- Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
Santander Bancorp (Holding CO)	NYSE:SBP	NYSE	Ordinary Share

	Price Change	% Change	Share Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	12.68				0.00	01:00:00

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 September 30, 2009

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
(Do not check if a smaller reporting company)

Smaller reporting company o

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

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 September 30, 2009


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 Income (Loss)		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		44

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		71

Item 4.	Controls and Procedures		81

Part II: Other Information
Item 1.	Legal Proceedings		82
Item 1A.	Risk Factors		82
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		82
Item 3.	Defaults Upon Senior Securities		82
Item 4.	Submission of Matters to a Vote of Security Holders		82
Item 5.	Other Information		82
Item 6.	Exhibits		83

Signatures			84
EX-12
EX-31.1
EX-31.2
EX-32.1

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 SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
(Dollars in thousands, except share data)


	September 30,			December 31,
	2009			2008
ASSETS

Cash and Cash Equivalents:
Cash and due from banks	$	260,277		$	217,311
Interest-bearing deposits		787			976
Federal funds sold		47,825			64,871

Total cash and cash equivalents		308,889			283,158
Interest-Bearing Deposits		9,178			7,394
Trading Securities, at fair value:		30,061			64,719
Investment Securities Available for Sale, at fair value:
Securities pledged that can be repledged		—			408,650
Other investment securities available for sale		423,538			393,462

Total investment securities available for sale		423,538			802,112

Other Investment Securities, at amortized cost		53,631			61,632
Loans Held for Sale, net		25,173			38,459
Loans, net		5,343,466			5,929,499
Accrued Interest Receivable		44,922			45,953
Premises and Equipment, net		21,061			19,368
Real Estate Held for Sale		2,818			8,075
Goodwill		121,482			121,482
Intangible Assets		29,194			29,842
Other Assets		425,218			485,883

	$	6,838,631		$	7,897,576


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non interest-bearing	$	692,538		$	692,963
Interest-bearing, including $12.4 million and $101.4 million at fair value in 2009 and 2008, respectively		3,740,157			4,321,939

Total deposits		4,432,695			5,014,902

Federal Funds Purchased and Other Borrowings		47,500			2,040
Securities Sold Under Agreements to Repurchase		—			375,000
Commercial Paper Issued		116,961			50,985
Federal Home Loan Bank Advances		1,020,000			1,185,000
Term Notes		20,424			19,967
Subordinated Capital Notes, including $123.2 million and $118.3 million at fair value in 2009 and 2008, respectively		311,336			306,392
Accrued Interest Payable		31,106			45,419
Other Liabilities		282,920			346,235

Total liabilities		6,262,942			7,345,940

Contingencies and Commitments (Notes 8, 9, 10, 11, 12, 13, 14 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		318,282			317,141
Treasury stock at cost, 4,011,260 shares		(67,552	)		(67,552	)
Accumulated other comprehensive loss, net of taxes		(22,173	)		(22,563	)
Retained earnings:
Reserve fund		139,250			139,250
Undivided profits		81,256			58,734

Total stockholders’ equity		575,689			551,636

	$	6,838,631		$	7,897,576

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

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands, except per share data)


	For the nine months ended						For the three months ended
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
Interest Income:
Loans	$	348,861		$	417,070		$	113,844		$	135,263
Investment securities		17,479			38,758			4,132			11,442
Interest-bearing deposits		433			750			89			174
Federal funds sold		58			3,897			15			1,132

Total interest income		366,831			460,475			118,080			148,011

Interest Expense:
Deposits		68,723			117,403			18,410			37,235
Securities sold under agreements to repurchase and other borrowings		28,242			65,047			8,054			15,240
Subordinated capital notes		11,243			9,974			3,561			3,130

Total interest expense		108,208			192,424			30,025			55,605

Net interest income		258,623			268,051			88,055			92,406
Provision for Loan Losses		115,525			123,650			40,689			45,560

Net interest income after provision for loan losses		143,098			144,401			47,366			46,846

Other Income (Loss):
Bank service charges, fees and other		30,097			33,744			9,746			10,220
Broker-dealer, asset management and insurance fees		45,165			58,110			13,986			16,137
Gain on sale of securities available for sale		9,251			5,153			—			2,279
Gain on sale of loans		3,820			3,004			1,019			737
Other (loss) income		(3,025	)		19,756			(2,806	)		7,040

Total other income		85,308			119,767			21,945			36,413

Other Operating Expenses:
Salaries and employee benefits		79,513			92,883			24,633			31,372
Occupancy costs		18,976			20,631			6,597			7,409
Equipment expenses		3,032			3,340			988			1,087
EDP servicing, amortization and technical assistance		29,782			31,208			9,760			10,147
Communication expenses		6,988			7,724			2,193			2,544
Business promotion		2,794			5,438			926			1,652
Provision for claim receivable		—			25,120			—			25,120
Other taxes		9,895			10,150			3,179			3,394
Other operating expenses		49,565			52,947			13,369			19,027

Total other operating expenses		200,545			249,441			61,645			101,752

Income (loss) before income tax		27,861			14,727			7,666			(18,493	)
Provision (Benefit) for Income Tax		5,336			(1,349	)		(2,805	)		(10,331	)

Net Income (Loss) Available to Common Shareholders	$	22,525		$	16,076		$	10,471		$	(8,162	)


Basic and Diluted Earnings (Loss) per Common Share	$	0.48		$	0.34		$	0.22		$	(0.18	)

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 NINE MONTHS ENDED SEPTEMBER 30, 2009 AND YEAR ENDED DECEMBER 31, 2008
(Dollars in thousands)


	For the nine months ended			Year ended
	September 30, 2009			December 31, 2008
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		317,141			308,373
Share based compensation sponsored by the ultimate parent		1,974			9,710
Payments to ultimate parent for long-term incentive plan		(833	)		(942	)

Balance at end of period		318,282			317,141

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		(22,563	)		(24,478	)
Unrealized net (loss) gain on investment securities available for sale, net of tax		(3,181	)		13,449
Unrealized net gain on cash flow hedges, net of tax		—			1,237
Minimum pension benefit (liability), net of tax		3,571			(12,771	)

Balance at end of the period		(22,173	)		(22,563	)

Reserve Fund:
Balance at beginning of period		139,250			139,250

Balance at end of the period		139,250			139,250

Undivided Profits:
Balance at beginning of period		58,734			54,317
Net income		22,525			10,531
Deferred tax benefit amortization		(3	)		(4	)
Common stock cash dividends		—			(9,329	)
Cummulative effect of the adoption of FASB ASC
Topic 825, Fair Value Option		—			3,219

Balance at end of the period		81,256			58,734

Total stockholders’ equity	$	575,689		$	551,636

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 NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands)


	For the nine months ended						For the three months ended
	Sept. 30,			Sept. 30,			Sept. 30,		Sept. 30,
	2009			2008			2009		2008

Comprehensive income (loss)
Net income (loss)	$	22,525		$	16,076		$	10,471	$	(8,162	)

Other comprehensive income (loss), net of tax:
Unrealized holding losses on investment securities available for sale, net of tax		1,522			1,408			2,606		3,557
Reclassification adjustment for gains on investment securities available for sale included in net income (loss), net of tax		(4,703	)		(1,689	)		—		(2,093	)

Unrealized net (loss) gain on investment securities available for sale, net of tax		(3,181	)		(281	)		2,606		1,464

Unrealized net gain on cash flow hedges, net of tax		—			1,049			—		573
Minimum pension benefit, net of tax		3,571			—			2,771		—

Total other comprehensive income, net of tax		390			768			5,377		2,037

Comprehensive income (loss)	$	22,915		$	16,844		$	15,848	$	(6,125	)

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 NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands)


	For the nine months ended
	September 30,			September 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	22,525		$	16,076

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,512			11,515
Deferred tax benefit		(6,307	)		(9,895	)
Provision for loan losses		115,525			123,650
Gain on sale of securities available for sale		(9,251	)		(5,153	)
Gain on sale of loans		(3,820	)		(3,004	)
Loss (gain) on financial instruments measured at fair value		8,356			(4,135	)
Gain on trading securities		(1,537	)		(2,798	)
Valuation (gain) loss on loans held for sale		—			6,902
Net premium amortization (discount accretion) on securities		366			(2,732	)
Net (discount acretion) premium amortization on loans		(359	)		281
Accretion of debt discount		478			470
Share based compensation sponsored by the ultimate parent		1,974			8,039
Provision for claim receivable		—			25,120
Purchases and originations of loans held for sale		(150,373	)		(294,294	)
Proceeds from sales of loans		187,494			317,536
Repayments of loans held for sale		506			16,710
Proceeds from sales of trading securities		709,324			1,869,182
Purchases of trading securities		(588,996	)		(1,798,473	)
Decrease in accrued interest receivable		1,031			28,834
Decrease in other assets		8,968			18,172
Decrease in accrued interest payable		(14,314	)		(32,265	)
Drecrease in other liabilities		(9,445	)		(513	)

Total adjustments		259,132			273,149

Net cash provided by operating activities		281,657			289,225


CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest-bearing deposits		(1,784	)		(866	)
Proceeds from sales of investment securities available for sale		507,258			129,451
Proceeds from maturities of investment securities available for sale		196,240			8,621,004
Purchases of investment securities available for sale		(346,155	)		(8,537,194	)
Proceeds from maturities of other investment securities		83,151			38,477
Purchases of other investments		(75,150	)		(28,800	)
Repayment of securities and securities called		26,274			72,952
Payments on derivative transactions		—			(1,497	)
Net decrease in loans		366,213			425,921
Purchases of premises and equipment		(1,088	)		(4,634	)

Net cash provided by investing activities		754,959			714,814

(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 NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands)


	For the nine months ended
	September 30,			September 30,
	2009			2008

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(581,488	)		426,042
Net decrease in federal funds purchased and other borrowings		(119,540	)		(916,110	)
Net decrease in securities sold under agreements to repurchase		(375,000	)		(60,597	)
Net increase (decrease) in commercial paper issued		65,976			(234,624	)
Payment to ultimate parent for long-term incentive plan		(833	)		—
Dividends paid		—			(16,790	)

Net cash used in financing activities		(1,010,885	)		(802,079)	)


NET CHANGE IN CASH AND CASH EQUIVALENTS		25,731			201,960
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		283,158			201,697

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	308,889		$	403,657

Concluded

Supplemental Disclosures of Cash Flow Information:


	For the nine months ended
	September 30,		September 30,
	2009		2008
	(Dollars in thousands)

Cash paid during the period for:
Interest	$	121,204	$	223,877

Income taxes	$	5,915	$	10,038

Noncash transactions:
Minimum pension benefit	$	3,571	$	—

Loan securitizations	$	84,312	$	69,401

Reclassification of premises to real estate held for sale	$	—	$	8,076

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

Assets received in full satisfaction of loans	$	19,030	$	10,431

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

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

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

SANTANDER BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

1. Summary of Significant Accounting Policies:

The accounting and reporting policies of 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 nine month periods ended September 30, 2009 and 2008 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, 2008. The accounting policies used in preparing these condensed consolidated financial statements are substantially the same as those described in Note 1 to the 2008 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 significant 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 Securitie s

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 condensed consolidated statements of income 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 condensed consolidated statements of income 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 condensed consolidated statements of income.

	•		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 condensed consolidated statements of income, net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any.

Derivative Financial Instruments

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

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

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

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 condensed consolidated statements of income 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.

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 condensed 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 September 30, 2009 had terms ranging from one month to four 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 FASB ASC Topic 310,“ Receivables ”. 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. 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.

Effective July 1, 2009, the Corporation revised its quantitative methodology for estimating the allowance for loan losses for the consumer and consumer finance portfolios. Through the end of the second quarter ended June 30, 2009, the Corporation’s quantitative methodology for estimating the allowance for loan losses for the consumer and consumer finance portfolios was based on a historical loss rate analysis, which relied on historical loss experience over a defined period for pools of loans with common characteristics. The revised quantitative methodology is based on a migration analysis/roll rate and considers both historical loss rates and loss rates based on the likelihood of credit deterioration (expectation of current loans becoming delinquent in monthly increments until they default and are charged-off). The loss factor estimated based on this methodology may be adjusted to incorporate seasonality attributes as well as to reflect recent economic or business trends that may affect the collectability of the portfolio. The loss factor is then applied to the outstanding portfolio at period end to estimate the amount of expected charge offs and the provision for loan losses required to support an adequate allowance for loan losses. The Corporation’s decision to revise and improve its methodology was made after a thorough evaluation of the reliability of the revised methodology including a back testing analysis. Management believes that the revised quantitative methodology provides a more reliable estimate of probable losses on its existing consumer and consumer finance portfolios. The application of this revised methodology for the quarter ended September 30, 2009 resulted in a provision for loan losses on consumer and consumer finance loans which is $305,000 lower than the amount that would have been determined under the previous quantitative method. The positive effect on earnings per share for the quarter ended September 30, 2009 was less than $.01.

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 condensed consolidated statements of income (loss).

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 indicate 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 operation expenses in the condensed consolidated statements of income (loss).

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 has adopted FASB ASC Topic 820, “ Fair Value Measurements and Disclosures ” for fair value measurement of goodwill and intangible assets. The adoption of this accounting standard for nonfinancial assets and nonfinancial liabilities did not have a material impact on the Corporation’s condensed 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 nine-month periods ended September 30, 2009 and 2008.

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 September 30, 2009 and December 31, 2008, the unpaid principal balances of mortgage loans serviced for others amounted to approximately $1,346,000,000 and $1,281,000,000, respectively. In connection with these mortgage-servicing activities, the Corporation administered escrow and other custodial funds which amounted to approximately $3,489,000 and $4,001,000 at September 30, 2009 and December 31, 2008, respectively.

Trust Services

In connection with its trust activities, the Corporation administers and is custodian of assets amounting to approximately $139,000,000 and $200,000,000 at September 30, 2009 and December 31, 2008, 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, 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.

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 September 30, 2009 and 2008. 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 September 30, 2009 and 2008.

Recent Accounting Pronouncements that Affect the Corporation

The adoption of these accounting standards had the following impact on the Corporation’s condensed consolidated statements of income and financial condition:

	•		FASB ASC Topic 855, “Subsequent Events” . In May 2009, the FASB issued FASB ASC Topic 855, which establish general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth : (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This FASB ASC Topic should be applied to the accounting and disclosure of subsequent events. This FASB ASC Topic does not apply to subsequent events or transactions that are within the scope of other applicable accounting standards that provide different guidance on the accounting treatment for subsequent events or transactions. This FASB ASC Topic was effective for interim and annual periods ending after June 15, 2009, which was June 30, 2009 for the Corporation. The adoption of this Topic did not have a material impact on the Corporation’s condensed consolidated financial statements and disclosures.

	•		FASB ASC Topic 105, “The FASB Accounting Standard Codification and the Hierarchy of Generally Accepted Accounting Principles”. In June 2009, the FASB issued FASB ASC Topic 105, which became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this FASB ASC Topic, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-SEC accounting literature not included in the Codification will become non-authoritative. This FASB ASC Topic identify the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. Also, arranged these sources of GAAP in a hierarchy for users to apply accordingly. In other words, the GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and non-authoritative. This FASB ASC Topic is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this topic did not have a material impact on the Corporation disclosure of the condensed financial statements

	•		FASB ASC Topic 320, “Recognition and Presentation of Other-Than-Temporary Impairments”. In April 2009, the FASB issued FASB ASC Topic 320 amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FASB ASC Topic does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FASB ASC Topic shall be effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted. This FASB ASC Topic does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FASB ASC Topic requires comparative disclosures only for periods ending after initial adoption. The adoption of this Topic did not have a material impact on the Corporation’s condensed consolidated financial statements and disclosures.

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

	•		FASB ASC Topic 860, “Accounting for Transfer of Financial Asset”., 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.

	•		FASB ASC Topic 810, “Variables 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.

	•		FASB ASC Topic 820 , “ Fair Value measurement and Disclosures ”, an Accounting Standard Update. In September 2009, the FASB issued this Update to amendments to Subtopic 82010, “ Fair Value Measurements and Disclosures ”. Overall, for the fair value measurement of investments in certain entities that calculates net asset value per share (or its equivalent). The amendments in this Update permit, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this Update on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity’s measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with Topic 820. The amendments in this Update also require disclosures by major category of investment about the attributes of investments within the scope of the amendments in this Update, such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments (for example, a contractual commitment by the investor to invest a specified amount of additional capital at a future date to fund investments that will be made by the investee), and the investment strategies of the investees. The major category of investment is required to be determined on the basis of the nature and risks of the investment in a manner consistent with the guidance for major security types in GAAP on investments in debt and equity securities in paragraph 320-10-50-lB. The disclosures are required for all investments within the scope of the amendments in this Update regardless of whether the fair value of the investment is measured using the practical expedient. The amendments in this Update apply to all reporting entities that hold an investment that is required or permitted to be measured or disclosed at fair value on a recurring or non recurring basis and, as of the reporting entity’s measurement date, if the investment meets certain criteria The amendments in this Update are effective for the interim and annual periods ending after December 15, 2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been issued.

	•		FASB ASC Topic 740 , “ Income Taxes ”, an Accounting Standard Update. In September 2009, the FASB issued this Update to address the need for additional implementation guidance on accounting for uncertainty in income taxes. The

guidance answers the following questions: (i) Is the income tax paid by the entity attributable to the entity or its owners? (ii) What constitutes a tax position for a pass-through entity or a tax-exempt not-for-profit entity? (iii) How should accounting for uncertainty in income taxes be applied when a group of related entities comprise both taxable and nontaxable entities? In addition, this Updated decided to eliminate the disclosures required by paragraph 740-10-50-15(a) through (b) for nonpublic entities. The implementation guidance will apply to financial statements of nongovernmental entities that are presented in conformity with GAAP. The disclosure amendments will apply only to nonpublic entities as defined in Section 740-10-20. For entities that are currently applying the standards for accounting for uncertainty in income taxes, the guidance and disclosure amendments are effective for financial statements issued for interim and annual periods ending after September 15, 2009.

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:


	September 30, 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	$	102,826	$	330	$	—	$	103,156		0.78	%
After one year to five years		77,461		795		—		78,256		1.05	%

		180,287		1,125		—		181,412		0.89	%


Commonwealth of Puerto Rico and its subdivisions:
Within one year		1,675		3		3		1,675		3.46	%
After one year to five years		73,897		295		83		74,109		5.03	%
After five years to ten years		7,176		169		—		7,345		5.24	%
Over ten years		4,430		95		—		4,525		5.55	%

		87,178		562		86		87,654		5.05	%


Corporate bonds:
After one year to five years		141,665		1,232		—		142,897		1.85	%


Mortgage-backed securities:
Over ten years		11,251		324		—		11,575		5.63	%

	$	420,381	$	3,243	$	86	$	423,538		2.20	%


	December 31, 2008
			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	$	164,844	$	1,164	$	1	$	166,007		2.30	%
After one year to five years		5,658		251		—		5,909		3.99	%

		170,502		1,415		1		171,916		2.36	%


Commonwealth of Puerto Rico and its subdivisions:
Within one year		1,460		—		6		1,454		4.23	%
After one year to five years		133,185		347		384		133,148		5.23	%
After five years to ten years		9,545		29		95		9,479		5.18	%
Over ten years		4,505		33		3		4,535		5.55	%

		148,695		409		488		148,616		5.22	%


Mortgage-backed securities:
After five years to ten years		193,630		2,258		73		195,815		4.39	%
Over ten years		282,235		3,525		45		285,715		5.41	%

		475,865		5,783		118		481,530		4.99	%


Foreign securities:
Within one year		50		—		—		50		4.65	%

	$	795,112	$	7,607	$	607	$	802,112		4.47	%

The duration of long-term (over one year) investment securities in the available for sale portfolio is approximately 1.9 years at September 30, 2009, comprised of approximately 1.3 years for treasuries and agencies of the United States Government, 2.2 years for instruments of the Commonwealth of Puerto Rico and its subdivisions, 2.4 years for corporate bonds and 3.3 years for mortgage backed securities.

The number of positions, fair value and unrealized losses at September 30, 2009 and December 31, 2008, 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:


	September 30, 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
Commonwealth of Puerto								—		—		—		—		—		—

Rico and its subdivisions		4	$	9,004	$	63		6	$	6,277	$	23		10	$	15,281	$	86


	December 31, 2008
	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		1	$	30,000	$	1		—	$	—	$	—		1	$	30,000	$	1
Commonwealth of Puerto Rico and its subdivisions		1		705		72		14		19,338		416		15		20,043		488
Mortgage-backed securities		—		—		—		4		33,091		118		4		33,091		118

		2	$	30,705	$	73		18	$	52,429	$	534		20	$	83,134	$	607

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 income 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 September 30, 2009 and December 31, 2008, 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 September 30, 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 September 30, 2009 and December 31, 2008, 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 September 30, and December 31 were as follows:


	September 30,		December 31,
	2009		2008
	(Dollars in thousands)

Investment securities available for sale	$	166,339	$	227,658
Other investment securities		45,900		53,325
Loans		2,309,607		2,511,098

	$	2,521,846	$	2,792,081

Pledged securities that the creditor has the right or contract to repledge, are presented separately on the consolidated balance sheets. At December 31, 2008, investment securities with a carrying value of approximately $408,650,000 were pledged to securities sold under agreements to repurchase.

4. Loans:

The Corporation’s loan portfolio consists of the following:


	September 30,			December 31,
	2009			2008
	(Dollars in thousands)

Commercial and industrial	$	1,967,172		$	2,165,613
Consumer		472,844			565,833
Consumer finance		828,271			996,919
Leasing		42,859			64,065
Construction		83,313			194,596
Mortgage		2,413,572			2,553,328

		5,808,031			6,540,354

Unearned income and deferred fees (costs):
Commercial, industrial and others		219			(290	)
Consumer finance		(269,989	)		(418,676	)
Allowance for loan losses		(194,795	)		(191,889	)

Loans, net	$	5,343,466		$	5,929,499

During the nine months ended September 30, 2009, the Corporation sold certain loans including some classified as impaired to an affiliate for $142.0 million in cash. These loans had a net book value of $142.0 million comprised of an outstanding principal balance of $149.2 million and a specific valuation allowance of $7.2 million. The type of loans sold, at net book value, was $65.5 million in construction loans, $61.2 million in commercial loans and $15.3 million in mortgage loans. No gain or loss was recognized on this transaction.

5. Allowance for Loan Losses:

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


	For the nine months ended				For the three months ended
	September 30,		September 30,		September 30,		September 30,
	2009		2008		2009		2008
	(Dollars in thousands)				(Dollars in thousands)

Balance at beginning of period	$	191,889	$	166,952	$	193,186	$	186,889
Provision for loan losses		115,525		123,650		40,689		45,560

		307,414		290,602		233,875		232,449

Losses charged to the allowance:
Commercial and industrial		18,568		10,589		10,225		6,439
Construction		2,254		28,128		—		22,770
Mortgage		6,498		64		945		—
Consumer		40,642		30,370		13,241		10,395
Consumer finance		47,533		42,764		15,734		13,306
Leasing		1,334		1,497		386		447

		116,829		113,412		40,531		53,357

Recoveries:
Commercial and industrial		1,870		501		697		208
Construction		23		—		—		—
Mortage		2		—		—		—
Consumer		991		887		220		308
Consumer finance		1,028		1,179		389		400
Leasing		296		333		145		82

		4,210		2,900		1,451		998

Net loans charged-off		112,619		110,512		39,080		52,359

Balance at end of period	$	194,795	$	180,090	$	194,795	$	180,090

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:


	September 30,		December 31,
	2009		2008
	(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.

Other Intangible Assets

Other intangible assets at September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009		December 31, 2008
	(Dollars in thousands)

Commercial Banking — Mortgage-servicing rights	$	9,856	$	10,175
Wealth Management — Advisory-servicing rights		1,038		1,267
Consumer Finance:
Trade name		18,300		18,300
Non-compete agreement		—		100

	$	29,194	$	29,842

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

The following table reflects the components of other intangible assets at September 30, 2009 and December 31, 2008:


	September 30, 2009
	Gross		Accumulated		Carrying
	Amount		Amortization		Amount
	(Dollars in thousands)

Commercial Banking — Mortgage-servicing rights	$	19,871	$	10,015	$	9,856
Wealth Management — Advisory-servicing rights		3,050		2,012		1,038
Consumer Finance — Trade Name		18,300		—		18,300

	$	41,221	$	12,027	$	29,194


	December 31, 2008
	Gross		Accumulated		Carrying
	Amount		Amortization		Amount
	(Dollars in thousands)

Commercial Banking — Mortgage-servicing rights	$	18,382	$	8,207	$	10,175
Wealth Management — Advisory-servicing rights		3,050		1,783		1,267
Consumer Finance:
Trade name		18,300		—		18,300
Non-compete agreements		3,356		3,256		100

	$	43,088	$	13,246	$	29,842

Amortization of the other intangibles assets for the nine-month periods ended September 30, 2009 and 2008 was approximately $2.1 million and $2.3 million, respectively.

7. Other Assets:

The Corporation’s other assets consist of the following:


	September 30, 2009		December 31, 2008
	(Dollars in thousands)

Deferred tax assets, net	$	61,224	$	56,542
Accounts receivable, net of allowance for claim receivable of $25.1 million		47,412		40,581
Repossesed assets, net		33,161		22,306
Software, net		5,879		7,295
Prepaid expenses		16,747		13,835
Income tax credits		12,022		19,645
Customers’ liabilities on acceptances		359		610
Derivative assets		144,560		197,192
Confirming advances		98,215		122,540
Other		5,639		5,337

	$	425,218	$	485,883

Amortization of software assets for the nine-month periods ended September 30, 2009 and 2008 was approximately $2.7 million and $3.7 million, respectively.

The Corporation had counterparty exposure to Lehman Brothers, Inc. (“LBI”) in connection with the sale of securities sold under agreements to repurchase amounting to $200.2 million at September 19, 2008 under a Master Repurchase Agreement. LBI was placed in a Securities Investor Protection Corporation (“SIPC”) liquidation proceeding on September 19, 2008. The filing of the SIPC liquidation proceeding was an event of default under the terms of the Master Repurchase Agreement, which resulted in the acceleration of repurchase dates under the Master Repurchase Agreement to September 19, 2008. This action resulted in a reduction in the Corporation’s total assets of $225.3 million and a reduction in its total liabilities of $200.2 million in 2008. During 2009, the Corporation filed a claim for the amount $25.1 million, which is the amount it is owed by LBI as a result of the acceleration of the repurchase date and the exercise by the Corporation of its rights under the Master Repurchase Agreement, plus incidental expenses and damages. The Corporation has recognized a claim receivable from LBI for $25.1 million and has established a valuation allowance for the same amount since management, in consultation with legal counsel, believes that based on current information and events, it is probable that the Corporation will be unable to collect all amounts due. The tax effect related to the recognition of this valuation allowance was a deferred tax benefit of $9.8 million.

The Law 197 of Puerto Rico (“Law 197”) of 2007 granted 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 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 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 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 $12.0 million unused income tax credits certified by the Secretary at September 30, 2009.

8. Other Borrowings:

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


	September 30, 2009
	Federal Funds			Securities Sold			Commercial
	Purchased and			Under Agreements			Paper
	Other Borrowings			to Repurchase			Issued
	(Dollars in thousands)

Amount outstanding at period-end	$	47,500		$	—		$	116,961

Average indebtedness outstanding during the period	$	5,605		$	102,747		$	85,088

Maximum amount outstanding during the period	$	47,500		$	375,000		$	175,000

Average interest rate for the period		2.11	%		4.43	%		1.07	%

Average interest rate at period-end		2.10	%		—			0.55	%


	December 31, 2008
	Federal Funds			Securities Sold			Commercial
	Purchased and			Under Agreements			Paper
	Other Borrowings			to Repurchase			Issued
	(Dollars in thousands)

Amount outstanding at year-end	$	2,040		$	375,000		$	50,985

Average indebtedness outstanding during the year	$	190,097		$	523,873		$	209,480

Maximum amount outstanding during the year	$	751,000		$	625,006		$	625,000

Average interest rate for the year		4.21	%		4.87	%		3.60	%

Average interest rate at year-end		0.09	%		4.35	%		0.75	%

Federal funds purchased and other borrowings, securities sold under agreements to repurchase and commercial paper issued mature as follows:


	September 30, 2009		December 31, 2008
	(In thousands)
Federal funds purchased and other borrowings:
Thirty to ninety days	$	47,500	$	—
Over ninety days		—		2,040

Total	$	47,500	$	2,040

Securities sold under agreements to repurchase:
Thirty to ninety days	$	—	$	75,000
Over ninety days		—		300,000

Total	$	—	$	375,000

Commercial paper issued:
Within thirty days	$	116,961	$	50,985

As of December 31, 2008, securities sold under agreements to repurchase (classified by counterparty) were as follows:

December 31, 2008

Weighted-

Fair Value of

Average

Balance of

Underlying

Maturity

Borrowings

Securities

in Months

(Dollars in thousands)

JP Morgan Chase Bank, N.A.

375,000

408,650

10.98

During the first quarter ended March 31, 2009, the Corporation cancelled $300 million of securities sold under agreement to repurchase. As a result of this early cancellation, the Corporation paid $9.6 million of penalty which was recognized as a loss included within other income in the condensed consolidated statements of income.

The followings investments securities were sold under agreements to repurchase:

December 31, 2008

Carrying

Fair

Weighted-

Value of

Average

Underlying

Balance of

Underlying

Interest Rate

Underlying Securities

Securities

Borrowings

Securities

Borrowings

(Dollars in thousands)

Mortgage-backed securities

408,650

375,000

408,650

5.12

4.35

9. Advances from Federal Home Loan Bank:

Advances from Federal Home Loan Bank consisted of the following:


	September 30, 2009		December 31, 2008
	(Dollars in thousands)

Non-callable advances at 2.77% and 2.63% average fixed rate at September 30, 2009 and December 31, 2008 , respectively, with maturities during 2009	$	50,000	$	310,000
Non-callable advances at 2.61% and 2.98% average fixed rate at September 30, 2009 and December 31, 2008 , respectively, with maturities during 2010		645,000		500,000
Non-callable advances at 3.85% average fixed rate at September 30, 2009 and December 31, 2008 with maturities during 2011		325,000		325,000
Non-callable advances at 4.28% average floating rate tied to 3-month LIBOR with maturities during 2009		—		50,000

	$	1,020,000	$	1,185,000

The Corporation had approximately $2.0 billion in mortgage loans and investment securities pledged as collateral for Federal Home Loan Bank advances as of September 30, 2009 and December 31, 2008.

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

Term Notes

Term notes payable outstanding consisted of the following:


	September 30, 2009			December 31, 2008
	(Dollars in thousands)

Term notes maturing January 29, 2010 linked to the S&P 500 index	$	4,815		$	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

		21,815			21,815
Unamortized discount		(1,391	)		(1,848	)

	$	20,424		$	19,967

Subordinated Capital Notes

Subordinated capital notes consisted of the following:


	September 30,			December 31,
	2009			2008
	(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		74,965			72,076
Subordinated notes with fixed interest of 6.10% maturing June 1, 2032, at fair value		48,239			46,206
Subordinated notes with fixed interest of 6.75% maturing July 1, 2036		129,000			129,000

		312,204			307,282
Unamortized discount		(868	)		(890	)

	$	311,336		$	306,392

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.

11. Income Tax:

A reconciliation of beginning and ending amount of the accrual for uncertain income tax positions, including interest and penalties, is as follows:


	For the nine months ended
	September 30,			September 30,
	2009			2008
	(in thousands)

Balance at beginning of the year	$	31,570		$	16,507
Gross increases for tax positions of prior years		3,140			544
Gross decrease for tax positions of prior year		(653	)		—
Gross increases for tax positions of current year		3,708			2,614
Release of contingencies		(7,868	)		(958	)

Balance at end of the year	$	29,897		$	18,707

For the nine months ended September 30, 2009 and 2008, the Corporation recognized $1.6 million and $0.9 million of interest and penalties, respectively, for uncertain tax positions in accordance with provisions of SFAB ASC Topic 740. As of September 30, 2009 and December 31, 2008, the related accrued interest amounted to approximated $3.0 million and $3.7 million, respectively. As of September 30, 2009 and December 31, 2008, the Corporation had $7.2 million and $10.3 million, respectively, of unrecognized tax benefits 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 statute 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.

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 $18.6 million and $0.1 million, respectively, at September 30, 2009. Accordingly, deferred tax asset valuation allowances of $18.6 million and $0.1 million for Santander Financial Services, Inc and Santander Bancorp (parent company only), respectively, were recorded at September 30, 2009.

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 Stoxx) 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 September 30, 2009, the Corporation had the following derivative financial instruments outstanding:


						Gain (Loss) for
						the nine months
	Notional					ended
	Value		Fair Value			September 30, 2009
	(Dollars in thousands)
ECONOMIC UNDESIGNATED HEDGES
Interest rate swaps	$	125,000	$	1,074		$	(4,136	)
OTHER DERIVATIVES
Options		107,642		3,575			(199	)
Embedded options on stock-indexed deposits		107,642		(3,575	)		199
Interest rate caps		439		(10	)		3
Customer interest rate caps		439		10			(3	)
Customer interest rate swaps		1,749,558		136,836			(39,612	)
Interest rate swaps-offsetting position of customer swaps		1,749,559		(136,730	)		39,891
Interest rate swaps		—		—			(287	)
Loan commitments		2,859		83			(10	)

						$	(4,154	)

As of December 31, 2008, the Corporation had the following derivative financial instruments outstanding:


									Other
						Gain (Loss) for			Comprehensive
						the year			*Gain for the**
	Notional		Fair			ended			year ended
	Value		Value			Dec. 31, 2008			Dec. 31, 2008
			(Dollars in thousands)
CASH FLOW HEDGES
Interest rate swaps	$	—	$	—		$	—		$	1,237
ECONOMIC UNDESIGNATED HEDGES
Interest rate swaps		125,000		5,210			4,311			—
OTHER DERIVATIVES
Options		118,214		3,774			(18,995	)		—
Embedded options on stock-indexed deposits		118,214		(3,774	)		18,974			—
Interest rate caps		583		(13	)		(20	)		—
Customer interest rate caps		583		13			20			—
Customer interest rate swaps		1,729,209		176,447			130,778			—
Interest rate swaps-offsetting position of customer swaps		1,729,209		(176,787	)		(131,991	)		—
Interest rate swaps		90,000		287			821			—
Loan commitments		3,862		93			48			—

						$	3,946		$	1,237


*		Net of tax

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.

The Corporation hedges certain callable brokered certificates of deposit and subordinated capital notes by using interest rate swaps. Prior to the adoption of FASB ASC Topic 825 as of January 1, 2008, these swaps were designated for hedge accounting treatment under FASB ASC Topic 815. For designated fair value hedges, the changes in the fair value of both the hedging instrument and the underlying hedged instrument were included in other income and the interest flows were included in the net interest income in the condensed consolidated statements of income. In connection with the adoption of FASB ASC Topic 825, the Corporation elected the fair value option for certain callable brokered certificates of deposit and subordinated capital notes and is no longer required to maintain hedge accounting documentation to achieve a similar financial statements outcome.

As of September 30, 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 0.79% and 6.22%, respectively. As of September 30, 2009, the Corporation had two subordinated notes aggregating approximately $125 million, with a fair value of $123.2 million, swapped to create a floating rate source of funds. For the nine-month periods ended September 30, 2009 and 2008, the Corporation recognized a loss of approximately $4.1 million and a gain of $3.9 million, respectively, on these economic hedges, which is included in other income in the condensed consolidated statements of income.

As of December 31, 2008, the Corporation had outstanding interest rate swap agreements with a notional amount of approximately $125 million, maturing through the year 2032. The weighted average rate paid and received on these contracts is 3.24% and 6.22%, respectively. As of December 31, 2008, the Corporation had two subordinated notes aggregating to approximately $125 million, with a fair value of $118.3 million, swapped to create a floating rate source of funds. As a result of the bankruptcy filing of Lehman Brothers Holding, Inc. (“LBHI”) and the default on its contractual payments as of September

19, 2008, the Corporation terminated $23.8 million of fixed-for-floating interest rate swaps. The derivative liability of the swaps with Lehman Brothers Special Financing (“LBSF”) was $681,535 as of September 19, 2008 and was paid on December 5, 2008.

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 condensed consolidated statements of operating. For the nine-month period ended September 30, 2009, a gain of approximately $0.2 million was recorded on embedded options on stock-indexed deposits and notes and a loss of approximately $0.2 million was recorded on the option contracts. For the nine-month period ended September 30, 2008, a gain of approximately $6.7 million was recorded on embedded options on stock-indexed deposits and notes and a loss of approximately $6.7 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 nine months ended September 30, 2009 and 2008, the Corporation recognized a net gain and a net loss on these transactions of $279,000 and $628,000, 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 nine months ended September 30, 2009 and 2008, the Corporation recognized a net loss of $287,000 and a net gain of $987,000, respectively, on these transactions. There were no outstanding freestanding derivatives contracts as of September 30, 2009.

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 September 30, 2009 and December 31, 2008, the Corporation had loan commitments outstanding for approximately $2.9 million and $3.9 million, respectively. The Corporation recognized a net loss of $10,000 for the nine months ended September 30, 2009 and a net loss of $52,000 for the nine months ended September 30, 2008 on these commitments.

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:

(Dollars in thousands)


		Assets Derivatives
		Fair Value
	Balance Sheet	as of
	Location	September 30, 2009		December 31, 2008
Derivatives not designated as hedging instruments under FASB ASC Topic 815:
Interest rate swaps	Other assets	$	140,890	$	193,312
Interest rate caps	Other assets		12		13
Options	Other assets		3,575		3,774
Loan commitment	Other assets		83		93

Total		$	144,560	$	197,192


		Liabilities Derivatives
		Fair Value
	Balance Sheet	as of
	Location	September 30, 2009		December 31, 2008
Derivatives not designated as hedging instruments under FASB ASC Topic 815:
Interest rate swaps	Other liabilities	$	139,710	$	187,525
Interest rate caps	Other liabilities		12		13
Options	Other liabilities		3,575		3,774
Loan commitment	Other liabilities		—		—

Total		$	143,297	$	191,312

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

(Dollars in thousands)


		Gain or (Loss) recognized in
	Location of Gain or (Loss)	Income on derivatives
	recognized in Income on	for the nine months ended
	Derivatives	September 30, 2009
Derivatives not designated as hedging instruments under FASB ASC Topic 815:
Interest rate swaps	Interest Income (Expense)	$	4,317
Interest rate swaps	Other Income (Loss)		(3,751	)
Loan commitment	Other Income (Loss)		(10	)

Total		$	556

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 September 30, 2009 is $15.5 million, for which the Corporation has posted collateral of $9.2 million 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 therefrom 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 nine-month and three-month periods ended September 30, 2009 and 2008 were as follows:


	For the nine months ended						For the three months ended
	September 30,						September 30,
	2009			2008			2009			2008
	(Dollars in thousands)						(Dollars in thousands)

Interest cost on projected benefit obligation	$	1,781		$	1,761		$	594		$	587
Expected return on assets		(1,544	)		(2,019	)		(515	)		(673	)
Net amortization		877			162			292			54

Net periodic pension cost (benefit)	$	1,114		$	(96	)	$	371		$	(32	)

The expected contribution to the Plan for 2009 is $584,000.

The components of net periodic pension cost for the Central Hispano Plan for nine-month and three-month periods ended September 30, 2009 and 2008 were as follows:


	For the nine months ended						For the three months ended
	September 30,						September 30,
	2009			2008			2009			2008
	(Dollars in thousands)						(Dollars in thousands)

Interest cost on projected benefit obligation	$	1,428		$	1,383		$	476		$	461
Expected return on assets		(1,168	)		(1,554	)		(389	)		(518	)
Net amortization		575			375			192			125

Net periodic pension cost	$	836		$	204		$	279		$	68

The expected contribution to the Central Hispano Plan for 2009 is $522,000.

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

nine months ended September 30, 2009 and 2008, were approximately $188,000 and $425,000, respectively. 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 provides for settlement in cash or stock of Santander Group to the participants and is classified as a liability plan. Accordingly, the Corporation accrues a liability and recognizes monthly compensation expense over the fourteen month vesting period through January 2008. The Corporation recognized a reversal of compensation expense under this plan amounting to $4.0 million due to a favorable change in plan valuation during the nine-month period ended September 30, 2008. As options were exercised on September 30, 2008, $6.7 million was reclassified from liabilities to capital paid in excess of par value, as a capital contribution.

	•		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 expiring 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 $1.7 million and 1.9 million for the nine months ended September 30, 2009 and 2008, 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 $0.3 million for the nine months ended September 30, 2009.

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 $256,000 at September 30, 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 is typically equal to the net present value of the future amount of premium receivable under the 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 September 30, 2009 and December 31, 2008 had terms ranging from one month to four years. The aggregate contract amount of the standby letters of credit of approximately $39,898,000 and $95,660,000 at September 30, 2009 and December 31, 2008, 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 nine months ended September 30, 2009 and 2008. 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.


	September 30, 2009
	Commercial		Mortgage		Consumer		Treasury and			Wealth								Consolidated
	Banking		Banking		Finance		Investments			Management		Other			Eliminations			Total
	(Dollars in thousands)
Total external revenue	$	165,842	$	121,160	$	102,665	$	19,840		$	45,303	$	39,198		$	(41,869	)	$	452,139
Intersegment revenue		—		—		—		2,595			135		39,139			(41,869	)		—
Interest income		134,426		115,232		100,559		14,623			2,195		35,670			(35,874	)		366,831
Interest expense		14,503		40,375		22,145		25,599			740		34,853			(30,007	)		108,208
Depreciation and amortization		3,348		2,019		709		672			1,132		1,632			—			9,512
Segment income (loss) before income tax		24,421		58,893		6,541		(13,737	)		14,243		(54,039	)		(8,461	)		27,861
Segment assets		2,593,426		2,485,504		669,454		660,546			128,945		1,304,233			(1,003,477	)		6,838,631


	September 30, 2008
	Commercial		Mortgage		Consumer		Treasury and			Wealth								Consolidated
	Banking		Banking		Finance		Investments			Management		Other			Eliminations			Total
	(Dollars in thousands)
Total external revenue	$	235,558	$	124,688	$	107,674	$	47,558		$	57,335	$	37,162		$	(29,733	)	$	580,242
Intersegment revenue		10,181		—		—		—			508		19,044			(29,733	)		—
Interest income		195,109		125,488		107,168		41,926			2,205		16,446			(27,867	)		460,475
Interest expense		51,564		55,689		19,632		70,496			1,694		15,459			(22,110	)		192,424
Depreciation and amortization		3,274		1,876		2,325		709			974		2,357			—			11,515
Segment income (loss) before income tax		36,417		59,139		5,650		(54,323	)		19,167		(45,566	)		(5,757	)		14,727
Segment assets		3,876,429		2,720,289		651,586		1,168,991			139,908		633,939			(1,055,963	)		8,135,179

Reconciliation of Segment Information to Consolidated Amounts

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


	September 30,			September 30,
	2009			2008
	(Dollars in thousands)
Revenues:
Total revenues for reportable segments	$	454,810		$	572,813
Other revenues		39,198			37,162
Elimination of intersegment revenues		(41,869	)		(29,733	)

Total consolidated revenues	$	452,139		$	580,242


Total income before tax of reportable segments	$	90,361		$	66,050
Loss before tax of other segments		(54,039	)		(45,566	)
Elimination of intersegment profits		(8,461	)		(5,757	)

Consolidated income before tax	$	27,861		$	14,727


Assets:
Total assets for reportable segments		6,537,875		$	8,557,203
Assets not attributed to segments		1,304,233			633,939
Elimination of intersegment assets		(1,003,477	)		(1,055,963	)

Total consolidated assets	$	6,838,631		$	8,135,179

18. Fair Value of Financial Instruments:

As discussed in Note 1, “Summary of Significant Accounting Policies and Other Matters” to the condensed consolidated financial statement, effective January 1, 2008, the Corporation adopted FASB ASC Topic 820, which provides a framework for measuring fair value.

The Corporation also adopted FASB ASC Topic 825 on January 1, 2008. FASB ASC Topic 825 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.

The following table summarizes the impact of adopting the fair value option for certain financial instruments on January 1, 2008. Amounts shown represent the carrying value of the affected instruments before and after the changes in accounting resulting from the adoption FASB ASC Topic 825.

(Dollars in thousands)


							Opening Balance as
	Ending Balance as of						of
	December 31, 2007			Adoption Net			January 1, 2008
	(Prior to Adoption)*			Gain (Loss)			(After Adoption)

Impact of Electing the Fair Value Option under Topic 825:
Callable Brokered Certificates of Deposits	$	(763,476	)	$	64		$	(763,412	)
Subordinated Capital Notes		(123,686	)		5,134			(118,552	)

Cumulative-effect Adjustments (pre-tax)	$	(887,162	)		5,198		$	(881,964	)

Tax Impact					(1,979	)

Cumulative-effect Adjustment Increase to Retained Earmings, net of tax				$	3,219


*		Net of debt issue cost, placement fees and basis adjustments as of December 31, 2007

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.

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, 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 September 30, 2009 and December 31, 2008.

(Dollars in thousands)


	September 30, 2009
	Level 1		Level 2		Level 3		Total

Assets:
Trading Securities	$	1,212	$	10,216	$	18,633	$	30,061
Investment Securities Available for Sale		324,309		99,229		—		423,538
Derivative Assets		—		144,211		349		144,560

Total Assets reported at Fair Value	$	325,521	$	253,656	$	18,982	$	598,159

Liabilities:
Deposits (1)	$	—	$	12,407	$	—	$	12,407
Subordinated Capital Notes (2)		—		123,204		—		123,204
Derivative Liabilities		—		143,032		265		143,297

Total Liabilities reported at Fair Value	$	—	$	278,643	$	265	$	278,908


	December 31, 2008
	Level 1		Level 2		Level 3		Total

Assets:
Trading Securities	$	117	$	35,083	$	29,519	$	64,719
Investment Securities Available for Sale		171,916		630,196		—		802,112
Derivative Assets		463		195,993		736		197,192

Total Assets reported at Fair Value	$	172,496	$	861,272	$	30,255	$	1,064,023

Liabilities:
Deposits (1)	$	—	$	101,401	$	—	$	101,401
Subordinated Capital Notes (2)		—		118,282		—		118,282
Derivative Liabilities		—		190,669		643		191,312

Total Liabilities reported at Fair Value	$	—	$	410,352	$	643	$	410,995


(1)		Amounts represent certain callable brokered certificates of deposits for which the Corporation has elected the fair value option under FASB ASC Topic 825.

(2)		Amounts represent certain subordinated capital notes for which the Corporation has elected the fair value option under FASB ASC Topic 825.

Level 3 assets and liabilities were 3.2% and 0.10% of total assets reported at fair value and total liabilities reported at fair value, respectively, as of September 30, 2009 and 2.8% and 0.16% as of December 31, 2008, 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, 2009 to September 30, 2009 and January 1, 2008 to September 30, 2008:

(Dollars in thousands)


			Net realized/unrealized
			loss included in					Transfers		Purchases,					Unrealized
	Balance					Other		in and/or		issuances			Balance		losses
	January 1,					Comprehensive		out of		and			September 30,		still
	2009		Earnings			Income		Level 3		settlements			2009		held (2)

Trading Securities (1)	$	29,519	$	(2,107	)	$	—	$	—	$	(8,779	)	$	18,633	$	(298	)
Derivatives, net		93		(9	)		—		—		—			84		(10	)

	$	29,612	$	(2,116	)	$	—	$	—	$	(8,779	)	$	18,717	$	(308	)


			Net realized/unrealized
			gains included in					Transfers		Purchases,					Unrealized
	Balance					Other		in and/or		issuances		Balance			gains (loss)
	January 1,					Comprehensive		out of		and		September 30,			still
	2008		Earnings			Income		Level 3		settlements		2008			held (2)

Trading Securities (1)	$	20,150	$	1,960		$	—	$	—	$	25,234	$	47,344		$	155
Derivatives, net		45		(52	)		—		—		—		(7	)		(7	)

	$	20,195	$	1,908		$	—	$	—	$	25,234	$	47,337		$	148


(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 September 30, 2009 and 2008.

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 nine-month and three-month period ended September 30, 2009 and 2008. 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.

(Dollars in thousands)


	Total Gains (Losses)
	For the nine months ended
	September 30, 2009						September 30, 2008
	Trading			Net			Trading		Net
	Securities			Derivatives			Securities		Derivatives
Classification of gains and losses (realized/unrealized) included in earnings for the period :
Other income (loss)	$	(2,107	)	$	(9	)	$	1,960	$	(52	)


	Total Gains (Losses)
	For the three months ended
	September 30, 2009						September 30, 2008
	Trading			Net			Trading		Net
	Securities			Derivatives			Securities		Derivatives

Classification of gains and losses (realized/unrealized) included in earnings for the period :
Other income (loss)	$	(904	)	$	(98	)	$	431	$	64

The table below summarizes changes in unrealized gains or losses recorded in earnings for the nine-month and three-month periods ended September 30, 2009 and 2008 for Level 3 assets and liabilities that are still held at September 30, 2009 and 2008. 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.

(Dollars in thousands)


	Changes in Unrealized Gains (Loss)
	For the nine months ended
	September 30, 2009						September 30, 2008
	Trading			Net			Trading		Net
	Securities			Derivatives			Securities		Derivatives
Classification of unrealized gains (losses) included in earnings for the period :
Other income	$	(298	)	$	(10	)	$	155	$	(7	)

Changes in Unrealized Gains (Loss)

For the three months ended

September 30, 2009

September 30, 2008

Trading

Net

Trading

Net

Securities

Derivatives

Securities

Derivatives

Classification of unrealized gains (losses) included in earnings for the period :

Other income

(98

)

123

109

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.

Trading Securities

Trading securities are recorded at fair value and consist primarily of US Government and agencies, US corporate debt and equity securities, Puerto Rico Government, corporate debt and equity securities. Fair value is generally based on quoted market prices. Level 1 trading securities include those identical securities traded in active markets. If these market prices are not available, 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 and open ended funds. Investments in Puerto Rico open ended funds are valued using a net asset value approach and can be redeemed at net asset value.

Level 3 trading securities primarily include Puerto Rico Government and Agencies debt securities and fixed income closed end funds. At September 30, 2009 the majority of these instruments were valued based on dealer indicative quotes.

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.

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. Effective January 1, 2008, the Corporation updated its methodology to include the impact of both counterparty and its own credit standing.

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. Effective January 1, 2008, the Corporation updated its methodology to include the impact of its own credit standing.

Deposits, other than those recorded at fair value under FASB ASC Topic 825, are carried at historical cost.

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 six months ended September 30, 2009 and the year ended December 31, 2008.

(Dollars in thousands)


			Carrying Value as of September 30, 2009
			Using
	Carrying		Quoted Prices in		Significant		Significant		Valuation
	Value		Active Markets for		Other		Unobservable		Allowance
	as of		Identical Assets		Observable Inputs		Inputs		as of
	Sept. 30, 2009		(Level 1)		(Level 2)		(Level 3)		Sept. 30, 2009

Loans, net(1)	$	55,695	$	—	$	—	$	55,695	$	13,759
Repossesed Assets (2)		20,428		—		—		20,428		4,259


	$	76,123	$	—	$	—	$	76,123	$	18,018


(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 .

(Dollars in thousands)

Carrying Value as of December 31, 2008

Using

Carriying

Quoted Prices in

Significant

Valuation

Value

Active Markets for

Other

Unobservable

Allowance

as of

Identical Assets

Observable Inputs

Inputs

as of

Dec. 31, 2008

(Level 1)

(Level 2)

(Level 3)

Dec. 31, 2008

Loans, net(1)

59,152

—

59,152

18,410


(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.

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 September 30, 2009, these callable brokered certificates of deposits had a fair value of $12.4 million and principal balance of $12.5 million recorded in interest-bearing deposits; and subordinated capital notes had a fair value of $123.2 million and principal balance of $125.0 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 income. Electing the fair value option allows the Corporation to avoid the burden of complying with the requirements for hedge accounting under FASB ASC Topic 815 (e.g., documentation and effectiveness assessment) without introducing earnings volatility. Subsequent to the adoption of FASB ASC Topic 825, debt issuance costs are recognized in Net Interest Income when incurred. 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.

As a result of the adoption of FASB ASC Topic 825, the Corporation elected to also apply the fair value option to new positions within the brokered certificates of deposits and subordinated capital notes.

The following table represents changes in fair value for the nine months ended September 30, 2009 and 2008 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 income based on their contractual coupons.


	For the nine months ended
	September 30, 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	$	(1,798	)	$	719		$	(1,079	)
Subordinated Capital Notes		(5,831	)		(4,922	)		(10,753	)

Total	$	(7,629	)	$	(4,203	)	$	(11,832	)


	For the nine months ended
	September 30, 2008
	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	$	(16,336	)	$	(1,066	)	$	(17,402	)
Subordinated Capital Notes		(5,831	)		6,497			666

Total	$	(22,167	)	$	5,431		$	(16,736	)

The impact of changes in the Corporation’s credit risk on subordinated capital notes for the nine and three months ended September 30, 2009 and 2008 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 nine months ended
	September 30, 2009									September 30, 2008
	Gain (Loss)			Gain (Loss)			Total			Gain (Loss)		Gain (Loss)			Total
	related			not related			Gains			related		not related			Gains
(Dollars in thousands)	Credit Risk			Credit Risk			(Losses)			Credit Risk		Credit Risk			(Losses)
Subordinated Capital Notes	$	(9,286	)	$	(1,467	)	$	(10,753	)	$	5,661	$	(4,995	)	$	666


	For the three months ended
	September 30, 2009									September 30, 2008
	Gain (Loss)			Gain (Loss)			Total			Gain (Loss)		Gain (Loss)			Total
	related			not related			Gains			related		not related			Gains
	Credit Risk			Credit Risk			(Losses)			Credit Risk		Credit Risk			(Losses)
Subordinated Capital Notes	$	(8,816	)	$	(3,071	)	$	(11,887	)	$	3,490	$	(1,515	)	$	1,975

FASB ASC Topic 825 Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates as of September 30, 2009 and December 31, 2008, 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.


	September 30, 2009				December 31, 2008
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
			(Dollars in thousands)
Consolidated balance sheets financial instruments:
ASSETS:
Other investment securities	$	53,631	$	53,631	$	61,632	$	61,632

Loans held for sale	$	25,173	$	25,559	$	38,459	$	38,740

Loans (1)	$	5,274,012	$	5,082,406	$	5,929,499	$	5,862,539


LIABILITIES:
Deposits — interest-bearing (2)		3,727,672		3,737,362		4,321,939		4,311,104

Securities sold under agreements to repurchase	$	—	$	—	$	375,000	$	365,314

Federal Home Loan Advances	$	1,020,000	$	1,035,519	$	1,185,000	$	1,159,619

Subordinated capital note (2)	$	189,000	$	197,077	$	189,000	$	203,516

Term notes	$	21,815	$	20,823	$	19,967	$	22,977


	September 30, 2009					December 31, 2008
	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	$	39,898	$	(256	)	$	95,660	$	(1,102	)

Commitments to extend credit, approved loans not yet disbursed and unused lines of credit	$	1,237,129	$	(1,237	)	$	1,193,875	$	(1,194	)


(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 $12.4 million and $101.4 million as of September 30, 2009 and December 31, 2008, respectively, and subordinated capital notes of $123.2 million and $118.3 million as of September 30, 2009 December 31, 2008, respectively, measured at fair value under FASB ASC Topic 825.

19. Subsequent Events Reviews:

The Corporation has evaluated all subsequent events through November 9, 2009, the date this Quarterly Report on Form 10-Q was filed with the SEC. No recognized or unrecognized events require disclosure as significant subsequent events.

PART I — ITEM 2

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

Santander BanCorp
Selected Financial Data

(Dollars in thousands, except per share data)


	Nine months ended						Three months ended
	September 30,						September 30,
	2009			2008			2009			2008
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Interest income	$	366,831		$	460,475		$	118,080		$	148,011
Interest expense		108,208			192,424			30,025			55,605

Net interest income		258,623			268,051			88,055			92,406
Gain on sale of securities available for sale		9,251			5,153			—			2,279
Loss on early termination of repurchase agreements		(9,600	)		—			—			—
Broker-deaker, asset management and insurance fees		45,165			58,110			13,986			16,137
Other income		40,492			56,504			7,959			17,997
Operating expenses		200,545			224,321			61,645			76,632
Provision for claim receivable		—			25,120			—			25,120
Provision for loan losses		115,525			123,650			40,689			45,560
Income tax provision		5,336			(1,349	)		(2,805	)		(10,331	)

Net income	$	22,525		$	16,076		$	10,471		$	(8,162	)

PER COMMON SHARE DATA*
Net income	$	0.48		$	0.34		$	0.22		$	(0.18	)
Book value	$	12.34		$	11.91		$	12.34		$	11.91
Outstanding shares:
Average		46,639,104			46,639,104			46,639,104			46,639,104
End of period		46,639,104			46,639,104			46,639,104			46,639,104
Cash Dividend per Share	$	—		$	0.20		$	—		$	—
AVERAGE BALANCES
Loans held for sale and loans, net of allowance for loans losses	$	5,609,498		$	6,732,106		$	5,446,670		$	6,485,861
Allowance for loan losses		191,374			172,764			189,333			176,267
Earning assets		6,485,761			8,262,315			6,200,156			7,849,123
Total assets		7,232,790			8,978,663			6,889,995			8,530,640
Deposits		4,755,452			5,617,668			4,507,697			5,778,670
Borrowings		1,572,764			2,499,362			1,478,364			1,905,542
Common equity		563,118			564,672			574,327			568,568
PERIOD END BALANCES
Loans held for sale and loans, net of allowance for loans losses	$	5,368,639		$	6,248,276		$	5,368,639		$	6,248,276
Allowance for loan losses		194,795			180,090			194,795			180,090
Earning assets		6,193,936			7,549,266			6,193,936			7,549,266
Total assets		6,838,631			8,135,179			6,838,631			8,135,179
Deposits		4,432,695			5,589,900			4,432,695			5,589,900
Borrowings		1,516,221			1,720,830			1,516,221			1,720,830
Common equity		575,689			555,306			575,689			555,306

Continued


	Nine months ended						Three months ended
	September 30,						September 30,
	2009			2008			2009			2008
SELECTED RATIOS
Performance:
Net interest margin on a tax-equivalent basis (on an annualized basis)		5.38	%		4.40	%		5.67	%		4.76	%
Efficiency ratio (1)		58.45	%		59.21	%		57.51	%		59.00	%
Return on average total assets (on an annualized basis)		0.42	%		0.24	%		0.60	%		-0.38	%
Return on average common equity (on an annualized basis)		5.35	%		3.80	%		7.23	%		-5.71	%
Dividend payout		0.00	%		58.82	%		0.00	%		0.00	%
Average net loans/average total deposits		117.96	%		119.84	%		120.83	%		112.24	%
Average earning assets/average total assets		89.67	%		92.02	%		89.99	%		92.01	%
Average stockholders’ equity/average assets		7.79	%		6.29	%		8.34	%		6.67	%
Fee income to average assets (annualized)		1.39	%		1.37	%		1.37	%		1.23	%
Capital:
Tier I capital to risk-adjusted assets		10.11	%		8.65	%		10.11	%		8.65	%
Total capital to risk-adjusted assets		15.10	%		11.84	%		15.10	%		11.84	%
Leverage Ratio		7.46	%		6.05	%		7.46	%		6.05	%
Asset quality:
Non-performing loans to total loans		4.53	%		3.26	%		4.53	%		3.26	%
Annualized net charge-offs to average loans		2.60	%		2.14	%		2.75	%		3.13	%
Allowance for loan losses to period-end loans		3.50	%		2.80	%		3.50	%		2.80	%
Allowance for loan losses to non-performing loans		77.37	%		85.91	%		77.37	%		85.91	%
Allowance for loan losses to non-performing loans plus accruing loans past-due 90 days or more		74.26	%		80.69	%		74.26	%		80.69	%
Non-performing assets to total assets		4.17	%		2.81	%		4.17	%		2.81	%
Recoveries to charge-offs		3.60	%		2.56	%		3.58	%		1.87	%
EARNINGS TO FIXED CHARGES:
Excluding interest on deposits		1.64	x		1.19	x		1.59	x		0.05	x
Including interest on deposits		1.25	x		1.08	x		1.24	x		0.67	x
OTHER DATA AT END OF PERIOD
Customer financial assets under management	$	13,333,000		$	13,957,000		$	13,333,000		$	13,957,000
Bank branches		54			57			54			57
Consumer Finance branches		60			68			60			68

Total Branches		114			125			114			125
ATMs		148			162			148			162

(Concluded)


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

(1)		Operating expenses less provision for claim receivable 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, 2008. 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, 2008.

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 Nine-Month and Three-Month Periods Ended September 30, 2009 and 2008

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 nine-month and three-month periods ended September 30, 2009 and 2008, net income and other selected financial information, as reported are the following:


	Nine months ended						Three months ended
($ in thousands, except earnings per share)	30-Sep-09			30-Sep-08			30-Sep-09			30-Sep-08
Net income	$	22,525		$	16,076		$	10,471		$	(8,162	)
EPS	$	0.48		$	0.34		$	0.22		$	(0.18	)
ROA		0.42	%		0.24	%		0.60	%		(0.38	)%
ROE		5.35	%		3.80	%		7.23	%		(5.71	)%
Efficiency Ratio (*)		58.45	%		59.21	%		57.51	%		59.00	%


(*)		Operating expenses less provision for claim receivable divided by net interest income on a tax equivalent basis plus other income ecluding 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 Nine-Month and Three-Month Periods Ended September 30, 2009 and 2008

The Corporation’s financial results for the nine-month and three-month periods ended September 30, 2009 were impacted by the following:

	(i)		The Corporation experienced an improvement of 98 basis points in net interest margin, on a tax equivalent basis, to 5.38% for the nine months ended September 30, 2009 from 4.40% for the same period in 2008. Also, there was an improvement of 91 basis points in net interest margin, on a tax equivalent basis, to 5.67% for the three months ended September 30, 2009 from 4.76% for the same period in 2008;

	(ii)		The provision for loan losses decreased $8.1 million or 6.6% and $4.9 million or 10.7% for the nine-month and three month periods ended September 30, 2009 compared to the same period in 2008, respectively. The provision for loan losses represented 102.6% and 111.9% of the net charge-offs for the nine months ended September 30, 2009 and 2008, respectively and 104.1% and 87.0% of the net charge-offs for the three months ended September 30, 2009 and 2008, respectively;

	(iii)		The allowance for loan losses of $194.8 million as of September 30, 2009 represented 3.5% of total loans and 77.4% of non-performing loans and 258.1% of non-performing loans excluding loans secured by real estate. As of December 31, 2008 and September 30, 2008, the allowance for loan losses was $191.9 million and $180.1 million, respectively, represented 3.1% and 2.8% of total loans, and 90.2% and 85.9% of non-performing loans and 225.1% and 216.2% of non-performing loans excluding loans secured by real estate, respectively;

	(iv)		Non-interest income decreased $34.5 million or 28.8% for the nine months ended September 30, 2009 as compared to the same period in 2008. Non-interest income was impacted principally by: (i) a gain of $9.3 million on investment securities available for sale partially offset by a loss of $9.6 million on the early termination of a repurchase agreements, compared with a gain of $5.2 million for the same period in the prior year ; (ii) a decrease in broker-dealer, asset management and insurance fees of $12.9 million;(iii) a gain of $3.3 million on the sale of a portion of the Corporation’s investment in Visa, Inc. during the third quarter of 2009 compared with a gain of $8.6 million during the first quarter 2008 in connection with Visa’s initial public offering;(iv) a loss of $8.4

			million on derivatives and other financial instruments compared with a gain of $6.2 million for the same period in prior year, and (v) an unfavorable valuation adjustment of $7.0 million for loans held for sale recorded during 2008. For the quarter ended September 30, 2009, non-interest income decreased $14.5 million when compared with the quarter ended September 30, 2008, impacted principally by: (i) a $2.3 million decrease in gain on investment securities available for sale; (ii) a loss of $9.3 million on derivatives and other financial instruments for the quarter ended September 30, 2009 compared with a gain of $5.0 million for the same period in prior year; (iii) a gain of $3.3 million on the sale of part of the investment in Visa, Inc., (iv) an unfavorable valuation adjustment of $2.9 million for loans held for sale recorded during 2008 and (v) a decrease in broker-dealer, asset management and insurance fees of $2.2 million.

	(v)		Operating expenses reflected a decrease of $48.9 million or 19.6% for the nine months ended September 30, 2009 when compared to the same period in the prior year. This decrease was affected principally by: (i) $19.6 million decrease in salaries and other employee benefits partially offset by increases of 4.0 million in incentive stock plan expense and $2.2 million in expense from loan origination cost being deferred; (ii) a provision for claim receivable of $25.1 million from Lehman Brother Inc (LBI) recognized during the third quarter of 2008; (iii) $4.7 million decrease in professional fees; (iv) decreases of $2.6 million in business promotion , $1.7 million in occupancy cost, $1.4 million in EDP and technical services and amortization and $1.3 million in repossessed expenses, (v) partially offset by $5.9 million increase in FDIC assessment due to the assessment systems implemented under the Federal Deposit Insurance Reform Act of 2005. For the quarter ended September 30, 2009, operating expenses decreased $40.1 million or 39.4% when compared with the same quarter in 2008, impacted principally by: (i) decrease of $7.6 million in salaries and other employee benefits partially offset by $0.5 million incentive stock plan expense; (ii) a provision for claim receivable of $25.1 million from LBI in 2008; (iii) decreases of $3.1 million in decrease in professional fees, $0.8 million in occupancy cost and 0.7 million in business promotion.

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

	(vii)		The Efficiency Ratio, on a tax equivalent basis, for the nine months ended September 30, 2009 and 2008 was 58.45% and 59.21%, respectively, reflecting an improvement of 76 basis points. The Efficiency Ratio, on a tax equivalent basis, for the three months ended September 30, 2009 and 2008 was 57.51% and 59.00%, respectively, reflecting an improvement of 149 basis points.

Net Interest Income

The Corporation’s net interest income for the nine months ended September 30, 2009 and 2008 was $258.6 million and $268.1 million, respectively. The $9.4 million or 3.5% decrease was mainly due to decreases of $68.2 million, $21.3 million and $3.8 million in interest income on loans, investment securities and federal funds sold, respectively. These decreases reflected the impact of the sale of commercial, construction and mortgage loans to an affiliate and the sale of investment securities available for sale resulting in the decrease of interest income and the decline in the average volume of these portfolios. Offsetting the decrease in net interest income was the $48.7 million decrease in interest expense on deposits and $36.8 million decrease on other borrowings when compared with the same period in prior year. The average cost of funds on interest-bearing liabilities was 2.57% for the nine months ended September 30, 2009, reflecting a 92 basis points decrease from 3.49% for the same period in 2008. This was influenced by the reduction in federal funds rates made by the Federal Reserve (“FED”) from 2.0% in September 30, 2008 to between 0% and 0.25% at September 30, 2009 and management’s actions to lower the rates on certain deposits. The average yield on interest-earning assets reflected an increase of 10 basis points to reach 7.61% in the nine months ended September 30, 2009 compared with 7.51% for the same period in the prior year.

The Corporation’s net interest income for the three months ended September 30, 2009 decreased $4.4 million or 4.7% when compared to the same quarter in 2008. The $4.4 million decrease was principally due to a reduction in interest

income on loans of $21.4 million and reduction in interest income on investment securities of $7.3 million. This decline can be attributed to the decrease in volume as the result of the sale of loans and investment securities and the decline in market rates. Offsetting the reduction in interest income was a $25.6 million decrease in interest expense mainly due to $18.8 million decrease in interest expense on deposits and $7.2 million decrease on other borrowings for the quarter ended September 30, 2009 when compared with the same period in prior year. The average cost of funds on interest-bearing liabilities experienced a decrease of 93 basis points from 3.17% for the three-month period ended September 30, 2008 to 2.24% for the same period in 2009. This was influenced by the reduction in federal funds rates made by the FED and management actions to lower the rates on certain deposits. The average yield on interest-earning assets remained basically flat to reach 7.59% in the quarter ended September 30, 2009.

The tables on page 54 and 55, Year to Date Average Balance Sheet and Summary of Net Interest Income — Tax Equivalent Basis and 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 nine-month periods and quarters ended September 30, 2009 and 2008. 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 the nine-month and three-month periods ended September 30, 2009 compared with the same periods of 2008.

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 $2.1 million and $3.9 million for the nine months ended September 30, 2009 and 2008, respectively. For the quarters ended September 30, 2009 and 2008, the tax equivalent adjustments were $0.5 million and $1.4 million, respectively.

The following table sets forth the principal components of the Corporation’s net interest income for the nine-month and three-month periods ended September 30, 2009 and 2008.


	Nine months ended						Quarter ended
	Sept. 30, 2009			Sept. 30, 2008			Sept. 30, 2009			Sept. 30, 2008
	(Dollars in thousands)						(Dollars in thousands)
Interest income — tax equivalent basis	$	368,973		$	464,379		$	118,599		$	149,441
Interest expense		108,208			192,424			30,025			55,605

Net interest income — tax equivalent basis	$	260,765		$	271,955		$	88,574		$	93,836

Net interest margin — tax equivalent basis (1)		5.38	%		4.40	%		5.67	%		4.76	%


(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 nine-month period ended September 30, 2009, net interest margin, on a tax equivalent basis, was 5.38% compared to net interest margin, on a tax equivalent basis, of 4.40% for the same period in 2008. The 98 basis points increase in net interest margin, on a tax equivalent basis, was mainly due to a decrease in the cost of average interest-bearing liabilities of 92 basis points resulting in a decrease of $84.2 million in interest expense. The reduction of $84.2 million or 43.8% in interest expense was principally due to the significant reductions of 96 basis points in the cost of funds of average interest-bearing deposits from 3.22% for the nine months ended September 30, 2008 to 2.26% for the nine months ended September 30, 2009 reflecting the Federal Reserve’s interest rate cuts. The yield on the average interest-earning assets reflected an increase of 10 basis points from 7.51% to 7.61% for the nine months ended September 30, 2008 and 2009, respectively, principally due to a change in the mix of the assets portfolios, which also was affected for the reduction of average volume in portfolios.

For the three-month period ended September 30, 2009, net interest margin, on a tax equivalent basis, was 5.67% compared to net interest margin, on a tax equivalent basis, of 4.76% for the same period in 2008. The 91 basis points increase in net interest margin, on a tax equivalent basis, was mainly due to a decrease in the cost of average interest-bearing liabilities of 93 basis points resulting in a decrease of $25.6 million or 46.0% in interest expense. The reduction in interest expense was principally due to the significant reductions of 101 basis points in the cost of funds of average interest-bearing deposits from 2.92% for the three months ended September 30, 2008 to 1.91% for the three months ended

September 30, 2009. The average yield on interest-earning assets remained basically flat to reach 7.59% in the quarter ended September 30, 2009.

For the nine-month period ended September 30, 2009, the average interest-earning assets decreased $1.8 billion or 21.5% when compared with figures reported at September 30, 2008. This decrease was mainly due to a decrease of $1.1 billion in average net loans mainly due to the sale of commercial and construction loans, including some classified as impaired, to an affiliate and repayments on loans, net of originations. The decrease in average net loans was comprised of the following items:

	(i)		a decrease in the average commercial and construction loans of $443.5 million or 17.8% and $315.7 million or 74.2%, respectively, for the nine months ended September 30, 2009 when compared with the same period in 2008, which considers the effect of the sale of loans to an affiliate and net repayments during the period;

	(ii)		a decrease of $167.1 million or 6.2% in average mortgage loans mainly due to a $143.9 million decrease in mortgage loans originations;

	(iii)		a decrease in average consumer loans (including consumer finance) of $147.8 million or 12.1% which comprised $106.0 million and $41.7 million decreases in average personal loans and consumer finance, respectively;

	(iv)		a decrease in average leasing portfolio of $29.9 million or 37.4% since the Corporation has strategically reduced this line of lending;

	(v)		an increase in the average allowance for loan losses of $18.6 million when compared with figures reported in 2008.

Also, there was a decrease of $631.7 million or 50.5% in average investment securities mainly due to a sale of investment securities available for sale of $441.0 million during the first quarter of 2009 and $346.7 million during 2008.

The average interest-bearing liabilities decreased $1.7 billion or 23.6% for the nine-month period ended September 30, 2009 driven by a decrease in average borrowings of $926.6 million when compared to the nine-month period ended September 30, 2008. The decrease in average interest-bearing liabilities was composed of:

	(i)		a reduction in average securities sold under agreements to repurchase of $471.1 million mainly caused by the cancellation of $200 million of securities sold under agreements to repurchase with Lehman Brothers Inc. (“LBI”) as result of the bankruptcy of its parent, Lehman Brothers Holding Inc. (“LBHI”) during 2008 and the early termination of repurchase agreements of $375 million that were funding investment securities sold during the first quarter of 2009;

	(ii)		a decrease in average federal funds and other borrowings of $247.8 million mainly due to the repayment of the outstanding indebtedness incurred under a bridge facility agreement among the Corporation, SFS and National Australia Bank Limited during 2008;

	(iii)		reductions of $180.7 million in average commercial paper ;

	(iv)		a decrease in average Federal Home Loan Bank Advances (“FHLB”) of $85.7 million for the nine months ended September 30, 2009 compared with the same period in 2008;

	(v)		a decrease of $810 million in average total interest bearing deposits comprised of $853.5 million decrease in average brokered deposits and $42.6 million decrease in average other time deposits offset by an increase of $86.1 million average savings and NOW accounts.

	(vi)		partially offset by an increase of $58.1 million in average subordinated capital notes due to a subordinated purchase agreement undertook with an affiliate;

For the three-month period ended September 30, 2009, the average interest-earning assets decreased $1.6 billion or 21.1% when compared with the same period in prior year. This decrease was mainly due to a decrease of $1.0 billion in average net loans mainly due to the sale of commercial and construction loans, including some classified as impaired, to an affiliate and repayments on loans, net of originations and a decrease of $538.1 million or 49.0% in average investment securities. The decrease in average net loans was comprised of the following items:

	(i)		a decrease in the average commercial and construction loans of $366.6 million or 15.5% and $276.9 million or 76.7%, respectively, for the three months ended September 30, 2009 when compared with the same period in 2008, which considers the effect of the sale of loans to an affiliate and net repayments during the period;

	(ii)		a decrease of $194.6 million or 7.3% in average mortgage loans, mainly due to a $44.9 million decrease in mortgage loans originations and $151.5 million in repayments net of loans sold for the period;

	(iii)		a decrease in average consumer loans (including consumer finance) of $159.5 million or 13.3% principally due to $121.3 million and $38.2 million decreases in average personal and consumer finance loans, respectively.

	(iv)		a decrease in average leasing portfolio of $28.5 million or 39.5% for the three-month periods ended September 30, 2009, compared with the same periods in 2008, since the Corporation has strategically reduced this line of lending;

	(v)		an increase in the average allowance for loan losses of $13.1 million when compared with figures reported in 2008.

There was a decrease of $538.1 million or 49.0% in average investment securities mainly due to a sale of investment securities available for sale of $441.0 million during the first quarter of 2009 and $346.7 million during 2008. Also there was a decrease in average interest-bearing deposits of $71.7 million or 27.1%.

The decrease in average interest-bearing liabilities of $1.7 billion or 23.8% for the three-month period ended September 30, 2009, was driven by a decrease in average interest-bearing deposits and average borrowings of $1.2 billion and $0.5 billion, respectively, when compared to the three-month period ended September 30, 2008. The decrease in average interest-bearing liabilities was composed of:

	(i)		a decrease of $1.2 million in average total interest bearing deposits comprised of decreases of $1.0 billion and $311.2 million decrease in average brokered deposits and average other time deposits, respectively, offset by increases of $91.2 million in average savings and NOW accounts;

	(ii)		a reduction in average securities sold under agreements to repurchase of $550.2 million mainly caused by the cancellation of $200 million of securities sold under agreements to repurchase with LBI as result of the bankruptcy of its parent, LBHI during 2008 and the early termination of repurchase agreements of $375 million that were funding investment securities sold during the first quarter of 2009.

	(iii)		an increase of $43.9 million in average commercial paper ;

	(iv)		an increase in average FHLB of $13.3 million for the three months ended September 30, 2009 compared with the same period in 2008;

	(v)		an increase in average federal funds and other borrowings of $3.1 million;

	(vi)		an increase of $62.1 million in average subordinated capital notes due to a subordinated purchase agreement undertook with an affiliate;

The following table allocates changes in the Corporation’s interest income, on a tax-equivalent basis, and interest expense for the nine-month and three-month periods ended September 30, 2009, compared to the nine-month and three-month periods ended September 30, 2008, 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.

INTEREST VARIANCE ANALYSIS
on a Tax Equivalent Basis


	Nine Months Ended September 30, 2009									Three Months Ended September 30, 2009
	Compared to the Nine Months									Compared to the Three Months
	Ended September 30, 2008									Ended September 30, 2008
	Increase (Decrease) Due to Change in:									Increase (Decrease) Due to Change in:
	Volume			Rate			Total			Volume			Rate			Total
	(In thousands)									(In thousands)
Interest income, on a tax equivalent basis:
Federal funds sold and securities purchased under agreements to resell	$	(2,106	)	$	(1,733	)	$	(3,839	)	$	(591	)	$	(525	)	$	(1,116	)
Time deposits with other banks		819			(1,136	)		(317	)		161			(246	)		(85	)
Investment securities		(19,173	)		(2,743	)		(21,916	)		(4,796	)		(3,082	)		(7,878	)
Loans		(70,018	)		684			(69,334	)		(21,801	)		38			(21,763	)

Total interest income, on a tax equivalent basis		(90,478	)		(4,928	)		(95,406	)		(27,027	)		(3,815	)		(30,842	)


Interest expense:
Savings and NOW accounts		1,302			(13,248	)		(11,946	)		393			(4,275	)		(3,882	)
Other time deposits		(22,792	)		(13,942	)		(36,734	)		(10,213	)		(4,730	)		(14,943	)
Borrowings		(24,167	)		(12,637	)		(36,804	)		(3,880	)		(3,303	)		(7,183	)
Long-term borrowings		2,172			(904	)		1,268			734			(306	)		428

Total interest expense		(43,485	)		(40,731	)		(84,216	)		(12,966	)		(12,614	)		(25,580	)


Net interest income, on a tax equivalent basis	$	(46,993	)	$	35,803		$	(11,190	)	$	(14,061	)	$	8,799		$	(5,262	)

The following table shows average balances and, where applicable, interest amounts earned on a tax-equivalent basis and average rates for the Corporation’s assets and liabilities and stockholders’ equity for the nine-month and three-month periods ended September 30, 2009 and 2008.

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


	September 30, 2009								September 30, 2008
						Annualized								Annualized
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
						(Dollars in thousands)
Assets:
Interest bearing deposits	$	242,567		$	433		0.24	%	$	49,840		$	750		2.01	%
Federal funds sold and securities purchased under agreements to resell		14,834			58		0.52	%		229,758			3,897		2.27	%

Total interest bearing deposits		257,401			491		0.26	%		279,598			4,647		2.22	%


U.S.Treasury securities		119,512			650		0.73	%		45,955			981		2.85	%
Obligations of other U.S.government agencies and corporations		58,094			1,398		3.22	%		506,839			13,000		3.43	%
Obligations of government of Puerto Rico and political subdivisions		159,406			7,750		6.50	%		100,500			4,283		5.69	%
Corporate bonds		72,034			963		1.79	%		—			—
Collateralized mortgage obligations and mortgage backed securities		153,653			5,861		5.10	%		529,362			18,780		4.74	%
Other		56,163			1,979		4.71	%		67,955			3,473		6.83	%

Total investment securities		618,862			18,601		4.02	%		1,250,611			40,517		4.33	%

Loans:
Commercial		2,049,106			70,796		4.62	%		2,492,613			105,940		5.68	%
Construction		109,477			2,389		2.92	%		425,152			13,787		4.33	%
Consumer		518,230			61,331		15.82	%		624,355			65,153		13.94	%
Consumer Finance		559,522			99,207		23.71	%		601,212			106,620		23.69	%
Mortgage		2,514,429			113,680		6.03	%		2,681,527			123,763		6.15	%
Lease financing		50,108			2,478		6.61	%		80,011			3,952		6.60	%

Gross loans		5,800,872			349,881		8.06	%		6,904,870			419,215		8.11	%
Allowance for loan losses		(191,374	)							(172,764	)

Loans, net		5,609,498			349,881		8.34	%		6,732,106			419,215		8.32	%
Total interest earning assets/ interest income (on a tax equivalent basis)		6,485,761			368,973		7.61	%		8,262,315			464,379		7.51	%

Total non-interest earning assests		747,029								716,348

Total assets	$	7,232,790							$	8,978,663

Liabilities and stockholders’ equity:
Savings and NOW accounts	$	1,776,330		$	14,852		1.12	%	$	1,690,276		$	26,798		2.12	%
Other time deposits		1,647,187			38,201		3.10	%		1,689,747			40,095		3.17	%
Brokered deposits		637,915			15,670		3.28	%		1,491,372			50,510		4.52	%

Total interest bearing deposits		4,061,432			68,723		2.26	%		4,871,395			117,403		3.22	%
Federal funds purchased and other borrowings		5,605			9		0.21	%		253,441			7,849		4.14	%
Securities sold under agreements to repurchase		102,747			3,396		4.42	%		573,860			21,290		4.96	%
Federal Home Loan advances		1,055,256			23,916		3.03	%		1,140,916			28,164		3.30	%
Commercial paper		85,089			450		0.71	%		265,748			7,272		3.66	%
Term Notes		20,201			471		3.12	%		19,599			472		3.22	%
Subordinated Notes		303,866			11,243		4.95	%		245,798			9,974		5.42	%

Total interest bearing liabilities/interest expense		5,634,196			108,208		2.57	%		7,370,757			192,424		3.49	%

Total non-interest bearing liabilities		1,035,476								1,043,234

Total liabilities		6,669,672								8,413,991

Stockholders’ Equity		563,118								564,672

Total liabilities and stockholders’ equity	$	7,232,790							$	8,978,663

Net interest income, on a tax equivalent basis				$	260,765							$	271,955

Net interest spread							5.04	%							4.02	%
Cost of funding earning assets							2.23	%							3.11	%
Net interest margin, on a tax equivalent basis							5.38	%							4.40	%

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


	September 30, 2009								September 30, 2008
						Annualized								Annualized
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
						(Dollars in thousands)
Assets:
Interest bearing deposits	$	177,277		$	89		0.20	%	$	49,071		$	174		1.41	%
Federal funds sold and securities purchased under agreements to resell		16,132			15		0.37	%		216,062			1,131		2.08	%

Total interest bearing deposits		193,409			104		0.21	%		265,133			1,305		1.96	%

U.S.Treasury securities		175,126			346		0.78	%		33,033			123		1.48	%
Obligations of other U.S.government agencies and corporations		35,736			189		2.10	%		396,693			3,557		3.57	%
Obligations of government of Puerto Rico and political subdivisions		127,710			2,013		6.25	%		99,538			1,428		5.71	%
Corporate bonds		141,534			657		1.84	%		—			—		—
Collateralized mortgage obligations and mortgage backed securities		24,395			278		4.52	%		513,567			6,098		4.72	%
Other		55,576			749		5.35	%		55,298			904		6.50	%

Total investment securities		560,077			4,232		3.00	%		1,098,129			12,110		4.39	%

Loans:
Commercial		2,002,758			23,221		4.60	%		2,369,368			32,687		5.49	%
Construction		84,257			627		2.95	%		361,139			3,551		3.91	%
Consumer		487,368			19,251		15.67	%		608,694			22,137		14.47	%
Consumer Finance		556,049			33,287		23.75	%		594,260			35,523		23.78	%
Mortgage		2,461,913			37,168		6.04	%		2,656,530			40,949		6.17	%
Lease financing		43,658			709		6.44	%		72,137			1,179		6.50	%

Gross loans		5,636,003			114,263		8.04	%		6,662,128			136,026		8.12	%
Allowance for loan losses		(189,333	)							(176,267	)

Loans, net		5,446,670			114,263		8.32	%		6,485,861			136,026		8.34	%
Total interest earning assets/ interest income (on a tax equivalent basis)		6,200,156			118,599		7.59	%		7,849,123			149,441		7.57	%

Total non-interest earning assests		689,838								681,517

Total assets	$	6,889,994							$	8,530,640

Liabilities and stockholders’ equity:
Savings and NOW accounts	$	1,818,030		$	3,934		0.86	%	$	1,726,829		$	7,816		1.80	%
Other time deposits		1,596,022			11,562		2.87	%		1,907,268			14,136		2.95	%
Brokered deposits		417,397			2,914		2.77	%		1,431,987			15,283		4.25	%

Total interest bearing deposits		3,831,449			18,410		1.91	%		5,066,084			37,235		2.92	%
Federal funds purchased and other borrowings		14,660			9		0.24	%		11,519			203		7.01	%
Securities sold under agreements to repurchase		—			—		0.00	%		550,167			6,781		4.90	%
Federal Home Loan advances		1,051,576			7,758		2.93	%		1,038,325			7,785		2.98	%
Commercial paper		86,288			127		0.58	%		42,374			308		2.89	%
Term Notes		20,353			160		3.12	%		19,747			163		3.28	%
Subordinated Notes		305,487			3,561		4.62	%		243,410			3,130		5.12	%

Total interest bearing liabilities/interest expense		5,309,813			30,025		2.24	%		6,971,626			55,605		3.17	%

Total non-interest bearing liabilities		1,005,854								990,446

Total liabilities		6,315,667								7,962,072

Stockholders’ Equity		574,327								568,568

Total liabilities and stockholders’ equity	$	6,889,994							$	8,530,640

Net interest income, on a tax equivalent basis				$	88,574							$	93,836

Net interest spread							5.35	%							4.40	%
Cost of funding earning assets							1.92	%							2.82	%
Net interest margin, on a tax equivalent basis							5.67	%							4.76	%

Provision for Loan Losses

The Corporation’s provision for loan losses decreased $8.1 million or 6.6% to reach $115.5 million for the nine-month period ended September 30, 2009. For the quarter ended September 30, 2009, the provision for loan losses was $40.7 million, reflecting a decrease of $4.9 million when compared with quarter ended September 30, 2008. These reductions in provision for loan losses was mainly due to the sale of certain loans including some classified as impaired to an affiliate during the year.

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 nine months ended					For the three months ended
	September 30,			September 30,		September 30,			September 30,
	2009			2008		2009			2008
	(In thousands)

Bank service fees on deposit accounts	$	9,458		$	10,015	$	3,003		$	3,094
Other service fees:
Credit card and payment processing fees		6,832			6,142		2,350			2,014
Mortgage servicing fees		3,044			2,561		1,033			859
Trust fees		812			1,235		261			411
Confirming advances fees		1,629			5,110		403			1,120
Other fees		8,322			8,681		2,696			2,722

Total fee income		30,097			33,744		9,746			10,220
Broker/dealer, asset management, and insurance fees		45,165			58,110		13,986			16,137
Gain on sale of securities available for sale		9,251			5,153		—			2,279
Gain on sale of loans		3,820			3,004		1,019			737
Trading gains		1,541			2,798		138			804
Gain (loss) on derivatives and other financial instruments		(8,356	)		6,224		(9,267	)		5,029
Other (losses) gains, net		(2,796	)		5,375		4,281			(731	)
Other		6,586			5,359		2,042			1,938

	$	85,308		$	119,767	$	21,945		$	36,413

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


	For the nine months ended				For the three months ended
	September 30, 2009		September 30, 2008		September 30, 2009		September 30, 2008
	(In thousands)				(In thousands)
Broker-dealer	$	23,673	$	31,604	$	6,447	$	7,427
Asset management		18,800		20,038		6,396		6,757

Total Santander Securities		42,473		51,642		12,843		14,184
Insurance		2,692		6,468		1,143		1,953

Total	$	45,165	$	58,110	$	13,986	$	16,137

For the nine-month period ended September 30, 2009, other income reflected a decrease of 34.5 million or 28.8% when compared to $119.8 million for the same period in 2008. The changes in other income for the nine-month period ended September 30, 2009 as compared with the same period in prior year was follows:

	(i)		Broker-dealer, asset management and insurance fees reflected a decrease of $12.9 million due to decreases in broker-dealer and asset management fees of $9.2 million and a decrease of $3.8 million in insurance fees due to a reduction in credit life commissions generated from the Bank and Island Finance operations. The broker-dealer operation is carried out through Santander Securities Corporation, whose business includes securities underwriting and distribution, sales, trading, financial planning and securities brokerage services. In addition, Santander Securities provides investment management services through its wholly-owned subsidiary, Santander Asset Management Corporation. The broker-dealer, asset management and insurance operations contributed 52.9% and 48.5% to the Corporation’s other income for the nine-month period ended September 30, 2009, respectively.

	(ii)		There was an increase in gain on sale of securities available for sale of $4.1 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), on the early termination of repurchase agreements that were funding the securities sold. During 2008, the Corporation sold $346.7 million of investment securities available for sale resulting in a gain of $5.2 million.

	(iii)		The Corporation recognized a gain of $3.3 million on the sale of part of the investment in Visa, Inc. compared with a gain of $8.6 million during 2008 in connection with Visa’s initial public offering recognize through earnings and included within other gains (losses).

	(iv)		A loss of $8.4 million on derivatives and other financial instruments during 2009 compared with a gain of $6.2 million for the same period in prior year mostly resulting from the credit risk component incorporated into the fair value calculation of a subordinated notes and brokered deposits.

	(v)		An unfavorable valuation adjustment of $7.0 million for loans held for sale was recorded through earnings and included within other gains (losses) during 2008 offset by an amortization of $0.5 million of previously recorded unrealized losses on loans reclassified to held to maturity recognized during 2009.

For the quarter ended September 30, 2009, a decrease of $14.5 million was reported reaching $21.9 million when compared to $36.4 million for the same period in 2008. The changes in other income for the three-month period ended September 30, 2009 as compared with the same period in prior year was follows:

(i)

Broker-dealer, asset management and insurance fees decreased of $2.2 million due to decreases in broker-dealer and asset management fees of $1.3 million and a decrease of $0.8 million in insurance fees. The broker-dealer, asset management and insurance operations contributed 48.5% to the Corporation’s other income for the quarter ended September 30, 2009 and 44.3% for the same period in prior year.

	(ii)		There was a decrease of $2.3 million in gain on sale of investment available for sale for the quarter ended September 30, 2009.

	(iii)		The Corporation recognized a gain of $3.3 million on the sale of part of the investment in Visa, Inc. recognized through earnings and included within other gains (losses) in the third quarter of 2009 in connection with Visa’s initial public offering during 2008.

	(iv)		The Corporation reported a loss on derivatives and other financial instruments of $9.3 million for the quarter ended September 30, 2009 compared with a gain of $5.0 million reported for the quarter ended September 30, 2008.

	(v)		An unfavorable valuation adjustment of $2.9 million for loans held for sale was recorded through earnings and included within other gains (losses) during the quarter ended September 30, 2008.

OPERATING EXPENSES

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

Operating Expenses


	Nine months ended						Three months ended
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	(In thousands)

Salaries	$	44,833		$	54,784		$	14,933		$	19,938
Share based compensation (benefit)		1,973			(2,059	)		517			35
Pension and other benefits		36,958			46,573			10,729			13,297
Expenses deferred as loan origination costs		(4,251	)		(6,415	)		(1,546	)		(1,898	)

Total personnel costs		79,513			92,883			24,633			31,372

Occupancy costs		18,976			20,631			6,597			7,409

Equipment expenses		3,032			3,340			988			1,087

EDP servicing expense, amortization and technical services		29,782			31,208			9,760			10,147

Communication expenses		6,988			7,724			2,193			2,544

Business promotion		2,794			5,438			926			1,652

Provision for claim receivable		—			25,120			—			25,120

Other taxes		9,895			10,150			3,179			3,394

Other operating expenses:
Professional fees		10,828			15,550			3,216			6,328
Amortization of intangibles		2,137			2,264			671			779
Printing and supplies		1,050			1,360			354			438
Credit card expenses		4,709			3,411			1,534			1,192
Insurance		1,687			2,792			576			868
Examinations and FDIC assessment		10,286			4,431			1,879			1,454
Transportation and travel		1,362			1,972			426			566
Repossessed assets provision and expenses		3,270			4,579			1,695			1,996
Collections and related legal costs		1,477			1,027			588			365
All other		12,759			15,561			2,430			5,041

Other operating expenses		49,565			52,947			13,369			19,027

Non-personnel expenses		121,032			156,558			37,012			70,380

Total Operating expenses	$	200,545		$	249,441		$	61,645		$	101,752

The Corporation’s operating expenses reflected a decrease of $48.9 million or 19.6% to reach $200.5 million for the nine-month periods ended September 30, 2009 when compared with the nine-month period ended September 30, 2008. The major variances in operating expenses are described below:

	(i)		a decrease in net salaries and other employee benefits of $13.4 million principally attributed to $10.0 million decrease in salaries and $9.6 million decrease in other employee benefits (which comprised principally a $6.7 million decrease in bonuses and commissions) partially offset by increases of 4.0 million in incentive stock plan expense and $2.2 million expense of loan origination cost being deferred;

	(ii)		a provision for claim receivable of $25.1 million recognized during the third quarter of 2008 which represent the excess of the value of the securities held by LBI over the amount owned by the Corporation under the securities sold under agreement to repurchase;

	(iii)		a $4.7 million decrease in professional fees due to a decrease in consulting fees related to the review of certain operational procedures during 2008;

	(iv)		decreases of $2.6 million in business promotion , $1.7 million in occupancy cost, $1.4 million in EDP and technical services and $1.3 million in repossessed expenses;

	(v)		partially offset by $5.9 million increase in FDIC assessment due to the assessment systems implemented under the Federal Deposit Insurance Reform Act of 2005 that imposed insurance premiums based on factors such as capital level, supervisory rating, certain financial ratios and risk information and special assessment of 5 basis points, and no more than 10 basis points, of insured depository institutions assets minus Tier 1 capital.

For the three-month period ended September 30, 2009 operating expense decreased $40.1 million or 39.4% when compared with the same period in 2008. The variances in operating expenses are described below:

	(i)		a decrease net salaries and other employee benefits of $6.7 mainly due to decreases in salaries of $5.0 million and a decrease of $2.6 million in other employee benefit (which comprised a reduction of $1.4 million in bonuses and commissions), partially offset by an increase of $0.5 million in stock incentive plans;

	(ii)		a provision for claim receivable of $25.1 million recognized during the third quarter of 2008 which represent the excess of the value of the securities held by LBI over the amount owned by the Corporation under the securities sold under agreement to repurchase;

	(iii)		decreases of $3.1 million in professional fees, $0.8 million in occupancy expense and $0.7 million in business promotions.

The Efficiency Ratio, on a tax equivalent basis, for the nine months ended September 30, 2009 and 2008 was 58.45% and 59.21%, respectively, reflecting an improvement of 76 basis points. The Efficiency Ratio, on a tax equivalent basis, for the three months ended September 30, 2009 and 2008 was 57.51% and 59.00%, respectively, reflecting an increase of 149 basis points.

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

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

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

The income tax provision increased $6.7 million to reach $5.3 million for the nine-month period ended September 30, 2009 compared to an income tax benefit of $1.3 million for the same period in 2008. For the quarter ended September 30, 2009, the benefit for income tax amounted $2.8 million reflecting an increase of $7.5 million from a $10.3 million of income tax benefit for the quarter ended September 30, 2008. This increase in the provision for income tax resulted from a higher taxable income in 2009 compared with the same period in 2008 and 5% additional surcharge imposed for a temporary three-year period commencing in taxable year 2009 and ending in taxable year 2011.

Financial Position — September 30, 2009

Assets

The Corporation’s assets reached $6.8 billion as of September 30, 2009, a $1.1 billion or 13.4% decrease compared to total assets of $7.9 billion at December 31, 2008 and a $1.3 billion or 15.9% decrease compared to total assets of $8.1 billion at September 30, 2008. The reduction of $1.1 billion, for the nine-month period ended September 30, 2009, on Corporation’s total assets was driven by decreases of $599.3 million in net loan portfolio and $342.4 million in investment securities available for sale mainly due to a sale of $441.0 million investment securities during the first quarter of 2009. Also, there was a decrease of $94.8 million in cash and cash equivalents. The reduction of $1.3 billion compared to September 30, 2008 balances was principally due to a $879.6 million decrease in net loan portfolio and $378.6 million decrease in investment securities available for sale due to the sale of investment securities of $441.0 million during the first quarter of 2009.

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


	Sept. 30,			Dec. 31,			Sept. 09/Dec. 08			Sept. 30,			Sept. 09/Sept. 08
	2009			2008			Variance			2008			Variance
	(In thousands)

Commercial and industrial	$	1,965,867		$	2,164,786		$	(198,919	)	$	2,291,376		$	(325,509	)
Construction		83,096			194,026			(110,930	)		241,669			(158,573	)
Mortgage		2,442,049			2,595,588			(153,539	)		2,639,940			(197,891	)
Consumer		473,341			566,589			(93,248	)		595,569			(122,228	)
Consumer Finance		558,283			578,243			(19,960	)		591,435			(33,152	)
Leasing		40,798			60,615			(19,817	)		68,377			(27,579	)

Gross Loans		5,563,434			6,159,847			(596,413	)		6,428,366			(864,932	)
Allowance for loan losses		(194,795	)		(191,889	)		(2,906	)		(180,090	)		(14,705	)

Net Loans	$	5,368,639		$	5,967,958		$	(599,319	)	$	6,248,276		$	(879,637	)

The net loan portfolio, including loans held for sale, reflected a decrease of $599.3 million or 10.0%, reaching $5.4 billion at September 30, 2009, compared to the figures reported as of December 31, 2008, and a decrease of $879.6 million or 14.1%, when compared to September 30, 2008. The commercial and industrial and construction loans portfolios decreased $198.9 million and $110.9 million, respectively, when compared to the December 31, 2008 balances. The reduction in these portfolios was basically due to the sale to an affiliate of $131.2 million of commercial and industrial and construction loans, including some classified as impaired, and $178.7 million of repayments, net of

originations for the nine months ended September 30, 2009. Compared with September 30, 2008 balances, the commercial and construction loans portfolios reflected decreases of $325.5 million and $158.6 million, respectively, due to $242.2 million loans sold to an affiliate and $241.9 million of repayments, net of originations.

The mortgage portfolio reflected a decrease of $153.5 million, or 5.9%, and $197.9 million, or 7.5%, decreases compared to December 31, 2008 and September 30, 2008 balances. Residential mortgage loan origination for the nine months ended September 30, 2009 was $150.4 million, $143.9 million or 48.9% less than the $294.3 million originated during the same period in 2008.

Also, the Corporation reported a decrease in consumer loans (including consumer finance) of $113.2 million or 9.9% when compared with December 31, 2008 balances and $155.4 million or 13.1% when compared with September 30, 2008 balances. The leasing portfolio reflected decreases of $19.8 million and $27.6 million when compared with December 31, 2008 and September 30, 2008, respectively, reflecting the Corporation’s strategy to reduce this line of lending.

For the nine months ended September 30, 2009, the Corporation sold loans, including certain impaired loans, to an affiliate with a net book value of $142.0 million which 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.

Allowance for Loan Losses

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

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

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

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

a more reliable estimate of probable losses on its existing consumer and consumer finance portfolios. The application of this revised methodology for the quarter ended September 30, 2009 resulted in a provision for loan losses on consumer and consumer finance loans which is $305,000 lower than the amount that would have been determined under the previous quantitative method. The positive effect on earnings per share for the quarter ended September 30, 2009 was less than $.01.

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 nine month ended						For the three months ended
	September 30,						September 30,
	2009			2008			2009			2008
	(In thousands)						(In thousands)

Balance at beginning of period	$	191,889		$	166,952		$	193,186		$	186,889
Provision for loan losses		115,525			123,650			40,689			45,560

		307,414			290,602			233,875			232,449

Losses charged to the allowance:
Commercial and industrial		18,568			10,589			10,225			6,439
Construction		2,254			28,128			—			22,770
Mortgage		6,498			64			945			—
Consumer		40,642			30,370			13,241			10,395
Consumer finance		47,533			42,764			15,734			13,306
Leasing		1,334			1,497			386			447

		116,829			113,412			40,531			53,357

Recoveries:
Commercial and industrial		1,870			501			697			208
Construction		23			—			—			—
Mortgage		2			—
Consumer		991			887			220			308
Consumer finance		1,028			1,179			389			400
Leasing		296			333			145			82

		4,210			2,900			1,451			998

Net loans charged-off		112,619			110,512			39,080			52,359

Balance at end of period	$	194,795		$	180,090		$	194,795		$	180,090


Ratios:
Allowance for loan losses to period-end loans		3.50	%		2.80	%		3.50	%		2.80	%
Recoveries to charge-offs		3.60	%		2.56	%		3.58	%		1.87	%
Annualized net charge-offs to average loans		2.60	%		2.14	%		2.75	%		3.13	%

The Corporation’s allowance for loan losses was $194.8 million or 3.50% of period-end loans at September 30, 2009, a 70 basis point increase compared to $180.1 million, or 2.80% of period-end loans at September 30, 2008. The $194.8 million in the allowance for loan losses is comprised of $128.9 million related to the Bank and $65.9 million related to Island Finance entity, with a provision for loan losses of $72.3 million and $43.3 million for each respective segment for the nine months ended September 30, 2009. At September 30, 2008, the composition of the allowance for loan losses of $180.1 million was comprised of $110.5 million related to the Bank and $69.6 million related to Island Finance entity, with a provision for loan losses of $80.9 million and $42.8 million for the same period for each respective entities.

The 70 basis points increment in the ratio of allowance for loan losses to period-end loan for the nine months ended September 30, 2009 as compared with the same period in 2008 was driven by $42.1 million increase in non-performing loans which amounted $251.8 million as of September 30, 2009 versus $209.6 million as of September 30, 2008. The allowance for loan losses is a current estimate of the losses inherent in the present portfolio based on management’s ongoing quarterly evaluations of the loan portfolio. On a quarterly basis, the Corporation reviews and evaluates historical loss experience by loan type, quantitative factors (historical net charge-offs, statistical loss estimates, etc.) as well as qualitative factors (current economics conditions, portfolio composition, delinquency trends, industry concentrations, etc.).

The ratio of the allowance for loan losses to non-performing loans and accruing loans past due 90 days or more was 74.3%, 84.8% and 80.7% at September 30, 2009, December 30, 2008 and September 30, 2008, respectively. Excluding non-performing mortgage loans this ratio was 226.5% at September 30, 2009 compared to 186.0% at September 30, 2008 and 194.4% at December 31, 2008.

The annualized ratio of net charge-offs to average loans for the nine-month period ended September 30, 2009 was 2.60%, increasing 46 basis points from 2.14% for the same period in 2008. This change was due to an increment in net charge-offs of $2.1 million during the nine months ended September 30, 2009 when compared with the same period in 2008 combined with a decrease in average gross loans of $1.1 billion for the nine months ended September 30, 2009 compared with the same period in 2008.

At September 30, 2009, impaired loans (loans evaluated individually for impairment) and related allowance amounted to approximately $145.8 million and $23.1 million, respectively. At December 31, 2008 impaired loans and related allowance amounted to $100.9 million and $18.4 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 September 30, 2009, the Corporation’s total non-performing loans (excluding other real estate owned) reached $251.8 million or 4.53% of total loans from $212.7 million or 3.45% of total loans as of December 31, 2008 and from $209.6 million or 3.26% of total loans as of September 30, 2008. The Corporation’s non-performing loans reflected an increase of $42.1 million or 20.1% compared to non-performing loans as of September 30, 2008 and an increase of $39.1 million or 18.4% compared to non-performing loans as of December 31, 2008. The $42.1 million increase in non-performing loans was principally to $46.6 million increase in non-performing residential mortgage loans and $5.8 million increase in non-performing consumer loans (including consumer finance). These increases were offset by decreases of $7.5 million and $2.3 million in non-performing commercial and construction loans, respectively, when compared to September 30, 2008. Compared to December 31, 2008, the increase of $39.1 million was composed mainly of $45.1 million and $5.2 million increases in non-performing residential mortgage loans and consumer loans (including consumer finance) partially offset by $7.5 million decrease in non-performing construction loans and $3.8 million in non-performing commercial loans.

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


	September 30,			December 31,			September 30,
	2009			2008			2008
	(Dollars in thousands)

Commercial and Industrial	$	26,801		$	30,564		$	34,299
Construction		6,383			13,856			8,904
Mortgage		161,523			116,473			114,923
Consumer		10,067			13,479			13,122
Consumer Finance		44,102			35,508			35,248
Leasing		2,055			2,493			2,786
Restructured Loans		843			341			346

Total non-performing loans		251,774			212,714			209,628
Repossessed Assets		33,161			22,306			18,908

Total non-performing assets	$	284,935		$	235,020		$	228,536


Accruing loans past-due 90 days or more	$	10,536		$	13,462		$	13,551

Non-Performing loans to total loans		4.53	%		3.45	%		3.26	%
Non-Performing loans plus accruing loans past due 90 days or more to total loans		4.71	%		3.67	%		3.47	%
Non-Performing assets to total assets		4.17	%		2.97	%		2.81	%

Liabilities

The Corporation’s total liabilities reached $6.3 billion as of September 30, 2009, reflecting a decrease of $1.1 billion or 14.7% compared to December 31, 2008. This reduction in total liabilities was principally due to a decrease in total deposits of $582.2 million or 11.6% to $4.4 billion balance reported as of September 30, 2009 and a decrease in total borrowings (comprised of federal funds purchased and other borrowings, securities sold under agreements to repurchase, commercial paper issued, federal home loan advances, term and capital notes) of $423.2 million or 21.8% as of September 30, 2009 from $1.9 billion at December 31, 2008.

Total deposits of $4.4 billion as of September 30, 2009 were composed of $0.4 billion in brokered deposits and $4.0 billion of customer deposits. Compared to December 31, 2008, brokered deposits reflected a decrease of $583.1 million or 59.9% and customer deposits reflected an increase of $0.9 million s of September 30, 2009. Total deposits reflected a decrease of $1.2 billion compared with $5.6 billion as of September 30, 2008 which comprised decreases of $0.7 billion and $0.5 billion in brokered deposits and customer deposits, respectively.

Total borrowings at September 30, 2009 (comprised of federal funds purchased and other borrowings, securities sold under agreements to repurchase, commercial paper issued, federal home loan bank advances and term and capital notes) decreased $423.2 million or 21.8% and 204.6 million or 11.9% compared to borrowings at December 31, 2008 and September 30, 2008, respectively. The $423.2 million reduction was mainly due to the cancellation of $375 million in securities sold under agreements to repurchase, $165.0 million decrease in federal home loan bank advances partially offset by an increase of $66.0 million in commercial paper issued and $45.5 million in federal funds purchased. The $204.6 million reduction compared with September 30, 2008 balances was mainly due to the cancellation of $375 million in securities sold under agreements to repurchase and $15.0 million decrease in federal funds purchased partially offset by $71.2 million, $67.1 million and $46.5 million increases in subordinated notes, commercial paper issued and federal funds purchased, respectively.

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

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

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

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 $575.7 million, or 8.4% of total assets at September 30, 2009, compared to $551.6 million or 7.0% of total assets at December 31, 2008. The $24.0 million increase in stockholders’ equity was composed of net income of $22.5 million, an increase in minimum pension benefit of $3.6 million and stock incentive plan expense recognized as capital contribution of $1.1 million during the nine-month period ended September 30, 2009. These changes were offset an increase in accumulated other comprehensive loss of $3.2 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 nine months ended September 30, 2009 and 2008, the Corporation did not repurchase any shares of common stock. As of September 30, 2009, 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 September 30, 2009, the 3 ^nd quarter of 2009, the Corporation’s stock price traded consistently below (from $5.18 to $10.80) the book value per share of $12.34 as of September 30, 2009. This is mainly attributed to the current condition of the worldwide and Puerto Rico economy which has affected the stock market, where all stocks and specially the ones in the financial sector both in Puerto Rico and the United States have experienced a depression in price. Also, the Corporation’s stock experienced a limited float, due to 91% were owned by Santander SA. These situations impact a relatively small changes or trends in volume triggers a significant impact in the share price.

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 September 30, 2009 the Corporation continued to exceed the regulatory risk-based capital requirements. Tier I capital to risk-adjusted assets and total capital ratios at September 30, 2009 were 10.11% and 15.10%, respectively, and the leverage ratio was 7.46%.

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 September 30, 2009 and December 31, 2008.

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

Economic Undesignated Hedges:

The following table summarizes the derivative contracts designated as economic undesignated hedges as of September 30, 2009 and December 31, 2008, respectively:


	September 30, 2009
	Notional
(In thousands)	Amounts		Fair Value		Loss
Economic Undesignated Hedges
Interest Rate Swaps	$	125,000	$	1,074	$	(4,136	)


Totals	$	125,000	$	1,074	$	(4,136	)


	December 31, 2008
	Notional
(In thousands)	Amounts		Fair Value		Gain
Economic Undesignated Hedges
Interest Rate Swaps	$	125,000	$	5,210	$	4,311


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


*		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 September 30, 2009 and December 31, 2008, the economic undesignated hedges have maturities through the year 2032. The weighted average rate paid and received on these contracts is 0.79% and 6.22% as of September 30, 2009 and 3.24% and 6.22% as of December 31, 2008, respectively.

The Corporation had issued fixed rate debt swapped to create a floating rate source of funds. In this case, the Corporation matches all of the relevant economic variables (notional, coupon, payments date and exchanges, etc) of the fixed rate sources of funds to the fixed rate portion of the interest rate swaps, (which it received from counterparty), and pays the floating rate portion of the interest swaps. The effectiveness of these transactions is very high since all of the relevant economic variables are matched. As of September 30, 2009 and December 31, 2008, the Corporation has $1.1 million and $5.2 million, respectively, in fair value of these economic undesignated hedges.

Derivative instruments not designated as hedging instruments:

Any derivative not associated to hedging activity is booked as a freestanding derivative. In the normal course of business the Corporation may enter into derivative contracts as either a market maker or proprietary position taker. The Corporation’s mission as a market maker is to meet the clients’ needs by providing them with a wide array of financial products, which include derivative contracts. The Corporation’s major role in this aspect is to serve as a derivative counterparty to these clients. Positions taken with these clients are hedged (although not designated as hedges) in the OTC market with interbank participants or in the organized futures markets. To a lesser extent, the Corporation enters into freestanding derivative contracts as a proprietary position taker, based on market expectations or to benefit from price differentials between financial instruments and markets. 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 September 30, 2009 and December 31, 2008, respectively:


	September 30, 2009
	Notional
(In thousands)	Amounts *		Fair Value		Gain (Loss)
Interest Rate Contracts
Interest Rate Swaps	$	3,499,117	$	106	$	(8	)
Interest Rate Caps		878		—		—
Other		2,859		83		(10	)
Equity Derivatives		215,284		—		—

Totals	$	3,718,138	$	189	$	(18	)


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

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


*		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 evaluates its 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 September 30, 2009 and December 31, 2008:


	September 30, 2009			December 31, 2008
	($ in thousands)

Commercial and industrial	$	1,967,172		$	2,165,613

Consumer — banking operations		472,844			565,833

Consumer Finance:
Consumer Installment Loans		540,907			686,277
Mortgage Loans		287,364			310,642

		828,271			996,919

Leasing		42,859			64,065


Construction		83,313			194,596

Mortgage Loans		2,413,572			2,553,328

Sub-total		5,808,031			6,540,354

Unearned income and deferred fees/cost:
Banking operations		219			(290	)
Consumer finance		(269,989	)		(418,676	)

Allowance for loans losses:
Banking operations		(128,871	)		(122,761	)
Consumer finance		(65,924	)		(69,128	)

	$	5,343,466		$	5,929,499

The Corporation’s gross loan portfolio as of September 30, 2009 and December 31, 2008 amounted to $5.8 billion and $6.5 billion respectively, which represented 93.7% and 90.9%, respectively, of the Corporation’s total earning assets. The loan portfolio is distributed among various types of credit, including commercial business loans, commercial real estate loans, construction loans, small business loans, consumer lending and residential mortgage loans. The credit risk exposure provides for diversification among specific industries, specific types of business, and related individuals. As of September 30, 2009 and December 31, 2008, there was no obligor group that represented more than 2.5% of the Corporation’s total loan portfolio. Obligors’ resident or having a principal place of business in Puerto Rico comprised approximately 99% of the Corporation’s loan portfolio.

As of September 30, 2009 and December 31, 2008, the Corporation had over 318,000 consumer loan customers each and over 8,000 and 7,000 commercial loan customers, respectively, As of such dates, the Corporation had 38 and 50 clients with commercial loans outstanding over $10.0 million, respectively. Although the Corporation has generally avoided cross-border loans, the Corporation had approximately $12.0 and $31.3 million in cross-border loans as of September 30, 2009 and December 31, 2008, respectively, which are collateralized with real estate in the United States of America, cash and marketable securities.

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

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

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

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

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

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


	September 30, 2009
	First		Second		Total		Vintage			Non-performing		% of
	mortgage		mortgage		Mortgage		% of total			loans		total loans
					(Dollars in thousands)

Vintage:
2009	$	32,358	$	235	$	32,593		1	%	$	—		0.00	%
2008		104,289		2,078		106,367		4	%		1,371		1.29	%
2007		254,402		2,196		256,598		11	%		10,969		4.27	%
2006		538,310		3,966		542,276		22	%		41,069		7.57	%
2005		553,228		534		553,762		23	%		36,535		6.60	%
2004 and earlier		920,146		1,830		921,976		39	%		44,928		4.87	%

Sub- Total	$	2,402,733	$	10,839	$	2,413,572		100	%	$	134,872		5.59	%


	December 31, 2008
	First		Second		Consumer		Other		Total		Vintage			Non-performing		% of
	mortgage		mortgage		mortgage		mortgage		Mortgage		% of total			loans		total loans
							(Dollars in thousands)

Vintage:
2008	$	106,836	$	2,359	$	—	$	—	$	109,195		4	%	$	638		0.58	%
2007		269,220		2,546				—		271,766		11	%		5,701		2.10	%
2006		578,086		4,319		31		157		582,593		23	%		32,198		5.53	%
2005		604,142		636		—		—		604,778		24	%		24,251		4.01	%
2004		439,674		487				—		440,161		17	%		16,256		3.69	%
2003 and earlier		543,044		1,578		55		158		544,835		21	%		22,953		4.21	%

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

The Corporation originates mortgage loans through three main channels: retail sales force, licensed real estate brokers and purchases from third parties. The production originated through the retail sales force represent 59% and 44% of the total mortgage originations for the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively. The Corporation performed strict quality control reviews of third party originated loans, which represented 41% for the nine-month period ended September 30, 2009 and 55% of the total originated mortgage portfolio for the year ended December 31, 2008. The Corporation offered fixed rate first and second mortgages which are almost entirely secured by a primary residence for the purpose of purchase money, refinance, debt consolidation, or home equity loans. Residential real estate mortgages of banking operations represent approximately 42% and 39% of total gross loans at September 30, 2009 and December 31, 2008, respectively. As of September 30, 2009 and December 31, 2008, the first mortgage portfolio totaled approximately $2.4 billion while the second mortgage portfolio was approximately $10.8 million for both periods 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:


	September 30, 2009
	First		Second		ARM		Total		Vintage			Non-performing		% of
	mortgage		mortgage		mortgage		Mortgage*		% of total			loans		total loans
	(Dollars in thousands)

Vintage:
2009	$	9,543	$	95	$	—	$	9,638		6	%	$	—		0.00	%
2008		29,244		407		—		29,651		18	%		2,076		7.00	%
2007		25,613		1,067		1,084		27,764		17	%		2,253		8.11	%
2006		12,805		918		21,178		34,901		22	%		4,367		12.51	%
2005		11,278		1,124		17,731		30,133		19	%		3,041		10.09	%
2004 and earlier		22,422		6,524		—		28,946		18	%		3,971		13.72	%

Total	$	110,905	$	10,135	$	39,993	$	161,033		100	%	$	15,708		9.75	%


*		Net of unearned finance charges and deferred income/cost


	December 31, 2008
	First		Second		ARM		Total		Vintage			Non-performing		% of
	mortgage		mortgage		mortgage		Mortgage*		% of total			loans		total loans
	(Dollars in thousands)

Vintage:
2008	$	31,441	$	696	$	—	$	32,137		19	%	$	262		0.82	%
2007		28,323		1,498		1,246		31,067		19	%		572		1.84	%
2006		13,409		1,281		22,355		37,045		21	%		3,196		8.63	%
2005		12,208		1,219		19,953		33,380		20	%		3,014		9.03	%
2004		11,524		3,108		—		14,632		9	%		1,776		12.14	%
2003 and earlier		13,129		6,185		—		19,314		12	%		2,160		11.18	%

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


*		Net of unearned finance charges and deferred income/cost

The Corporation originates loans to near prime or “Band C” borrowers (customers with Fair Isaac Corporation (“FICO”) scores of 620 or less among other factors, including level of income and its source, loan-to-value (LTV), other guarantees and banking relationships and nature and location of collateral, if any,). The following table provides information on the Corporation’s residential mortgage and consumer installments loans exposure from banking operations and consumer finance business, including near prime or “Band C” loans at September 30, 2009 and December 31, 2008.


	September 30, 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	$	1,529,773		72	%	$	270,392		70	%	$	613,407		73	%	$	2,413,572		72	%
Consumer Finance		68,641		66	%		39,278		67	%		53,114		65	%		161,033		64	%

	$	1,598,414				$	309,670				$	666,521				$	2,574,605


*Consumer Installment Loans:**
Banking Operations	$	303,590		n/a		$	56,367		n/a		$	112,887		n/a		$	472,844		n/a
Consumer Finance		181,603		n/a			111,920		n/a			103,400		n/a			396,923		n/a

	$	485,193				$	168,287				$	216,287				$	869,767


*		Net of unearned finance charges and deferred income/cost


	December 31, 2008
	“BAND A”		Avg.			“BAND B”		Avg.			“BAND C”		Avg.			Total		Avg.
	FICO>=660		LTV			FICO>620 and <660		LTV			FICO<=620		LTV			Loans		LTV
	(Dollars in thousands)

Mortgage Loan Portfolio:
Banking Operations	$	1,984,652		80	%	$	308,690		81	%	$	259,986		76	%	$	2,553,328		80	%
Consumer Finance		65,516		61	%		41,652		62	%		60,407		61	%		167,575		61	%

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


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

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


*		Net of unearned finance charges and deferred income/cost

At September 30, 2009, residential mortgage portfolio categorized as near prime or “Band C” loans was approximately $613.4 million and $53 million for banking operations and consumer finance business, respectively, a 25% and 33% of its total residential mortgage portfolio, respectively. The mortgage loans amounts reported in “Band C” as of September 30, 2009 includes $2.7 million or 1.0% of originated loans during the year for banking operations and $1.9 million or 3.6% for consumer finance portfolio. At December 31, 2008, residential mortgage portfolio categorized as near prime or “Band C” loans was approximately $260 million and $60 million for banking operations and consumer finance business, respectively, a 10% and 36% of its total residential mortgage portfolio, respectively. The mortgage loans amounts reported in “Band C” as of December 31, 2008 includes $5.3 million or 1.5% of originated loans during the year for banking operations and $7.9 million or 13% for consumer finance portfolio.

The Corporation’s risk management considers a “FICO” credit score, an indicator of credit rating and credit profile, and loan-to value ratios, the proportional lending exposure relative to property value, as a key determinant of credit performance. The average FICO score for the residential mortgage portfolio of banking operations, as of September 30, 2009 and December 31, 2008 was 676 and 706, respectively and an average LTV of 72% as compared to 80% as of December 31, 2008. For its consumer finance business residential mortgages, average FICO score, as of September 30, 2009 and December 31, 2008 was 642 and 648, respectively and an average LTV of 66% as of September 30, 2009 as compared to 61% as of December 31, 2008. The actual rates of delinquencies, foreclosures and losses on these loans could be higher than anticipated during economic slowdowns.

Residential mortgage loan origination for banking operations was $150.4 million for the nine months ended September 30, 2009, $345.7 million for the year ended December 31, 2008 and $294.3 million for the nine months ended September 30, 2008. The Corporation sold and securitized $143.8 million, $213.4 million and $160.8 million for the nine months ended September 30, 2009, the year ended December 31, 2008 and nine months ended September 30, 2008, respectively, to third parties. Within the sales and securitizations numbers mentioned above, the Corporation sold and securitized $7.5 million and $18.8 million of near prime or “Band C” loans for the nine-month period ended September 30, 2009 and the year ended December 31, 2008, respectively.

The Corporation added strength to the control over its credit activities and does not pursue near prime or “Band C” residential mortgage and consumer installment as a core product of its lending activities. Under the Corporation’s Loss Mitigation Policy (“LMP”), we evaluate, 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.

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 September 30, 2009, was negative $658.6 million or -10.3% 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 September 30, 2009 and may not be representative of interest rate gap positions at other times. In addition, variations in interest rate sensitivity may exist within the repricing period presented due to the differing repricing dates within the period. In preparing the interest rate gap report, the following assumptions 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 SEPTEMBER 30, 2009


																More			No
	0 to 3			3 months			1 to 3			3 to 5			5 to 10			than			Interest
	months			to a Year			Years			Years			Years			10 Years			Rate Risk			Total
	(dollars in thousands)
ASSETS:
Investment Portfolio	$	10,073		$	104,501		$	271,896		$	23,353		$	9,785		$	—		$	87,622		$	507,230
Deposits in Other Banks		258,759			—			—			—			—			—			59,308			318,067
Loan Portfolio
Commercial		1,117,441			180,870			228,389			170,181			127,611			66,982			115,190			2,006,664
Construction		49,716			11,912			10,127			2,086			3,898			1,967			3,390			83,096
Consumer		320,199			190,029			316,343			167,269			27,761			14			10,009			1,031,624
Mortgage		104,886			276,003			538,766			439,380			806,532			160,544			115,938			2,442,049
Fixed and Other Assets		—			—			—			—			—			—			449,901			449,901

Total Assets	$	1,861,074		$	763,315		$	1,365,521		$	802,269		$	975,587		$	229,507		$	841,358		$	6,838,631


LIABILITIES AND STOCKHOLDERS’ EQUITY

External Funds Purchased
Commercial Paper	$	117,000		$	—		$	—		$	—		$	—		$	—		$	(39	)	$	116,961
Repurchase Agreements		—			—			—			—			—			—			—			—
Federal Funds Purchased and Other Borrowings		97,500			445,000			525,000			—			—			—			—			1,067,500
Deposits
Certificates of Deposit		754,899			929,406			143,522			28,275			—			12,489			44			1,868,635
Demand Deposits and Savings Accounts		103,461			38,918			333,805			97,228			119,125			—			—			692,537
Transactional Accounts		301,261			365,497			553,930			80,983			569,852			—			—			1,871,523
Term and Subordinated Debt		—			4,815			15,569			75,000			172,336			60,000			4,040			331,760
Other Liabilities and Capital		—			—			—			—			—			—			889,715			889,715

Total Liabilities and Capital	$	1,374,121		$	1,783,636		$	1,571,826		$	281,486		$	861,313		$	72,489		$	893,760		$	6,838,631


Off-Balance Sheet Financial Information

Interest Rate Swaps (Assets)	$	1,718,975		$	72,338		$	2,323		$	111,630		$	1,557,851		$	36,000		$	—		$	3,499,117
Interest Rate Swaps (Liabilities)		1,854,256			62,338			2,151			36,521			1,507,851			36,000			—			3,499,117
Caps		879			235			643			—			—			—			—			1,757
Caps Final Maturity		879			235			643			—			—			—			—			1,757

GAP	$	351,672		$	(1,010,321	)	$	(206,133	)	$	595,892		$	164,274		$	157,018		$	(52,402	)	$	—

Cumulative GAP	$	351,672		$	(658,649	)	$	(864,782	)	$	(268,890	)	$	(104,616	)	$	52,402		$	—		$	—

Cumulative interest rate gap to earning assets		5.50	%		-10.31	%		-13.54	%		-4.21	%		-1.64	%		0.82	%

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 September 30, 2009, it was determined for purposes of the Net Interest Income Shock Report that the Corporation had a potential loss in net interest income of approximately $4.4 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 $38.1 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 September 30, 2009.

NET INTEREST MARGIN SHOCK REPORT
September 30, 2009


(In millions)	-200 BP’s			-100 BP’s		-50 BP’s		Base Case		+50 BP’s			+100 BP’s			+200 BP’s
Gross Interest Margin	$	370.1		$	402.0	$	402.4	$	399.5	$	397.7		$	395.1		$	388.6
Sensitivity	$	(29.4	)	$	2.5	$	2.9			$	(1.8	)	$	(4.4	)	$	(10.9	)

MARKET VALUE SHOCK REPORT
September 30, 2009


(In millions)	-200 BP’s			-100 BP’s		-50 BP’s		Base Case		+50 BP’s			+100 BP’s			+200 BP’s
Market Value of Equity	$	771.7		$	804.6	$	796.1	$	773.7	$	771.9		$	735.6		$	703.5
Sensitivity	$	(2.0	)	$	30.9	$	22.4			$	(1.8	)	$	(38.1	)	$	(70.2	)

As of September 30, 2009 the Corporation had a liability sensitive profile as explained by the negative gap, the NIM shock report and the MVE shock report. Any decision to reposition the balance sheet is taken by the ALCO committee, and is subject to compliance with the established risk limits. Some factors that could lead to shifts in policy could be, but are not limited to, changes in views on interest rate markets, monetary policy, and macroeconomic factors as well as legal, fiscal and other factors which could lead to shifts in the asset liability mix.

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 September 30, 2009, the Corporation had $1.5 billion in unsecured lines of credit ($649.2 million available) and $3.7 billion in collateralized lines of credit with banks and financial entities ($2.6 billion available). All securities in portfolio are highly rated and very liquid enabling 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.

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 September 30, 2009, the Corporation had a liquidity ratio of 11.70%. At September 30, 2009, the Corporation had total available liquid assets of $767.4 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.

On February 2009, SFS conducted a conversion of its loan platform and cash collection systems. Management understands that this system conversion, which includes significant modifications to procedures, could represent a material change in internal control over financial reporting. Also, the Corporation completed the outsourcing of its payroll systems on June 2009. Changes to certain processes, and information systems and other components of internal control over financial reporting (as defined in Rule 13-159(e) and 15d-15(e) under the Securities Exchange Act of 1934) resulting from the system conversion and payroll outsourcing, referred to above, may occur and are in the process of being evaluated by management as certain processes, activities and controls are implemented. Management intends to complete its assessment of the effectiveness of internal control over financial reporting for the 2009 annual management report on internal control over financial reporting.

Changes in Internal Controls

Besides the matter described above, 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, 2008.

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, 2008.

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

None

ITEM 5 — OTHER INFORMATION

None

ITEM 6 — EXHIBITS


Exhibit No.	Description	Reference
(3.1)	Amendment to the Articles of Incorporation	Exhibit 3.1 10-Q-06/30/09
(10.0)	Code of Ethics	Exhibit 8-K-04/01/09
(10.1)	Loan Agreement Agreement between Santander BanCorp, Santander Financial Services, Inc. and Banco Santander Puerto Rico	Exhibit 8K-09/30/09
(12)	Computation of Ratio of Earnings to Fixed Charges	Exihbit 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: November 9, 2009	By:	/s/ Juan Moreno
		President and Chief Executive Officer



Dated: November 9, 2009	By:	/s/ Roberto Jara
		Executive Vice President and
		Chief Accounting Officer

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