UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2010

Commission File: 001-15849

SANTANDER BANCORP

(Exact name of Corporation as specified in its charter)


Commonwealth of Puerto Rico		66-0573723

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

B7 Tabonuco Street, 18th Floor, San Patricio, Guaynabo, Puerto Rico		00968-3028

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:
(787) 777-4100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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). Yes o No o

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


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

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

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the last practicable date.

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


Title of each class		Outstanding as of March 31, 2010
Common Stock, $2.50 par value		46,639,104

SANTANDER BANCORP

CONTENTS


		Page No.
Part I: Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets		1
Condensed Consolidated Statements of Operations		2
Condensed Consolidated Statements of Changes in Stockholders’ Equity		3
Condensed Consolidated Statements of Comprehensive Income (Loss)		4
Condensed Consolidated Statements of Cash Flows		5
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		46
Item 3. Quantitative and Qualitative Disclosures About Market Risk		68
Item 4. Controls and Procedures		79
Part II: Other Information
Item 1. Legal Proceedings		80
Item 1A. Risk Factors		80
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		80
Item 3. Defaults Upon Senior Securities		80
Item 4. Submission of Matters to a Vote of Security Holders		80
Item 5. Other Information		80
Item 6. Exhibits		81
Signatures		82
EX-12 Computation of Ratio of Earnings to Fixed Charges
EX-31.1 Section 302, Certification of the CEO
EX-31.2 Section 302, Certifiation of the CAO
EX-32.1 Section 906, Certification of the CEO and CAO

Forward-Looking Statements. When used in this Form 10-Q or future filings by Santander BanCorp (the “Corporation”) 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 or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “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 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.

PART I – ITEM 1

FINANCIAL STATEMENTS (UNAUDITED)

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF MARCH 31, 2010 AND DECEMBER 31, 2009
(Dollars in thousands, except share data)


	March 31,			December 31,
	2010			2009
ASSETS
Cash and Cash Equivalents:
Cash and due from banks	$	372,869		$	296,425
Interest-bearing deposits		10,517			10,467
Federal funds sold		18,978			22,146

Total cash and cash equivalents		402,364			329,038

Interest-Bearing Deposits		1,750			1,909
Trading Securities, at fair value:		36,912			47,739
Investment Securities Available for Sale, at fair value:		417,306			417,608
Other Investment Securities, at amortized cost		51,381			55,431
Loans Held for Sale, net		25,351			26,726
Loans, net		5,160,038			5,246,444
Accrued Interest Receivable		37,544			32,651
Premises and Equipment, net		19,001			20,179
Real Estate Held for Sale		2,818			2,818
Goodwill		121,482			121,482
Intangible Assets		28,579			28,948
Other Assets		553,151			435,463

	$	6,857,677		$	6,766,436

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non interest-bearing	$	855,669		$	698,769
Interest-bearing, including $12.5 million at fair value in December 31, 2009		3,625,590			3,696,791

Total deposits		4,481,259			4,395,560

Federal Funds Purchased and Other Borrowings		55,000			50,000
Commercial Paper Issued		129,962			67,482
Federal Home Loan Bank Advances		970,000			1,060,000
Term Notes		15,913			20,581
Subordinated Capital Notes, including $124.2 million and $120.6 million at fair value in 2010 and 2009, respectively		312,325			308,691
Accrued Interest Payable		15,779			14,015
Other Liabilities		258,420			254,210

Total liabilities		6,238,658			6,170,539

Contingencies and Commitments (Notes 12, 13 and 16)
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		318,634			318,263
Treasury stock at cost, 4,011,260 shares		(67,552	)		(67,552	)
Accumulated other comprehensive loss, net of taxes		(19,374	)		(20,695	)
Retained earnings:
Reserve fund		141,833			141,833
Undivided profits		118,852			97,422

Total stockholders’ equity		619,019			595,897

	$	6,857,677		$	6,766,436

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Dollars in thousands, except per share data)


	For the three months ended
	March 31,		March 31,
	2010		2009
Interest Income:
Loans	$	109,687	$	119,527
Investment securities		3,778		8,944
Interest-bearing deposits		109		189
Federal funds sold		8		15

Total interest income		113,582		128,675

Interest Expense:
Deposits		8,653		27,788
Securities sold under agreements to repurchase and other borrowings		6,708		12,522
Subordinated capital notes		3,460		3,972

Total interest expense		18,821		44,282

Net interest income		94,761		84,393
Provision for Loan Losses		30,093		41,100

Net interest income after provision for loan losses		64,668		43,293

Other Income (Loss):
Bank service charges, fees and other		9,439		10,358
Broker-dealer, asset management and insurance fees		13,591		12,965
Gain on sale of securities available for sale		—		9,251
Gain on sale of loans		39		2,246
Other income (loss)		6,302		(9,452	)

Total other income		29,371		25,368

Other Operating Expenses:
Salaries and employee benefits		25,847		26,855
Occupancy costs		6,365		6,257
Equipment expenses		877		1,083
EDP servicing, amortization and technical assistance		9,847		10,254
Communication expenses		2,169		2,447
Business promotion		1,205		767
Other taxes		3,287		3,357
Other operating expenses		13,210		18,357

Total other operating expenses		62,807		69,377

Income (loss) before provision (benefit) income tax		31,232		(716	)
Provision (Benefit) for Income Tax		9,802		(685	)

Net Income (Loss) Available to Common Shareholders	$	21,430	$	(31	)

Basic and Diluted Earnings per Common Share	$	0.46	$	(0.00	)

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND YEAR ENDED DECEMBER 31, 2009
(Dollars in thousands)


	For the three months ended			Year ended
	March 31, 2010			December 31, 2009
Common Stock:
Balance at beginning of period	$	126,626		$	126,626

Balance at end of period		126,626			126,626

Capital Paid in Excess of Par Value:
Balance at beginning of period		318,263			317,141
Share based compensation sponsored by the ultimate parent		371			2,406
Payments to ultimate parent for long-term incentive plan		—			(1,284	)

Balance at end of period		318,634			318,263

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

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

Accumulated Other Comprehensive Loss, net of tax:
Balance at beginning of period		(20,695	)		(22,563	)
Unrealized net gain (loss) on investment securities available for sale, net of tax		579			(3,130	)
Minimum pension benefit (liability), net of tax		742			4,998

Balance at end of the period		(19,374	)		(20,695	)

Reserve Fund:
Balance at beginning of period		141,833			139,250
Transfer from undivided profits		—			2,583

Balance at end of the period		141,833			141,833

Undivided Profits:
Balance at beginning of period		97,422			58,734
Net income		21,430			41,275
Transfer to reserve fund		—			(2,583	)
Deferred tax benefit amortization		—			(4	)

Balance at end of the period		118,852			97,422

Total stockholders’ equity	$	619,019		$	595,897

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Dollars in thousands)


	For the three months ended
	March. 31,		March. 31,
	2010		2009
Comprehensive income (loss)
Net income (loss)	$	21,430	$	(31	)

Other comprehensive income (loss), net of tax:
Unrealized holding gain (losses) on investment securities available for sale, net of tax		579		(60	)
Reclassification adjustment for gains on investment securities available for sale included in net operations, net of tax		—		(4,612	)

Unrealized net gain (loss) on investment securities available for sale, net of tax		579		(4,672	)

Minimum pension benefit (liability), net of tax		742		(1,950	)

Total other comprehensive income (loss), net of tax		1,321		(6,622	)

Comprehensive income (loss)	$	22,751	$	(6,653	)

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Dollars in thousands)


	For the three months ended
	March 31,			March 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	21,430		$	(31	)

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,737			3,216
Deferred tax provision (benefit)		686			(4,603	)
Provision for loan losses		30,093			41,100
Gain on sale of securities available for sale		—			(9,251	)
Gain on sale of loans		(39	)		(2,246	)
Loss on financial instruments measured at fair value		2,862			3,928
Gain on sale of trading securities		(939	)		(403	)
Net premium amortization on securities		31			309
Net premium amortization on loans		83			144
Accretion of debt discount		155			158
Share based compensation sponsored by the ultimate parent		371			483
Purchases and originations of loans held for sale		(31,290	)		(56,598	)
Proceeds from sales of loans		2,267			111,834
Repayments of loans held for sale		1,331			734
Proceeds from sales of trading securities		473,956			226,772
Purchases of trading securities		(442,735	)		(174,684	)
(Increase) decrease in accrued interest receivable		(4,893	)		4,052
(Increase) decrease in other assets		(108,516	)		27,636
Increase in accrued interest payable		1,764			6,326
Increase (decrease) in other liabilities		794			(2,033	)

Total adjustments		(71,282	)		176,874

Net cash (used in) provided by operating activities		(49,852	)		176,843


CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in interest-bearing deposits		159			(1,163	)
Proceeds from sales of investment securities available for sale		—			450,258
Proceeds from maturities of investment securities available for sale		100,000			137,000
Purchases of investment securities available for sale		(99,851	)		(129,339	)
Proceeds from maturities of other investment securities		18,225			11,700
Purchases of other investments		(14,175	)		(2,025	)
Repayment of securities and securities called		605			23,850
Net decrease in loans		60,026			181,350
Purchases of premises and equipment		(175	)		(360	)

Net cash provided by investing activities		64,814			671,271

(Continued)

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Dollars in thousands)


	For the three months ended
	March 31,			March 31,
	2010			2009
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		85,699			84,779
Net decrease in federal funds purchased and other borrowings		(85,000	)		(216,150	)
Net decrease in securities sold under agreements to repurchase		—			(375,000	)
Net increase (decrease) in commercial paper issued		62,480			(16,901	)
Net decrease in term notes		(4,815	)		—

Net cash provided by (used in) financing activities		58,364			(523,272	)


NET CHANGE IN CASH AND CASH EQUIVALENTS		73,326			324,842
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		329,038			283,158

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	402,364		$	608,000

Concluded

Supplemental Disclosures of Cash Flow Information:


	For the three months ended
	March 31,		March 31,
	2010		2009
	(Dollars in thousands)
Cash paid during the period for:
Interest	$	16,900	$	37,457

Income taxes	$	25	$	4,268

Noncash transactions:
Minimum pension benefit	$	742	$	1,950

Loan securitizations	$	19,454	$	34,057

Assets received in full satisfaction of loans	$	5,855	$	6,699

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2010 AND 2009

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. The unaudited quarterly condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The results of the operations and cash flows for the three month periods ended March 31, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year.

These statements should be read in conjunction with the consolidated financial statements included in the Corporation’s Form 10-K for the year ended December 31, 2009. The accounting policies used in preparing these condensed consolidated financial statements are substantially the same as those described in Note 1 to the 2009 consolidated financial statements in the Corporation’s Form 10-K.

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

Nature of Operations and Use of Estimates

The Corporation 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 and subsidiary (the “Bank”). The Corporation also engages in broker-dealer, asset management, consumer finance, international banking, insurance agency services 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.

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

In preparing the condensed 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 condensed 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 condensed 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.

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 fi nancial instruments as part of its overall interest rate risk management strategy to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. All derivatives are recognized on the statement of condition at fair value.

The Corporation’s policy is not to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement nor to offset the fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments.

When the Corporation enters into a derivative contract, the derivative instrument is designated as either a fair value hedge, cash fl ow hedge or as a free-standing derivative instrument. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized fi rm commitment attributable to the hedged risk are recorded in current period earnings. For a cash fl ow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded net of taxes in accumulated other comprehensive income and subsequently reclassified to net income (loss) in the same period(s) that the hedged transaction impacts earnings. The ineffective portion of cash flow hedges is inmediately recognized in current earnings. For free-standing derivative instruments, changes in the fair values are reported in current period earnings.

Prior to entering a hedge transaction, the Corporation formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash fl ow hedges to specific assets and

liabilities on the statement of condition or to specific forecasted transactions or firm commitments along with a formal assessment, at both inception of the hedge and on an ongoing basis, as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash fl ows of the hedged item. Hedge accounting is discontinued when the derivative instrument is not highly effective as a hedge, a derivative expires, is sold, terminated, when it is unlikely that a forecasted transaction will occur or when it is determined that is no longer appropriate. When hedge accounting is discontinued the derivative continues to be carried at fair value with changes in fair value included in earnings.

For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash fl ow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. The fair value of derivative instruments considers the risk of nonperformance by the counterparty or the Corporation, as applicable. The Corporation obtains or pledges collateral in connection with its derivative activities when applicable under the agreement.

The Corporation hedges certain callable brokered certificates of deposits and subordinated capital notes by using interest rate swaps. In connection with the adoption of Financial Accounting Standard Codification (“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 Notes 12 and 18 to the condensed 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.

Certain contracts contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.

Loans Held for Sale

Loans held for sale are recorded at the lower of cost or market computed on the aggregate portfolio basis. The amount, by which cost exceeds market value, if any, is accounted for as a valuation allowance with changes included in the determination of results of operations for the period in which the change occurs. The amount of loan origination cost and fees are deferred at origination of the loans and recognized as part of the gain and loss on sale of the loans in the consolidated statement of operations as part of other income.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, unearned finance charges and any deferred fees or costs on originated loans.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and amortized using methods that approximate the interest method over the term of the loans as an adjustment to interest yield. Discounts and premiums on purchased loans are amortized to results of operations over the expected lives of the loans using a method that approximates the interest method.

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 collected. The non accrual status is discontinued when loans are made current by the borrower.

The Corporation leases vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in FASB ASC Topic 840, “Leases,” as amended. Aggregate rentals due over the term of the leases less unearned income are included in lease receivable, which is part of “Loans, net” in the consolidated balance sheets. Unearned income is amortized to results of operations over the lease term so as to yield a constant rate of return on the principal amounts outstanding. Lease origination fees and costs are deferred and amortized over the average life of the portfolio as an adjustment to yield.

During 2009, the Corporation commenced to restructure residential real estate loans whose terms have been modified. These loans were 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 TDR’s 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 mortgage loans under this program amounted $114.6 million as of March 31, 2010 and $95.1 million as of December 31, 2009. Refer to the Allowance for Loan Losses section for further information.

Off-Balance Sheet Instruments

In the ordinary course of business, the Corporation enters into off-balance sheet instruments consisting of commitments to extend credit, stand by letters of credit and financial guarantees. Such financial instruments are recorded in the consolidated financial statements when they are funded or when related fees are incurred or received. The Corporation periodically evaluates the credit risks inherent in these commitments, and establishes loss allowances for such risks if and when these are deemed necessary.

The Corporation recognized as liabilities the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit issued or modified after December 31, 2002, net of the related amortization at inception. The fair value approximates the unamortized fees received from the customers for issuing the standby letters of credit. The fees are deferred and recognized on a straight-line basis over the commitment period. Standby letters of credit outstanding at March 31, 2010 had terms ranging from one month to three years.

Fees received for providing loan commitments and letters of credit that result in loans are typically deferred and amortized to interest income over the life of the related loan, beginning with the initial borrowing. Fees on commitments and letters of credit are amortized to other income as banking fees and commissions over the commitment period when funding is not expected.

Allowance for Loan Losses

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. Estimates of losses inherent in the loan portfolio involve the exercise of judgment and the use of assumptions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management’s estimate of credit losses in the loan portfolio and the related allowance may change in the near term.

The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses. This methodology consists of several key elements.

Larger commercial, construction loans and certain mortgage loans that exhibit potential or observed credit weaknesses are subject to individual review. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Corporation.

Included in the review of individual loans are those that are impaired as defined by GAAP. Any allowances for loans deemed impaired are measured based on the present value of expected future cash flows discounted at the loans’ effective interest rate or on the fair value of the underlying collateral if the loan is collateral dependent. Commercial business, commercial real estate, construction and mortgage loans exceeding a predetermined monetary threshold are individually evaluated for impairment. Other loans are evaluated in homogeneous groups and collectively evaluated for impairment. Loans that are

recorded at fair value or at the lower of cost or fair value are not evaluated for impairment. 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. Impaired loans for which the discounted cash flows, collateral value or fair value exceeds its carrying value do not require an allowance. The Corporation evaluates the collectibity of both principal and interest when assessing the need for loss accrual.

Historical loss rates for commercial and consumer loans may also be adjusted for significant factors that, in management’s judgment, reflect the impact of any current condition on loss recognition. Factors which management considers in the analysis include the effect of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs, non-accrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and the Corporation’s internal credit examiners.

Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions, actual collection, charge-off experience and other factor that, based on management judgment, reflect the impact of any current condition.

The Corporation considers in its allowance for loan and lease losses, debt’s modification of terms that may be identified as 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. The Corporation had $114.6 million and $95.1 million of restructured residential mortgage loans with allowance for loan losses of $6.8 million and $6.1 million as of March 31, 2010 and December 31, 2009, respectively.

An unallocated allowance is maintained to recognize the imprecision in estimating and measuring losses when estimating the allowance for individual loans or pools of loans.

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

Transfers of financial assets are accounted for as sales, when control over the transferred assets is deemed to be surrendered: (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The Corporation recognizes the financial assets and servicing assets it controls and the liabilities it has incurred. At the same time, it ceases to recognize financial assets when control has been surrendered and liabilities when they are extinguished.

Goodwill and Intangible Assets

The Corporation accounts for goodwill in accordance with FASB ASC Topic 350, “Intangible-Goodwill and Others.” The reporting units are tested for impairment 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 operating expenses in the consolidated statements of operations.

In accordance with FASB ASC Topic 360 “Property, Plant and Equipment”, the Corporation reviews finite-lived intangible assets for impairment whenever an event occurs or circumstances change which indicates that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on the estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. If the fair value of the asset is determined to be less that the carrying value, an impairment loss is incurred in the amount equal to the difference. Impairment losses, if any, are reflected in operating expenses in the consolidated statements of 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. Effective January 1, 2009, the Corporation adopted FASB ASC Topic 820-65, “Transition related to FASB Staff Position FAS 157-2, Effective date of FASB Statement No. 157” for fair value measurement of goodwill, intangible assets and non-recurring measurements. The adoption of this accounting standard for nonfinancial assets and nonfinancial liabilities did not have a material impact on the Corporation’s consolidated financial statements and disclosures.

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.

Mortgage-servicing Rights

Mortgage-servicing rights (“MSRs”) represent the cost of acquiring the contractual rights to service loans for others. On a quarterly basis the Corporation evaluates its MSRs for impairment and charges any such impairment to current period earnings. In order to evaluate its MSRs, the Corporation stratifies the related mortgage loans on the basis of their risk characteristics which have been determined to be: type of loan (government-guaranteed, conventional, conforming and non-conforming), interest rates and maturities. Impairment of MSRs is determined by estimating the fair value of each stratum and comparing it to its carrying value. No impairment loss was recognized for the three-month periods ended March 31, 2010 and 2009.

MSRs are also subject to periodic amortization. The amortization of MSRs is based on the amount and timing of estimated cash flows to be recovered with respect to the MSRs over their expected lives. Amortization may be accelerated or decelerated to the extent that changes in interest rates or prepayment rates warrant.

Mortgage Banking

Mortgage loan servicing includes collecting monthly mortgagor payments, forwarding payments and related accounting reports to investors, collecting escrow deposits for the payment of mortgagor property taxes and insurance, and paying taxes and insurance from escrow funds when due. No asset or liability is recorded by the Corporation for mortgages serviced, except for mortgage-servicing rights arising from the sale of mortgages, advances to investors and escrow advances.

The Corporation recognizes as a separate asset the right to service mortgage loans for others whenever those servicing rights are acquired. The Corporation acquires MSRs by purchasing or originating loans and selling or securitizing those loans (with the servicing rights retained) and allocates the total cost of the mortgage loans sold to the MSRs (included in intangible assets in the accompanying condensed consolidated balance sheets) and the loans based on their relative fair values. Further, mortgage-servicing rights are assessed for impairment based on the fair value of those rights. MSRs are amortized over the estimated life of the related servicing income. Mortgage loan-servicing fees, which are based on a percentage of the principal balances of the mortgages serviced, are credited to income as mortgage payments are collected.

Mortgage loans serviced for others are not included in the accompanying condensed consolidated balance sheets. At March 31, 2010 and December 31, 2009, the unpaid principal balances of mortgage loans serviced for others amounted to approximately $1,356,000,000 and $1,357,000,000, respectively. In connection with these mortgage-servicing activities, the Corporation administered escrow and other custodial funds which amounted to approximately $3,410,000 and $3,874,000 at March 31, 2010 and December 31, 2009, respectively.

Trust Services

In connection with its trust activities, the Corporation administers and is custodian of assets amounting to approximately $125,000,000 and $131,000,000 at March 31, 2010 and December 31, 2009, respectively. Due to the nature of trust activities, these assets are not included in the Corporation’s consolidated balance sheets. The Corporation’s Trust Division is focusing its efforts on transfer and paying agent and Individual Retirement Account (IRA) services.

Broker-dealer and Asset Management Commissions

Commissions of the Corporation’s broker-dealer operations are composed of brokerage commission income and expenses recorded on a trade date basis and proprietary securities transactions recorded on a trade date basis. Investment banking revenues include gains, losses and fees net of syndicate expenses, arising from securities offerings in which the Corporation acts as an underwriter or agent. Investment banking management fees are recorded on offering date, sales concessions on trade date, and underwriting fees at the time the underwriting is completed and the income is reasonably determinable. Revenues from portfolio and other management and advisory fees include fees and advisory charges resulting from the asset management of certain funds and are recognized over the period when services are rendered.

Insurance Commissions

The Corporation’s insurance agency operation earns commissions on the sale of insurance policies issued by unaffiliated insurance companies. Commission revenue is reported net of the provision for commission returns on insurance policy cancellations and commission expense, which is based on management’s estimate of future insurance policy cancellations as a result of historical turnover rates by types of credit facilities subject to insurance.

Income Taxes

The Corporation uses the asset and liability balance sheet method for the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.

The Corporation accounts for uncertain tax positions in accordance with FASB ASC Topic 740, “Income Taxes”. 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.

Variable Interest Entities

Variable interest entities (VIE’s) are entities that either have a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest (i.e., ability to make significant decisions, through voting rights, right to receive the expected residual returns of the entity, and obligation to absorb the expected losses of the entity). The FASB amended on June 2009 the guidance applicable to VIE’s and changed how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

Currently, the Corporation owned a Trust preferred security subsidiary. Even though this Trust is still considered a VIE under the new accounting guidance, the Corporation does not consolidated this subsidiary since its sole asset is a receivable from the Corporation. This transaction is described in Note 10.

The Corporation has variable interests in certain investments that have the attributes of investment companies. However, in January 2010, the FASB decided to make official the deferral of ASC Subtopic 860-10 for certain investment entities. The deferral allows asset managers that have no obligation to fund potentially significant losses of an investment entity to continue to apply the previous accounting guidance to investment entities that have the attributes of entities subject to ASC Topic 946 (the “Investment Company Guide”). The FASB also decided to defer the application of this guidance for money market funds subject to Rule 2a-7 of the Investment Company Act of 1940. Asset managers would continue to apply the applicable existing guidance to those entities that qualify for the deferral.

On January 2010, the joint agencies issued a final rule regarding risk-based capital and the impact of adoption of the new consolidation guidance issued by the FASB. The final rule allows for a phase-in period for a maximum of one year for the effect on risk-weighted assets and the regulatory limit on the inclusion of the allowance for loan losses in Tier 2 capital related to the assets that are consolidated. There is no impact in the Corporation Tier 1 and 2 capital ratios.

Earnings Per Common Share

Basic and diluted earnings per common share are computed by dividing net income available to common stockholders, by the weighted average number of common shares outstanding during the period. The Corporation’s average number of common shares outstanding, used in the computation of earnings per common share was 46,639,104 for each of the quarters ended March 31, 2010 and 2009. Basic and diluted earnings per common share are the same since no stock options or other potentially dilutive common shares were outstanding during the periods ended March 31, 2010 and 2009.

Recent Accounting Pronouncements that Affect the Corporation

The adoption of these accounting pronouncements had the following impact on the Corporation’s consolidated statements of financial condition and operations:

•

Update No.2010-02, “Accounting and Reporting for Decreases in Ownership of a Subsidiary”, an Accounting Standard Update. In January 2010, the FASB issued this Update to address the implementation issues related to the changes in ownership provisions in the consolidation process. This Update establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. This update also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The guidance in this Update also improves the disclosures for fair value

			measurements relating to retained investments in a deconsolidated subsidiary or a preexisting interest held by an acquirer in a business combination. This Update is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this Update should be applied retrospectively to the first period that an entity adopted Statement 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”. The adoption of this update did not have a material impact on the Corporation’s consolidated financial statements.

	•		Update No. 2009-16, “Accounting for Transfer of Financial Assets”. In June 2009, the FASB issued additional guidance under FASB ASC Topic 860, “Accounting for Transfer and Servicing of Financial Assets and Extinguishment of Liabilities”, which improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The Board undertook this project to address (i) practices that have developed since the issuance of FASB ASC Topic 860, that are not consistent with the original intent and key requirements of that statement and (ii) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This additional guidance requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This additional guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This additional guidance must be applied to transfers occurring on or after the effective date. The adoption of this update did not have a material impact on the Corporation’s consolidated financial statements.

	•		Update No.2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities”. In June 2009, the FASB issued FASB ASC Topic 810, which requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics (i)The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (ii)The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. This FASB Topic requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, which was based on determining which enterprise absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both. This FASB ASC Topic shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this update did not have a material impact on the Corporation’s consolidated financial statements.

	•		Update No.2010-06, “Improving Disclosures about Fair Value Measurements”. In January 2010, the FASB issued an updated of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” to address new disclosures regards transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. Also, this update require a reconciliation for fair value measurements using significant unobservable inputs (Level 3), in which a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This Update provides amendments to Subtopic 820-10 which required that a reporting entity provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. Also required that a reporting entity provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. This Update also includes conforming amendments to the guidance on employers disclosures about postretirement benefit plan assets (Subtopic 715- 20, “Defined Benefits Plan”). The conforming amendments to Subtopic 715-20, change the terminology from major categories of assets to classes of assets and provide a cross reference to the

			guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this update did not have a material impact on the Corporation’s consolidated financial statements.

	•		Update No.2010-09,“Amendments to Certain Recognition and Disclosure Requirements”. In January 2010, the FASB issued an updated to amend the Sub-topic 855-10, Subsequent Events. This Update provides amendments to Subtopic 855-10 as follows: (1) an entity that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued. If an entity meets neither of those criteria, then it should evaluate subsequent events through the date the financial statements are available to be issued; (2) the glossary of Topic 855 is amended to include the definition of SEC filer. An SEC filer is an entity that is required to file or furnish its financial statements with either the SEC or, with respect to an entity subject to Section 120) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section. It does not include an entity that is not otherwise an SEC filer whose financial statements are included in a submission by another SEC filer; (3) an entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC’s requirements; (4) the glossary of Topic 855 is amended to remove the definition of public entity. The definition of a public entity in Topic 855 was used to determine the date through which subsequent events should be evaluated. Based on the amendments, that definition is no longer necessary for purposes of Topic 855; (5) the scope of the reissuance disclosure requirements is refined to include revised financial statements only. The term revised financial statements is added to the glossary of Topic 855. Revised financial statements include financial statements revised either as a result of correction of an error or retrospective application of U.S. generally accepted accounting principles. The amendments remove the requirement for an SEC filer to disclose a date in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. Additionally, the Board has clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. Those amendments remove potential conflicts with the SEC’s literature. All of the amendments in this Update are effective upon issuance of the final Update, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The adoption of this update did not have a material impact on the Corporation’s consolidated financial statements.

	•		Update No.2010-01, “Accounting for Distribution to Shareholders with Components of Stock and Cash”, an EITF Developed Accounting Standard Update. In January 2010, the FASB issued a ASC Topic 505 to address diversity in practice related to the accounting for a distribution to shareholders that offers them the ability to elect to receive their entire distribution in cash or shares of equivalent value with a potential limitation on the total amount of cash that shareholders can elect to receive in the aggregate. Historically, some entities have accounted for the stock portion of the distribution as a new share issuance that is reflected in earning per share (EPS) prospectively. Other entities have accounted for the stock portion of the distribution as a stock dividend by retroactively restating shares outstanding and EPS for all periods presented. This Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or shares with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance thus eliminating the diversity in practice. This Update affect entities that declare dividends to shareholders that may be paid in cash or shares at the election of the shareholders with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate. Such a scenario is common for real estate investment trusts, but this Update apply to other kinds of entities as well. This Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). Those distributions should be accounted for and included in EPS calculations in accordance with paragraphs 480-10-25- 14 and 260-10-45-45 through 45-47 of the FASB ASC. The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of this update did not have a material impact on the Corporation’s consolidated financial statements.

	•		Update No.2010-10 “Consolidated Financial Statements”. In January 2010, the FASB issued an updated to amend the ASC Topic 810, “Consolidation”. The amendments to the consolidation requirements of Topic 810 resulting from the issuance of Statement 167 are deferred for a reporting entity’s interest in an entity (1) that has all the attributes of an

investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to kind losses of an entity that could potentially be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered qualifying special- purpose entities. In addition, the deferral applies to a reporting entity’s interest in an entity that is required to comply or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167 amendments) or other applicable consolidation guidance, such as the guidance for the consolidation of partnerships in Subtopic 810-20. The amendments in this Update also clarify that for entities that do not qualify for the deferral, related parties should be considered when evaluating each of the criteria in paragraph 810-10-55-37, as amended by Statement 167 for determining whether a decision maker or service provider fee represents a variable interest. In addition, the requirements for evaluating whether a decision makers or service providers fee is a variable interest are modified to clarify the Board’s intention that a quantitative calculation should not be the sole basis for this evaluation. The amendments in this Update do not defer the disclosure requirements in the Statement 167 amendments to Topic 810. Accordingly, both public and nonpublic companies are required to provide the disclosures included in Topic 810, as amended by Statement 167, for all variable interest entities in which they hold a variable interest. This includes variable interests in entities that qualify for the deferral but are considered VIEs under the provisions in Topic 810 (before the Statement 167 amendments). The amendments in this Update are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009, and for interim periods within that first annual reporting period. The effective date coincides with the effective date for the Statement 167 amendments to Topic 810. Early application is not permitted. The adoption of this update did not have a material impact on the Corporation’s consolidated financial statements.

The Corporation is evaluating the impact that the following recently issued accounting pronouncements may have on its consolidated financial statements and disclosures.

•

Accounting Standard Update (Update) No.2010-11 “Derivatives and Hedging-Embedded Derivatives”. In March 2010, the FASB issued an updated to amend the ASC Sub Topic 815-15, “Derivatives and Hedging—Embedded Derivatives”, This Update provides amendments to: (i) clarify the scope exception under paragraphs 815-15-15-8 through 15-9 for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. The amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed under Section 815-15-25 for potential bifurcation and separate accounting; (ii) The embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to the application of Section 815-15-2; (iii) Other embedded credit derivative features, including those in some collateralized debt obligations and synthetic collateralized debt obligations, are considered embedded derivatives subject to the application of Section 815-15-25 (which involves an analysis of whether the economic characteristics and risks of the embedded credit derivative features are clearly and closely related to the economic characteristics and risks of the host contract), provided that the overall contract is not a derivative in its entirety under Section 815-10-1. The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update.

•

Accounting Standard Update (Update) No.2010-18 “Receivables-Effect of a Loan Modification when the loan is part of a Pool”. In April 2010, the FASB issued an updated to amend the ASC Sub Topic 310-30. This update provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition. Paragraph 310-30-15-6 allows acquired assets with common risk characteristics to be accounted for in the aggregate as a pool. Upon establishment of the pool, the pool becomes the unit of accounting. When loans are accounted for as a pool, the purchase discount is not allocated to individual loans; thus, all of the loans in the pool accrete at a single pool rate (based on cash flow projections for the pool). Under Subtopic 310-30, the impairment analysis also is performed on the pool as a whole as opposed to each individual loan. Paragraphs 310-40-15-4 through 15-12 establish the criteria for evaluating whether a loan modification should be classified as a troubled debt restructuring. Specifically, paragraph 310-40-15-5 states that ‘a restructuring of a debt constitutes a troubled debt restructuring for purposes of this Subtopic if the creditor for economic or legal reasons related to the debtors financial difficulties grants a concession to the debtor that it would not otherwise consider. Diversity in practice has developed on whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool upon a modification that would constitute a troubled debt restructuring. In the view of certain entities, accounting for troubled debt restructuring does not apply to individual loans within a pool, and modified loans should remain within the pool. In the view of other entities, each modified loan should be evaluated against the troubled debt restructuring criteria, and if the loan modification is a

troubled debt restructuring, the modified loan should be removed from the pool and accounted for as a separate asset. The objective of the amendments in this Update is to address the diversity in practice regarding such modifications. The amendments in this Update affect any entity that acquires loans subject to Subtopic 310-30, that accounts for some or all of those loans within pools, and that subsequently modifies one or more of those loans after acquisition. The amendments in this Update improve comparability by eliminating diversity in practice about the treatment of modifications of loans accounted for within pools under Subtopic 310-30. Furthermore, the amendments clarify guidance about maintaining the integrity of a pool as the unit of accounting for acquired loans with credit deterioration. The amendments in this Update are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early application is permitted.

2. Investment Securities Available for Sale:

The amortized cost, gross unrealized gains and losses, fair value and weighted average yield of investment securities available for sale by contractual maturity are as follows:


	March 31, 2010
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
			(Dollars in thousands)
Treasury and agencies of the United States Government:
Within one year	$	5,646	$	100	$	—	$	5,746		3.98	%
After one year to five years		174,799		829		229		175,399		1.35	%

		180,445		929		229		181,145		1.44	%


Commonwealth of Puerto Rico and its subdivisions:
Within one year		1,190		2		—		1,192		3.72	%
After one year to five years		71,538		417		4		71,951		5.10	%
After five years to ten years		5,355		94		—		5,449		5.64	%
Over ten years		4,370		43		—		4,413		5.55	%

		82,453		556		4		83,005		5.14	%


Corporate bonds:
After one year to five years		141,361		1,766		—		143,127		1.85	%


Mortgage-backed securities:
Over ten years		9,611		418		—		10,029		5.62	%

	$	413,870	$	3,669	$	233	$	417,306		2.42	%


	December 31, 2009
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
			(Dollars in thousands)
Treasury and agencies of the United States Government:
Within one year	$	105,521	$	267	$	—	$	105,788		0.85	%
After one year to five years		74,939		414		20		75,333		1.58	%

		180,460		681		20		181,121		1.15	%


Corporate Bonds:
After one year to five years		141,513		1,004		—		142,517		1.85	%


Commonwealth of Puerto Rico and its subdivisions:
Within one year		1,190		3		—		1,193		3.72	%
After one year to five years		71,527		831		3		72,355		5.10	%
After five years to ten years		6,420		127		1		6,546		5.58	%
Over ten years		3,305		36		—		3,341		5.65	%

		82,442		997		4		83,435		5.14	%

Mortgage-backed securities:
Over ten years		10,239		296		—		10,535		5.62	%

	$	414,654	$	2,978	$	24	$	417,608		2.29	%

The duration of long-term (over one year) investment securities in the available for sale portfolio is approximately 2.1 years at March 31, 2010, comprised of approximately 2.1 years for treasuries and agencies of the United States Government, 1.98 years for instruments of the Commonwealth of Puerto Rico and its subdivisions, 2.1 years for corporate bonds and 3.1 years for mortgage backed securities.

The number of positions, fair value and unrealized losses at March 31, 2010 and December 31, 2009, of investment securities available for sale that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, are as follows:


	March 31, 2010
	Less than 12 months						12 months or more						Total
	Number						Number						Number
	of		Fair		Unrealized		of		Fair		Unrealized		of		Fair		Unrealized
	Positions		Value		Losses		Positions		Value		Losses		Positions		Value		Losses
							(Dollars in thousands)
Treasury and agencies of the United States Government		2	$	99,625	$	229		—	$	—	$	—		2	$	99,625	$	229
Commonwealth of Puerto Rico and its subdivisions		—		—		—		2		6,996		4		2		6,996		4

		2	$	99,625	$	229		2	$	6,996	$	4		4	$	106,621	$	233


	December 31, 2009
	Less than 12 months						12 months or more						Total
	Number						Number						Number
	of		Fair		Unrealized		of		Fair		Unrealized		of		Fair		Unrealized
	Positions		Value		Losses		Positions		Value		Losses		Positions		Value		Losses
							(Dollars in thousands)
Treasury and agencies of the United States Government		3	$	20,028	$	20		—	$	—	$	—		3	$	20,028	$	20
Commonwealth of Puerto Rico and its subdivisions		1		355		1		2		6,997		3		3		7,352		4

		4	$	20,383	$	21		2	$	6,997	$	3		6	$	27,380	$	24

The Corporation evaluates its investment securities for other-than-temporary impairment on a quarterly basis or earlier if other factors indicate that potential impairment exists. An impairment charge in the condensed consolidated statements of operations is recognized when the decline in the fair value of the securities below their cost basis is judged to be other-than-temporary. The Corporation considers various factors in determining whether it should recognize an impairment charge, including, but not limited to the length of time and extent to which the fair value has been less than its cost basis, expectation of recoverability of its original investment in the securities and the Corporation’s intent to sell and the situation that it most likely-than-not that the Corporation will be required to sell the security prior to recovery of the carrying amount of the investment.

As of March 31, 2010 and December 31, 2009, management concluded that there was no other-than-temporary impairment in its investment securities portfolio.

The unrealized losses in the Corporation’s investments in debt securities were caused by changes in market interest rates and not credit quality. All debt securities are investment grade, as rated by major rating agencies. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. The Corporation evaluates debt securities for other than temporary impairment based on any of the following triggering events (1) the Corporation has the intent to sell the security, (2) it is more likely than not that the Corporation will be required to sell the security before recovery, or (3) the Corporation does not expect to recover the entire amortized cost basis of the security. Upon evaluation of these triggering events, the Corporation believes that none of such conditions are present at March 31, 2010 and December 31, 2009 because the Corporation has sufficient capital and liquidity to operate its business and it has no requirements or needs to sell such securities, and the Corporation is not subject to any contractual arrangements that would require the Corporation to sell such securities.

Contractual maturities on certain securities, including mortgage-backed securities, could differ from actual maturities since certain issuers may have the right to call or prepay these securities.

The weighted average yield on investment securities available for sale is based on amortized cost, therefore it does not give effect to changes in fair value.

3. Assets Pledged:

At March 31, 2010 and December 31, 2009, investment securities and loans were pledged to secure deposits of public funds and Federal Home Loan Bank advances. The classification and carrying amount of pledged assets, which the secured parties are not permitted to sell or repledge as of March 31, and December 31 were as follows:


	March 31, 2010		December 31, 2009
	(Dollars in thousands)
Investment securities available for sale	$	145,995	$	156,982
Other investment securities		43,650		47,700
Loans		2,314,803		2,309,556

	$	2,504,448	$	2,514,238

4. Loans:

The Corporation’s loan portfolio consists of the following:


	March 31, 2010			December 31, 2009
	(Dollars in thousands)
Commercial and industrial	$	1,914,143		$	1,947,809
Consumer		424,329			443,567
Consumer finance		747,907			783,510
Leasing		31,339			36,624
Construction		64,257			70,879
Mortgage		2,366,525			2,385,592

		5,548,500			5,667,981
Unearned income and deferred fees and costs:
Commercial, industrial and others		668			328
Consumer finance		(190,970	)		(224,562	)
Allowance for loan losses		(198,160	)		(197,303	)

Loans, net	$	5,160,038		$	5,246,444

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 recorded on these transactions.

5. Allowance for Loan Losses:

Changes in the allowance for loan losses are summarized as follows:


	For the three months ended
	March 31, 2010		March 31, 2009
	(Dollars in thousands)
Balance at beginning of period	$	197,303	$	191,889
Provision for loan losses		30,093		41,100

		227,396		232,989

Losses charged to the allowance:
Commercial and industrial		2,924		4,727
Construction		—		2,254
Mortgage		1,105		1,380
Consumer		12,476		13,067
Consumer finance		13,834		16,056
Leasing		126		313

		30,465		37,797

Recoveries:
Commercial and industrial		500		470
Construction		—		20
Consumer		443		333
Consumer finance		232		414
Leasing		54		81

		1,229		1,318

Net loans charged-off		29,236		36,479

Balance at end of period	$	198,160	$	196,510

6. Goodwill and Other Intangible Assets:

Goodwill

The Corporation assigned goodwill to reporting units at the time of acquisition. Goodwill was allocated to the Commercial Banking segment, the Wealth Management segment and the Consumer Finance segment as follows:


	March 31, 2010		December 31, 2009
	(Dollars in thousands)
Commercial Banking	$	10,537	$	10,537
Wealth Management		24,254		24,254
Consumer Finance		86,691		86,691

	$	121,482	$	121,482

Goodwill assigned to the Commercial Banking segment is related to the acquisition of Banco Central Hispano Puerto Rico in 1996, the goodwill assigned to the Wealth Management segment is related to the acquisition of Merrill Lynch’s retail brokerage business in Puerto Rico by Santander Securities Corporation in 2000 and the goodwill assigned to the Consumer Finance segment is related to the acquisition of Island Finance in 2006.

The gross carrying value and accumulated impaired loss to goodwill at March 31, 2010 and December 31, 2009, are presented below:


			Accumulated
			Impairment
	Gross Amount		Charges		Carrying Amount
	(Dollars in thousands)
Balance at beginning of the period	$	148,300	$	26,818	$	121,482

Balance at end of the period	$	148,300	$	26,818	$	121,482

Other Intangible Assets

Other intangible assets at March 31, 2010 and December 31, 2009 were as follows:


	March 31, 2010		December 31, 2009
	(Dollars in thousands)
Commercial Banking — Mortgage-servicing rights	$	9,390	$	9,686
Wealth Management — Advisory-servicing rights		889		962
Consumer Finance — Trade name		18,300		18,300

	$	28,579	$	28,948

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.

The following table reflects the components of other intangible assets at March 31, 2010 and December 31, 2009:


	March 31, 2010
					Accumulated
			Accumulated		Impairment
	Gross Amount		Amortization		Charges		Carrying Amount
			(Dollars in thousands)
Commercial Banking — Mortgage-servicing rights	$	20,557	$	11,167	$	—	$	9,390
Wealth Management — Advisory-servicing rights		3,050		2,161		—		889
Consumer Finance — Trade Name		23,700		—		5,400		18,300

	$	47,307	$	13,328	$	5,400	$	28,579


	December 31, 2009
					Accumulated
			Accumulated		Impairment
	Gross Amount		Amortization		Charges		Carrying Amount
			(Dollars in thousands)
Commercial Banking — Mortgage-servicing rights	$	20,286	$	10,600	$	—	$	9,686
Wealth Management — Advisory-servicing rights		3,050		2,088		—		962
Consumer Finance — Trade name		23,700		—		5,400		18,300

	$	47,036	$	12,688	$	5,400	$	28,948

Amortization of the other intangibles assets for the three-month periods ended March 31, 2010 and 2009 was approximately $0.6 million and $0.8 million, respectively.

7. Other Assets:

The Corporation’s other assets consist of the following:


	March 31, 2010		December 31, 2009
	(Dollars in thousands)
Deferred tax assets, net	$	56,408	$	54,793
Accounts receivable, net		36,433		45,368
Repossesed assets, net		34,974		34,486
Software, net		7,049		7,643
Prepaid expenses		8,523		13,272
Prepaid FDIC insurance		24,114		25,764
Income tax credits, net		12,557		15,350
Customers’ liabilities on acceptances		227		391
Derivative assets		123,217		118,788
Confirming advances		241,045		113,692
Other		8,604		5,916

	$	553,151	$	435,463

Amortization of software assets for the three-month periods ended March 31, 2010 and 2009 was approximately $0.7 million and $0.9 million, respectively.

The Law 197 of Puerto Rico (“Law 197”) of 2007 grants certain credits to home buyers on the purchase of certain qualified new or existing homes. The incentives were as follows: (a) for a newly constructed home that will constitute the

individuals principal residence, a credit equal to 20% of the sales price or $25,000, whichever is lower; (b) for newly 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 loan tax credits were generally granted to home buyers by the financial institutions financing the home acquisition and later claimed on the financial institution’s tax return as a tax credit. Credits available under Law 197 needed to be certified by the Puerto Rico Secretary of Treasury and the total amount of credits available under the law was $220,000,000, which was depleted in December of 2008.

The loan tax credits do not expire and may be used against income taxes, including estimated income taxes, for tax years commencing after December 31, 2007 in three installments, subject to certain limitations. In addition, the loan tax credits may be ceded, sold or otherwise transferred to any other person; and any tax credit not used in a given tax year, may be claimed as a refund but only for taxable years commencing after December 31, 2010. The Corporation had $12.6 million and $15.4 million of unused loan tax credits certified by the Secretary at March 31, 2010 and December 31, 2010, respectively

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 Corporation had a prepaid assessment of $24.1 million and $25.8 million as of March 31, 2010 and December 31, 2009, respectively.

8. Other Borrowings:

Following are summaries of borrowings as of and for the periods indicated:


	March 31, 2010
	Federal Funds			Securities Sold		Commercial
	Purchased and			Under Agreements		Paper
	Other Borrowings			to Repurchase		Issued
	(Dollars in thousands)
Amount outstanding at period-end	$	55,000		$	—	$	129,962

Average indebtedness outstanding during the period	$	50,111		$	—	$	115,024

Maximum amount outstanding during the period	$	55,000		$	—	$	140,000

Average interest rate for the period		0.21	%		—		0.48	%

Average interest rate at period-end		0.22	%		—		0.49	%


	December 31, 2009
	Federal Funds			Securities Sold			Commercial
	Purchased and			Under Agreements			Paper
	Other Borrowings			to Repurchase			Issued
	(Dollars in thousands)
Amount outstanding at year-end	$	50,000		$	—		$	67,482

Average indebtedness outstanding during the year	$	14,824		$	76,849		$	90,454

Maximum amount outstanding during the year	$	50,000		$	375,000		$	175,000

Average interest rate for the year		0.21	%		4.42	%		1.34	%

Average interest rate at year-end		0.21	%		0.00	%		0.48	%

Federal funds purchased and other borrowings and commercial paper issued mature as follows:


	March 31, 2010		December 31, 2009
	(In thousands)
Federal funds purchased and other borrowings:
Within thirty days	$	55,000	$	50,000

Commercial paper issued:
Within thirty days	$	79,992	$	67,482
Thirty to ninety days		49,970		—

Total	$	129,962	$	67,482

As of March 31, 2010, the weighted average maturity of Federal funds purchased and other borrowings over ninety days was 9.02 months.

9. Advances from Federal Home Loan Bank:

Advances from Federal Home Loan Bank consisted of the following:


	March 31, 2010		December 31, 2009
	(Dollars in thousands)
Non-callable advances at 1.98% and 2.33% average fixed rate at March 31, 2010 and December 31, 2009 , respectively, with maturities during 2010	$	400,000	$	735,000
Non-callable advances at 2.90% and 3.85% average fixed rate at March 31, 2010 and December 31, 2009 , respectively, with maturities during 2011		470,000		325,000
Non-callable advances at 2.13% fixed rate at March 31, 2010 with maturity during 2011		100,000		—

	$	970,000	$	1,060,000

The Corporation had approximately $1.9 billion and $2.0 billion in mortgage loans pledged as collateral for Federal Home Loan Bank advances as of March 31, 2010 and December 31, 2009.

10. Term Notes, Subordinated Capital Notes and Trust Preferred Securities:

Term Notes

Term notes payable outstanding consisted of the following:


	March 31, 2010			December 31, 2009
	(Dollars in thousands)
Term notes maturing January 29, 2010 linked to the S&P 500 index	$	—		$	4,815
Term notes maturing May 31, 2011 with a spread of 0.25%:
Linked to the S&P 500		4,000			4,000
Linked to the Dow Jones Euro STOXX 50		3,000			3,000
Term notes maturing May 25, 2012 linked to the Euro STOXX 50		5,000			5,000
Term notes maturing May 25, 2012 linked to the NIKKEI		5,000			5,000

		17,000			21,815
Unamortized discount		(1,087	)		(1,234	)

	$	15,913		$	20,581

Subordinated Capital Notes

Subordinated capital notes consisted of the following:


	March 31, 2010			December 31, 2009
	(Dollars in thousands)
Subordinated notes with fixed interest of 7.50% maturing December 10, 2028	$	60,000		$	60,000
Subordinated notes with fixed interest of 6.30% maturing June 1, 2032, at fair value		75,616			73,122
Subordinated notes with fixed interest of 6.10% maturing June 1, 2032, at fair value		48,561			47,429
Subordinated notes with fixed interest of 6.75% maturing July 1, 2036		129,000			129,000

		313,177			309,551
Unamortized discount		(852	)		(860	)

	$	312,325		$	308,691

Trust Preferred Securities:

At December 31, 2006, the Corporation had established a trust for the purpose of issuing trust preferred securities to the public in connection with the acquisition of Island Finance. In connection with this financing arrangement, the Corporation completed the private placement of $125 million 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 classified as subordinated notes (included on the table for subordinated capital notes above) and the dividends are classified as interest expense in the accompanying condensed consolidated statements of income.

Trust preferred securities (trust securities) were issued by a trust company (the Trust) that is not consolidated although it is a 100% owned subsidiary of the Corporation. These trust securities are redeemable preferred security obligations of the Trust. The sole asset of the Trust is a junior subordinated note of the Corporation. We do not consolidate the Trust because its sole asset is a receivable from the Corporation even though we own all of the voting equity shares of the Trust.

11. Income Tax:

For the three months ended March 31, 2010 and 2009, the Corporation recognized $0.6 million and $0.4 million of interest and penalties, respectively, for uncertain tax positions in accordance with provisions of SFAB ASC Topic 740. As of March 31, 2010 and December 31, 2009, the related accrued interest amounted to approximated $3.8 million and $3.2 million, respectively. As of March 31, 2010 and December 31, 2009, the Corporation had $8.6 million and $8.1 million of unrecognized tax benefits, respectively, which, if recognized, would decrease the effective income tax rate in future periods.

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity, and the addition or elimination of uncertain tax positions. As of March 31, 2010, the years 2005 through 2009 remain subject to examination by the Puerto Rico tax authorities. The Corporation does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

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 $11.6 million and $0.1 million, respectively, at March 31, 2010 and $14.5 million and $0.1 million, respectively, at December 31, 2009. Accordingly, a deferred tax asset valuation allowance of $11.6 million and $0.1 million at March 31, 2010 and $14.5 million and $0.1 million at December 31, 2009, for Santander Financial Services, Inc and Santander BanCorp (parent company only), respectively, were recorded.

12. Derivative Financial Instruments:

The Corporation’s principal objective in holding interest rate swap agreements is the management of interest rate risk and changes in the fair value of assets and liabilities. The following summarizes the derivatives used by the Corporation in managing interest rate and fair values exposures:

Interest Rate Swaps. An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. It involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable rate index for the same period of time. The variable interest rate received by the Corporation is London Interbank Offered Rate (LIBOR).

Interest Rate Caps and Floors. In a cap agreement, a cash flow is generated if the price or rate of an underlying variable rises above a certain threshold (or “cap”) price. In a floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold (or “floor”) price.

Indexed Options. Options are generally over-the-counter (OTC) contracts that the Corporation enters into in an order to receive the appreciation of a specified Stock Index (e.g. Dow Jones Industrial Composite Stock Index, S&P 500, Nikkei, and Dow Jones Euro Stock) over a specified period in exchange for a premium paid at the contract’s inception. The option period is determined by the contractual maturity of the certificates of deposits tied to the performance of the Index.

Loan Commitment. Commitment to a borrower by a lending institution that it will loan a specific amount at a certain rate on a particular piece of real estate.

As of March 31, 2010, the Corporation had the following derivative financial instruments outstanding:


						Gain (Loss) for
						the three months
	Notional					ended
	Value		Fair Value			March 31, 2010
	(Dollars in thousands)
ECONOMIC UNDESIGNATED HEDGES
Interest rate swaps	$	125,000	$	1,182		$	1,674
OTHER DERIVATIVES
Options		106,325		2,934			(855	)
Embedded options on stock-indexed deposits		106,325		(2,934	)		855
Interest rate caps		3,485		107			115
Customer interest rate caps		3,485		(107	)		(115	)
Customer interest rate swaps		1,654,387		116,943			4,900
Interest rate swaps-offsetting position of customer swaps		1,654,387		(117,630	)		(5,807	)
Loan commitments		2,908		(27	)		(19	)

						$	748

As of December 31, 2009, the Corporation had the following derivative financial instruments outstanding:


						Gain (Loss) for
	Notional					the year ended
	Value		Fair Value			December 31, 2009
	(Dollars in thousands)
ECONOMIC UNDESIGNATED HEDGES
Interest rate swaps	$	125,000	$	(492	)	$	(5,702	)
OTHER DERIVATIVES
Options		105,450		3,789			16
Embedded options on stock-indexed deposits		105,450		(3,789	)		(16	)
Interest rate caps		390		(8	)		5
Customer interest rate caps		390		8			(5	)
Customer interest rate swaps		1,655,318		112,031			(64,416	)
Interest rate swaps-offsetting position of customer swaps		1,675,319		(111,811	)		64,810
Interest rate swaps		—		—			(287	)
Loan commitments		3,447		(8	)		(101	)

						$	(5,696	)

Prior to the adoption of FASB ASC Topic 825, changes in the value of the derivatives instruments qualifying as fair value hedges that have been highly effective were recognized in the current period results of operations along with the change in the value of the designated hedged item. If the hedge relationship was terminated, hedge accounting was discontinued and any balance related to the derivative was recognized in current operations, and fair value adjustment to the hedge item continued to be reported as part of the basis of the item and was amortized to earnings as a yield adjustment. After adoption of FASB ASC Topic 825 for certain callable brokered certificates of deposit and subordinated capital notes, the hedge relationship was terminated, and both previously hedged items and the respective hedging derivatives are presented at fair value with changes recorded in the current period results of operations.

As of March 31, 2010, 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 0.68% and 6.22%, respectively. As of March 31, 2010, the Corporation had two subordinated notes aggregating approximately $125 million, with a fair value of $124.2 million, swapped to create a floating rate source of funds. For the three months ended March 31, 2010 and 2009, the Corporation recognized a gain of approximately $1.7 million and a loss $1.3 million, respectively, on these economic hedges, which is included in other income in the consolidated statements of operations.

As of December 31, 2009, 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 0.68% and 6.22%, respectively. As of December 31, 2009, the Corporation had two subordinated notes aggregating approximately $125 million, with a fair value of $120.6 million, swapped to create a floating rate source of funds. For the year ended December 31, 2009, the Corporation recognized a loss of approximately $5.7 million on these economic hedges, which is included in other income in the consolidated statements of operations.

The Corporation issues certificates of deposit, individual retirement accounts and notes with returns linked to the different equity indexes, which constitute embedded derivative instruments that are bifurcated from the host deposit and recognized on the consolidated balance sheets. The Corporation enters into option agreements in order to manage the interest rate risk on these deposits and notes; however, these options have not been designated for hedge accounting, therefore gains and losses on the market value of both the embedded derivative instruments and the option contracts are marked to market through results of operations and recorded in other income in the consolidated statements of operations. For the three months ended March 31, 2010, a loss of approximately $855.5 million was recorded on embedded options on stock-indexed deposits and notes and a gain of approximately $855.5 million was recorded on the option contracts. For the three months ended March 31, 2009, a gain of approximately $1.9 million was recorded on embedded options on stock-indexed deposits and notes and a loss of approximately $1.9 million was recorded on the option contracts.

The Corporation enters into certain derivative transactions to provide derivative products to customers, which includes interest rate caps, collars and swaps, and simultaneously covers the Corporation’s position with related and unrelated third parties under substantially the same terms and conditions. These derivatives are not linked to specific assets and liabilities on the consolidated balance sheets or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for

hedge accounting. These derivatives are carried at fair value with changes in fair value recorded as part of other income. For the three months ended March 31, 2010 and 2009, the Corporation recognized a net loss of $907,000 and a net gain of $282,000 on these transactions, respectively.

To a lesser extent, the Corporation enters into freestanding derivative contracts as a proprietary position taker, based on market expectations or on benefits from price differentials between financial instruments and markets. These derivatives are not linked to specific assets and liabilities on the consolidated balance sheets or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. For the three months ended March 31, 2009, the Corporation recognized a net loss of $287,000. There were no outstanding freestanding derivatives contracts as of March 31, 2010.

The Corporation enters into loan commitments with customers to extend mortgage loans at a specified rate. These loan commitments are written options and are measured at fair value pursuant to FASB ASC Topic 820 and FASB ASC Topic 815. As of March 31, 2010 and December 31, 2009, the Corporation had loan commitments outstanding for approximately $2.9 million and $3.4 million, respectively. The Corporation recognized a net loss of $19,230 and $9,000 for the three months ended March 31, 2010 and 2009.

The Corporation is exposed to certain risk relating to its ongoing business operations. The primary risk managed by using derivative instruments is the interest rate risk. The following table presents the fair value of derivative instruments in a statement of financial position:


		Assets Derivatives
	Balance Sheet	Fair Value
	Location	as of
		March 31, 2010		December 31, 2009
(Dollars in thousands)
Derivatives not designated as hedging instruments under FASB ASC Topic 815:
Interest rate swaps	Other assets	$	120,160	$	114,991
Interest rate caps	Other assets		123		8
Options	Other assets		2,934		3,789

Total		$	123,217	$	118,788


		Liabilities Derivatives
	Balance Sheet	Fair Value
	Location	as of
		March 31, 2010		December 31, 2009
Derivatives not designated as hedging instruments under FASB ASC Topic 815:
Interest rate swaps	Other liabilities	$	119,665	$	115,263
Interest rate caps	Other liabilities		123		8
Options	Other liabilities		2,934		3,789
Loan commitment	Other liabilities		27		8

Total		$	122,749	$	119,068

The following table presents the effect of the derivative instruments on the statement of results of operations:


		Gain or (Loss) recognized in
	Location of Gain or (Loss)	Income on derivatives
	recognized in Income on	for the three months ended
	Derivatives	March 31, 2010			March 31, 2009
(Dollars in thousands)
Derivatives not designated as hedging instruments under FASB ASC Topic 815:
Interest rate swaps	Interest Income (Expense)	$	1,731		$	1,220
Interest rate swaps	Other Income (Loss)		810			(1,042	)
Loan commitment	Other Income (Loss)		(19	)		(9	)

Total		$	2,522		$	169

Contingent Features

Certain of the Corporation’s derivative instruments contain provisions that require the Corporation’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Corporation’s debt were to fall below investment grade, it would be a violation of these provisions and the counterparties to the derivative instruments could demand immediate payment or immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on March 31, 2010 and December 31, 2009 are $6.3 million and $4.1 million, respectively, for which the Corporation has posted collateral of $2.2 million for each period, in the normal course of business.

13. Contingencies:

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 there from will not have a material adverse effect on the condensed consolidated statements of income or condensed consolidated financial position of the Corporation.

14. Employee Benefits Plan:

Pension Plan

The Corporation maintains two inactive qualified noncontributory defined benefit pension plans. One plan covers substantially all active employees of the Corporation (the “Plan”) before January 1, 2007, while the other plan was assumed in connection with the 1996 acquisition of Banco Central Hispano de Puerto Rico (the “Central Hispano Plan”).

The components of net periodic cost (benefit) for the Plan for the three-month ended March 31, 2010 and 2009 were as follows:


	For the three months ended
	March 31,
	2010			2009
	(Dollars in thousands)
Interest cost on projected benefit obligation	$	610		$	594
Expected return on assets		(631	)		(515	)
Net amortization		216			292

Net periodic pension cost (benefit)	$	195		$	371

The expected contribution to the Plan for 2010 is $3,173,000.

The components of net periodic pension cost for the Central Hispano Plan for three-month ended March 31, 2010 and 2009 were as follows:


	For the three months ended
	March 31,
	2010			2009
	(Dollars in thousands)
Interest cost on projected benefit obligation	$	455		$	476
Expected return on assets		(473	)		(389	)
Net amortization		163			192

Net periodic pension cost	$	145		$	279

The expected contribution to the Central Hispano Plan for 2010 is $1,086,000.

Savings Plan

The Corporation also sponsors three contributory savings plans pursuant to Section 1165(e) of the Puerto Rico Internal Revenue Code for substantially all the employees of the Corporation. Investments in the plans are participant-directed, and employer matching contributions are determined based on the specific provisions of each plan. Employees are fully vested in the employer’s contribution after three and five years of service, respectively. The Corporation’s contribution to the plans for the three months ended March 31, 2009 was approximately $188,000. Effective March 2009, the Corporation amended the plans to suspend monthly contributions.

15. Long Term Incentive Plans:

Santander Group sponsors various non-qualified share-based compensation programs for certain of its employees and those of its subsidiaries, including the Corporation. All of these plans have been approved by the Board of Directors of the Corporation. A summary of each of the plans follows:

	•		A long term incentive plan for certain eligible officers and key employees which contains service, performance and market conditions. This plan comprehends two cycles, one expired in 2009 and another expiring in 2010. This plan provides for settlement in stock of Santander Group to the participants and is classified as an equity plan. Accordingly, the Corporation recognizes monthly compensation expense over the two and three year cycles and credits additional paid in capital. The Corporation recognized compensation expense under this plan amounting to $0.3 million and $0.4 million for the three months ended March 31, 2010 and 2009, respectively.

	•		A long term incentive plan for certain eligible officers and key employees which contains service, performance and market conditions. This plan comprehends one cycle expiring in 2011. This plan provides for settlement in stock of Santander Group to the participants and is classified as an equity plan. Accordingly, the Corporation recognizes monthly compensation expense and credits additional paid in capital. The Corporation recognized compensation expense under this plan amounting to $0.1 million for each of three month period ended March 31, 2010 and 2009.

	•		A long term incentive plan for certain eligible officers and key employees which contains service, performance and market conditions. This plan comprehends one cycle expiring in 2012. This plan provides for settlement in stock of Santander Group to the participants and is classified as an equity plan. Accordingly, the Corporation recognizes monthly compensation expense and credits additional paid in capital. The Corporation recognized compensation expense under this plan amounting to $0.1 million for three months ended March 31, 2010.

16. Guarantees:

The Corporation issues financial standby letters of credit to guarantee the performance of its customers to third parties. If the customer fails to meet its financial performance obligation to the third party, then the Corporation would be obligated to make the payment to the guaranteed party. In accordance with the provisions of FASB ASC Topic 460, “Guarantees”, the Corporation recorded a liability of $180,000 at March 31, 2010 and $254,000 at December 31, 2009, which represents the fair

value of the obligations undertaken in issuing the guarantees under the standby letters of credit issued or modified, net of the related amortization. The fair value at inception of the obligation undertaken when issuing the guarantees and commitments that qualify under FASB ASC Topic 460 approximates the unamortized fees received from the customers. The fair value of the liability recorded at inception is amortized into income as lending & deposit-related fees over the life of the guarantee contract. The fair value of the liability recorded at inception is amortized into income as lending and deposit-related fees over the life of the guarantee contract. Standby letters of credit outstanding at March 31, 2010 and December 31, 2009 had terms ranging from one month to three years. The aggregate contract amount of the standby letters of credit of approximately $46,044,000 and $41,837,000 at March 31, 2010 and December 31, 2009, respectively, represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of non-performance by its customers. These standby letters of credit typically expire without being drawn upon. Management does not anticipate any material losses related to these guarantees.

17. Segment Information:

Types of Products and Services

The Corporation has five reportable segments: Commercial Banking, Mortgage Banking, Consumer Finance, Treasury and Investments and Wealth Management. Insurance operations and International Banking are other lines of business in which the Corporation commenced its involvement during 2000 and 2001, respectively, and are included in the “Other” column below since they did not meet the quantitative thresholds for disclosure of segment information.

Measurement of Segment Profit or Loss and Segment Assets

The Corporation’s reportable business segments are strategic business units that offer distinctive products and services that are marketed through different channels. These are managed separately because of their unique technology, marketing and distribution requirements.

The following present financial information of reportable segments as of and for the three months ended March 31, 2010 and 2009. General corporate expenses and income taxes have not been added or deducted in the determination of operating segment profits. The “Other” column includes insurance and international banking operations and the items necessary to reconcile the identified segments to the reported consolidated amounts. Included in the “Other” column are expenses of the internal audit, investors’ relations, strategic planning, administrative services, mail, marketing, public relations, electronic data processing departments and comptroller’s departments. The “Eliminations” column includes all intercompany eliminations for consolidation purposes.


	March 31, 2010
	Commercial		Mortgage		Consumer		Treasury and			Wealth								Consolidated
	Banking		Banking		Finance		Investments			Management		Other			Eliminations			Total

							(Dollars in thousands)
Total external revenue	$	53,360	$	36,955	$	35,281	$	2,115		$	13,529	$	9,039		$	(7,326	)	$	142,953
Intersegment revenue		—		—		—		—			55		7,271			(7,326	)		—
Interest income		39,436		35,632		35,188		2,739			596		6,092			(6,101	)		113,582
Interest expense		2,087		7,456		3,504		6,015			176		3,702			(4,119	)		18,821
Depreciation and amortization		1,048		635		156		112			363		423			—			2,737
Segment income (loss) before income tax		18,297		22,865		7,150		(5,946	)		4,788		(13,940	)		(1,982	)		31,232
Segment assets		2,610,644		2,422,981		669,670		595,508			136,112		1,384,118			(961,356	)		6,857,677


	March 31, 2009
	Commercial		Mortgage		Consumer		Treasury and			Wealth								Consolidated
	Banking		Banking		Finance		Investments			Management		Other			Eliminations			Total

							(Dollars in thousands)
Total external revenue	$	64,066	$	41,686	$	34,862	$	9,100		$	13,499	$	4,146		$	(13,316	)	$	154,043
Intersegment revenue		6,984		—		—		—			47		6,285			(13,316	)		—
Interest income		54,246		39,404		33,036		8,295			832		5,049			(12,187	)		128,675
Interest expense		9,910		15,199		7,418		16,415			340		5,230			(10,230	)		44,282
Depreciation and amortization		1,096		671		323		236			372		518			—			3,216
Segment income (loss) before income tax		7,453		21,687		415		(9,806	)		3,841		(22,348	)		(1,958	)		(716	)
Segment assets		3,351,042		2,628,179		661,890		751,698			126,478		851,476			(1,017,783	)		7,352,980

Reconciliation of Segment Information to Consolidated Amounts

Information for the Corporation’s reportable segments in relation to the consolidated totals follows:


	March 31, 2010			March 31, 2009
	(Dollars in thousands)
Revenues:
Total revenues for reportable segments	$	141,240		$	163,213
Other revenues		9,039			4,146
Elimination of intersegment revenues		(7,326	)		(13,316	)

Total consolidated revenues	$	142,953		$	154,043


Total income before tax of reportable segments	$	47,154		$	23,590
Loss before tax of other segments		(13,940	)		(22,348	)
Elimination of intersegment profits		(1,982	)		(1,958	)

Consolidated income before tax	$	31,232		$	(716	)


Assets:
Total assets for reportable segments		6,434,915		$	7,519,287
Assets not attributed to segments		1,384,118			851,476
Elimination of intersegment assets		(961,356	)		(1,017,783	)

Total consolidated assets	$	6,857,677		$	7,352,980

18. Fair Value of Financial Instruments:

The Corporation follows FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, which provides a framework for measuring fair value under GAAP.

The FASB ASC Topic 825, “Disclosures about Fair Value of Financial Instruments” allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation elected to adopt the fair value option for callable brokered certificates of deposits and subordinated notes on the adoption date. FASB ASC Topic 825 requires that the difference between the carrying value before election of the fair value option and the fair value of these instruments be recorded as an adjustment to beginning retained earnings in the period of adoption.

Fair Value Hierarchy

FASB ASC Topic 820 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1		Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. treasury, other U.S. government, agency mortgage-backed debt securities and FDIC insured corporate bonds that are highly liquid and are actively traded in over-the-counter markets.

Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include securities with quoted prices that are traded less frequently than exchange-traded instruments, securities and derivative contracts and financial liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain mortgage-backed debt securities, corporate debt securities, derivative contracts, callable brokered certificates of deposits and subordinated notes and certain open-end funds, closed-end funds.

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain Puerto Rico corporate debt securities, open-end funds, closed-end funds, and certain derivative contracts.

Recurring Measurements

The following table presents for each of these hierarchy levels, the Corporation’s assets and liabilities that are measured at fair value on a recurring basis, including financial instruments for which the Corporation has elected the fair value option at March 31, 2010 and December 31, 2009.


	March 31, 2010
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Trading Securities:
US Treasury Bills	$	100	$	—	$	—	$	100
Puerto Rico Municipal Bonds, GNMA’s and notes		—		9,289		11,783		21,072
Closed-end Funds						12,427		12,427
Mortgage Backed Securities		—		—		36		36
Corporate equity-US Preferred Stocks and Open-end funds		—		3,267		10		3,277
Investment Securities Available for Sale:
Treasury and agencies of the United States Government		181,145		—		—		181,145
Commonwealth of Puereto Rico and its subdivisions		—		83,005		—		83,005
Corporate Bonds		143,127		—		—		143,127
Mortgage Backed Securities		—		10,029		—		10,029
Derivative Assets:
Interest rate swaps		—		120,160		—		120,160
Interest rate caps		—		123		—		123
Embedded options		—		2,853		81		2,934


Total Assets reported at Fair Value	$	324,372	$	228,726	$	24,337	$	577,435

Liabilities:
Deposits (1)	$	—	$	—	$	—	$
Subordinated Capital Notes (2)		—		124,178		—		124,178
Derivative Liabilities:
Interest rate swaps		—		119,665		—		119,665
Interest rate caps		—		123		—		123
Embedded options		—		2,853		81		2,934
Loan commitment		—		—		27		27


Total Liabilities reported at Fair Value	$	—	$	246,819	$	108	$	246,927

(Dollars in thousands)


	December 31, 2009
	Level 1		Level 2		Level 3		Total
Assets:
Trading Securities:
US Treasury Bills	$	100	$	—	$	—	$	100
Puerto Rico Municipal Bonds, GNMA’s and notes		—		36,189		1,174		37,363
Closed-end Funds		—		—		7,038		7,038
Mortgage Backed Securities		—		—		41		41
Corporate equity-US Preferred Stocks and Open-end funds		—		3,187		10		3,197
Investment Securities Available for Sale:
Treasury and agencies of the United States Government		182,125		—		—		182,125
Commonwealth of Puereto Rico and its subdivisions		—		83,434		—		83,434
Corporate Bonds		141,513				—		141,513
Mortgage Backed Securities		—		10,536		—		10,536
Derivative Assets:
Interest rate swaps		—		114,988		—		114,988
Interest rate caps		—		10		—		10
Embedded options		—		3,543		247		3,790


Total Assets reported at Fair Value	$	323,738	$	251,887	$	8,510	$	584,135

Liabilities:
Deposits — Callable Brokered Certificates	$	—	$	12,476	$	—	$	12,476
Subordinated Capital Notes (2)		—		120,551		—		120,551
Derivative Liabilities:
Interest rate swaps		—		115,260		—		115,260
Interest rate caps		—		10		—		10
Embedded options		—		3,543		247		3,790
Loan commitment		—		—		8		8

Total Liabilities reported at Fair Value	$	—	$	251,840	$	255	$	252,095

There were no transfers reported between levels of the fair value hierarchy at March 31, 2010 and December 31, 2009. Level 3 assets and liabilities were 4.2% and 0.04% of total assets reported at fair value and total liabilities reported at fair value, respectively, as of March 31, 2010 and 1.5% and 0.10% as of December 31, 2009, respectively.

The following table presents the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period from January 1, 2010 to March 31, 2010 and January 1, 2009 to March 31, 2009:


			Net realized/unrealized
			loss included in					Transfers		Purchases,					Unrealized
	Balance					Other		in and/or		issuances			Balance		losses
	January 1,					Comprehensive		out of		and			March 31,		still
(Dollars in thousands)	2010		Earnings			Income		Level 3		settlements			2010		held (2)
Trading Securities (1):
Puerto Rico Municipal Bonds, GNMA’s and notes	$	1,174		7			—		—		10,602		$	11,783		10
Close-end funds		7,038		232			—		—		5,157			12,427		142
Mortgage Backed Securities		41		3			—		—		(8	)		36		—
Corporate Equity-US Preferred														—		—
Stocks and Open-end funds		10		—			—		—		—			10		—
Derivatives, net		247		(166	)		—		—		—			81		(166	)

	$	8,510	$	76		$	—	$	—	$	15,751		$	24,337	$	(14	)


			Net realized/unrealized
			gains included in					Transfers		Purchases,					Unrealized
	Balance					Other		in and/or		issuances			Balance		gains (loss)
	January 1,					Comprehensive		out of		and			March 31,		still
	2009		Earnings			Income		Level 3		settlements			2009		held (2)
Trading Securities (1)
Puerto Rico Municipal Bonds, GNMA’s and notes	$	4,472	$	49		$	—	$	—	$	(2,872	)	$	1,649	$	1
Close-end funds		24,917		(598	)		—		—		133			24,452		(422	)
Mortgage Backed Securities		79		(2	)		—		—		(69	)		8		—
Corporate Equity-US Preferred
Stocks and Open-end funds		51		—			—		—		(50	)		1		—
Derivatives, net		93		(9	)		—		—		—			84		(9	)

	$	29,612	$	(560	)	$	—	$	—	$	(2,858	)	$	26,194	$	(430	)


(1)		Changes in fair value and gains and losses from sales for these instruments are recorded in other income while interest revenue and expense are included in the net interest income based on the contractual coupons on the consolidated statements of income. The amounts above do not include interest.

(2)		Represents the amount of total gains or losses for the period, included in earmings, attributable to the change in unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held at March 31, 2010 and 2009.

The table below summarizes gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities for the three-month periods ended March 31, 2010 and 2009. These amounts include gains and losses generated by derivative contracts and trading securities, which were carried at fair value prior to the adoption of FASB ASC Topic 825.


			Total Gains (Losses)
	For the three months ended
	March 31, 2010					March 31, 2009
	Trading		Net			Trading			Net
(Dollars in thousands)	Securities		Derivatives			Securities			Derivatives
Classification of gains and losses (realized/unrealized) included in earnings for the period :
Other income (loss)	$	242	$	(166	)	$	(551	)	$	(9	)

The table below summarizes changes in unrealized gains or losses recorded in earnings for the three-month periods ended March 31, 2010 and 2009 for Level 3 assets and liabilities that are still held at March 31, 2010 and 2009. These amounts include changes in fair value for derivative contracts and trading securities, which were carried at fair value prior to the adoption of Topic 825.


			Changes in Unrealized Gains (Loss)
	For the three months ended
	March 31, 2010					March 31, 2009
	Trading		Net			Trading			Net
(Dollars in thousands)	Securities		Derivatives			Securities			Derivatives
Classification of unrealized gains (losses) included in earnings for the period :
Other income	$	152	$	(166	)	$	(421	)	$	(9	)

Determination of Fair Value

The following is a description of the valuation methodologies used for instruments recorded at fair value and for estimating fair value for financial instruments not recorded, but disclosed at fair value. The estimated fair value was calculated using certain facts and assumptions, which vary depending on the specific financial instrument.

Short-Term Financial Instruments

Short-term financial instruments, including cash and cash equivalents, interest-bearing deposits placed, federal funds purchased and other borrowings, commercial paper issued, accrued interest receivable and payable, certain other assets and liabilities, are carried at historical cost. The carrying amount is a reasonable estimate of fair value of these instruments. These financial instruments generally expose the Corporation to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market.

Trading Securities

Trading securities are recorded at fair value and consist primarily of mortgage-backed securities, Puerto Rico government obligations, corporate debt, and equity securities. Fair value is generally based on quoted market prices. Level 1 securities owned include those identical securities traded in active markets. Level 2 securities owned include those securities for which market prices are not available and fair values are estimated based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant management judgment or estimation. Level 2 trading securities primarily include Puerto Rico government obligations and Puerto Rico open-ended funds Level 3 trading securities primarily include Puerto Rico corporate debt securities and Puerto Rico fixed-income closed-ended funds. At March 31, 2010, the majority of these instruments were valued based on dealer indicative quotes and recent trade activity.

The Corporation holds certain equity securities for which the net asset value is used for valuation purposes. The equity securities held by the Corporation have limited observable activity, therefore are classified within level 2 or 3 of the fair value hierarchy.

The table below summarizes those securities owned open-ended and closed-ended funds outstanding as of March 31, 2010 and December 31, 2009, for which the Corporation uses the net asset value for valuation purposes.


	Fair Value				Redemption
	March 31, 2010		December 31, 2009		Frequency
Closed-ended funds (1)	$	12,426,776	$	7,037,646		N/A
Open-ended fixed income funds (2)		1,687,435		1,644,909	Daily, Weekly
Open-ended equity funds (3)		1,579,578		1,541,742	Daily

	$	15,693,789	$	10,224,297

These funds seek to provide shareholders with a high level of current income consistent with the preservation of capital, its investment policies and prudent investment management. These funds will invest not less than 67% of its assets in Puerto Rico securities and up to 33% in U.S. securities. The fair value of the funds’ investments, which include municipal securities — bonds issued by Puerto Rico and United States governments and agencies, mortgage-backed securities, corporate bonds and preferred stock, are obtained from third-party pricing services providers and by broker-dealers. Market inputs utilized in the pricing evaluating process include, primarily, all or some of the following: benchmark yields, reported trades, broker-dealers quotes, issuer spreads, two-sided markets, bid-offer price or spread, benchmark securities, bids, offers, reference data, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, and industry and economic events. Certain securities of the Fund for which quotations are not readily available from any source, are valued at fair value by or under the direction of the Investment Adviser utilizing quotations and other information concerning similar securities obtained from recognized dealers. Short-term securities having a maturity of 60 days or less are valued at amortized cost, which approximates fair value. All Puerto Rico fixed income securities valuations provided by broker-dealers are priced using the average of two quotes, if available.

	(1)		These funds seek to provide shareholders with a high level of current income consistent with the preservation of capital, its investment policies and prudent investment management. There are two funds under this category, one hold not less than 67% of its assets in Puerto Rico securities and up to 33% in U.S. securities, and the other hold not less than 20% of its assets in Puerto Rico securities and up to 80% in non-Puerto Rico securities. The fair value of the funds’ investments, which include municipal securities — bonds issued by Puerto Rico and United States governments and agencies, mortgage-backed securities, corporate bonds and preferred stock, are obtained from third-party pricing services providers and by broker-dealers. Market inputs utilized in the pricing evaluation process include, primarily, all or some of the following: benchmark yields, reported trades, broker-dealers quotes, issuer spreads, two-sided markets, bid-offer price or spread, benchmark securities, bids, offers, reference data, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, and industry and economic events. Certain securities of the Fund for which quotations are not readily available from any source, are valued at fair value by or under the direction of the Investment Adviser utilizing quotations and other information concerning similar securities obtained from recognized dealers. Short-term securities having a maturity of 60 days or less are valued at amortized cost, which approximates fair value. All Puerto Rico fixed income securities valuations provided by broker-dealers are priced using the average of two quotes, if available.

	(2)		These funds seek to provide shareholders long-term growth of capital. These funds will invest up to 80% of its assets in common stock and other equity securities of U.S. and foreign companies with small, medium and large market capitalization, including exchanged-traded funds. One of the funds can also invest in alternative investments. Each fund will invest at least 20% of its assets in Puerto Rico securities. The fair value of the securities is determined on the basis of the valuations provided by dealers or independent pricing services. Equity securities are valued at the official closing price of, or the last reported sales price on, the exchange or market on which such securities are traded, as of the close of business on the day the securities are being valued, or lacking any sales, at the last available bid price. Certain securities of the Fund for which quotations are not readily available from any source, are valued at fair value by or under the direction of the Investment Adviser utilizing quotations and other information concerning similar securities obtained from recognized dealers. Short-term securities having a maturity of 60 days or less are valued at amortized cost, which approximates fair value. All Puerto Rico fixed income securities valuations provided by broker-dealers are priced using the average of two quotes, if available.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as discounted cash flow methodologies, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 Investment securities available for sale include those identical securities traded in active markets, such as U.S. treasury and agency securities. Level 2 securities primarily include Puerto Rico Government securities and mortgage-backed securities.

Other Investment Securities

Federal Home Loan Bank (FHLB) stocks are recorded under the cost method of accounting. There are restrictions on the sale of FHLB stocks, however they are redeemable at par. The carrying amount is a reasonable estimate of fair value.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market. Fair values for loans held for sale are based on observable inputs, such as observable market prices, credit spreads and interest rate yield curves when available. In instances when significant valuation assumptions are not readily observable in the market, instruments are valued based on the best available data in order to approximate fair value. This data may be internally developed and considers types of loans, conformity of loans, delinquency statistics and risk premiums that a market participant would require, and accordingly may be classified as Level 3 in a non-recurring fair value measurement.

Loans

Loans are not recorded at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for disclosure purposes. However, any allowance for collateral dependent loans deemed impaired is measured based on the fair value of the underlying collateral and its estimated disposition costs. The fair value of collateral is determined by external valuation specialists, and accordingly classified as Level 3 inputs for impaired loans in a non-recurring fair value measurement disclosure.

The fair value for disclosure purposes are estimated for portfolios of loans held to maturity with similar financial characteristics, such as loan category, pricing features and remaining maturity. Loans are segregated by type such as commercial, consumer, mortgage, construction, and other loans. Each loan category is further segmented based on similar market and credit risk characteristics. The fair value is calculated by discounting the contractual cash flows using discount rates that reflect the current pricing for loans with similar characteristics and remaining maturity. Fair values consider the credit risk of the counterparties.

Derivatives

For exchange-traded contracts, fair value is based on quoted market prices, and accordingly, classified as Level 1. For non-exchange traded contracts, fair value is based on internally developed proprietary models or discounted cash flow methodology using various inputs. The inputs include those characteristics of the derivative that have a bearing on the economics of the instrument.

The determination of the fair value of many derivatives is mainly derived from inputs that are observable in the market place. Such inputs include yield curves, publicly available volatilities, floating indexes, foreign exchange prices, and accordingly, are classified as Level 2 inputs.

Level 3 derivatives include interest rate lock commitments (IRLC), the fair value for which is derived from the fair value of related mortgage loans primarily based on observable inputs. In estimating the fair value of an IRLC, the Corporation assigns a probability to the loan commitment based on an expectation that it will be exercised and the loan will be funded. In addition, certain OTC equity linked options are priced by counterparties, and accordingly are classified as Level 3 inputs.

Valuations of derivative assets and liabilities reflect the value of the instruments including the values associated with counterparty risk., With the issuance of FASB ASC Topic 820, these values must also take into account the Corporation’s own credit standing, thus including in the valuation of the derivative instrument the value of the net credit differential between the counterparties to the derivative contract. The Corporation does not determine credit value adjustment on derivative assets and liabilities where Santander Group and/or its affiliates are the counterparties, because it believes there is no material exposure to counterparty credit risk.

Deposits and Subordinated Capital Notes

Under FASB ASC Topic 825, the Corporation elected to carry callable brokered certificates of deposits and subordinated notes at fair value. The fair value of callable brokered certificates of deposits, included within deposits, and subordinated capital notes is determined using discounted cash flow analyses over the full term of the instruments. The valuation uses an industry-standard model for the instruments with callable option components. The model incorporates such observable inputs as yield curves, publicly available volatilities and floating indexes and accordingly, is classified as Level 2 inputs.

Deposits, other than those recorded at fair value under FASB ASC Topic 825, are carried at historical cost. For FASB ASC Topic 825 disclosures, fair value of deposits with no stated maturity, such as demand deposits, savings and NOW accounts, money market and checking accounts is equal to the amount payable on demand as of March 31, 2010. The fair value of fixed maturity certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities, including adjustments to reflect the current credit worthiness of the Corporation.

Federal Home Loan Bank Advances

Federal Home Loan Bank advances are carried at historical cost. For FASB ASC Topic 825 disclosures, the fair value is determined by discounting cash flows by market rates currently offered for similar instruments.

Term Notes

Term notes are carried at historical cost. For FASB ASC Topic 825 disclosures, the fair value is determined using discounted cash flows method, which considers an estimated discount rate currently offered for similar borrowings, including adjustments to reflect the current credit worthiness of the Corporation.

Standby Letters Of Credit and Commitments to Extend Credit

Standby letters of credit, financial guarantees, commitments to extend credit, and unused lines of credit generally have stated maturities within one year and are recorded off-balance sheet. As such, valuation techniques discussed herein are for estimating fair value for disclosure purposes. The fair value at inception of the obligation undertaken when issuing the guarantees and commitments that qualify under FASB ASC Topic 460 approximates the unamortized fees received from the customers. The fair value of the liability recorded at inception is amortized into income as lending & deposit-related fees over the life of the guarantee contract.

Non-Recurring Measurements for Assets

The following table presents the carrying value of those assets measured at fair value on a non-recurring basis, for which impairment was recognized during the three months ended March 31, 2010 and the year ended December 31, 2009.


			Carrying Value as of March 31, 2010
			Using
	Carrying		Quoted Prices in		Significant		Significant		Valuation
	Value		Active Markets for		Other		Unobservable		Allowance
	as of		Identical Assets		Observable Inputs		Inputs		for the Period Ended
(Dollars in thousands)	March. 31, 2010		(Level 1)		(Level 2)		(Level 3)		March. 31, 2010

Loans, net(1)	$	145,598	$	—	$	—	$	145,598	$	10,688
Repossesed Assets (2)		8,450		—		—		8,450		1,707

	$	154,048	$	—	$	—	$	154,048	$	12,395


(1)		Amount represented loans measured for impairment during the period based on the fair value of the collateral using the practical expedient in FASB ASC Topic 310.

(2)		Amount represented real estate owned properties measured for impairment during the period based on the fair value of the collateral accordance with the adoption of FASB ASC Topic 820.


			Carrying Value as of December 31, 2009
			Using
	Carrying		Quoted Prices in		Significant		Significant		Valuation
	Value		Active Markets for		Other		Unobservable		Allowance
	as of		Identical Assets		Observable Inputs		Inputs		for the Period Ended
(Dollars in thousands)	Dec. 31, 2009		(Level 1)		(Level 2)		(Level 3)		Dec. 31, 2009
Loans, net(1)	$	183,691	$	—	$	—	$	183,691	$	27,811
Repossesed Assets (2)		25,182		—		—		25,182		7,021

	$	208,873	$	—	$	—	$	208,873	$	34,832


(1)		Amount represented loans measured for impairment during the period based on the fair value of the collateral using the practical expedient in FASB ASC Topic 310.

(2)		Amount represented real estate owned properties measured for impairment during the period based on the fair value of the collateral accordance with the adoption of FASB ASC Topic 820.

Fair Value Option

Callable Brokered Certificates of Deposits and Subordinated Capital Notes

The Corporation elected to account at fair value certain of its callable brokered certificates of deposits and subordinated capital notes that were hedged with interest rate swaps designated for fair value hedge accounting in accordance with FASB ASC Topic 815. As of March 31, 2010, these callable brokered certificates of deposits had been cancelled and subordinated capital notes had a fair value of $124.2 million and principal balance of $125.0 million. As of December, 2009, these callable brokered certificates of deposits had been cancelled and subordinated capital notes had a fair value of $120.6 million and principal balance of $118.3 million. Interest expense on these items is recorded in Net Interest Income whereas net gains (losses) resulting from the changes in fair value of these items, were recorded within Other Income on the Corporation’s condensed consolidated statements of operations. Interest rate risk on the callable brokered certificates of deposits and subordinated capital notes measured at fair value under FASB ASC Topic 825 continues to be economically hedged with callable interest rate swaps with the same terms and conditions.

The following table represents changes in fair value for the three months ended March 31, 2010 and 2009 which includes the interest expense on callable brokered certificates of deposits and interest expense on subordinated capital notes. Interest expense on callable brokered certificates of deposits and subordinated capitals notes that the Corporation has elected to carry at fair value under the provisions of FASB ASC Topic 825 are recorded in interest expense in the condensed consolidated statements of operations based on their contractual coupons.

For the three months ended

March 31, 2010

Changes in

Total Changes in

Fair Value

included in

(Dollars in thousands)

Interest Expense

Other Income

Earnings

Subordinated Capital Notes

5,579

(3,626

)

1,953


	For the three months ended
	March 31, 2009
	Changes in			Changes in			Total Changes in
	Fair Value			Fair Value			Fair Value
	included in			included in			included in
(Dollars in thousands)	Interest Expense			Other Income			Earnings
Callable Brokered Certificates of Deposits	$	(1,100	)	$	316		$	(784	)
Subordinated Capital Notes		(1,944	)		(2,663	)		(4,607	)

Total	$	(3,044	)	$	(2,347	)	$	(5,391	)

The impact of changes in the Corporation’s credit risk on subordinated capital notes for the nine and three months ended March 31, 2010 and 2009 presented in the table below has been calculated as the difference between the fair value of those instruments as of the reporting date and the theoretical fair values of those instruments calculated by using the yield curve prevailing at the end of the reporting period, adjusted up or down for changes in credit spreads from the transition date to the reporting date.

For the three months ended

March 31, 2010

Gain (Loss)

Total

related

not related

Gains

(Dollars in thousands)

Credit Risk

(Losses)

Subordinated Capital Notes

1,709

244

1,953


	For the three months ended
	March 31, 2009
	Gain (Loss)			Gain (Loss)			Total
	related			not related			Gains
	Credit Risk			Credit Risk			(Losses)
Subordinated Capital Notes	$	(4,081	)	$	(526	)	$	(4,607	)

FASB ASC Topic 825 Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates as of March 31, 2010 and 2009, for financial instruments, as defined by FASB ASC Topic 825, excluding short-term financial assets and liabilities, for which carrying amounts approximate fair value, and excluding financial instruments recorded at fair value on a recurring basis. The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding risk characteristics of various financial instruments, current economic conditions, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.


	March 31, 2010				December 31, 2009
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(Dollars in thousands)
Consolidated balance sheets financial instruments:
ASSETS:
Other investment securities	$	51,381	$	51,381	$	55,431	$	55,431

Loans held for sale	$	25,351	$	25,569	$	26,726	$	26,643

Loans (1)	$	5,160,038	$	4,903,278	$	5,034,942	$	4,725,493


LIABILITIES:
Deposits — interest-bearing (2)		3,625,590		3,631,077		3,696,791		3,698,246

Federal Home Loan Advances and other borrowings	$	1,025,000	$	1,032,326	$	1,060,000	$	1,070,542

Subordinated capital note (2)	$	189,000	$	201,608	$	189,000	$	197,979

Term notes	$	15,913	$	15,320	$	20,581	$	21,030


	March 31, 2010					December 31, 2009
	Contract or					Contract or
	Notional					Notional
	Amount		Fair Value			Amount		Fair Value
	(Dollars in thousands)
Off balance sheet financial instruments:
Standby letters of credit and financial guarantees written	$	46,044	$	(180	)	$	41,837	$	(254	)

Commitments to extend credit, approved loans not yet disbursed and unused lines of credit	$	1,616,156	$	(1,616	)	$	1,218,115	$	(1,218	)


(1)		This amount does not include loans measured for impairment during the period based on the fair value of the collateral using the practical expedient in FASB ASC Topic 310.

(2)		This amount does not include callable brokered certificates of deposits of $12.5 million as of December 31, 2009 and subordinated capital notes of $124.2 million and $120.6 million as of March 31, 2010 and December 31, 2009, respectively, measured at fair value under FASB ASC Topic 825.

19. Subsequent Events Reviews:

The Corporation has evaluated all subsequent events through the date this Quarter Report on Form 10-Q was filed with the SEC as significant subsequent events.

PART I — ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Santander BanCorp and Subsidiaries
Selected Financial Data


	Quarter ended March 31,
	2010		2009
	(Dollars in thousands, except per data share)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS:
Interest income	$	113,582	$	128,675
Interest expense		18,821		44,282
Net interest income		94,761		84,393
Security gains		—		9,251
Loss on extinghuishment of debt		—		(9,600	)
Broker-dealer, asset management and insurance fees		13,591		12,965
Other income		15,780		12,752
Operating expenses		62,807		69,377
Provision for loan losses		30,093		41,100
Income tax provision (benefit)		9,802		(685	)

Net income (loss)	$	21,430	$	(31	)

PER COMMON SHARE DATA
Net income (loss)	$	0.46	$	—
Book value	$	13.27	$	11.70
Outstanding shares:
Average		46,639,104		46,639,104
End of period		46,639,104		46,639,104
Cash Dividend per Share	$	—	$	—
AVERAGE BALANCES
Loans held for sale and loans, net of allowance for loan losses	$	5,219,713	$	5,836,035
Allowance for loan losses		195,989		192,800
Earning assets		6,006,634		6,968,818
Total assets		6,772,021		7,757,024
Deposits		4,377,273		5,010,354
Borrowings		1,505,673		1,830,525
Common equity		609,408		555,441
PERIOD END BALANCES
Loans held for sale and loans, net of allowance for loan losses	$	5,185,389	$	5,657,583
Allowance for loan losses		198,160		196,510
Earning assets		6,095,102		6,696,810
Total assets		6,857,677		7,352,980
Deposits		4,481,259		5,099,681
Borrowings		1,483,200		1,334,154
Common equity		619,019		545,465

Continued on the following page


	Quarter ended
	March 31,
	2010			2009
SELECTED RATIOS
Performance:
Net interest margin on a tax-equivalent basis (on an annualized basis)		6.46	%		4.98	%
Efficiency ratio (1)		52.37	%		62.38	%
Return on average total assets (on an annualized basis)*		1.28	%		0.00	%
Return on average common equity (on an annualized basis)*		14.26	%		(0.02	)%
Average net loans/average total deposits		119.25	%		116.48	%
Average earning assets/average total assets		88.69	%		89.84	%
Average stockholders’ equity/average assets		9.00	%		7.16	%
Fee income to average assets (annualized)		1.38	%		1.22	%
Capital:
Tier I capital to risk-adjusted assets		11.10	%		8.95	%
Total capital to risk-adjusted assets		16.15	%		13.68	%
Leverage Ratio		8.26	%		6.21	%
Asset quality:
Non-performing loans to total loans		5.69	%		4.07	%
Annualized net charge-offs to average loans		2.19	%		2.45	%
Allowance for loan losses to period-end loans		3.68	%		3.36	%
Allowance for loan losses to non-performing loans		64.64	%		82.53	%
Allowance for loan losses to non-performing loans plus accruing loans past-due 90 days or more		61.85	%		77.37	%
Non-performing assets to total assets		4.98	%		3.62	%
Recoveries to charge-offs		4.03	%		3.49	%
EARNINGS TO FIXED CHARGES:
Excluding interest on deposits		3.74 x			0.96 x
Including interest on deposits		2.56 x			0.98 x
OTHER DATA AT END OF PERIOD
Customer financial assets under management	$	13,644,000		$	13,598,000
Bank branches		54			54
Consumer Finance branches		60			64

Total Branches		114			118
ATMs		141			163

(Concluded)


*		Per share data is based on the average number of shares outstanding during the periods.

(1)		Operating expenses divided by net interest income on a tax equivalent basis, plus other income excluding gain on sale of securities available for sale, gain on equity securities and loss on early termination of repurchase agreements.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This financial discussion contains an analysis of the consolidated financial position and consolidated results of operations of Santander BanCorp and its wholly-owned subsidiaries (the “Corporation”) and should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report.

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.

In addition to the information contained in this Form 10-Q, readers should consider the description of the Corporation’s business contained in Item 1 of the Corporation’s Form 10-K for the year ended December 31, 2009. While not all inclusive, Item 1 of the Form 10-K, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation’s control, that provides further discussion of the operating results, financial condition and credit, market and liquidity risks is presented in the narrative and tables included herein.

Critical Accounting Policies

The consolidated financial statements of the Corporation and its wholly-owned subsidiaries are prepared in accordance with GAAP and with general practices within the financial services industry. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Corporation’s critical accounting policies are detailed in the Financial Review and Supplementary Information section of the Corporation’s Form 10-K for the year ended December 31, 2009.

Current Accounting Developments

The Corporation’s condensed 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.

Overview of Results of Operations for the Three-Month Periods Ended March 31, 2010 and 2009

Santander BanCorp is the financial holding company for Banco Santander Puerto Rico and subsidiary (the “Bank”), Santander Securities Corporation and subsidiary (‘SSC”), Santander Financial Services, Inc. (“SFS”), Santander Insurance Agency, Inc. (“SIA”) and Island Insurance Corporation (“IIC”).

For the three-month periods ended March 31, 2010 and 2009, net income and other selected financial information, as reported are the following:


	Three months ended
($ in thousands, except earnings per share)	March 31, 2010			March 31, 2009
Net income (loss)	$	21,430		$	(31	)
EPS	$	0.46		$	—
ROA		1.28	%		0.00	%
ROE		14.26	%		(0.02	)%
Efficiency Ratio (*)		52.37	%		62.38	%


(*)		Operating expenses divided by net interest income, on a tax equivalent basis, plus other income excluding a gain on sale of securities available for sale, gain on equity securities and loss on early termination of repurchase agreements.

Overview of Financial Results for the Three-Month Period Ended March 31, 2010 and 2009

The Corporation’s financial results for the three-month periods ended March 31, 2010 were impacted by the following:

	(i)		The Corporation experienced an improvement of 148 basis points in net interest margin, on a tax equivalent basis, to 6.46% for the three months ended March 31, 2010 from 4.98% for the same period in 2009;

	(ii)		The provision for loan losses decreased $11.0 million or 26.8% for the three month period ended March 31, 2010 compared to the same period in 2009, respectively. The provision for loan losses represented 102.9% and 112.7% of the net charge-offs for the three months ended March 31, 2010 and 2009, respectively;

	(iii)		The allowance for loan losses of $198.2 million as of March 31, 2010 represented 3.7% of total loans, 64.6% of non-performing loans and 215.3% of non-performing loans excluding loans secured by real estate. As of December 31, 2009 the allowance for loan losses was $197.3 million represented 3.6% of total loans, 68.1% of non-performing loans and 230.4% of non-performing loans excluding loans secured by real estate;

	(iv)		Non-interest income increased $4.0 million or 15.8% for the three months ended March 31, 2010 as compared to the same period in 2009. Non-interest income was impacted principally by: (i) a gain of $9.3 million on investment securities available for sale offset by a loss of $9.6 million on the early termination of a repurchase agreement in the first quarter of 2009; (ii) a gain of $5.1 million on the sale of a portion of the Corporation’s investment in Visa, Inc. during the first quarter of 2010; (iii) a gain of $2.2 million on sale of loans recognized during the quarter ended March 31, 2009; (iv) and a $0.8 million decrease in loss on derivatives and other financial instruments compared with the same period in prior year;

	(v)		Operating expenses reflected a decrease of $6.6 million or 9.5% for the three months ended March 31, 2010 when compared to the same period in the prior year. This decrease was affected principally by: (i) $2.2 million decrease in professional services; (ii) $1.0 million decrease in salaries and other employee benefits; (iii) $2.1 million decrease in other operational expenses; (iv) $0.5 million decrease in FDIC assessment and (iv) $0.5 million decrease in credit card expense;

	(vi)		Income tax expense increase of $10.5 million due to a higher taxable income when compared with the same figures reported during the same quarter in 2009;

	(vii)		The Efficiency Ratio, on a tax equivalent basis, for the quarter ended March 31, 2010 was 52.37%, reflecting a significant improvement when compared with 62.38% for the quarter ended March 31, 2009.

Net Interest Income

The Corporation’s net interest income for the three months ended March 31, 2010 and 2009 was $94.8 million and $84.4 million, respectively. The $10.4 million or 12.3% increase was mainly due to a decrease of $25.5 million in interest expense offset by a decrease of $15.1 million interest income. The $25.5 million decrease in interest expense was due to decreases of $19.1 million and $6.3 million in interest expense on deposits and interest expense in other borrowings, respectively. The average cost of funds on interest-bearing liabilities was 1.49% for the three months ended March 31, 2010, reflecting a 144 basis points decrease from 2.93% for the same period in 2009. This was influenced by the low maintained rates by the Federal Reserve (“FED”) and management’s actions to lower the rates on certain deposits. Also, the Corporation experienced a $996.3 million reduction average interest bearing liabilities. The interest income decreased $15.1 million due to a $9.8 million decrease in interest income on loans and $5.2 million decrease in interest income on investment securities. The decrease in interest income was driven by a reduction of $962.5 million in average interest-earning assets. The average yield on interest-earning assets reflected an increase of 18 basis points to reach 7.73% for the three months ended March 31, 2010 compared with 7.55% for the same period in the prior year.

The table on page 54, Quarter to Date Average Balance Sheet and Summary of Net Interest Income — Tax Equivalent Basis, presents average balance sheets, net interest income on a tax equivalent basis and average interest rates for the quarter ended March 31, 2010 and 2009. The table on Interest Variance Analysis — Tax Equivalent Basis on page 53, allocates changes in the Corporation’s interest income (on a tax-equivalent basis) and interest expense among changes in the average volume of interest earning assets and interest bearing liabilities and changes in their respective interest rates for three-month period ended March 31, 2010 compared with the same period of 2009.

To permit the comparison of returns on assets with different tax attributes, the interest income on tax-exempt assets has been adjusted by an amount equal to the income taxes which would have been paid had the income been fully taxable. This tax equivalent adjustment is derived using the applicable statutory tax rate and resulted in adjustments of $0.9 million and $1.1 million for the three months ended March 31, 2010 and 2009, respectively.

The following table sets forth the principal components of the Corporation’s net interest income for the three-month periods ended March 31, 2010 and 2009.


	Three months ended
	March 31, 2010			March 31, 2009
	(Dollars in thousands)
Interest income — tax equivalent basis	$	114,523		$	129,777
Interest expense		18,821			44,282

Net interest income — tax equivalent basis	$	95,702		$	85,495

Net interest margin — tax equivalent basis (1)		6.46	%		4.98	%


(1)		Net interest margin for any period equals tax-equivalent net interest income divided by average interest-earning assets for the period (on an annualized basis.)

For the three-month period ended March 31, 2010, net interest margin, on a tax equivalent basis, was 6.46% compared to net interest margin, on a tax equivalent basis, of 4.98% for the same period in 2009. The 148 basis points increase in net interest margin, on a tax equivalent basis, was mainly due to a significant decrease in the cost of average interest-bearing liabilities of 144 basis points from 2.93% for the three months ended March 31, 2009 to 1.49% for the three months ended March 31, 2010, resulting in a decrease of $25.5 million or 57.5% million in interest expense. The yield on the average interest-earning assets reflected an increase of 18 basis points to 7.73% for the three months ended March 31, 2010.

For the three-month period ended March 31, 2010, the average interest-earning assets decreased $962.5 million or 13.8% when compared with figures reported at March 31, 2009. The decrease in average net loans was comprised of the following items:

	(i)		a decrease in the average commercial and construction loans of $205.7 million or 9.7% and $83.9 million or 55.2%, respectively, for the three months ended March 31, 2010 when compared with the same period in 2009, which considers the effect of the sale of loans to an affiliate and net repayments during the 2009;

	(ii)		a decrease of $171.3 million or 6.7% in average mortgage loans mainly due the sale of mortgage loans amounting to $39.2 million in 2009 and a decrease in mortgage loans originations, net of repayments;

	(iii)		a decrease in average consumer loans (including consumer finance) of $128.0 million or 11.4% which comprised $92.9 million, $24.7 million and $10.4 million decreases in average personal loans, credit cards and consumer finance, respectively;

	(iv)		a decrease in average leasing portfolio of $24.2 million or 42.5% since the Corporation has strategically reduced this line of lending;

	(v)		partially offset by a decrease in the average allowance for loan losses of $3.2 million when compared with figures reported in 2009.

Also, there was a decrease of $278.3 million or 34.8% in average investment securities. The average interest bearing deposits experienced a decrease of $67.4 million for the quarter ended March 31, 2010 compared with the same period in prior year.

The average interest-bearing liabilities decreased $996.3 million or 16.2% for the three-month period ended March 31, 2010 driven by a decrease in average interest bearing deposits of $671.4 million and average borrowings of $324.9 million when compared to the three-month period ended March 31, 2009. The decrease in average interest-bearing liabilities was composed of:

	(i)		a decrease of $671.4 million in average total interest bearing deposits comprised of $610.0 million decrease in average brokered deposits and $404.0 million decrease in average other time deposits offset by an increase of $342.5 million average savings and NOW accounts;

	(ii)		a reduction in average securities sold under agreements to repurchase of $311.7 million mainly caused by the early termination of repurchase agreements of $375 million that were funding investment securities sold during the first quarter of 2009;

	(iii)		a decrease in average Federal Home Loan Bank Advances (“FHLB”) of $131.6 million for the three months ended March 31, 2010 compared with the same period in 2009;

	(iv)		an increase of $62.1 million in average commercial paper ;

	(v)		an increase in average federal funds and other borrowings of $48.4 million;

	(vi)		partially offset by an increase of $10.6 million in average subordinated notes due to the changes in note market valuation.

The following table allocates changes in the Corporation’s interest income, on a tax-equivalent basis, and interest expense for the three-month period ended March 31, 2010, compared to the three-month period ended March 31, 2009, among changes related to the average volume of interest-earning assets and interest-bearing liabilities, and changes related to interest rates. Volume and rate variances have been calculated based on the activity in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of change in each category.


	Three Months Ended March 31, 2010
	Compared to the Three Months
	Ended March 31, 2009
	Increase (Decrease) Due to Change in:
	Volume			Rate			Total
	(In thousands)
Interest income, on a tax equivalent basis:
Federal funds sold and securities purchased under agreements to resell	$	(4	)	$	(3	)	$	(7	)
Time deposits with other banks		(33	)		(47	)		(80	)
Investment securities		(2,778	)		(2,838	)		(5,616	)
Loans		(12,948	)		3,397			(9,551	)

Total interest income, on a tax equivalent basis		(15,763	)		509			(15,254	)


Interest expense:
Savings and NOW accounts		1,100			(2,963	)		(1,863	)
Other time deposits		(6,310	)		(10,962	)		(17,272	)
Borrowings		(2,369	)		(3,446	)		(5,815	)
Long-term borrowings		100			(611	)		(511	)

Total interest expense		(7,479	)		(17,982	)		(25,461	)


Net interest income, on a tax equivalent basis	$	(8,284	)	$	18,491		$	10,207

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 three-month periods ended March 31, 2010 and 2009.

SANTANDER BANCORP
QUARTER TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
Tax Equivalent Basis


	March 31, 2010								March 31, 2009
						Annualized								Annualized
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
	(Dollars in thousands)
Assets:
Interest bearing deposits	$	252,952		$	109		0.17	%	$	314,876		$	189		0.24	%
Federal funds sold and securities purchased under agreements to resell		10,704			8		0.30	%		16,208			15		0.38	%

Total interest bearing deposits		263,656			117		0.18	%		331,084			204		0.25	%


U.S.Treasury securities		179,769			483		1.09	%		42,876			30		0.28	%
Obligations of other U.S.government agencies and corporations		5,777			56		3.93	%		74,750			684		3.71	%
Obligations of government of Puerto Rico and political subdivisions		116,108			1,764		6.16	%		204,081			3,442		6.84	%
Corporate bonds		142,443			656		1.87	%		—			—
Collateralized mortgage obligations and mortgage backed securities		25,351			303		4.85	%		420,154			5,359		5.17	%
Other		53,517			816		6.18	%		59,838			179		1.21	%

Total investment securities		522,965			4,078		3.16	%		801,699			9,694		4.90	%


Loans:
Commercial		1,918,701			22,013		4.65	%		2,124,371			24,882		4.75	%
Construction		68,227			534		3.17	%		152,121			1,006		2.68	%
Consumer		434,137			17,402		16.26	%		551,781			21,407		15.73	%
Consumer Finance		558,476			34,596		25.12	%		568,878			32,893		23.45	%
Mortgage		2,403,440			35,266		5.87	%		2,574,757			38,756		6.02	%
Lease financing		32,721			517		6.41	%		56,927			935		6.66	%

Gross loans		5,415,702			110,328		8.26	%		6,028,835			119,879		8.06	%
Allowance for loan losses		(195,989	)							(192,800	)

Loans, net		5,219,713			110,328		8.57	%		5,836,035			119,879		8.33	%
Total interest earning assets/ interest income (on a tax equivalent basis)		6,006,334			114,523		7.73	%		6,968,818			129,777		7.55	%

Total non-interest earning assests		765,687								788,206

Total assets	$	6,772,021							$	7,757,024

Liabilities and stockholders’ equity:
Savings and NOW accounts	$	2,064,743		$	4,523		0.89	%	$	1,722,194		$	6,386		1.50	%
Other time deposits		1,270,548			2,711		0.87	%		1,674,523			13,689		3.32	%
Brokered deposits		297,306			1,419		1.94	%		907,281			7,962		3.56	%
Total interest bearing deposits		3,632,597			8,653		0.97	%		4,303,998			28,037		2.64	%
Federal funds purchased and other borrowings		50,111			26		0.21	%		1,669			0		0.00	%
Securities sold under agreements to repurchase		—			—		—			311,667			3,389		4.41	%
Federal Home Loan advances		1,012,277			6,393		2.56	%		1,143,889			8,602		3.05	%
Commercial paper		115,024			134		0.47	%		52,959			128		0.98	%
Term Notes		17,342			155		3.62	%		20,048			154		3.12	%
Subordinated Notes		310,919			3,460		4.51	%		300,293			3,972		5.36	%

Total interest bearing liabilities/interest expense		5,138,270			18,821		1.49	%		6,134,523			44,282		2.93	%

Total non-interest bearing liabilities		1,024,343								1,067,060

Total liabilities		6,162,613								7,201,583

Stockholders’ Equity		609,408								555,441

Total liabilities and stockholders’ equity	$	6,772,021							$	7,757,024

Net interest income, on a tax equivalent basis				$	95,702							$	85,495

Net interest spread							6.25	%							4.62	%
Cost of funding earning assets							1.27	%							2.58	%
Net interest margin, on a tax equivalent basis							6.46	%							4.98	%

Provision for Loan Losses

The Corporation’s provision for loan losses decreased $11.0 million or 26.8% to reach $30.1 million for the three-month period ended March 31, 2010 compared with figures reported for the same period in prior year. The decrease in provision for loan losses was mainly due to a reduction in loan portfolio, overall improvement in credit ratios metrics and the sale of certain loans including some classified as impaired to an affiliate during 2009.

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

Other Income

Other income consists of service charges on the Corporation’s 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 the Corporation’s other income for the periods indicated:

OTHER INCOME


	For the three months ended
	March 31,			March 31,
	2010			2009
	(In thousands)
Bank service fees on deposit accounts	$	2,752		$	3,335
Other service fees:
Credit card and payment processing fees		2,074			2,119
Mortgage servicing fees		1,032			996
Trust fees		273			277
Confirming advances fees		243			749
Other fees		3,065			2,882

Total fee income		9,439			10,358
Broker/dealer, asset management, and insurance fees		13,591			12,965
Gain on sale of securities available for sale		—			9,251
Gain on sale of loans		39			2,246
Trading gains		939			403
Loss on derivatives and other financial instruments		(2,862	)		(3,613	)
Other gains (losses) gains,		6,024			(8,596	)
Other		2,201			2,354

	$	29,371		$	25,368

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


	For the three months ended
	March 31, 2010		March 31, 2009
	(In thousands)
Broker-dealer	$	5,656	$	6,489
Asset management		6,648		6,128

Total Santander Securities		12,304		12,617
Insurance		1,287		348

Total	$	13,591	$	12,965

For the three-month period ended March 31, 2010, other income reflected an increase of 4.0 million or 15.8% when compared to $25.4 million for the same period in 2009. The changes in other income for the three-month period ended March 31, 2010 as compared with the same period in prior year was follows:

	(i)		There was decrease in gain on sale of securities available for sale of $9.3 million. During the first quarter of 2009, the Corporation sold $441 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) in 2009, on the early termination of repurchase agreements that were funding the securities sold. There was no gain on investment securities available for sale during the quarter ended March 31, 2010;

	(ii)		The Corporation recognized a gain of $5.1 million on the sale of part of the investment in Visa, Inc. during the quarter ended March 31, 2010 which is included within other gains (losses);

	(iii)		There was a $2.2 million decrease in gain on sale of residential mortgage loans due to a $39.2 million decrease in mortgage loans sold when compared with the same period in prior year;

	(iv)		The Corporation reported a loss $2.9 million on derivatives and other financial instruments, a $0.8 million decrease, for the quarter ended March 31, 2010 from a loss of $3.6 million for the quarter ended March 31, 2009;

	(v)		Broker-dealer, asset management and insurance fees reflected a decrease of $0.6 million due to decreases in broker-dealer and asset management fees of $0.3 million offset by an increase of $0.9 million in insurance fees due to 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 46.3% and 51.1% to the Corporation’s other income for the three-month period ended March 31, 2010 and 2009, respectively.

Operating Expenses

The following table presents the detail of other operating expenses for the periods indicated:

OPERATING EXPENSES


	Three months ended
	March 31,			March 31,
	2010			2009
	(In thousands)
Salaries	$	15,197		$	15,042
Pension and other benefits		12,163			13,050
Expenses deferred as loan origination costs		(1,513	)		(1,237	)

Total personnel costs		25,847			26,855

Occupancy costs		6,365			6,257

Equipment expenses		877			1,083

EDP servicing expense, amortization and technical services		9,847			10,254

Communication expenses		2,169			2,447

Business promotion		1,205			767

Other taxes		3,287			3,357

Other operating expenses:
Professional fees		2,626			4,776
Amortization of intangibles		640			773
Printing and supplies		380			334
Credit card expenses		1,164			1,641
Insurance		565			540
Examinations and FDIC assessment		2,180			2,653
Transportation and travel		528			460
Repossessed assets provision and expenses		1,375			1,036
Collections and related legal costs		556			448
All other		3,196			5,696

Other operating expenses		13,210			18,357

Non-personnel expenses		36,960			42,522

Total Operating expenses	$	62,807		$	69,377

The Corporation’s operating expenses reflected a decrease of $6.6 million or 9.5% to reach $62.8 million for the three-month period ended March 31, 2010 when compared with the three-month period ended March 31, 2009. The major variances in operating expenses are described below:

	(i)		a decrease in net salaries and other employee benefits of $1.0 million principally attributed to $0.6 million decrease in commissions and $0.5 million decrease in pension plan expense;

	(ii)		a $2.2 million decrease in professional fees due to a decrease in consulting fees and other professional fees related to the review of certain operational procedures;

	(iii)		decreases of $2.1 million in other operational expenses, $0.5 million in FDIC assessment and $0.5 million in credit card expenses;

The Efficiency Ratio, on a tax equivalent basis, for the three months ended March 31, 2010 was 52.37%, reflecting a significant improvement, from 62.38% for the three months ended March 31, 2009. This improvement was mainly due to higher operating income and a reduction in operating expenses.

Provision for Income Tax

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 Corporation is also subject to municipal license tax at various rates that do not exceed 1.5% on the Corporation’s taxable gross income. 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. The PR Code provides dividends received deduction of 100% on dividends received from controlled subsidiaries subject to taxation in Puerto Rico.

On July 2009, the 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 in 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 will 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.

The income tax provision increased $10.5 million to reach $9.8 million for the three-month period ended March 31, 2010 compared to an income tax benefit of $0.7 million for the same period in 2009. This increase in the provision for income tax resulted from a higher taxable income in 2010 compared with the same period in 2009.

Financial Position — March 31, 2010

Assets

The Corporation’s assets reached $6.9 billion as of March 31, 2010, a $0.1 billion or 1.4% increase compared to total assets of $6.8 billion at December 31, 2009 and a $495.3 million or 6.7% decrease compared to total assets of $7.4 billion at March 31, 2009. The reduction of $0.1 million, for the three-month period ended March 31, 2010, on Corporation’s total assets was driven by decreases of $87.8 million in net loan portfolio partially offset by $73.3 million increase in cash and cash equivalent and $117.7 million increase in other assets mainly due to a $127.4 million increase in confirming advances. The reduction of $495.3 million compared to March 31, 2009 balances was principally due to a $472.2 million decrease in net loan portfolio and $205.6 million decrease in cash and cash equivalents. These decreases were partially offset by increases of $116.4 million and $93.7 million in other assets and investment securities available for sale, respectively.

The composition of the loan portfolio, including loans held for sale, was as follows:


							March 2010 / Dec.						March 2010 /
	March 31,			Dec. 31,			2009			March 31,			March 2009
	2010			2009			Variance			2009			Variance
				(In thousands)
Commercial and industrial	$	1,913,042		$	1,946,579		$	(33,537	)	$	2,071,533		$	(158,491	)
Construction		64,123			70,707			(6,584	)		94,354			(30,231	)
Mortgage		2,394,792			2,415,294			(20,502	)		2,546,593			(151,801	)
Consumer		424,623			443,945			(19,322	)		530,982			(106,359	)
Consumer Finance		556,937			558,948			(2,011	)		557,298			(361	)
Leasing		30,032			35,000			(4,968	)		53,333			(23,301	)

Gross Loans		5,383,549			5,470,473			(86,924	)		5,854,093			(470,544	)
Allowance for loan losses		(198,160	)		(197,303	)		(857	)		(196,510	)		(1,650	)

Net Loans	$	5,185,389		$	5,273,170		$	(87,781	)	$	5,657,583		$	(472,194	)

The net loan portfolio, including loans held for sale, reflected a decrease of $87.8 million or 1.7%, reaching $5.2 billion at March 31, 2010, compared to the figures reported as of December 31, 2009, and a decrease of $472.2 million or 8.4%, when compared to March 31, 2009. The commercial and industrial and construction loans portfolios decreased $33.5 million and $6.6 million, respectively, when compared to the December 31, 2009 balances. The reduction in these portfolios was basically due the repayments of these portfolios, net of the originations. Compared with March 31, 2009 balances, the commercial and construction loans portfolios reflected decreases of $158.5 million and $30.2 million, respectively, due to the sale to an affiliate of commercial and industrial and construction loans, including some classified as impaired during 2009, net of the repayments and originations.

The mortgage portfolio reflected a decrease of $20.5 million and $151.8 million compared to December 31, 2009 and March 31, 2009 balances. Residential mortgage loan origination for the three months ended March 31, 2010 was $44.3 million, $12.3 million or 21.7% less than the $56.6 million originated during the same period in 2009.

Also, the Corporation reported a decrease in consumer loans (including consumer finance) of $21.3 million or 2.1% when compared with December 31, 2009 balances and $106.7 million or 9.8% when compared with March 31, 2009 balances. The leasing portfolio reflected decreases of $5.0 million and $23.3 million when compared with December 31, 2009 and March 31, 2009, respectively, reflecting the Corporation’s strategy to reduce this line of lending.

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 to FASB ASC 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.

The Corporation considers in its allowance for loan and lease losses, debt’s modification of terms that may be identified as Troubled Debt Restructuring (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. As of March 31, 2010, the Corporation restructured $114.6 million residential mortgage loans with allowance for loan losses of $6.8 million.

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.

ALLOWANCE FOR LOAN LOSSES


	For the three month ended
	March 31,
	2010			2009
	(In thousands)
Balance at beginning of period	$	197,303		$	191,889
Provision for loan losses		30,093			41,100

		227,396			232,989


Losses charged to the allowance:
Commercial and industrial		2,924			4,727
Construction		—			2,254
Mortgage		1,105			1,380
Consumer		12,476			13,067
Consumer finance		13,834			16,056
Leasing		126			313

		30,465			37,797


Recoveries:
Commercial and industrial		500			470
Construction		—			20
Consumer		443			333
Consumer finance		232			414
Leasing		54			81

		1,229			1,318

Net loans charged-off		29,236			36,479

Balance at end of period	$	198,160		$	196,510


Ratios:
Allowance for loan losses to period-end loans		3.68	%		3.36	%
Recoveries to charge-offs		4.03	%		3.49	%
Annualized net charge-offs to average loans		2.19	%		2.45	%

The Corporation’s allowance for loan losses was $198.2 million or 3.68% of period-end loans at March 31, 2010, a 32 basis point increase compared to $196.5 million, or 3.36% of period-end loans at March 31, 2009. The $198.2 million in the allowance for loan losses is comprised of $133.7 million related to the Bank and $64.5 million related to Island Finance entity, with a provision for loan losses of $15.4 million and $14.7 million for each respective entity for the three months ended March 31, 2010. At March 31, 2009, the composition of the allowance for loan losses of $196.5 million was comprised of $127.4 million related to the Bank and $69.1 million related to Island Finance, with a provision for loan losses of $25.5 million and $15.6 million for the same period for each respective entity.

The 32 basis points increment in the ratio of allowance for loan losses to period-end loan for the three months ended March 31, 2010 as compared with the same period in 2009 was driven by a $16.7 million increase in non-performing loans which amounted to $306.6 million as of March 31, 2010 versus $238.1 million as of March 31, 2009 and a reduction of $470.5 million in gross loan portfolio balances. 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 61.9%, 65.5% and 77.4% at March 31, 2010, December 31, 2009 and March 31, 2009, respectively. Excluding non-performing mortgage loans this ratio was 187.2% at March 31, 2010 compared to 217.0% at March 31, 2009 and 203.7% at December 31, 2009.

The annualized ratio of net charge-offs to average loans for the three-month period ended March 31, 2010 was 2.19%, decreasing 26 basis points from 2.45% for the same period in 2009. This change was due to a reduction in net charge-offs of $7.2 million during the quarter ended March 31, 2010 when compared with the same period in 2009 combined with a decrease in average gross loans of $613.1 million for the three months ended March 31, 2010 compared with the same period in 2009.

At March 31, 2010, impaired loans (loans evaluated individually for impairment) and related allowance amounted to approximately $279.6 million and $35.4 million, respectively. At December 31, 2009 impaired loans and related allowance amounted to $252.4 million and $28.8 million, respectively.

Although the Corporation’s provision and allowance for loan losses will fluctuate from time to time based on economic conditions, net charge-off levels and changes in the level and mix of the loan portfolio, management considers that the allowance for loan losses is adequate to absorb probable losses on its loan portfolio.

Non-performing Assets and Past Due Loans

As of March 31, 2010, the Corporation’s total non-performing loans (excluding other real estate owned) reached $306.6 million or 5.69% of total loans from $289.8 million or 5.30% of total loans as of December 31, 2009 and from $238.1 million or 4.07% of total loans as of March 31, 2009. The Corporation’s non-performing loans reflected an increase of $68.5 million or 28.8% compared to non-performing loans as of March 31, 2009 and an increase of $16.7 million or 5.8% compared to non-performing loans as of December 31, 2009. The $68.5 million increase in non-performing loans was principally due to $45.9 million increase in non-performing residential mortgage loans, $9.8 million increase in construction loans, $5.5 million in non-performing consumer loans (including consumer finance) and $4.3 million in commercial loans when compared to March 31, 2009. Compared to December 31, 2009, the increase of $16.7 million was composed mainly of $9.8 million and $3.2 million increases in non-performing residential mortgage loans and consumer loans (including consumer finance).

The Corporation continuously monitors non-performing assets and has deployed significant resources to manage the non-performing loan portfolio. Management expects to continue to improve its collection efforts by devoting more full time employees and outside resources.

Non-performing Assets and Past Due Loans


	March 31,			December 31,			March 31,
	2010			2009			2009
	(Dollars in thousands)
Commercial and Industrial	$	31,883		$	31,021		$	27,624
Construction		15,697			15,571			5,912
Mortgage		195,998			186,202			150,136
Consumer		12,663			10,385			13,825
Consumer Finance		44,731			43,782			38,080
Leasing		1,925			1,908			2,524
Restructured Loans		3,662			977			—

Total non-performing loans		306,559			289,846			238,101
Repossessed Assets		34,973			34,486			28,410

Total non-performing assets	$	341,532		$	324,332		$	266,511


Accruing loans past-due 90 days or more	$	13,829		$	11,214		$	15,899
Non-Performing loans to total loans		5.69	%		5.30	%		4.07	%
Non-Performing loans plus accruing loans past due 90 days or more to total loans		5.95	%		5.50	%		4.34	%
Non-Performing assets to total assets		4.98	%		4.79	%		3.62	%

Liabilities

The Corporation’s total liabilities reached $6.2 billion as of March 31, 2010, reflecting an increase of $68.1 million or 1.1% compared to December 31, 2009. This increase in total liabilities was principally due to a increase in total deposits of $85.7 million or 2.0% to $4.5 billion balance reported as of March 31, 2010 partially offset by 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 $23.6 million or 1.6% as of March 31, 2010 from $1.5 billion at December 31, 2009.

Total deposits of $4.5 billion as of March 31, 2010 were composed of $0.3 billion in brokered deposits and $4.2 billion of customer deposits. Compared to December 31, 2009, brokered deposits reflected an increase of $21.5 million or 7.2% and customer deposits reflected an increase of $64.2 million as of March 31, 2010. Total deposits reflected a decrease of $618.4 million compared with $5.1 billion as of March 31, 2009 which comprised decreases of $537.7 million and $80.7 million in brokered deposits and customer deposits, respectively.

Total borrowings at March 31, 2010 (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 $23.6 million or 1.6% and 149.0 million or 11.2% compared to borrowings at December 31, 2009 and March 31, 2009, respectively. The $23.6 million reduction was mainly due to $90.0 million decrease in Federal Home Loan Bank advances and $4.7 million decrease in term notes partially offset by an increase of $62.5 million in commercial paper issued, $5.0 million in federal funds purchased and $3.6 million increase in subordinated capital notes. The $149.0 million increase compared with March 31, 2009 balances was mainly due a increases in Federal Home Loan Bank advances and federal funds purchased of $95.9 million and $54.1 million, respectively.

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. The Loans bear interest at a fixed rate of 0.778% per annum. Interest is payable at maturity of the Loans. The Corporation and Santander Financial did not pay any fee or commission to the Bank in connection with the Loans. The entire principal balance of the Loans is due and payable on May 24, 2010.

On January 22, 2010, Santander BanCorp (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. The Loans bear interest at a fixed rate of 0.67% per annum. Interest is payable at maturity of the Loans. The Corporation and Santander Financial did not pay any fee or commission to the Bank in connection with the Loans. The entire principal balance of the Loans matured and was paid on March 23, 2010.

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.

Capital and Dividends

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 issuance alternatives. It may issue capital in the future, as needed, to maintain its “well-capitalized” status.

Stockholders’ equity was $619.0 million, or 9.0% of total assets at March 31, 2010, compared to $595.9 million or 8.8% of total assets at December 31, 2009. The $23.1 million increase in stockholders’ equity was composed of net income of $21.4 million, an increase in minimum pension benefit of $0.7 million and stock incentive plan expense recognized as capital contribution of $0.4 million during the three-month period ended March 31, 2010 and a decrease in accumulated other comprehensive loss of $0.6 million related unrealized gains on investment securities available for sale.

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 dividends 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.

The Corporation adopted and implemented various Stock Repurchase Programs in May 2000, December 2000 and June 2001. Under these programs the Corporation acquired 3% of its then outstanding common shares. During November 2002, the Corporation started a fourth Stock Repurchase program under which it planned to acquire 3% of its outstanding common shares. In November 2002, the Corporation’s Board of Directors authorized the Corporation to repurchase up to 928,204 shares, or approximately 3%, of its shares of outstanding common stock, of which 325,100 shares have been purchased. 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 any significant impact on the Corporation’s 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 three months ended March 31, 2010 and 2009, the Corporation did not repurchase any shares of common stock. As of March 31, 2010, the Corporation had repurchased 4,011,260 shares of its common stock under these programs at a cost of $67.6 million. The Corporation’s management believes that the repurchase program will not have 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. 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 March 31, 2010, the firstquarter of 2010, the Corporation’s stock price traded consistently below (from $11.73 to $12.56) the book value per share of $13.27 as of March 31, 2010. This is mainly attributed to the cash tender offer described below, which carries an offer of $12.25 stock price.

On December 14, 2009, Banco Santander, S.A. (“Banco Santander”) 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 Santander BanCorp (NYSE: SBP; LATIBEX: XSBP) at $12.25 per share. Banco Santander, which currently owns 90.6% of the outstanding shares of Santander BanCorp. As soon as reasonably practicable after the consummation of the offer Banco Santander intends to consummate a short-form merger with Santander BanCorp 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 Santander BanCorp and Banco Santander has not asked the board of directors of Santander BanCorp to approve the tender offer. Santander BanCorp’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 with the U.S. Securities and Exchange Commission when the offer commences. On or before the date 10 business days after the commencement of the tender offer, a special committee of independent directors of Santander BanCorp intends to announce if it recommends acceptance or rejection of the tender offer, expresses no opinion and remains neutral toward the tender offer, or is unable to take a position with respect to the tender offer, as well as setting forth the reasons for its position with respect to the tender offer. Santander BanCorp stockholders are urged to defer making any determination with respect to the tender offer until they have been advised of such special committee’s position with respect to the tender offer.

The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. The regulations require the Corporation to meet specific capital guidelines that involve quantitative measures of the Corporation’s 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.

At March 31, 2010, the Corporation continued to exceed the regulatory risk-based capital requirements. Tier I capital to risk-adjusted assets and total capital ratios at March 31, 2010 were 11.10% and 16.15%, respectively, and the leverage ratio was 8.26%.

Liquidity

The Corporation’s general policy is to maintain liquidity adequate to ensure its ability to honor withdrawals of deposits, make repayments at maturity of other liabilities, extend loans and meet its own working capital needs. Liquidity is derived from the Corporation’s capital, reserves, and 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.

Management monitors liquidity levels continuously. The focus is on the liquidity ratio, which presents total liquid assets over net volatile liabilities and core deposits. The Corporation believes it has sufficient liquidity to meet current obligations.

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. Refer to Notes 1, 12 and 18 to the accompanying consolidated financial statements for additional details of the Corporation’s derivative transactions as of March 31, 2010 and December 31, 2009.

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.

Economic Undesignated Hedges:

The following table summarizes the derivative contracts designated as economic undesignated hedges as of March 31, 2010 and December 31, 2009, respectively:


	March 31, 2010
	Notional
(In thousands)	Amounts		Fair Value		Loss
Economic Undesignated Hedges
Interest Rate Swaps	$	125,000	$	1,182	$	1,674


Totals	$	125,000	$	1,182	$	1,674


	December 31, 2009
	Notional
(In thousands)	Amounts		Fair Value			Gain
Economic Undesignated Hedges
Interest Rate Swaps	$	125,000	$	(492	)	$	(5,702	)


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


*		Net of tax.

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 March 31, 2010 and December 31, 2009, 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 March 31, 2010 and 0.68% and 6.22% as of December 31, 2009, 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.

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. 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 March 31, 2010 and December 31, 2009, respectively:


	March 31, 2010
	Notional
(In thousands)	Amounts *		Fair Value			Gain (Loss)
Interest Rate Contracts
Interest Rate Swaps	$	3,308,774	$	(687	)	$	(907	)
Interest Rate Caps		6,970		—			—
Other		2,908		(27	)		(19	)
Equity Derivatives		212,650		—			—

Totals	$	3,531,302	$	(714	)	$	(926	)


	December 31, 2009
	Notional
(In thousands)	Amounts *		Fair Value			Gain (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


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

PART I — ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

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 continuously revised and implement 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 March 31, 2010 and December 31, 2009:


	March 31, 2010			December 31, 2009
	($ in thousands)
Banking operations:
Commercial and industrial	$	1,914,277		$	1,947,809
Consumer		424,838			443,567
Leasing		31,339			36,624
Construction		63,614			70,879
Mortgage Loans		2,366,525			2,385,592

		4,800,593			4,884,471

Consumer Finance:
Consumer Installment Loans		475,833			504,054
Mortgage Loans		272,074			279,456

		747,907			783,510

Sub-total		5,548,500			5,667,981

Unearned income and deferred fees/cost:
Banking operations		668			328
Consumer finance		(190,970	)		(224,562	)
Allowance for loans losses:
Banking operations		(133,710	)		(133,930	)
Consumer finance		(64,450	)		(63,373	)

	$	5,160,038		$	5,246,444

The Corporation’s gross loan portfolio as of March 31, 2010 and December 31, 2009 amounted to $5.5 billion and $5.7 billion at March 31, 2010 and December 31, 2009, which represented 91.0% and 92.5%, 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 March 31, 2010 and December 31, 2009, 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 March 31, 2010 and December 31, 2009, the Corporation had over 305,000 and 312,000 consumer loan customers, respectively, and over 8,000 commercial loan customers, respectively, As of such dates, the Corporation had 34 and 44 clients with commercial loans outstanding over $10.0 million, respectively. Although the Corporation has generally avoided cross-border loans, the Corporation had approximately $12.7 and $11.7 million in cross-border loans as of March 31, 2010 and December 31, 2009, 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:


	March 31, 2010
	First		Second		Total		Vintage			Non-performing		% of
	mortgage		mortgage		Mortgage		% of total			loans		total loans
					(Dollars in thousands)
Vintage:
2010	$	13,860	$	56	$	13,916		1	%	$	—		0.00	%
2009		56,921		407		57,328		2	%		125		0.22	%
2008		109,015		1,521		110,536		5	%		2,911		2.63	%
2007		250,868		2,438		253,306		11	%		15,110		5.97	%
2006		518,033		3,792		521,825		22	%		44,993		8.62	%
2005 and earlier		1,406,780		2,834		1,409,614		59	%		97,983		6.95	%

Sub- Total	$	2,355,477	$	11,048	$	2,366,525		100	%	$	161,122		6.81	%


	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	%

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 41% and 59% of the total mortgage originations for the years ended March 31, 2010 and December 31, 2009, respectively. The Corporation performed strict quality control reviews of third party originated loans, which represented 59% and 41% of the total originated mortgage portfolio for the years ended March 31, 2010 and December 31, 2009. 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 43% and 42% of total gross loans at March 31, 2010 and December 31, 2009, respectively. As of March 31, 2010 and December 31, 2009, the first mortgage portfolio totaled approximately $2.4 billion, while the second mortgage portfolio was approximately $11.0 million and $11.2 million as of March 31, 2010 and December 31, 2009, 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:


	March 31, 2010
	First		Second		ARM		Total		Vintage			Non-performing		% of
	mortgage		mortgage		mortgage		Mortgage*		% of total			loans		total loans
							(Dollars in thousands)
Vintage:
2010	$	3,153	$	82	$	—	$	3,235		2	%	$	—		0.00	%
2009		13,517		120		—		13,637		9	%		—		0.00	%
2008		27,039		373				27,412		17	%		2,302		8.40	%
2007		23,890		990		1,074		25,954		16	%		2,592		9.99	%
2006		12,032		835		19,988		32,855		21	%		4,702		14.31	%
2005 and earlier		30,938		6,759		16,776		54,473		35	%		6,525		11.98	%

Total	$	110,569	$	9,159	$	37,838	$	157,566		100	%	$	16,121		10.23	%


*		Net of unearned finance charges and deferred income/cost


	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

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 March 31, 2010 and December 31, 2009.


	March 31, 2010
	“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	$	1,487,953	74%	$	229,219		74%	$	649,353	75%	$	2,366,525	74%
Consumer Finance		68,196	66%		39,010		67%		50,360	65%		157,566	64%

	$	1,556,149		$	268,229			$	699,713		$	2,524,091


*Consumer Installment Loans:**
Banking Operations	$	262,355	n/a	$	47,265		n/a	$	115,218	n/a	$	424,838	n/a
Consumer Finance		191,264	n/a		107,374		n/a		100,653	n/a		399,291	n/a

	$	453,619		$	154,639			$	215,871		$	824,129


*		Net of unearned finance charges and deferred income/cost


	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

At March 31, 2010, residential mortgage portfolio categorized as near prime or “Band C” loans was approximately $649.4 million and $50.4 million for banking operations and consumer finance business, respectively, a 27% and 32% of its total residential mortgage portfolio, respectively. The mortgage loans amounts reported in “Band C” as of March 31, 2010 includes $0.3 million or 0.4% of originated loans during the year for banking operations and $0.4 million or 0.3% for consumer finance portfolio. 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.

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 March 31, 2010 and December 31, 2009 was 676 and 677, respectively and an average LTV of 74% as compared to 72% as of December 31, 2009. For its consumer finance business residential mortgages, average FICO score, as of March 31, 2010 and December 31, 2009 was 644and 643, respectively and an average LTV of 66% as of March 31, 2010 and December 31, 2009. 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 $44.3 million for the quarter ended March 31, 2010 and $195.4 million for the year ended December 31, 2009. The Corporation sold and securitized $21.7 million and $169.5 million for the quarter ended March 31, 2010 and year ended December 31, 2009, respectively, to third parties. Within the sales and securitizations numbers mentioned above, the Corporation sold and securitized $1.4 million and $7.7 million of near prime or “Band C” loans for the quarter ended March 31, 2010 and year ended December 31, 2009, 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.

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 $114.6 million as of March 31, 2010. Refer to the Allowance for Loan Losses section for further information.

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 and Chief Executive Officer, 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 March 31, 2010, was positive $3.0 million or 0.05% 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 March 31, 2010 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 are made, 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.

SANTANDER BANCORP
MATURING GAP ANALYSIS
As of MARCH 31, 2010


	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	$	1,050		$	15,777		$	372,790		$	19,114		$	4,370		$	—		$	92,498		$	505,599
Deposits in Other Banks		262,132			2,200			—			—			—			—			139,782			404,114
Loan Portfolio
Commercial		1,143,722			190,403			195,482			168,389			109,112			64,889			71,077			1,943,074
Construction		36,326			2,747			9,522			1,613			3,406			1,504			9,005			64,123
Consumer		304,619			172,205			295,091			163,759			34,661			5,891			5,334			981,560
Mortgage		111,765			296,469			556,296			424,655			739,820			126,664			139,123			2,394,792
Fixed and Other Assets		—			—			—			—			—			—			564,415			564,415

Total Assets	$	1,859,614		$	679,801		$	1,429,181		$	777,530		$	891,369		$	198,948		$	1,021,234		$	6,857,677


LIABILITIES AND STOCKHOLDERS’ EQUITY

External Funds Purchased
Commercial Paper	$	130,000		$	—		$	—		$	—		$	—		$	—		$	(38	)	$	129,962
Repurchase Agreements		—			—			—			—			—			—			—			—
Federal Funds Purchased and Other Borrowings		205,000			395,000			425,000			—			—			—			—			1,025,000
Deposits
Certificates of Deposit		1,091,532			321,232			59,277			12,774			—			4			(5,681	)		1,479,138
Demand Deposits and Savings Accounts		256,418			—			608,781			(12,895	)		1,310			—			2,055			855,669
Transactional Accounts		11,912			—			1,406,947			682,293			—			—			45,300			2,146,452
Term and Subordinated Debt		—			—			15,913			175,000			73,325			60,000			4,000			328,238
Other Liabilities and Capital		—			—			—			—			—			—			893,218			893,218

Total Liabilities and Capital	$	1,694,862		$	716,232		$	2,515,918		$	857,172		$	74,635		$	60,004		$	938,854		$	6,857,677


Off-Balance Sheet Financial Information

Interest Rate Swaps (Assets)	$	1,490,303		$	23,645		$	14,068		$	152,417		$	1,592,341		$	36,000		$	—		$	3,308,774
Interest Rate Swaps (Liabilities)		1,615,584			23,645			13,787			27,417			1,592,341			36,000			—			3,308,774
Caps		3,259			—			3,711			—			—			—			—			6,970
Caps Final Maturity		3,259			—			3,711			—			—			—			—			6,970

GAP	$	39,471		$	(36,431	)	$	(1,086,456	)	$	45,358		$	816,734		$	138,944		$	82,380		$	—

Cumulative GAP	$	39,471		$	3,040		$	(1,083,416	)	$	(1,038,058	)	$	(221,324	)	$	(82,380	)	$	—		$	—

Cumulative interest rate gap to earning assets		0.63	%		0.05	%		-17.22	%		-16.49	%		-3.52	%		-1.31	%

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 $27.0 million of NIM sensitivity for a 1% parallel shock and $115 million of MVE sensitivity for a 1% parallel shock.

As of March 31, 2010, 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 $5.2 million if market rates were to increase 100 basis points immediately parallel across the yield curve, less than the $27.0 million limit. For purposes of the Market Value Shock Report it was determined that the Corporation had a potential loss of approximately $18.7 million if market rates were to increase 100 basis points immediately parallel across the yield curve, less than the $115.0 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 March 31, 2010.


	NET INTEREST MARGIN SHOCK REPORT
	March 31, 2010
(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	$	391.8	$	394.4	$	393.6	$	390.7	$	388.4		$	385.5		$	378.0


Sensitivity	$	1.1	$	3.7	$	2.9			$	(2.3	)	$	(5.2	)	$	(12.7	)


	MARKET VALUE SHOCK REPORT
	March 31, 2010
(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	$	813.9		$	841.9	$	833.8	$	818.2	$	815.5		$	799.5		$	772.4


Sensitivity	$	(4.3	)	$	23.7	$	15.6			$	(2.7	)	$	(18.7	)	$	(45.8	)

As of March 31, 2010 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.

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 its ability to honor withdrawals of deposits, make repayments at maturity of other liabilities, extend loans and meet its own 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 March 31, 2010, the Corporation had $1.5 billion in unsecured lines of credit ($692.7 million available) and $2.6 billion in collateralized lines of credit with banks and financial entities ($1.6 billion available). All securities in portfolio are highly rated and very liquid enabling the Corporation to treat them as a secondary source of liquidity.

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

Liquidity is derived from the Corporation’s capital, reserves and 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 March 23, 2010, Santander BanCorp (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 $422 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 January 22, 2010 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 $604 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. The Loans bear interest at a fixed rate of 0.778% per annum. Interest is payable at maturity of the Loans. The Corporation and Santander Financial did not pay any fee or commission to the Bank in connection with the Loans. The entire principal balance of the Loans is due and payable on May 24, 2010.

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.

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 March 31, 2010, the Corporation had a liquidity ratio of 12.0%. At March 31, 2010, the Corporation had total available liquid assets of $785.5 million. The Corporation believes 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.

PART I. ITEM 4

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporation’s management, including the Chief Executive Officer and the Chief Accounting Officer (as the Corporation’s principal financial officer), conducted an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and the Chief Accounting Officer (as the Corporation’s principal financial officer) concluded that the design and operation of these disclosure controls and procedures were effective.

Changes in Internal Controls

There have been no changes in the Corporation’s internal controls over financial reporting during the three-month periods covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal controls over financial reporting.

PART II — OTHER INFORMATION


ITEM I		— 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 there from would not have a material adverse effect on the consolidated results of operations or consolidated financial condition of the Corporation. For discussion of certain other legal proceedings involving the Corporation, please, refer to the Corporation’s Annual Report on Form 10K for the year ended December 31, 2009.


ITEM 1A.		RISK FACTORS

There are no material changes in risk factors as previously disclosed under Item 1A of the Corporation’s Form 10-K for the year ended December 31, 2009.


ITEM 2		— UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None


ITEM 3		— DEFAULTS UPON SENIOR SECURITIES

None


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

Santander BanCorp’s Annual Meeting of Stockholders was held on April 26, 2010. A quorum was obtained with 43,531,486 shares represented in person or by proxy, which represents 93.34% of all votes eligible to be cast at the meeting. The following results were obtained for the proposals voted at the meeting:

•

The following three directors were elected for a three-year term, ending in April 2013:


	For		Exception		Withheld
Victor Arbulu		42,189,590		286,764		287,364
María Calero		41,007,590		286,764		1,469,364
Sthephen Ferris		42,188,800		286,764		288,154

•

A resolution to ratify the appointment of Deloitte & Touche LLP as the Corporation’s independent accountants for fiscal year 2010 was approved with the following results:


For			43,517,790
Against			6,390
Abstained			7,306


ITEM 5		— OTHER INFORMATION

None


ITEM 6		— EXHIBITS


Exhibit No.	Description	Reference
(10.0)	Code of Ethics	Exhibit 8-K-04/01/09
(10.1)	Loan Agreement between Santander BanCorp, Santander Financial Services, Inc. and Banco Santander Puerto Rico	Exhibit 8K-03/29/10
(12)	Computation of Ratio of Earnings to Fixed Charges	Exhibit 12
(31.1)	Certification from the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Exhibit 31.1
(31.2)	Certification from the Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Exhibit 31.2
(32.1)	Certification from the Chief Executive Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Exhibit 32.2

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SANTANDER BANCORP
Name of Registrant



Dated: May 10, 2010	By:	/s/ Juan Moreno
		President and Chief Executive Officer



Dated: May 10, 2010	By:	/s/ Roberto Jara
		Executive Vice President and
		Chief Accounting Officer

SANTANDER BANCORP 10-Q