UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

FORM 10-K

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

Commission File: 001-15849

SANTANDER BANCORP

(Exact name of Corporation as specified in its charter)

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

Title of each class		Name of each exchange on which registered
Common Stock, $2.50 par value		New York Stock Exchange

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

Yes þ No o

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

Yes o No þ

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

Yes þ No o

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

 

 

SANTANDER BANCORP

CONTENTS
PART I							3
		Item 1.		Business			3
		Item 1A.		Risk Factors			20
		Item 1B.		Unresolved Staff Comments			23
		Item 2.		Properties			23
		Item 3.		Legal Proceedings			23
		Item 4.		Submission of Matters to a Vote of Security Holders			23
PART II							23
		Item 5.		Market for Registrant’s Common Equity, Related Stockholders’ Matters and Issuer Purchases of Equity Securities			23
		Item 6.		Selected Financial Data			25
		Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
		Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			62
		Item 8.		Financial Statements and Supplementary Data			84
		Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			145
		Item 9A.		Controls and Procedures			145
		Item 9B.		Other Information			145
PART III							146
		Item 10.		Directors, Executive Officers and Corporate Governance			146
		Item 11.		Executive Compensation			146
		Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			146
		Item 13.		Certain Relationships and Related Transactions, and Director Independence			146
		Item 14.		Principal Accountant Fees and Services			146
PART IV							147
		Item 15.		Exhibits, Financial Statement Schedules			147
SIGNATURES							148
EXHIBIT INDEX							149
EX-12
EX-21
EX-31.1
EX-31.2
EX-32.1

Santander BanCorp

PART I

ITEM 1. BUSINESS

General

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

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

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

Banco Santander Puerto Rico

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

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

Santander International Bank of Puerto Rico, Inc.

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

Santander Securities Corporation

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

Santander Asset Management Corporation

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

Santander Insurance Agency, Inc.

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

Santander Financial Services, Inc.

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

Island Insurance Corporation

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

Santander PR Capital Trust I

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

Operations

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

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

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

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

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

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

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

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

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

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

Forward Looking Statements

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

The 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.

REGULATION AND SUPERVISION

Overview

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

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

Holding Company Operations — Federal Regulation

General

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

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

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

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

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

In addition, the GLB Act specifically gives the Federal Reserve the authority, by regulation or order, to expand the list of “financial” or “incidental” activities, but requires consultation with the U.S. Treasury, and gives the Federal Reserve authority to allow a financial holding company to engage in any activity that is “complementary” to a financial activity and does not “pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.”

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

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

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

USA Patriot Act

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

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

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

Privacy Policies

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

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

Dividend Restrictions

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

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

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

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

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

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

Federal Home Loan Bank System

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

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

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

Limitations on Transactions with Affiliates

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

Loans to Insiders

Sections 22(h) and (g) of the Federal Reserve Act and its implementing regulation, Regulation O, restrict loans by a bank to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater-than-10% stockholder of a bank and certain of their related interests, or insiders, and insiders of affiliates, may not exceed, together with all other outstanding loans to such person and related interests, the bank’s loans-to-one-borrower limit, generally equal to 15% of the institution’s unimpaired capital and surplus. Section 22(h) also requires that loans to insiders and to insiders of affiliates be made on terms substantially the same as offered in comparable transactions to other persons, unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the bank and (ii) does not give preference to insiders over other employees of the bank. Section 22(h) also requires prior board of directors approval for certain loans. In addition, the aggregate amount of extensions of credit by a depository institution to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.

Capital Requirements

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

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

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

The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions, substantially above the minimum supervisory levels, without significant reliance on intangible assets.

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

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

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

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

Sarbanes-Oxley Act

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

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

Change of Control

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

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

Banking Operations

General

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

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

FDIC Capital Requirements

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

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

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

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

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

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

FDIC Deposit Insurance Assessments

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

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

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

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

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

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

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

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

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

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

The FDIC may terminate its insurance of deposits if it finds after a hearing that the depository institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance.

Community Reinvestment Act

The Bank has a responsibility under the CRA and related regulations, to help meet the credit needs of its entire community, including low-and moderate-income neighborhoods consistent with safe and sound banking practice. The CRA does not establish specific lending requirements or programs for such banks nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires each federal banking agency, in connection with its examination of an insured depository institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community. An institution’s failure to comply with the provisions of the CRA could lead to potential penalties, including regulatory denials of applications to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or purchase other financial institutions. The CRA also requires that all institutions make public disclosure of their CRA ratings. The Bank received a rating of “outstanding” from the FDIC on its last CRA examination report dated August 2008.

Office of Foreign Assets Control Regulation

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

Brokered Deposits

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

Federal Limitations on Activities and Investments

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

Interstate Branching

Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) amended the FDIA and certain other statutes to permit state and national banks with different home states to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank had passed legislation prior to May 31, 1997 expressly prohibiting interstate mergers. States are also allowed to permit de novo interstate branching. Under the Riegle-Neal Act amendments, once a state or national bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching (if permitted under state laws) may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opted out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo.

For purposes of the Riegle-Neal Act’s amendments to the FDIA, the Bank is treated as a state bank and is subject to the same restriction on interstate branching as other state banks. However, for purposes of the IBA, the Bank is considered to be a foreign bank and may branch interstate by merger or de novo to the same extent as a domestic bank in the Bank’s home state.

Banking Operations-Puerto Rico Regulation

General

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

Section 12 of the Banking Law requires the prior approval of the Commissioner with respect to a transfer of capital stock of a bank that results in a change of control of the bank. Under Section 12, a change of control is presumed to occur if a person or a group of persons acting in concert, directly or indirectly, acquire more than 5% of the outstanding voting capital stock of the bank. The Commissioner has interpreted the restrictions of Section 12 as applying to acquisitions of voting securities of entities controlling a bank, such as a bank holding company. Under the Banking Law, the determination of the Commissioner whether to approve a change of control filing is final and non-appealable.

Section 16 of the Banking Law requires every bank to maintain a legal reserve which, except as otherwise provided by the Commissioner, may not be less than 20% of its demand liabilities, excluding government deposits (federal, state and municipal) which are secured by actual collateral. The reserve is required to be composed of any of the following securities or a combination thereof: (1) legal tender of the United States; (2) checks on banks or trust companies located in Puerto Rico, to be presented for collection on the day after the day they are received; (3) money deposited in other banks or depository institutions, subject to immediate collection; (4) federal funds sold to any Federal Reserve Bank and securities purchased under agreement to resell executed by the bank to the extent such funds are subject to be repaid to the bank on or before the close of the next business day; and (5) any other asset that the Commissioner determines from time to time.

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

which are wholly secured by bonds, securities and other evidences of indebtedness of the Governments of the United States or of the Commonwealth of Puerto Rico, or by bonds, not in default, of authorities, instrumentalities or dependencies of the Commonwealth of Puerto Rico or its municipalities.

Section 17 of the Banking Law also prohibits banks from making loans secured by their own stock, and from purchasing their own stock in connection therewith, unless such purchase is necessary to prevent losses because of a debt previously contracted in good faith. The stock so purchased by a bank must be sold by it in a public or private sale within one year from the date of purchase.

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

Section 27 of the Banking Law also provides that when the expenditures of a bank are greater than receipts, the excess of the expenditures over receipts must be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If the reserve fund is not sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the capital account and no dividends may be declared until capital has been restored to its original amount and the reserve fund to 20% of the original capital of the bank.

Section 14 of the Banking Law authorizes the Bank to conduct certain financial and related activities directly or through subsidiaries, including finance leasing of personal property, operating small loans companies and mortgage loans activities. The Bank currently has one wholly-owned subsidiary, Santander International Bank, an international banking entity operating under the International Banking Center Regulatory Act of Puerto Rico (the “IBC Act”).

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

IBC Act

Santander International Bank, an international banking entity (“IBE”), is subject to supervision and regulation by the Commissioner under the IBC Act. Under the IBC Act, no sale, encumbrance, assignment, merger, exchange or transfer of shares, interest or participation in the capital of an IBE may be initiated without the prior approval of the Commissioner, if by such transaction a person or persons acting in concert would acquire, directly or indirectly, control of 10% or more of any class of stock, interest or participation in the capital of the IBE. Such authorization must be requested at least 30 days prior to the transaction. The IBC Act and the regulations issued thereunder by the Commissioner limit the business activities that may be carried out by an IBE. The activities of Santander International Bank are limited to dealing with persons and assets located outside Puerto Rico. The IBC Act further provides that every IBE must have not less than $300,000 of unencumbered assets or acceptable financial securities in Puerto Rico.

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

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

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

Mortgage Banking Operations

The mortgage banking business conducted by the Bank is subject to the rules and regulations of FHA, VA, FNMA, FHLMC, HUD and GNMA with respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals, required credit reports on prospective borrowers and fix maximum loan amounts and, with respect to VA loans, fix maximum interest rates. Moreover, mortgages lenders are required annually to submit to FHA, VA, FNMA, FHLMC, GNMA and HUD, audited financial statements, and each regulatory entity has its own financial requirements. Our mortgage banking business is also subject to supervision and examination by FHA, VA, FNMA, FHLMC, GNMA and HUD at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the regulations promulgated thereunder.

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

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

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

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

Broker-Dealer Operations

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

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

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

Insurance Operations

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

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

Recent Puerto Rico Legislation

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

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

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

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

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

Employees

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

Availability at our website

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

ITEM 1A. RISK FACTORS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ITEM 1B.		UNRESOLVED STAFF COMMENTS

     None

ITEM 2.		PROPERTIES

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

ITEM 3.		LEGAL PROCEEDINGS

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

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

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

None

PART II

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

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

										Cash				Book
										Dividends				Value
Period		High				Low				per Share				per Share
2009
1st Quarter		$	13.49			$	5.74			$	—			$	11.70
2nd Quarter			8.13				6.18				—				11.99
3rd Quarter			10.80				5.18				—				12.34
4th Quarter			13.12				9.58				—				12.78
2008
1st Quarter		$	14.56			$	7.06			$	0.10			$	12.15
2nd Quarter			15.00				9.23				0.10				12.03
3rd Quarter			15.50				9.63				—				11.91
4th Quarter			14.50				6.63				—				11.83

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

Dividend Policy and Dividends Paid

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

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

Stock Performance Graph

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

ITEM 6.		SELECTED FINANCIAL DATA

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

Santander BanCorp and Subsidiaries
Selected Financial Data

		Year ended December 31,
		2009				2008				2007				2006				2005
		(Dollars in thousands, except per data share)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Interest income		$	482,158			$	600,771			$	674,210			$	618,320			$	439,605
Interest expense			130,431				244,449				362,531				327,714				212,583
Net interest income			351,727				356,322				311,679				290,606				227,022
Security gains			9,251				5,154				1,265				—				17,842
Loss on extinghuishment of debt			(9,600	)			—				—				—				(5,959	)
Broker-dealer, asset management and insurance fees			62,688				74,808				68,265				56,973				53,016
Other income			60,107				67,873				78,590				61,496				60,459
Operating expenses			269,067				324,627				344,016				277,783				221,386
Provision for loan losses			152,496				175,523				147,824				65,583				20,400
Income tax (benefit) provision			11,335				(6,524	)			4,204				22,540				30,788
Net income (loss)		$	41,275			$	10,531			$	(36,245	)		$	43,169			$	79,806
PER COMMON SHARE DATA
Net income (loss)		$	0.88			$	0.23			$	(0.78	)		$	0.93			$	1.71
Book value		$	12.78			$	11.83			$	11.50			$	12.42			$	12.19
Outstanding shares:
Average			46,639,104				46,639,104				46,639,104				46,639,104				46,639,104
End of period			46,639,104				46,639,104				46,639,104				46,639,104				46,639,104
Cash Dividend per Share		$	—			$	0.20			$	0.64			$	0.64			$	0.64
AVERAGE BALANCES
Loans held for sale and loans, net of allowance for loan losses		$	5,529,239			$	6,584,842			$	6,900,764			$	6,439,205			$	5,871,433
Allowance for loan losses			191,738				175,100				125,897				87,465				67,956
Earning assets			6,375,311				8,014,368				8,530,213				8,262,748				7,882,180
Total assets			7,112,754				8,740,670				9,199,712				8,820,630				8,285,992
Deposits			4,645,829				5,558,667				5,221,999				5,054,687				5,082,520
Borrowings			1,565,983				2,314,535				3,093,947				2,876,720				2,415,172
Common equity			569,700				564,238				573,536				563,593				576,226
PERIOD END BALANCES
Loans held for sale and loans, net of allowance for loan losses		$	5,273,170			$	5,967,958			$	6,911,380			$	6,836,693			$	5,954,890
Allowance for loan losses			197,303				191,889				166,952				106,863				66,842
Earning assets			6,124,895				7,186,973				8,519,773				8,598,703				7,933,139
Total assets			6,766,436				7,897,576				9,160,213				9,188,168				8,271,948
Deposits			4,395,560				5,014,902				5,160,703				5,313,974				5,224,650
Borrowings			1,506,754				1,939,384				3,138,730				2,954,515				2,212,245
Common equity			595,897				551,636				536,536				579,220				568,527

Continued on the following page

Continued from the previous page

		Year ended December 31,
		2009				2008				2007				2006				2005
		(Dollars in thousands)
SELECTED RATIOS
Performance:
Net interest margin (1)			5.56	%			4.50	%			3.74	%			3.63	%			3.02	%
Efficiency ratio (2)			56.77	%			60.39	%			66.32	%			66.82	%			62.97	%
Return on average total assets			0.58	%			0.12	%			(0.39	)%			0.49	%			0.96	%
Return on average common equity			7.25	%			1.87	%			(6.32	)%			7.66	%			13.85	%
Dividend payout			0.00	%			86.96	%			(82.05	)%			68.82	%			37.43	%
Average net loans/average total deposits			119.02	%			118.46	%			132.15	%			127.39	%			115.52	%
Average earning assets/average total assets			89.63	%			91.69	%			92.76	%			93.68	%			95.13	%
Average stockholders’ equity/average assets			8.01	%			6.46	%			6.24	%			6.39	%			6.95	%
Fee income to average assets			1.44	%			1.37	%			1.26	%			1.20	%			1.15	%
Capital:
Tier I capital to risk-adjusted assets			10.60	%			8.41	%			7.42	%			7.87	%			9.09	%
Total capital to risk-adjusted assets			15.55	%			12.83	%			10.55	%			10.93	%			12.30	%
Leverage Ratio			7.98	%			6.10	%			5.38	%			5.81	%			6.50	%
Asset quality:
Non-performing loans to total loans			5.30	%			3.45	%			4.16	%			1.54	%			1.22	%
Annualized net charge-offs to average loans			2.57	%			2.23	%			1.25	%			0.93	%			0.38	%
Allowance for loan losses to period-end loans			3.61	%			3.12	%			2.36	%			1.54	%			1.11	%
Allowance for loan losses to non-performing loans			68.07	%			90.21	%			56.70	%			100.01	%			90.72	%
Allowance for loan losses to non-performing loans plus accruing loans past-due 90 days or more			65.54	%			84.84	%			55.36	%			83.62	%			87.17	%
Non-performing assets to total assets			4.79	%			2.97	%			3.39	%			1.23	%			0.92	%
Recoveries to charge-offs			3.25	%			2.52	%			3.97	%			9.30	%			18.28	%
EARNINGS TO FIXED CHARGES:
Excluding interest on deposits			1.94	x			1.04	x			0.82	x			1.42	x			2.19	x
Including interest on deposits			1.39	x			1.02	x			0.91	x			1.20	x			1.51	x
OTHER DATA AT END OF PERIOD
Customer financial assets under management		$	13,501,000			$	13,413,000			$	13,263,000			$	14,154,000			$	12,960,000
Full services branches			54				57				61				61				64
Consumer retail branches			60				64				68				70				—
Total branches			114				121				129				131				64
ATMs			145				169				140				144				149

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

Description of the Business

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

•		Commercial Banking — Banco Santander Puerto Rico
•		Mortgage Banking — Banco Santander Puerto Rico (Santander Mortgage Corporation during 2007 and prior, which was merged into the Bank at January 1, 2008)
•		Securities Brokerage and Investment Banking — Santander Securities Corporation
•		Asset Management — Santander Asset Management Corporation
•		Consumer Finance — Santander Financial Services, Inc.
•		Insurance — Santander Insurance Agency, Inc. and Island Insurance Corporation
•		International Banking — Santander International Bank of Puerto Rico, Inc.

Basis of Presentation

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

Forward-Looking Statements

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

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

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

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

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

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

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

Overview of Financial Results

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

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

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

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

	•		The net interest margin, on a tax equivalent basis, was 5.56%, a 106 basis points of improvement over 4.50% for the year ended December 31, 2008;
	•		The provision for loan losses decreased $23.0 million or 13.1% for the year ended December 31, 2009 compared to the same period in 2008. The provision for loan losses represented 103.7% of the net charge-offs for the year ended December 31, 2009 versus 116.6% for the year ended December 31, 2008;
	•		The allowance for loan losses of $197.3 million as of December 31, 2009 represented 3.61% of total loans, 68.07% of non-performing loans and 230.74% of non-performing loans excluding loans secured by real estate. As of December 31, 2008, the allowance for loan losses was $191.9 million, represented 3.12% of total loans, 90.21% of non-performing loans and 225.06% of non-performing loans excluding loans secured by real estate;
	•		Non-interest income decreased $25.4 million or 17.2% for the year ended December 31, 2009 as compared to the same period in 2008. Non-interest income was impacted principally by:

	(i)		a gain of $9.3 million on investment securities available for sale partially offset by a loss of $9.6 million on the early termination of a repurchase agreement, compared with a gain of $5.2 million for the same period in the prior year;
	(ii)		a decrease in broker-dealer, asset management and insurance fees of $12.1 million;

	(iii)		a gain of $3.3 million on the sale of a portion of the Corporation’s investment in Visa, Inc. during the third quarter of 2009 compared with a gain of $8.6 million during the first quarter 2008 in connection with Visa’s initial public offering;
	(iv)		a loss of $7.3 million on derivatives and other financial instruments compared with a gain of $3.3 million for the same period in prior year,
	(v)		an unfavorable valuation adjustment of $7.4 million for loans held for sale recorded during 2008.

•

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

	(i)		$24.8 million decrease in salaries and other employee benefits partially offset by increases of $4.5 million in incentive stock plan expense and a decrease of $2.3 million in expense from loan origination cost being deferred;
	(ii)		a provision for claim receivable of $25.1 million from Lehman Brother Inc (LBI) recognized during the third quarter of 2008;
	(iii)		decreases of $7.5 million in professional fees, $2.8 million in business promotion, $2.4 million in occupancy cost, $2.1 in insurance expense and $1.2 million in EDP and technical services and amortization
	(iv)		partially offset by $6.6 million increase in FDIC assessment due to the assessment systems implemented under the Federal Deposit Insurance Reform Act of 2005 including the emergency special assessment recognized on September 30, 2009.

•

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

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

Current Accounting Developments

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

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

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

Commercial, construction loans and certain mortgage loans exceeding a predetermined monetary threshold are identified for evaluation of impairment on an individual basis pursuant FASB ASC Topic 310. The Corporation considers a loan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	–		Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Corporation has the ability to access.
	–		Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
	–		Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Corporation’s own assumptions about the assumptions that market participants would use.

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

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

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

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

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

Results of Operations

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

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

		2009				2008				2007
		(Dollars in thousands)
Components of net income (loss):
Net interest income		$	351,727			$	356,322			$	311,679
Provision for loan losses			(152,496	)			(175,523	)			(147,824	)
Other income			122,446				147,835				148,120
Other operating expenses			(269,067	)			(324,627	)			(344,016	)
Provision (benefit) for income tax			11,335				(6,524	)			4,204
Net income (loss)		$	41,275			$	10,531			$	(36,245	)
Other selected financial information:
EPS		$	0.88			$	0.23			$	(0.78	)
ROA			0.58	%			0.12	%			(0.39	)%
ROE			7.25	%			1.87	%			(6.32	)%
Net interest margin, on a tax equivalent basis			5.56	%			4.50	%			3.74	%
Efficiency Ratio (*)			56.77	%			60.39	%			66.32	%

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

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

Net Interest Income

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

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

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

		2009				2008				2007
		(Dollars in thousands)
Interest income — tax equivalent basis		$	484,949			$	605,445			$	681,755
Interest expense			(130,431	)			(244,449	)			(362,531	)
Net interest income — tax equivalent basis		$	354,518			$	360,996			$	319,224
Net interest margin — tax equivalent basis (1)			5.56	%			4.50	%			3.74	%

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

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

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

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

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

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

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

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

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

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

		Year ended December 31,
		2009												2008												2007
		Average								Average				Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
														(Dollars in thousands)
Assets
Interest-earning assets:
Interest bearing deposits		$	240,496			$	541				0.22	%		$	81,851			$	1,063				1.30	%		$	85,278			$	3,343				3.92	%
Federal funds sold and securities purchased under agreements to resell			14,053				67				0.48	%			202,658				4,333				2.14	%			68,477				3,456				5.05	%
Total interest-bearing deposits			254,549				608				0.24	%			284,509				5,396				1.90	%			153,755				6,799				4.42	%
U.S.Treasury securities			133,740				1,255				0.94	%			42,604				1,028				2.41	%			91,384				4,090				4.48	%
Obligations of other U.S. government agencies and corporations			45,343				1,517				3.35	%			417,457				14,122				3.38	%			635,219				29,561				4.65	%
Corporate Bonds			89,543				1,619				1.81	%
Obligations of the government of Puerto Rico and political subdivisions			147,753				9,565				6.47	%			100,610				5,633				5.60	%			95,781				5,113				5.34	%
Collateralized mortgage obligations and mortgage backed securities			118,946				6,050				5.09	%			519,311				24,752				4.77	%			588,719				28,422				4.83	%
Other			56,198				2,750				4.89	%			65,035				3,820				5.87	%			64,591				4,076				6.31	%
Total investment securities			591,523				22,756				3.85	%			1,145,017				49,355				4.31	%			1,475,694				71,262				4.83	%
Loans :
Commercial			2,017,909				92,424				4.58	%			2,431,527				137,263				5.65	%			2,505,825				172,671				6.89	%
Construction			100,819				2,942				2.92	%			379,857				16,363				4.31	%			481,174				38,479				8.00	%
Consumer			503,112				79,624				15.83	%			613,499				86,960				14.17	%			626,580				79,531				12.69	%
Consumer Finance			559,823				133,638				23.87	%			596,129				141,701				23.77	%			608,366				139,075				22.86	%
Mortgage			2,492,276				149,841				6.01	%			2,662,726				163,360				6.14	%			2,692,448				166,192				6.17	%
Lease financing			47,038				3,116				6.62	%			76,204				5,047				6.62	%			112,268				7,746				6.90	%
Gross loans			5,720,977				461,585				8.07	%			6,759,942				550,694				8.15	%			7,026,661				603,694				8.59	%
Allowance for loan losses			(191,738	)											(175,100	)											(125,897	)
Loans, net			5,529,239				461,585				8.35	%			6,584,842				550,694				8.36	%			6,900,764				603,694				8.75	%
Total interest-earning assets/ interest income (tax-equivalent basis)			6,375,311				484,949				7.61	%			8,014,368				605,445				7.55	%			8,530,213				681,755				7.99	%
Total non-interest-earning assets			737,443												726,302												669,499
Total assets		$	7,112,754											$	8,740,670											$	9,199,712
Liabilities and stockholders’ equity
Interest-bearing liabilities:
Savings and NOW accounts		$	1,817,911			$	19,016				1.05	%		$	1,691,094			$	34,944				2.07	%		$	1,715,631			$	51,785				3.02	%
Other time deposits			1,589,018				42,932				2.70	%			1,749,942				56,905				3.25	%			1,419,185				65,810				4.64	%
Brokered deposits			547,419				17,525				3.20	%			1,385,318				60,603				4.37	%			1,401,310				73,820				5.27	%
Total Interest-bearing deposits			3,954,348				79,473				2.01	%			4,826,354				152,452				3.16	%			4,536,126				191,415				4.22	%
Borrowings			1,240,099				35,600				2.87	%			2,047,442				78,049				3.81	%			2,805,003				153,951				5.49	%
Term Notes			20,279				636				3.14	%			19,674				631				3.21	%			38,223				1,278				3.34	%
Subordinated Notes			305,605				14,722				4.82	%			247,419				13,317				5.38	%			250,721				15,887				6.34	%
Total interest-bearing liabilities interest expense			5,520,331				130,431				2.36	%			7,140,889				244,449				3.42	%			7,630,073				362,531				4.75	%
Total non interest-bearing liabilities			1,022,723												1,035,543												996,103
Total liabilities			6,543,054												8,176,432												8,626,176
Stockholders’ Equity			569,700												564,238												573,536
Total liabilities and stockholders’ equity		$	7,112,754											$	8,740,670											$	9,199,712
Net interest income						$	354,518											$	360,996											$	319,224
Net interest spread											5.24	%											4.13	%											3.24	%
Cost of funding earning assets											2.05	%											3.05	%											4.25	%
Net interest margin (tax equivalent basis)											5.56	%											4.50	%											3.74	%

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

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

		2009 vs. 2008												2008 vs. 2007
		Increase (decrease) due to change in:												Increase (decrease) due to change in:
		Volume				Rate				Total				Volume				Rate				Total
										(Dollars in thousands)
Interest Income — tax equivalent basis:
Federal funds sold and securities purchased under agreements to resell		$	(2,325	)		$	(1,941	)		$	(4,266	)		$	3,756			$	(2,879	)		$	877
Time deposits with other banks			866				(1,388	)			(522	)			(129	)			(2,151	)			(2,280	)
Investment securities			(21,760	)			(4,839	)			(26,599	)			(14,810	)			(7,097	)			(21,907	)
Loans, net			(88,124	)			(985	)			(89,109	)			(27,016	)			(25,984	)			(53,000	)
Total interest income			(111,343	)			(9,153	)			(120,496	)			(38,199	)			(38,111	)			(76,310	)
Interest Expense:
Savings and NOW accounts			2,450				(18,378	)			(15,928	)			(730	)			(16,111	)			(16,841	)
Other time deposits			(32,251	)			(24,800	)			(57,051	)			14,509				(37,876	)			(23,367	)
Borrowings			(26,103	)			(16,346	)			(42,449	)			(35,377	)			(39,251	)			(74,628	)
Long-term borrowings			2,863				(1,453	)			1,410				(1,239	)			(2,007	)			(3,246	)
Total interest expense			(53,041	)			(60,977	)			(114,018	)			(22,837	)			(95,245	)			(118,082	)
Net interest income (expense) — tax equivalent basis		$	(58,302	)		$	51,824			$	(6,478	)		$	(15,362	)		$	57,134			$	41,772

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

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

Provision for Loan Losses

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

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

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

Other Income

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

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

		Year ended December 31,
		2009				2008				2007
		(Dollars In thousands)
Bank service fees on deposit accounts		$	12,403			$	12,975			$	13,603
Other service fees:
Credit card fees			9,412				8,788				10,872
Mortgage-servicing fees			4,087				3,555				3,010
Trust fees			1,090				1,561				1,914
Confirming advances			1,882				6,200				4,169
Other fees			10,963				11,606				13,633
Broker-dealer, asset management and insurance fees			62,688				74,808				68,265
Gain on sale of securities, net			9,251				5,154				1,265
Gain on sale of loans			5,144				3,253				6,658
Trading gains			3,275				2,608				2,831
Gain (loss) on derivatives and other financial instruments			(7,303	)			3,284				249
Other (loss) gains, net			(1,637	)			5,739				18,644
Other			11,191				8,304				3,007
		$	122,446			$	147,835			$	148,120

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

		Year ended December 31,
		2009				2008				2007
		(Dollars in thousands)
Broker-dealer		$	34,281			$	40,480			$	32,147
Asset management			25,359				26,833				24,362
Total Santander Securities and subsidiary			59,640				67,313				56,509
Insurance			3,048				7,495				11,756
Total		$	62,688			$	74,808			$	68,265

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

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

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

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

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

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

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

Operating Expenses

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

		Year ended December 31,
		2009				2008				2007
		(Dollars in thousands)
Salaries		$	60,241			$	76,012			$	72,927
Pension and other benefits			52,594				57,200				72,815
Expenses deferred as loan origination costs			(5,816	)			(8,076	)			(11,484	)
Total personnel costs			107,019				125,136				134,258
Occupancy costs			25,291				27,665				23,767
Equipment expenses			3,907				4,358				4,427
EDP servicing expense, amortization and technical services			40,645				41,860				39,255
Communications			9,038				10,062				10,923
Business promotion			3,864				6,628				15,621
Goodwill and other intangibles impairment charges			—				—				43,349
Other taxes			13,270				13,101				12,334
Other:
Professional fees			14,609				22,094				14,330
Amortization of intangibles			2,798				3,067				3,828
Printing and supplies			1,435				1,926				2,137
Credit card expenses			6,357				5,041				6,198
Insurance			1,318				3,371				4,029
Examinations & FDIC assessment			12,547				5,952				2,194
Transportation and travel			2,017				2,539				2,981
Repossessed assets provision and expenses			5,031				5,717				7,482
Collections and related legal costs			2,102				1,462				1,239
Provision for claim receivable			—				25,120				—
All other			17,819				19,528				15,664
Total other			66,033				95,817				60,082
Non personnel expenses			162,048				199,491				209,758
Total Other Operating Expenses		$	269,067			$	324,627			$	344,016
Efficiency ratio-on a tax equivalent basis			56.77	%			60.39	%			66.32	%
Personnel cost to average assets			1.50	%			1.43	%			1.46	%
Other operating expenses to average assets			2.28	%			2.28	%			2.28	%
Assets per employee		$	3,836			$	4,467			$	3,494