4.37	%		1,401,310			73,820		5.27	%

Total Interest-bearing deposits		3,954,348			79,473		2.01	%		4,826,354			152,452		3.16	%		4,536,126			191,415		4.22	%
Borrowings		1,240,099			35,600		2.87	%		2,047,442			78,049		3.81	%		2,805,003			153,951		5.49	%
Term Notes		20,279			636		3.14	%		19,674			631		3.21	%		38,223			1,278		3.34	%
Subordinated Notes		305,605			14,722		4.82	%		247,419			13,317		5.38	%		250,721			15,887		6.34	%

Total interest-bearing liabilities interest expense		5,520,331			130,431		2.36	%		7,140,889			244,449		3.42	%		7,630,073			362,531		4.75	%

Total non interest-bearing liabilities		1,022,723								1,035,543								996,103

Total liabilities		6,543,054								8,176,432								8,626,176

Stockholders’ Equity		569,700								564,238								573,536

Total liabilities and stockholders’ equity	$	7,112,754							$	8,740,670							$	9,199,712

Net interest income				$	354,518							$	360,996							$	319,224

Net interest spread							5.24	%							4.13	%							3.24	%
Cost of funding earning assets							2.05	%							3.05	%							4.25	%
Net interest margin (tax equivalent basis)							5.56	%							4.50	%							3.74	%

Changes in Interest Income and Interest Expense-Volume and Rate Analysis

The following table allocates changes in the Corporation’s tax equivalent interest income and interest expense between changes in the average volume of interest-earning assets and interest-bearing liabilities and changes in their respective interest rates for the years 2009 compared to 2008 and 2008 compared to 2007. Volume and rate variances have been calculated based on activities in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities.


	2009 vs. 2008									2008 vs. 2007
	Increase (decrease) due to change in:									Increase (decrease) due to change in:
	Volume			Rate			Total			Volume			Rate			Total
							(Dollars in thousands)
Interest Income — tax equivalent basis:
Federal funds sold and securities purchased under agreements to resell	$	(2,325	)	$	(1,941	)	$	(4,266	)	$	3,756		$	(2,879	)	$	877
Time deposits with other banks		866			(1,388	)		(522	)		(129	)		(2,151	)		(2,280	)
Investment securities		(21,760	)		(4,839	)		(26,599	)		(14,810	)		(7,097	)		(21,907	)
Loans, net		(88,124	)		(985	)		(89,109	)		(27,016	)		(25,984	)		(53,000	)

Total interest income		(111,343	)		(9,153	)		(120,496	)		(38,199	)		(38,111	)		(76,310	)

Interest Expense:
Savings and NOW accounts		2,450			(18,378	)		(15,928	)		(730	)		(16,111	)		(16,841	)
Other time deposits		(32,251	)		(24,800	)		(57,051	)		14,509			(37,876	)		(23,367	)
Borrowings		(26,103	)		(16,346	)		(42,449	)		(35,377	)		(39,251	)		(74,628	)
Long-term borrowings		2,863			(1,453	)		1,410			(1,239	)		(2,007	)		(3,246	)

Total interest expense		(53,041	)		(60,977	)		(114,018	)		(22,837	)		(95,245	)		(118,082	)

Net interest income (expense) — tax equivalent basis	$	(58,302	)	$	51,824		$	(6,478	)	$	(15,362	)	$	57,134		$	41,772

During 2009, the increase in net interest income on a tax equivalent basis was driven primarily by decreases in volume and rate on interest bearing-liabilities of 106 basis points accompanied by a decrease in volume and yield earned on interest-earning assets of 6 basis points. The increase in net interest income was mainly due to the repricing of interest bearing deposits as a result of Federal Reserve’s interest rate cuts during 2008.

During 2008, the increase in net interest income on a tax equivalent basis was driven primarily by decreases in volume and rate on interest bearing-liabilities of 133 basis points accompanied by a decrease in volume and yield earned on interest-earning assets of 44 basis points. The increase in net interest income was attributed to a significant cost of funds reduction and the refinancing of existing debts.

Provision for Loan Losses

2009 compared to 2008. The provision for loan losses decreased $23.0 million or 13.1% to reach $152.5 million for the year ended December 31, 2009 from $175.5 million for the year ended December 31, 2008. The decrease in the provision for loan losses was due primarily to the sale of certain loans including some classified as impaired to an affiliate during the year, a reduction loan portfolio and overall improvement in credit ratios metrics.

2008 compared to 2007. The provision for loan losses increased $27.7 million or 18.7% from $147.8 million for the year ended December 31, 2007 to $175.5 million for the year ended December 31, 2008. The increase in the provision for loan losses was due primarily to increases in non-performing loans due to the deterioration in economic conditions in Puerto Rico, requiring the Corporation to increase the level of its allowance for loan losses.

Refer to the discussions under “Allowance for Loan Losses” and “Risk Management” for further analysis of the allowance for loan losses, the allocation of the allowance by loan category and non-performing assets and related ratios.

Other Income

Other income consists of service charges on deposit accounts, other service fees, including mortgage servicing fees and fees on credit cards, broker-dealer, asset management and insurance fees, gains and losses on sales of securities, gain on sale of mortgage servicing rights, certain other gains and losses and certain other income.

The following table sets forth the components of our other income for the years ended December 31, 2009, 2008 and 2007:


	Year ended December 31,
	2009			2008		2007
	(Dollars In thousands)
Bank service fees on deposit accounts	$	12,403		$	12,975	$	13,603
Other service fees:
Credit card fees		9,412			8,788		10,872
Mortgage-servicing fees		4,087			3,555		3,010
Trust fees		1,090			1,561		1,914
Confirming advances		1,882			6,200		4,169
Other fees		10,963			11,606		13,633
Broker-dealer, asset management and insurance fees		62,688			74,808		68,265
Gain on sale of securities, net		9,251			5,154		1,265
Gain on sale of loans		5,144			3,253		6,658
Trading gains		3,275			2,608		2,831
Gain (loss) on derivatives and other financial instruments		(7,303	)		3,284		249
Other (loss) gains, net		(1,637	)		5,739		18,644
Other		11,191			8,304		3,007

	$	122,446		$	147,835	$	148,120

The table below details the breakdown of commissions from broker-dealer, asset management and insurance operations:


	Year ended December 31,
	2009		2008		2007
	(Dollars in thousands)
Broker-dealer	$	34,281	$	40,480	$	32,147
Asset management		25,359		26,833		24,362

Total Santander Securities and subsidiary		59,640		67,313		56,509
Insurance		3,048		7,495		11,756

Total	$	62,688	$	74,808	$	68,265

2009 compared to 2008. For the year ended December 31, 2009, other income reflected a reduction of 25.4 million or 17.2% as compared with figures reported in the prior year. Broker-dealer, asset management and insurance fees reflected a decrease of $12.1 million or 16.2% due decreases of $7.7 million in broker-dealer and asset management fees and $4.4 million in insurance fees due to a reduction in credit life commissions generated from the Bank and Island Finance operations. The broker-dealer operation is carried out through Santander Securities Corporation, whose business includes securities underwriting and distribution, sales, trading, financial planning and securities brokerage services. In addition, Santander Securities provides investment management services through its wholly-owned subsidiary, Santander Asset Management Corporation. The broker- dealer asset management and insurance operations contributed 51.2%, 50.6% and 46.1% of commissions to the Corporation’s other income for the year ended December 31, 2009, 2008 and 2007.

The Corporation reported an increase in gain on sale of securities available for sale of $4.1 million. During 2009, the Corporation sold $495.4 million of investment securities available for sale and realized a gain of $9.3 million. This gain was

offset by a loss of $9.6 million, included in other gains (losses), on the early termination of repurchase agreements that were funding the securities sold. During 2008, the Corporation sold $346.7 million of investment securities available for sale resulting in a gain of $5.2 million. There was a gain of $3.3 million on the sale of a portion of the Corporation’s investment in Visa, Inc. during the third quarter of 2009 compared with a gain of $8.6 million during the first quarter 2008 in connection with Visa’s initial public offering. A loss of $7.3 million on derivatives and other financial instruments was recognized at December 31, 2009 compared with a gain of $3.3 million for the same period in prior year mostly resulting from the credit risk component incorporated into the fair value calculation of a subordinated notes and brokered deposits. These decreases were partially offset by an unfavorable valuation adjustment of $7.4 million for loans held for sale recorded during 2008 and $4.4 million increase in loan administration fees collected from loan sold to affiliates.

Bank service charges, fees and other decreased $4.8 million, or 10.9% for the year ended December 31, 2009. These reductions were principally due to $4.3 million decrease in commissions from confirming advances. The confirming advances portfolio experienced a reduction of $8.9 million during 2009 when compared with 2008.

2008 compared to 2007. For the year ended December 31, 2008, other income remained basically flat as compared with figures reported in the prior year. Broker-dealer, asset management and insurance fees reflected an increase of $6.5 million or 9.6% due to increases in broker-dealer and asset management fees of $10.8 million partially offset by a decrease of $4.3 million in insurance fees due to a reduction of $3.1 million and $1.1 million in credit life commissions generated from the Bank and Island Finance operations, respectively. The broker-dealer asset management and insurance operations contributed 50.6% of commissions to the Corporation’s other income for the year ended December 31, 2008.

There was a gain of $8.6 million on the sale of a portion of the Corporation’s investment in Visa, Inc. in connection with its initial public offering during the first quarter of 2008. A gain on sale of securities of $5.2 million or a $3.9 million increase was recognized for the year ended December 31, 2008. This increase was driven by a sale of investment securities of $346.7 million during 2008, including $221.4 million related to investment securities available for sale held as collateral by LBI under securities sold under agreements to repurchase. The Corporation recognized a $2.3 million gain in connection with the settlement of the securities pledged as collateral to securities sold under agreements to repurchase. Also, the Corporation reported an increase in gain on derivative instruments of $3.0 million for the year ended December 31, 2008 compared with the prior year mainly due to the net effect of incorporating the Corporation’s credit risk in the derivative fair value calculation methodology pursuant the adoption of SFAS 157, a $1.0 million increase in swap income, $1.2 million increase in technical assistance collected from affiliates and an additional fees received of $1.0 million as part of the agreement for the sale of the Corporation’s merchant business during 2007. These increases were partially offset by an unfavorable valuation adjustment of $7.4 million for loans held for sale, a decrease in other gain of $12.9 due mainly to a $12.2 million in gain of sale of merchant business to an unrelated party during 2007. Also, there was a $3.4 million decrease in gain on sale of loans. The Corporation reported $105.8 million in mortgage loans sold, a reduction of $145.7 million or 57.9%, for the year ended December 31, 2008 compared with $251.4 million mortgage loans sold during 2007.

Bank service charges, fees and other decreased $2.6 million, or 5.3% for the year ended December 31, 2008. These reductions were principally due to a $2.1 million decrease in credit card fees due to the sale of the Corporation’s merchant business to an unrelated third party during the first quarter of 2007.

Operating Expenses

The following table sets forth information as to the Corporation’s other operating expenses for the years ended December 31, 2009, 2008 and 2007:


	Year ended December 31,
	2009			2008			2007
	(Dollars in thousands)
Salaries	$	60,241		$	76,012		$	72,927
Pension and other benefits		52,594			57,200			72,815
Expenses deferred as loan origination costs		(5,816	)		(8,076	)		(11,484	)

Total personnel costs		107,019			125,136			134,258

Occupancy costs		25,291			27,665			23,767

Equipment expenses		3,907			4,358			4,427

EDP servicing expense, amortization and technical services		40,645			41,860			39,255

Communications		9,038			10,062			10,923

Business promotion		3,864			6,628			15,621

Goodwill and other intangibles impairment charges		—			—			43,349

Other taxes		13,270			13,101			12,334

Other:
Professional fees		14,609			22,094			14,330
Amortization of intangibles		2,798			3,067			3,828
Printing and supplies		1,435			1,926			2,137
Credit card expenses		6,357			5,041			6,198
Insurance		1,318			3,371			4,029
Examinations & FDIC assessment		12,547			5,952			2,194
Transportation and travel		2,017			2,539			2,981
Repossessed assets provision and expenses		5,031			5,717			7,482
Collections and related legal costs		2,102			1,462			1,239
Provision for claim receivable		—			25,120			—
All other		17,819			19,528			15,664

Total other		66,033			95,817			60,082

Non personnel expenses		162,048			199,491			209,758

Total Other Operating Expenses	$	269,067		$	324,627		$	344,016


Efficiency ratio-on a tax equivalent basis		56.77	%		60.39	%		66.32	%
Personnel cost to average assets		1.50	%		1.43	%		1.46	%
Other operating expenses to average assets		2.28	%		2.28	%		2.28	%
Assets per employee	$	3,836		$	4,467		$	3,494

2009 compared to 2008. The Efficiency Ratio, on a tax equivalent basis, was 56.77% and 60.39% for the year ended December 31, 2009 and 2008, respectively, reflecting an improvement of 362 basis points. This improvement was mainly the result of a reduction in operating expenses. The effect of the $25.1 million provision for claim receivable recognized during 2008 were excluded from operating expenses to determine the Efficiency Ratio, on a tax equivalent basis.

The Corporation’s operating expenses reflected a decrease of $55.6 million or 17.1% to $269.1 million for the year ended December 31, 2009 when compared with the year ended December 31, 2008. This decrease was driven by a decrease in net salaries and other employee benefits of $18.1 million and $37.5 million other operating expense. The decrease in total personnel cost of $18.1 million principally attributed to $15.8 million decrease in salaries expense and $9.1 million decrease in other employee benefits (which comprised principally a $5.0 million decrease in bonuses and commissions) partially offset by increases of 4.5 million in incentive stock plan expense and $2.3 million expense of loan origination cost being deferred.

The $37.5 million decrease in other operating expense was principally due a provision for claim receivable of $25.1 million recognized during the third quarter of 2008 which represent the excess of the value of the securities held by LBI over the amount owned by the Corporation under the securities sold under agreement to repurchase. The Corporation also reported decreases of $7.5 million decrease in professional fees due to a decrease in consulting fees related to the review of certain operational procedures during 2008, $2.8 million in business promotion, $2.4 million in occupancy cost, $2.1 million in

insurance expense, $1.2 million in EDP and technical services, $1.0 million in communications and $0.7 million in repossessed assets provision and expense. These expense reductions were partially offset by $6.6 million increase in FDIC assessment due to the assessment systems implemented under the Federal Deposit Insurance Reform Act of 2005 that imposed insurance premiums based on factors such as capital level, supervisory rating, certain financial ratios and risk information and special assessment of 5 basis points, and no more than 10 basis points, of insured depository institutions assets minus Tier 1 capital.

2008 compared to 2007. For the year ended December 31, 2008, the Efficiency Ratio, on a tax equivalent basis, was 60.39% reflecting an improvement of 593 basis points compared to 66.32% for the year ended December 31, 2007. This improvement was mainly the result of higher net interest income and a reduction in operating expenses. The effect of the $43.3 million for goodwill and other intangible assets impairment charges recognized during 2007 and $25.1 million provision for claim receivable recognized during 2008 were excluded from operating expenses to determine the Efficiency Ratio, on a tax equivalent basis.

For the year ended December 31, 2008, operating expenses amounted $324.6 million, a decrease of $19.4 million or 5.6% compared to $344.0 million for the year ended December 31, 2007. The decrease in operating expenses was principally due to a $43.3 million related to goodwill and other intangible assets impairment charges recognized during 2007, a $16.0 million decrease in stock incentive compensation expense sponsored by Santander Group, a provision for claim receivable of $25.1 million recognized during 2008, a $7.8 million increase in professional fees due to an increment in consulting fees related to the adoption of new accounting pronouncements and the review of other operational procedures, a $6.9 million increase in salaries and other personnel expenses mainly due to severance payments related to personnel reductions, a $3.9 million increase in occupancy cost due to the sale and leaseback of the Corporation’s two principal properties in December 2007, a $3.8 million increase in FDIC assessment due to the 2007 assessment systems implemented under the Federal Deposit Insurance Reform Act of 2005 that imposed insurance premiums based on factors such as capital level, supervisory rating, certain financial ratios and risk information, offset by a decrease of $9.0 million in business promotion and a decrease of $1.8 million in repossessed asset provision and expenses.

Income Taxes

Under the Puerto Rico Internal Revenue Code, as amended (the “PR Code”), the Corporation and each of its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns in Puerto Rico. The maximum statutory marginal corporate income tax rate is 39%. Furthermore, there is an alternative minimum tax of 22%. The difference between the statutory marginal tax rate and the effective tax rate is primarily due to the interest income earned on certain investments and loans, which is exempt from income tax (net of the disallowance of expenses attributable to the exempt income) and to the disallowance of certain expenses and other items. The PR Code provides dividends received deduction of 100% on dividends received from controlled subsidiaries subject to taxation in Puerto Rico. The Corporation is also subject to municipal license tax at various rates that do not exceed 1.5% of the Corporation’s taxable gross income. .

On July 2009, Governor of Puerto Rico signed Act No. 37, which amends Act No. 7 of March 9, 2009. This law imposed a temporary three-year surcharge of 5% commencing on taxable year 2009. Since the 5% surcharge is imposed on the tax liability instead of the income subject to tax, the effect of the 5% surcharge will be that during the temporary period the 39% maximum statutory marginal corporate income tax rate may be increased to 40.95%. Also, the amendments of Act No. 7 of March 9, 2009, particularly to alternative minimum tax (“AMT”), eliminates the deduction for expenses incurred outside Puerto Rico unless these payments are subject to income tax in Puerto Rico.

This law, also, includes a temporary 5% special income tax applicable to Puerto Rico international banking entities, or IBEs, such as Santander International Bank (SIB), which, before this law, was exempt from taxation under Puerto Rico law. This special income tax shall be applicable for taxable years 2009, 2010 and 2011

The Corporation adopted the provisions under FASB ASC Topic 740, “Income Tax”. These provisions clarify the accounting for uncertainty of income tax recognized in a enterprise’s financial statements in accordance with FASB ASC Topic 740. This interpretation prescribes a recognition threshold and measurement attribute for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management

considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income, management believes it is more likely than not, the Corporation will not realize the benefits of the deferred tax assets related to Santander Financial Services, Inc. and Santander Bancorp (parent company only) amounting to $14.5 million and $0.1 million, respectively, at December 31, 2009 and $ 20.6 million and $ 0.1 million, respectively, at December 31, 2008. Accordingly, deferred tax asset valuation allowances of $14.5 million and $0.1 million at December 31, 2009 and $ 20.6 million and $0.1 million at December 31, 2008 for Santander Financial Services, Inc and Santander Bancorp (parent company only), respectively, were recorded.

2009 compared to 2008. The income tax provision was $11.3 million as of December 31, 2009, reflecting an increase of $17.9 million over one year. The Corporation reported an income tax benefit of $6.5 million for the year ended December 31, 2008. The increase in the provision for income tax during 2009 was due in primarily to higher taxable income in 2009 compared to 2008. Refer to Note 17 of the consolidated financial statements for additional information.

2008 compared to 2007. The income tax benefit was $6.5 million a decrease of $10.7 million or 255.2% for the year ended December 31, 2008 compared to provision for income tax $4.2 million for the same period in 2007. The decrease in the provision for income tax during 2008 was due in primarily to lower taxable income in 2008 compared to 2007. Refer to Note 17 of the consolidated financial statements for additional information.

Financial Condition

Assets

The Corporation’s total assets as of December 31, 2009 reached $6.8 billion, a $1.1 billion decrease when compared to $7.9 billion as of December 31, 2008. The decrease of $1.1 billion was driven principally by $694.8 million decrease in net loans and $384.5 million decrease in investment securities portfolio partially offset by $44.8 million increase in total cash and cash equivalents.

There was a decrease in other assets of $50.4 million, which consisted mainly of decreases of $78.4 million in derivative assets and $8.8 million in confirming advances. These decreases were partially offset by increases of $25.2 million in prepaid expenses as a result $25.8 million of prepaid FDIC insurance and $12.2 million in real estate owned.

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

The Corporation sells federal funds, purchases securities under agreements to resell and deposits funds in interest-bearing accounts in other financial institutions to help meet liquidity requirements and provide temporary holdings until the funds can be otherwise invested or utilized. As of December 31, 2009, 2008 and 2007, the Corporation had interest-bearing deposits, federal funds sold and securities purchased under agreements to resell as detailed below:


	2009		2008		2007
	(Dollars in thousands)
Interest-bearing deposits	$	12,376	$	8,370	$	6,606
Federal funds sold		22,146		64,871		82,434

	$	34,522	$	73,241	$	89,040

Investment Portfolio

The following tables set forth the Corporation’s investments in government securities and certain other financial investments at December 31, 2009 and 2008, by contractual maturity, giving comparative carrying and fair values and average yield for each of the categories. The Corporation has evaluated the conditions under which it might sell its investment securities. As a result, most of its investment securities have been classified as available for sale. The Corporation may decide to sell some of the securities classified as available for sale either as part of its efforts to manage its interest rate risk, or in response to changes in interest rates, prepayment risk or similar economic factors. Investment securities available for sale are carried at fair value and unrealized gains and losses net of taxes on these investments are included in accumulated other comprehensive income or loss, which is a separate component of stockholders’ equity.

Gains or losses on sales of investment securities available for sale are recognized when realized and are computed on the basis of specific identification. At December 31, 2009, 2008 and 2007 investment securities available for sale were $0.4 billion, $0.8 billion and $1.3 billion, respectively. The investment securities available for sale reflected a decrease of $384.5 million for the year ended December 31, 2009 compared with the same period in prior year which. This reduction was driven by a sale of $495.4 million investment securities during 2009. The Corporation recognized a $9.3 million gain in connection with the settlement of these securities.

Other investment securities include debt, equity or other securities that do not have readily determinable fair values and are stated at amortized cost. The Corporation includes in this category stock owned to comply with regulatory requirements, such as Federal Home Loan Bank (FHLB) stock.

The Corporation acquires certain securities for trading purposes and carries its trading account at fair value. Financial instruments including, to a limited extent, derivatives, such as option contracts, are used in dealing and other trading activities and are carried at fair value. The Corporation classifies as trading those securities that are acquired and held principally for the purpose of selling them in the near term. Realized and unrealized changes in fair value are recorded separately in the trading profit or loss account as part of the results of operations in the period in which the changes occur. At December 31, 2009, 2008 and 2007, the Corporation had $47.7 million, $64.7 million and $68.5 million of securities held for trading, respectively.

The following table presents the carrying value and fair value of the Corporation’s investment securities available for sale by major category as of the December 31, 2009, 2008 and 2007:


	2009				2008				2007
	Carrying		Fair		Carrying		Fair		Carrying		Fair
Available for Sale	Value		Value		Value		Value		Value		Value
					(Dollars in thousands)
U.S. Treasury	$	175,330	$	175,330	$	30,000	$	30,000	$	64,455	$	64,455
U.S. Agency Notes		5,791		5,791		141,916		141,916		609,223		609,223
Corporate Bonds		142,517		142,517
P.R. Government Obligations		83,435		83,435		148,616		148,616		49,288		49,288
Mortgage-backed Securities		10,535		10,535		481,530		481,530		545,182		545,182
Foreign Securities		—		—		50		50		50		50

	$	417,608	$	417,608	$	802,112	$	802,112	$	1,268,198	$	1,268,198

The tables below summarize the contractual maturity of the Corporation’s available for sale and other investment securities at December 31, 2009, 2008 and 2007:


	December 31, 2009
						After One					After Five Years
	Within					Year to					to
	One Year					Five Years					Ten Years					Over Ten Years					Total
	Carrying		Avg			Carrying		Avg			Carrying		Avg			Carrying		Avg			Carrying		Fair		Avg
	Value		Yield			Value		Yield			Value		Yield			Value		Yield			Value		Value		Yield

											(Dollars in thousands)
U.S. Treasury	$	99,996		0.67	%	$	75,333		1.58	%	$	—		—		$	—		—		$	175,329	$	175,329		1.06	%
U.S. Agency Notes		5,792		3.98	%		—		—			—		—			—		—			5,792		5,792		3.98	%
Corporate Bonds		—		—			142,517		1.85	%		—		—			—		—			142,517		142,517		1.85	%
P.R. Government Obligations		1,193		3.72	%		72,355		5.10	%		6,546		5.58	%		3,341		5.65	%		83,435		83,435		5.14	%
Mortgage-backed Securities		—		—			—		—			—		—			10,535		5.62	%		10,535		10,535		5.62	%
Foreign Securities		—		—			—		—			—		—			—		—			—		—		—
Other Securities		55,431		3.50	%		—		—			—		—			—		—			55,431		55,431		3.50	%

Total Securities	$	162,412		1.78	%	$	290,205		2.59	%	$	6,546		5.58	%	$	13,876		5.63	%	$	473,039	$	473,039		2.44	%


	December 31, 2008
						After One					After Five Years
	Within					Year to					to
	One Year					Five Years					Ten Years					Over Ten Years					Total
	Carrying		Avg			Carrying		Avg			Carrying		Avg			Carrying		Avg			Carrying		Fair		Avg
	Value		Yield			Value		Yield			Value		Yield			Value		Yield			Value		Value		Yield

											(Dollars in thousands)
U.S. Treasury	$	30,000		0.05	%	$	—		—		$	—		—		$	—		—		$	30,000	$	30,000		0.05	%
U.S. Agency Notes		136,007		2.80	%		5,909		3.99	%		—		—			—		—			141,916		141,916		2.85	%
P.R. Government Obligations		1,454		4.23	%		133,148		5.23	%		9,479		5.18	%		4,535		5.55	%		148,616		148,616		5.22	%
Mortgage-backed Securities		—		—			—		—			195,815		4.39	%		285,715		5.41	%		481,530		481,530		4.99	%
Foreign Securities		—		—			50		4.65	%		—		—			—		—			50		50		4.65	%
Other Securities		50,382		3.50	%		11,250		3.50	%		—		—			—		—			61,632		61,632		3.50	%

Total Securities	$	217,843		2.59	%	$	150,357		5.05	%	$	205,294		4.43	%	$	290,250		5.41	%	$	863,744	$	863,744		4.40	%


	December 31, 2007
						After One					After Five Years
	Within					Year to					to
	One Year					Five Years					Ten Years					Over Ten Years					Total
	Carrying		Avg			Carrying		Avg			Carrying		Avg			Carrying		Avg			Carrying		Fair		Avg
	Value		Yield			Value		Yield			Value		Yield			Value		Yield			Value		Value		Yield

											(Dollars in thousands)
U.S. Treasury	$	64,455		3.92	%	$	—		—		$	—		—		$	—		—		$	64,455	$	64,455		3.92	%
U.S. Agency Notes		253,423		2.84	%		355,800		3.91	%		—		—			—		—			609,223		609,223		3.40	%
P.R. Government Obligations		1,367		3.99	%		19,775		4.44	%		15,111		5.21	%		13,035		5.73	%		49,288		49,288		5.00	%
Mortgage-backed Securities		—		—			—		—			225,124		4.40	%		320,058		5.41	%		545,182		545,182		4.99	%
Foreign Securities		—		—			50		4.65	%		—		—			—		—			50		50		4.65	%
Other Securities		64,559		5.50	%		—		—			—		—			—		—			64,559		64,559		5.50	%

Total Securities	$	383,804		3.47	%	$	375,625		3.94	%	$	240,235		4.45	%	$	333,093		5.42	%	$	1,332,757	$	1,332,757		4.24	%

Loan Portfolio

The following table analyzes the Corporation’s loans by type of loan, including loans held for sale, as of December 31, 2009, 2008, 2007, 2006 and 2005.


	Year ended December 31,
	2009					2008					2007					2006					2005
			% of					% of					% of					% of					% of
			Total					Total					Total					Total					Total
	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans
	(Dollars in thousands)
Commercial, industrial and agricultural:
Retail commercial banking:
Middle-market	$	1,249,993		22.8	%	$	1,363,742		22.1	%	$	1,646,046		23.3	%	$	1,692,058		24.4	%	$	1,593,359		26.5	%
Agricultural		36,205		0.7	%		46,032		0.7	%		63,204		0.9	%		59,315		0.9	%		61,531		1.0	%
SBA		38,696		0.7	%		51,871		0.8	%		63,825		0.9	%		66,734		1.0	%		69,763		1.2	%
Factor liens		9,488		0.2	%		10,268		0.2	%		18,252		0.3	%		20,553		0.3	%		16,696		0.3	%
Other		—		0.0	%		897		0.0	%		4,688		0.1	%		6,965		0.1	%		40,072		0.7	%

Retail commercial banking		1,334,382		24.5	%		1,472,810		24.0	%		1,796,015		25.5	%		1,845,625		26.6	%		1,781,421		29.6	%
Corporate banking		612,197		11.2	%		691,976		11.2	%		765,310		10.8	%		673,566		9.7	%		1,205,664		20.0	%
Construction		70,707		1.3	%		194,026		3.1	%		484,237		6.8	%		435,182		6.3	%		213,705		3.5	%
Lease Financing		35,000		0.6	%		60,615		1.0	%		92,641		1.3	%		132,655		1.9	%		125,168		2.1	%

Total Commercial		2,052,286		37.5	%		2,419,427		39.3	%		3,138,203		44.3	%		3,087,028		44.6	%		3,325,958		55.2	%

Consumer:
Personal (installment and other loans)		207,156		3.8	%		305,058		5.0	%		402,195		5.7	%		383,460		5.5	%		378,269		6.3	%
Automobile		—		0.0	%		—		0.0	%		—		0.0	%		2		0.0	%		610		0.0	%
Credit Cards		236,789		4.3	%		261,531		4.2	%		240,858		3.4	%		193,260		2.8	%		169,416		2.8	%
Consumer Finance		558,948		10.2	%		578,243		9.4	%		611,114		8.6	%		625,266		9.0	%		—		0.0	%

Total Consumer		1,002,893		18.2	%		1,144,832		18.5	%		1,254,167		17.6	%		1,201,988		17.3	%		548,295		9.1	%

Mortgage:
Residential		2,412,136		44.1	%		2,591,930		42.1	%		2,682,362		37.9	%		2,649,128		38.1	%		2,141,358		35.6	%
Commercial		3,158		0.1	%		3,658		0.1	%		3,600		0.1	%		5,412		0.1	%		6,121		0.1	%

Total Mortgage		2,415,294		44.3	%		2,595,588		42.2	%		2,685,962		38.0	%		2,654,540		38.2	%		2,147,479		35.7	%


Total Loans, net of unearned interest
and deferred fees	$	5,470,473		100.0	%	$	6,159,847		100.0	%	$	7,078,332		100.0	%	$	6,943,556		100.0	%	$	6,021,732		100.0	%

The gross loan portfolio, including loans held for sale, reflected a decrease of $689.4 million or 11.2%, to $5.4 billion at December 31, 2009, compared to the figures reported as of December 31, 2008.

The commercial and construction portfolio experienced a decrease of $218.2 million and $123.3 million, respectively over last year. The reduction in these portfolios was basically due to the sale to an affiliate of $131.2 million of commercial and industrial and construction loans, including some classified as impaired, and $210.3 million of repayments, net of originations for the year ended December 31, 2009.

The Corporation reported decrease in mortgage portfolio of $180.3 million or 7.0% for the year ended December 31, 2009 when compared with the same period in the prior year. For the year ended December 31, 2009 residential mortgage loans origination was $150.3 million or 43.5%, less than the $345.7 million originated during the same period in 2008. For the year ended December 31, 2009, mortgage loans sold and securitized were $169.5 million, a $43.9 million less than mortgage loans sold and securitized during 2008. Also, there was a decrease in consumer loans portfolio (credit cards and personal installment

loans and consumer finance) of $141.9 million or 12.4% which comprised decreases of $97.9 million in personal loans, $24.7 million in credit card and $19.3 million in consumer finance, when compared with the same figures in 2008.

During the year ended December 31, 2009, the Corporation sold certain loans including some classified as impaired to an affiliate for $142.0 million in cash. These loans had a net book value of $142.0 million comprised of an outstanding principal balance of $149.2 million and a specific valuation allowance of $7.2 million. The type of loans sold, at net book value, was $65.5 million in construction loans, $61.2 million in commercial loans and $15.3 million in mortgage loans. No gain or loss was recognized on this transaction.

During 2009, the Corporation has restructured residential real estate loans and commercial loans whose terms have been modified and was already identified as a Trouble Debt Restructuring (TDR’s), as stated on FASB ASC Topic 310, “Receivables”. This FASB ASC Topic states that a restructuring of a debt constitutes a troubled debt restructuring if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Once a loan is determined to be a TDR, then various effects must be considered, such as: identifying the loan as impaired, performing an impairment analysis, applying proper revenue recognition accounting, and reviewing its regulatory credit risk grading. Total restructured loans under this program amounted $95.1 million as of December 31, 2009. Refer to the Allowance for Loan Losses section for further information.

Allowance for Loan Losses

The Corporation assesses the overall risks in its loan portfolio and establishes and maintains an allowance for probable losses thereon. The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on the evaluation of known and inherent risks in the Corporation’s loan portfolio. The Corporation’s management evaluates the adequacy of the allowance for loan losses on a monthly basis.

The determination of the allowance for loan losses is one of the most complex and critical accounting estimates the Corporation’s management makes. The allowance for loan losses is composed of three different components. An asset-specific reserve based on the provisions of accounting standard FASB ASC Topic 310 “Receivables” (as amended), an expected loss estimate based on the provisions of FASB ASC Topic 450 “Contingencies”, and an unallocated reserve based on the effect of probable economic deterioration above and beyond what is reflected in the asset-specific component of the allowance.

Commercial, construction loans and certain mortgage loans exceeding a predetermined monetary threshold are identified for evaluation of impairment on an individual basis pursuant accounting standard Topic 310. The Corporation considers a loan impaired when interest and/or principal is past due 90 days or more, or, when based on current information and events it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. The asset-specific reserve on each individual loan identified as impaired is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except as a practical expedient, the Corporation may measure impairment based on the loan’s observable market price, or the fair value of the collateral, net of estimated disposal costs, if the loan is collateral dependent. Most of the asset-specific reserves of the Corporation’s impaired loans are measured on the basis of the fair value of the collateral. The fair value of the collateral is determined by external valuation specialists and since these values cannot be observed or corroborated with market data, they are classified as Level 3 and presented as part of non-recurring measurement disclosures.

A reserve for expected losses is determined under the provisions of FASB ASC Topic 450 for all loans not evaluated individually for impairment. Effective July 1, 2009, the Corporation revised its quantitative methodology for estimating the allowance for loan losses for the consumer and consumer finance portfolios. Through the end of the second quarter ended June 30, 2009, the Corporation’s quantitative methodology for estimating the allowance for loan losses for the consumer and consumer finance portfolios was based on a historical loss rate analysis, which relied on historical loss experience over a defined period for pools of loans with common characteristics. The revised quantitative methodology is based on a migration analysis/roll rate and considers both historical loss rates and loss rates based on the likelihood of credit deterioration (expectation of current loans becoming delinquent in monthly increments until they default and are charged-off). The loss factor estimated based on this methodology may be adjusted to incorporate seasonality attributes as well as to reflect recent economic or business trends that may affect the collectability of the portfolio. The loss factor is then applied to the outstanding portfolio at period end to estimate the amount of expected charge offs and the provision for loan losses required to supports an adequate allowance for loan losses. The Corporation’s decision to revise and improve its methodology was made after a thorough evaluation of the reliability of the revised methodology including a back testing analysis. Management believes that the revised quantitative methodology provides a more reliable estimate of probable losses on its existing consumer and consumer finance portfolios.

The Corporation considers in its allowance for loan and lease losses, debt’s modification of terms that may be identified as Troubled Debt Restructurings (TDRs), as stated on FASB ASC Topic 310. This FASB ASC Topic states that a restructuring of a debt constitutes a troubled debt restructuring if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. TDRs represent loans where concessions have been granted to borrowers experiencing financial difficulties that the creditor would not otherwise consider. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. These concessions stem from an agreement between the creditor and the debtor or are imposed by law or a court. Classification of loan modifications as TDRs involves a degree of judgment. Indicators that the debtor is experiencing financial difficulties include, for example: (i) the debtor is currently in default on any of its debt; (ii) the debtor has declared or is in the process of declaring bankruptcy; (iii) there is significant doubt as to whether the debtor will continue to be a going concern; (iv) currently, the debtor has securities that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange; and (v) based on estimates and projections that only encompass the current business capabilities, the debtor forecasts that its entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through maturity; and absent the current modification, the debtor cannot obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a nontroubled debtor. The identification of TDRs is critical in the determination of the adequacy of the allowance for loan losses. Loans classified as TDRs are reported in non-accrual status if the loan was in non-accruing status at the time of the modification. The TDR loan should continue in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (at least six months of sustained performance after classified as TDR). Loans classified as TDRs are excluded from TDR status if performance under the restructured terms exists for a reasonable period (at least twelve months of sustained performance after classified) and the loan yields a market rate. The Corporation identifies as TDRs and impaired, residential real estate loans whose terms have been modified under the conditions set forth in FASB ASC Topic 310, as mentioned previously. Although the accounting codification guidance for specific impairment of a loan excludes large groups of smaller balance homogeneous loans that are collectively evaluated for impairment (e.g., mortgage loans), it specifically requires that loan modifications considered TDR’s be analyzed under its provisions.

For purposes of determining the impairment analysis to be applied on TDR’s, the Corporation stratifies these loans into performing loans and non-performing loans. Impairment measure in performing loans was based on the present value of future cash flows discounted at the loan’s original contractual rate. The impairment measure on non-performing loans is based on the fair value of the collateral net of dispositions cost. During 2009, the Corporation restructured $95.1 million residential mortgage loans with allowance for loan losses of $6.1 million.


	Year ended December 31,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
Balance at beginning of year	$	191,889		$	166,952		$	106,863		$	66,842		$	69,177
Allowance acquired (Island Finance)		—			—			—			35,104			—
Provision for loan losses		152,496			175,523			147,824			65,583			20,400

		344,385			342,475			254,687			167,529			89,577


Losses charged to the allowance:
Commercial and industrial		21,536			17,782			10,375			9,792			8,044
Construction		2,459			32,257			2,710			—			1,438
Mortage		7,340			1,257			1,768			—			—
Consumer		55,565			44,682			29,281			16,679			17,351
Consumer Finance		63,322			56,444			44,484			38,345			—
Leasing		1,801			2,064			2,742			2,071			986

		152,023			154,486			91,360			66,887			27,819


Recoveries:
Commercial and industrial		1,614			626			1,192			2,463			1,686
Construction		—			20			—			—			—
Mortage		92			—			—			—			—
Consumer		1,404			1,256			904			1,677			2,646
Consumer Finance		1,452			1,517			1,088			1,314			—
Leasing		379			481			441			767			752

		4,941			3,900			3,625			6,221			5,084

Net loans charged-off		147,082			150,586			87,735			60,666			22,735

Balance at end of year	$	197,303		$	191,889		$	166,952		$	106,863		$	66,842


Ratios:
Allowance for loan losses to year-end loans		3.61	%		3.12	%		2.36	%		1.54	%		1.11	%
Recoveries to charge-offs		3.25	%		2.52	%		3.97	%		9.30	%		18.28	%
Net charge-offs to average loans		2.57	%		2.23	%		1.25	%		0.93	%		0.38	%
Allowance for loan losses to net charge-offs		134.14	%		127.43	%		190.29	%		176.15	%		294.00	%
Allowance for loan losses to non-performing loans		68.07	%		90.21	%		56.70	%		100.01	%		90.72	%

Provision for loan losses to:
Net charge-offs		103.68	%		116.56	%		168.49	%		108.11	%		89.73	%
Average loans		2.67	%		2.60	%		2.10	%		1.00	%		0.34	%

The Corporation recognized reserves related to unfunded lending commitments and standby letters of credit from the allowance for the loan losses to other liabilities. Changes in the reserve for unfunded commitments and standby letters of credit were as follows:


	Year ended December 31,
	2009			2008			2007			2006		2005
	(Dollars in thousands)
Balance at beginning of year	$	1,562		$	1,835		$	1,864		$	1,666	$	1,269
Provision (credit) for unfunded lending commitments and stand by letters of credit		(114	)		(273	)		(29	)		198		397

Balance at end of year	$	1,448		$	1,562		$	1,835		$	1,864	$	1,666

2009 compared to 2008. The Corporation’s allowance for loan losses was $197.3 million or 3.61% of period-end loans at December 31, 2009, a 49 basis point increase compared to $191.9 million, or 3.12% of period-end loans at December 31, 2008. The $197.3 million in the allowance for loan losses is comprised of $133.9 million related to the Bank and $63.4 million related to Island Finance entity, with a provision for loan losses of $96.4 million and $56.1 million for each respective segment for the year ended December 31, 2009.

The 49 basis points increment in the ratio of allowance for loan losses to period-end loan for the year ended December 31, 2009 as compared with the same period in 2008 was driven by $77.1 million increase in non-performing loans which amounted $289.8 million as of December 31, 2009 versus $212.7 million as of December 31, 2008. The allowance for loan losses is a current estimate of the losses inherent in the present portfolio based on management’s ongoing quarterly evaluations of the loan portfolio. On a quarterly basis, the Corporation reviews and evaluates historical loss experience by loan type, quantitative factors (historical net charge-offs, statistical loss estimates, etc.) as well as qualitative factors (current economics conditions, portfolio composition, delinquency trends, industry concentrations, etc.).

The ratio of the allowance for loan losses to non-performing loans and accruing loans past due 90 days or more was 65.5% and 84.8% at December 31, 2009 and 2008, respectively. Excluding non-performing mortgage loans this ratio was 203.7% at December 31, 2009 compared to 194.4% at December 31, 2008.

The annualized ratio of net charge-offs to average loans for the year ended December 31, 2009 and 2008 was 2.57% and 2.23%, respectively, reflecting an increase of increasing 34 basis points.

2008 compared to 2007. The allowance for loan losses reached $191.9 million as of December 31, 2008, a $24.9 million increase when compared with prior year. The Corporation’s allowance for loan losses represented 3.12% of period-end loans at December 31, 2008, a 76 basis points increase over 2.36% reported as of December 31, 2007. At December 31, 2008, the composition of the allowance for loan losses was of $122.8 million related to the Bank with a provision for loan losses of $119.8 million and $69.1 million related to Island Finance, with a provision for loan losses of $55.7 million.

The ratio of allowance for loan losses to non-performing loans was 90.21% reflecting an increase of 3,351 percentage points from to 56.70% during the year ended 2007. Excluding non-performing mortgage loans, this ratio is 225.06% and 82.32% as of December 31, 2008 and 2007, respectively.

The annualized ratio of net charge-off to average loans for the year ended December 31, 2008 was 2.23%, an increase of 98 basis points from 1.25% for the year ended December 31, 2007. Losses charged to the allowance amounted to $154.5 million in 2008, an increase of $63.1 million when compared $91.4 million of losses charged to the allowance in 2007 mainly due to an increment in charge-offs on certain loans sold to an affiliate amounting $34.5 million.

Broken down by major loan categories, the allowance for loan losses for each of the five years in the period ended December 31, 2009 was as follows:


	Year ended December 31,
	2009					2008					2007					2006					2005
			% of loans					% of loans					% of loans					% of loans					% of loans
			in each					in each					in each					in each					in each
			category to					category to					category to					category to					category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
	(Dollars in thousands)
Commercial	$	37,150		19.1	%	$	36,926		35.2	%	$	29,883		35.8	%	$	29,846		49.3	%	$	27,765		49.3	%
Construction		3,518		1.8	%		15,496		3.1	%		23,735		6.8	%		3,128		3.5	%		1,456		3.5	%
Consumer		56,927		29.3	%		46,135		9.2	%		33,641		9.5	%		20,099		9.4	%		30,664		9.4	%
Consumer Finance		63,373		32.6	%		69,128		9.4	%		68,359		8.6	%		41,281		—			—		—
Mortgage		32,969		17.0	%		22,876		42.1	%		7,379		38.0	%		9,249		35.7	%		2,415		35.7	%
Lease financing		366		0.2	%		373		1.0	%		1,292		1.3	%		555		2.1	%		2,128		2.1	%
Unallocated		3,000					955		—			2,663		—			2,705		—			2,414		—

	$	197,303		100.0	%	$	191,889		100.0	%	$	166,952		100.0	%	$	106,863		100.0	%	$	66,842		100.0	%

Under the caption “Unallocated” the Corporation maintains an unallocated reserve for loan losses of $3.0 million as of December 31, 2009. The unallocated reserve is maintained to cover the effect of probable economic deterioration above and beyond what is reflected in the asset-specific component of the allowance. This component represents management’s view that given the complexities of the lending portfolio and the assessment process, including the inherent imprecision in the financial models used in the loss forecasting process, there are estimable losses that have been incurred but not yet specifically identified, and as a result not fully provided for in the asset-specific component of the allowance. The level of the unallocated reserve may change periodically after evaluating factors impacting assumptions used in the calculation of the asset specific component of the reserve.

At December 31, 2009, 2008 and 2007, the portion of the allowance for loan losses related to impaired loans was $28.8 million, $18.4 million and $25.6 million, respectively. Please refer to Notes 1 and 5 to the consolidated financial statements for further information.

Liabilities

The principal sources of funding for the Corporation are its equity capital, core deposits from retail and commercial clients, and wholesale deposits and borrowings raised in the interbank and commercial markets.

As of December 31, 2009 total liabilities amounted $6.2 billion, $1.2 billion or 16.0% less when compared to figures reported as of December 31, 2008. This reduction in total liabilities was principally due to a decrease in total deposits of $619.3 million or 12.4% to $4.4 billion balance reported as of December 31, 2009 and a decrease in total borrowings (comprised of federal funds purchased and other borrowings, securities sold under agreements to repurchase, commercial paper issued, federal home loan advances, term and capital notes) of $432.6 million or 22.3% as of December 31, 2009 from $1.9 billion at December 31, 2008.

Total deposits of $4.4 billion as of December 31, 2009 were composed of $0.3 billion in brokered deposits and $4.1 billion of customer deposits. Compared to December 31, 2008, brokered deposits reflected a decrease of $676.3 million or 69.4% and customer deposits reflected an increase of $56.9 million as of December 31, 2009.

Total borrowings at December 31, 2009 (comprised of federal funds purchased and other borrowings, securities sold under agreements to repurchase, commercial paper issued, federal home loan bank advances and term and capital notes) decreased $432.6 million or 22.3% compared to borrowings at December 31, 2008. This reduction was mainly due to the cancellation of $375 million in securities sold under agreements to repurchase, $125.0 million decrease in federal home loan bank advances partially offset by an increase of $48.0 million in federal funds purchased and $16.5 million in commercial paper issued.

On January 22, 2010, the Corporation and Santander Financial Services, Inc., a wholly owned subsidiary of the Corporation (“Santander Financial”), entered into a collateralized loan agreement (the “Loan Agreement”) with Banco Santander Puerto Rico (the “Bank”). Under the Loan Agreement, the Bank advanced $182 million and $430 million (the “Loans”) to the Corporation and Santander Financial, respectively. The proceeds of the Loans were used to refinance the outstanding indebtedness incurred under a loan agreement dated September 24, 2009 among the Corporation, Santander Financial and the Bank, and for general corporate purposes. The Loans are collateralized by a certificate of deposit in the amount of $612 million opened by Banco Santander, S.A., the parent of the Corporation, at the Bank and provided as security for the Loans pursuant to the terms of a Security Agreement, Pledge and Assignment between the Bank and Banco Santander, S.A. The Corporation and Santander Financial have agreed to pay an annual fee of 0.10% net of taxes, deductions and withholdings to Banco Santander, S.A. in connection with its agreement to collateralize the Loans with the deposit.

On September 24, 2009, the Corporation and Santander Financial Services, Inc., entered into a collateralized loan agreement (the “Loan Agreement”) with Banco Santander Puerto Rico. Under the Loan Agreement, the Bank advanced $190 million and $440 million (the “Loans”) to the Corporation and Santander Financial, respectively. The proceeds of the Loans were used to refinance the outstanding indebtedness incurred under a loan agreement dated September 24, 2008 among the Corporation, Santander Financial and the Bank, and for general corporate purposes. The Loans are collateralized by a certificate of deposit in the amount of $630 million opened by Banco Santander, S.A., the parent of the Corporation, at the Bank and provided as security for the Loans pursuant to the terms of a Security Agreement, Pledge and Assignment between the Bank and Banco Santander, S.A. The Corporation and Santander Financial have agreed to pay an annual fee of 0.10% net of taxes, deductions and withholdings to Banco Santander, S.A. in connection with its agreement to collateralize the Loans with the deposit.

On December 10, 2008, the Bank undertook a Subordinated Note Purchase Agreement with Crefisa, Inc, (“Crefisa”), an affiliate, for $60 million due on December 10, 2028 and to pay interest thereon from December 10, 2008 or from the most recent interest payment date to which interest has been paid or duly provided for, semiannually on the tenth (10^th) day of June and the tenth (10^th) of December of each year, commencing on June 10, 2009, at the rate of 7.5% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any interest payment date will, as provided in such Note Purchase Agreement, be paid to Crefisa at the close of business on the regular record date for such interest, which shall be the tenth (10^th) day of the month next preceding the relevant interest payment date.

During October 2006, the Corporation completed the private placement of $125 million Trust Preferred Securities (“Preferred Securities”) and issued Junior Subordinated Debentures in the aggregate principal amount of $129 million in connection with the issuance of the Preferred Securities. The Preferred Securities are fully and unconditionally guaranteed (to the extent described in the guarantee agreement between the Corporation and the guarantee trustee, for the benefit of the holders from time to time of the Preferred Securities) by the Corporation. The Trust Preferred Securities were acquired by an affiliate of the Corporation. In connection with the issuance of the Preferred Securities, the Corporation issued an aggregate principal amount of $129,000,000 of its 7.00% Junior Subordinated Debentures, Series A, due July 1, 2037.

The following table sets forth the Corporation’s average daily balance of liabilities for the years ended December 31, 2009, 2008 and 2007 by source, together with the average interest rates paid thereon.


	Year ended December 31,
	2009								2008								2007
			% of								% of								% of
	Average		Total			Average			Average		Total			Average			Average		Total			Average
	Balance		Liabilities			Cost			Balance		Liabilities			Cost			Balance		Liabilities			Cost
	(Dollars in thousands)
Savings deposits	$	1,817,911		27.8	%		1.05	%	$	1,691,094		20.7	%		2.07	%	$	1,715,631		19.9	%		3.02	%
Time deposits		2,136,437		32.6	%		2.83	%		3,135,260		38.3	%		3.75	%		2,820,495		32.7	%		4.95	%

Interest-bearing deposits		3,954,348		60.4	%		2.01	%		4,826,354		59.0	%		3.16	%		4,536,126		52.6	%		4.22	%

Federal funds, repos, and commercial paper and other borrowings		1,240,099		19.0	%		2.87	%		2,047,442		25.0	%		3.81	%		2,805,003		32.5	%		5.49	%
Term and subordinated notes		325,884		5.0	%		4.71	%		267,093		3.3	%		5.22	%		284,944		3.3	%		6.02	%

Total borrowings		1,565,983		24.0	%		3.25	%		2,314,535		28.3	%		3.97	%		3,089,947		35.8	%		5.54	%

Total interest-bearing liabilities		5,520,331		84.4	%		2.36	%		7,140,889		87.3	%		3.42	%		7,626,073		88.4	%		4.75	%


Non-interest-bearing deposits		691,482		10.6	%		0.00	%		732,314		9.0	%		0.00	%		685,875		8.0	%		0.00	%
Other liabilities		331,241		5.0	%		0.00	%		303,229		3.7	%		0.00	%		310,228		3.6	%		0.00	%

Total non-interest-bearing liabilities		1,022,723		15.6	%		0.00	%		1,035,543		12.7	%		0.00	%		996,103		11.6	%		0.00	%

Total Liabilities	$	6,543,054		100.0	%		1.99	%	$	8,176,432		100.0	%		2.99	%	$	8,622,176		100.0	%		4.20	%

The following tables set forth additional details on the Corporation’s average deposit base for the years ended December 31, 2009, 2008 and 2007.


	Year ended December 31,
Average Total Deposits	2009		2008		2007
	(Dollars in thousands)
Private Demand	$	690,924	$	731,645	$	684,922
Public Demand		558		669		953

Non-interest bearing		691,482		732,314		685,875


Savings Accounts		739,901		641,970		657,044
NOW and Super NOW accounts		474,364		417,654		401,104
Government NOW accounts		603,646		631,470		657,483

Total Savings Accounts		1,817,911		1,691,094		1,715,631


Time deposits:
Under $100,000		219,543		273,409		262,561
$100,000 and over		1,916,894		2,861,851		2,557,934

Total Time Deposits		2,136,437		3,135,260		2,820,495

Total Interest Bearing Deposits		3,954,348		4,826,354		4,536,126

Total Deposits	$	4,645,830	$	5,558,668	$	5,222,001

The Corporation’s most important source of funding is its customer deposits. Total average deposits reached $4.6 billion for the year ended December 31, 2009, a decrease of 16.4% compared with figures reported in 2008. Average interest-bearing deposits decreased $872.0 million or 18.1% to $4.0 billion as of December 31, 2009, which includes a decrease in average other time deposits of $998.8 million or 31.9% offset by an increase of $126.8 million in average savings and Now accounts when compared with the figures reported in prior year. Average non-interest bearing deposits are the least expensive sources of funding used by Corporation and represent 10.6%, 9.0% and 8.0% of the Corporation average total liabilities for the years

ended December 31, 2009, 2008 and 2007, respectively Total average deposits represented 71.0%, 68.0% and 60.6% of the total average liabilities of the Corporation as of December 31, 2009, 2008 and 2007, respectively.

For the year ended December 31, 2009, the Corporation’s customer deposits (average balance) consisted of $691.5 million in non interest-bearing-checking accounts and $4.0 billion of interest-bearing deposits. The decrease in average interest-bearing deposits was primarily in time deposits greater than $100,000, which reflected a decrease of $945.0 million or 33.0%.

The following table sets forth the maturities of time deposits of $100,000 or more as of December 31, 2009, 2008 and 2007.


	2009		2008		2007
	(Dollars in thousands)
Three months or less	$	1,156,944	$	702,292	$	1,105,405
Over three months through six months		180,450		397,697		365,957
Over six months through twelve months		90,064		1,000,911		79,576
Over twelve months		76,303		261,580		948,841

Total	$	1,503,761	$	2,362,480	$	2,499,779

The Corporation’s current funding strategy is to continue to use various alternative funding sources taking into account their relative cost, their availability and the general asset and liability management strategy of the Corporation, placing a stronger emphasis on obtaining client deposits and reducing reliance on borrowings maintaining adequate levels of liquidity and to meet funding requirements.

For further information regarding the Corporation’s deposits and borrowings, see Notes 11 and 12 to the consolidated financial statements.

Capital and Dividends

The Corporation does not expect favorable or unfavorable trends that would materially affect our capital resources.

As an investment-grade rated entity by several nationally recognized rating agencies, the Corporation has access to a variety of capital issuance alternatives in the United States and Puerto Rico capital markets. The Corporation continuously monitors its capital raising alternatives. The Corporation may issue additional capital in the future, as needed, to maintain its “well-capitalized” status.

Stockholders’ equity was $595.9 million or 8.8% of total assets at December 31, 2009, compared to $551.6 million or 7.0% of total assets at December 31, 2008. The $44.3 million change in stockholders’ equity was composed by net income of $41.3 million, stock incentive plan expense recognized as capital contribution of $1.1 million, net of payment to ultimate parent, for the period, an increase in minimum pension benefits of $5.0 million. These increases were offset by an increase of $3.1 million of unrealized loss on investment securities available for sale, net of tax, included in accumulated other comprehensive loss.

The Corporation declared a cash dividend of $0.20 and $0.64 per common share during the years ended December 31, 2008 and 2007, respectively. The current annualized dividend yield is 1.6% and 7.4% for the years ended December 31, 2008 and 2007, respectively. In light of the continuing challenging general economic conditions in Puerto Rico and the global capital markets, the Board of Directors of the Corporation voted during August 2008 to discontinue the payment of the quarterly cash dividend on the Corporation’s common stock to strengthen the institution’s core capital position. The Corporation may use a portion of the funds previously paid as dividends to reduce its outstanding debt. The Corporation’s decision is part of the significant actions it has proactively taken in order to face the on-going challenges presented by the Puerto Rico economy. While each of the Corporation and its banking subsidiary remain above well capitalized ratios, these prudent measures will preserve and continue to reinforce the Corporation’s capital position.

The Corporation adopted and implemented various Stock Repurchase Programs in May 2000, December 2000 and June 2002. Under these programs the Corporation acquired 3% of the then outstanding common shares. During November 2002, the Corporation started a fourth Stock Repurchase program under which it may acquire 3% of its outstanding common shares. In November 2002, the Board of Directors authorized the Corporation to repurchase up to 928,204 shares, or approximately 3%,

of its shares of outstanding common stock. The Board felt that the Corporation’s shares of common stock represented an attractive investment at prevailing market prices at the time of the adoption of the common stock repurchase program and that, given the relatively small amount of the program, the stock repurchases would not have a significant impact on liquidity and capital positions. The program has no time limitation and management is authorized to effect repurchases at its discretion. The authorization permits the Corporation to repurchase shares from time to time in the open market or in privately negotiated transactions. The timing and amount of any repurchases will depend on many factors, including the Corporation’s capital structure, the market price of the common stock and overall market conditions. All of the repurchased shares will be held by the Corporation as treasury stock and reserved for future issuance for general corporate purposes.

During the years ended December 31, 2009, 2008 and 2007, the Corporation did not repurchase any shares of common stock. As of December 31, 2009, the Corporation had repurchased 4,011,260 shares of its common stock under these programs at a cost of $67.6 million. Management believes that the repurchase program has not had a significant effect on the Corporation’s liquidity and capital positions.

The Corporation has a Dividend Reinvestment Plan and a Cash Purchase Plan wherein holders of common stock have the opportunity to automatically invest cash dividends to purchase more shares of the Corporation’s common stock. Shareholders may also make, as frequently as once a month, optional cash payments for investment in additional shares of the Corporation’s common stock.

Up to December 31, 2009, the 4^thquarter of 2009, the Corporation’s stock price traded consistently below (from $9.58 to $13.12) the book value per share of $12.78 as of December 31, 2009. This is mainly attributed to the current condition of the worldwide and Puerto Rico economy which has affected the stock market, where all stocks and specially the ones in the financial sector both in Puerto Rico and the United States have experienced a depression in price. Also, the Corporation’s stock experienced a limited float, due to 91% were owned by Santander SA. These situations impact a relatively small changes or trends in volume triggers a significant impact in the share price.

On December 14, 2009, Banco Santander, S.A. announced by press release that it intends to commence a cash tender offer through its wholly-owned subsidiary, Administración de Bancos Latinoamericanos Santander, S.L., for all outstanding publicly-held shares of common stock of the Corporation at $12.25 per share. Banco Santander S.A, which currently owns 90.6% of the outstanding shares of the Corporation, commenced the tender offer during the first quarter of 2010. As soon as reasonably practicable after the consummation of the offer Banco Santander S.A. intends to consummate a short-form merger with the Corporation in which all remaining public stockholders will receive the same price per share as was paid in the offer, without interest. The commencement and completion of the tender offer does not require any approval by the board of directors of the Corporation and Banco Santander, S.A has not asked the board of directors of the Corporation to approve the tender offer. The Corporation’s board of directors is evaluating the terms of the proposed offer and has not taken a position with respect to the offer. The complete terms, conditions and other details of the tender offer will be contained in materials filed by Banco Santander S. A. with the U.S. Securities and Exchange Commission when the offer commences.

The Corporation is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. The regulations require the Corporation to meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Corporation’s common stock is listed on the New York Stock Exchange (“NYSE”) and on the Madrid Stock Exchange (LATIBEX). The symbol on the NYSE and on the LATIBEX for the common stock is “SBP” and “XSBP,” respectively. There were approximately 110 holders of record of the Corporation’s common stock as of December 31, 2009, not including beneficial owners whose shares are held in names of brokers or other nominees.

As of December 31, 2009, the Bank was classified as a “well capitalized” institution under the regulatory framework for prompt corrective action. At December 31, 2009, the Corporation continued to exceed the regulatory risk-based capital requirements. Tier I capital to risk-adjusted assets and total capital ratios of the Corporation at December 31, 2009 were 10.60% and 15.55%, respectively, and the leverage ratio was 7.98%. Refer to notes 1 and 26 in the consolidated financial statements for additional information.


*Capital Adequacy Data*													To be Well Capitalized
							For Minimum Capital						Under Prompt Corrective
	Actual						Adequacy						Action Provision
							Amount		Ratio				Amount		Ratio
	Amount		Ratio				Must be		Must be				Must be		Must be
							(Dollars in thousands)
December 31, 2009:
Total Capital (to Risk Weighted Assets)
Santander BanCorp	$	765,629		15.55	%	³	$	393,865		³8.00	%			N/A
Banco Santander Puerto Rico		686,964		15.60	%	³		352,244		³8.00	%	³	$	440,305		³10.00	%
Tier I (to Risk Weighted Assets)
Santander BanCorp		521,842		10.60	%	³		196,932		³4.00	%			N/A
Banco Santander Puerto Rico		571,380		12.98	%	³		176,122		³4.00	%	³		264,183		³6.00	%
Leverage (to average assets)
Santander BanCorp		521,842		7.98	%	³		196,075		³3.00	%			N/A
Banco Santander Puerto Rico		571,380		8.77	%	³		195,403		³3.00	%	³		325,672		>5.00	%
December 31, 2008:
Total Capital (to Risk Weighted Assets)
Santander BanCorp	$	726,863		12.83	%	³	$	453,114		³8.00	%			N/A
Banco Santander Puerto Rico		662,161		12.87	%	³		411,725		³8.00	%	³	$	514,656		³10.00	%
Tier I (to Risk Weighted Assets)
Santander BanCorp		476,268		8.41	%	³		226,557		³4.00	%			N/A
Banco Santander Puerto Rico		537,395		10.44	%	³		205,863		³4.00	%	³		308,795		³6.00	%
Leverage (to average assets)
Santander BanCorp		476,268		6.10	%	³		234,278		³3.00	%			N/A
Banco Santander Puerto Rico		537,395		6.88	%	³		234,488		³3.00	%	³		390,813		>5.00	%
December 31, 2007:
Total Capital (to Risk Weighted Assets)
Santander BanCorp	$	697,009		10.55	%	³	$	528,134		³8.00	%			N/A
Banco Santander Puerto Rico		647,482		10.91	%	³		474,647		³8.00	%	³	$	593,309		³10.00	%
Tier I (to Risk Weighted Assets)
Santander BanCorp		490,259		7.42	%	³		264,067		³4.00	%			N/A
Banco Santander Puerto Rico		573,022		9.66	%	³		237,324		³4.00	%	³		355,986		³6.00	%
Leverage (to average assets)
Santander BanCorp		490,259		5.38	%	³		273,297		³3.00	%			N/A
Banco Santander Puerto Rico		573,022		6.84	%	³		251,493		³3.00	%	³		419,155		>5.00	%

Goodwill and Intangible Assets

Total goodwill and intangibles at December 31, 2009, 2008 and 2007 consisted of:


	2009		2008		2007
	(Dollars in millions)
Mortgage Servicing Rights	$	9.7	$	10.2	$	9.6
Advisory Servicing Rights		1.0		1.3		1.6
Trade Name		18.3		18.3		18.3
Non-compete Agreement		—		0.1		0.7
Goodwill:
Retail Banking		10.5		10.5		10.5
Wealth Management		24.3		24.3		24.3
Consumer Finance		86.7		86.7		86.7

	$	150.5	$	151.4	$	151.7

Goodwill and intangible assets were $121.5 million and $28.9 million at December 31, 2009.

Mortgage-servicing rights arise from the right to service mortgages sold and have an estimated useful life of eight years. The advisory-servicing rights are related to the Corporation’s subsidiary acquisition of the right to serve as the investment advisor for First Puerto Rico Tax-Exempt Fund, Inc. acquired in 2002 and for First Puerto Rico Growth and Income Fund Inc. and First Puerto Rico Daily Liquidity Fund Inc. acquired in December 2006. These intangible assets are being amortized over a 10-year estimated useful life. Trade name is related to the acquisition of Island Finance and has an indefinite useful life and is therefore not being amortized but is tested for impairment at least annually. Non-compete agreement was intangible asset related to the acquisition of Island Finance. The non-compete agreement has been fully amortized.

Contractual Obligations and Commercial Commitments

As disclosed in the notes to the consolidated financial statements, the Corporation has various financial obligations, including contractual obligations and commercial commitments, which require future cash payments on debt and lease agreements. Also, in the normal course of business, the Corporation enters into contractual agreements whereby it commits to future purchases of products or services from third parties. Obligations that are legally binding agreements, whereby the Corporation agrees to purchase products or services with a specific minimum quantity defined a fixed minimum or variable price over a specified period of time, are defined as purchases obligations. At December 31, 2009, the aggregate contractual cash obligations, including purchases obligations and borrowings maturities, were:


	Payments due by Period
	as of December 31, 2009
									More
			Less than						than
	Total		1 year		1-3 years		3-5 years		5 years
	(Dollars in thousands)
Contractual Obligations:
Federal funds purchased and other borrowings	$	50,000	$	50,000	$	—	$	—	$	—
Commercial paper		67,482		67,482		—		—		—
Federal Home Loan Bank Advances		1,060,000		735,000		325,000		—		—
Subordinated notes		308,691		—		—		—		308,691
Term notes		20,581		4,802		6,697		9,082		—
Operating lease obligations		122,406		30,933		22,154		18,970		50,349
Pension plan contribution		1,366		1,366		—		—		—

Total	$	1,630,526	$	889,583	$	353,851	$	28,052	$	359,040


	Amount of Commitment and expiration period
	as of December 31, 2009
									More
			Less than						than
	Total		1 year		1-3 years		3-5 years		5 years
	(Dollars in thousands)
Other Commercial Commitments:
Lines of credit and financial guarantees written		41,837		40,612		874		351		—
Commitments to extend credit		1,218,115		1,218,115		—		—		—

Total	$	1,259,952	$	1,258,727	$	874	$	351	$	—

Recent Accounting Pronouncements

Refer to Note 1 to the consolidated financial statements for a description of each of the pronouncements and management’s assessment as to the impact of the adoptions.

ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

The Corporation has specific policies and procedures which structure and delineate the management of risks, particularly those related to credit, interest rate exposure and liquidity risk. Risks are identified, measured and monitored through various committees including the Asset and Liability, Credit and Investment Committees, among others.

Credit Risk Management and Loan Quality

The lending activity of the Corporation represents its core function, and as such, the quality and effectiveness of the loan origination and credit risk areas are imperative to management for the growth and success of the Corporation. The importance of the Corporation’s lending activity has been considered when establishing functional responsibilities, organizational reporting, lending policies and procedures, and various monitoring processes and controls.

Critical risk management responsibilities include establishing sound lending standards, monitoring the quality of the loan portfolio, establishing loan rating systems, assessing reserves and loan concentrations, supervising document control and accounting, providing necessary training and resources to credit officers, implementing lending policies and loan documentation procedures, identifying problem loans as early as possible, and instituting procedures to ensure appropriate actions to comply with laws and regulations. Due to the challenging environment, the Corporation implemented during 2006 more stringent underwriting and lending criteria.

Credit risk management for our portfolio begins with initial underwriting and continues throughout the borrower’s credit cycle. Experiential judgment in conjunction with statistical techniques are used in all aspects of portfolio management including underwriting, product pricing, risk appetite, setting credit limits, operating processes and metrics to quantify balance risks and returns. In addition to judgmental decisions, statistical models are used for credit decisions. Tolerance levels are set to decrease the percentage of approvals as the risk profile increases. Statistical models are based on detailed behavioral information from external sources such as credit bureaus and/or internal historical experience. These models are an integral part of our credit management process and are used in the assessment of both new and existing credit decisions, portfolio management, strategies including authorizations and line management, collection practices and strategies and determination of the allowance for credit losses.

The Corporation has also established an internal risk rating system and internal classifications which serve as timely identification of potential deterioration in loan quality attributes in the loan portfolio.

Credit extensions for commercial loans are approved by credit committees including the Small Loan Credit Committee, the Regional Credit Committee, the Credit Administration Committee, the Management Credit Committee, and the Board of Directors Credit Committee. A centralized department of the Consumer Lending Division approves all consumer loans.

The Corporation’s collateral requirements for loans depend on the financial strength and liquidity of the prospective borrower and the principal amount and term of the proposed financing. Acceptable collateral includes cash, marketable securities, mortgages on real and personal property, accounts receivable, and inventory.

In addition, the Corporation has an independent Loan Review Department and an independent Internal Audit Division, each of which conducts monitoring and evaluation of loan portfolio quality, loan administration, and other related activities, carried on as part of the Corporation’s lending activity. Both departments provide periodic reports to the Board of Directors, continuously assess the validity of information reported to the Board of Directors and maintain compliance with established lending policies.

The following table provides the composition of the Corporation’s loan portfolio as of December 31, 2009 and 2008:


	December 31, 2009			December 31, 2008
	($ in thousands)
Commercial and industrial	$	1,947,809		$	2,165,613

Consumer — banking operations		443,567			565,833

Consumer Finance:
Consumer Installment Loans		504,054			686,277
Mortgage Loans		279,456			310,642

		783,510			996,919

Leasing		36,624			64,065


Construction		70,879			194,596

Mortgage Loans		2,385,592			2,553,328

Sub-total		5,667,981			6,540,354

Unearned income and deferred fees/cost:
Banking operations		328			(290	)
Consumer finance		(224,562	)		(418,676	)

Allowance for loans losses:
Banking operations		(133,930	)		(122,761	)
Consumer finance		(63,373	)		(69,128	)


	$	5,246,444		$	5,929,499

The Corporation’s gross loan portfolio as of December 31, 2009 and 2008 amounted to $5.7 billion and $6.5 billion respectively, which represented 92.5% and 90.9%, respectively, of the Corporation’s total earning assets. The loan portfolio is distributed among various types of credit, including commercial business loans, commercial real estate loans, construction loans, small business loans, consumer lending and residential mortgage loans. The credit risk exposure provides for diversification among specific industries, specific types of business, and related individuals. As of December 31, 2009 and 2008, there was no obligor group that represented more than 2.5% of the Corporation’s total loan portfolio. Obligors’ resident or having a principal place of business in Puerto Rico comprised approximately 99% of the Corporation’s loan portfolio.

As of December 31, 2009 and 2008, the Corporation had over 312,000 and 379,000 consumer loan customers, respectively, and over 8,000 and 7,000 commercial loan customers, respectively, As of such dates, the Corporation had 44 and 50 clients with commercial loans outstanding over $10.0 million, respectively. Although the Corporation has generally avoided cross-border loans, the Corporation had approximately $11.7 and $31.3 million in cross-border loans as of December 31, 2009 and 2008, respectively, which are collateralized with real estate in the United States of America, cash and marketable securities.

The Corporation uses an underwriting system for the origination of residential mortgage loans. These loans are fully underwritten by experienced underwriters. The methodology used in underwriting the extension of credit for each residential mortgage loan employs objective mathematical principles which relate the mortgagor’s income, assets, and liabilities to the proposed payment and such underwriting methodology confirmed that at the time of origination (application/approval) the borrower had a reasonable ability to make timely payments on the residential mortgage loan. Also the character of the borrower or willingness to pay is evaluated by analyzing the credit report. We apply the basic principles of the borrower’s willingness and ability to pay.

The risk involved with a loan decision is kept in perspective and must be considered in the analysis of a loan. Certain characteristics of the transaction are indicators of risk such as occupancy, loan amount, purpose, product type, property type, loan amount size in relation to borrower’s previous credit depth and loan to value, cash out of the transaction, time of occupancy, etc. Risk will be mitigated, in part, by requiring a higher equity, risk pricing, additional documentation and obtaining and documenting compensating factors.

The purpose of mortgage credit analysis is to determine the borrower’s ability and willingness to repay the mortgage debt, and thus, limit the probability of default or collection difficulties. There are four major elements which, typically, are evaluated in assessing a borrower’s ability and willingness to repay the mortgage debt and the property to determine it complies with the agency and investor’s requirement, has marketability, and is a sound collateral for the loan. The elements above mentioned comprised (1) stability documentation, (2) continuity and adequacy of income, (3) credit and assets and (4) collateral.

The Corporation follows the established guidelines and requirements for all government insured or guaranteed loans such as FHA, VA, RURAL, PR government products, as well as conforming loans sold to FHLMC and FNMA. In addition to conforming loans and government insured or guaranteed loans, we also provide loans designed to offer an alternative to individuals who do not qualify for an Agency conforming mortgage loan. These non-conforming loans typically have: (1) LTV higher than 80% with mortgage insurance or additional collateral; (2) the mortgage amount may exceed the FNMA/FHLMC limits and (3) may have different documentation requirements.

The Corporation’s underwriting policies take into consideration the worsening macroeconomic conditions in PR. The implementation of more tight underwriting standards to reduce the exposure of risks, has contributed to a significant reduction of mortgage loans originations, and to improve the credit quality of our portfolio. These underwriting criteria reflect the Corporation’s effort to minimize the impact of the local recession on its overall loan portfolio, including its mortgage business and protect the value of its franchise from the higher risk levels caused by declining assets quality.

Residential real estate mortgages are one of the Corporation’s core products and pursuant to our credit management strategy the Corporation offers a broad range of alternatives of this product to borrowers that are considered mostly prime or near prime or “Band C” (borrowers with Fair Isaac Corporation (“Fico Scores”) of 620 or less among other factors including income and its source, nature and location of collateral, loan-to-value and other guarantees, if any). Near prime or “Band C” lending policies and procedures do not differ from our general residential mortgages and consumer lending policies and procedures to other customers. The concentration of residential mortgages loans of the Bank are presented in the followings tables:


	December 31, 2009
	First		Second		Total		Vintage			Non-performing		% of
	mortgage		mortgage		Mortgage		% of total			loans		total loans
					(Dollars in thousands)
Vintage:
2009	$	50,615	$	385	$	51,000		2	%	$	—		0.00	%
2008		108,939		1,567		110,506		5	%		2,116		1.91	%
2007		252,133		2,528		254,661		11	%		13,768		5.41	%
2006		528,486		3,823		532,309		22	%		43,390		8.15	%
2005		554,696		528		555,224		23	%		40,410		7.28	%
2004 and earlier		879,490		2,402		881,892		37	%		49,028		5.56	%

Sub- Total	$	2,374,359	$	11,233	$	2,385,592		100	%	$	148,712		6.23	%


	December 31, 2008
	First		Second		Consumer		Other		Total		Vintage			Non-performing		% of
	mortgage		mortgage		mortgage		mortgage		Mortgage		% of total			loans		total loans
							(Dollars in thousands)
Vintage:
2008	$	106,836	$	2,359	$	—	$	—	$	109,195		4	%	$	638		0.58	%
2007		269,220		2,546				—		271,766		11	%		5,701		2.10	%
2006		578,086		4,319		31		157		582,593		23	%		32,198		5.53	%
2005		604,142		636		—		—		604,778		24	%		24,251		4.01	%
2004		439,674		487				—		440,161		17	%		16,256		3.69	%
2003 and earlier		543,044		1,578		55		158		544,835		21	%		22,953		4.21	%

Sub- Total	$	2,541,002	$	11,925	$	86	$	315	$	2,553,328		100	%	$	101,997		3.99	%

The Corporation originates mortgage loans through three main channels: retail sales force, licensed real estate brokers and purchases from third parties. The production originated through the retail sales force represent 59% and 44% of the total mortgage originations for the years ended December 31, 2009 and 2008, respectively. The Corporation performed strict quality control reviews of third party originated loans, which represented 41% and 56% of the total originated mortgage portfolio for the years ended December 31, 2009 and 2008. The Corporation offered fixed rate first and second mortgages which are almost entirely secured by a primary residence for the purpose of purchase money, refinance, debt consolidation, or home equity loans. Residential real estate mortgages of banking operations represent approximately 42% and 39% of total gross loans at December 31, 2009 and 2008, respectively. As of December 31, 2009 and 2008, the first mortgage portfolio totaled approximately $2.4 billion and $2.5 billion, while the second mortgage portfolio was approximately $11.2 million and $11.9 million as of December 31, 2009 and 2008, respectively, from banking operations.

The Corporation has not originated option adjustable-rate mortgage products (option ARMs) or variable-rate mortgage products with fixed payment amounts, commonly referred to within the financial services industry as negative amortizing mortgage loans, as the Corporation believes these products rarely provide a benefit to our customers. The interest rates impact the amount and timing of origination and servicing fees because consumer demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage interest rates. The ARMs currently outstanding in the residential mortgage portfolio came from previous acquisitions made by the Corporation. The Corporation also mitigated its credit risk in its residential mortgage loan portfolio through sales and securitizations transactions.

The mortgage real estate loans in the Corporation’s consumer finance subsidiary Santander Financial Services, Inc. (“Island Finance”) are presented in the followings tables:


	December 31, 2009
	First		Second		ARM		Total		Vintage			Non-performing		% of
	mortgage		mortgage		mortgage		Mortgage*		% of total			loans		total loans
							(Dollars in thousands)
Vintage:
2009	$	13,810	$	121	$	—	$	13,931		9	%	$	—		0.00	%
2008		28,033		378		—		28,411		18	%		2,289		8.06	%
2007		24,811		1,052		1,079		26,942		17	%		2,467		9.16	%
2006		12,299		899		20,557		33,755		21	%		4,545		13.46	%
2005		10,824		1,079		17,151		29,054		18	%		2,789		9.60	%
2004 and earlier		21,457		6,069		—		27,526		17	%		4,165		15.13	%

Total	$	111,234	$	9,598	$	38,787	$	159,619		100	%	$	16,255		10.18	%


*		Net of unearned finance charges and deferred income/cost


	December 31, 2008
	First		Second		ARM		Total		Vintage			Non-performing		% of
	mortgage		mortgage		mortgage		Mortgage*		% of total			loans		total loans
	(Dollars in thousands)
Vintage:
2008	$	31,441	$	696	$	—	$	32,137		19	%	$	262		0.82	%
2007		28,323		1,498		1,246		31,067		19	%		572		1.84	%
2006		13,409		1,281		22,355		37,045		21	%		3,196		8.63	%
2005		12,208		1,219		19,953		33,380		20	%		3,014		9.03	%
2004		11,524		3,108		—		14,632		9	%		1,776		12.14	%
2003 and earlier		13,129		6,185		—		19,314		12	%		2,160		11.18	%

Total	$	110,034	$	13,987	$	43,554	$	167,575		100	%	$	10,980		6.55	%


*		Net of unearned finance charges and deferred income/cost

The Corporation originates loans to near prime or “Band C” borrowers (customers with Fair Isaac Corporation (“FICO”) scores of 620 or less among other factors, including level of income and its source, loan-to-value (LTV), other guarantees and banking relationships and nature and location of collateral, if any,). The following table provides information on the Corporation’s residential mortgage and consumer installments loans exposure from banking operations and consumer finance business, including near prime or “Band C” loans at December 31, 2009 and 2008.


	December 31, 2009
	“BAND A”		Avg.			“BAND B”		Avg.			“BAND C”		Avg.			Total		Avg.
	FICO>=660		LTV			FICO>620 and <660		LTV			FICO<=620		LTV			Loans		LTV
	(Dollars in thousands)
Mortgage Loan Portfolio:
Banking Operations	$	1,514,980		72	%	$	251,166		70	%	$	619,446		73	%	$	2,385,592		72	%
Consumer Finance		68,339		66	%		39,437		67	%		51,843		65	%		159,619		64	%

	$	1,583,319				$	290,603				$	671,289				$	2,545,211


*Consumer Installment Loans:**
Banking Operations	$	284,635		n/a		$	53,808		n/a		$	105,124		n/a		$	443,567		n/a
Consumer Finance		187,747		n/a			109,654		n/a			101,710		n/a			399,111		n/a

	$	472,382				$	163,462				$	206,834				$	842,678


*		Net of unearned finance charges and deferred income/cost


	December 31, 2008
	“BAND A”		Avg.			“BAND B”		Avg.			“BAND C”		Avg.			Total		Avg.
	FICO>=660		LTV			FICO>620 and <660		LTV			FICO<=620		LTV			Loans		LTV
	(Dollars in thousands)
Mortgage Loan Portfolio:
Banking Operations	$	1,984,652		80	%	$	308,690		81	%	$	259,986		76	%	$	2,553,328		80	%
Consumer Finance		65,516		61	%		41,652		62	%		60,407		61	%		167,575		61	%

	$	2,050,168				$	350,342				$	320,393				$	2,720,903


*Consumer Installment Loans:**
Banking Operations	$	427,056		n/a		$	59,070		n/a		$	79,707		n/a		$	565,833		n/a
Consumer Finance		176,334		n/a			119,492		n/a			114,842		n/a			410,668		n/a

	$	603,390				$	178,562				$	194,549				$	976,501


		*Net of unearned finance charges and deferred income/cost

At December 31, 2009, residential mortgage portfolio categorized as near prime or “Band C” loans was approximately $619.4 million and $51.8 million for banking operations and consumer finance business, respectively, a 26% and 32% of its total residential mortgage portfolio, respectively. The mortgage loans amounts reported in “Band C” as of December 31, 2009 includes $5.1 million or 1.0% of originated loans during the year for banking operations and $2.9 million or 5.6% for consumer finance portfolio. At December 31, 2008, residential mortgage portfolio categorized as near prime or “Band C” loans was approximately $260 million and $60 million for banking operations and consumer finance business, respectively, a 10% and 36% of its total residential mortgage portfolio, respectively. The mortgage loans amounts reported in “Band C” as of December 31, 2008 includes $5.3 million or 1.5% of originated loans during the year for banking operations and $7.9 million or 13% for consumer finance portfolio.

The Corporation’s risk management considers a “FICO” credit score, an indicator of credit rating and credit profile, and loan-to value ratios, the proportional lending exposure relative to property value, as a key determinant of credit performance. The average FICO score for the residential mortgage portfolio of banking operations, as of December 31, 2009 and 2008 was 677 and 706, respectively and an average LTV of 72% as compared to 80% as of December 31, 2008. For its consumer finance business residential mortgages, average FICO score, as of December 31, 2009 and December 31, 2008 was 643 and 648, respectively and an average LTV of 66% as of December 31, 2009 as compared to 61% as of December 31, 2008. The actual rates of delinquencies, foreclosures and losses on these loans could be higher than anticipated during economic slowdowns.

Residential mortgage loan origination for banking operations was $195.4 million for the year ended December 31, 2009 and $345.7 million for the year ended December 31, 2008. The Corporation sold and securitized $169.5 million and $213.4 million for the year ended December 31, 2009 and 2008, respectively, to third parties. Within the sales and securitizations numbers mentioned above, the Corporation sold and securitized $7.7 million and $18.8 million of near prime or “Band C” loans for the year ended December 31, 2009 and 2008, respectively.

The Corporation added strength to the control over its credit activities and does not pursue near prime or “Band C” residential mortgage and consumer installment as a core product of its lending activities. Under the Loss Mitigation Policy (“LMP”), the Corporation evaluates several alternatives for identifying near prime or “Band C” residential mortgage loan borrowers who are at risk of default in order to design and offer loan mitigation strategies, including repayment plans and loan modifications to such borrowers. The objective of the Loss Mitigation Policy is to document the approach to loss mitigation manage and reduce the risk of loss for the consumer and mortgage portfolios and takes into consideration the current stress that consumer and mortgage borrowers are facing in Puerto Rico. The Corporation’s strategy is to maximize the recovery from delinquent and past due consumer and mortgage loans by actively working with borrowers to develop repayment plans that avoid foreclosure or other legal remedies.

The policy applies to the Corporation’s consumer lending business, including personal loans, credit cards and credit lines and mortgage business including conforming, guaranteed & insured mortgages and non-conforming mortgages. Loss mitigation, where applicable, is intended to benefit both the Corporation and the borrower. The Corporation avoids a costly and time consuming foreclosure process while the borrower maintains ownership of his/her home. The Loss Mitigation Policy describes

the Corporation’s approach to identifying borrowers with higher risk of default, assessing their ability to pay taking into account various factors, including debt to income ratios; assessing the likelihood of default; explore loss mitigation techniques that might avoid foreclose or other legal remedies and ensuring compliance with the appropriate regulations and policies of each regulatory or investment agency.

Industry Risk

Commercial loans, including commercial real estate and construction loans, amounted to $2.1 million as of December 31, 2009. The Corporation accepts various types of collateral to guarantee specific loan obligations. As of December 31, 2009, the use of real estate as loan collateral has resulted in a portfolio of approximately $1.2 billion, or 57.5% of the commercial loan portfolio. In addition, as of such date, loans secured by cash collateral and marketable securities amounted to $209.2 million, or 10.2% of the commercial loan portfolio. Commercial loans guaranteed by federal or local government amounted to $153.4 million as of December 31, 2009, which represents 7.5% of the commercial loan portfolio. The remaining commercial loan portfolio had $85.9 million partially secured by other types of collateral including, among others, equipment, accounts receivable, and inventory. As of December 31, 2009, unsecured commercial loans represented $425.3 million or 20.7% of commercial loans receivable; however, the majority of these loans were backed by personal guarantees.

In addition to the commercial loan portfolio indicated above, as of December 31, 2009, the Corporation had $1.2 billion in unused commitments under commercial lines of credit. These credit facilities are typically structured to mature within one year. As of December 31, 2009, stand-by letters of credit amounted to $41.8 million.

The commercial loan portfolio is distributed among the different economic sectors and there are no concentrations of credit consisting of direct, indirect, or contingent obligations in any specific borrower, an affiliated group of borrowers, or borrowers engaged in or dependent on one industry. The Corporation provides for periodic reviews of industry trends and the credits’ susceptibility to external factors.

Government Risk

As of December 31, 2009, $181.1 million of the Corporation’s investment securities represented exposure to the U.S. government in the form of U.S. Treasury securities and federal agency obligations. In addition, as of such date, $37.6 million of residential mortgages and $40.4 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies through the Small Business Administration (SBA) and Rural Development Programs. Furthermore, as of December 31, 2009, there were $83.4 million of investment securities representing obligations of the Commonwealth of Puerto Rico, its agencies, instrumentalities and political subdivisions as well as $7.1 million of mortgage loans and $318.8 million in commercial loans issued to or guaranteed by Puerto Rico government agencies, instrumentalities, political subdivisions and municipalities. As of December 31, 2009, the Corporation’s credit exposure to the Commonwealth of Puerto Rico and its political subdivisions and municipalities was $409.3 million composed of $141.1 million in municipalities loans, $184.8 million in other government credit facilities and $83.4 million in outstanding bonds and other obligations. The Corporation believes that the credit exposure to the Commonwealth of Puerto Rico and its political subdivisions and municipalities is manageable. The Commonwealth of Puerto Rico has a long-standing record of supporting all of its debt obligations. It has never defaulted in the payment of principal or interest on any public debt. The Corporation’s level of exposure is manageable given the fact that its outstanding loans and investment securities have either one or more of the following characteristics: (i) investment grade rated counterparties, (ii) identifiable source of repayment, (iii) high ranking in repayment priority or (iv) tangible collateral. The Corporation has $141.1 million on loans or obligations to various Municipalities for which payments are secured by the full faith, credit and unlimited taxing power of the Municipalities. The Corporation anticipates recovery of the amortized cost of these securities at maturity. Since the Corporation has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, and the contractual term of these investments do not permit the issuer to settle the securities at a price less than the amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired at December 31, 2009.

Non-performing Assets and Past Due Loans

The following table sets forth non-performing assets as of December 31, 2009, 2008, 2007, 2006 and 2005.


	Year ended December 31,
	2009			2008			2007			2006			2005
	(Dollars in thousands)
Commercial, Industrial and Agricultural	$	31,021		$	30,564		$	21,236		$	15,549		$	14,326
Construction		15,571			13,856			141,140			3,966			3,414
Mortgage		186,202			116,473			80,805			51,341			45,292
Consumer		10,385			13,479			10,818			7,590			4,747
Consumer Finance		43,782			35,508			37,412			24,731			—
Lease Financing		1,908			2,493			2,334			2,783			3,340
Restructured Loans		977			341			693			892			2,560

Total non-performing loans		289,846			212,714			294,438			106,852			73,679
Total repossessed assets		34,486			21,592			16,447			6,173			2,706

Non-performing assets	$	324,332		$	234,306		$	310,885		$	113,025		$	76,385


Accruing loans past-due 90 days or more	$	11,214		$	13,462		$	7,162		$	20,938		$	2,999

Non-performing loans to total loans		5.30	%		3.45	%		4.16	%		1.54	%		1.22	%
Non-performing loans plus accruing loans past due 90 days or more to total loans		5.50	%		3.67	%		4.26	%		1.84	%		1.27	%
Non-performing assets to total assets		4.79	%		2.97	%		3.39	%		1.23	%		0.92	%
Interest lost	$	11,888		$	9,268		$	7,708		$	3,112		$	2,111

Non-performing assets consist of past-due commercial loans, construction loans, lease financing and closed-end consumer loans with principal or interest payments over 90 days on which no interest income is being accrued, and mortgage loans with principal or interest payments over 120 days past due on which no interest income is being accrued, renegotiated loans and other real estate owned.

Once a loan is placed on non-accrual status, interest is recorded as income only to the extent of the Corporation’s management expectations regarding the full collectibility of principal and interest on such loans. The interest income that would have been realized had these loans been performing in accordance with their original terms amounted to $11.9 million, $9.3 million and $7.7 million in 2009, 2008 and 2007, respectively.

Non-performing loans to total loans as of December 31, 2009 were 5.30%, 185 basis point increase compared to the 3.45% reported as of December 31, 2008. Non-performing loans at December 31, 2009 amounted to $289.8 million. The Corporation’s non-performing loans reflected an increase of $77.1 million or 36.3% compared to non-performing loans as of December 31, 2008. This change was driven by increases in non-performing mortgage loans of $69.7 million or 59.9% and in non-performing consumer loans (including non-performing consumer finance) of $5.2 million or 10.6%.

Repossessed assets increased $12.9 million or 59.7% to $34.5 million at December 31, 2009, from $21.6 million at December 31, 2008.

As of December 31, 2009, the coverage ratio (allowance for loan losses to total non-performing loans) decreased to 68.07% in 2009 from 90.21% in 2008. Excluding non-performing mortgage loans (for which the Corporation has historically had a minimal loss experience) this ratio is 230.42% at December 31, 2009 compared to 225.06% as of December 31, 2008.

The accrual of interest on commercial loans, construction loans, lease financing and closed-end consumer loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, but in no event is it recognized after 90 days in arrears on payments of principal or interest. Interest on mortgage loans is not recognized after four months in arrears on payments of principal or interest. Income is generally recognized on open-end (revolving credit) consumer loans until the loans are charged off. When interest accrual is discontinued, unpaid interest is reversed on all closed-end

portfolios. Interest income is subsequently recognized only to the extent that it is received. The non accrual status is discontinued when loans are made current by the borrower.

Potential Problem Loans

As a general rule, the Corporation closely monitors certain loans not disclosed under “Non-performing Assets and Past Due Loans” but that represent a greater than normal credit risk. These loans are not included under the non-performing category, but management provides close supervision of their performance. The identification process is implemented through various risk management procedures, such as periodic review of customer relationships, a risk grading system, an internal watch system and a loan review process. This classification system enables management to respond to changing circumstances and to address the risk that may arise from changing business conditions or any other factors that bear significantly on the overall condition of these loans. The principal amounts of loans under this category as of December 31, 2009 and 2008 were approximately $428.5 million and $297.8 million, respectively.

Asset and Liability Management

The Corporation’s policy with respect to asset liability management is to maximize its net interest income, return on assets and return on equity while remaining within the established parameters of interest rate and liquidity risks provided by the Board of Directors and the relevant regulatory authorities. Subject to these constraints, the Corporation takes mismatched interest rate positions. The Corporation’s asset and liability management policies are developed and implemented by its Asset and Liability Committee (“ALCO”), which is composed of senior members of the Corporation including the President, Chief Accounting Officer, Treasurer and other executive officers of the Corporation. The ALCO reports on a monthly basis to the members of the Bank’s Board of Directors.

Market Risk and Interest Rate Sensitivity

A key component of the Corporation’s asset and liability policy is the management of interest rate sensitivity. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the maturity or repricing characteristics of interest-earning assets and interest-bearing liabilities. For any given period, the pricing structure is matched when an equal amount of such assets and liabilities mature or reprice in that period. Any mismatch of interest-earning assets and interest-bearing liabilities is known as a gap position. A positive gap denotes asset sensitivity, which means that an increase in interest rates would have a positive effect on net interest income, while a decrease in interest rates would have a negative effect on net interest income. A negative gap denotes liability sensitivity, which means that a decrease in interest rates would have a positive effect on net interest income, while an increase in interest rates would have a negative effect on net interest income. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.

The Corporation’s one-year cumulative GAP position at December 31, 2009, was negative $0.7 billion or -11.0% of total earning assets. This is a one-day position that is continually changing and is not indicative of the Corporation’s position at any other time. This denotes liability sensitivity, which means that an increase in interest rates would have a negative effect on net interest income while a decrease in interest rates would have a positive effect on net interest income. While the GAP position is a useful tool in measuring interest rate risk and contributes toward effective asset and liability management, shortcomings are inherent in GAP analysis since certain assets and liabilities may not move proportionally as interest rates change.

The Corporation’s interest rate sensitivity strategy takes into account not only rates of return and the underlying degree of risk, but also liquidity requirements, capital costs and additional demand for funds. The Corporation’s maturity mismatches and positions are monitored by the ALCO and managed within limits established by the Board of Directors.

The following table sets forth the repricing of the Corporation’s interest earning assets and interest bearing liabilities at December 31, 2009 and may not be representative of interest rate gap positions at other times. In addition, variations in interest rate sensitivity may exist within the repricing period presented due to the differing repricing dates within the period. In preparing the interest rate gap report, the following assumptions was considered, all assets and liabilities are reported according to their repricing characteristics. For example, a commercial loan maturing in five years with monthly variable interest rate payments is stated in the column of “up to 90 days”. The investment portfolio is reported considering the effective duration of the securities. Expected prepayments and remaining terms are considered for the residential mortgage portfolio. Core deposits are reported in accordance with their effective duration. Effective duration of core deposits is based on price and volume elasticity to market rates. The Corporation reviews on a monthly basis the effective duration of core deposits. Assets and liabilities with embedded options are stated based on full valuation of the asset/liability and the option to ascertain their effective duration.


	Interest Rate Sensitivity
	As of December 31, 2009
	0 to 3			3 months			1 to 3			3 to 5			5 to 10			More than			No Interest
	Months			to a Year			Years			Years			Years			10 Years			Rate Risk			Total
	(Dollars in thousands)
ASSETS:
Investment Portfolio	$	99,872		$	18,689		$	263,257		$	22,337		$	9,725		$	—		$	106,898		$	520,778
Deposits with Other Banks		226,841			2,668			—			—			—			—			101,438			330,947
Loan Portfolio:
Commercial		1,014,360			339,663			190,250			161,354			116,998			67,934			91,020			1,981,579
Construction		47,943			6,501			9,678			1,728			3,524			1,333			—			70,707
Consumer		305,142			183,149			311,450			163,226			24,693			26			15,207			1,002,893
Mortgage		112,797			298,411			563,922			430,735			744,739			130,170			134,520			2,415,294
Fixed and Other Assets		—			—			—			—			—						444,238			444,238

Total Assets		1,806,955			849,081			1,338,557			779,380			899,679			199,463			893,321			6,766,436


LIABILITIES AND STOCKHOLDERS’ EQUITY:

External Funds Purchased:
Commercial Paper		67,500			—			—			—			—			—			(18	)		67,482
Repurchase Agreements		—			—			—			—			—			—			—			—
Federal Funds and other borrowings		535,000			250,000			325,000			—			—			—			—			1,110,000
Deposits:
Certificates of Deposit		1,179,664			392,284			90,422			12,851			—			204			(6,362	)		1,669,063
Demand Deposits and
Savings Accounts		184,934			37,028			202,028			159,145			118,055			—			(2,421	)		698,769
Transactional Accounts		206,438			367,366			770,070			86,167			597,772			—			(85	)		2,027,728
Senior and Subordinated Debt		4,815			—			15,757			—			244,691			60,000			4,009			329,272
Other Liabilities and Capital		—			—			—			—			—			—			864,122			864,122

Total Liabilities and Capital		2,178,351			1,046,678			1,403,277			258,163			960,518			60,204			859,245			6,766,436

Off-Balance Sheet
Financial Information
Interest Rate Swaps (Assets)		1,637,166			23,645			14,068			27,417			1,592,341			36,000			—			3,330,637
Interest Rate Swaps (Liabilities)		(1,762,447	)		(23,645	)		(13,787	)		(27,417	)		(1,467,341	)		(36,000	)		—			(3,330,637	)
Caps		—			175			605			—			—			—			—			780
Caps Final Maturity		—			(175	)		(605	)		—			—			—			—			(780	)

GAP		(496,677	)		(197,597	)		(64,439	)		521,217			64,161			139,259			34,076			—

Cumulative GAP	$	(496,677	)	$	(694,274	)	$	(758,713	)	$	(237,496	)	$	(173,335	)	$	(34,076	)	$	—		$	—


Cumulative GAP to earning assets		-7.86	%		-10.98	%		-12.00	%		-3.76	%		-2.74	%		-0.54	%

Interest rate risk is the primary market risk to which the Corporation is exposed. Nearly all of the Corporation’s interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. They include loans, investment securities, deposits, short-term borrowings, senior and subordinated debt and derivative financial instruments used for asset and liability management.

As part of its interest rate risk management process, the Corporation analyzes on an ongoing basis the profitability of the balance sheet structure, and how this structure will react under different market scenarios. In order to carry out this task, management prepares three standardized reports with detailed information on the sources of interest income and expense: the “Financial Profitability Report”, the “Net Interest Income Shock Report” and the “Market Value Shock Report”. The former report deals with historical data while the latter two deal with expected future earnings.

The Financial Profitability Report identifies individual components of the Corporation’s non-trading portfolio independently with their corresponding interest income or expense. It uses the historical information at the end of each month to track the yield of such components and to calculate net interest income for such time period.

The Net Interest Income Shock Report uses a simulation analysis to measure the amount of net interest income the Corporation would have from its operations throughout the next twelve months and the sensitivity of these earnings to assumed shifts in market interest rates throughout the same period. The important assumptions of this analysis are: ( i ) rate shifts are parallel and immediate throughout the yield curve; (ii) rate changes affect all assets and liabilities equally; (iii) interest-bearing demand accounts and savings passbooks will run off in a period of one year; and (iv) demand deposit accounts will run off in a period of one to three years. Cash flows from assets and liabilities are assumed to be reinvested at market rates in similar instruments. The object is to simulate a dynamic gap analysis enabling a more accurate interest rate risk assessment.

The ALCO monitors interest rate gaps in combination with net interest margin (NIM) sensitivity and duration of market value equity (MVE).

NIM sensitivity analysis captures the maximum acceptable net interest margin loss for a one percent parallel change of all interest rates across the curve. Duration of market value equity analysis entails a valuation of all interest bearing assets and liabilities under parallel movements in interest rates. The ALCO has established limits of $35 million of NIM sensitivity for a 1% parallel shock and $140 million of MVE sensitivity for a 1% parallel shock.

As of December 31, 2009, it was determined for purposes of the Net Interest Income Shock Report that the Corporation had a potential loss in net interest income of approximately $6.8 million if market rates were to increase 100 basis points immediately parallel across the yield curve, less than the $35.0 million limit. For purposes of the Market Value Shock Report it was determined that the Corporation had a potential loss of approximately $22.1 million if market rates were to increase 100 basis points immediately parallel across the yield curve, less than the $140.0 million limit. The tables below present a summary of the Corporation’s net interest margin and market value shock reports, considering several scenarios as of December 31, 2009.


	NET INTEREST MARGIN SHOCK REPORT
	December 31, 2009
(In millions)	-200 BP’s			-100 BP’s		-50 BP’s		Base Case		+50 BP’s			+100 BP’s			+200 BP’s
Gross Interest Margin	$	397.8		$	406.5	$	405.0	$	401.6	$	398.4		$	394.8		$	386.2

Sensitivity	$	(3.8	)	$	4.9	$	3.4			$	(3.2	)	$	(6.8	)	$	(15.4	)


	MARKET VALUE SHOCK REPORT
	December 31, 2009
(In millions)	-200 BP’s		-100 BP’s		-50 BP’s		Base Case		+50 BP’s		+100 BP’s			+200 BP's
Market Value of Equity	$	761.1	$	783.7	$	774.1	$	749.9	$	750.9	$	727.8		$	702.2

Sensitivity	$	11.2	$	33.8	$	24.2			$	1.0	$	(22.1	)	$	(47.7	)

As of December 31, 2009 the Corporation had a liability sensitive profile as explained by the negative gap, the NIM shock report and the MVE shock report. Any decision to reposition the balance sheet is taken by the ALCO committee, and is subject to compliance with the established risk limits. Some factors that could lead to shifts in policy could be, but are not limited to, changes in views on interest rate markets, monetary policy, and macroeconomic factors as well as legal, fiscal and other factors which could lead to shifts in the asset liability mix.

Derivatives

The Corporation uses derivative financial instruments mostly as hedges of interest rate risk, changes in fair value of assets and liabilities and to secure future cash flows. Refer to Notes 1 and 22 to the consolidated financial statements for details of the Corporation’s derivative transactions as of December 31, 2009 and 2008.

In the normal course of business, the Corporation utilizes derivative instruments to manage exposure to fluctuations in interest rates, currencies and other markets, to meet the needs of customers and for proprietary trading activities. The Corporation uses the same credit risk management procedures to assess and approve potential credit exposures when entering into derivative transactions as those used for traditional lending.

Hedging Activities:

The following table summarizes the derivative contracts designated as hedges as of December 31, 2009, 2008 and 2007, respectively:


	December 31, 2009
									Other
									Comprehensive
	Notional					Gain			Income
(Dollars in thousands)	Amounts *		Fair Value			(Loss)			(Loss)**
Economic Undesignated Hedges
Interest Rate Swaps		125,000		(492	)		(5,702	)		—


Totals	$	125,000	$	(492	)	$	(5,702	)	$	—


	December 31, 2008
							Other
							Comprehensive
	Notional				Gain		Income
(Dollars in thousands)	Amounts *		Fair Value		(Loss)		(Loss)**
Cash Flow Hedges
Interest Rate Swaps		—		—		—		1,237
Economic Undesignated Hedges
Interest Rate Swaps		125,000		5,210		4,311		—


Totals	$	125,000	$	5,210	$	4,311	$	1,237


	December 31, 2007
									Other
									Comprehensive
	Notional					Gain			Income
(Dollars in thousands)	Amounts *		Fair Value			(Loss)			(Loss)**
Cash Flow Hedges
Foreign Currency	$	—	$	—		$	—		$	—
Interest Rate Swaps		650,000		(2,027	)		—			(1,023	)
Fair Value Hedges
Interest Rate Swaps		937,863		(4,425	)		(465	)		—


Totals	$	1,587,863	$	(6,452	)	$	(465	)	$	(1,023	)


*		The notional amount represents the gross sum of long and short

**		Net of tax

Cash Flow Hedges:

The Corporation designates hedges as Cash Flow Hedges when its main purpose is to reduce the exposure associated with the variability of future cash flows related to fluctuations in short term financing rates (such as LIBOR). At the inception of each hedge, management documents the hedging relationship, including its objective and probable effectiveness. To assess ongoing effectiveness of the hedges, the Corporation compares the hedged item’s periodic variable rate with the hedging item’s benchmark rate (LIBOR) at every reporting period to determine the effectiveness of the hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or loss in consolidated statements of income.

The Corporation had a $100 million floating-for-fixed interest rate swap designated as cash flow hedges with LBSF. The derivative liability of this swap was $371,736 as of September 19, 2008 and was paid on December 5, 2008. As a result of the bankruptcy filing of LBHI and the default on its contractual payments as of September 19, 2008, the Corporation terminated the swap and the cash flow hedge designation on these swaps. The net loss of $371,000 was reclassified into earnings in the last quarter of 2008.

Economic Undesignated Hedges:

The Corporation adopted the accounting standard FASB ASC Topic 825 effective January 1, 2008 which permit the measurement of selected financial instruments at fair value. The Corporation elected to account at fair value certain of its brokered deposits and subordinated capital notes that were previously designated for fair value hedge accounting in accordance with FASB ASC Topic 815. The selected financial instruments are reported at fair value with changes in fair value reported in condensed consolidated statements of income.

As of December 31, 2009 and December 31, 2008, the economic undesignated hedges have maturities through the year 2032. The weighted average rate paid and received on these contracts is 0.68% and 6.22% as of December 31, 2009 and 3.24% and 6.22% as of December 31, 2008, respectively.

The Corporation had issued fixed rate debt swapped to create a floating rate source of funds. In this case, the Corporation matches all of the relevant economic variables (notional, coupon, payments date and exchanges, etc) of the fixed rate sources of funds to the fixed rate portion of the interest rate swaps, (which it received from counterparty), and pays the floating rate portion of the interest swaps. The effectiveness of these transactions is very high since all of the relevant economic variables are matched. For the year ended December 31, 2009 and 2008, the Corporation recognized a loss of approximately $5.7 million and a gain of $4.3 million, respectively, on these economic hedges, which is included in other income in the consolidated statements of income.

As of December 31, 2008, the Corporation had outstanding interest rate swap agreements with a notional amount of approximately $125 million, maturing through the year 2032. The weighted average rate paid and received on these contracts is 3.24% and 6.22%, respectively. As of December 31, 2008, the Corporation had two subordinated notes aggregating to approximately $125 million, with a fair value of $118.3 million, swapped to create a floating rate source of funds. As a result of the bankruptcy filing of Lehman Brothers Holding, Inc. (“LBHI”) and the default on its contractual payments as of September 19, 2008, the Corporation terminated $23.8 million of fixed-for-floating interest rate swaps. The derivative liability of the swaps with Lehman Brothers Special Financing (“LBSF”) was $681,535 as of September 19, 2008 and was paid on December 5, 2008. As of December 31, 2009 and 2008, the Corporation has $0.5 million and $5.2 million, respectively, in fair value of these economic undesignated hedges.

Derivative instruments not designated as hedging instruments:

Any derivative not associated to hedging activity is booked as a freestanding derivative. In the normal course of business the Corporation may enter into derivative contracts as either a market maker or proprietary position taker. The Corporation’s mission as a market maker is to meet the clients’ needs by providing them with a wide array of financial products, which include derivative contracts. The Corporation’s major role in this aspect is to serve as a derivative counterparty to these clients. Positions taken with these clients are hedged (although not designated as hedges) in the OTC market with interbank participants or in the organized futures markets. To a lesser extent, the Corporation enters into freestanding derivative contracts as a proprietary position taker, based on market expectations or to benefit from price differentials between financial instruments and markets. The Corporation had $13.8 million of interest rate swaps with LBSF. The derivative liability of these swaps was $166,333 as of September 19, 2008 and was paid on December 5, 2008. As a result of the bankruptcy filing of LBHI and the default on its contractual payments as of September 19, 2008, the Corporation terminated these swaps.

These derivatives are not linked to specific assets and liabilities on the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. These derivatives are carried at fair value and changes in fair value are recorded in earnings. The market and credit risk associated with these activities is measured, monitored and controlled by the Corporation’s Market Risk Group, a unit independent from the treasury department. Among other things, this group is responsible for: policy, analysis, methodology and reporting of anything related to market risk and credit risk. The following table summarizes the aggregate notional amounts and the reported derivative assets or liabilities (i.e. the fair value of the derivative contracts) as of December 30, 2009, 2008 and 2007, respectively:


	December 31, 2009
	Notional					Gain
(Dollars in thousands)	Amounts *		Fair Value			(Loss)
Interest Rate Contracts
Interest Rate Swaps	$	3,330,637	$	220		$	107
Interest Rate Caps		780		—			—
Other		3,447		(8	)		(101	)
Equity Derivatives		210,900		—			—

Totals	$	3,545,764	$	212		$	6


	December 31, 2008
	Notional					Gain
(Dollars in thousands)	Amounts *		Fair Value			(Loss)
Interest Rate Contracts
Interest Rate Swaps	$	3,548,418	$	(53	)	$	(392	)
Interest Rate Caps		1,166		—			—
Other		3,862		93			48
Equity Derivatives		236,428		—			(21	)

Totals	$	3,789,874	$	40		$	(365	)


	December 31, 2007
	Notional				Gain
(Dollars in thousands)	Amounts *		Fair Value		(Loss)
Interest Rate Contracts
Interest Rate Swaps	$	3,237,179	$	257	$	679
Interest Rate Caps		14,762		—		—
Other		1,451		45		35
Equity Derivatives		267,124		—		—

Totals	$	3,520,516	$	302	$	714


*		The notional amount represents the gross sum of long and short

Liquidity Risk

Liquidity risk is the risk that not enough cash will be generated from either assets or liabilities to meet deposit withdrawals or contractual loan funding. The Corporation’s general policy is to maintain liquidity adequate to ensure our ability to honor withdrawals of deposits, make repayments at maturity of other liabilities, extend loans and meet working capital needs. The Corporation’s principal sources of liquidity are capital, core deposits from retail and commercial clients, and wholesale deposits raised in the inter-bank and commercial markets. The Corporation manages liquidity risk by maintaining diversified

short-term and long-term sources through the Federal funds market, commercial paper program, repurchase agreements and retail certificate of deposit programs. As of December 31, 2009 the Corporation had $1.5 billion in unsecured lines of credit ($0.6 billion available) and $3.7 billion in collateralized lines of credit with banks and financial entities ($2.6 billion available). All securities in portfolio are highly rated and very liquid, enabling us to treat them as a secondary source of liquidity.

The Corporation does not have significant usage or limitations on its ability to upstream or downstream funds as a method of liquidity. However, there are certain tax constraints when borrowing funds (excluding the placement of deposits) from Santander Spain or affiliates because Puerto Rico’s tax code requires local corporations to withhold 29% of the interest income paid to non-resident affiliates. The Corporation does not face significant limitations to its ability to downstream funds to its affiliates. The current intra-group credit line for the Corporation is $1.4 billion.

Liquidity is derived from capital, reserves and the securities portfolio. The Corporation has established lines of credit with foreign and domestic banks, has access to U.S. markets through its commercial paper program and also has broadened its relations in the federal funds and repurchase agreement markets to increase the availability of other sources of funds and to augment liquidity as necessary.

On September 24, 2009, Santander BanCorp and Santander Financial Services, Inc., entered into a collateralized loan agreement (the “Loan Agreement”) with Banco Santander Puerto Rico. Under the Loan Agreement, the Bank advanced $190 million and $440 million (the “Loans”) to the Corporation and Santander Financial, respectively. The proceeds of the Loans were used to refinance the outstanding indebtedness incurred under a loan agreement dated September 24, 2008 among the Corporation, Santander Financial and the Bank, and for general corporate purposes. The Loans are collateralized by a certificate of deposit in the amount of $630 million opened by Banco Santander, S.A., the parent of the Corporation, at the Bank and provided as security for the Loans pursuant to the terms of a Security Agreement, Pledge and Assignment between the Bank and Banco Santander, S.A. The Corporation and Santander Financial have agreed to pay an annual fee of 0.10% net of taxes, deductions and withholdings to Banco Santander, S.A. in connection with its agreement to collateralize the Loans with the deposit.

In October 2006, the Corporation also completed the private placement of $125 million Trust Preferred Securities (“Preferred Securities”) and issued Junior Subordinated Debentures in the aggregate principal amount of $129 million in connection with the issuance of the Preferred Securities. The Preferred Securities are fully and unconditionally guaranteed (to the extent described in the guarantee agreement between the Corporation and the guarantee trustee, for the benefit of the holders from time to time of the Preferred Securities) by the Corporation. The Trust Preferred Securities were acquired by an affiliate of the Corporation. In connection with the issuance of the Preferred Securities, the Corporation issued an aggregate principal amount of $129,000,000 of its 7.00% Junior Subordinated Debentures, Series A, due July 1, 2037 to the Trust.

The Corporation has a high credit rating, which permits the Corporation to utilize various alternative funding sources. The Corporation’s current ratings are as follows:


	Standard	Fitch
	& Poor’s	IBCA
Short-term funding	A-1	F1+
Long-term funding	A	AA-

Management monitors liquidity levels each month. The focus is on the liquidity ratio, which compares net liquid assets (all liquid assets not subject to collateral or repurchase agreements) against total liabilities plus contingent liabilities. As of December 31, 2009, the Corporation had a liquidity ratio of 11.24%. At December 31, 2009, the Corporation had total available liquid assets of $718.8 million. The Corporation believes that it has sufficient liquidity to meet current obligations.

The Corporation does not contemplate material uncertainties in the rolling over of deposits, both retail and wholesale, and is not engaged in capital expenditures that would materially affect the capital and liquidity positions. Should any deficiency arise for seasonal or more critical reasons, the Bank would make recourse to alternative sources of funding such as the commercial paper program, its lines of credit with domestic and national banks, unused collateralized lines with Federal Home Loan Banks and others.

Maturity and Interest Rate Sensitivity of Interest-Earning Assets as of December 31, 2009

The following table sets forth an analysis by type and time remaining to maturity of the Corporation’s loans and securities portfolio as of December 31, 2009. Loans are stated before deduction of the allowance for loan losses and include loans held for sale.


	As of December 31, 2009
	Maturities and/or Next Repricing Date
			After One Year
			Through Five Years				After Five Years
	One Year		Fixed		Variable		Fixed		Variable
	or Less		Interest Rates		Interest Rates		Interest Rates		Interest Rates		Total
					(Dollars in thousands)
Cash and Cash Equivalents and other Interest-bearing deposits	$	330,947	$	—	$	—	$	—	$	—	$	330,947
Investment Portfolio		118,545		285,595		—		116,638		—		520,778
Loans:
Commercial		724,129		354,165		324,007		225,958		318,320		1,946,579
Construction		25,750		6,423		10,401		—		28,133		70,707
Consumer		179,407		135,478		—		129,060		—		443,945
Consumer Finance		182,826		338,547		10,909		16,667		9,999		558,948
Mortgage		411,208		994,657		—		1,009,429		—		2,415,294
Leasing		22,214		9,893		588		2,305		—		35,000

Total	$	1,995,026	$	2,124,758	$	345,905	$	1,500,057	$	356,452	$	6,322,198

Capital Expenditures

The following table reflects capital expenditures for the years ended December 31, 2009, 2008 and 2007.


	2009		2008		2007
	(Dollars in thousands)
Headquarters/branches	$	218	$	412	$	1,770
Data processing equipment		563		1,829		1,438
Software		3,093		4,419		1,981
Office furniture and equipment		819		2,766		1,257

Total	$	4,693	$	9,426	$	6,446

During 2009 and 2008, the Corporation’s capital expenditures reflected an increase in software due to standard upgrade and improvement procedures.

Environmental Matters

Under various environmental laws and regulations, a lender may be liable as an “owner” or “operator” for the costs of investigation or remediation of hazardous substances at any mortgaged property or other property of a borrower or at its owned or leased property regardless of whether the lender knew of, or was responsible for, the hazardous substances. In addition, certain cities in which some of the Corporation’s assets are located impose a statutory lien, which may be prior to the lien of the mortgage, for costs incurred in connection with a cleanup of hazardous substances.

Some of the Corporation’s mortgaged properties and owned and leased properties may contain hazardous substances or are located in the vicinity of properties that are contaminated. As a result, the value of such properties may decrease, the borrower’s ability to repay the loan may be affected, the Corporation’s ability to foreclose on certain properties may be affected or the Corporation may be exposed to potential environmental liabilities. The Corporation, however, is not aware of any such environmental costs or liabilities that would have a material adverse effect on the Corporation’s results of operations or financial condition.

Puerto Rico Income Taxes

The Corporation is subject to Puerto Rico income tax. The maximum statutory regular corporate tax rate that the Corporation is subject to under the P.R. Code is 39%. In computing its net income subject to the regular income tax, the Corporation is entitled to exclude from its gross income, interest derived on obligations of the Commonwealth of Puerto Rico and its agencies, instrumentalities and political subdivisions, obligations of the United States Government and its agencies and instrumentalities, certain FHA and VA loans and certain GNMA securities. In computing its net income subject to the regular income tax the Corporation is entitled to claim a deduction for ordinary and necessary expenses, worthless debts, interest and depreciation, among others. The Corporation’s deduction for interest is reduced in the same proportion that the average adjusted basis of its exempt obligations bears to the average adjusted basis of its total assets.

The Corporation is also subject to an alternative minimum tax of 22% imposed on its alternative minimum tax net income. In general, the Corporation’s alternative minimum net income is an amount equal to its net income determined for regular income tax purposes, as adjusted for certain items of tax preference. To the extent that the Corporation’s alternative minimum tax for a taxable year exceeds its regular tax, such excess is required to be paid by the Corporation as an alternative minimum tax. An alternative minimum tax paid by the Corporation in any taxable year may be claimed by the Corporation as a credit in future taxable years against the excess of its regular tax over the alternative minimum tax in such years, and such credits do not expire.

applicable to Puerto Rico international banking entities, or IBEs, such as Santander International Bank (SIB), which, before this law, was exempt from taxation under Puerto Rico law. This special income tax shall be applicable for taxable years 2009, 2010 and 2011

Under the P.R. Code, corporations are not permitted to file consolidated tax returns with their subsidiaries and affiliates. However, the Corporation is entitled to a 100% dividend received deduction with respect to dividends received from Banco Santander Puerto Rico, Santander Securities Corporation, Santander Insurance Agency, or any other Puerto Rico corporation subject to tax under the P.R. Code and in which the Corporation owns at least 80% of the value of its stock or voting power.

Interest paid by the Corporation to non-resident foreign corporations is not subject to Puerto Rico income tax, provided such foreign corporation is not related to the Corporation. Dividends paid by the Corporation to non-resident foreign corporations and individuals (whether resident or not) are subject to a Puerto Rico income tax of 10%.

The Corporation recognizes interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2009 and 2008, the Corporation recognized $1.8 million and $1.3 million of interest and penalties, respectively, for uncertain tax positions. As of December 31, 2009 and 2008, the related accrued interest amounted to approximated $3.2 million and $3.7 million, respectively. As of December 31, 2009 and 2008, the Corporation had $8.1 million and $10.3 million, respectively, of unrecognized tax benefits which, if recognized, would decrease the effective income tax rate in future periods. The Corporation recognized a tax benefit of $2.3 million and $1.1 million for the year ended December 31, 2009 and 2008, respectively, as a result of the expiration of the statute of limitations related to the uncertain tax positions.

United States Income Taxes

The Corporation, the Bank, Santander Securities and Santander Insurance Agency are corporations organized under the laws of Puerto Rico. Accordingly, the Corporation, the Bank, Santander Securities and Santander Insurance Agency are subject to United States income tax under the Internal Revenue Code of 1986, as amended to the date hereof (the “Code”) only on certain income from sources within the United States or effectively connected with a United States trade or business.

CERTIFICATION PURSUANT TO SECTION 303A.12(a) OF THE
NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL

Santander BanCorp’s Chief Executive Officer and Chief Accounting Officer have filed with the Securities and Exchange Commission the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 and to Santander BanCorp’s 2009 Form 10-K. In addition, on May 4, 2009, Santander BanCorp’s CEO certified to the New York Stock Exchange that he was not aware of any violation by the Corporation of the NYSE corporate governance listing standards. The foregoing certification was unqualified.

Date: March 5, 2010

By:

/s/ Juan Moreno Blanco

President and Chief Executive Officer

By:

/s/ Roberto Jara

Executive Vice President and
Chief Accounting Officer

Deloitte & Touche LLP
Torre Chardón
350 Chardón Ave. Suite 700
San Juan, PR 00918-2140
USA

Tel: +1 787 759 7171
Fax: +1 787 756 6340
www.deloitte.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Santander BanCorp
San Juan, Puerto Rico

We have audited the accompanying consolidated balance sheets of Santander Bancorp and subsidiaries (the “Corporation”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2009. We also have audited the Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Santander Bancorp and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

March 5, 2010

Stamp No. 2473573
affixed to original.

Member of
Deloitte & Touche Tohmatsu

Santander BanCorp and Subsidiaries

Consolidated Balance Sheets
December 31, 2009 and 2008
(Dollars in thousands, except share data)


	2009			2008
ASSETS
Cash and Cash Equivalents:
Cash and due from banks	$	296,425		$	217,311
Interest-bearing deposits		10,467			976
Federal funds sold and securities purchased under agreements to resell		22,146			64,871

Total cash and cash equivalents		329,038			283,158

Interest-Bearing Deposits		1,909			7,394
Trading Securities, at fair value		47,739			64,719
Investment Securities Available for Sale, at fair value:
Securities pledged that can be repledged		—			408,650
Other investment securities available for sale		417,608			393,462

Total investment securities available for sale		417,608			802,112

Other Investment Securities, at amortized cost		55,431			61,632
Loans Held for Sale, net		26,726			38,459
Loans, net		5,246,444			5,929,499
Accrued Interest Receivable		32,651			45,953
Premises and Equipment, net		20,179			19,368
Real Estate Held for Sale		2,818			8,075
Goodwill		121,482			121,482
Intangible Assets, net		28,948			29,842
Other Assets		435,463			485,883

	$	6,766,436		$	7,897,576


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non interest-bearing	$	698,769		$	692,963
Interest-bearing, including $12.5 million and $101.4 million at fair value in 2009 and 2008, respectively		3,696,791			4,321,939

Total deposits		4,395,560			5,014,902

Federal Funds Purchased and Other Borrowings		50,000			2,040
Securities Sold Under Agreements to Repurchase		—			375,000
Commercial Paper Issued		67,482			50,985
Federal Home Loan Bank Advances		1,060,000			1,185,000
Term Notes		20,581			19,967
Subordinated Capital Notes, including $120.6 million and 118.3 million at fair value in 2009 and 2008, respectively		308,691			306,392
Accrued Interest Payable		14,015			45,419
Other Liabilities		254,210			346,235

Total liabilities		6,170,539			7,345,940

Contingencies and Commitments (Notes 18, 22 and 23)
STOCKHOLDERS’ EQUITY:
Series A Preferred stock, $25 par value; 10,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364 shares issued; 46,639,104 shares outstanding		126,626			126,626
Capital paid in excess of par value		318,263			317,141
Treasury stock at cost, 4,011,260 shares		(67,552	)		(67,552	)
Accumulated other comprehensive loss, net of taxes		(20,695	)		(22,563	)
Retained earnings:
Reserve fund		141,833			139,250
Undivided profits		97,422			58,734

Total stockholders’ equity		595,897			551,636

	$	6,766,436		$	7,897,576

The accompanying notes are an integral part of these financial statements.

Santander BanCorp and Subsidiaries

Consolidated Statements of Operations
Years Ended December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)


	2009		2008			2007
Interest Income:
Loans	$	460,248	$	547,973		$	599,581
Investment securities		21,302		47,402			67,830
Interest-bearing deposits		541		1,063			3,344
Federal funds sold and securities purchased under agreements to resell		67		4,333			3,455

Total interest income		482,158		600,771			674,210

Interest Expense:
Deposits		79,473		152,452			192,660
Securities sold under agreements to repurchase and other borrowings		36,236		78,680			153,955
Subordinated capital notes		14,722		13,317			15,916

Total interest expense		130,431		244,449			362,531

Net interest income		351,727		356,322			311,679
Provision for Loan Losses		152,496		175,523			147,824

Net interest income after provision for loan losses		199,231		180,799			163,855

Other Income:
Bank service charges, fees and other		39,837		44,685			47,201
Broker-dealer, asset management and insurance fees		62,688		74,808			68,265
Gain on sale of investment securities available for sale		9,251		5,154			1,265
Gain on sale of loans		5,144		3,253			6,658
Other income		5,526		19,935			24,731

Total other income		122,446		147,835			148,120

Other Operating Expenses:
Salaries and employee benefits		107,019		125,137			134,258
Occupancy costs		25,291		27,665			23,767
Equipment expenses		3,907		4,358			4,427
EDP servicing, amortization and technical assistance		40,645		41,860			39,255
Communication expenses		9,038		10,062			10,923
Business promotion		3,864		6,628			15,621
Goodwill and other intangibles impairment charges		—		—			43,349
Provision for claim receivable		—		25,120			—
Other taxes		13,270		13,101			12,334
Other operating expenses		66,033		70,696			60,082

Total other operating expenses		269,067		324,627			344,016

Income (loss) before provision (benefit) for income tax		52,610		4,007			(32,041	)
Provision (Benefit) for Income Tax		11,335		(6,524	)		4,204

Net Income (Loss) Available to Common Shareholders	$	41,275	$	10,531		$	(36,245	)

Basic and Diluted Earnings (Loss) per Common Share	$	0.88	$	0.23		$	(0.78	)

The accompanying notes are an integral part of these financial statements.

Santander BanCorp and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2009, 2008 and 2007
(Dollars in thousands)


	2009			2008			2007
Common Stock:
Balance at beginning of year	$	126,626		$	126,626		$	126,626

Balance at end of year		126,626			126,626			126,626

Capital Paid in Excess of Par Value:
Balance at beginning of year		317,141			308,373			304,171
Capital contribution		2,406			9,710			4,202
Payments to ultimate parent for long-term incentive plan		(1,284	)		(942	)		—

Balance at end of year		318,263			317,141			308,373

Treasury Stock at cost:
Balance at beginning of year		(67,552	)		(67,552	)		(67,552	)

Balance at end of year		(67,552	)		(67,552	)		(67,552	)

Accumulated Other Comprehensive Loss, net of tax:
Balance at beginning of year		(22,563	)		(24,478	)		(44,213	)
Unrealized net (loss) gain on investment securities available for sale, net of tax		(3,130	)		13,449			18,227
Unrealized net gain (loss) on cash flow hedges, net of tax		—			1,237			(1,023	)
Minimum pension benefit (liability), net of tax		4,998			(12,771	)		2,531

Balance at end of year		(20,695	)		(22,563	)		(24,478	)

Reserve Fund:
Balance at beginning of year		139,250			139,250			137,511
Transfer from undivided profits		2,583			—			1,739

Balance at end of year		141,833			139,250			139,250

Undivided Profits:
Balance at beginning of year		58,734			54,317			122,677
Net income (loss)		41,275			10,531			(36,245	)
Transfer to reseve fund		(2,583	)		—			(1,739	)
Deferred tax benefit amortization		(4	)		(4	)		(3	)
Common stock cash dividends		—			(9,329	)		(29,849	)
Cummulative effect of adoption of FASB ASC Topic 825		—			3,219			—
Cummulative effect of adoption of FASB ASC Topic 740		—			—			(524	)

Balance at end of year		97,422			58,734			54,317

Total stockholders’ equity	$	595,897		$	551,636		$	536,536

The accompanying notes are an integral part of these financial statements.

Santander BanCorp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2009, 2008 and 2007
(Dollars in thousands)


	2009			2008			2007
Comprehensive income (Loss)
Net income (loss)	$	41,275		$	10,531		$	(36,245	)

Other comprehensive income (loss), net of tax:
Unrealized holding gains on investment securities available for sale, net of tax		1,573			14,142			18,170
Reclassification adjustment for (losses) gains included in net income (loss), net of tax		(4,703	)		(693	)		57

Unrealized (losses) gains on investment securities available for sale, net of tax		(3,130	)		13,449			18,227

Unrealized gain (loss) on cash flow hedges, net of tax		—			1,237			(1,023	)
Minimum pension benefit (liability), net of tax		4,998			(12,771	)		2,531

Total other comprehensive income, net of tax		1,868			1,915			19,735

Comprehensive income (loss)	$	43,143		$	12,446		$	(16,510	)

The accompanying notes are an integral part of these financial statements.

Santander BanCorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(Dollars in thousands)


	2009			2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	41,275		$	10,531		$	(36,245	)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		12,451			15,096			16,276
Deferred tax benefit		(535	)		(18,083	)		(23,833	)
Provision for loan losses		152,496			175,523			147,824
Goodwill and other intangibles impairment charges		—			—			43,349
Gain on sale of investment securities available for sale		(9,251	)		(5,154	)		(1,265	)
Gain on sale of loans		(5,144	)		(3,253	)		(6,658	)
Gain on sale of mortgage-servicing rights		—			—			(132	)
Loss (gain) on derivatives and other financial instruments at fair value		7,303			(3,284	)		(249	)
Gain on trading securities		(3,275	)		(2,607	)		(2,831	)
Valuation loss on loans held for sale		—			7,357			—
Net premium amortization (discount accretion) on securities		368			(2,877	)		(6,782	)
Net (discount accretion) premium amortization on loans		(2,646	)		433			(1,793	)
Accretion of debt discount		644			628			—
Share based compensation (benefit) sponsored by the ultimate parent		2,406			(1,210	)		14,656
Provision for claim receivable		—			25,120			—
Purchases and originations of loans held for sale		(195,466	)		(345,706	)		(556,838	)
Proceeds from sales of loans held for sale		199,937			437,177			305,183
Repayments of loans held for sale		364			17,109			22,511
Proceeds from sales of trading securities		1,002,635			2,215,946			2,553,127
Purchases of trading securities		(883,665	)		(2,101,645	)		(2,576,040	)
Net change in:
Decrease in accrued interest receivable		13,302			32,382			22,215
(Increase) decrease in other assets		(10,788	)		19,897			(116,664	)
Decrease in accrued interest payable		(31,406	)		(31,709	)		(13,889	)
Decrease in other liabilities		(11,683	)		(3,469	)		(48,111	)

Total adjustments		238,047			427,671			(229,944	)

Net cash provided by (used in) operating activities		279,322			438,202			(266,189	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in interest-bearing deposits		5,485			(1,955	)		46,016
Proceeds from sales of investment securities available for sale		507,256			129,451			149,413
Proceeds from maturities of investment securities available for sale		196,240			8,858,239			36,258,629
Purchases of investment securities available for sale		(346,155	)		(8,808,967	)		(36,323,477	)
Proceeds from maturities of other investment securities		104,526			40,727			16,526
Purchases of other investments		(98,325	)		(37,800	)		(30,375	)
Repayment of securities and securities called		32,006			89,302			100,631
Payments on derivative transactions		—			(1,497	)		(434	)
Net decrease in loans		422,615			547,090			15,083
Proceeds from sales of mortgage-servicing rights		—			—			132
Proceeds from sale of buildings		—			—			56,750
Purchases of premises and equipment		(1,582	)		(5,137	)		(3,694	)

Net cash provided by investing activities		822,066			809,453			285,200


(Continued)



The accompanying notes are an integral part of these financial statements.

Santander BanCorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(Dollars in thousands)


	2009			2008			2007
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits		(618,680	)		(149,298	)		(168,296	)
Net (decrease) increase in federal funds purchased and other borrowings		(77,040	)		(765,070	)		323,710
Net decrease in securities sold under agreements to repurchase		(375,000	)		(60,597	)		(194,972	)
Net increase (decrease) in commercial paper issued		16,496			(233,497	)		74,933
Net decrease in term notes		—			—			(22,158	)
Issuance of subordinated capital notes		—			60,000			54
Payments to ultimate parent for long-term incentives plans		(1,284	)		(942	)		—
Dividends paid		—			(16,790	)		(29,849	)

Net cash used in financing activities		(1,055,508	)		(1,166,194	)		(16,578	)


NET CHANGE IN CASH AND CASH EQUIVALENTS		45,880			81,461			2,433
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		283,158			201,697			199,264

CASH AND CASH EQUIVALENTS, END OF YEAR	$	329,038		$	283,158		$	201,697


							(Concluded)

Supplemental Disclosures of Cash Flow Information:


	2009		2008			2007
	(Dollars in thousands)
Cash paid during the year for:
Interest	$	160,405	$	274,186		$	375,045

Income taxes	$	8,023	$	10,756		$	23,648

Non-cash transactions:
Exercised options in ultimate parent stock recognized as capital contribution	$	—	$	6,661		$	—

Minimum pension benefit (liability)	$	4,998	$	(12,771	)	$	2,531

Loan securitization	$	98,715	$	107,691		$	47,093

Assets received in full satisfaction of loans	$	23,916	$	16,978		$	20,250

Reclassification of premises to real estate held for sale		—	$	8,075			—

Reclassification of real estate held for sale to premises	$	5,257	$	—		$	—

Settlement by counterparty in bankruptcy of securities sold under agreement to repurchase	$	—	$	200,228		$	—

Settlement by counterparty in bankruptcy of investment securities available for sale pledged under agreement to repurchase	$	—	$	225,348		$	—




The accompanying notes are an integral part of these financial statements.

Santander BanCorp and Subsidiaries

Notes to Consolidated Financial Statements
Years Ended December 31, 2009, 2008 and 2007

1. Summary of Significant Accounting Policies and Other Matters:

The accounting and reporting policies of Santander BanCorp (the “Corporation”), a 91% owned subsidiary of Banco Santander, S.A. (Santander Group), conform with accounting principles generally accepted in the United States of America (hereinafter referred to as “generally accepted accounting principles” or “GAAP”) and with general practices within the financial services industry.

Following is a summary of the Corporation’s most significant accounting policies:

Nature of Operations and Use of Estimates

Santander BanCorp is a financial holding company offering a full range of financial services (including mortgage banking) through its wholly owned banking subsidiary Banco Santander Puerto Rico (the “Bank”). The Corporation also engages in broker-dealer, asset management, consumer finance, international banking, insurance agency services and insurance products through its subsidiaries, Santander Securities Corporation, Santander Asset Management Corporation, Santander Financial Services, Inc. (“Island Finance”), Santander International Bank, Santander Insurance Agency and Island Insurance Corporation (currently inactive), respectively.

Santander BanCorp is subject to the Federal Bank Holding Company Act and to the regulations, supervision, and examination of the Federal Reserve Board.

In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of goodwill and other intangibles, income taxes, and the valuation of foreclosed real estate, deferred tax assets and financial instruments.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation, the Bank and the Bank’s wholly owned subsidiary, Santander International Bank; Santander Securities Corporation and its wholly owned subsidiary, Santander Asset Management Corporation; Santander Financial Services, Inc., Santander Insurance Agency and Island Insurance Corporation. All intercompany balances and transactions have been eliminated in consolidation. Effective January 1, 2008, Santander Mortgage Corporation (a formerly wholly owned subsidiary of the Bank) was merged into the Bank and ceased to operate as a separate legal entity.

Cash Equivalents

All highly liquid instruments with a maturity of three months or less, when acquired or generated, are considered cash equivalents.

Securities Purchased/Sold under Agreements to Resell/Repurchase

Repurchase and resell agreements are treated as collateralized financing transactions and are carried at the amounts at which the assets will be reacquired or resold at the contractual maturity. The settlement of these agreements prior to maturity may be subject to early termination penalties.

The counterparties to securities purchased under resell agreements maintain effective control over such securities and accordingly, those securities are not reflected in the Corporation’s consolidated balance sheets. The Corporation monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral where deemed appropriate.

The Corporation maintains effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated balance sheets.

Investment Securities

Investment securities are classified in four categories and accounted for as follows:

	•		Debt securities that the Corporation has the intent and ability to hold to maturity are classified as securities held to maturity and reported at cost adjusted for premium amortization and discount accretion. The Corporation may not sell or transfer held to maturity securities without calling into question its intent to hold securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred.

	•		Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value with unrealized gains and losses included in the consolidated statements of operations as part of other income. Financial instruments including, to a limited extent, derivatives, such as option contracts, are used by the Corporation in dealing and other trading activities and are carried at fair value. Interest revenue and expense arising from trading instruments are included in the consolidated statements of operations as part of net interest income.

	•		Debt and equity securities not classified as either securities held to maturity or trading securities, and which have a readily available fair value, are classified as securities available for sale and reported at fair value, with unrealized gains and losses reported, net of tax, in accumulated other comprehensive income (loss). The specific identification method is used to determine realized gains and losses on sales of securities available for sale, which are included in gain (loss) on sale of investment securities in the consolidated statements of operations.

	•		Investments in debt, equity or other securities, that do not have readily determinable fair values, are classified as other investment securities in the consolidated balance sheets. These securities are stated at cost. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Home Loan Bank (FHLB) stock, is included in this category.

The amortization of premiums is deducted and the accretion of discounts is added to net interest income based on a method which approximates the interest method, over the outstanding life of the related securities. The cost of securities sold is determined by specific identification. For securities available for sale, held to maturity and other investment securities, the Corporation reports separately in the consolidated statements of operations, net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any.

Derivative Financial Instruments

The Corporation uses derivative financial instruments mostly as hedges of interest rate risk, changes in fair value of assets and liabilities and to secure future cash flows.

All of the Corporation’s derivative instruments are recognized as assets or liabilities at fair value. If certain conditions are met, the derivative may qualify for hedge accounting treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”) or (c) a hedge of foreign currency exposure (“foreign currency hedge”).

Prior to the adoption of Financial Accounting Standard Board (FASB) Accounting Standard Codification (ASC or the Codification) Topic 825, “Fair Value Option”, in the case of a qualifying fair value hedge, changes in the value of the derivative instruments that have been highly effective were recognized in current period consolidated statements of operations along with the change in value of the designated hedged item attributable to the risk being hedged. If the hedge relationship was terminated, hedge accounting was discontinued and any balance related to the derivative was recognized in current operations, and the fair value adjustment to the hedged item continued to be reported as part of the basis of the item and was amortized to earnings as a yield adjustment. The Corporation hedges certain callable brokered certificates of deposits and subordinated capital notes by using interest rate swaps. In connection with the adoption of FASB ASC Topic 825,, the Corporation carries certain callable brokered certificates of deposits and subordinated capital notes at fair value with changes in fair value included in other income in the consolidated statements of operations. The cost of funding of the Corporation’s borrowings, as well as

derivatives, continues to be included in interest expense and income, as applicable, in the consolidated statements of operations. See Note 22 to the consolidated financial statements for more information.

In the case of a qualifying cash flow hedge, changes in the value of the derivative instruments that have been highly effective are recognized in other comprehensive income, until such time as those earnings are affected by the variability of the cash flows of the underlying hedged item. If the hedge relationship is terminated, the net derivative gain or loss related to the discontinued cash flow hedge should continue to be reported in accumulated other comprehensive income (loss) and would be reclassified into earnings when the cash flows that were hedged occur, or when the forecasted transaction affects earnings or is no longer expected to occur. In either a fair value hedge or a cash flow hedge, net earnings may be impacted to the extent the changes in the value of the derivative instruments do not perfectly offset changes in the value of the hedged items. If the derivative is not designated as a hedging instrument, the changes in fair value of the derivative are recorded in consolidated statements of operations.

SANTANDER BANCORP 10-K