Santander Bancorp - 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 June 30, 2008

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.)

207 Ponce de León Avenue, Hato Rey, Puerto Rico		00917

(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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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 June 30, 2008


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		2
Condensed Consolidated Statements of Changes in Stockholders’ Equity		3
Condensed Consolidated Statements of Comprehensive Income		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		37

Item 3. Quantitative and Qualitative Disclosures About Market Risk		63

Item 4. Controls and Procedures		68

Part II: Other Information
Item 1. Legal Proceedings		69
Item 1A. Risk Factors		69
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		69
Item 3. Defaults Upon Senior Securities		69
Item 4. Submission of Matters to a Vote of Security Holders		69
Item 5. Other Information		69
Item 6. Exhibits		70

Signatures		72

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SECTION 302 CERTIFICATION OF THE CEO
SECTION 302 CERTIFICATION OF THE COO
SECTION 302 CERTIFICATION OF THE CAO
SECTION 906 CERT OF THE CEO, COO AND CAO

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

The future results of the Corporation could be affected by subsequent events and could differ materially from those expressed in forward-looking statements. If future events and actual performance differ from the Corporation’s assumptions, the actual results could vary significantly from the performance projected in the forward-looking statements.

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

PART I — ITEM 1

ITEM 1

FINANCIAL STATEMENTS (UNAUDITED)

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AS OF JUNE 30, 2008 AND DECEMBER 31, 2007

(Dollars in thousands, except share data)


	June 30,			December 31,
	2008			2007
ASSETS

Cash and Cash Equivalents:
Cash and due from banks	$	148,441		$	118,096
Interest-bearing deposits		3,228			1,167
Federal funds sold and securities purchased under agreements to resell		168,597			82,434

Total cash and cash equivalents		320,266			201,697

Interest-Bearing Deposits		7,866			5,439
Trading Securities, at fair value:
Securities pledged that can be repledged		8,879			15,965
Other trading securities		60,506			52,535

Total trading securities		69,385			68,500

Investment Securities Available for Sale, at fair value:
Securities pledged that can be repledged		624,458			667,361
Other investment securities available for sale		502,951			600,837

Total investment securities available for sale		1,127,409			1,268,198

Other Investment Securities, at amortized cost		56,907			64,559
Loans Held for Sale, net		136,745			141,902
Loans, net		6,488,259			6,769,478
Accrued Interest Receivable		53,631			80,029
Premises and Equipment, net		30,553			29,523
Goodwill		121,482			121,482
Intangible Assets		29,949			30,203
Other Assets		396,239			379,203

	$	8,838,691		$	9,160,213


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non interest-bearing	$	754,371		$	755,457
Interest-bearing, including $285.5 million at fair value in 2008		5,223,885			4,405,246

Total deposits		5,978,256			5,160,703

Federal Funds Purchased and other borrowings		53,790			707,110
Securities Sold Under Agreements to Repurchase		583,875			635,597
Commercial Paper Issued		49,779			284,482
Federal Home Loan Bank Advances		1,080,000			1,245,000
Term Notes, net		19,665			19,371
Subordinated Capital Notes, including $116.0 million at fair value in 2008		240,067			247,170
Accrued Interest Payable		46,810			77,356
Other Liabilities		225,363			246,888

Total liabilities		8,277,605			8,623,677


Contingencies and Commitments (Notes 10, 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		316,065			308,373
Treasury stock at cost, 4,011,260 shares		(67,552	)		(67,552	)
Accumulated other comprehensive loss, net of tax		(25,747	)		(24,478	)
Retained earnings:
Reserve fund		139,250			139,250
Undivided profits		72,444			54,317

Total stockholders’ equity		561,086			536,536

	$	8,838,691		$	9,160,213

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

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007

(Dollars in thousands, except per share data)


	For the six months ended				For the three months ended
	June 30,		June 30,		June 30,			June 30,
	2008		2007		2008			2007
Interest Income:
Loans	$	281,807	$	298,189	$	138,137		$	149,834
Investment securities		27,316		33,649		13,196			16,742
Interest-bearing deposits		576		2,260		126			1,110
Federal funds sold and securities purchased under agreements to resell		2,765		1,222		1,977			556

Total interest income		312,464		335,320		153,436			168,242

Interest Expense:
Deposits		80,168		92,828		40,963			46,864
Securities sold under agreements to repurchase and other borrowings		49,807		77,007		18,249			39,229
Subordinated capital notes		6,844		7,886		3,179			3,952

Total interest expense		136,819		177,721		62,391			90,045

Net interest income		175,645		157,599		91,045			78,197
Provision for Loan Losses		78,090		52,874		38,515			30,850

Net interest income after provision for loan losses		97,555		104,725		52,530			47,347

Other Income:
Bank service charges, fees and other		23,525		24,452		11,101			12,134
Broker-dealer, asset management and insurance fees		41,973		32,369		19,986			16,081
Gain on sale of securities		2,874		238		—			49
Gain on sale of loans		2,267		4,338		829			1,990
Other income (loss)		12,716		4,568		(920	)		1,658

Total other income		83,355		65,965		30,996			31,912

Other Operating Expenses:
Salaries and employee benefits		61,512		65,902		31,525			34,073
Occupancy costs		13,222		11,488		6,806			5,914
Equipment expenses		2,252		2,241		1,059			1,076
EDP servicing, amortization and technical assistance		21,061		18,074		10,883			8,640
Communication expenses		5,181		5,451		2,646			2,766
Business promotion		3,786		8,000		1,821			4,548
Other taxes		6,756		4,948		3,349			1,843
Other operating expenses		33,919		29,697		18,156			14,894

Total other operating expenses		147,689		145,801		76,245			73,754

Income before provision for income tax		33,221		24,889		7,281			5,505
Provision for Income Tax		8,983		9,064		765			1,409

Net Income Available to Common Shareholders	$	24,238	$	15,825	$	6,516		$	4,096

Basic and Diluted Earnings per Common Share	$	0.52	$	0.34	$	0.14		$	0.09

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 SIX MONTHS ENDED JUNE 30, 2008 AND YEAR ENDED DECEMBER 31, 2007

(Dollars in thousands)


	For the six months ended			Year ended
	June 30, 2008			December 31, 2007
Common Stock:
Balance at beginning of year	$	126,626		$	126,626

Balance at end of period		126,626			126,626

Capital Paid in Excess of Par Value:
Balance at beginning of year		308,373			304,171
Capital contribution		7,692			4,202

Balance at end of period		316,065			308,373

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

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

Accumulated Other Comprehensive Loss, net of tax:
Balance at beginning of year		(24,478	)		(44,213	)
Unrealized net (loss) gain on investment securities available for sale, net of tax		(1,745	)		18,227
Unrealized net gain (loss) on cash flow hedges, net of tax		476			(1,023	)
Change in retirement plan’s funded status, net of tax		—			2,531

Balance at end of the period		(25,747	)		(24,478	)

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

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

Undivided Profits:
Balance at beginning of year		54,317			122,677
Net income (loss)		24,238			(36,245	)
Transfer to reserve fund		—			(1,739	)
Deferred tax benefit amortization		(2	)		(3	)
Common stock cash dividends		(9,328	)		(29,849	)
Cumulative effect of the adoption of SFAS 159 (See notes 1, 12 and 18)		3,219			—
Cumulative effect of the adoption of FIN No. 48 (See note 11)		—			(524	)

Balance at end of the period		72,444			54,317

Total stockholders’ equity	$	561,086		$	536,536

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 SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 2008 AND 2007

(Dollars in thousands)


	For the six months ended						For the three months ended
	June 30,			June 30,			June 30,			June 30,
	2008			2007			2008			2007
Comprehensive income
Net income	$	24,238		$	15,825			6,516		$	4,096

Other comprehensive income, net of tax:
Unrealized holding losses on investment securities available for sale, net of tax		(2,149	)		(8,280	)		(12,124	)		(11,395	)
Reclassification adjustment for gains (losses) included in net income, net of tax maturity category, net of amortization		404			—			735			(17	)

Unrealized net loss on investment securities available for sale, net of tax		(1,745	)		(8,280	)		(11,389	)		(11,412	)

Unrealized net gain on cash flow hedges, net of tax		476			531			1,593			746

Total other comprehensive loss, net of tax		(1,269	)		(7,749	)		(9,796	)		(10,666	)

Comprehensive income (loss)	$	22,969		$	8,076			(3,280	)	$	(6,570	)

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 SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(Dollars in thousands)


	For the six months ended
	June 30,			June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	24,238		$	15,825

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		7,797			8,324
Deferred tax benefit		(6,330	)		(9,097	)
Provision for loan losses		78,090			52,874
Gain on sale of securities		(2,874	)		(238	)
Gain on sale of loans		(2,267	)		(4,338	)
Gain on sale of mortgage-servicing rights		—			(168	)
(Gain) loss on derivatives		(1,304	)		758
Trading gains		(1,994	)		(1,241	)
Valuation loss on loans held for sale		4,017			—
Net discount accretion on securities		(2,398	)		(2,534	)
Net premium (discount) amortization (accretion) on loans		146			(1,416	)
Share-based compensation		7,691			7,982
Purchases and originations of loans held for sale		(214,936	)		(332,806	)
Proceeds from sales of loans		162,134			171,532
Repayments of loans held for sale		11,320			14,612
Proceeds from sales of trading securities		5,633,201			1,199,498
Purchases of trading securities		(5,599,000	)		(1,201,459	)
Decrease in accrued interest receivable		26,398			22,909
(Increase) decrease in other assets		(28,583	)		832
Decrease in accrued interest payable		(30,546	)		(18,366	)
Decrease in other liabilities		(3,356	)		(11,079	)

Total adjustments		37,206			(103,421	)

Net cash provided by (used in) operating activities		61,444			(87,596	)


CASH FLOWS FROM INVESTING ACTIVITIES:
(Decrease) increase in interest-bearing deposits		(2,427	)		1,455
Proceeds from sales of investment securities available for sale		128,158			20,301
Proceeds from maturities of investment securities available for sale		7,797,759			16,919,244
Purchases of investment securities available for sale		(7,825,616	)		(16,910,514	)
Purchases of other investments		7,652			551
Repayment of securities and securities called		44,041			51,156
Payments on derivative transactions		(1,497	)		—
Net decrease in loans		214,952			53,578
Proceeds from sales of mortgage-servicing rights		—			168
Purchases of premises and equipment		(4,618	)		(1,117	)

Net cash provided by investing activities		358,404			134,822

(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 SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)


	For the six months ended
	June 30,			June 30,
	2008			2007
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		815,281			(30,459	)
Net decrease in federal funds purchased and other borrowings		(818,320	)		(46,900	)
Net decrease in securities sold under agreements to repurchase		(51,722	)		(61,738	)
Net (decrease) increase in commercial paper issued		(234,703	)		173,113
Net increase in term notes		294			620
Net increase in subordinated capital notes		17			26
Dividends paid		(12,126	)		(14,924	)

Net cash (used in) provided by financing activities		(301,279	)		19,738


NET CHANGE IN CASH AND CASH EQUIVALENTS		118,569			66,964
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		201,697			199,264

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	320,266		$	266,228

Concluded

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

SANTANDER BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

1. Summary of Significant Accounting Policies:

The accounting and reporting policies of Santander BanCorp (the “Corporation”), a 91% owned subsidiary of Banco Santander, S.A. (“Santander Spain”) 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 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 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 six month periods ended June 30, 2008 and 2007 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, 2007. The accounting policies used in preparing these condensed consolidated financial statements are substantially the same as those described in Note 1 to the 2007 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

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

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

In preparing the 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. Effective January 1, 2008, Santander Mortgage Corporation ( a wholly owned subsidiary of the Bank) was merged into the Bank and ceased to operate as a separate legal entity.

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 subsequently reacquired or resold.

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 condensed 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 condensed 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 other 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 the 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 condensed 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 and 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 Statement of Financial Accounting Standard (“SFAS” ) No. 159, , “Fair Value Option for Financial Assets and Financial Liabilities- including an amendment of FASB Statements No. 115” , 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. Prior to the adoption of SFAS 159 as of January 1, 2008, these swaps were designated for the hedge accounting treatment under SFAS 133, “ Accounting for Derivatives Instruments and Hedging Activities” as amended and interpreted (“SFAS 133”). These financial instruments were

accounted for as fair value hedges, with changes in the fair value of both the derivative and the hedged item included in other income and the interest included in net interest income in the condensed consolidated statements of income. In connection with the adoption of SFAS 159 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. The cost of funding on the Corporation’s borrowings, as well as derivatives, continue to be included in interest expense and income, as applicable, in the condensed consolidated statements of income. See Note 12 of 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 net income 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 statement 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 received. 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 Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for 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 condensed 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 June 30, 2008 had terms ranging from one month to five years.

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

Allowance for Loan Losses

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

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

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

Included in the review of individual loans are those that are impaired as defined by GAAP. Any allowances for loans deemed impaired are measured based on the present value of expected future cash flows discounted at the loans’ effective interest rate or on the fair value of the underlying collateral if the loan is collateral dependent. Commercial business, commercial real estate, construction and mortgage loans exceeding a predetermined monetary threshold are individually evaluated for impairment. Other loans are evaluated in homogeneous groups and collectively evaluated for impairment. Loans that are recorded at fair value or at the lower of cost or fair value are not evaluated for impairment. 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 collectibility of both principal and interest when assessing the need for loss accrual.

Historical loss rates are applied to other commercial loans not subject to individual review. The loss rates are derived from historical loss trends.

Homogeneous loans, such as consumer installment, credit card, residential mortgage and consumer finance are not individually risk graded. Allowances are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are based on the average net charge-off history by loan category, market loss trends and other relevant economic factors.

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

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 and actual collection and charge-off experience.

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 SFAS No. 142, “Goodwill and Other Intangible Assets.” 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 statement of income.

In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, 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.

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. The Corporation has not adopted SFAS 157 for fair value measurement of goodwill and intangible assets pursuant FASB Staff Position (“FSP”) FAS 157-2 “ Effective Date of FASB Statement No. 157” issued in February 2008.

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

The Corporation’s mortgage-servicing rights (“MSRs”) are stated at the lower of carrying value or fair value at each balance sheet date. 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 six months ended June 30, 2008 and 2007.

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 June 30, 2008 and December 31, 2007, the unpaid principal balances of mortgage loans serviced for others amounted to approximately $1,157,000,000 and $1,056,000,000, respectively. In connection with these mortgage-servicing activities, the Corporation administered escrow and other custodial funds which amounted to approximately $3,563,000 and $3,254,000 at June 30, 2008 and December 31, 2007, respectively.

Trust Services

In connection with its trust activities, the Corporation administers and is custodian of assets amounting to approximately $225,000,000 and $1,113,000,000 at June 30, 2008 and at December 31, 2007, respectively. Due to the nature of trust activities, these assets are not included in the Corporation’s condensed consolidated balance sheets. Since December 31, 2006, when the Corporation sold to an unaffiliated third party the servicing rights for certain trust accounts, 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 bases 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 Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). 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 June 30, 2008 and 2007. 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 June 30, 2008 and 2007.

Recent Accounting Pronouncements that Affect the Corporation

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

	•		Staff Accounting Bulletin No. 109 (“SAB 109”) “Written Loan Commitments Recorded at Fair Value through Earnings.” On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109 (SAB 109), which requires that the fair value of a written loan commitment that is marked to market through earnings should include the future cash flows related to the loan’s servicing rights. However, the fair value measurement of a written loan commitment still must exclude the expected net cash flows related to internally developed intangible assets (such as customer relationship intangible assets). SAB 109 applies to two types of loan commitments: (1) written mortgage loan commitments for loans that will be held-for-sale when funded that are marked to market as derivatives under FAS 133 (derivative loan commitments); and (2) other written loan commitments that are accounted for at fair value through earnings under Statement 159’s fair-value election. SAB 109 supersedes SAB 105, which applied only to derivative loan commitments and allowed the expected future cash flows related to the associated servicing of the loan to be recognized only after the servicing asset had been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained. SAB 109 will be applied prospectively to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of this statement did not have material impact on the Corporation’s condensed consolidated financial statements and disclosures.

	•		SFAS No. 157, “Fair Value Measurements.” In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The Corporation adopted SFAS 157, as of January 1, 2008 for financial assets and liabilities. Fair value is defined under SFAS 157 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. In February 2008, the FASB issued a FASB Staff Position (FSP FAS 157-2) that partially delayed the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP FAS 157-2 states that a measurement is recurring if it happens at least annually and defines nonfinancial assets and nonfinancial liabilities as all assets and liabilities other than those meeting the definition of a financial asset or financial liability in SFAS No. 159. As such, the Corporation did not adopt SFAS 157 for nonfinancial assets and liabilities eligible for deferral under FSP FAS 157-2, and is evaluating the impact, that this adoption may have on its condensed consolidated financial statements and disclosures. See Note 18 for additional information.

	•		SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities- including an amendment of FASB Statements No. 115.” In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets

and Financial Liabilities”. In conjunction with the adoption of SFAS 157, the Corporation adopted SFAS 159, as of January 1, 2008. SFAS 159 provides an option for most financial assets and liabilities to be reported at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. The election is made at the initial adoption, at the acquisition of a financial asset, financial liability or a firm commitment and it may not be revoked. Under the SFAS 159 transition provisions, the Corporation has elected to report certain callable brokered certificates of deposits and subordinated notes at fair value with future changes in value reported in earnings. SFAS 159 provides an opportunity to mitigate volatility in reported earnings as well as reducing the burden associated with complex hedge accounting requirements. As a result of this adoption and election under the fair value option, the Corporation reported an after-tax increase to beginning of year retained earnings of $3.2 million.

•

FSP FIN No. 39-1 “Amendment of FASB Interpretation No. 39” In April 2007, the FASB issued Staff Position FSP FIN No. 39-1, which defines “right of setoff” and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. It also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of financial position. In addition, this FSP permits the offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. This interpretation is effective for fiscal years beginning after November 15, 2007, with early application permitted. The adoption of FSP FIN No. 39-1 in 2008 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 consolidated financial condition and results of operations.

•

SFAS No. 161 “Disclosure about Derivative Instruments and Hedging Activities, an amendment of FASB Statements No. 133.” In March 2008, the FASB issued SFAS No. 161, which requires the enhancement of the current disclosure framework in Statement 133. The Statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity’s liquidity from using derivatives. Finally, this Statement requires cross-referencing within the footnotes, which should help users of financial statements locate important information about derivative instruments. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Corporation is evaluating the effects, if any, that the adoption of this statement will have on its consolidated financial statements.

•

Staff Position (FSP) FAS 142-3, “Determination of Useful Life of Intangible Assets”(“FSP FAS 142-3”). In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of Useful Life of Intangible Assets. This FASB Staff Position (FSP) amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets . The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. generally accepted accounting principles (GAAP). An intangible asset may be acquired individually or with a group of other assets. This FSP applies regardless of the nature of the transaction that resulted in the recognition of the intangible asset, that is, whether acquired in a business combination or otherwise. In developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset, an entity shall consider its own historical experience in renewing or extending similar arrangements; however, these assumptions should be adjusted for the entity-specific factors in paragraph 11 of Statement 142. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension (consistent with the highest and best use of the asset by market participants), adjusted for the entity-specific factors in paragraph 11 of Statement 142. The Corporation is evaluating the potential impact of adopting this FSP.

•

SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles.” In May 2008, the FASB issued SFAS No. 162, which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally

accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the Board concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Corporation will be evaluating the effects, if any, that the adoption of this statement may have on its consolidated financial statements.

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:


	June 30, 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	$	342,647	$	—	$	33	$	342,614		2.02	%
After one year to five years		227,930		2,450		—		230,380		3.89	%

		570,577		2,450		33		572,994		2.77	%


Commonwealth of Puerto Rico and its subdivisions:
Within one year		245		—		1		244		3.50	%
After one year to five years		25,945		—		497		25,448		4.20	%
After five years to ten years		15,237		39		182		15,094		5.21	%
Over ten years		16,111		114		81		16,144		5.67	%

		57,538		153		761		56,930		4.87	%


Mortgage-backed securities:
After five years to ten years		179,293		—		6,302		172,991		4.37	%
Over ten years		332,233		—		7,789		324,444		5.32	%

		511,526		—		14,091		497,435		4.99	%


Foreign securities:
After one year to five years		50		—		—		50		4.65	%

	$	1,139,691	$	2,603	$	14,885	$	1,127,409		3.87	%


	December 31, 2007
			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	$	317,974	$	137	$	233	$	317,878		3.63	%
After one year to five years		354,281		1,703		184		355,800		3.91	%

		672,255		1,840		417		673,678		3.78	%

Commonwealth of Puerto Rico and its subdivisions:
Within one year		1,370		—		3		1,367		3.99	%
After one year to five years		20,245		—		470		19,775		4.44	%
After five years to ten years		15,186		84		159		15,111		5.21	%
Over ten years		13,091		62		118		13,035		5.73	%

		49,892		146		750		49,288		5.00	%


Mortgage-backed securities:
After five years to ten years		232,420		—		7,296		225,124		4.40	%
Over ten years		324,112		—		4,054		320,058		5.41	%

		556,532		—		11,350		545,182		4.99	%


Foreign securities:
After one year to five years		50		—		—		50		4.65	%

	$	1,278,729	$	1,986	$	12,517	$	1,268,198		4.35	%

The duration of long-term (over one year) investment securities in the available for sale portfolio is approximately 2.7 years at June 30, 2008, comprised of approximately 0.7 years for treasuries and agencies of the United States Government, 4.2 years for instruments from the Commonwealth of Puerto Rico and its subdivisions, 4.7 years for mortgage backed securities and 0.8 year for all other securities.

The number of positions, fair value and unrealized losses at June 30, 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:


	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		7	$	342,614	$	33		—	$	—	$	—		7	$	342,614	$	33
Commonwealth of Puerto Rico and its subdivisions		11		17,260		231		15		22,690		530		26		39,950		761
Mortgage-backed securities		14		182,417		2,774		17		315,018		11,317		31		497,435		14,091

		32	$	542,291	$	3,038		32	$	337,708	$	11,847		64	$	879,999	$	14,885

The Corporation evaluates its investment securities for other-than-temporary impairment on a quarterly basis or earlier if other factors indicative of potential impairment exist. 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 and ability to hold the securities for a period of time sufficient to allow for any forecasted recovery of fair value up to (or beyond) the cost of the investment.

As of June 30, 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 U.S. and P.R. Government agencies and subdivisions were caused by changes in market interest rates. Substantially, all U.S. and P.R. Government agencies securities are rated the equivalent of AAA and BBB-, respectively, 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 face value of the investment. Since the Corporation has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Corporation does not consider these investments to be other-than-temporarily impaired at June 30, 2008. The unrealized losses in the Corporation’s investment in mortgage-backed securities were also caused by changes in market interest rates. The Corporation purchased these investments at a discount relative to their face amount, and the contractual cash flows of these investments are guaranteed by an agency of the U.S. government or by other government-sponsored corporations. Accordingly, it is expected that the securities will be settled at a price not less than the amortized cost of the Corporation’s investment. The decline in market value is attributable to changes in interest rates and not credit quality and since the Corporation has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Corporation does not consider these investments to be other-than-temporarily impaired at June 30, 2008.

Contractual maturities on certain securities, including mortgage-backed securities, could differ from actual maturities since certain issuers 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 June 30, 2008 and December 31, 2007, 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 June 30 and December 31, were as follows:


	June 30, 2008		December 31, 2007
	(Dollars in thousands)
Investment securities available for sale	$	283,218	$	415,278
Other investment securities		48,600		56,025
Loans		2,337,985		2,314,359

	$	2,669,803	$	2,785,662

Pledged securities, that the creditor has the right or contract to repledge, are presented separately on the condensed consolidated balance sheet. At June 30, 2008 and December 31, 2007, investment securities with a carrying value of approximately $633,337,000 and $683,326,000, respectively, were pledged to securities sold under agreements to repurchase.

4. Loans:

The Corporation’s loan portfolio consists of the following:


	June 30, 2008			December 31, 2007
	(Dollars in thousands)
Commercial and industrial	$	2,410,664		$	2,530,806
Consumer		648,333			672,888
Consumer finance		1,013,262			946,209
Leasing		80,717			98,987
Construction		384,752			486,284
Mortgage		2,546,104			2,539,811

		7,083,832			7,274,985

Unearned income and deferred fees/costs:
Commercial and industrial		(1,749	)		(3,459	)
Consumer finance		(406,935	)		(335,096	)
Allowance for loan losses		(186,889	)		(166,952	)

Loans, net	$	6,488,259		$	6,769,478

During the quarter ended June 30, 2008, the Corporation sold certain impaired loans to an affiliate for $91.3 million in cash. These loans had a net book value of $91.3 million comprised of an outstanding principal balance of $96.8 million and a specific valuation allowance of $5.5 million. The type of loans by net book value was $76.8 million in construction loans and $14.5 million in commercial 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 six months ended				For the three months ended
	June 30, 2008		June 30, 2007		June 30, 2008		June 30, 2007
	(Dollars in thousands)				(Dollars in thousands)
Balance at beginning of period	$	166,952	$	106,863	$	179,150	$	115,171
Provision for loan losses		78,090		52,874		38,515		30,850

		245,042		159,737		217,665		146,021

Losses charged to the allowance:
Commercial and industrial		4,150		3,484		1,818		1,568
Construction		5,358		—		5,344		—
Mortgage		64		1,150		—		—
Consumer		19,975		11,717		10,438		6,970
Consumer finance		29,458		16,190		13,541		9,863
Leasing		1,050		1,485		562		516

		60,055		34,026		31,703		18,917

Recoveries:
Commercial and industrial		293		799		137		104
Consumer		579		429		234		263
Consumer finance		779		723		403		370
Leasing		251		254		153		75

		1,902		2,205		927		812

Net loans charged-off		58,153		31,821		30,776		18,105

Balance at end of period	$	186,889	$	127,916	$	186,889	$	127,916

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:


	June 30, 2008		December 31, 2007
	(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 goodwill assigned to the Consumer Finance segment is related to the acquisition of Island Finance in 2006.

As a result of the unfavorable economic environment in Puerto Rico, Island Finance’s short-term financial performance and profitability declined significantly during 2007, caused by reduced lending activity and increases in non-performing assets and charge-offs. The Corporation, with the assistance of an independent valuation firm, performed an interim impairment test of the goodwill and other intangibles of Island Finance as of July 1, 2007. Statement 142 provides a two-step impairment test. The first step of the impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to

measure the amount of the impairment loss, if any. The Corporation completed the first step of the impairment test and determined that the carrying amount of the goodwill and other intangible assets of Island Finance exceeded their fair value, thereby requiring performance of the second step of the impairment test to calculate the amount of the impairment. Based upon the completed impairment test, the Corporation determined that the actual non-cash impairment charges as of July 1, 2007 were $43.3 million, which included $26.8 of goodwill and $16.5 million of other intangibles assets (comprised of $9.2 million of customer relationships, $5.4 million of trade name and $1.9 million of non-compete agreement). These impairment charges did not result in cash expenditures and will not result in future cash expenditures.

Upon the completion of the interim impairment test, the Corporation performed its annual impairment assessment as of October 1, 2007 with the assistance of the independent valuation specialist. Based upon their test, and after consideration of the July 1, 2007 impairment charge, the Corporation determined that no additional impairment charge was necessary as of October 1, 2007.

Other Intangible Assets

Other intangible assets at June 30, 2008 and December 31, 2007 were as follows:


	June 30, 2008		December 31, 2007
	(Dollars in thousands)
Commercial Banking — Mortgage-servicing rights	$	9,830	$	9,631
Wealth Management — Advisory-servicing rights		1,419		1,572
Consumer Finance:
Trade name		18,300		18,300
Non-compete agreements		400		700

	$	29,949	$	30,203

Mortgage-servicing rights arise from the right to serve 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 the 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. This intangible asset is 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 agreements are intangible assets related to the acquisition of Island Finance. Non-compete agreements are being amortized over 1 year.

Amortization of the other intangibles assets for the six month period ended June 30, 2008 and year ended December 31, 2007 were approximately $1.5 million and $3.8 million, respectively.

7. Other Assets:

The Corporation’s other assets consist of the following:


	June 30, 2008		December 31, 2007
	(Dollars in thousands)
Deferred tax assets, net	$	40,500	$	37,199
Accounts receivable		43,817		38,617
Repossesed assets		18,250		16,448
Software, net		6,268		8,069
Prepaid expenses		34,221		14,224
Customers’ liabilities on acceptances		829		783
Derivative assets		65,798		79,969
Confirming advances		182,384		179,376
Other		4,172		4,518

	$	396,239	$	379,203

Amortization of software assets for the six month period ended June 30, 2008 and year ended December 31, 2007 was approximately $2.7 million and $4.4 million, respectively.

8. Other Borrowings:

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


	June 30, 2008
	Federal Funds			Securities Sold			Commercial
	Purchased and			Under Agreements			Paper
	Other Borrowings			to Repurchase			Issued
	(Dollars in thousands)
Amount outstanding at period-end	$	53,790		$	583,875		$	49,779

Average indebtedness outstanding during the period	$	360,764		$	585,837		$	378,663

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

Average interest rate for the period		4.84	%		4.98	%		3.70	%

Average interest rate at period-end		2.75	%		4.85	%		2.94	%


	December 31, 2007
	Federal Funds			Securities Sold			Commercial
	Purchased and			Under Agreements			Paper
	Other Borrowings			to Repurchase			Issued
	(Dollars in thousands)
Amount outstanding at year-end	$	707,110		$	635,597		$	284,482

Average indebtedness outstanding during the year	$	723,364		$	756,117		$	379,351

Maximum amount outstanding during the year	$	800,000		$	851,578		$	676,957

Average interest rate for the year		5.77	%		5.48	%		5.48	%

Average interest rate at year-end		5.14	%		5.43	%		5.31	%

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


	June 30, 2008		December 31, 2007
	(In thousands)
Federal funds purchased and other borrowings:
Within thirty days	$	52,000	$	7,110
Thirty to ninety days		—		700,000
Over ninety days		1,790		—

Total	$	53,790	$	707,110

Securities sold under agreements to repurchase:
Within thirty days	$	8,875	$	10,591
Over ninety days		575,000		625,006

Total	$	583,875	$	635,597

Commercial paper issued:
Within thirty days	$	10,000	$	284,482
Thirty to ninety days		39,779		—

Total	$	49,779	$	284,482

As of June 30, 2008 the weighted average maturity of Federal funds purchased and other borrowings over ninety days was 6.03 months.

As of June 30, 2008, securities sold under agreements to repurchase (classified by counterparty) were as follows:


					Weighted-
			Fair Value of		Average
	Balance of		Underlying		Maturity
	Borrowings		Securities		in Months
	(Dollars in thousands)
JP Morgan Chase Bank, N.A.	$	375,000	$	400,590		17.06
Lehman Brothers Special Financing, Inc.		200,000		223,868		55.50
Popular Securities, Inc.		8,875		8,879		0.10

	$	583,875	$	633,337		29.97

The following investment securities were sold under agreements to repurchase:


	June 30, 2008
	Carrying				Fair		Weighted-			Weighted-
	Value of				Value of		Average			Average
	Underlying		Balance of		Underlying		Interest Rate			Interest Rate
Underlying Securities	Securities		Borrowings		Securities		Securities			Borrowings
			(Dollars in thousands)
Obligations of U.S. Government agencies and corporations	$	223,868	$	200,000	$	223,868		4.05	%		5.88	%
Mortgage-backed securities		409,469		383,875		409,469		5.12	%		4.32	%

Total	$	633,337	$	583,875	$	633,337		4.74	%		4.85	%


	December 31, 2007
	Carrying				Fair		Weighted-			Weighted-
	Value of				Value of		Average			Average
	Underlying		Balance of		Underlying		Interest Rate			Interest Rate
Underlying Securities	Securities		Borrowings		Securities		Securities			Borrowings
			(Dollars in thousands)
Obligations of U.S. Government agencies and corporations	$	270,821	$	250,006	$	270,821		4.79	%		5.76	%
Mortgage-backed securities		412,505		385,591		412,505		5.22	%		5.22	%

Total	$	683,326	$	635,597	$	683,326		5.05	%		5.43	%

9. Advances from Federal Home Loan Bank:

Advances from Federal Home Loan Bank consisted of the following:


	June 30, 2008		December 31, 2007
	(Dollars in thousands)
Non-callable advances at 2.43% and 4.74% averages fixed rate at June 30, 2008 and December 31, 2007 , respectively, with maturities during 2008	$	60,000	$	420,000
Non-callable advances at 2.49% average fixed rate with maturities during 2009		120,000		—
Non-callable advances at 2.71% average fixed rate with maturities during 2010		300,000		—
Non-callable advances at 3.79% average fixed rate with maturities during 2011		175,000		—
Non-callable advances at 2.66% and 5.07% averages floating rates tied to 3-month LIBOR at June 30, 2008 and December 31, 2007, respectively, with maturities during 2008		375,000		825,000
Non-callable advances at 2.67% average floating rate tied to 3-month LIBOR with maturities during 2009		50,000		—

	$	1,080,000	$	1,245,000

The Corporation had $2.0 billion and $2.1 billion in mortgage loans and investment securities pledged as collateral for Federal Home Loan Bank advances as of June 30, 2008 and December 31, 2007, respectively.

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

Subordinated Capital Notes

Subordinated capital notes consisted of the following:


	June 30, 2008			December 31, 2007
	(Dollars in thousands)
Subordinated notes with fixed interest of 6.30% maturing June 1, 2032, at fair value in 2008	$	70,465		$	73,260
Subordinated notes with fixed interest of 6.10% maturing June 1, 2032, at fair value in 2008		45,508			50,236
Subordinated notes with fixed interest of 6.75% maturing July 1, 2036		125,000			125,000

		240,973			248,496
Unamortized discount		(906	)		(1,326	)

	$	240,067		$	247,170

Term Notes

Term notes payable outstanding consisted of the following:


	June 30, 2008			December 31, 2007
	(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		(2,150	)		(2,444	)

	$	19,665		$	19,371

The term notes issued contain certain general covenants related to financial ratios, among others. The Corporation was in compliance with such covenants at June 30, 2008 and December 31, 2007.

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 consolidated statements of operations.

11. Income Tax:

The Corporation adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the implementation of FIN 48, the Corporation recognized a decrease of $0.5 million in the January 1, 2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits. A reconciliation of beginning and ending amount of the accrual for uncertain income tax positions is as follows:


	For the six months ended
	June 30, 2008		June 30, 2007
	(in thousands)
Balance at beginning of the year	$	16,507	$	12,676
Additions for tax positions of prior years		124		761
Additions for tax positions of current year		1,974		211

Balance at end of the period	$	18,605	$	13,648

The Corporation’s policy is to report interest and penalties related to unrecognized tax benefits in income tax expense. For the six months ended June 30, 2008 and 2007, the Corporation recognized $0.5 million and $0.5 million of interest and penalties, respectively, for uncertain tax positions. As of June 30, 2008 and 2007, the related accrued interest approximated $3.2 million and $2.4 million, respectively. At June 30, 2008 and 2007, the Corporation had $18.6 million and $13.6 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 statutes of limitation, changes in

management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity, and the addition or elimination of uncertain tax positions. As of June 30, 2008, the years 2003 through 2007 remain subject to examination by the Puerto Rico tax authorities. The Corporation does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will 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 principally to Santander Financial Services, Inc. amounting to $22.1 million at June 30, 2008. Accordingly, a deferred tax asset valuation allowance of $22.1 million was recorded at June 30, 2008.

12. Derivative Financial Instruments:

As of June 30, 2008, the Corporation had the following derivative financial instruments outstanding:


									Other
						Gain (Loss) for			Comprehensive
						the six months			*Gain for the**
	Notional					ended			six months ended
	Value		Fair Value			June 30, 2008			June 30, 2008
			(Dollars in thousands)
CASH FLOW HEDGES
Interest rate swaps	$	375,000	$	(1,247	)	$	—		$	476
ECONOMIC UNDESIGNATED HEDGES
Interest rate swaps		243,984		(2,639	)		683			—
OTHER DERIVATIVES
Options		133,339		10,782			(11,808	)		—
Embedded options on stock-indexed deposits		133,339		(10,782	)		11,808			—
Interest rate caps		1,349		(1	)		(8	)		—
Customer interest rate caps		1,349		1			8			—
Customer interest rate swaps		1,757,008		53,206			7,536			—
Interest rate swaps-offsetting position of customer swaps		1,757,009		(52,652	)		(7,855	)		—
Interest rate swaps		90,000		568			1,101			—
Loan commitments		4,496		(116	)		(161	)		—

						$	1,304		$	476


*		Net of tax

As of December 31, 2007, the Corporation had the following derivative financial instruments outstanding:


									Other
						Gain (Loss) for			Comprehensive
						the year			*Loss for the**
	Notional					ended			year ended
	Value		Fair Value			Dec. 31, 2007			Dec. 31, 2007
			(Dollars in thousands)
CASH FLOW HEDGES
Interest rate swaps	$	650,000	$	(2,027	)	$	—		$	(1,023	)
FAIR VALUE HEDGES
Interest rate swaps		937,863		(4,425	)		(465	)		—
OTHER DERIVATIVES
Options		133,562		22,590			134			—
Embedded options on stock-indexed deposits		133,562		(22,590	)		(134	)		—
Interest rate caps		7,381		7			(58	)		—
Customer interest rate caps		7,381		(7	)		58			—
Customer interest rate swaps		1,496,798		44,380			44,432			—
Interest rate swaps-offsetting position of customer swaps		1,498,381		(43,589	)		(44,068	)		—
Interest rate swaps		242,000		(534	)		315			—
Loan commitments		1,451		45			35			—

						$	249		$	(1,023	)


*		Net of tax

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 Corporation’s policy is that each swap contract be specifically tied to assets or liabilities with the objective of transforming the interest rate characteristic of the hedged instrument. During 2006, the Corporation swapped $825 million of FHLB Adjustable Rate Credit Advances with maturities between July 2007 and November 2008. The purpose of this swap is to fix the interest paid on the underlying borrowings. These swaps were designated as cash flow hedges. As of June 30, 2008 and December 31, 2007, the Corporation had outstanding $375 million and $650 million, respectively, of interest rate swaps designed as cash flow hedges. As of June 30, 2008 and December 31, 2007 the total amount, net of tax, included in accumulated other comprehensive income was an unrealized loss of $761,000 and an unrealized loss of $1.2 million, respectively, of which the Corporation expects to reclassify approximately $1.0 million into earnings during the next quarter of 2008.

Prior to the adoption of SFAS 159, changes in the value of the derivatives instruments qualifying as fair value hedge that have been highly effective were recognized in the current period results of operations along with the change in the value of the designated hedge 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 yield adjustment. After adoption of SFAS 159 for certain callable brokered certificates of deposits 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 deposits and subordinated capital notes by using interest rate swaps. Prior to the adoption of SFAS 159 as of January 1, 2008, these swaps were designated for hedge accounting treatment under SFAS 133. 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 SFAS 159, the Corporation has the option to elect fair value for these callable brokered certificates of deposits and subordinated capital notes and is no longer required to maintain hedge documentation to achieve a similar financial statements outcome.

As of June 30, 2008, the Corporation had outstanding interest rate swap agreements with a notional amount of approximately $244.0 million, maturing through the year 2024. The weighted average rate paid and received on these contracts is 2.82% and 5.38%, respectively. As of June 30, 2008, the Corporation had retail fixed rate certificates of deposit amounting to approximately $117.0 million, with a fair value of $115.7 million, and a subordinated note amounting to approximately $125 million, with a fair value of $116.0 million, swapped to create a floating rate source of funds. For the six months ended June 30, 2008, the Corporation recognized a gain of approximately $0.7 million on these economic hedges, which is included in other income in the condensed consolidated statements of income and was the result of incorporating the credit risk component in the fair value of the subordinated note. For the semester ended June 30, 2007, the Corporation recognized a loss of approximately $1.1 million on these swaps that were classified as fair value hedges prior to the adoption of SFAS 159 on January 1, 2008.

As of December 31, 2007, the Corporation also had outstanding interest rate swap agreements with a notional amount of approximately $937.9 million, maturing through the year 2032. The weighted average rate paid and received on these contracts is 5.10% and 5.39%, respectively. As of December 31, 2007, the Corporation had retail fixed rate certificates of deposit amounting to approximately $786 million and a subordinated note amounting to approximately $125 million swapped to create a floating rate source of funds.

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 condensed 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 income. For the six months ended June 30, 2008, a gain of approximately $11.8 million was recorded on embedded options on stock-indexed deposits and notes and a loss of approximately $11.8 million was recorded on the option contracts. For the semester ended June 30, 2007, a loss of approximately $2.9 million was recorded on embedded options on stock-index deposits and notes and a gain of approximately $2.9 million was recorded on the option contracts.

The Corporation enters into certain derivative transactions to provide derivative products to customers, which includes interest rate caps, collars and swaps, and simultaneously covers the Corporation’s position with related and unrelated third parties under substantially the same terms and conditions. These derivatives are not linked to specific assets and liabilities on the condensed 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 six months ended June 30, 2008 and 2007, the Corporation recognized a loss on these transactions of $319,000 and a gain of $148,000 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 condensed 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 six months ended June 30, 2008 and 2007, the Corporation recognized a gain of $1,101,000 and $196,000, respectively, on these transactions.

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 SFAS 157. Prior the adoption of SFAS 157, the loan commitments were measured at fair value pursuant to SFAS 133. As of June 30, 2008, the Corporation had loan commitments outstanding for approximately $4.5 million and recognized a loss of $161,000 on these commitments. As of June 30, 2007, a gain of $14,000 was recognized on these commitments.

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 benefit for the Plan for the six month periods ended June 30, 2008 and 2007 were as follows:


	For the six months ended
	June 30,
	2008			2007
	(Dollars in thousands)
Interest cost on projected benefit obligation	$	1,175		$	1,140
Expected return on assets		(1,347	)		(1,359	)
Net amortization		108			207

Net periodic pension benefit	$	(64	)	$	(12	)

The expected contribution to the Plan for 2008 is $1,581,000.

The components of net periodic pension cost for the Central Hispano Plan for six month periods ended June 30, 2008 and 2007 were as follows:


	For the six months ended
	June 30
	2008			2007
	(Dollars in thousands)
Interest cost on projected benefit obligation	$	921		$	919
Expected return on assets		(1,036	)		(1,085	)
Net amortization		251			257

Net periodic pension cost	$	136		$	91

The expected contribution to the Central Hispano Plan for 2008 is $1,816,000.

Savings Plan

The Corporation also provides 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 plans contribution for the six months ended June 30, 2008 and 2007 were approximately $394,000 and $276,000, respectively.

15. Long Term Incentive Plans:

Santander Spain 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 Spain 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 $3.6 million due to a favorable change in plan valuation during the semester ended June 30, 2008 and $4.0 million of compensation expense for the same period in 2007. As options were exercised as of June 30, 2008, $6.7 million has been reclassified as a capital contribution.

	•		The grant of 100 shares of Santander Spain stock to all employees of Santander Group’s operating entities as part of the celebration of Santander Group 150th Anniversary during 2007. The Corporation recognized compensation expense under this plan amounting to $4.3 million in 2007. The shares granted were purchased by an affiliate and recorded 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 Spain 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 $1.6 million for the six months ended June 30, 2008.

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 FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others – An Interpretation of FASB Statement No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34”, the Corporation recorded a liability of $1,183,000 at June 30, 2008, which represents 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. 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 June 30, 2008 had terms ranging from one month to five years. The aggregate contract amount of the standby letters of credit of approximately $118,368,000 at June 30, 2008, 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 six months ended June 30, 2008 and 2007. 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.


	June 30, 2008
	Commercial		Mortgage		Consumer		Treasury and			Wealth								Consolidated
	Banking		Banking		Finance		Investments			Management		Other			Eliminations			Total
	(Dollars in thousands)
Total external revenue	$	157,785	$	83,876	$	71,828	$	36,684		$	41,271	$	22,657		$	(18,282	)	$	395,819
Intersegment revenue		1,159		—		—		—			446		16,677			(18,282	)		—
Interest income		126,743		83,932		71,427		34,768			1,442		11,087			(16,935	)		312,464
Interest expense		31,634		39,140		13,423		53,741			1,197		10,788			(13,104	)		136,819
Depreciation and amortization		2,159		1,230		1,534		472			685		1,717			—			7,797
Segment income (loss) before income tax		32,994		37,547		3,211		(21,221	)		14,021		(29,500	)		(3,831	)		33,221
Segment assets		3,619,519		2,762,277		679,010		1,511,257			134,369		1,207,869			(1,075,610	)		8,838,691


	June 30, 2007
	Commercial		Mortgage		Consumer			Treasury and			Wealth								Consolidated
	Banking		Banking		Finance			Investments			Management		Other			Eliminations			Total
	(Dollars in thousands)
Total external revenue	$	167,766	$	93,380	$	73,426		$	37,776		$	29,776	$	24,447		$	(25,286	)	$	401,285
Intersegment revenue		5,005		5,600		—			—			2,104		12,577			(25,286	)		—
Interest income		148,218		83,479		71,357			35,593			1,173		12,484			(16,984	)		335,320
Interest expense		48,720		49,636		19,208			56,241			1,617		15,375			(13,076	)		177,721
Depreciation and amortization		2,020		1,018		2,199			380			567		2,140			—			8,324
Segment income (loss) before income tax		54,401		25,957		(5,896	)		(21,544	)		7,961		(31,323	)		(4,667	)		24,889
Segment assets		3,820,064		2,776,946		724,439			1,633,827			104,679		593,954			(457,750	)		9,196,159

Reconciliation of Segment Information to Consolidated Amounts

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


	June 30, 2008			June 30, 2007
	(Dollars in thousands)
Revenues:
Total revenues for reportable segments	$	391,444		$	402,124
Other revenues		22,657			24,447
Elimination of intersegment revenues		(18,282	)		(25,286	)

Total consolidated revenues	$	395,819		$	401,285

Total income before tax of reportable segments	$	66,552		$	60,879
Loss before tax of other segments		(29,500	)		(31,323	)
Elimination of intersegment profits		(3,831	)		(4,667	)

Consolidated income before tax	$	33,221		$	24,889


Assets:
Total assets for reportable segments	$	8,706,432		$	9,059,955
Assets not attributed to segments		1,207,869			593,954
Elimination of intersegment assets		(1,075,610	)		(457,750	)

Total consolidated assets	$	8,838,691		$	9,196,159

18. Fair Value Disclosures:

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 SFAS 157, which provides a framework for measuring fair value under GAAP.

The Corporation also adopted SFAS 159 on January 1, 2008. SFAS 159 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 certain callable brokered certificates of deposits and subordinated notes on the adoption date. SFAS 159 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 SFAS 159.

(Dollars in thousands)


	Ending Balance as of						Opening Balance as of
	December 31, 2007			Adoption Net			January 01, 2008
	(Prior to Adoption)*			Gain (Loss)			(After Adoption)
Impact of Electing the Fair Value Option under SFAS 159:
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 Earnings, net of tax				$	3,219


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

Fair Value Measurement

The Corporation uses fair value measurements to record fair value adjustments to certain financial instruments. Trading securities, securities available for sale, derivatives and certain brokered deposits and subordinate notes are financial instruments recorded at fair value on a recurring basis. The Corporation may be required to record at fair value other financial assets on a nonrecurring basis such as loans held for sale. These nonrecurring fair value adjustments involve the application of lower of cost or market accounting.

SFAS 157 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. SFAS 157 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 and agency mortgage-backed debt securities 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 such as 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 derivatives contract.

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 at June 30, 2008, including financial instruments for which the Corporation has elected the fair value option:

(Dollars in thousands)


	Level 1		Level 2		Level 3		Total
Assets:
Trading Securities	$	695	$	37,816	$	30,874	$	69,385
Investment Securities AFS		572,994		554,415		—		1,127,409
Derivative Assets		513		62,367		2,918		65,798

Total Assets, at Fair Value	$	574,202	$	654,598	$	33,792	$	1,262,592

Liabilities:
Deposits (1)	$	—	$	285,527	$	—	$	285,527
Subordinated Capital Notes (2)		—		115,973		—		115,973
Derivative Liabilities		—		65,131		3,034		68,165

Total Liabilities, at Fair Value	$	—	$	466,631	$	3,034	$	469,665


(1)		Amounts represent certain callable brokered certificates of deposits for which the Corporation has elected the fair value option under SFAS 159.

(2)		Amounts represent certain subordinated capital notes for which the Corporation has elected the fair value option under SFAS 159.

Level 3 assets and liabilities were 2.70% and 0.65% of Total Assets at fair value and Total Liabilities at fair value, respectively, at June 30, 2008.

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, 2008 to June 30, 2008:

(Dollars in thousands)


			Net realized/unrealized
			gains included in					Transfers		Purchases,					Unrealized
						Other		in and/or		issuances					gains (loss)
	January 1,					Comprehensive		out of		and		June 30,			still
	2008		Earnings			Income		Level 3		settlements		2008			held (2)
Trading Securities (1)	$	20,150	$	1,529		$	—	$	—	$	9,195	$	30,874		$	32
Derivatives, net		45		(161	)		—		—		—		(116	)		(116	)

	$	20,195	$	1,368		$	—	$	—	$	9,195	$	30,758		$	(84	)


(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 earnings, attributable to the change in unrealized gains (losses) relating to assets and liabilities classified as Level 3 that are still held at June 30, 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 period from January 1, 2008 to June 30, 2008. These amounts include gains and losses generated by derivative contracts and trading securities, which are continued to carry at fair value after the adoption of SFAS 159.

(Dollars in thousands)


	Total Gains and Losses
	Trading		Net
	Securities		Derivatives
	(1)		(1)
Classification of gains and losses (realized/unrealized) included in earnings for the period :
Other income	$	1,529	$	(161	)


(1)		Amounts represented items which were carried at fair value prior to the adoption of SFAS 159.

The table below summarizes changes in unrealized gains or losses recorded in earnings for the period from January 1, 2008 to June 30, 2008 for Level 3 assets and liabilities that are still held at June 30, 2008. These amounts include changes in fair value for derivative contracts and trading securities which are continued to carry at fair value after the adoption of SFAS 159.

(Dollars in thousands)


	Changes in Unrealized Gains (Loss)
	Trading		Net
	Securities		Derivatives
	(1)		(1)
Classification of unrealized gains (losses) included in earnings for the period :
Other income	$	32	$	(116	)


(1)		Amounts represented items which were carried at fair value prior to the adoption of SFAS 159.

Determination of Fair Value

The following is a description of the valuation methodologies used for instruments for which fair value is presented as well as for instruments that the Corporation has elected the fair value option. 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. 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 1 trading securities include those identical securities traded in active markets. . 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 if redeemed must be at net asset value.

Level 3 trading securities primarily include Puerto Rico corporate debt securities and fixed income closed end funds. At June 30, 2008 the majority of these instruments were valued based on dealer indicative quotes.

Available for Sale Investment Securities

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 and mortgage-backed securities.

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 (IRLCs), 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 such values cannot be observed or corroborated with market data. Accordingly, these derivatives 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 SFAS 157, 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.

Loans Held for Sale

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 independent pricing models may be used and considers types of loans, conformity of loans, delinquency statistics and risk premiums that a market participant would require. Since these values cannot be observed or corroborated with market data, they are classified as Level 3.

Loans

Any allowance for collateral dependent loans deemed impaired is measured based on the fair value of the underlying collateral and its estimated dispositions costs. The fair value of collateral is determined by external valuation specialist, and accordingly classified as Level 3 inputs.

Deposits and Subordinated Capital Notes

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 a Level 2 inputs. Effective January 1, 2008, the Corporation updated its methodology to include the impact of its own credit standing. As such, the effect of credit component on the fair value of subordinated capital notes was determined based on the CORP Curve 70 (the US Banks A-rated curve) from Bloomberg.

Non-Recurring Measurements

The following table presents the change in carrying value of those financial assets measured at fair value on a non-recurring basis, for which impairment was recognized in the current period.

(Dollars in thousands)


			Carrying Value as of June 30, 2008
			Using
	Carrying		Quoted Prices in		Significant		Significant		Valuation
	Value		Active Markets for		Other		Unobservable		Allowance
	as of		Identical Assets		Observable Inputs		Inputs		as of
	June 30, 2008		(Level 1)		(Level 2)		(Level 3)		June 30, 2008
Loans Held for Sale (1)	$	136,745	$	—	$	—	$	136,745	$	2,370
Loans, net(2)		87,900		—		—		87,900		10,421

	$	224,645	$	—	$	—	$	224,645	$	12,791


(1)		These balances were not impacted by the election of the fair value option and are measured at fair value on a non-recurring basis in accordance with applicable accounting policies.

(2)		Amount represented loans measured for impairment based on the fair value of the collateral using the practical expedient in SFAS 114, “ Accounting by Creditors for Impairment of a Loan”.

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 SFAS 133. As of June 30, 2008, these callable brokered certificates of deposits had a fair value of $285.6 million and principal balance of $286.7 million recorded in interest-bearing deposits; and subordinated capital notes had a fair value of $116.0 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 statement of income. Electing the fair value option allows the Corporation to be relieved of the burden of complying with the requirements for hedge accounting under SFAS 133 (e.g., documentation and effectiveness assessment) without incremental earnings volatility. Subsequent to the adoption of SFAS 159, 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 SFAS 159 continues to be economically hedged with callable interest rate swaps with the same terms and conditions.

As a result of the adoption of SFAS 159, the Corporation elected to also apply the fair value option to new positions within the brokered certificates of deposits and subordinated capital notes, where the Corporation would otherwise have hedged with interest rate swaps designated as a fair value hedge in accordance with SFAS 133.

The following table represents changes in fair value for the six months ended June 30, 2008 which includes the interest expense on callable brokered certificates of deposits of $13.0 million and interest expense on subordinated capital notes of $3.9 million. 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 SFAS 159 are recorded in interest expense in the Condensed consolidated Statements of Income based on their contractual coupons.

(Dollars in thousands)


							Total Changes in
	Changes in			Changes in			Fair Value
	Fair Value			Fair Value			included in
	included in			included in			Current Period
	Interest Expense			Other Income			Earnings
Callable Brokered Certificates of Deposits	$	(12,978	)	$	(2,375	)	$	(15,353	)
Subordinated Capital Notes		(3,888	)		2,579			(1,309	)

Total	$	(16,866	)	$	204		$	(16,662	)

The impacts of changes in the Corporation’ credit risk on subordinated capital notes for the six months ended June 30, 2008 presented in the table below have 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 the Corporation’s credit spreads from the transition date to the reporting date.

(Dollars in thousands)


	Gain (Loss)		Gain (Loss)			Total
	related		not related			Gains
	Credit Risk		Credit Risk			(Losses)
Subordinated Capital Notes	$	2,171	$	(3,480	)	$	(1,309	)

PART I — ITEM 2

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

Santander BanCorp
Selected Financial Data


	Six months ended				Three months ended
	June 30,				June 30,
(Dollars in thousands, except per share data)	2008		2007		2008		2007
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Interest income	$	312,464	$	335,320	$	153,436	$	168,242
Interest expense		136,819		177,721		62,391		90,045

Net interest income		175,645		157,599		91,045		78,197
Gain on sale of securities		2,874		238		—		49
Broker-dealer, asset management and insurance fees		41,973		32,369		19,986		16,081
Other income		38,508		33,358		11,010		15,782
Operating expenses		147,689		145,801		76,245		73,754
Provision for loan losses		78,090		52,874		38,515		30,850
Income tax provision		8,983		9,064		765		1,409

Net income	$	24,238	$	15,825	$	6,516	$	4,096

PER COMMON SHARE DATA*
Net income	$	0.52	$	0.34	$	0.14	$	0.09
Book value	$	12.03	$	12.26	$	12.03	$	12.26
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	$	0.32	$	0.10	$	0.16
AVERAGE BALANCES
Loans held for sale and loans, net of allowance for loans losses	$	6,856,580	$	6,888,251	$	6,751,233	$	6,916,569
Allowance for loan losses		170,994		112,513		175,460		117,151
Earning assets		8,471,326		8,467,210		8,537,455		8,484,144
Total assets		9,204,584		9,113,814		9,241,576		9,135,829
Deposits		5,536,427		5,149,455		6,066,138		5,125,327
Borrowings		2,795,535		3,063,169		2,319,625		3,104,104
Common equity		562,704		588,392		572,550		596,328
PERIOD END BALANCES
Loans held for sale and loans, net of allowance for loans losses	$	6,625,004	$	6,882,657	$	6,625,004	$	6,882,657
Allowance for loan losses		186,889		127,916		186,889		127,916
Earning assets		8,206,837		8,624,961		8,206,837		8,624,961
Total assets		8,838,691		9,196,159		8,838,691		9,196,159
Deposits		5,978,256		5,280,132		5,978,256		5,280,132
Borrowings		2,027,176		3,015,175		2,027,176		3,015,175
Common equity		561,086		571,846		561,086		571,846

Continued


	Six months ended						Three months ended
	June 30,						June 30,
	2008			2007			2008			2007
SELECTED RATIOS
Performance:
Net interest margin on a tax-equivalent basis (on an annualized basis)		4.23	%		3.86	%		4.34	%		3.79	%
Efficiency ratio (1)		58.64	%		64.06	%		65.55	%		65.78	%
Return on average total assets (on an annualized basis)		0.53	%		0.35	%		0.28	%		0.18	%
Return on average common equity (on an annualized basis)		8.66	%		5.42	%		4.58	%		2.76	%
Dividend payout		38.46	%		94.12	%		71.43	%		177.78	%
Average net loans/average total deposits		123.84	%		133.77	%		111.29	%		134.95	%
Average earning assets/average total assets		92.03	%		92.91	%		92.38	%		92.87	%
Average stockholders’ equity/average assets		6.11	%		6.46	%		6.20	%		6.53	%
Fee income to average assets (annualized)		1.43	%		1.26	%		1.35	%		1.24	%
Capital:
Tier I capital to risk-adjusted assets		8.08	%		7.78	%		8.08	%		7.78	%
Total capital to risk-adjusted assets		11.18	%		10.81	%		11.18	%		10.81	%
Leverage Ratio		5.68	%		5.69	%		5.68	%		5.69	%
Asset quality:
Non-performing loans to total loans		4.09	%		1.95	%		4.09	%		1.95	%
Annualized net charge-offs to average loans		1.66	%		0.92	%		1.79	%		1.03	%
Allowance for loan losses to period-end loans		2.74	%		1.82	%		2.74	%		1.82	%
Allowance for loan losses to non-performing loans		67.11	%		93.39	%		67.11	%		93.39	%
Allowance for loan losses to non-performing loans plus
accruing loans past-due 90 days or more		64.48	%		86.87	%		64.48	%		86.87	%
Non-performing assets to total assets		3.36	%		1.56	%		3.36	%		1.56	%
Recoveries to charge-offs		3.17	%		6.48	%		2.92	%		4.29	%
EARNINGS TO FIXED CHARGES:
Excluding interest on deposits		1.56	x		1.29	x		1.32	x		1.12	x
Including interest on deposits		1.24	x		1.14	x		1.11	x		1.06	x
OTHER DATA AT END OF PERIOD
Customer financial assets under management	$	14,189,000		$	13,568,000		$	14,189,000		$	13,568,000
Bank branches		57			61			57			61
Consumer Finance branches		68			69			68			69

Total Branches		125			130			125			130
ATMs		143			141			143			141

(Concluded)


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

(1)		Operating expenses, divided by net interest income on a tax equivalent basis, plus other income excluding gain on sale of securities, gain on equity securities and extinguishment of liabilities.

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, 2007. 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 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. In preparing the 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, 2007.

Current Accounting Developments

Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements , for all financial instruments accounted for at fair value on a recurring basis. In February 2008, the FASB issued a final staff position (FSP FAS 157-2) that partially delayed the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. As such, the Corporation did not adopt SFAS 157 for those nonfinancial assets and liabilities eligible for deferral under FSP FAS 157-2 and is evaluating the impact that this adoption may have on its consolidated financial statements and disclosures. Adoption of SFAS 157 did not have a material effect on the Corporation’s financial position and results of operations. Illiquidity in the credit markets contributed to the amount of our reported Level 3 instruments, primarily in our trading and loan portfolios. At June 30, 2008, the aggregate amount of instruments requiring fair value measurement on a recurring basis included in Level 3 represented approximately 2.70% and 0.65% of the aggregate amount of consolidated assets and liabilities recorded at fair value respectively. The amount we report in Level 3 in future periods will be affected by market conditions. See Notes 1 and 18 to the accompanying consolidated financial statements for further information related to the adoption of SFAS 157.

In conjunction with the adoption of SFAS 157, effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 provides an option for most financial assets and liabilities to be reported at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. The election is made at the initial adoption, at the acquisition of a financial asset, financial liability or a firm commitment and it may not be revoked. Under the SFAS 159 transition provisions, the Corporation has elected to report certain callable brokered certificates of deposits and subordinated notes at fair value with future changes in value reported in earnings. SFAS 159 provides an opportunity to mitigate volatility in reported earnings as well as reducing the burden associated with complex hedge accounting requirements. As a result of this adoption and election under the fair value option, the Corporation reported an after-tax increase in opening retained earnings of $3.2 million. See Notes 1 and 18 to the accompanying consolidated financial statements for further information related to the adoption of SFAS 159.

Fair Value Measurement

The Corporation’s estimates of fair value for financial instruments are based on the framework established in SFAS 157. The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated willing parties, i.e., not in a forced transaction. The disclosure of fair value estimates in the SFAS 157 hierarchy is based on whether the significant inputs into the valuation are observable. In determining such estimates and the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets, the lowest priority to unobservable inputs that reflect the Corporation’s market assumptions. SFAS 157 requires the use of observable inputs when available. Additionally, the level at which a financial instrument is reported is based on the lowest level of any significant input into the estimation of fair value. The three levels of the hierarchy are as follows:

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

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

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

The Corporation uses quoted market prices, when available, to determine estimates of fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. When quoted market prices are unavailable, the Corporation is assisted to obtain fair value estimates from a nationally recognized pricing service that determines fair value estimates based on objectively verifiable information: relevant market information, relevant credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities additional inputs may be necessary. The Corporation reviews the estimates of fair value provided by the pricing service and compares the estimates to the Corporation’s knowledge of the market to determine if the estimates obtained are representative of the prices in the market. The Corporation will challenge any prices deemed not to be representative of fair value. The fair value estimates provided from this pricing service are included in the amount disclosed in Level 2 of the hierarchy.

If quoted market prices and an estimate from a pricing service are unavailable, the Corporation produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. See Note 18 to the accompanying consolidated financial statements for further information related to valuation methods used by the Corporation for each type of financial instruments that are carried at fair value.

The Corporation employs control processes to validate the fair value of its financial instruments. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied, and the assumptions are reasonable. These control processes include validation and corroboration procedures over the quotes and prices obtained from brokers and counterparties, as

well as reviews of the pricing models’ appropriateness by the personnel with relevant expertise, which are independent from the trading desks on a quarterly basis. In addition, the Corporation is considering recently executed comparable transaction and other observable market data for purposes of validating assumptions used in the models.

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

Overview of Results of Operations for the Six-Month and Three-Month Periods Ended June 30, 2008 and 2007

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

For the six-month and three-month periods ended June 30, 2008 and 2007, net income and other selected financial information, as reported are the following:


	Six months ended						Three months ended
($ in thousands, except earnings per share)	30-Jun-08			30-Jun-07			30-Jun-08			30-Jun-07
Net Income	$	24,238		$	15,825		$	6,516		$	4,096
EPS	$	0.52		$	0.34		$	0.14		$	0.09
ROA		0.53	%		0.35	%		0.28	%		0.18	%
ROE		8.66	%		5.42	%		4.58	%		2.76	%
Efficiency Ratio (*)		58.64	%		64.06	%		65.55	%		65.78	%


(*)		Operating expenses divided by net interest income on a tax equivalent basis, plus other income excluding gain on sale of securities, gain on equity securities and extinguishment of liabilities and derivatives.

Results of Operations for the Six-Month Periods and Three-Month Periods ended June 30, 2008 and 2007

The Corporation reported a net income of $24.2 million for the six-month period ended June 30, 2008, compared with net income of $15.8 million for the same period in 2007. Earnings per common share (EPS) for the six-month periods ended June 30, 2008 and 2007 were $0.52 and $0.34, respectively, based on 46,639,104 average common shares for each period. Returns on average total assets (ROA) on an annualized basis and return on average common equity (ROE) on an annualized basis for the six-month period ended June 30, 2008 were 0.53% and 8.66%, respectively, compared with 0.35% and 5.42% reported during the same six-month period of 2007. The Efficiency Ratio, on a tax equivalent basis, for the six months ended June 30, 2008 reached 58.64%, an improvement of 542 basis points compared to 64.06% for the six months ended June 30, 2007. This improvement was mainly due to higher net interest income and higher other income.

For the quarter ended June 30, 2008, the Corporation reported net income of $6.5 million compared with $4.1 million for the same quarter in 2007. EPS for the quarters ended June 30, 2008 and 2007 were $0.14 and $0.09, respectively, based on 46,639,104 average common shares for each period. ROA, on annualized basis, was 0.28% for the quarter ended June 30, 2008 and 0.18% for the quarter ended June 30, 2007. ROEs, on annualized basis, were 4.58% and 2.76% for the quarters ended June 30, 2008 and 2007, respectively. The Efficiency Ratio, on a tax equivalent basis, for the quarter ended June 30, 2008 was 65.55% compared with 65.78% for the quarter ended June 30, 2007.

The Corporation’s financial results for the semester and quarter ended June 30, 2008 were impacted by the following:

•

The provision for loan losses increased $25.2 million or 47.7% for the semester ended June 30, 2008 compared to the same period in 2007 and $7.7 million or 24.9% for the quarter ended June 30, 2008 compared to the same period in the prior year. The allowance for loan losses of $186.9 million as of June 30, 2008 represented 2.74% of total loans, 67.11% of non-performing loans and 114.66% of non-performing loans excluding loans secured by

			real estate. The increase in the provision for loan losses reflects the current recessionary cycle in Puerto Rico affecting the loan portfolio, including commercial and construction loans;

	•		The provision for loan losses represented 134.28% and 125.15% of the net charge-offs for the six and three months ended June 30, 2008;

	•		The Corporation experienced an increment of 37 basis points in net interest margin, on a tax equivalent basis, to 4.23% for the semester ended June 30, 2008 versus 3.86% for the same period in 2007 and an increment of 55 basis points to 4.34% for the quarter ended June 30, 2008 compared to 3.79% for the same quarter in 2007;

	•		Non-interest income for the six months ended June 30, 2008, increased $17.4 million or 26.4% as compared to the same period in prior year, basically due to higher broker-dealer, asset management and insurance fees of $9.6 million, an increase in gains on sale of securities of $2.6 million, an increase in gain on derivatives of $2.1 million and a gain of $8.6 million on the sale of a portion of the Corporation’s investment in Visa, Inc. in connection with its initial public offering. These increases were partially offset by a decrease in gain on sale of loans of $2.1 million and an unfavorable valuation adjustment of $4.0 million for loans held for sale recorded through earnings for the semester ended June 30, 2008. The non-interest income for the quarter ended June 30, 2008 remained basically flat when compared with the same quarter in prior year;

	•		Operating expenses experienced an increase of $1.9 million or 1.3% and $2.5 million or 3.4% for the semester and quarter ended June 30, 2008, respectively, when compared to the same periods in 2007;

	•		During the quarter ended June 30, 2008, the Corporation sold certain impaired loans to an affiliate for $91.3 million in cash. These loans had a net book value of $91.3 million comprised of an outstanding principal balance of $96.8 million and a specific valuation allowance of $5.5 million. The type of loans by net book value was $76.8 million in construction loans and $14.5 million in commercial loans. No gain or loss was recognized on this transaction;

	•		The common stock dividend for the six-month period ended June 30, 2008 was $0.20 per share resulting in a current annualized dividend yield of 3.77%.

Net Interest Income

The Corporation’s net interest income for the six months ended June 30, 2008 was $175.6 million, an increase of $18.0 million, or 11.5%, compared with $157.6 million for the six months ended June 30, 2007. This improvement was mainly due to a decrease in interest expense of $40.9 million or 23.0% when compared with the same period in prior year. The average cost of funds on interest-bearing liabilities experienced a decrease of 113 basis points from 4.77% for the first semester ended June 30, 2007 to 3.64% for the same period in 2008. This was influenced by the reduction in federal funds rates made by the Federal Reserve since June 2007 which resulted in a lower cost of short term borrowings. Interest income reflected a reduction of $22.9 million or 6.8% for the six months ended June 30, 2008 compared to the same period in 2007 mainly due to decreases of $16.4 million or 5.5% in interest income on loans and $6.3 million or 18.8% in interest income on investment securities.

The Corporation’s net interest income for the three months ended June 30, 2008 reached $91.0 million compared with $78.2 million for the same period in 2007, reflecting an increase of $12.8 million, or 16.4%. There was a decrease in interest expense of $27.7 million or 30.7% when compared with the same period in prior year due to a decrease in average cost of funds of 149 basis points from 4.78% to 3.29% for the quarter ended June 30, 2008. Net interest income reflected a reduction of $14.8 million or 8.8% for the quarter ended June 30, 2008 from $168.2 million for the quarter ended June 30, 2007 to $153.4 million for the quarter ended June 30, 2008 mainly due to a decrease of $11.7 million or 7.8% in interest income on loans.

The table on page 47 and 48, 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 six-month periods and quarters ended June 30, 2008 and 2007. The table on Interest Variance Analysis — Tax Equivalent Basis on

page 46, 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 semester and quarter ended June 30, 2008 compared with the same periods of 2007.

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 $2.5 million and $4.3 million for the six months ended June 30, 2008 and 2007, respectively. For the quarters ended June 30, 2008 and 2007, the tax equivalent adjustments were $1.0 million and $2.1 million, respectively.

The following table sets forth the principal components of the Corporation’s net interest income for the six and three-month periods ended June 30, 2008 and 2007.


	Six months ended						Three months ended
	June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007
	(Dollars in thousands)						(Dollars in thousands)
Interest income — tax equivalent basis	$	314,938		$	339,601		$	154,434		$	170,298
Interest expense		136,819			177,720			62,391			90,045

Net interest income — tax equivalent basis	$	178,119		$	161,881		$	92,043		$	80,253

Net interest margin — tax equivalent basis (1)		4.23	%		3.86	%		4.34	%		3.79	%


(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 six-month period ended June 30, 2008, net interest margin, on a tax equivalent basis, was 4.23% compared to net interest margin, on a tax equivalent basis, of 3.86% for the same period in 2007. The 37 basis points increase in net interest margin, on a tax equivalent basis, was mainly due a decrease in interest expense on average interest-bearing liabilities of $40.9 million or 23.0% principally due to decrease in the cost of average interest-bearing liabilities of 113 basis points. This reduction in interest expense was principally due to the significant reduction of 149 basis points in the cost of funds of average borrowings (comprised of federal funds purchased and other borrowings, securities sold under agreements to repurchase, commercial paper issued, term notes and subordinated notes) from 5.57% for the first semester of 2007 to 4.08% for the first semester of 2008 reflecting the Federal Reserve’s interest rate cuts. The impact of the decrease in average cost of funds was partially offset by a 61 basis points decrease in yield on the average interest-earning assets resulting in a decrease of $24.7 million in interest income, on a tax equivalent basis, on average interest-earning assets. This decrease was mainly due to a 55 basis points decrease in the yield on average gross loans.

The average interest-earning assets at June 30, 2008 increased $4.1 million when compared with figures reported at June 30, 2007. This change was composed of an increase of $152.9 million in average interest bearing deposits partially offset by a decrease of $117.1 million in average investment securities due to a sale of $125 million of investment securities available for sale during the first quarter of 2008. There was a decrease of $31.7 million in average net loans for the six months ended June 30, 2008 compared with the same period in 2007. The decrease in average net loans was due to decreases in the leasing and construction loans portfolios of $38.4 million and $34.4 million, respectively. The decrease in construction loans was due to the sale of $82.9 million to an affiliate during the quarter. These decreases were partially offset by increases of $16.4 million in average consumer loans, $14.6 million in average mortgage loans and $68.6 million in average commercial loans.

The increase in average interest-bearing liabilities of $52.1 million for the six-month period ended June 30, 2008, was driven by an increase in average total interest-bearing deposits of $319.7 million offset by a decrease in average borrowings of $243.8 million when compared to the six-month period ended June 30, 2007. The increase in average total interest bearing deposits was composed of $203.8 million and $173.3 million in average other time deposits and average brokered deposits, respectively, offset by a $57.3 million decrease in average savings and NOW accounts. The increase in average total interest bearing deposits was principally due to a certificate of deposit for the amount of $640 million opened by Banco Santander, S.A. in Banco Santander Puerto Rico. The decrease in average borrowings of $243.8 million was composed of a decrease in average federal funds and other borrowings of $419.0 million mainly due to the payment of the outstanding indebtedness incurred under bridge facility agreement among the Corporation, SFS and National Australia Bank Limited. Average FHLB advances reflected an increase of $380.6 million offset by reductions in average repurchase agreements of $204.8 million. There was also an increase in average term notes of $22.3 million for the semester ended June 30, 2008 compared with the same period in 2007.

For the three-month period ended June 30, 2008, net interest margin, on a tax equivalent basis, reflected an increase of 55 basis points from 3.79% for the quarter ended June 30, 2007 to 4.34% for the quarter ended June 30, 2008. The 55 basis points increase in net interest margin, on a tax equivalent basis, was mainly due a decrease in interest expense on average interest-bearing liabilities of $27.7 million or 30.7% principally due to a decrease in the cost of average interest-bearing liabilities of 149 basis points. This reduction in interest expense was principally due to the significant reduction of 187 basis points in the cost of average borrowings (comprised of federal funds purchased and other borrowings, securities sold under agreements to repurchase, commercial paper issued, term notes and subordinated notes) from 5.59% for the second quarter of 2007 to 3.72% for the second quarter of 2008, reflecting the Federal Reserve’s interest rate cuts. The impact of the decrease in average cost of funds was partially offset by a 77 basis points decrease in yield on the average interest-earning assets resulting in a decrease of $15.9 million in interest income, on a tax equivalent basis, on average interest-earning assets. This decrease was mainly due to a 55 basis points decrease in the yield on average gross loans.

For the three months ended June 30, 2008, average interest-earning assets increased $53.3 million when compared to same period the prior year. This improvement was mainly due to an increase of $290.9 million or 220.8% in average interest-bearing deposits partially offset by decreases of $165.3 million or 2.4% in average net loans and $72.3 million or 5.0% in average investment securities due to a sale of $125 million of investment securities available for sale during the first quarter of 2008. The decrease in average net loans was driven principally by an $85.4 million decrease in average construction loans as a result of the sale of loans with a principal value of $82.9 million to an affiliate and a reduction in average lease financing portfolio, respectively. Also there was an increase of average allowance for loan losses of $58.3 million for the quarter. Average commercial loans reflected an increase of $14.9 million for the quarter ended June 30, 2008 compared with the quarter ended June 30, 2007.

The $69.6 million increase in average interest-bearing liabilities for the quarter ended June 30, 2008, was driven by an increase in average other time deposits and average brokered deposits of $484.5 million and $363.8 million, respectively. The increase in average interest bearing deposits, mainly due to a certificate of deposit for the amount of $640 million opened by Banco Santander, S.A. in Banco Santander Puerto Rico, was offset by $759.1 million decrease in average borrowings and $22.4 million in average term notes. The reduction in average borrowings was driven by decreases of $713.9 million in average federal funds purchased and other borrowings, $189.1 million in average commercial paper and $180.5 in average securities sold under agreements to repurchase. These decreases were partially offset by an increase in average FHLB advances of $324.5 million for the quarter ended June 30, 2008 compared with the same period in 2007.

The following table allocates changes in the Corporation’s interest income, on a tax-equivalent basis, and interest expense for the six-month and three-month periods ended June 30, 2008, compared to the six-month and three-month periods ended June 30, 2007, 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


	Six Months Ended June 30, 2008									Three Months Ended June 30, 2008
	Compared to the Six Months									Compared to the Three Months
	Ended June 30, 2007									Ended June 30, 2007
	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	$	2,584		$	(1,041	)	$	1,543		$	1,950		$	(529	)	$	1,421
Time deposits with other banks		(742	)		(942	)		(1,684	)		(358	)		(626	)		(984	)
Investment securities		(2,746	)		(4,520	)		(7,266	)		(854	)		(3,198	)		(4,052	)
Loans		(1,376	)		(15,880	)		(17,256	)		(3,547	)		(8,702	)		(12,249	)

Total interest income, on a tax equivalent basis		(2,280	)		(22,383	)		(24,663	)		(2,809	)		(13,055	)		(15,864	)


Interest expense:
Savings and NOW accounts		(840	)		(6,277	)		(7,117	)		42			(4,563	)		(4,521	)
Other time deposits		8,489			(14,031	)		(5,542	)		9,010			(10,390	)		(1,380	)
Borrowings		(6,249	)		(20,573	)		(26,822	)		(8,854	)		(11,934	)		(20,788	)
Long-term borrowings		(684	)		(736	)		(1,420	)		(361	)		(604	)		(965	)

Total interest expense		716			(41,617	)		(40,901	)		(163	)		(27,491	)		(27,654	)


Net interest income, on a tax equivalent basis	$	(2,996	)	$	19,234		$	16,238		$	(2,646	)	$	14,436		$	11,790

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 semesters and quarters ended June 30, 2008 and 2007.

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


	June 30, 2008								June 30, 2007
						Annualized								Annualized
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate

						(Dollars in thousands)
Assets:
Interest bearing deposits	$	50,374		$	576		2.30	%	$	88,937		$	2,260		5.12	%
Federal funds sold and securities purchased under agreements to resell		236,681			2,765		2.35	%		45,203			1,222		5.45	%

Total interest bearing deposits		287,055			3,341		2.34	%		134,140			3,482		5.23	%


U.S. Treasury securities		52,487			858		3.29	%		64,320			1,605		5.03	%
Obligations of other U.S. government agencies and corporations		562,517			9,444		3.38	%		614,897			14,860		4.87	%
Obligations of government of Puerto Rico and political subdivisions		100,986			2,855		5.69	%		90,118			2,435		5.45	%
Collateralized mortgage obligations and mortgage backed securities		537,347			12,682		4.75	%		614,912			14,866		4.88	%
Other		74,354			2,569		6.95	%		60,572			1,908		6.35	%

Total investment securities		1,327,691			28,408		4.30	%		1,444,819			35,674		4.98	%

Loans:
Commercial		2,539,507			73,253		5.80	%		2,470,931			85,792		7.00	%
Construction		440,603			10,236		4.67	%		474,970			20,523		8.71	%
Consumer		664,583			43,015		13.02	%		641,435			37,469		11.78	%
Consumer Finance		604,726			71,098		23.64	%		611,443			69,993		23.08	%
Mortgage		2,694,164			82,814		6.15	%		2,679,585			82,475		6.16	%
Lease financing		83,991			2,773		6.64	%		122,400			4,193		6.91	%

Gross loans		7,027,574			283,189		8.10	%		7,000,764			300,445		8.65	%
Allowance for loan losses		(170,994	)							(112,513	)

Loans, net		6,856,580			283,189		8.31	%		6,888,251			300,445		8.80	%
Total interest earning assets/ interest income (on a tax equivalent basis)		8,471,326			314,938		7.48	%		8,467,210			339,601		8.09	%

Total non-interest earning assets		733,258								646,604

Total assets	$	9,204,584							$	9,113,814

Liabilities and stockholders’ equity:
Savings and NOW accounts	$	1,671,798		$	18,982		2.28	%	$	1,729,127		$	26,099		3.04	%
Other time deposits		1,579,936			25,959		3.30	%		1,376,182			31,412		4.60	%
Brokered deposits		1,521,391			35,227		4.66	%		1,348,079			35,316		5.28	%

Total interest bearing deposits		4,773,125			80,168		3.38	%		4,453,388			92,827		4.20	%
Borrowings		2,533,005			49,498		3.93	%		2,776,766			76,320		5.54	%
Term Notes		19,524			309		3.18	%		41,858			687		3.31	%
Subordinated Notes		243,006			6,844		5.66	%		244,545			7,886		6.50	%

Total interest bearing liabilities/interest expense		7,568,660			136,819		3.64	%		7,516,557			177,720		4.77	%

Total non-interest bearing liabilities		1,073,220								1,008,865

Total liabilities		8,641,880								8,525,422

Stockholders’ Equity		562,704								588,392

Total liabilities and stockholders’ equity	$	9,204,584							$	9,113,814

Net interest income, on a tax equivalent basis				$	178,119							$	161,881

Net interest spread							3.84	%							3.32	%
Cost of funding earning assets							3.25	%							4.23	%
Net interest margin, on a tax equivalent basis							4.23	%							3.86	%

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


	June 30, 2008								June 30, 2007
							Annualized							Annualized
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate

						(Dollars in thousands)
Assets:
Interest bearing deposits	$	49,548		$	126		1.02	%	$	90,599		$	1,110		4.91	%
Federal funds sold and securities purchased under agreements to resell		373,095			1,977		2.13	%		41,117			556		5.42	%

Total interest bearing deposits		422,643			2,103		2.00	%		131,716			1,666		5.07	%


U.S. Treasury securities		40,035			235		2.36	%		64,160			796		4.98	%
Obligations of other U.S. government agencies and corporations		617,261			4,457		2.90	%		622,599			7,414		4.78	%
Obligations of government of Puerto Rico and political subdivisions		106,981			1,515		5.70	%		91,518			1,251		5.48	%
Collateralized mortgage obligations and mortgage backed securities		530,319			6,229		4.72	%		600,712			7,196		4.80	%
Other		68,983			1,180		6.88	%		56,870			1,011		7.13	%

Total investment securities		1,363,579			13,616		4.02	%		1,435,859			17,668		4.94	%

Loans:
Commercial		2,479,583			33,706		5.47	%		2,464,685			43,231		7.04	%
Construction		408,971			4,625		4.55	%		494,334			10,568		8.57	%
Consumer		656,863			21,513		13.17	%		659,926			19,538		11.88	%
Consumer Finance		605,626			36,155		24.01	%		606,580			34,257		22.65	%
Mortgage		2,695,108			41,394		6.14	%		2,690,971			41,406		6.15	%
Lease financing		80,542			1,322		6.60	%		117,224			1,964		6.72	%

Gross loans		6,926,693			138,715		8.05	%		7,033,720			150,964		8.61	%
Allowance for loan losses		(175,460	)							(117,151	)

Loans, net		6,751,233			138,715		8.26	%		6,916,569			150,964		8.75	%
Total interest earning assets/ interest income (on a tax equivalent basis)		8,537,455			154,434		7.28	%		8,484,144			170,298		8.05	%

Total non-interest earning assets		704,121								651,685

Total assets	$	9,241,576							$	9,135,829

Liabilities and stockholders’ equity:
Savings and NOW accounts	$	1,712,086		$	8,232		1.93	%	$	1,706,387		$	12,753		3.00	%
Other time deposits		1,870,175			13,543		2.91	%		1,385,663			16,155		4.68	%
Brokered deposits		1,730,902			19,188		4.46	%		1,367,067			17,956		5.27	%

Total interest bearing deposits		5,313,163			40,963		3.10	%		4,459,117			46,864		4.22	%
Borrowings		2,058,420			18,089		3.53	%		2,817,478			38,877		5.53	%
Term Notes		19,598			160		3.28	%		42,015			352		3.36	%
Subordinated Notes		241,607			3,179		5.29	%		244,611			3,952		6.48	%

Total interest bearing liabilities/interest expense		7,632,788			62,391		3.29	%		7,563,221			90,045		4.78	%

Total non-interest bearing liabilities		1,036,238								976,280

Total liabilities		8,669,026								8,539,501

Stockholders’ Equity		572,550								596,328

Total liabilities and stockholders’ equity	$	9,241,576							$	9,135,829

Net interest income, on a tax equivalent basis				$	92,043							$	80,253

Net interest spread							3.99	%							3.27	%
Cost of funding earning assets							2.94	%							4.26	%
Net interest margin, on a tax equivalent basis							4.34	%							3.79	%

Provision for Loan Losses

The Corporation’s provision for loan losses increased $25.2 million or 47.7% from $52.9 million for the six months ended June 30, 2007 to $78.1 million for the same period in 2008 and $7.7 million or 24.9% for the quarter ended June 30, 2008 when compared with the same period in prior year. The increase in the provision for loan losses was due primarily to increases in non-performing loans due to the deterioration in economic conditions in Puerto Rico, requiring the Corporation to increase the level of its allowance for loan losses. There was an increase of $142.6 million in past-due loans (non-performing loans and accruing loans past-due 90 days or more) which reached $289.8 million as of June 30, 2008, from $147.3 million as of June 30, 2007, and $301.6 million as of December 31, 2007. Non-performing loans were $278.5 million as of June 30, 2008, an increase of $141.5 million or 103.3%, compared to non-performing loans as of June 30, 2007.

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 six months ended					For the three months ended
	June 30,		June 30,			June 30,			June 30,
	2008		2007			2008			2007
	(In thousands)
Bank service fees on deposit accounts	$	6,922	$	6,539		$	3,342		$	3,297
Other service fees:
Credit card and payment processing fees		4,128		6,538			2,109			2,057
Mortgage servicing fees		1,702		1,440			849			737
Trust fees		823		989			447			554
Confirming advances fees		3,989		1,726			1,582			888
Other fees		5,961		7,219			2,773			4,601

Total fee income		23,525		24,451			11,102			12,134
Broker/dealer, asset management, and insurance fees		41,973		32,369			19,986			16,081
Gain on sale of securities, net		2,874		238			—			49
Gain on sale of loans		2,267		4,338			829			1,990
Gain on sale of mortgage servicing rights		—		168			—			99
Trading gains		1,994		1,241			412			511
Gain (loss) on derivatives		1,304		(758	)		(2,466	)		(541	)
Other gains (losses), net		5,998		2,104			(1,440	)		907
Other		3,420		1,814			2,573			682

	$	83,355	$	65,965		$	30,996		$	31,912

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


	For the six months ended				For the three months ended
	June 30, 2008		June 30, 2007		June 30, 2008		June 30, 2007
	(In thousands)				(In thousands)
Broker-dealer	$	24,177	$	13,524	$	11,091	$	7,025
Asset management		13,281		11,796		6,683		6,145

Total Santander Securities		37,458		25,320		17,774		13,170
Insurance		4,515		7,049		2,212		2,911

Total	$	41,973	$	32,369	$	19,986	$	16,081

For the six months ended June 30, 2008, other income reached $83.4 million, a $17.4 million or 26.4% increase when compared to $66.0 million for the same period in 2007. For the quarter ended June 30, 2008, other income remained basically flat when compare to the figures reported for the same period the prior year. The other income was impacted by the following:

	•		Broker-dealer, asset management and insurance fees reflected an increase of $ 9.6 million for the six-month period ended June 30, 2008, due to increases in broker-dealer and asset management fees of $12.1 million partially offset by a decrease of $2.5 million in insurance fees due to a reduction in credit life commissions generated from the Island Finance operation. For the quarter ended June 30, 2008, the $4.6 million increase in broker-dealer and asset management fees was partially offset by a $0.7 million decrease in insurance fees. 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 50.35% and 64.48% to the Corporation’s other income for the semester and quarter ended June 30, 2008, respectively, and 49.07% and 50.39% to the semester and quarter ended June 30, 2007.

	•		There was an increase in gain on sale of securities available for sale of $2.6 million for the six months ended June 30, 2008 due to the sale of $125 million in securities during the first quarter of 2008, partially offset by a loss of $0.4 million on the extinguishment of certain repurchase agreements that were funding part of the securities sold.

	•		The Corporation reported an increase in gain on derivative instruments of $2.1 million for the six months ended June 30, 2008 compared with the same period during the prior year due to the net effect of incorporating the Corporation’s credit risk in the derivative fair value calculation methodology pursuant the adoption of SFAS 157. For the quarter ended June 30, 2008, there was an increase in losses on derivative instruments of $1.9 million when compared with the quarter ended June 30, 2007 mostly resulting from a loss of $1.7 million arising from the credit risk component incorporated into the fair value calculation of a subordinated note recognized during the quarter pursuant to SFAS 157.

	•		There were decreases in gain on sale of residential mortgage loans of $2.1 million and $1.2 million in gain on sale of residential mortgage loans for the six-month and three-month periods ended June 30, 2008, respectively, compared with the same periods the prior year, due to a decrease in mortgage loans sold of $87.8 million and $35.9 million for the semester and quarter ended June 30, 2008, respectively compared with the same period in 2007

	•		During the first quarter of 2008 a gain of $8.6 million on the sale of part of the investment in Visa, Inc. in connection with its initial public offering was recognized through earnings.

	•		An unfavorable valuation adjustment of $4.0 million and $2.2 million for loans held for sale was recorded through earnings for the semester and quarter ended June 30, 2008.

Operating Expenses

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

OPERATING EXPENSES


	Six months ended						Three months ended
	June 30,			June 30,			June 30,			June 30,
	2008			2007			2008			2007
					(In thousands)
Salaries	$	34,846		$	35,883		$	17,018		$	17,509
Stock incentive plans		(2,094	)		8,288			887			5,814
Pension and other benefits		33,277			28,020			15,981			13,934
Expenses deferred as loan origination costs		(4,517	)		(6,289	)		(2,361	)		(3,184	)

Total personnel costs		61,512			65,902			31,525			34,073

Occupancy costs		13,222			11,488			6,806			5,914

Equipment expenses		2,252			2,241			1,059			1,076

EDP servicing expense, amortization and technical services		21,061			18,074			10,883			8,640

Communication expenses		5,181			5,451			2,646			2,766

Business promotion		3,786			8,000			1,821			4,548

Other taxes		6,756			4,948			3,349			1,843

Other operating expenses:
Professional fees		9,222			6,383			5,203			3,280
Amortization of intangibles		1,485			2,428			750			1,228
Printing and supplies		923			1,058			534			579
Credit card expenses		2,220			4,103			1,241			1,231
Insurance		1,924			1,905			887			1,078
Examinations and FDIC assessment		2,977			958			1,488			479
Transportation and travel		1,406			1,526			732			816
Repossessed assets provision and expenses		2,584			2,527			1,259			1,202
Collections and related legal costs		663			653			341			186
All other		10,515			8,156			5,721			4,815

Other operating expenses		33,919			29,697			18,156			14,894

Non-personnel expenses		86,177			79,899			44,720			39,681

Total Operating expenses	$	147,689		$	145,801		$	76,245		$	73,754

The Corporation’s operating expenses reflected increases of $1.9 million and $2.5 million for the six-month and three-month periods ended June 30, 2008 when compared with six-month and three-month period ended June 30, 2007. The variances in operating expenses are described below:

•

During the first semester of 2008, total salaries and other employee benefits reflected a decrease of $4.4 million compared with the same period the prior year. A $10.4 million decrease in expense for stock incentive plans was partially offset by an increase of $5.3 million in other compensation. The increase in other compensation is mainly due to a $5.4 million increment in commissions and bonuses. For the quarter ended June 30, 2008, total salaries and other employee benefits decreased $2.5 million compared with the quarter ended June 30, 2007. This decrease was mainly due to a $4.9 million reduction in stock incentive plans expense partially offset by $2.0 increase in other employee benefits.

•		The Corporation’s non-personnel expenses increased $6.3 million and $5.0 million for the six months and three months ended June 30, 2008 compared with the same period in prior year. There were increases of $3.0 million in EDP servicing expenses, amortization and technical services mainly due to an increase in technical assistance expense charged by affiliates for software development; $2.8 million in professional fees principally due to an increment in consulting fees regarding the adoption of new accounting pronouncements and review of other operational procedures; $2.0 million in FDIC assessment due to the 2007 assessment systems implemented under the Federal Deposit Insurance Reform Act of 2005 (“the Reform Act”) that imposed insurance premiums based on factors such as capital level, supervisory rating, certain financial ratios and risk information; $1.7 million in occupancy cost due to the sale and leaseback of the Corporation’s two principal properties in December 2007; and $1.8 million in other taxes. These increases were partially offset by a $4.2 million decrease in business promotion expenses and a $1.9 million decrease in credit card expenses due to the sale of the Corporation’s merchant business during the first quarter of 2007.

•		For the quarter ended June 30, 2008, non-personnel expenses increased $5.0 million compared with the quarter ended June 30, 2007. This increment was due to increases in EDP servicing expenses, amortization and technical services of $2.2 million, professional fees of $1.9 million, other taxes of $1.5 million, FDIC assessment due of $1.0 million and occupancy cost of $0.9 million. These increases were partially offset by $2.7 million decrease in business promotion.

The Efficiency Ratio, on a tax equivalent basis, for the six months ended June 30, 2008 and 2007 was 58.64% and 64.06%, respectively, reflecting an improvement of 542 basis points. For the six months ended June 30, 2008 there was a decrease of $10.4 million in compensation expense due to a favorable change in Long Term Incentive Plan valuation and because the majority of the options granted under this plan were exercised during the six months ended June 30, 2008, which resulted in no additional valuation adjustments.

The Efficiency Ratio, on a tax equivalent basis, for the three months ended June 30, 2008 and 2007 was 65.55% and 65.78%, respectively, reflecting an improvement of 23 basis points. For the three months ended June 30, 2008 there was a decrease of $4.9 million in compensation expense mostly attributed to the fact that during 2007 the Santander Group granted of 100 shares of its stock to all employees as part of the celebration of its 150 ^th anniversary and during the quarter ended June 30, 2008 the majority of the options granted to certain employees under a Long Term Incentive Plan sponsored by the Santander Group were exercised, which resulted in no additional valuation adjustments. Further, there a favorable change in Long Term Incentive Plan valuation during the quarter ended June 30, 2008.

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.

Puerto Rico international banking entities, or IBEs, such as Santander International Bank (SIB), are currently exempt from taxation under Puerto Rico law. During 2004, the Legislature of Puerto Rico and the Governor of Puerto Rico approved a law amending the IBE Act. This law imposes income taxes at normal statutory rates on each IBE that operates as a unit of a bank, if the IBE’s net income generated was 20% of the bank’s net income in the taxable year commencing on July 1, 2005, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a bank as is the case of SIB.

During June 2006, the FASB issued Interpretation No.48 (“FIN 48”), “ Accounting for Uncertainty in Income Tax – an interpretation of FASB Statement No 109”. FIN 48 clarifies the accounting for uncertainty of income tax recognized in

a enterprise’s financial statements in accordance with SFAS No 109, “ Accounting for Income Tax”. 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 provision for income tax amounted to $9.0 million, or 27.0% of pretax earnings, for the six months ended June 30, 2008 compared to $9.0 million, or 36.4% of pretax earnings, for the same period in 2007. A gain of $8.6 million on the sale of a portion of the Corporation’s investment in Visa, Inc. recognized during 2008 in connection with its initial public offering qualify as a capital gain at a preferential rate of 15%. For the quarter ended June 30, 2008, the provision for income tax amounted $0.8 million or 10.5% of pretax earnings compared to $1.4 million or 25.6% pretax earnings for the same period in 2007. The decrease in provision for income tax for the quarter ended June 30, 2008 when compared to the same period in prior year was principally due to the deferred tax benefit related to $1.7 million loss on the credit risk component of the fair value of the subordinated capital note recognized during the quarter pursuant SFAS 157.

Financial Position – June 30, 2008

Assets

The Corporation’s assets reached $8.8 billion as of June 30, 2008, a 3.5% or $321.5 million decrease compared to total assets of $9.2 billion at December 31, 2007, and a 3.9% or $357.4 million decrease compared to total assets of $9.2 billion at June 30, 2007. This reduction was mainly due to a decrease of $286.4 million in net loan portfolio as of June 30, 2008 compared with December 31, 2007 and a decrease of $140.8 million in investment securities due to the sale of $125 million of investment securities available for sale during the first quarter of 2008. These decreases were partially offset by an increase in cash and cash equivalents of $118.6 million.

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


	June 30,			Dec. 31,			Jun. 08/Dec.07			June 30,			Jun. 08/Jun. 07
	2008			2007			Variance			2007			Variance
	(In thousands)
Commercial and industrial	$	2,409,723		$	2,530,030		$	(120,307	)	$	2,403,375		$	6,348
Construction		383,704			484,237			(100,533	)		500,328			(116,624	)
Mortgage		2,686,556			2,685,962			594			2,710,573			(24,017	)
Consumer		649,560			674,349			(24,789	)		670,367			(20,807	)
Consumer Finance		606,327			611,113			(4,786	)		613,924			(7,597	)
Leasing		76,023			92,641			(16,618	)		112,006			(35,983	)

Gross Loans		6,811,893			7,078,332			(266,439	)		7,010,573			(198,680	)
Allowance for loan losses		(186,889	)		(166,952	)		(19,937	)		(127,916	)		(58,973	)

Net Loans	$	6,625,004		$	6,911,380		$	(286,376	)	$	6,882,657		$	(257,653	)

The net loan portfolio, including loans held for sale, reflected a decrease of $286.4 million or 4.1%, reaching $6.6 billion at June 30, 2008, compared to the figures reported as of December 31, 2007, and a decrease of $257.7 million or 3.7%, when compared to June 30, 2007. The reduction in net loan portfolio was basically due to the sale of $96.8 million of certain impaired commercial and construction loans to an affiliate and repayments of approximately of $226.3 million in the retail and corporate loan portfolio during the six months ended June 30, 2008. The mortgage loan portfolio at June 30, 2008 remained basically flat when compared to December 31, 2007 and reflected a decrease of $24.0 million when compared to June 30, 2007. Residential mortgage loan origination for the semester ended June 30, 2008 was $214.9 million, $127.4 million or 37.2% less than the $342.3 million originated during the same period in 2007. Total mortgage loans sold and securitized during the six months ended June 30, 2008 were $96.0 million compared to $167.2 million during the same period in 2007. The consumer loan portfolio (including consumer finance) also reflected a decrease of $29.6 million or 2.3% as of June 30, 2008, compared to December 31, 2007. Compared to June 30, 2007, the consumer loan portfolio reflected a decrease of $28.4 million or 2.2%. The commercial loan portfolio (including leasing) decreased $136.9 million or 5.2% and $29.6 million or 1.2% compared with December 31, 2007 and June 30, 2007, respectively.

Allowance for Loan Losses

The Corporation assesses the overall risks in its loan portfolio and establishes and maintains a reserve 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 Statements of Financial Accounting Standards (“SFAS”) No. 114 “Accounting by Creditors for Impairment of a Loan” (as amended), an expected loss estimate based on the provisions of SFAS No. 5 “Accounting for Contingencies”, and an unallocated reserve based on the effect of probable economic deterioration above and beyond what is reflected in the asset-specific component of the allowance.

Commercial, construction loans and certain mortgage loans exceeding a predetermined monetary threshold are identified for evaluation of impairment on an individual basis pursuant to SFAS No. 114. 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 specialist 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 SFAS No. 5 for all loans not evaluated individually for impairment, based on historical loss experience by loan type, management judgment of the quantitative factors (historical net charge-offs, statistical loss estimates, etc.), as well as qualitative factors (current economic conditions, portfolio composition, delinquency trends, industry concentrations, etc.). The Corporation groups small homogeneous loans by type of loan (consumer, credit card, mortgage, etc.) and applies a loss factor, which is determined using an average history of actual net losses and other statistical loss estimates. Historical loss rates are reviewed at least quarterly and adjusted based on changing borrower and/or collateral conditions and actual collections and charge-off experience. Historical loss rates for the different portfolios may be adjusted for significant factors that in management’s judgment reflect the impact of any current conditions on loss recognition. Factors that management considers in the analysis include the effect of the trends in the nature and volume of loans (delinquency, charge-offs, non accrual), changes in the mix or type of collateral, asset quality trends, changes in the internal lending policies and credit standards, collection practices and examination results from internal and external agencies.

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 six months ended						For the three months ended
	June 30,						June 30,
	2008			2007			2008			2007
				(In thousands)
Balance at beginning of period	$	166,952		$	106,863		$	179,150		$	115,171
Provision for loan losses		78,090			52,874			38,515			30,850

		245,042			159,737			217,665			146,021

Losses charged to the allowance:
Commercial and industrial		4,150			3,484			1,818			1,568
Construction		5,358			—			5,344			—
Mortgage		64			1,150			—			—
Consumer		19,975			11,717			10,438			6,970
Consumer finance		29,458			16,190			13,541			9,863
Leasing		1,050			1,485			562			516

		60,055			34,026			31,703			18,917

Recoveries:
Commercial and industrial		293			799			137			104
Consumer		579			429			234			263
Consumer finance		779			723			403			370
Leasing		251			254			153			75

		1,902			2,205			927			812

Net loans charged-off		58,153			31,821			30,776			18,105

Balance at end of period	$	186,889		$	127,916		$	186,889		$	127,916


Ratios:
Allowance for loan losses to period-end loans		2.74	%		1.82	%		2.74	%		1.82	%
Recoveries to charge-offs		3.17	%		6.48	%		2.92	%		4.29	%
Annualized net charge-offs to average loans		1.66	%		0.92	%		1.79	%		1.03	%

The Corporation’s allowance for loan losses was $186.9 million or 2.74% of period-end loans at June 30, 2008, a 92 basis point increase compared to $127.9 million, or 1.82% of period-end loans at June 30, 2007. The $186.9 million in the allowance for loan losses is comprised of $117.3 million related to commercial banking and $69.6 million to the consumer finance operations, with a provision for loan losses of $48.1 million and $30.0 million for each respective segment for the six months ended June 30, 2008. At June 30, 2007, the $127.9 million in the allowance for loan losses is comprised of $68.0 million related to commercial banking and $59.9 million to the consumer finance operations, with a provision for loan losses of $18.8 million and $34.1 million for the same period for each respective segment.

The increment in the allowance for loan losses to period-end loan was due to the increase in non-performing loans and loans past due 90 days or more of $142.6 million from $147.3 million at June 30, 2007 to $289.8 million at June 30, 2008.

The ratio of allowance for loan losses to non-performing loans and accruing loans past due 90 days or more was 64.48% and 86.87% at June 30, 2008 and June 30, 2007, respectively, a decrease of 22.39 percentage points. At June 30, 2008, this ratio increased 9.12 percentage points when compared to 55.36% at December 31, 2007. Excluding non-performing mortgage loans (for which the Corporation has historically had a minimal loss experience) this ratio was 107.18% at June 30, 2008 compared to 181.39% as of June 30, 2007 and 79.51% as of December 31, 2007.

The annualized ratio of net charge-offs to average loans for the six-month period ended June 30, 2008 was 1.66%, increasing 74 basis points from 0.92% for the same period in 2007. This change was due to an increment in net charge-offs of $26.3 million during 2008 when compared with the same period in 2007.

At June 30, 2008, impaired loans (loans evaluated individually for impairment) with related allowance amounted to approximately $184.0 million and $30.9 million, respectively. At December 31, 2007 impaired loans with related allowance amounted to $205.6 million and $25.6 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 June 30, 2008, the Corporation’s total non-performing loans (excluding other real estate owned) reached $278.5 million or 4.09% of total loans from $294.4 million or 4.16% of total loans as of December 31, 2007 and from $137.0 million or 1.95% of total loans as of June 30, 2007. The Corporation’s non-performing loans reflected an increase of $141.5 million or 103.3% compared to non-performing loans as of June 30, 2007 and a decrease of $16.0 million or 5.4% compared to non-performing loans as of December 31, 2007. The increase in non-performing loans was principally due to the $87.5 million increase in nonperforming construction loans and the $39.1 million increase in non-performing residential mortgages when compared to June 30, 2007. Compared to December 31, 2007, the increase was composed mainly of increases in non-performing residential mortgages of $24.3 million or 30.0% partially offset by $49.6 million decrease in non-performing construction loans mainly due to the sale of $82.9 million of certain impaired construction loans to an affiliate.

Non-performing loans and accruing loans past due 90 days or more in the Island Finance portfolio totaled $36.5 million at June 30, 2008, reflecting an decrease of $1.8 million compared to December 31, 2007 and an increase of $1.3 million compared to June 30, 2007.

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


	June 30,			December 31,			June 30,
	2008			2007			2007

	(Dollars in thousands)
Commercial and Industrial	$	30,866		$	21,236		$	22,333
Construction		91,499			141,140			3,966
Mortgage		105,062			80,805			65,923
Consumer		13,569			10,818			8,513
Consumer Finance		34,337			37,412			33,615
Leasing		2,460			2,334			2,223
Restructured Loans		687			693			392

Total non-performing loans		278,480			294,438			136,965
Repossessed Assets		18,249			16,447			6,898

Total non-performing assets	$	296,729		$	310,885		$	143,863


Accruing loans past-due 90 days or more	$	11,369		$	7,162		$	10,293

Non-Performing loans to total loans		4.09	%		4.16	%		1.95	%
Non-Performing loans plus accruing loans past due 90 days or more to total loans		4.26	%		4.26	%		2.10	%
Non-Performing assets to total assets		3.36	%		3.39	%		1.56	%

Liabilities

The Corporation’s total liabilities reached $8.3 billion as of June 30, 2008, reflecting a decrease of $346.1 million compared to December 31, 2007. This reduction in total liabilities was principally due to 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 $1.1 billion or 35.4% at June 30, 2008 from $3.1 billion at December 31, 2007. This decrease was partially offset by an increase in total deposits of $817.6 million or 15.8% to $6.0 billion as of June 30, 2008 from $5.2 billion as of June 30, 2007.

Total deposits of $6.0 billion as of June 30, 2008 were composed of $1.6 billion in brokered deposits and $4.4 billion of customer deposits. Compared to December 31, 2007, brokered deposits reflected an increase of $162.4 million or 11.2% and customer deposits reflected increases of $655.2 million, or 17.7% as of June 30, 2008. The increase in customer deposits was due to a certificate of deposit for the amount of $640 million opened by Banco Santander, S.A. at Banco Santander Puerto Rico, described below.

Total borrowings at June 30, 2008 (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 $1.1 billion or 35.4% and $988.0 million or 32.8% compared to borrowings at December 31, 2007 and June 30, 2007, respectively. The $1.1 million decrease for the six months ended June 30, 2008 when compared with December 31, 2007 includes a decrease in fed funds purchased and other borrowings of $653.3 million due to the refinancing of the outstanding indebtedness incurred under bridge facility agreement among the Corporation, SFS and National Australia Bank Limited. Also, there were decreases in commercial paper issued of $234.7 million, federal home loan bank advances of $165.0 million, securities sold under agreements to repurchase of $51.7 million and subordinated capital notes of $7.1 million.

On March 25, 2008, the Corporation and SFS., entered into a fully-collateralized Loan Agreement (the “Loan”) with the Bank. The proceeds of the Loan were used to refinance the outstanding indebtedness incurred under the previously announced bridge facility agreement among the Corporation, SFS and National Australia Bank Limited, and for general corporate purposes. Under the Loan, the Corporation and SFS had available $186 million and $454 million, respectively, all of which was drawn on March 25, 2008. The Loan is fully-collateralized by a certificate of deposit in the amount of $640 million opened by Banco Santander, S.A., the parent of the Corporation, and provided as security for the Loan pursuant to the terms of a Security Agreement, Pledge and Assignment between the Bank and Banco Santander, S.A. The Corporation and SFS have agreed to pay a fee of 0.10% net of taxes, deduction and withholdings, on an annualized basis, to Banco Santander, S.A. in connection with its agreement to collateralize the loan with the deposit.

The amounts drawn under the Loan bear interest at an annual rate equal to the applicable LIBOR rate plus 0.465% per annum. Interest under the Loan is payable at maturity. The Corporation and SFS did not pay any facility fee or commission to the Bank in connection with the Loan. The entire principal balance of the Loan is due and payable on September 25, 2008. Upon the occurrence and during the continuance of an Event of Default as defined in the Loan the Bank shall have the right to declare the outstanding balance of the Loan, together with accrued interest and any other amount owing to the Bank, due and payable on demand or immediately due for payment. In addition, the Corporation and SFS will be required to pay interest on any overdue amounts at a default rate that is equal to the then applicable interest rate payable on the Loan plus 2% per annum. The Corporation’s and SFS’s obligations to pay interest and principal under the Loan are several and not joint. However, the Corporation and SFS are jointly and severally responsible for all other amounts payable under the Loan.

During 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.

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 $561.1 million, or 6.4% of total assets at June 30, 2008, compared to $536.5 million or 5.9% of total assets at December 31, 2007. The $24.6 million increase in stockholders’ equity was composed of net income of $24.2 million, stock incentive plan expense recognized as capital contribution of $7.7 million and the cumulative effect of the adoption of SFAS 159 of $3.2 million This increase was partially offset by dividend declared of $9.3 million during the semester ended June 30, 2008 and an increase in accumulated other comprehensive loss of $1.3 million.

The Corporation declared a cash dividend of $0.20 per common share during the six-month period ended June 30, 2008 to all stockholders and expects to continue to pay quarterly dividends. The current annualized dividend yield is 3.8%.

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 six months ended June 30, 2008 and 2007, the Corporation did not repurchase any shares of common stock. As of June 30, 2008, 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.

As of June 30, 2008, the Corporation’s common stock price per share was $10.61, resulting in a market capitalization of $494.8 million, including affiliated holdings compared to book value equity of $561.1 million.

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.

As of June 30, 2008, the Corporation was well capitalized under the regulatory framework for prompt corrective action. At June 30, 2008 the Corporation continued to exceed the regulatory risk-based capital requirements for well-capitalized institutions. Tier I capital to risk-adjusted assets and total capital ratios at June 30, 2008 were 8.08% and 11.18%, respectively, and the leverage ratio was 5.68%.

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 June 30, 2008 and December 31, 2007.

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

Hedging Activities:

The following table summarizes the derivative contracts designated as hedges and economic undesignated hedges as of June 30, 2008 and December 31, 2007, respectively:


	June 30, 2008
								Other
	Notional							Comprehensive
(In thousands)	Amounts		Fair Value			Gain		Loss*
Cash Flow Hedges
Interest Rate Swaps	$	375,000	$	(1,247	)	$	—	$	(476	)
Economic Undesignated Hedges
Interest Rate Swaps		243,984		(2,639	)		683		—


Totals	$	618,984	$	(3,886	)	$	683	$	(476	)


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


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


*		Net of tax.

Cash Flow Hedges:

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

As of June 30, 2008, the total amount, net of tax, included in accumulated other comprehensive income pertaining to interest rate swaps designated as cash flow hedges was an unrealized loss, net ox tax of $761,000. As of December 31, 2007, the total amount, net of tax, included in accumulated other comprehensive income pertaining to the cash flow hedges was an unrealized loss, net of tax of $1.2 million.

Economic Undesignated Hedges:

The Corporation adopted SFAS 159 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 SFAS 133. The selected financial instruments are reported at fair value with changes in fair value reported in condensed consolidated statements of income.

As of June 30, 2008 the economic undesignated hedges have maturities through the year 2024. The weighted average rate paid and received on these contracts is 2.82% and 5.38% as of June 30, 2008.

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 economics 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 June 30, 2008, the Corporation has $244.0 million of these economic undesignated hedges.

Fair Value Hedges:

The Corporation designates hedges as Fair Value Hedges when its main purpose is to hedge the changes in market value of an associated asset or liability. The Corporation only designates these types of hedges if at inception it is believed that the relationship in the changes in the market value of the hedged item and hedging item will offset each other in a highly effective manner. At the inception of each hedge, management documents the hedging relationship, including its objective and probable effectiveness. To assess ongoing effectiveness of the hedges, the Corporation marks to market both the hedging item and the hedged item at every reporting period to determine the effectiveness of the hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or loss in condensed consolidated statements of income.

The Corporation hedges its certain callable brokered certificates of deposits and subordinated capital notes by using interest rate swaps. These swaps were designated for hedge accounting treatment under SFAS 133. 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 condensed consolidated statements of income.

The fair value hedges have maturities through the year 2032 as of December 31, 2007. The weighted-average rate paid and received on these contracts is 5.10% and 5.39%, as of December 31, 2007.

The $937.9 million fair value hedges are associated to the swapping of fixed rate debt as December 31, 2007. The Corporation regularly issues term fixed rate debt, which it in turn swaps to floating rate debt via interest rate swaps. In these cases the Corporation matches all of the relevant economic variables (notional, coupon, payment dates and conventions etc.) of the fixed rate debt it issues to the fixed rate leg of the interest rate swap ( which it receives from the counterparty) and pays the floating rate leg of the interest rate swap. The effectiveness of these transactions is very high since all of the relevant economic variables are matched.

Derivative instruments not designated as hedging instruments:

Any derivative not associated to hedging activity is booked as a freestanding derivative. In the normal course of business the Corporation may enter into derivative contracts as either a market maker or proprietary position taker. The Corporation’s mission as a market maker is to meet the clients’ needs by providing them with a wide array of financial products, which include derivative contracts. The Corporation’s major role in this aspect is to serve as a derivative counterparty to these clients. Positions taken with these clients are hedged (although not designated as hedges) in the OTC market with interbank participants or in the organized futures markets. To a lesser extent, the Corporation enters into freestanding derivative contracts as a proprietary position taker, based on market expectations or to benefit from price differentials between financial instruments and markets. These derivatives are not linked to specific assets and liabilities on the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. These derivatives are carried at fair value and changes in fair value are recorded in earnings. The market and credit risk associated with these activities is measured, monitored and controlled by the Corporation’s Market Risk Group, a unit independent from the treasury department. Among other things, this group is responsible for: policy, analysis, methodology and reporting of anything related to market risk and credit risk. The following table summarizes the aggregate notional amounts and the reported derivative assets or liabilities (i.e. the fair value of the derivative contracts) as of June 30, 2008 and December 31, 2007, respectively:


	June 30, 2008
	Notional
(In thousands)	Amounts *		Fair Value			Gain
Interest Rate Contracts
Interest Rate Swaps	$	3,604,017	$	1,122		$	782
Interest Rate Caps		2,698		—			—
Other		4,496		(116	)		(161	)
Equity Derivatives		266,678		—			—


Totals	$	3,877,889	$	1,006		$	621


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


Totals	$	3,520,516	$	302	$	714


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

PART I — ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Asset and Liability Management

The Corporation’s policy with respect to asset liability management is to maximize its net interest income, return on assets and return on equity while remaining within the established parameters of interest rate and liquidity risks provided by the Board of Directors and the relevant regulatory authorities. Subject to these constraints, the Corporation takes mismatched interest rate positions. The Corporation’s asset and liability management policies are developed and implemented by its Asset and Liability Committee (“ALCO”), which is composed of senior members of the Corporation including the President, Chief Operating 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 June 30, 2008, was negative $1.5 billion or -18.17% 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 June 30, 2008 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 June 30, 2008


	0 to 3			3 months			1 to 3			3 to 5			5 to 10			More than			No Interest
	months			to a Year			Years			Years			Years			10 Years			Rate Risk			Total
	(dollars in thousands)
ASSETS:
Investment Portfolio	$	345,471		$	1,504		$	257,922		$	315,496		$	204,990		$	—		$	128,318		$	1,253,701
Deposits in Other Banks		203,851			7,740			—			—			—			—			116,541			328,132
Loan Portfolio
Commercial		1,168,269			253,809			377,174			200,915			249,501			78,944			157,134			2,485,746
Construction		348,839			4,665			10,070			10,257			5,355			3,196			1,322			383,704
Consumer		384,279			206,147			407,965			202,159			56,330			16			(1,009	)		1,255,887
Mortgage		85,244			272,694			645,683			555,182			1,010,250			106,256			11,247			2,686,556
Fixed and Other Assets		—			—			—			—			—			—			444,965			444,965

Total Assets	$	2,535,953		$	746,559		$	1,698,814		$	1,284,009		$	1,526,426		$	188,412		$	858,518		$	8,838,691


LIABILITIES AND STOCKHOLDERS’ EQUITY
External Funds Purchased
Commercial Paper	$	49,779		$	—		$	—		$	—		$	—		$	—		$	—		$	49,779
Repurchase Agreements		8,875			75,000			300,000			200,000			—			—			—			583,875
Federal Funds Purchased and Other Borrowings		537,000			121,790			475,000			—			—			—			—			1,133,790
Deposits
Certificates of Deposit		1,826,644			1,185,997			225,998			78,104			105,869			55,812			(1,196	)		3,477,228
Demand Deposits and Savings Account		137,692			—			141,560			491,014			—			—			(15,895	)		754,371
Transactional Accounts		263,397			360,788			—			1,122,350			—			—			122			1,746,657
Term and Subordinated Debt		—			—			9,472			10,000			240,068			—			192			259,732
Other Liabilities and Capital		—			—			—			—			—			—			833,259			833,259

Total Liabilities and Capital	$	2,823,387		$	1,743,575		$	1,152,030		$	1,901,468		$	345,937		$	55,812		$	816,482		$	8,838,691


Off-Balance Sheet Financial Information

Interest Rate Swaps (Assets)	$	2,253,371		$	57,600		$	161,641		$	14,068		$	1,533,865		$	202,456		$	—		$	4,223,001
Interest Rate Swaps (Liabilities)		2,433,711			117,600			136,641			14,068			1,343,865			177,116			—			4,223,001
Caps		1,349			—			521			—			828			—			—			2,698
Caps Final Maturity		1,349			—			521			—			828			—			—			2,698

GAP	$	(467,774	)	$	(1,057,016	)	$	571,784		$	(617,459	)	$	1,370,489		$	157,940		$	42,036		$	—

Cumulative GAP	$	(467,774	)	$	(1,524,790	)	$	(953,006	)	$	(1,570,465	)	$	(199,976	)	$	(42,036	)	$	—		$	—

Cumulative interest rate gap to earning assets		-5.57	%		-18.17	%		-11.35	%		-18.71	%		-2.38	%		-0.50	%

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

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

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

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

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

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

As of June 30, 2008, 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 $13.0 million if market rates were to increase 100 basis points immediately parallel across the yield curve, less than the $35.0 million limit. For purposes of the Market Value Shock Report it was determined that the Corporation had a potential loss of approximately $58.1 million if market rates were to increase 100 basis points immediately parallel across the yield curve, less than the $140.0 million limit. The tables below present a summary of the Corporation’s net interest margin and market value shock reports, considering several scenarios as of June 30, 2008.


	NET INTEREST MARGIN SHOCK REPORT
	June 30, 2008
(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	$	339.2	$	323.8	$	318.6	$	313.1	$	307.2		$	300.1		$	285.3
Sensitivity	$	26.1	$	10.7	$	5.5			$	(5.9	)	$	(13.0	)	$	(27.8	)


	MARKET VALUE SHOCK REPORT
	June 30, 2008
(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	$	730.3	$	706.5	$	677.9	$	640.9	$	610.4		$	582.8		$	523.9
Sensitivity	$	89.4	$	65.6	$	37.0			$	(30.5	)	$	(58.1	)	$	(117.0	)

As of June 30, 2008 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 June 30, 2008, the Corporation had $1.5 billion in unsecured lines of credit ($727.7 million available) and $4.6 billion in collateralized lines of credit with banks and financial entities ($2.9 billion available). All securities in portfolio are highly rated and very liquid enabling the Corporation to treat them as a secondary source of liquidity.

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

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

On March 25, 2008, Santander BanCorp (the “Corporation”) and Santander Financial Services, Inc., a wholly owned subsidiary of the Corporation (“Santander Financial”), entered into a fully-collateralized Loan Agreement (the “Loan”) with Banco Santander Puerto Rico (the “Bank”). The proceeds of the Loan were used to refinance the outstanding indebtedness incurred under the previously announced bridge facility agreement among the Corporation, Santander Financial and National Australia Bank Limited, and for general corporate purposes. Under the Loan, the Corporation and Santander Financial had available $186 million and $454 million, respectively, all of which was drawn on March 25, 2008. The Loan is fully-collateralized by a certificate of deposit in the amount of $640 million opened by Banco Santander, S.A., the parent of the Corporation, and provided as security for the Loan 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 a fee of 0.10% net of taxes, deduction and withholdings, on an annualized basis, to Banco Santander, S.A. in connection with its agreement to collateralize the loan with the deposit.

The amounts drawn under the Loan bear interest at an annual rate equal to the applicable LIBOR rate plus 0.465% per annum. Interest under the Loan is payable at maturity. The Corporation and Santander Financial did not pay any facility fee or commission to the Bank in connection with the Loan. The entire principal balance of the Loan is due and payable on September 25, 2008. Upon the occurrence and during the continuance of an Event of Default (as defined in the Loan) under the Loan, the Bank shall have the right to declare the outstanding balance of the Loan, together with accrued interest and any other amount owing to the Bank, due and payable on demand or immediately due for payment. In addition, the Corporation and Santander Financial will be required to pay interest on any overdue amounts at a default rate that is equal to the then applicable interest rate payable on the Loan plus 2% per annum. The Corporation’s and Santander Financial’s obligations to pay interest and principal under the Loan are several and not joint. However, the Corporation and Santander Financial are jointly and severally responsible for all other amounts payable under the Loan.

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 June 30, 2008, the Corporation had a liquidity ratio of 7.94%. At June 30, 2008, the Corporation had total available liquid assets of $1.2 billion. 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, the Chief Operating 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, the Chief Operating 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.

The adoption of Financial Accounting Standard’s Board Statements No. 157 “Fair Value Measurements” (“SFAS 157”) and No. 159 “Fair Value Option” (“SFAS 159”) effective January 1, 2008 is a significant event to the Corporation and could represent a material change in financial reporting. Changes to certain processes, valuation models and methodologies 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 adoption of SFAS 157 and SFAS 159 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 2008 annual management report on internal control over financial reporting.

Changes in Internal Controls

With the exception of the adoption of SFAS 157 and 159, there have been no changes in the Corporation’s internal controls over financial reporting during the three-month and six-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 therefrom 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, 2007.

ITEM 1A. RISK FACTORS

There have 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, 2007.

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

None

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

None

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

Santander BanCorp’s Annual Meeting of Stockholders was held on April 24, 2008. A quorum was obtained with 43,827,760 shares represented in person or by proxy, which represents 93.97% of all votes eligible to be cast at the meeting. The following results were obtained for the proposals voted at the meeting:

• The following three directors were elected for a three-year term, ending in April 2011:


	For		Withheld
Jose R. González		43,251,734		576,026
Carlos M. García		42,820,747		1,007,013
Roberto Valentín		43,691,830		135,930

• A resolution to ratify the appointment of Deloitte & Touche LLP as the Corporation’s independent accountants for fiscal year 2008 was

approved with the following results:


For			43,981,946
Against			15,346
Abstained			468

ITEM 5 — OTHER INFORMATION

None

ITEM 6 — EXHIBITS


Exhibit No.	Description	Reference
(2.0)	Agreement and Plan of Merger-Banco Santander Puerto Rico and Santander BanCorp	Exhibit 3.3 8-A12B

(2.1)	Stock Purchase Agreement Santander BanCorp and Banco Santander Central Hispano, S.A.	Exhibit 2.1 10K-12/31/00

(2.2)	Stock Purchase Agreement dated as of November 28, 2003 by and among Santander BanCorp, Administración de Bancos Latinoamericanos Santander, S.L. and Santander Securities Corporation	Exhibit 2.2 10Q-06/30/04

(2.3)	Settlement Agreement between Santander BanCorp and Administración de Bancos Latinoamericanos Santander, S.L.	Exhibit 2.3 10Q-06/30/04

(3.1)	Articles of Incorporation	Exhibit 3.1 8-A12B

(3.2)	Bylaws	Exhibit 3.1 8-A12B

(4.1)	Authoring and Enabling Resolutions 7% Noncumulative Perpetual Monthly Income Preferred Stock, Series A	Exhibit 4.1 10Q-06/30/04

(4.2)	Offering Circular for $30,000,000 Banco Santander PR Stock Market Growth Notes Linked to the S&P 500 Index	Exhibit 4.6 10Q-03/31/04

(4.3)	Private Placement Memorandum Santander BanCorp $75,000,000 6.30% Subordinated Notes	Exhibit 4.3 10KA-12/31/04

(4.4)	Private Placement Memorandum Santander BanCorp $50,000,000 6.10% Subordinated Notes	Exhibit 4.4 10K-12/31/05

(4.5)	Indenture dated as of February 28, 2006, between the Santander BanCorp and Banco Popular de Puerto Rico	Exhibit 4.6 10Q-03/31/06

(4.6)	First Supplemental Indenture, dated as of February 28, 2006, between Santander Bancorp and Banco Popular de Puerto Rico	Exhibit 4.7 10Q-03/31/06

(4.7)	Amended and Restated Declaration of Trust and Trust Agreement, dated as of February 28, 2006, among Santander BanCorp, Banco Popular de Puerto Rico Wilmington Trust Company, the Administrative Trustees named therein and the holders from time to time, of the undivided beneficial ownership interest in The Assets of the Trust.	Exhibit 4.8 10-Q-03/31/06

(4.8)	Guarantee Agreement, dated as of February 28, 2006 between Santander BanCorp and Banco Popular de Puerto Rico	Exhibit 4.9 10-Q-03/31/06

(4.9)	Global Capital Securities Certificate	Exhibit 4.10 10Q-03/31/06

(4.10)	Certificate of Junior Subordinated Debenture	Exhibit 4.11 10Q-03/31/06

(10.1)	Contract for Systems Maintenance between ALTEC & Banco Santander Puerto Rico	Exhibit 10A 10K-12/31/02

(10.2)	Employment Contract-José Ramón González	Exhibit 10.1 8K-01/04/07

(10.3)	Employment Contract-Carlos M. García	Exhibit 10.2 8K-01/04/07

(10.4)	Deferred Compensation Contract-María Calero	Exhibit 10C 10K-12/31/02

(10.5)	Information Processing Services Agreement between America Latina Tecnología de Mexico, SA and Banco Santander Puerto Rico, Santander International Bank of Puerto Rico and Santander Investment International Bank, Inc.	Exhibit 10A 10Q-06/30/03

(10.6)	Employment Contract-Roberto Córdova	Exhibit 10.3 10Q-03/31/05

(10.7)	Employment Contract-Bartolomé Vélez	Exhibit 10.7 10K-12/31/06

(10.8)	Employment Contract-Lillian Díaz	Exhibit 10.5 10Q-03/31/05

(10.9)	Technology Assignment Agreement between CREFISA, Inc. and Banco Santander Puerto Rico	Exhibit 10.12 10KA-12/31/04

(10.10)	Altair System License Agreement between CREFISA, Inc. and Banco Santander Puerto Rico	Exhibit 10.13 10KA-12/31/04

(10.11)	2005 Employee Stock Option Plan	Exhibit B Def14-03/26/05

(10.12)	Asset Purchase Agreement by and among Wells Fargo & Company, Island Finance Puerto Rico, Inc., Island Finance Sales Finance Corporation and Santander BanCorp and Santander Financial Services, Inc. for the purpose and sale of certain assets of Island Finance Puerto Rico, Inc. and Island Finance Sales Corporation dated as of January 22, 2006.	Exhibit 10.1 8K-01/25/06

EXHIBIT INDEX — Con’t


Exhibit No.	Exhibit Description	Reference
(10.13)	Employment Contract-Tomás Torres	Exhibit 10.16 10Q-09/30/06

(10.14)	Employment Contract-Eric Delgado	Exhibit 10.17 10Q-09/30/06

(10.15)	Agreement of Benefits Coverage Agreed with Officers of Grupo Santander	Exhibit 10.18 10K-12/31/06

(10.16)	Employment Contract-Justo Muñoz	Exhibit 10.18 10Q-06/30/07

(10.17)	Sales and Leaseback Agreement with Corporación Hato Rey Uno and Corporación Hato Rey Dos for the Bank’s two principal properties and certain parking spaces	Exhibit 10.18 10K-12/31/07

(10.18)	Option Agreement among Crefisa, Inc., D&D Investment Group, S.E., and Quisqueya 12, Inc.	Exhibit 10.19 10K-12/31/07

(10.19)	Merge Agreement among Banco Santander Puerto Rico and Santander Mortgage Corporation	Exhibit 10.20 10K-12/31/07

(10.20)	Regulations for the first and second cycle of The Share Plan (“Long Term Incentive Plan”) among Santander BanCorp and Santander Spain	Exhibit 10.21 10K-12/31/07

(10.21)	Loan Agreement Agreement between Santander BanCorp, Santander Financial Services, Inc. and Banco Santander Puerto Rico	Exhibit 10.1 8K-03/31/08

(12)	Computation of Ratio of Earnings to Fixed Charges	Exhibit 12

(14)	Code of Ethics	Exhibit 14 10-KA-12/31/04

(22)	Registrant’s Proxy Statement for the April 30, 2007 Annual Meeting of Stockholders	Def14A-03/24/08

(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 Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Exhibit 31.2

(31.3)	Certification from the Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Exhibit 31.3

(32.1)	Certification from the Chief Executive Officer, Chief Operating Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Exhibit 32.1

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: August 8, 2008	By:	/s/ José Ramón González
	President and Chief Executive Officer


Dated: August 8, 2008	By:	/s/ Carlos M. García
	Senior Executive Vice President and
	Chief Operating Officer


Dated: August 8, 2008	By:	/s/ María Calero
	Executive Vice President and
	Chief Accounting Officer

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