Santander Bancorp 10-Q 2006 Q1 Quarterly report

UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

FORM 10-Q

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

For the Quarterly Period ended March 31, 2006

Commission File: 001-15849

SANTANDER BANCORP

(Exact name of Corporation as specified in its charter)

Commonwealth of Puerto Rico	66-0573723
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
207 Ponce de Leon Avenue, Hato Rey, Puerto Rico	00917
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:
(787) 759-7070

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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

Large accelerated filero                    Accelerated filerþ                    Non-accelerated filero

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

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

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

Title of each class	Outstanding as of May 5, 2006
Common Stock, $2.50 par value	46,639,104

SANTANDER BANCORP

CONTENTS

	Page No.
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets		1
Condensed Consolidated Statements of Income		2
Condensed Consolidated Statements of Changes in Stockholders’ Equity		3
Condensed Consolidated Statements of Comprehensive Income		4
Condensed Consolidated Statements of Cash Flows		5
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3. Quantitative and Qualitative Disclosures about Market Risk		49
Item 4. Controls and Procedures		53
Part II: Other Information
Item 1. Legal Proceedings		54
Item 1A. Risk Factors		54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		55
Item 3. Defaults upon Senior Securities		55
Item 4. Submission of Matters to a Vote of Security Holders		55
Item 5. Other Information		55
Item 6. Exhibits		56
Signatures		58
EX-4.6 INDENTURE DATED AS OF FEBRUARY 28,2006
EX-4.7 FIRST SUPPLEMENTAL INDENTURE DATED AS OF FEBRUARY 28, 2006
EX-4.8 AMENDED AND RESTATED DECLARATION AND TRUST
EX-4.9 GUARANTEE AGREEMENT DATED AS OF FEBRUARY 28,2006
EX-4.10 GLOBAL CAPITAL SECURITIES CERTIFICATE
EX-4.11 CERTIFICATE OF JUNIOR SUBORDINATED DEBENTURE
EX-10.14 LOAN AGREEMENT BETWEEN SANTANDER BANCORP/SANTUSA HOLDINGS
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-31.3 SECTION 302 CERTIFICATION OF THE CAO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO, CFO AND CAO

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

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

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

PART I — ITEM 1

FINANCIAL STATEMENTS

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

AS OF MARCH 31, 2006 AND DECEMBER 31, 2005
(Dollars in thousands, except share data)

	March 31,			December 31,
	2006			2005
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks	$	133,996		$	136,731
Interest-bearing deposits		816			8,833
Federal funds sold and securities purchased under agreements to resell		86,514			92,429
Total cash and cash equivalents		221,326			237,993
INTEREST-BEARING DEPOSITS		51,366			101,034
TRADING SECURITIES		47,146			37,679
INVESTMENT SECURITIES AVAILABLE FOR SALE, at fair value:
Securities pledged that can be repledged		959,252			995,032
Other investment securities available for sale		609,986			564,649
Total investment securities available for sale		1,569,238			1,559,681
OTHER INVESTMENT SECURITIES, at amortized cost		41,862			41,862
LOANS HELD FOR SALE, net		295,296			213,102
LOANS, net		6,372,971			5,741,788
ACCRUED INTEREST RECEIVABLE		96,988			77,962
PREMISES AND EQUIPMENT, net		56,944			55,867
GOODWILL		152,049			34,791
INTANGIBLE ASSETS		50,424			10,092
OTHER ASSETS		197,919			160,097
	$	9,153,529		$	8,271,948
LIABILITIES AND STOCKHOLDERS’ EQUITY
DEPOSITS:
Non interest-bearing	$	656,870		$	672,225
Interest-bearing		4,698,376			4,552,425
Total deposits		5,355,246			5,224,650
FEDERAL FUNDS PURCHASED AND OTHER BORROWINGS		1,375,000			768,846
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE		921,989			947,767
COMMERCIAL PAPER ISSUED		319,194			334,319
TERM NOTES		40,525			40,215
SUBORDINATED CAPITAL NOTES		242,579			121,098
ACCRUED INTEREST PAYABLE		80,377			65,160
OTHER LIABILITIES		256,049			201,366
Total liabilities		8,590,959			7,703,421
STOCKHOLDERS’ EQUITY:
Series A preferred stock, $25 par value; 10,000,000 shares authorized, none outstanding		—			—
Common stock, $2.50 par value; 200,000,000 shares authorized; 50,650,364 shares issued; 46,639,104 shares outstanding.		126,626			126,626
Capital paid in excess of par value		304,171			304,171
Treasury stock at cost, 4,011,260 shares in March 2006 and December 2005		(67,552	)		(67,552	)
Accumulated other comprehensive loss, net of taxes		(53,440	)		(41,591	)
Retained earnings:
Reserve fund		133,759			133,759
Undivided profits		119,006			113,114
Total stockholders’ equity		562,570			568,527
	$	9,153,529		$	8,271,948

The accompanying notes are an integral part of these financial statements

1

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Dollars in thousands, except per share data)

	For the three months ended
				March 31,
	March 31,			2005
	2006			As Restated*
INTEREST INCOME:
Loans	$	112,078		$	77,373
Investment securities		18,268			22,457
Interest-bearing deposits		959			210
Federal funds sold and securities purchased under agreements to resell		1,331			1,348
Total interest income		132,636			101,388
INTEREST EXPENSE:
Deposits		38,637			22,281
Securities sold under agreements to repurchase and other borrowings		28,247			22,398
Subordinated capital notes		2,414			601
Total interest expense		69,298			45,280
Net interest income		63,338			56,108
PROVISION FOR LOAN LOSSES		7,538			6,700
Net interest income after provision for loan losses		55,800			49,408
OTHER INCOME:
Bank service charges, fees and other		11,118			10,196
Broker-dealer, asset management and insurance fees		15,045			12,572
Gain on sale of securities		4			16,960
Loss on extinguishment of debt		—			(6,727	)
Gain on sale of mortgage servicing rights		3			43
(Loss) gain on sale of loans		(2	)		1,081
Other (expense) income		(306	)		4,963
Total other income		25,862			39,088
OTHER OPERATING EXPENSES:
Salaries and employee benefits		26,556			24,169
Occupancy costs		4,649			4,024
Equipment expenses		1,040			916
EDP servicing, amortization and technical assistance		8,053			7,793
Communication expenses		2,318			2,016
Business promotion		2,581			2,362
Other taxes		2,376			2,101
Other operating expenses		12,139			11,985
Total other operating expenses		59,712			55,366
Income before provision for income tax		21,950			33,130
PROVISION FOR INCOME TAX		8,594			7,216
NET INCOME	$	13,356		$	25,914
BASIC AND DILUTED EARNINGS PER COMMON SHARE	$	0.29		$	0.56

*See Note 2

The accompanying notes are an integral part of these financial statements

2

SANTANDER BANCORP AND SUBSIDIARIES

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

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND THE YEAR ENDED DECEMBER 31, 2005
(Dollars in thousands)

	Three months Ended			Year Ended
	March 31, 2006			December 31, 2005
Common Stock:
Balance at beginning of year	$	126,626		$	126,626
Balance at end of period		126,626			126,626
Capital Paid in Excess of Par Value:
Balance at beginning of year		304,171			304,171
Balance at end of period		304,171			304,171
Treasury Stock at cost:
Balance at beginning of year		(67,552	)		(67,552	)
Balance at end of period		(67,552	)		(67,552	)
Accumulated Other Comprehensive Income, net of taxes:
Balance at beginning of year		(41,591	)		(6,818	)
Unrealized net loss on investment securities available for sale, net of tax		(11,885	)		(34,031	)
Unrealized net gain on cash flow hedges, net of tax		36			1,333
Minimum pension benefit, net of tax		—			(2,075	)
Balance at end of period		(53,440	)		(41,591	)
Reserve Fund:
Balance at beginning of year		133,759			126,820
Transfer from undivided profits		—			6,939
Balance at end of period		133,759			133,759
Undivided Profits:
Balance at beginning of year		113,114			70,099
Net income		13,356			79,806
Transfer to reserve fund		—			(6,939	)
Deferred tax benefit amortization		(1	)		(3	)
Common stock cash dividends		(7,463	)		(29,849	)
Balance at end of period		119,006			113,114
Total stockholders’ equity	$	562,570		$	568,527

The accompanying notes are an integral part of these financial statements

3

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Dollars in thousands)

	For the three months ended
				March 31,
	March 31,			2005
	2006			As Restated*
Net income	$	13,356		$	25,914
Other comprehensive income (loss), net of tax:
Unrealized losses on investments securities available for sale, net of tax		(11,995	)		(14,994	)
Reclassification adjustment for gains (losses) included in net income, net of tax		110			(14,810	)
Unrealized losses on investment securities available for sale, net of tax		(11,885	)		(29,804	)
Unrealized gains on derivative used for cash flow hedges, net of tax		36			701
Total other comprehensive loss, net of tax		(11,849	)		(29,103	)
Comprehensive income (loss)	$	1,507		$	(3,189	)

*    See Note 2

The accompanying notes are an integral part of these financial statements

4

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Dollars in thousands)

	For the three months ended
				March 31,
	March 31,			2005
	2006			As Restated*
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	13,356		$	25,914
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		3,552			3,117
Deferred tax (benefit) provision		(940	)		1,624
Provision for loan losses		7,538			6,700
Gain on sale of securities		(4	)		(16,960	)
Loss (gain) on sale of loans		2			(1,081	)
Gain on sale of mortgage servicing rights		(3	)		(43	)
Loss (gain) on derivatives		791			(2,813	)
Gain on sale of trading securities		(439	)		(32	)
Net (discount accretion) premium amortization on securities		(922	)		1,037
Net (discount accretion) premium amortization on loans		(109	)		87
Purchases and originations of loans held for sale		(181,850	)		(172,252	)
Proceeds from sales of loans held for sale		565			99,165
Repayments of loans held for sale		3,414			2,470
Proceeds from sales of trading securities		2,311,946			165,604
Purchases of trading securities		(2,320,974	)		(169,752	)
Net change in:
Increase in accrued interest receivable		(19,026	)		(653	)
Increase in other assets		(23,466	)		(9,121	)
Increase in accrued interest payable		15,218			7,954
Increase (decrease) in other liabilities		21,119			(1,206	)
Total adjustments		(183,588	)		(86,155	)
Net cash used in operating activities		(170,232	)		(60,241	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest-bearing deposits		49,668			(1,090	)
Proceeds from sales of investment securities available for sale		—			802,365
Proceeds from maturities of investment securities available for sale		7,696,795			101,398
Purchases of investment securities available for sale		(7,751,338	)		(748,357	)
Repayment of securities and securities called		29,080			31,152
Proceeds from derivative transactions		—			1,453
Net decrease (increase) in loans		38,933			(155,810	)
Proceeds from sales of mortgage servicing rights		3			43
Payment for the acquisition of net assets of consumer finance company, net of cash and cash equivalents acquired		(740,761	)		—
Purchases of premises and equipment		(334	)		(1,671	)
Net cash (used in) provided by investing activities		(677,954	)		29,483

*  See Note 2
(Continued)

The accompanying notes are an integral part of these financial statements

5

SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Dollars in thousands)

	For the three months ended
				March 31,
	March 31,			2005
	2006			As Restated*
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	141,049		$	564,471
Net increase (decrease) in federal funds purchased and other borrowings		606,154			(49,690	)
Net decrease in securities sold under agreements to repurchase		(25,778	)		(230,002	)
Net decrease in commercial paper issued	��	(15,125	)		(249,731	)
Net increase in term notes		310			103
Issuance of subordinated capital notes		124,909			2
Net cash provided by financing activities		831,519			35,153
NET CHANGE IN CASH AND CASH EQUIVALENTS		(16,667	)		4,395
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		237,993			479,410
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	221,326		$	483,805

*  See Note 2

(Concluded)

The accompanying notes are an integral part of these financial statements

6

SANTANDER BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005

1. Summary of Significant Accounting Policies:

     The accounting and reporting policies of Santander BanCorp (the “Corporation”), a 91% owned subsidiary of Banco Santander Central Hispano, S.A. (“BSCH”) conform with accounting principles generally accepted in the United States of America (hereinafter referred to as “generally accepted accounting principles” or “GAAP”) and with general practices within the financial services industry. The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The results of operations and cash flows for the quarters ended March 31, 2006 and 2005 are not necessarily indicative of the results to be expected for the full year.

     These statements should be read in conjunction with the consolidated financial statements and footnotes included in the Corporation’s Form 10-K for the year ended December 31, 2005. The accounting policies used in preparing these consolidated financial statements are the same as those described in Note 1 to the consolidated financial statements in the Corporation’s Form 10-K.

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

Nature of Operations and Use of Estimates

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

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

     In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, income taxes, the valuation of foreclosed real estate, deferred tax assets and financial instruments.

Principles of Consolidation

     The accompanying condensed consolidated financial statements include the accounts of the Corporation, the Bank and the Bank’s wholly owned subsidiaries, Santander Mortgage Corporation and Santander International Bank of Puerto Rico, Inc.; Santander Securities Corporation and its wholly owned subsidiary, Santander Asset Management Corporation; Santander Financial Services, Inc. and Santander Insurance Agency, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

     On February 28, 2006 the Corporation acquired substantially all the assets and business operations in Puerto Rico of Island Finance for $742 million. The Island Finance operation was acquired by Santander Financial Services, Inc. (“Santander Financial”) a 100% owned subsidiary of the Corporation. In connection with this transaction the Corporation entered into a $725 million loan agreement with Santusa Holding, S.L., a subsidiary of its parent company. The Corporation also completed the private placement of $125 million Trust Preferred Securities (“Preferred Securities”) and issued Junior Subordinated Debentures in the aggregate principal amount of $129 million in connection with the issuance of the Preferred Securities. The Preferred Securities are classified as subordinated notes, and the dividends as interest expense in the accompanying condensed consolidated financial statements.

7

     As a result of this transaction the Corporation recognized goodwill of $117.3 million and other intangible assets of $40.7 million (refer to Note 6 for additional information).

     The table below includes certain financial information of Santander Financial as of and for the period ended March 31, 2006 (one month of operations) and balances acquired as of February 28, 2006.

	March 31, 2006
	(In thousands)
Loans*	$	579,146
Allowance for loan losses		19,817
Total Assets		767,087
Borrowings		617,000
Past-due loans over 90 days and accruing		29,595
Interest income		12,386
Interest expense		3,565
Net interest income		8,821
Provision for loan losses		3,038
Non interest income		35
Operating expenses		5,143
Income tax expense		355
Net income		320
Net interest margin		15.28	%

Balances acquired as of February 28, 2006

	(In thousands)
Loans*	$	596,775
Other Assets		9,517
Total Assets		606,292
Other Liabilities		(1,415	)
Net Assets Acquired	$	604,877

* Net of allowance for loan losses of $19.8 million and $17.8 million and discount of $32.1 million and $36.0 million as of March 31, 2006 and February 28, 2006, respectively.

Securities Purchased/Sold under Agreements to
Resell/Repurchase

     Repurchase and resell agreements are treated as collateralized financing transactions and are carried at the amounts at which the assets will be subsequently reacquired or resold.

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

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

Investment Securities

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

• Debt securities that the Corporation has the intent and ability to hold to maturity are classified as securities held-to-maturity and reported at cost adjusted for premium amortization and discount accretion. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold

8

	other securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred.
•	Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Financial instruments including, to a limited extent, derivatives, such as option contracts, are used by the Corporation in dealing and other trading activities and are carried at fair value. Interest revenue and expense arising from trading instruments are included in the consolidated statement of income as part of net interest income.
•	Debt and equity securities not classified as either securities held-to-maturity or trading securities, and which have a readily available fair value, are classified as securities available for sale and reported at fair value, with unrealized gains and losses reported, net of taxes, in accumulated other comprehensive income(loss). The specific identification method is used to determine realized gains and losses on securities available for sale, which are included in gain (loss) on sale of investment securities in the consolidated statements of income.
•	Investments in debt, equity or other securities that do not have readily determinable fair value, are classified as other investment securities in the consolidated balance sheets. These securities are stated at cost. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Home Loan Bank (FHLB) stock, is included in this category.

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

Derivative Financial Instruments

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

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

     In the case of a qualifying fair value hedge, changes in the value of the derivative instruments that have been highly effective are recognized in current period earnings along with the change in value of the designated hedged item. If the hedge relationship is terminated, hedge accounting is discontinued and any balance related to the derivative is recognized in current operations, and the fair value adjustment to the hedged item continues to be reported as part of the basis of the item and is amortized to earnings as a yield adjustment. In the case of a qualifying cash flow hedge, changes in the value of the derivative instruments that have been highly effective are recognized in other comprehensive income, until such time as those earnings are affected by the variability of the cash flows of the underlying hedged item. If the hedge relationship is terminated, the net derivative gain or loss related to the discontinued cash flow hedge continues to be reported in accumulated other comprehensive income and is reclassified into earnings when the cash flows that were hedged occur, or when the forecasted transaction affects earnings or is no longer expected to occur. In either a fair value hedge or a cash flow hedge, net earnings may be impacted to the extent the changes in the value of the derivative instruments do not perfectly offset changes in the value of the hedged items. If the derivative is not designated as a hedging instrument, the changes in fair value of the derivative are recorded in earnings. Currently, the Corporation does not have foreign currency hedges.

9

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

Loans Held for Sale

     Loans held for sale are recorded at the lower of cost or market computed on the aggregated portfolio basis. The amount by which cost exceeds market value, if any, is accounted for as a valuation allowance with changes included in the determination of net income for the period in which the change occurs.

Loans

     Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, unearned finance charges and any deferred fees or costs on originated loans. Certain mortgage loans are hedged to generate a floating rate source of funds and are carried at fair value.

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

     The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, but in no event is it recognized after 90 days in arrears on payments of principal or interest, except for credit cards and mortgage loans for which interest is not recognized after four months. When interest accrual is discontinued, all unpaid interest is reversed. Interest income is subsequently recognized only to the extent that it is received. Thereafter, the non accrual status is discontinued and the loans will continue in an accrual basis if the delinquency period is no longer more than 90 days or 120 days according to the existing policy.

     The Corporation leases vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in Statement of Financial Accounting Standards (“SFAS’) No. 13, “Accounting for Leases”, as amended. Aggregate rentals due over the term of the leases less unearned income are included in lease receivable, which is part of “Loans, net” in the consolidated balance sheets. Unearned income is amortized to income over the lease term so as to yield a constant rate of return on the principal amounts outstanding. Lease origination fees and costs are deferred and amortized over the average life of the portfolio as an adjustment to yield.

Off-Balance Sheet Instruments

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

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

Allowance for Loan Losses

     The allowance for loan losses is a current estimate of the losses inherent in the present portfolio based on management’s ongoing quarterly evaluations of the loan portfolio. Estimates of losses inherent in the loan portfolio involve the exercise of judgment and the use of assumptions. This evaluation is inherently subjective as it requires estimates that

10

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

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

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

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

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

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

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

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

     Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

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

Goodwill and Intangible Assets

     Goodwill and other intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually for impairment. Intangible assets with finite useful lives continue to be amortized over the period the Corporation

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expects to benefit from such assets. These intangible assets are periodically reviewed for other than temporary impairment by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets.

     Based on management’s assessment of the value of the Corporation’s goodwill at October 1, 2005 , which included an independent valuation, among others, management determined that the Corporation’s goodwill was not impaired.

Mortgage-Servicing Rights

     The Corporation’s mortgage-servicing rights (“MSRs”) are stated at the lower of carrying value or market at each balance sheet date. On a quarterly basis the Corporation evaluates its MSRs for impairment and charges any such impairment to current period earnings. In order to evaluate its MSRs the Corporation stratifies the related mortgage loans on the basis of their risk characteristics which have been determined to be type of loan (government-guaranteed, conventional, conforming and non-conforming), interest rates and maturities. Impairment of MSRs is determined by estimating the fair value of each stratum and comparing it to its carrying value. No impairment has been identified as of March 31, 2006. An impairment amounting $214,000 was recognized as of December 31, 2005.

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

Mortgage Banking

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

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

Broker-dealer and Asset Management Commissions

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

Insurance Commissions

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

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Income Taxes

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

Earnings Per Common Share

     Basic and diluted earnings per common share are computed by dividing net income available to common stockholders, by the weighted average number of common shares outstanding during the period. The Corporation’s average number of common shares outstanding used in the computation of earnings per common share were 46,639,104 for each of the quarters ended March 31, 2006 and 2005, respectively. Basic and diluted earnings per common share are the same since no stock options or other stock equivalents were outstanding during the periods ended March 31, 2006 and 2005.

Recent Accounting Pronouncements which Affect the Corporation

     The adoption of the following accounting pronouncements did not have a material impact on the Corporation’s results of operations and financial condition:

• FIN No. 47, “Accounting for Conditional Asset Retirement Obligations” — an interpretation of FASB Statement No. 143.In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations”—an interpretation of FASB Statement No. 143. This Interpretation clarifies the term conditional asset retirement obligation as used in SFAS No. 143 and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by this Interpretation are those for which an entity has a legal obligation to perform an asset retirement activity, but for which the timing and (or) method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation was effective no later than the end of fiscal years ending after December 15, 2005. The adoption of this statement did not have a material impact on the Corporation’s financial condition, results of operations, or cash flows.

• SFAS No. 154, “Accounting Changes and Error Corrections”.In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board toward development of a single set of high-quality accounting standards. SFAS No. 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. APB Opinion No. 20 previously required that such a change be reported as a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this Statement. The adoption of this statement did not have a material impact on the Corporation’s financial condition, results of operations or cash flows.

     The Corporation is evaluating the impact that these recently issued accounting pronouncements may have on its financial condition and results of operations.

• FASB Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004”.In December 2004, the FASB issued

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FASB Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”). The American Jobs Creation Act of 2004 (the “Act”) provides for a special one time deduction of 85 percent of certain foreign earnings repatriated into the U.S. from non U.S. subsidiaries through September 30, 2006. To date, the Corporation has not provided for income taxes on unremitted earnings generated by the non U.S. subsidiary given the Corporation’s intent to permanently reinvest those earnings.

•

SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment to SFAS No. 140.”In March 2006, the FASB issued SFAS No. 156, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities to (1) require the recognition of a servicing asset or servicing liability under specified circumstances, (2) require that, if practicable, all separately recognized servicing assets and liabilities be initially measured at fair value, (3) create a choice for subsequent measurement of each class of servicing assets or liabilities by applying either the amortization method or the fair value method, and (4) permit the one-time reclassification of securities identified as offsetting exposure to changes in fair value of servicing assets or liabilities from available-for-sale securities to trading securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In addition, SFAS No. 156 amends SFAS No. 140 to require significantly greater disclosure concerning recognized servicing assets and liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, with early adoption permitted. The adoption of SFAS No. 156 is not expected to have a material effect on the Corporation’s consolidated financial position or results of operations.

2. Restatement of Previously Issued Financial Statements:

     Subsequent to the issuance of the Corporation’s condensed consolidated financial statements for the three months ended March 31, 2005, management of the Corporation determined that certain transactions originally accounted for as purchases of mortgage notes and sales of mortgage notes did not qualify for treatment as purchases and sales under the criteria for sale accounting as outlined in SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement 125” (SFAS No. 140). These transactions are described below. As a result, the accompanying 2005 interim condensed consolidated financial statements have been restated from amounts previously reported to correct the accounting for these transactions.

•	During 2000 and 2001, the Corporation entered into contemporaneous purchases and sales of mortgage loans with an unrelated local financial institution in the aggregate principal amount of approximately $445 million. These transactions occurred in pairs of purchases and sales of approximately equal amounts during six consecutive quarters beginning in the first quarter of 2000. The transactions were not accompanied by sufficient documentation concerning their business purpose, and the counterparty to the transactions subsequently repurchased certain quantities of the loans previously sold to the Corporation beyond the counterparty’s written recourse obligation. For these reasons, management determined that these transactions did not qualify as purchases and sales in accordance with SFAS No. 140.
	Accordingly, with respect to the sales transactions, the Corporation has now (i) presented the sales transactions as secured borrowings (recording the assets as mortgage loans and the liabilities as notes payable) on its consolidated balance sheet (ii) reversed the gains previously recognized, (iii) reversed the recognition of servicing assets and related amortization, (iv) reversed the related servicing income and (v) changed the classification of the proceeds from the transactions in the consolidated statements of cash flows from an operating activity to a financing activity.
	With respect to the purchase transactions, the Corporation has now (i) presented the transactions as commercial loans secured by mortgage notes classified within loans, net on the consolidated balance sheet, (ii) reversed the premium paid and related amortization, (iii) changed the classification of the cash outflows from the transactions from the purchase of mortgage notes to origination of loans within operating activities in the consolidated statements of cash flows.
	The adjustments to correct the sale transactions did not have an effect on the 2005 interim consolidated balance sheet as the secured borrowings were paid in full in 2003. The adjustment to correct the purchase transactions was to present the transaction as commercial loans secured by mortgages classified within loans, net on the 2005 consolidated balance sheets. There was no effect on the 2005 interim consolidated statements of income since the secured borrowings were repaid in full in 2003. The adjustment to correct the purchase transactions did not have an effect on net income previously recorded for the quarter ended March 31, 2005.

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• During 2003, the Corporation purchased the outstanding balance of the mortgage loans previously sold during 2000 and 2001 to the counterparty discussed in the preceding paragraph at fair value of $235 million, resulting in a premium paid of approximately $13.6 million. The Corporation also sold the mortgage servicing rights of the portfolio to the same counterparty for $4.1 million. Since the purchases of loans in 2000 and 2001 are now accounted as a financing transaction, the mortgage loans purchased in 2003 are now accounted for as a repayment of the commercial loan and the premium paid is accounted for as a debt extinguishment loss in the 2003 consolidated statement of income, which resulted in an increase in net interest income of $0.6 million for the three months ended March 31, 2005.

• During 2003, 2004 and the first quarter of 2005, the Corporation purchased mortgage loans amounting to $441 million from one unrelated local financial institution and $750 million from another unrelated financial institution. The transactions involved guarantees of payment of an uncapped and floating pass-through rate of interest and other recourse guarantees to the purchaser of mortgage loans. The Corporation originally recorded these transactions as purchased loans on its consolidated balance sheet. Based on a subsequent review of the written terms and conditions of the contracts and the absence of other written terms and conditions that may be customary to such transactions, the Corporation determined that the transactions did not qualify as purchases in accordance with SFAS No. 140. Accordingly, the transactions were reversed and are now accounted for as financings secured by mortgage notes and reported in the consolidated balance sheet as commercial loans (presented within loans, net). The adjustment to correct the accounting for these transactions did not have an effect on net income previously recorded for the quarter ended March 31, 2005. The adjustments to correct the March 31, 2005 consolidated balance sheets for the purchase transactions resulted in decreases of $8.9 million in loans, net and other liabilities, respectively. These decreases were primarily the result of the derecognized balance of the guaranteed swap derivative. As of March 31, 2005 the current outstanding balance of these loans was $1.1 billion.

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     The following is a summary of the significant effects of the restatement on the Corporation’s condensed consolidated financial statements:

	For the three months Ended
	March 31, 2005
	As Previously
(Dollars in thousands, except per share data)	Reported			As Restated
Selected Statement of Income Data:
Total interest income	$	100,750		$	101,388
Total other operating expenses		55,391			55,366
Income before provision for income tax		32,467			33,130
Provision for income tax		6,958			7,216
Net income		25,509			25,914
Basic and Diluted Earnings per Common Share		0.55			0.56
Selected Statement of Cash Flows Data:
Cash Used in Operating Activities:
Net income		25,509			25,914
Deferred tax provision		1,366			1,624
Net premium amortization on loans		749			87
Proceeds from sales of loans held for sale		99,164			99,165
Change in other assets		(9,013	)		(9,121	)
Change in other liabilities		(1,312	)		(1,206	)
Net Cash Used in Operating Activities		(60,241	)		(60,241	)
Cash Provided by Investing Activities:
Purchases of mortgage loans		(200,153	)		—
Change in loans		44,343			(155,810	)
Net Cash Provided by Investing Activities		29,483			29,483

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3. Investment Securities Available for Sale:

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

	March 31, 2006
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(Dollars in thousands)
Treasury and agencies of the United States Government:
Within one year	$	333,180	$	—	$	322	$	332,858		4.32	%
After one year to five years		292,912		—		13,248		279,664		3.72	%
After five years to ten years		194,735		—		9,220		185,515		4.15	%
		820,827		—		22,790		798,037		4.06	%
Commonwealth of Puerto Rico and its subdivisions:
Within one year		12,750		15		2		12,763		4.93	%
After one year to five years		9,920		10		53		9,877		4.07	%
After five years to ten years		31,331		—		582		30,749		4.85	%
Over ten years		3,686		6		103		3,589		6.35	%
		57,687		31		740		56,978		4.83	%
Mortgage-backed securities:
Over ten years		745,215		—		31,067		714,148		5.00	%
Foreign securities
After one year to five years		75		—		—		75		5.60	%
	$	1,623,804	$	31	$	54,597	$	1,569,238		4.42	%

	December 31, 2005
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(Dollars in thousands)
Treasury and agencies of the United States Government:
Within one year	$	279,780	$	4	$	598	$	279,186		3.04	%
After one year to five years		268,511		—		9,359		259,152		3.68	%
After five years to ten years		219,920		—		6,483		213,437		4.15	%
		768,211		4		16,440		751,775		3.58	%
Commonwealth of Puerto Rico and its subdivisions:
Within one year		12,750		43		3		12,790		4.93	%
After one year to five years		9,920		11		54		9,877		4.07	%
After five years to ten years		27,604		34		423		27,215		4.83	%
Over ten years		3,786		10		78		3,718		6.35	%
		54,060		98		558		53,600		4.82	%
Mortgage-backed securities:
Over ten years		775,073		—		20,842		754,231		5.00	%
Foreign Securities
After one year to five years		75		—		—		75		5.60	%
	$	1,597,419	$	102	$	37,840	$	1,559,681		4.42	%

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     The number of positions, fair value and unrealized losses at March 31, 2006, of investment securities available for sale that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, are as follows:

	Less than 12 months						12 months or more						Total
	Number						Number						Number
	of		Fair		Unrealized		of		Fair		Unrealized		of		Fair		Unrealized
	Positions		Value		Losses		Positions		Value		Losses		Positions		Value		Losses
	(Dollars in thousands)
Treasury and agencies of the United States Government		5	$	472,806	$	9,393		13	$	319,534	$	13,397		18	$	792,340	$	22,790
Commonwealth of Puerto Rico and its subdivisions		8		20,938		157		13		19,529		583		21		40,467		740
Mortgage-backed securities		13		256,119		8,506		18		458,028		22,561		31		714,147		31,067
		26	$	749,863	$	18,056		44	$	797,091	$	36,541		70	$	1,546,954	$	54,597

     The Corporation evaluates its investment securities for other-than-temporary impairment on a quarterly basis or earlier if other factors indicative of potential impairment exist. An impairment charge in the consolidated statements of income is recognized when the decline in the fair value of the securities below their cost basis is judged to be other-than-temporary. The Corporation considers various factors in determining whether it should recognize an impairment charge including, but not limited to the length of time and extent to which the fair value has been less than its cost basis, expectation of recoverability of its original investment in the securities and the Corporation’s intent and ability to hold the securities for a period of time sufficient to allow for any forecasted recovery of fair value up to (or beyond) the cost of the investment.

     The unrealized losses in the Corporation’s investments in U.S. and P.R. Government agencies and subdivisions were caused by interest rate increases. Substantially all of these securities are rated the equivalent of AAA by major rating agencies. For investment securities in the P.R. Government portfolio, which have experienced lower ratings due to credit quality concerns, no other-than-temporary impairment is expected because the Corporation anticipates to recover the amortized cost of these securities the next six months. Since the Corporation has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, and the contractual term of these investments do not permit the issuer to settle the securities at a price less than the amortized cost, the Corporation does not consider these investments to be other-than-temporarily impaired at March 31, 2006.

     The unrealized losses in the Corporation’s investment in mortgage-backed securities were also caused by interest rate increases. The Corporation purchased these investments at a discount relative to their face amount, and the contractual cash flows of these investments are guaranteed by an agency of the U.S. government or by other government-sponsored corporations. Accordingly, it is expected that the securities will not be settled at a price less than the amortized cost of the Corporation’s investment. The decline in market value is attributable to changes in interest rates and not credit quality and since the Corporation has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Corporation does not consider these investments to be other-than-temporarily impaired at March 31, 2006.

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

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

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4. Loans

     The Corporation’s loan portfolio at March 31, 2006 and December 31, 2005 consists of the following:

	March 31, 2006			December 31, 2005
	(in thousands)
Commercial and industrial	$	2,951,706		$	2,968,178
Consumer		1,310,364			564,198
Leasing		146,282			137,855
Construction		253,124			217,304
Mortgage		1,979,348			1,929,203
		6,640,824			5,816,738
Unearned income and deferred fees/costs		(180,136	)		(8,108	)
Allowance for loan losses		(87,717	)		(66,842	)
	$	6,372,971		$	5,741,788

5. Allowance for Loan Losses:

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

	For the three months ended
	March 31, 2006		March 31, 2005
	(in thousands)
Balance at beginning of period	$	66,842	$	69,177
Provision for loan losses		7,538		6,700
Reserve balance acquired		17,830		—
		92,210		75,877
Losses charged to the allowance:
Commercial		784		4,039
Consumer		4,746		4,382
Leasing		192		335
		5,722		8,756
Recoveries:
Commercial		655		466
Consumer		390		1,528
Leasing		184		90
		1,229		2,084
Net loans charged off		4,493		6,672
Balance at end of period	$	87,717	$	69,205

6. Goodwill and Intangible Assets:

     Goodwill represents the excess of an acquired company’s acquisition cost over the fair value of its net tangible and intangible assets. Goodwill is not amortized but rather is tested at least annually for impairment using a two step process at each reporting unit. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired and the second step of the impairment test is not performed. If the carrying value of the reporting unit exceeds its fair value, the second step in the impairment test consists of comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The Corporation uses the market multiple, the discount cash flows and comparable transaction approaches to determine the fair value of each reporting unit.

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     Intangible assets, with an indefinite life, are not amortized and are tested for impairment at least annually comparing the fair value with the carrying amount of those assets. In determining the indefinite life for those assets, the Corporation considers the expected cash flows and several factors such as legal, regulatory, economic, contractual, competition and others, which could limit the useful life.

     Tangible and intangible assets with finite useful lives are amortized over their estimated useful lives.

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

	March 31, 2006		December 31, 2005
	(In thousands)
Commercial Banking	$	10,537	$	10,537
Wealth Management		24,254		24,254
Consumer Finance		117,258		—
	$	152,049	$	34,791

     Goodwill assigned to the Commercial Banking segment is related to the acquisition of Banco Central Hispano Puerto Rico (“BCHPR”) in 1996, the goodwill assigned to the Wealth Management segment is related to the acquisition of Merril Lynch’s retail brokerage business in Puerto Rico by Santander Securities Corporation in 2000 and goodwill assigned to the Consumer Finance segment is related to the acquisition of Island Finance in 2006. There has been no impairment in goodwill for each of the periods reported.

Other Intangible Assets

     Other intangible assets at March 31, 2006 and December 31, 2005, were as follows:

	March 31, 2006		December 31, 2005
	(In thousands)
Mortgage-servicing rights	$	7,625	$	7,974
Advisory-servicing rights		1,250		1,300
Intangible pension asset		818		818
Trade name		24,800		—
Customer relationships		10,389		—
Non-compete agreements		5,542		—
	$	50,424	$	10,092

     Mortgage-servicing rights have an estimated useful life of eight years. The advisory-servicing rights are related to the Corporation’s subsidiary acquisition of the right to serve as the investment advisor for the First Puerto Rico Tax-Exempt Fund, Inc. This intangible asset is being amortized over a 10-year estimated useful life. Trade name has an indefinite useful life and is therefore not being amortized but is tested for impairment annually. Customer relationships and Non-compete agreements are intangible assets related to the acquisition of Island Finance during the first quarter of 2006 and are being amortized over their estimated useful lives of 10 years and 3 years, respectively.

20

7. Other Assets

     Other assets at March 31, 2006 and December 31, 2005 consist of the following:

	March 31, 2006		December 31, 2005
	(In thousands)
Deferred tax assets, net	$	26,603	$	19,635
Accounts receivable		82,401		65,728
Securities sold not delivered, net		2,400		72
Other real estate		3,108		2,249
Software, net		10,437		11,095
Prepaid expenses		9,982		8,468
Customers’ liabilities on acceptances		4,394		3,669
Derivative assets		57,713		47,436
Other		881		1,745
	$	197,919	$	160,097

8. Other Borrowings:

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

	March 31, 2006
	Federal Funds			Securities Sold			Commercial
	Purchased and			Under Agreements			Paper
	Other Borrowings			to Repurchase			Issued
	(Dollars in thousands)
Amount outstanding at period end	$	1,375,000		$	921,989		$	319,194
Average indebtedness outstanding during the period	$	1,014,458		$	936,711		$	423,818
Maximum amount outstanding during the period	$	1,521,098		$	947,767		$	505,000
Average interest rate for the period		4.71	%		4.91	%		4.57	%
Average interest rate at period end		4.81	%		4.94	%		4.77	%

	December 31, 2005
	Federal Funds			Securities Sold			Commercial
	Purchased and			Under Agreements			Paper
	Other Borrowings			to Repurchase			Issued
	(Dollars in thousands)
Amount outstanding at period end	$	768,846		$	947,767		$	334,319
Average indebtedness outstanding during the period	$	821,251		$	1,051,350		$	423,331
Maximum amount outstanding during the period	$	975,155		$	1,565,269		$	830,000
Average interest rate for the period		3.37	%		4.24	%		3.20	%
Average interest rate at period end		4.26	%		4.71	%		4.35	%

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

21

	March 31, 2006		December 31, 2005
	(In thousands)
Federal funds purchased and other borrowings:
Over thirty to ninety days	$	—	$	118,846
Over ninety days		1,375,000		650,000
Total	$	1,375,000	$	768,846
Securities sold under agreements to repurchase:
Within thirty days	$	571,983	$	597,761
Over ninety days		350,006		350,006
Total	$	921,989	$	947,767
Commercial paper issued:
Within thirty days	$	319,194	$	334,319

     As of March 31, 2006 and December 31, 2005, the weighted average maturity of Federal funds purchased and other borrowings over ninety days was 11.75 months and 18.92 months, respectively.

     As of March 31, 2006, securities sold under agreements to repurchase (classified by counterparty) were as follows:

					Weighted
			Fair Value of		Average
	Balance of		Underlying		Maturity
	Borrowings		Securities		in Months
	(Dollars in thousands)
Credit Suisse First Boston LLC	$	200,248	$	206,376		0.29
Federal Home Loan Bank New York		100,000		99,625		24.56
Barclays Capital		182,300		187,437		0.23
Lehman Brothers RS		250,006		269,926		71.23
UBS Financial Services, Inc.		189,435		195,888		0.28
	$	921,989	$	959,252		22.14

     There may be a penalty on early termination of these securities sold under agreements to repurchase.

22

The following investment securities were sold under agreements to repurchase:

	March 31, 2006
	Carrying				Fair		Weighted-
	Value of				Value of		Average
	Underlying		Balance of		Underlying		Interest
Underlying Securities	Securities		Borrowings		Securities		Rate
			(Dollars in thousands)
U.S. Government agencies and corporations	$	297,314	$	275,593	$	297,314		5.43	%
Mortgage-backed securities		661,938		646,396		661,938		4.72	%
Total	$	959,252	$	921,989	$	959,252		4.94	%

	December 31, 2005
	Carrying				Fair		Weighted-
	Value of				Value of		Average
	Underlying		Balance of		Underlying		Interest
Underlying Securities	Securities		Borrowings		Securities		Rate
			(Dollars in thousands)
U.S. Government agencies and corporations	$	296,848	$	268,285	$	296,848		5.43	%
Mortgage-backed securities		698,184		679,482		698,184		4.41	%
Total	$	995,032	$	947,767	$	995,032		4.72	%

9. Derivative Financial Instruments:

As of March 31, 2006, the Corporation had the following derivative financial instruments outstanding:

										Other
							Gain (Loss) for			Comprehensive Income*
							the three month			for the three
	Notional						period ended			months ended
	Value			Fair Value			March 31, 2006			March 31, 2006
	(In thousands)
CASH FLOW HEDGES
Foreign currency swaps	$	—		$	—		$	—		$	36
FAIR VALUE HEDGES
Interest rate swaps		1,463,772			(38,149	)		(493	)		—
OTHER DERIVATIVES
Options		134,897			28,109			3,642			—
Embedded options on stock-indexed deposits and notes		(134,897	)		(28,139	)		(3,672	)		—
Interest rate caps		48,250			108			30			—
Customer interest rate caps		(44,967	)		(103	)		(28	)		—
Customer interest rate swaps		(1,186,493	)		(5,121	)		(2,049	)		—
Interest rate swaps		1,203,493			5,584			1,889			—
Interest rate swaps-freestanding derivatives		387,000			(593	)		(142	)		—
Loan commitments		897			(8	)		32			—
							$	(791	)	$	36

* Net of tax

23

As of December 31, 2005, the Corporation had the following derivative financial instruments outstanding:

										Other
							Gain (Loss) for			Comprehensive
							the year			Income* for the
	Notional						ended			year ended
	Value			Fair Value			Dec. 31, 2005			Dec. 31, 2005
	(Dollars in thousands)
CASH FLOW HEDGES
Interest rate swaps	$	—		$	—		$	—		$	1,369
Foreign currency swaps		117,725			2,182			—			(36	)
FAIR VALUE HEDGES
Interest rate swaps		1,408,772			(26,880	)		28			—
OTHER DERIVATIVES
Options		135,150			23,833			11,711			—
Embedded options on stock-indexed deposits		(134,767	)		(23,833	)		(9,401	)		—
Interest rate caps		37,571			77			131			—
Customer interest rate caps		(35,851	)		(75	)		(118	)		—
Customer interest rate swaps		(901,760	)		(3,073	)		(2,136	)		—
Interest rate swaps		920,761			3,695			2,243			—
Interest rate swaps-free standing derivatives		354,000			(451	)		(451	)		—
Loan commitments		7,270			(40	)		(43	)		—
							$	1,964		$	1,333

* Net of tax

     The Corporation’s principal objective in holding interest rate swap agreements is the management of interest rate risk and changes in the fair value of assets and liabilities. The Corporation’s policy is that each swap contract be specifically tied to assets or liabilities with the objective of transforming the interest rate characteristic of the hedged instrument. During July 2000, the Corporation swapped $100 million of term funds at a fixed spread over U.S. Treasury securities. These swaps were designated as cash flow hedges and matured in 2005.

     The Corporation’s principal objective in entering into foreign currency derivative agreements is for the management of currency risk and changes in the fair value of assets and liabilities arising from fluctuations in foreign currencies. The Corporation’s policy is that each foreign currency contract be specifically tied to assets or liabilities with the objective of transforming the currency exposure of the hedged instrument to U.S. Dollars (“USD”). On December 15, 2005, the Corporation entered into a loan agreement with Banco Santander Central Hispano in which the Corporation borrowed 14,000,000,000 Japanese Yen (“JPY”) for a three month term at a per annum rate of 0.1629%. The purpose of this loan was to fund activity at the holding company level. Given that the Corporation’s business activity is primarily in USD management decided to hedge the foreign currency exposure arising from this transaction. The Corporation entered into a foreign currency swap (“FX Swap”), of approximately $117.7 million, with an unrelated third party in which the Corporation sold JPY spot to buy USD, and bought JPY forward and sold USD, thus eliminating exposure to changes USD/JPY. The implicit economic cost of this transaction is 4.64%. This rate is equivalent to the three-month LIBOR (as of the date of the transaction) plus 15 basis points. Management classified this transaction as a foreign currency cash flow hedge because the FX swap is hedging the principal and interest to be paid at the maturity of the loan contract. The notional value of the FX swap is $117.7 million and it matured on March 15, 2006.

     As of March 31, 2006, the Corporation also had outstanding interest rate swap agreements, with a notional amount of approximately $1.5 billion, maturing through the year 2032. The weighted average rate paid and received on these contracts is 4.80% and 4.56%, respectively. As of March 31, 2006, the Corporation had retail fixed rate certificates of deposit amounting to approximately $1.3 billion and a subordinated note amounting to approximately $125 million swapped to create a floating rate source of funds. These swaps were designated as fair value hedges. For the quarter ended March 31, 2006, the Corporation recognized a loss of approximately $0.5 million on fair value hedges due to hedge ineffectiveness, which is included in other income in the consolidated statements of income.

     As of December 31, 2005, the Corporation had outstanding interest rate swap agreements, with a notional amount of approximately $1.4 billion, maturing through the year 2032. The weighted average rate paid and received on these contracts is 4.34% and 4.33%, respectively. As of December 31, 2005, the Corporation had retail fixed rate certificates of deposit amounting to approximately $1.3 billion and a subordinated note amounting to approximately $125 million swapped to create a floating rate source of funds. For the year ended December 31, 2005, the Corporation recognized a gain of

24

approximately $28,000 on fair value hedges due to hedge ineffectiveness, which is included in other income in the consolidated statements of income.

     The Corporation issues certificates of deposit, individual retirement accounts and notes with returns linked to the different indexes, which constitute embedded derivative instruments that are bifurcated from the host deposit and recognized on the consolidated balance sheets. The Corporation enters into option agreements in order to manage the interest rate risk on these deposits and notes; however, these options have not been designated for hedge accounting, therefore gains and losses on the market value of both the embedded derivative instruments and the option contracts are marked to market through earnings and recorded in other gains and losses in the consolidated statements of income. For the quarter ended March 31, 2006, a loss of approximately $3.7 million was recorded on embedded options on stock-indexed deposits and notes and a gain of approximately $3.6 million was recorded on the option contracts. For the year ended December 31, 2005, a loss of approximately $9.4 million was recorded on embedded options on stock-indexed deposits and notes and a gain of approximately $11.7 million was recorded on the option contracts. Included in the option gain is the maturity of $1.0 billion in swaptions that resulted in a gain of approximately $2.3 million.

     The Corporation enters into certain derivative transactions to provide derivative products to customers, which includes interest rate caps, collars and swaps, and simultaneously cover the Corporation’s position with related and unrelated third parties under substantially the same terms and conditions. These derivatives are not linked to specific assets and liabilities on the consolidated balance sheets or the forecasted transaction in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. These derivatives are carried at fair value with changes in fair value recorded as part of other income. For the quarter ended March 31, 2006 and the year ended December 31, 2005, the Corporation recognized a loss on these transactions of $158,000 and $120,000 respectively, on these transactions.

     To a lesser extent, the Corporation enters into freestanding derivative contracts as a proprietary position taker, based on market expectations or to benefit from price differentials between financial instruments and markets. These derivatives are not linked to specific assets and liabilities on the balance sheets or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. These derivatives are carried at fair value and changes in fair value are recorded in earnings. For the three months ended March 31, 2006 and the year ended December 31, 2005, the Corporation recognized a loss of $142,000 and $451,000, respectively, on these transactions.

     The Corporation enters into loan commitments with customers to extend mortgage loans at a specified rate. These loan commitments are written options and are measured at fair value pursuant to SFAS 133. As of March 31, 2006 the Corporation had loan commitments outstanding for approximately $0.8 million and recognized a gain of $32,000 on these commitments. At December 31, 2005, the Corporation had loan commitments outstanding for approximately $7.3 million and recognized a loss of $43,000 on these commitments.

10. Contingencies and Commitments:

     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 of such litigation and that any losses therefrom would not have a material adverse effect on the consolidated results of operations or consolidated financial position of the Corporation.

     On December 8, 2005 the Corporation received a subpoena from the Securities and Exchange Commission for the production of documents concerning its mortgage loan transactions with an unrelated local financial institution. The Corporation has commenced providing documents and information to the SEC in response to the subpoena and concerning the transactions. The Corporation is cooperating fully with the SEC in connection with these inquiries. The Corporation is unable to predict what adverse consequences, if any, or other effects this investigation could have on its financial condition or results of operations.

25

11. Pension Plans:

     The Corporation maintains a qualified noncontributory defined benefit pension plan (the “Plan”), which covers substantially all active employees of the Corporation, and a frozen qualified noncontributory defined benefit plan acquired in connection with the 1996 acquisition of Banco Central Hispano de Puerto Rico (the “Central Hispano Plan”).

     The components of net periodic benefit cost for the Plan for the three months ended March 31, 2006 and 2005 were as follows:

	For the three months ended
	March 31,
	2006			2005
	(In thousands)
Service cost	$	443		$	347
Interest cost		566			508
Expected return on plan assets		(558	)		(534	)
Net amortization		169			114
Net periodic benefit cost	$	620		$	435

     The Plan’s required minimum contribution to be paid during 2006 is approximately $3,213,000.

     The components of net periodic benefit cost for the Central Hispano Plan for the three months ended March 31, 2006 and 2005 were as follows:

	For the three months ended
	March 31,
	2006			2005
	(In thousands)
Interest cost	$	485		$	476
Expected return on plan assets		(543	)		(500	)
Net amortization		121			105
Net periodic benefit cost	$	63		$	81

     For the Central Hispano Plan the required minimum contribution to be paid during 2006 is approximately $3,119,000.

12. Guarantees:

     The Corporation issues financial standby letters of credit to guarantee the performance of its customers to third parties. If the customer fails to meet its financial performance obligation to the third party, then the Corporation would be obligated to make the payment to the guaranteed party. In accordance with the provisions of FIN 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others – An Interpretation of FASB Statement No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34”, the Corporation recorded a liability of $1,169,000 at March 31, 2006, which represents the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit issued or modified after December 31, 2002, net of the related amortization at inception. The fair value approximates the fee received from the customer for issuing the standby letter of credit. The fees are deferred and recognized on a straight-line basis over the commitment period. Standby letters of credit outstanding at March 31, 2006 had terms ranging from six months to seven years. The contract amounts of the standby letters of credit of approximately $201,096,000 at March 31, 2006, represent the maximum potential amount of future payments the Corporation could be required to make under the guarantees in the event of non-performance by its customers. These standby letters of credit typically expire without being drawn upon. Management does not anticipate any material losses related to these guarantees.

26

13. Segment Information:

Types of Products and Services

     The Corporation has four reportable segments: Commercial Banking, Mortgage Banking, Consumer Finance, Treasury and Investments and Broker-dealer. Insurance operations and International Banking are other lines of business in which the Corporation commenced its involvement during 2000 and 2001, respectively. However, no separate disclosures are being provided for these operations, since they did not meet the quantitative thresholds for disclosure of segment information.

Measurement of Segment Profit or Loss and Segment Assets

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

     The following presents financial information of reportable segments as of and for the three months ended March 31, 2006 and 2005. General corporate expenses and income taxes have not been added or deducted in the determination of operating segment profits. The “Other” column includes the items necessary to reconcile the identified segments to the reported consolidated amounts. Included in the “Other” column are expenses of the internal audit, investors’ relations, strategic planning, administrative services, mail, marketing, public relations, electronic data processing departments and comptroller’s departments. The “Eliminations” column includes all intercompany eliminations for consolidation.

	March 31, 2006
	Commercial		Mortgage		Consumer		Treasury and		Wealth								Consolidated
	Banking		Banking		Finance		Investments		Management		Other			Eliminations			Total
	(In thousands)
Total external revenue	$	69,306	$	43,159	$	12,421	$	20,035	$	13,963	$	8,545		$	(8,931	)	$	158,498
Intersegment revenue		7,150		—		—		—		—		1,781			(8,931	)		—
Interest income		59,603		42,195		12,386		20,012		501		5,534			(7,595	)		132,636
Interest expense		32,010		22,456		3,565		10,644		655		6,819			(6,851	)		69,298
Depreciation and amortization		1,329		443		314		175		257		1,034			—			3,552
Segment income (loss) before income tax		10,068		16,986		675		8,246		4,782		(17,976	)		(831	)		21,950
Segment assets	$	3,509,538	$	2,944,555	$	767,087	$	1,848,637	$	96,357	$	1,037,369		$	(1,050,014	)	$	9,153,529

	March 31, 2005
	Commercial		Mortgage		Treasury and		Wealth								Consolidated
	Banking		Banking		Investments		Management		Other			Eliminations			Total
	(In thousands)
Total external revenue	$	53,955	$	37,415	$	35,308	$	11,520	$	5,266		$	(2,988	)	$	140,476
Intersegment revenue		2,462		—		—		—		526			(2,988	)		—
Interest income		44,821		34,624		23,888		104		481			(2,530	)		101,388
Interest expense		11,071		10,498		25,046		412		813			(2,560	)		45,280
Depreciation and amortization		1,460		338		46		131		1,142			—			3,117
Segment income (loss) before income tax		13,258		24,280		8,962		3,017		(16,417	)		30			33,130
Segment assets	$	3,322,759	$	2,775,382	$	2,244,748	$	84,625	$	252,638		$	(265,630	)	$	8,414,522

27

Reconciliation of Segment Information to Consolidated Amounts

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

	March 31, 2006			March 31, 2005
	(In thousands)
Revenues:
Total revenues for reportable segments	$	158,884		$	138,198
Other revenues		8,545			5,266
Elimination of intersegment revenues		(8,931	)		(2,988	)
Total consolidated revenues	$	158,498		$	140,476
Total income before tax of reportable segments	$	40,757		$	49,517
Income (loss) before tax of other segments		(17,976	)		(16,417	)
Elimination of intersegment income before tax		(831	)		30
Consolidated income before tax	$	21,950		$	33,130
Assets:
Total assets for reportable segments	$	9,166,174		$	8,427,514
Assets not attributed to segments		1,037,369			252,638
Elimination of intersegment assets		(1,050,014	)		(265,630	)
Total consolidated assets	$	9,153,529		$	8,414,522

28

PART I — ITEM 2

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

Santander BanCorp
Selected Financial Data

(Dollars in thousands, except per share data)

	Quarters ended
	March 31,
	2006		2005
CONDENSED INCOME STATEMENTS
Interest income	$	132,636	$	101,388
Interest expense		69,298		45,280
Net interest income		63,338		56,108
Gain on sale of securities		4		16,960
Loss on extinguishment of debt		—		(6,727	)
Broker-deaker, asset management and insurance fees		15,045		12,572
Other income		10,813		16,283
Operating expenses		59,712		55,366
Provision for loan losses		7,538		6,700
Income tax provision		8,594		7,216
Net income	$	13,356	$	25,914
PER COMMON SHARE DATA*
Net income	$	0.29	$	0.56
Book value	$	12.06	$	11.64
Outstanding shares:
Average		46,639,104		46,639,104
End of period		46,639,104		46,639,104
Cash Dividend per Share	$	0.16	$	0.16
AVERAGE BALANCES
Loans held for sale and loans, net of allowance for loans losses	$	6,155,757	$	5,484,038
Allowance for loan losses		79,234		69,270
Earning assets		8,093,820		7,895,103
Total assets		8,355,936		8,262,939
Deposits		4,938,292		4,728,396
Borrowings		2,586,459		2,835,049
Common equity		538,086		573,085
PERIOD END BALANCES
Loans held for sale and loans, net of allowance for loans losses	$	6,668,267	$	5,710,695
Allowance for loan losses		87,717		69,205
Earning assets		8,599,205		8,132,601
Total assets		9,153,529		8,414,522
Deposits		5,355,246		5,301,831
Borrowings		2,899,287		2,333,592
Common equity		562,570		542,694

Continued

29

	Quarters ended
	March 31,
	2006			2005
SELECTED RATIOS
Performance:
Net interest margin on a tax-equivalent basis (on an annualized basis)		3.27	%		3.12	%
Efficiency ratio (1)		65.51	%		61.86	%
Return on average total assets (on an annualized basis)		0.65	%		1.27	%
Return on average common equity (on an annualized basis)		10.07	%		18.34	%
Dividend payout		55.17	%		28.57	%
Average net loans/average total deposits		124.65	%		115.98	%
Average earning assets/average total assets		96.86	%		95.55	%
Average stockholders’ equity/average assets		6.44	%		6.94	%
Fee income to average assets (annualized)		1.27	%		1.12	%
Capital:
Tier I capital to risk-adjusted assets		7.60	%		8.54	%
Total capital to risk-adjusted assets		10.62	%		10.87	%
Leverage Ratio		6.11	%		6.20	%
Asset quality:
Non-performing loans to total loans		1.54	%		1.47	%
Annualized net charge-offs to average loans		0.29	%		0.49	%
Allowance for loan losses to period-end loans		1.30	%		1.20	%
Allowance for loan losses to non-performing loans		84.41	%		81.55	%
Allowance for loan losses to non-performing loans plus accruing loans past-due 90 days or more		81.14	%		77.83	%
Non-performing assets to total assets		1.17	%		1.05	%
Recoveries to charge-offs		21.48	%		23.80	%
OTHER DATA AT END OF PERIOD
Customer financial assets under management	$	13,178,000		$	13,204,900
Bank branches		63			65
Consumer Finance branches		70			—
Total Branches		133			65
ATMs		150			151

(Concluded)

*	Per share data is based on the average number of shares outstanding during the periods.
(1)	Operating expenses divided by net interest income on a tax equivalent basis, plus other income excluding securities gains and losses, loss on extinguishment of debt.

30

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

     This financial discussion contains an analysis of the consolidated financial position and consolidated results of operations of the Corporation and should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. This discussion gives effect to the restatement of the Corporation’s quarterly consolidated financial statements as discussed in Note 2 to the consolidated financial statements included in Part I of this report.

     During the first quarter of 2006 the Corporation restated its financial information for the four years ended December 31, 2004. All financial information included herein as of and for the period ended March 31, 2005 has also been restated to conform to current period presentation. The cumulative effect of all the restatement adjustment is a reduction of common stockholder’s equity as of March 31, 2005 of $2.3 million. For the first quarter of 2005 the restatement adjustment resulted in an increase in net income of $0.4 million.

     The following table summarizes the adjustments to restate net income, common stockholders’ equity and basic and diluted earnings per share on the interim consolidated financial statements for the quarterly periods ended March 31, June 30 and September 30, 2005 and 2004 and December 31, 2004.

Financial Statements Line Items	1Q05			2Q05			3Q05			1Q04			2Q04			3Q04			4Q04
($ in thousands)
Common Stockholders’ Equity — as Previously Reported	$	544,946		$	571,309		$	567,126		$	508,324		$	491,795		$	526,237		$	556,003
Net Income — as Previously Reported	$	25,509		$	19,255		$	17,065		$	25,215		$	16,046		$	21,869		$	21,330
Premium amortization and Net interest income		638			594			517			1,205			1,123			870			694
Reversal of Amortization of MSR & Amortization of reversed gains		25			26			23			48			40			36			32
Provision (Benefit) for Income Tax on the above adjustments		(258	)		(242	)		(210	)		(489	)		(454	)		(353	)		(283	)
Net Income — as Restated	$	25,914		$	19,633		$	17,395		$	25,979		$	16,755		$	22,422		$	21,773
Effect of restatement on Common Stockholders’ Equity	$	(2,252	)	$	(1,874	)	$	(1,544	)	$	(4,362	)	$	(3,653	)	$	(3,100	)	$	(2,657	)
Common Stockholders’ Equity — as Restated	$	542,694		$	569,435		$	565,582		$	503,962		$	488,142		$	523,137		$	553,346
Basic and Diluted Earnings per Share as Previously Reported	$	0.55		$	0.41		$	0.37		$	0.54		$	0.34		$	0.47		$	0.46
Basic and Diluted Earnings per Share as Restated	$	0.56		$	0.42		$	0.37		$	0.56		$	0.36		$	0.48		$	0.47

31

     The following is a summary of the significant effects of the restatement on the Corporation’s condensed consolidated financial statements:

	March 31, 2005
	As Previously
	Reported			As Restated
	(Dollars in thousands)
Selected Balance Sheet Data:
Loans, net	$	5,472,614		$	5,463,692
Other Assets		134,414			139,911
Total Assets		8,417,947			8,414,522
Other Liabilities		206,958			205,785
Total Liabilities		7,873,001			7,871,828
Reserve Fund		127,086			126,820
Undivided Profits		90,536			88,550
Total Retained Earnings		217,622			215,370
Total Stockholders’ Equity		544,946			542,694
Capital:
Tier 1 capital to risk-adjusted assets		9.40	%		8.46	%
Total capital to risk-adjusted assets		11.97	%		10.79	%
Leverage ratio		6.18	%		6.14	%

Critical Accounting Policies

     The consolidated financial statements of the Corporation are prepared in accordance with accounting principles generally accepted in the United States of America (hereinafter referred to as “generally accepted accounting principles” or “GAAP”) and with general practices within the financial services industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Corporation’s critical accounting policies are detailed in the Financial Review and Supplementary Information section of the Corporation’s Form 10-K for the year ended December 31, 2005.

     All financial data for March 31, 2005 presented in the accompanying financial information have been restated to reflect the above mentioned adjustments.

Overview of Results of Operations for the Three Months Ended March 31, 2006

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

     Santander BanCorp (the “Corporation”) reported net income of $13.4 million for the three months ended March 31, 2006, compared with $25.9 million for the same period in 2005. Earnings per common share (EPS) for the quarters ended March 31, 2006 and 2005 were $0.29 and $0.56, respectively, based on 46,639,104 average shares for each period. Return on average total assets (ROA) on an annualized basis and return on average common equity (ROE) on an annualized basis for the quarter ended March 31, 2006 were 0.65% and 10.07%, respectively, compared with 1.27% and 18.34% reported during the same quarter of 2005. The Efficiency Ratio¹ for the quarter ended March 31, 2006 reflected an increase of 365 basis points, from 61.86% to 65.51% for the quarter ended March 31, 2006.

     The decrease in net income for the quarter ended March 31, 2006 compared to the same period in 2005 was principally due to lower non-interest income.

     During the first quarter of 2006 the Corporation acquired substantially all the assets and business operations in Puerto Rico of Island Finance for $742 million. The Island Finance operation was acquired by Santander Financial

¹ On a tax equivalent basis.

32

     Services, Inc. (“Santander Financial”) a 100% owned subsidiary of the Corporation. In connection with this transaction the Corporation entered into a $725 million loan agreement with a subsidiary of its parent company. The loan bears interest at an annual rate of 4.965%, payable semiannually and matures on August 28, 2006. The Corporation also completed the private placement of $125 million Trust Preferred Securities (“Preferred Securities”) and issued Junior Subordinated Debentures in the aggregate principal amount of $129 million in connection with the issuance of the Preferred Securities. The Preferred Securities are fully and unconditionally guaranteed (to the extent described in the guarantee agreement between the Corporation and the guarantee trustee, for the benefit of the holders from time to time of the Preferred Securities) by the Corporation. The Trust Preferred Securities were acquired by an affiliate of the Corporation. In connection with the issuance of the Preferred Securities, the Corporation issued an aggregate principal amount of $129,000,000 of its 7.00% Junior Subordinated Debentures, Series A, due July 1, 2037.

     As a result of this transaction the Corporation recognized goodwill of $117.3 million and other intangible assets of $40.7 million (refer to Note 6 of the condensed consolidated financial statements for additional information).

     The table below includes certain financial information of Santander Financial as of and for the period ended March 31, 2006 (one month of operations) and balances acquired as of February 28, 2006.

	March 31, 2006
	(In thousands)
Loans*	$	579,146
Allowance for loan losses		19,817
Total Assets		767,087
Borrowings		617,000
Non-performing loans		29,595
Interest income		12,386
Interest expense		3,565
Net interest income		8,821
Provision for loan losses		3,038
Non interest income		35
Operating expenses		5,143
Income tax expense		355
Net income		320
Net interest margin		15.28	%

Balances acquired as of February 28, 2006
(In thousands)

Loans*	$	596,775
Other Assets		9,517
Total Assets		606,292
Other Liabilities		(1,415	)
Net Assets Acquired	$	604,877

* Net of allowance for loan losses of $19.8 million and $17.8 million, and discount of $32.1 million and $36.0 million as of March 31, 2006 and February 28, 2006, respectively.

33

Net Interest Income

     The Corporation’s net interest income for the three months ended March 31, 2006 reached $63.3 million, an increase of 12.9% over $56.1 million for the same period in 2005. This improvement was due to an increase in average interest earning assets of $198.7 million or 2.5% driven by an increase in average net loans of $671.7 million or 12.3% and partially offset by a decrease in average investment securities of $370.4 million. The increase in average interest earning assets was offset by an increase of $256.2 million in average interest bearing liabilities. Net interest margin, on a tax equivalent basis,for the first quarter of 2006 was 3.27% compared with 3.12% for the first quarter of 2005. This increase of 15 basis points was mainly due to and increase of 130 basis points in the yield on average interest earning assets primarily as a result of the acquisition of Island Finance on February 28, 2006. There was also an increase of 128 basis points in the average cost of interest bearing liabilities. Excluding the Island Finance acquisition, net interest margin on a tax equivalent basis for the first quarter of 2006 was 2.93%, a 19 basis point reduction from 3.12% for the same period in 2005.

     The table on page 36, Quarter to Date Average Balance Sheet and Summary of Net Interest Income – Tax Equivalent Basis, presents average balance sheets, net interest income on a tax equivalent basis and average interest rates for the first quarter of 2006 and 2005. The table on Interest Variance Analysis — Tax Equivalent Basis on page 35, allocates changes in the Corporation’s interest income (on a tax-equivalent basis) 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 first quarter of 2006 compared with the same period of 2005.

     To permit the comparison of returns on assets with different tax attributes, the interest income on tax-exempt assets has been adjusted by an amount equal to the income taxes which would have been paid had the income been fully taxable. This tax equivalent adjustment is derived using the applicable statutory tax rate and resulted in adjustments of $2.0 million and $4.5 million for the quarters ended March 31, 2006 and 2005, respectively.

     The following table sets forth the principal components of the Corporation’s net interest income for the quarters ended March 31, 2006 and 2005.

	March 31, 2006			March 31, 2005
	(Dollars in thousands)
Interest income — tax equivalent basis	$	134,596		$	105,922
Interest expense		69,298			45,280
Net interest income — tax equivalent basis	$	65,298		$	60,642
Net interest margin — tax equivalent basis (1)		3.27	%		3.12	%

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

     The Corporation’s interest income on a tax equivalent basis increased $28.7 million, or 27.1% to $134.6 million for the quarter ended March 31, 2006 from $105.9 million for the quarter ended March 31, 2005. The increase of $28.7 million in tax equivalent interest income is attributable to a $5.1 million increase related to the volume of interest earning assets and a $23.6 million increase related to the yield on such assets.

     The average yield on interest earning assets increased 130 basis points from 5.44% for the quarter ended March 31, 2005 to 6.74% for the quarter ended March 31, 2006. This increase was primarily the result of the acquisition of the assets of Island Finance during the first quarter of 2006. Average interest earning assets increased 2.5% for the quarter ended March 31, 2006 compared to the first quarter of 2005. The increment in average interest earning assets compared to the first quarter of 2005 was driven by an increase in average net loans of $671.7 million, which was partially offset by a decrease in average investment securities of $370.4 million and in average interest bearing deposits of $102.6 million. The increase in average net loans was due to an increase of $633.1 million or 41% in average mortgage loans as a result of the Corporation’s continued emphasis of growing this portfolio. There was also an increase of $329.9 million or 71% in the average consumer loan portfolio as a result of the acquisition of Island Finance. These increases were partially offset by a decrease in the commercial loan portfolio of $331.8 million or 10.24%. The reduction in investment securities is mainly attributed to the sale of $785 million of securities during March 2005 resulting in a decline in the yield on investment securities of 58 basis points from 5.19% for the quarter ended March 31, 2005 to 4.61% for the quarter ended March 31, 2006. The above mentioned sale generated a gain of $16.9 million during the first quarter of 2005 that was partially offset by a loss of $6.7 million on the extinguishment of certain term repo transactions that were funding part of the securities sold.

34

     The Corporation’s interest expense for the quarter ended March 31, 2006 increased by 53.0% to $69.3 million from $45.3 million for the quarter ended March 31, 2005. The $24.0 million increase in interest expense is attributable to a $2.1 million increase related to the volume of interest-bearing liabilities and a $21.9 million increase related to the cost of interest-bearing liabilities. This increase in interest expense was attributed to an increase of 3.8% or $256.2 million in average interest-bearing liabilities, as well as an increase of 128 basis points in the average cost of interest-bearing liabilities. Also contributing to the increase in interest expenses was an increase of 12.6% or $504.8 million in the average balance of interest-bearing deposits during the first quarter of 2006 compared to the same period in 2005. Average brokered deposits increased $680.0 million or 115.1%, while average customer deposits decreased $175.2 million. There was also a decrease of $248.6 million or 8.8% in average borrowings (including term and subordinated notes).

     The following table allocates changes in the Corporation’s interest income, on a tax-equivalent basis, and interest expense for the quarter ended March 31, 2006 compared to the quarter ended March 31, 2005, between changes related to the average volume of interest earning assets and interest bearing liabilities, and changes related to interest rates. Volume and rate variances have been calculated based on the activity in average balances over the period and changes in interest rates on average interest earning assets and average interest bearing liabilities. The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of change in each category.

INTEREST VARIANCE ANALYSIS
on a Tax Equivalent Basis

	Three Months Ended March 31, 2006
	Compared to the Three Months Ended
	March 31, 2005
	Increase (Decrease) Due to Change in:
	Volume			Rate			Total
	(In thousands)
Interest income, on a tax equivalent basis:
Federal funds sold and securities purchased under agreements to resell	$	(790	)	$	773		$	(17	)
Time deposits with other banks		(13	)		762			749
Investment securities		(4,414	)		(2,787	)		(7,201	)
Loans		10,321			24,822			35,143
Total interest income, on a tax equivalent basis		5,104			23,570			28,674
Interest expense:
Savings and NOW accounts		(37	)		4,089			4,052
Other time deposits		4,235			8,069			12,304
Borrowings		(3,194	)		8,827			5,633
Long-term borrowings		1,110			919			2,029
Total interest expense		2,114			21,904			24,018
Net interest income, on a tax equivalent basis	$	2,990		$	1,666		$	4,656

     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 three months ended March 31, 2006 and 2005.

35

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

	March 31, 2006								March 31, 2005
						Annualized								Annualized
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
	(Dollars in thousands)
Assets:
Interest bearing deposits	$	95,759		$	959		4.06	%	$	101,531		$	210		0.84	%
Federal funds sold and securities purchased under agreements to resell		116,355			1,331		4.64	%		213,197			1,348		2.56	%
Total interest bearing deposits		212,114			2,290		4.38	%		314,728			1,558		2.01	%
U.S. Treasury securities		44,692			470		4.26	%		10,607			55		2.10	%
Obligations of other U.S. government agencies and corporations		801,657			8,699		4.40	%		1,287,634			18,400		5.80	%
Obligations of government of Puerto Rico and political subdivisions		91,855			1,224		5.40	%		82,629			1,045		5.13	%
Collateralized mortgage obligations and mortgage backed securities		740,786			8,713		4.77	%		670,547			6,947		4.20	%
Other		46,959			507		4.38	%		44,920			367		3.31	%
Total investment securities		1,725,949			19,613		4.61	%		2,096,337			26,814		5.19	%
Loans:
Commercial		2,907,986			46,886		6.54	%		3,239,764			36,162		4.53	%
Construction		227,942			4,768		8.48	%		192,869			3,169		6.66	%
Consumer		794,618			26,765		13.66	%		464,682			11,392		9.94	%
Mortgage		2,177,643			32,147		5.99	%		1,544,538			24,952		6.55	%
Lease financing		126,802			2,127		6.80	%		111,455			1,875		6.82	%
Gross loans		6,234,991			112,693		7.33	%		5,553,308			77,550		5.66	%
Allowance for loan losses		(79,234	)							(69,270	)
Loans, net		6,155,757			112,693		7.42	%		5,484,038			77,550		5.73	%
Total interest earning assets/ interest income (on a tax equivalent basis)		8,093,820			134,596		6.74	%		7,895,103			105,922		5.44	%
Total non-interest earning assests		262,116								367,836
Total assets	$	8,355,936							$	8,262,939
Liabilities and stockholders’ equity:
Savings and NOW accounts	$	1,947,583		$	11,845		2.47	%	$	1,956,903		$	7,793		1.62	%
Other time deposits		1,292,030			12,262		3.85	%		1,457,911			9,723		2.70	%
Brokered deposits		1,270,667			14,530		4.64	%		590,632			4,765		3.27	%
Total interest bearing deposits		4,510,280			38,637		3.47	%		4,005,446			22,281		2.26	%
Borrowings		2,374,987			27,899		4.76	%		2,730,960			22,266		3.31	%
Term Notes		40,379			348		3.50	%		31,505			132		1.70	%
Subordinated Notes		171,093			2,414		5.72	%		72,584			601		3.36	%
Total interest bearing liabilities/interest expense		7,096,739			69,298		3.96	%		6,840,495			45,280		2.68	%
Total non-interest bearing liabilities		721,111								849,359
Total liabilities		7,817,850								7,689,854
Stockholders’ Equity		538,086								573,085
Total liabilities and stockholders’ equity	$	8,355,936							$	8,262,939
Net interest income, on a tax equivalent basis				$	65,298							$	60,642
Net interest spread							2.78	%							2.76	%
Cost of funding earning assets							3.47	%							2.33	%
Net interest margin, on a tax equivalent basis							3.27	%							3.12	%

36

Provision for Loan Losses

     The Corporation’s provision for loan losses for the quarter ended March 31, 2006 increased $0.8 million or 12.5% from $6.7 million for the quarter ended March 31, 2005 to $7.5 million for the first quarter of 2006. The increase in the provision for loan losses was due to a 21.6% increase in past-due loans (non-performing loans and accruing loans past-due 90 days or more) which reached $108.1 million as of March 31, 2006, from $88.9 million as of March 31, 2005, and $76.7 million as of December 31, 2005. Non-performing loans were $74.3 million as of March 31, 2006 a reduction of $10.5 million compared to non-performing loans as March 31, 2005. The Island Finance portfolio reflected past-due loans of $29.6 million as of March 31, 2006.

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

Other Income

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

     The following table sets forth the components of the Corporation’s other income for the periods indicated:

OTHER INCOME

	For the three months ended
	March 31,			March 31,
	2006			2005
	(In thousands)
Bank service fees on deposit accounts	$	3,281		$	3,005
Other service fees:
Credit card fees		3,882			3,496
Mortgage-servicing fees		719			440
Trust fees		683			751
Other fees		2,553			2,504
Broker-dealer, asset management, and insurance fees		15,045			12,572
Gain on sale of securities, net		4			16,960
Loss on extinguishment of debt		—			(6,727	)
(Loss) gain on sale of loans		(2	)		1,081
Mortgage servicing rights recognized		3			43
Trading (losses) gains		529			(237	)
(Loss) gain on derivatives		(791	)		2,813
Other (losses) gains, net		(870	)		1,602
Other		826			785
	$	25,862		$	39,088

37

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

	For the three months ended
	March 31, 2006		March 31, 2005
	(In thousands)
Broker-dealer	$	7,879	$	6,155
Asset management		4,979		5,029
Total Santander Securities		12,858		11,184
Insurance		2,187		1,388
Total	$	15,045	$	12,572

     For the quarter ended March 31, 2006, other income reached $25.9 million compared to $39.1 million reported for the same period in 2005. This $13.2 million or 33.8% decrease in other income was mainly due to a decrease in gain on sale of securities of $17.0 million net of a loss on extinguishment of debt $6.7 million. There was also a decrease of $5.3 million in other income, resulting mainly from reductions of $3.6 million on derivatives gains and $1.1 million in the recognition of mortgage servicing rights and an increase in the loss on valuation of mortgage loans available for sale in 2006 of $0.6 million. These reductions in non-interest income were partially offset by an increase in broker-dealer, asset management and insurance fees of $2.5 million.

     During the first quarter of 2005, the Corporation modified its asset/liability mix to adjust for expectations of further rises in short term rates. The Corporation sold $785 million of its investment securities and realized a gain of $16.9 million. This gain was partially offset by a loss of $6.7 million on the extinguishment of certain term repo transactions that were funding part of the securities sold. In addition, the Corporation engaged in covered call options against other portfolio positions and realized a gain of $1.5 million on expired swaptions.

     Broker-dealer, asset management and insurance fees increased $2.5 million or 19.7% for the quarter ended March 31, 2006 compared to the same period in 2005. Santander Securities business includes securities underwriting and distribution, sales, trading, financial planning, investment advisory services and securities brokerage services. In addition, Santander Securities provides portfolio management services through its wholly owned subsidiary, Santander Asset Management Corporation. The Broker-dealer, asset management and insurance operations contributed 58.2% to the Corporation’s other income for the quarter ended March 31, 2006 and 32.2% for the same period in 2005. The increase in broker-dealer commissions is due to the increase in underwriting activity and an increase in fixed income activity during the quarter ended March 31, 2006 compared to the same period in 2005.

     Insurance commissions increased $0.8 million, or 57.6%, during the first quarter of 2006 to $2.2 million from $1.4 million for the same period in 2005. This increase was due to the increase in the volume of business generated by the Island Finance operation as well as an increase in the open market business.

     The Corporation’s gains on sales of loans in 2005, were principally in the portfolio of mortgage loans held for sale. Mortgage loan sales are executed from time to time when interest rate movements permit the Corporation to maximize its returns.

38

Operating Expenses

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

OPERATING EXPENSES

	Three Months ended
	March 31,			March 31,
	2006			2005
	(In thousands)
Salaries	$	16,577		$	14,517
Pension and other benefits		12,520			12,381
Expenses deferred as loan origination costs		(2,541	)		(2,729	)
Total personnel costs		26,556			24,169
Occupancy costs		4,649			4,024
Equipment expenses		1,040			916
EDP servicing expense, amortization and technical services		8,053			7,793
Communications		2,318			2,016
Business promotion		2,581			2,362
Other taxes		2,376			2,101
Other operating expenses:
Professional fees		2,576			2,635
Amortization of intangibles		655			320
Printing and supplies		395			372
Credit card expenses		2,337			2,073
Insurance		661			563
Examinations & FDIC assessment		497			441
Transportation and travel		690			471
Repossessed assets provision and expenses		335			858
Collections and related legal costs		375			530
All other		3,618			3,722
Other operating expenses		12,139			11,985
Non-personnel expenses		33,156			31,197
Total Operating expenses	$	59,712		$	55,366

     For the quarter ended March 31, 2006, the Corporation’s efficiency ratio on a tax equivalent basis was 65.51% compared to 61.86% for the same period in 2005. This 365 basis point increase in the 2006 ratio was the result of higher operating expenses during the first quarter of 2006 resulting from the operations of the Island Finance business

     Operating expenses increased $4.3 million or 7.9% from $55.4 million for the quarter ended March 31, 2005 to $59.7 million for the quarter ended March 31, 2006. This increase was due primarily to the Island Finance operation which reflected operating expenses of $5.1 million for the quarter ended March 31, 2006. Excluding Island Finance expenses, operating expenses reflected a decrease of $0.8 million or 1.4%.

     The increase in operating expenses was composed of an increase of $2.4 million in personnel costs and $2.0 million in non-personnel expenses. The increase in personnel costs was due to an increase in salaries of $2.1 million of which Island Finance reported $1.5 million. There was a decrease in temporary personnel expense of $0.3 million and an increase in severance payments of $0.5 million. Pension and other benefits reflected an increase of $0.1 million of which Island Finance reported $1.2 million. There was a decrease in Christmas and performance bonuses of $1.9 million that was partially offset by an increase in commissions of $1.5 million.

39

     Other non-personnel expenses increased $2.0 million or 6.3% from $31.2 million for the quarter ended March 31, 2005 to $33.2 million for the quarter ended March 31, 2006, principally related to the Island Financial business.

Provision for Income Tax

     The Corporation and each of its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns in Puerto Rico. The maximum statutory marginal corporate income tax rate is 39%. However, there is an alternative minimum tax of 22%. The difference between the statutory marginal tax rate and the effective tax rate is primarily due to the interest income earned on certain investments and loans, which is exempt from income tax (net of the disallowance of expenses attributable to the exempt income) and to the disallowance of certain expenses and other items. Additionally, a temporary two-year surtax of 2.5% applicable to corporations was enacted. This surtax is applicable to taxable years beginning after December, 31, 2004 and increases the maximum marginal corporate income tax rate from 39% to 41.5%.

     Puerto Rico international banking entities, or IBE’s, such as Santander International Bank, are currently exempt from taxation under Puerto Rico law. During 2004, the Legislature of Puerto Rico and the Governor of Puerto Rico approved a law amending the IBE Act. This law imposes income taxes at normal statutory rates on each IBE that operates as a unit of a bank, if the IBE’s net income generated after December 31, 2003 exceeds 40% of the bank’s net income in the taxable year commenced on July 1, 2003, 30% of the bank’s net income in the taxable year commencing on July 1, 2004, and 20% of the bank’s net income in the taxable year commencing on July 1, 2005, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a bank as is the case for the Corporation.

     The Governor and the Legislature of Puerto Rico are currently considering assessing special tax assessments on financial institutions. A law has not yet been enacted and the matter is still under discussion, therefore its ultimate effect on the operations of the Corporation is not yet determinable.

     The provision for income tax amounted to $8.6 million, or 39.2% of pretax earnings, for the quarter ended March 31, 2006 compared to $7.2 million, or 21.8% of pretax earnings, for the same period in 2005. The increase in the provision for income tax during 2006 was due to a change in the composition of the Corporation’s taxable and tax-exempt assets over those periods, and to the temporary, two-year surtax of 2.5% for corporations.

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Financial Position — March 31, 2006

Assets

     The Corporation’s assets reached $9.2 billion as of March 31, 2006, a 10.7% or $0.9 billion increase when compared to total assets of $8.3 billion at December 31, 2005 and an 8.8% or $0.7 billion increase when compared to total assets of $8.4 billion at March 31, 2005. As of March 31, 2006 there was an increase of $713.4 million and $957.6 million in net loans, including loans held for sale, compared to December 31, 2005 and March 31, 2005 balances, respectively. There were also increases of $117.3 million, $40.3 million and $37.8 million in goodwill, intangible assets and other assets, respectively, as of March 31, 2006 compared to December 31, 2005. The increases in goodwill and intangible assets were due to the acquisition of the Island Finance business during the first quarter of 2006. The increase in other assets was due primarily to increases in net deferred tax assets and derivative assets.

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

	March 31,			December 31,			Increase
	2006			2005			(Decrease)
	(In thousands)
Commercial and industrial	$	2,951,716		$	2,968,185		$	(16,469	)
Construction		249,696			213,705			35,991
Mortgage		2,279,785			2,147,479			132,306
Consumer		1,141,152			567,195			573,957
Leasing		133,635			125,168			8,467
Gross Loans		6,755,984			6,021,732			734,252
Allowance for loan losses		(87,717	)		(66,842	)		(20,875	)
Net Loans	$	6,668,267		$	5,954,890		$	713,377

          Net loans, including loans held for sale, at March 31, 2006 were $6.7 billion, reflecting an increase in the loan portfolio of $713.4 million or 12.0% when compared to $6.0 billion at December 31, 2005. Mortgage loans originated continued to grow during the first quarter of 2006 resulting in an increase of $132.3 million or 6.2%, in the mortgage loan portfolio. Mortgage loan originations for the first quarter reached $183.2 million. Consumer loans at March 31, 2006 reflected an increase of $574.0 million or 101.2%, compared to December 31, 2005. The increase in the consumer loan portfolio was due to the acquisition of Island Finance in February 2006. Net loans of Island Finance as of March 31, 2006 were $579.0 million.

          Commercial banking provides financial services and products primarily to middle-market companies. These products and services are sold through a group of relationship managers and officers distributed among six regions throughout the island. The Corporation has established the so-called “Business Focus Meetings” between credit and relationship officers at the middle-market and corporate segments in order to facilitate and expedite business transactions. The Corporate/Institutional segment coordinates all banking and credit related services to customers through a group of corporate relationship officers. The corporate group provides financial services and products basically to corporations with annual revenues over $75 million. The Consumer Lending division provides financing solutions to individuals in the form of unsecured personal loans, credit cards, overdraft lines and auto leasing. These products are offered through our retail branch network, sales representatives, telephone banking, and internet. Growth in the consumer loan portfolio came as a result of the acquisition of Island Finance. Island Finance has a network of 70 branches throughout Puerto Rico offering consumer finance products. Management continues to focus on regaining market share with a strong emphasis on the mortgage and consumer loan portfolios. Due to more effective marketing strategies, streamlining of the loan application and approval process with continued stringent credit policies, and innovative products and massive consumer and credit card campaigns, and the increased branch network, the Corporation has been able to continue growing its loan portfolio.

          On May 15 and 16, 2006, the Corporation expects to sell to Doral Financial Corporation (“Doral”) mortgage loans aggregating $614.1 million in principal amount for a total purchase price of 99.125% plus accrued interest. The loans had previously been transferred by Doral to the Corporation pursuant to letter agreements between the parties dated February 3, 2004, May 3, 2004, December 17, 2004 and March 3, 2005.

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Allowance for Loan Losses

          The Corporation systematically assesses the overall risks in its loan portfolio and establishes and maintains an allowance for possible 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 loan portfolio. Management evaluates the adequacy of the allowance for loan losses on a monthly basis. This evaluation involves the exercise of judgment and the use of assumptions and estimates that are subject to revision, as more information becomes available. In determining the allowance, management considers the portfolio risk characteristics, prior loss experience and collection practices, prevailing and projected economic conditions, loan impairment measurements and results of internal and regulatory agencies’ loan reviews. 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 allowance for loan losses is adequate to absorb probable losses in the Corporation’s loan portfolio.

          Commercial and construction loans over a predetermined amount are individually evaluated on a quarterly basis for impairment following the provisions of SFAS No. 114, “Accounting by Creditors of a Loan”. A loan is impaired 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 impairment loss, if any, on each individual loan identified as impaired is measured based on the present value of expected cash flows discounted at the loan’s effective interest rate, except as a practical expedient, we may measure impairment based on the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent. Substantially all of the Corporation’s impaired loans are measured on the basis of the fair value of the collateral, net of estimated disposition costs. The Corporation maintains a detailed analysis of all loans identified as impaired with their corresponding allowances and the specific component of the allowance is computed on a quarterly basis. Additions, deletions or adjustment to the working paper are tracked and formal justification is documented detailing the rationale for such adjustment.

          For small-homogeneous type loans, a general allowance is computed based on average historical loss experience or ratios for each corresponding type of loans (consumer, credit cards, residential mortgages, auto, etc.) The methodology of accounting for all probable losses is made in accordance with the guidance provided by Statement of Accounting Standards (SFAS) No. 5, “Accounting for Contingencies”. In determining the general allowance, the Corporation applies a loss factor for each type of loan based on the average historical net charge off for the previous two or three years for each portfolio adjusted for other statistical loss estimates, as deemed appropriate. Historical loss rates are reviewed at least quarterly and adjusted based on changes in actual collections and charge off experience as well as significant factors that in management’s judgment reflect the impact of any current conditions on loss recognition. Factors that management considers in the analysis of the general reserve include the effect of the trends in the nature and volume of loans (delinquency, charge-offs and non-accrual loans), changes in the mix or type of collateral, asset quality trends, changes in the internal lending policies and credit standards, collection practices and examination results from bank regulatory agencies.

          The determination of the allowance for loan losses under SFAS No. 5, “Accounting for Contingencies”,for the Corporation is based on historical loss experience by loan type, management judgment of the quantitative factors (historical net charge-offs, statistical loss estimates, etc.), as well as qualitative factors (current economic conditions, portfolio composition, delinquency trends, industry concentrations, etc.) which result in the final determination of the provision for loan losses to maintain a level of allowance for loan losses deemed to be adequate.

          The Corporation’s methodology for allocating the allowance among the different parts of the portfolio or different elements of the allowance is based on the historical loss percentages for each type or pool of loan (consumer, commercial, construction, mortgage and other), after assigning the specific allowances for impaired loans on an individual review process. The sum of specific allowances for impaired loans plus the general allowances for each type of loan not specifically examined and the unallocated allowance constitutes our total allowance for loan losses at the end of any reporting period.

          An unallocated allowance is maintained to absorb changes and unexpected losses that may result from certain significant external factors, such as (a) the Corporation’s moderate concentration in certain industries, specially health care, and agriculture businesses; (b) the slow growth of the Puerto Rico economy as evidenced by high unemployment figures; (c) the broad negative effect on the Puerto Rico economy of the increased price of oil and oil-related products; (d) interest rates forecasts; and (e) the negative collateral economic effect of the war in Iraq or additional terrorist attacks, both which add material risk to the economy and curtail economic recovery. This allowance is based primarily on historical experience, current trends in factors such as bankruptcies and loss trends among others.

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          On a quarterly basis, management reviews its determination of the allowance for loan losses which includes the specific allowance computed according to the provisions of SFAS No.114 and the general allowance for small-homogenous type loans, which is based on historical loss percentages for each type or pool of loan. This analysis also considers loans classified by the internal loan review department, the internal auditors, the in-house Watch System Unit, and banking regulators.

          The Corporation has not changed any aspects of its overall approach in the determination of the allowance for loan losses, and there have been no material changes in assumptions or estimation techniques, as compared to prior periods.

ALLOWANCE FOR LOAN LOSSES

	For the three months ended
	March 31,
	2006			2005
Balance at beginning of period	$	66,842		$	69,177
Provision for loan losses		7,538			6,700
Reserve balance acquired		17,830			—
		92,210			75,877
Losses charged to the allowance:
Commercial and industrial		784			4,039
Consumer		4,746			4,382
Leasing		192			335
		5,722			8,756
Recoveries:
Commercial and industrial		655			466
Consumer		390			1,528
Leasing		184			90
		1,229			2,084
Net loans charged-off		4,493			6,672
Balance at end of period	$	87,717		$	69,205
Ratios:
Allowance for loan losses to period-end loans		1.30	%		1.20	%
Recoveries to charge-offs		21.48	%		23.80	%
Annualized net charge-offs to average loans		0.29	%		0.49	%

          The Corporation’s allowance for loan losses was $87.7 million or 1.30% of period-end loans at March 31, 2006 a 10 basis point reduction compared to $69.2 million, or 1.20% of period-end loans at March 31, 2005. The improvement in this ratio was partially due to past-due loans (non-performing loans and accruing loans past-due 90 days or more) during the period. Past-due loans increased 21.6% reaching $108.1 million as of March 31, 2006, from $88.9 million as of March 31, 2005, and $76.7 million as of December 31, 2005. The Island Finance portfolio had past-due of $29.6 million as of March 31, 2006.

          The ratio of allowance for loan losses to past-due loans increased to 81.14% at March 31, 2006, from 77.83% at March 31, 2005. At December 31, 2005, this ratio was 87.17%. Excluding non-performing mortgage loans this ratio is 139.7% compared to 146.9% as of March 31, 2005 and 213.0% as of December 31, 2005.

          The annualized ratio of net charge-offs to average loans for the quarter ended March 31, 2005 decreased 20 basis points to 0.29% from 0.49% for the same period in 2005.

          At March 31, 2006, the allowance for loan losses was $87.7 million, $20.9 million higher than the allowance at December 31, 2005 and $18.5 million higher than $69.2 million at March 31, 2005. The most significant change in the

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allowance for loan losses was the addition of $17.8 million of the Santander Financial allowance as a result of the acquisition of the net assets of Island Finance. At March 31, 2006, impaired loans (loans evaluated individually for impairment) with related allowance amounted to approximately $51.7 million and $2.1 million, respectively. At December 31, 2005 impaired loans with related allowance amounted to $48.8 million and $2.2 million.

          Although the Corporation’s provision and allowance for loan losses will fluctuate from time to time based on economic conditions, net charge-off levels and changes in the level and mix of the loan portfolio, management considers that the allowance for loan losses is adequate to absorb probable losses on its loan portfolio. Management expects to continue the positive trend experienced during the last two years by continuing to improve the quality of its loan portfolio, improving collection efforts and continuing with its stringent lending criteria.

Non-performing Assets and Past Due Loans

          As of March 31, 2006, the Corporation’s total non-performing loans (excluding other real estate owned) reached $74.3 million or 1.10% of total loans from $73.7 million or 1.22% of total loans as of December 31, 2005. Accruing loans past-due 90 days or more were $33.8 million as of March 31, 2006 compared to $4.1 million as of March 31, 2005. This increment is due to the inclusion of $29.6 million past-due loans of Island Finance. Island Finance past-due loans are classified as “accruing loans past-due 90 days or more”. The loans acquired pursuant to the Asset Purchase Agreement on February 28, 2006 are subject to a guarantee by Wells Fargo of up to $21.0 million (maximum reimbursement amount) for net losses in excess of $34 million, occurring on or prior to the 15 month anniversary of the acquisition. If the Corporation does not incur net losses in excess of $34 million prior to the 15 month anniversary then the guarantee would be up to $7 million for net losses incurred in excess of $34 million prior to the 18 month anniversary.

          The Corporation continuously monitors non-performing assets and has deployed significant resources to manage the non-performing loan portfolio.

Non-performing Assets and Past Due Loans

	March 31,			December 31,
	2006			2005
	(Dollars in thousands)
Commercial and Industrial	$	13,152		$	14,326
Construction		4,219			3,414
Mortgage		45,304			45,292
Consumer		5,631			4,747
Leasing		3,452			3,340
Restructured Loans		2,560			2,560
Total non-performing loans		74,318			73,679
Repossessed Assets		3,504			2,706
Total non-performing assets	$	77,822		$	76,385
Accruing loans past-due 90 days or more	$	33,782		$	2,999
Non-Performing loans to total loans		1.10	%		1.22	%
Non-Performing loans plus accruing loans past due 90 days or more to total loans		1.60	%		1.27	%
Non-Performing assets to total assets		0.85	%		0.92	%

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Liabilities

          As of March 31, 2006, total liabilities reached $8.6 billion, an increase of $887.5 million compared to the December 31, 2005 balance. This increase in total liabilities was principally due to increases in federal funds sold and other borrowings of $606.2 million or 78.8%, in capital notes of $121.5 million or 100.3%, in deposits of $130.6 million or 2.5%, and in other liabilities of $547 million.

          At March 31, 2006, total deposits were $5.4 billion, reflecting an increase of $130.6 million, or 2.5% over deposits of $5.2 billion as of December 31, 2005. This increase was composed of an increase $15.6 million in brokered deposits and $115.0 million in customer deposits. The Corporation continues its efforts to increase its core deposit base by maintaining competitive interest rates, maximizing the cross selling of products and services by the segmentation of its client base, introducing innovative products and the extensive use of alternative marketing tools such as telephone and internet banking.

          Total borrowings at March 31, 2006 (comprised of federal funds purchased and other borrowings, securities sold under agreements to repurchase, commercial paper issued, and term and capital notes) increased $565.7 million or 24.2% and $687.0 million or 31.1%, compared to borrowings at March 31, 2005 and December 31, 2005, respectively. The increase in borrowings was due to the acquisition of Island Finance during the first quarter of 2006.

          During the first quarter of 2006 the Corporation engaged in several financing transactions in order to fund the acquisition of Island Finance. In connection with this transaction, on February 28, 2006, the Corporation entered into a $725 million loan agreement with Santusa Holding, S.L., a subsidiary of its parent company, to be used in connection with the acquisition of substantially all the assets of Island Finance in Puerto Rico from Wells Fargo. The loan bears interest at an annual rate of 4.965%, payable semiannually. Upon the occurrence and during the continuance of an event of default under the loan agreement, the interest rate applicable to the outstanding principal amount of the loan shall be increased by two percent (2%). Pursuant to the terms of the loan agreement, all amounts payable thereunder shall be made free and clear of any withholding or reduction on account of any taxes imposed or levied on such payments. The entire principal balance of the loan is due and payable on August 28, 2006.

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

Capital and Dividends

          The Corporation expects no favorable or unfavorable trends that could materially affect its capital resources.

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

     Stockholders’ equity was $562.6 million, or 6.2% of total assets at March 31, 2006, compared to $568.5 million or 6.9% of total assets at December 31, 2005. The decrease in stockholders’ equity was mainly due to unrealized losses on investment securities available for sale and dividends declared and was partially offset by net income for the period.

     The Corporation declared cash dividends of $0.16 per common share to all stockholders of record as of March 10, 2006 and expects to continue to pay quarterly dividends. This has resulted in an annualized dividend yield of 2.52%.

     During the three months ended March 31, 2006 and 2005, the Corporation did not repurchase any shares of common stock. As of March 31, 2006, the Corporation had repurchased 4,011,260 shares of its common stock under these programs at a cost of $67.6 million. The Corporation’s management believes that the repurchase program will not have a significant effect on the Corporation’s liquidity and capital positions.

     The Corporation adopted and implemented various Stock Repurchase Programs in May 2000, December 2000 and June 2001. Under these programs the Corporation acquired 3% of its then outstanding common shares. During November

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2002, the Corporation started a fourth Stock Repurchase program under which it plans to acquire 3% of its outstanding common shares. In November 2002, the Corporation’s Board of Directors authorized the Corporation to repurchase up to 928,204 shares, or approximately 3%, of its shares of outstanding common stock, of which 325,100 shares have been purchased. The Board felt that the Corporation’s shares of common stock represented an attractive investment at prevailing market prices at the time of the adoption of the common stock repurchase program and that, given the relatively small amount of the program, the stock repurchases would not have any significant impact on the Corporation’s liquidity and capital positions. The program has no time limitation and management is authorized to effect repurchases at its discretion. The authorization permits the Corporation to repurchase shares from time to time in the open market or in privately negotiated transactions. The timing and amount of any repurchases will depend on many factors, including the Corporation’s capital structure, the market price of the common stock and overall market conditions. All of the repurchased shares will be held by the Corporation as treasury stock and reserved for future issuance for general corporate purposes.

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

          As of March 31, 2006, the Corporation’s common stock price per share was $25.40, resulting in a market capitalization of $1.2 billion, including affiliated holdings.

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

          As of March 31, 2006, the Corporation was well capitalized under the regulatory framework for prompt corrective action. At March 31, 2006 the Corporation continued to exceed the regulatory risk-based capital requirements for well-capitalized institutions. Tier I capital to risk-adjusted assets and total capital ratios at March 31, 2006 were 7.60% and 10.62%, respectively, and the leverage ratio was 6.11%.

Liquidity

          The Corporation’s general policy is to maintain liquidity adequate to ensure its ability to honor withdrawals of deposits, make repayments at maturity of other liabilities, extend loans and meet its own working capital needs. Liquidity is derived from the Corporation’s capital, reserves, and securities portfolio. The Corporation has established lines of credit with foreign and domestic banks, has access to U.S. markets through its commercial paper program, and also has broadened its relations in the federal funds and repurchase agreement markets to increase the availability of other sources of funds and to augment liquidity as necessary.

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

Derivative Financial Instruments:

          The Corporation uses derivative financial instruments mostly as hedges of interest rate risk, changes in fair value of assets and liabilities and to secure future cash flows. Refer to Notes 1 and 9 to the accompanying consolidated financial statements for additional details of the Corporation’s derivative transactions as of March 31, 2006 and December 31, 2005.

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

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     Hedging Activities:

     The following table summarizes the derivative contracts designated as hedges as of March 31, 2006 and December 31, 2005, respectively:

	March 31, 2006
									Other
									Comprehensive
	Notional					Gain			Income
(In thousands)	Amounts *		Fair Value			(Loss)			(Loss)**
Cash Flow Hedges
Foreign Currency Swaps	$	—	$	—		$	—		$	36
Fair Value Hedges
Interest Rate Swaps		1,463,772		(38,149	)		(493	)		—
Totals	$	1,463,772	$	(38,149	)	$	(493	)	$	36

	December 31, 2005
								Other
								Comprehensive
	Notional					Gain		Income
(In thousands)	Amounts *		Fair Value			(Loss)		(Loss)**
Cash Flow Hedges
Interest Rate Swaps	$	—	$	—		$	—	$	1,369
Foreign Currency Swaps		117,725		2,182			—		(36	)
Fair Value Hedges
Interest Rate Swaps		1,408,772		(26,880	)		28		—
Totals	$	1,526,497	$	(24,698	)	$	28	$	1,333

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

     Cash Flow Hedges:

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

          As of March 31, 2006, the total amount, net of tax, included in accumulated other comprehensive income pertaining to the cash flow hedges was an unrealized gain of $36,000. As of December 31, 2005, the total amount, net of tax, included in accumulated other comprehensive income pertaining to the cash flow hedges was an unrealized gain of $1.3 million.

     Fair Value Hedges:

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

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          The fair value hedges have maturities through the year 2032 as of March 31, 2006 and December 31, 2005. The weighted-average rate paid and received on these contracts is 4.80% and 4.56%, and 4.34% and 4.33%, as of March 31, 2006 and December 31, 2005, respectively.

          The $1.5 billion and $1.4 billion fair value hedges are associated to the swapping of fixed rate debt as of March 31, 2006 and December 31, 2005, respectively. The Corporation regularly issues term fixed rate debt, which it in turn swaps to floating rate debt via interest rate swaps. In these cases the Corporation matches all of the relevant economic variables (notional, coupon, payments dates and conventions etc.) of the fixed rate debt it issues to the fixed rate leg of the interest rate swap ( which it receives from the counterparty) and pays the floating rate leg of the interest rate swap. The effectiveness of these transactions is very high since all of the relevant economic variables are matched.

     Derivative instruments not designated as hedging instruments:

          Any derivative not associated to hedging activity is booked as a freestanding derivative. In the normal course of business the Corporation may enter into derivative contracts as either a market maker or proprietary position taker. The Corporation’s mission as a market maker is to meet the clients’ needs by providing them with a wide array of financial products, which include derivative contracts. The Corporation’s major role in this aspect is to serve as a derivative counterparty to these clients. Positions taken with these clients are hedged (although not designated as hedges) in the OTC market with interbank participants or in the organized futures markets. To a lesser extent, the Corporation enters into freestanding derivative contracts as a proprietary position taker, based on market expectations or to benefit from price differentials between financial instruments and markets. These derivatives are not linked to specific assets and liabilities on the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. These derivatives are carried at fair value and changes in fair value are recorded in earnings. The market and credit risk associated with these activities is measured, monitored and controlled by the Corporations Market Risk Group, an independent division from the treasury department. Among other things, this group is responsible for: policy, analysis, methodology and reporting of anything related to market risk and credit risk. The following table summarizes the aggregate notional amounts and the reported derivative assets or liabilities (i.e. the fair value of the derivative contracts) as of March 31, 2006 and December 31, 2005, respectively:

	March 31, 2006
	Notional					Gain
(In thousands)	Amounts *		Fair Value			(Loss)
Interest Rate Contracts
Interest Rate Swaps	$	2,776,986	$	(130	)	$	(302	)
Interest Rate Caps		93,217		5			2
Other		897		(8	)		32
Equity Derivatives		269,794		(30	)		(30	)
Totals	$	3,140,894	$	(163	)	$	(298	)

	December 31, 2005
	Notional					Gain
(In thousands)	Amounts *		Fair Value			(Loss)
Interest Rate Contracts
Interest Rate Swaps	$	2,176,521	$	171		$	(344	)
Interest Rate Caps		73,422		2			13
Other		7,270		(40	)		(43	)
Equity Derivatives		269,917		—			2,310
Totals	$	2,527,130	$	133		$	1,936

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

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PART I — ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Asset and Liability Management

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

Market Risk and Interest Rate Sensitivity

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

          The Corporation’s one-year cumulative GAP position at March 31, 2006, was negative $2.4 billion or -27.95% of total earning assets. This is a one-day position that is continually changing and is not indicative of the Corporation’s position at any other time. This denotes liability sensitivity, which means that an increase in interest rates would have a negative effect on net interest income while a decrease in interest rates would have a positive effect on net interest income. While the GAP position is a useful tool in measuring interest rate risk and contributes toward effective asset and liability management, shortcomings are inherent in GAP analysis since certain assets and liabilities may not move proportionally as interest rates change.

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

          The following table sets forth the repricing of the Corporation’s interest earning assets and interest bearing liabilities at March 31, 2006 and may not be representative of interest rate gap positions at other times. In addition, variations in interest rate sensitivity may exist within the repricing period presented due to the differing repricing dates within the period. In preparing the interest rate gap report, the following assumptions are made, all assets and liabilities are reported according to their repricing characteristics. For example, a commercial loan maturing in five years with monthly variable interest rate payments is stated in the column of “up to 90 days”. The investment portfolio is reported considering the effective duration of the securities. Expected prepayments and remaining terms are considered for the residential mortgage portfolio. Core deposits are reported in accordance with their effective duration. Effective duration of core deposits is based on price and volume elasticity to market rates. The Corporation reviews on a monthly basis the effective duration of core deposits. Assets and liabilities with embedded options are stated based on full valuation of the asset/liability and the option to ascertain their effective duration.

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SANTANDER BANCORP
MATURING GAP ANALYSIS
As of March 31, 2006

	0 to 3			3 months			1 to 3			3 to 5			5 to 10			More than			No Interest
	months			to a Year			Years			Years			Years			10 Years			Rate Risk			Total
	(dollars in thousands)
ASSETS:
Investment Portfolio	$	252,746		$	140,097		$	133,523		$	997,501		$	86,053		$	—		$	48,326		$	1,658,246
Deposits in Other Banks		138,696			—			—			—			—			—			133,996			272,692
Loan Portfolio
Commercial		1,903,514			216,758			272,575			366,644			215,405			50,174			60,281			3,085,351
Construction		225,271			7,593			1,997			8,425			6,410			—			—			249,696
Consumer		218,612			204,738			351,295			130,004			236,400			21			82			1,141,152
Mortgage		68,355			193,137			501,374			446,190			801,721			268,885			123			2,279,785
Fixed and Other Assets		—			—			—			—			—			—			466,607			466,607
Total Assets	$	2,807,194		$	762,323		$	1,260,764		$	1,948,764		$	1,345,989		$	319,080		$	709,415		$	9,153,529
LIABILITIES AND STOCKHOLDERS’ EQUITY
External Funds Purchased
Commercial Paper	$	319,194		$	—		$	—		$	—		$	—		$	—		$	—		$	319,194
Repurchase Agreements		571,983			—			150,006			—			200,000			—			—			921,989
Federal Funds Purchased and Other Borrowings		650,000			725,000			—			—			—			—			—			1,375,000
Deposits
Certificates of Deposit		995,722			615,903			337,947			266,834			428,859			105,927			(33,749	)		2,717,443
Demand Deposits and Savings Accounts		218,185			140,436			27,382			270,867			—			—			—			656,870
Transactional Accounts		399,186			238,520			520,750			822,216			—			—			261			1,980,933
Term and Subordinated Debt		—			—			—			25,518			132,016			121,663			3,906			283,103
Other Liabilities and Capital		—			—			—			—			—			—			898,997			898,997
Total Liabilities and Capital	$	3,154,270		$	1,719,859		$	1,036,085		$	1,385,435		$	760,875		$	227,590		$	869,415		$	9,153,529
Off-Balance Sheet Financial Information
Interest Rate Swaps (Assets)	$	1,936,352		$	813,270		$	490,932		$	226,717		$	494,840		$	278,647		$	—		$	4,240,758
Interest Rate Swaps (Liabilities)		3,399,123			474,270			285,594			29,646			(114,159	)		166,284			—			4,240,758
Caps		46,608			3,466			41,043			974			1,126			—			—			93,217
Caps Final Maturity		46,608			3,466			41,043			974			1,126			—			—			93,217
GAP	$	(1,809,847	)	$	(618,536	)	$	430,017		$	760,400		$	1,194,113		$	203,853		$	(160,000	)	$	—
Cumulative GAP	$	(1,809,847	)	$	(2,428,383	)	$	(1,998,366	)	$	(1,237,966	)	$	(43,853	)	$	160,000		$	—		$	—
Cumulative interest rate gap to earning assets		-20.83	%		-27.95	%		-23.00	%		-14.25	%		-0.50	%		1.84	%

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

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

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

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

          The ALCO has decided to maintain its negative interest rate gap in the current flat yield curve environment. However it is not yet prepared to increase the duration of its investment portfolio with new acquisitions of securities until some steepening in the yield curve is observed. Any increase in the duration of its equity will only be achieved by an increase in the commercial activity of the Bank.

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

          NIM sensitivity analysis captures the maximum acceptable net interest margin loss for a one percent parallel change of all interest rates across the curve. Duration of market value equity analysis entails a valuation of all interest bearing assets and liabilities under parallel movements in interest rates. The ALCO has established limits of $30 million of maximum NIM loss for a 1% parallel shock and $135 million maximum MVE loss for a 1% parallel shock.

          As of March 31, 2006, it was determined for purposes of the Net Interest Income Shock Report that the Corporation had a potential loss in net interest income of approximately $26.3 million if market rates were to increase 100 basis points immediately parallel across the yield curve, less than the $30.0 million limit. For purposes of the Market Value Shock Report it was determined that the Corporation had a potential loss of approximately $111.4 million if market rates were to increase 100 basis points immediately parallel across the yield curve, less than the $135.0 million limit.

          As of March 31, 2006 the Corporation had a liability sensitive profile as explained by the negative gap, the NIM shock report and the MVE shock report. Any decision to reposition the balance sheet is taken by the ALCO committee, and is subject to compliance with the established risk limits. Some factors that could lead to shifts in policy could be, but are not limited to, changes in views on interest rate markets, monetary policy, and macroeconomic factors as well as legal, fiscal and other factors which could lead to shifts in the asset liability mix.

Liquidity Risk

          Liquidity risk is the risk that not enough cash will be generated from either assets or liabilities to meet deposit withdrawals or contractual loan funding. The Corporation’s general policy is to maintain liquidity adequate to ensure its ability to honor withdrawals of deposits, make repayments at maturity of other liabilities, extend loans and meet its own working capital needs. The Corporation’s principal sources of liquidity are capital, core deposits from retail and commercial clients, and wholesale deposits raised in the inter-bank and commercial markets. The Corporation manages liquidity risk by maintaining diversified short-term and long-term sources through the Federal funds market, commercial paper program, repurchase agreements and retail certificate of deposit programs. As of March 31, 2006, the Corporation had $3.0 billion in unsecured lines of credit ($2.7 billion available) and $7.0 billion in collateralized lines of credit with banks and financial entities ($5.4 billion available). All securities in portfolio are highly rated and very liquid enabling the Corporation to treat them as a secondary source of liquidity.

          The Corporation does not have significant usage or limitations on the ability to upstream or downstream funds as a method of liquidity. However, the Corporation faces certain tax constraints when borrowing funds (excluding the placement of deposits) from BSCH or affiliates because Puerto Rico’s tax code requires local corporations to withhold 29% of the interest income paid to non-resident affiliates. The current intra-group credit line provided by BSCH and affiliates to the Corporation is $1.1 billion.

          Liquidity is derived from the Corporation’s capital, reserves and securities portfolio. The Corporation has established lines of credit with foreign and domestic banks, has access to U.S. markets through its commercial paper program

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and also has broadened its relations in the federal funds and repurchase agreement markets to increase the availability of other sources of funds and to augment liquidity as necessary.

          During the first quarter of 2006 the Corporation engaged in several financing transactions in order to fund the acquisition of Island Finance. In connection with this transaction, on February 28, 2006, the Corporation entered into a $725 million loan agreement with Santusa Holding, S.L., a subsidiary of its parent company, to be used in connection with the acquisition of substantially all the assets of Island Finance in Puerto Rico from Wells Fargo. The loan bears interest at an annual rate of 4.965%, payable semiannually. The entire principal balance of the loan is due and payable on August 28, 2006. The Corporation did not pay any commitment fee of commission in connection with the loan.

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

          Management monitors liquidity levels each month. The focus is on the liquidity ratio, which compares net liquid assets (all liquid assets not subject to collateral or repurchase agreements) against total liabilities plus contingent liabilities. As of March 31, 2006, the Corporation had a liquidity ratio of 9.9%. At March 31, 2006, the Corporation had total available liquid assets of $1.1 billion. The Corporation believes it has sufficient liquidity to meet current obligations.

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

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PART I. ITEM 4

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

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

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PART II — OTHER INFORMATION

ITEM I — LEGAL PROCEEDINGS

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

          On December 8, 2005, the Corporation received a subpoena from the SEC for the production of documents concerning its mortgage loan transactions with an unrelated local financial institution. The Corporation has commenced providing documents and information to the SEC in response to the subpoena and other mortgage loan portfolio transactions. The Corporation is cooperating fully with the SEC in connection with these inquiries.

          Other than this matter, 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 1A. RISK FACTORS

          Except as noted below, there have been no material changes to the risk factors as previously disclosed under Item 1A. in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005.

Current Economic Condition of the Commonwealth of Puerto Rico.As a result of an impasse between the legislative and executive branches relating to budgetary and cash flow issues affecting the financial situation of the Government of Puerto Rico (“the Government”), on May 1, 2006 the Government closed a number of government agencies for the remainder of its current fiscal year, which ends on June 30, 2006. This partial shutdown includes the closing of the Island’s public schools and indirectly forced the closing of government offices at certain municipalities. Approximately 95,000 public employees have been placed on unpaid leave until the budgetary crisis is resolved. On May 10, 2006 the legislative leaders of both Houses of the Legislature and the Governor agreed to follow the recommendations made by a mediation committee created to deal with the crisis. They announced that government employees would return to their jobs on Monday, May 15, 2006, however, such return is conditioned on adopting legislation authorizing the Government Development Bank for Puerto Rico to make a loan of up to $741 million to the Government to cover the budgetary deficit. Government officials are discussing this legislation and other legislative measures that would provide a repayment source for this loan. Notwithstanding a resolution of the crisis that led to the Government shutdown, there are open issues being discussed between the legislative and executive branches of the Government relating to fiscal and tax reform that have not been resolved and are relevant to the budgetary and cash flow issues still facing the Government.

          The current economic uncertainty that exists in Puerto Rico caused by the failure of the legislative and executive branches of the Government to reach an agreement regarding tax and fiscal reform and budget approval, coupled with increases in the price of petroleum and other consumer goods, are aggravating the concerns over the economic situation of the Island. The partial shutdown of the government, the increase in petroleum prices, along with rising interest rates, may adversely impact employment and economic growth in Puerto Rico. These factors may also have an adverse effect on the credit quality of the Corporation’s loan portfolios, as delinquency rates are expected to increase in the short-term, until the economy stabilizes.

          The Corporation is granting credit extensions and moratoria, subject to strict requirements and qualifications, on certain mortgage and consumer loans of government employees.

Downgrades of Commonwealth of Puerto Rico debt obligations.Although Puerto Rico’s economy is closely integrated to that of the U.S., and many of its instrumentalities are investment-grade rated borrowers in the U.S. capital markets, the current fiscal situation of the Government of Puerto Rico has led to a downgrade of its debt obligations.

On May 8, 2006, Moody’s Investors Service downgraded the Government’s general obligation bond rating to Baa3 from Baa2, and kept the rating on “watch list” for possible further downgrade. In addition to the Commonwealth’s general obligation bonds, the downgrade affects certain Commonwealth-guaranteed bonds, Commonwealth appropriation bonds, and government bond programs directly or indirectly linked to the general creditworthiness of the Commonwealth. All have been

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downgraded by one notch. The Commonwealth’s appropriation bonds, and some of the subordinated revenue bonds of the Highway and Transportation Authority, are now rated just below investment grade at Ba1. As of March 31, 2006, the Corporation had $57.0 million in Puerto Rico Government and agencies available for sale with gross unrealized losses of $0.7 million.

          According to Moody’s, this action reflects the Government’s strained financial condition, the ongoing political conflict and lack of agreement regarding the measures necessary to end the government’s multi-year trend of financial deterioration. Even assuming the enactment of significant measures, Moody’s believes that budget deficits and fiscal imbalance could continue in the coming years. Standard & Poor’s, the other nationally recognized rating agency that has outstanding ratings of the Government’s debt is also cautiously monitoring the situation.

          It is uncertain how the financial markets may react to any potential future ratings downgrade in Puerto Rico’s debt obligations. However, the current budgetary crisis and ratings downgrade could adversely affect the value of Puerto Rico’s Government obligations. A substantial portion of the Corporation’s credit exposure to the Government of Puerto Rico has an identified repayment stream, which includes in some cases the good faith, credit and unlimited taxation of certain municipalities, an assignment of basic property taxes and other revenues. The Corporation’s business activities and credit exposure are concentrated in Puerto Rico. Accordingly, the Corporation’s financial condition and results of operations are dependent to a significant extent upon the economic conditions prevailing in Puerto Rico. Any significant adverse political or economic developments in Puerto Rico resulting from the budget impasse could have a negative impact on the Corporation’s future financial condition and results of operations.

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

          None

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

          None

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

          None

ITEM 5 — OTHER INFORMATION

          None

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ITEM 6 – EXHIBITS

A.	Exhibit No.			Exhibit Description	Reference
		(2.0	)	Agreement and Plan of Merger-Banco Santander Puerto Rico and Santander Bancorp	Exhibit 3.3 8-A12B
		(2.1	)	Stock Purchase Agreement Santander BanCorp and Banco Santander Central Hispano, S.A.	Exhibit 2.1 10K-12/31/00
		(2.2	)	Stock Purchase Agreement dated as of November 28, 2003 by and among Santander BanCorp, Administración de Bancos Latinoamericanos Santander, S.L. and Santander Securities Corporation	Exhibit 2.2 10Q-06/30/04
		(2.3	)	Settlement Agreement between Santander BanCorp and Administración de Bancos Latinoamericanos Santander, S.L.	Exhibit 2.3 10Q-06/30/04
		(3.1	)	Articles of Incorporation	Exhibit 3.1 8-A12B
		(3.2	)	Bylaws	Exhibit 3.1 8-A12B
		(4.1	)	Authoring and Enabling Resolutions 7% Noncumulative Perpetual Monthly Income Preferred Stock, Series A	Exhibit 4.1 10Q-06/30/04
		(4.2	)	Offering Circular for $30,000,000 Banco Santander PR Stock Market Growth Notes Linked to the S&P 500 Index	Exhibit 4.610Q-03/31/04
		(4.3	)	Private Placement Memorandum Santander BanCorp $75,000,000 6.30% Subordinated Notes	Exhibit 4.3 10KA-12/31/04
		(4.4	)	Private Placement Memorandum Santander BanCorp $50,000,000 6.10% Subordinated Notes	Exhibit 4.4 10K-12/31/05
		(4.5	)	Not Used
		(4.6	)	Indenture,dated as of February 28, 2006, between the Santander BanCorp and Banco Popular de Puerto Rico	Exhibit 4.6
		(4.7	)	First Supplemental Indenture, dated as of February 28, 2006, between Santander BanCorp and Banco Popular de Puerto Rico	Exhibit 4.7
		(4.8	)	Amended and Restated Declaration of Trus and Trust Agreement, dated as of February 28, 2006, among Santander BanCorp, Banco Popular de Puerto Rico Wilmington Trust Company, the Administrative Trustees named therein and The holders from time to time, of the undivided beneficial ownership interests in The assets of the Trust.	Exhibit 4.8
		(4.9	)	Guarantee Agreement, dated as of February 28, 2006, between Santander BanCorp And Banco Popular de Puerto Rico	Exhibit 4.9
		(4.10	)	Global Capital Securities Certificate	Exhibit 4.10
		(4.11	)	Certificate of Junior Subordinated Debenture	Exhibit 4.11
		(10.1	)	Contract for Systems Maintenance between ALTEC and Banco Santander Puerto Rico	Exhibit 10A10K-12/31/02
		(10.2	)	Employment Contract – José Ramón González	Exhibit 10.1 10Q-03/31/05
		(10.3	)	Employment Contract – Carlos M. García	Exhibit 10.2 10Q-03/31/05
		(10.4	)	Information Processing Services Agreement between America Latina Tecnologia de Mexico SA and Banco Santander Puerto Rico, Santander International Bank of Puerto Rico, Inc. and Santander Investment International Bank, Inc.	Exhibit 10A10Q-06/30/03
		(10.5	)	Employment Contract – Roberto Córdova	Exhibit 10.3 10Q-03/31/05
		(10.6	)	Employment Contract – Bartolomé Vélez	Exhibit 10.4 10Q-03/31/05
		(10.7	)	Employment Contract – Lillian Díaz	Exhibit 10.5 10Q-03/31/05
		(10.8	)	Technology Assignment Agreement between CREFISA, Inc. and Banco Santander Puerto Rico	Exhibit 10.1210KA-12/31/04
		(10.9	)	Altair System License Agreement between CREFISA, Inc. and Banco Santander Puerto Rico	Exhibit 10.1310KA-12/31/04
		(10.10	)	Employment Contract-Anthony Boon	Exhibit 10.1410Q-03/31/04
		(10.11	)	Deferred Compensation Contract – Anthony Boon	Exhibit 10.1510Q-03/31/04
		(10.12	)	2005 Employee Stock Option Plan	Exhibit B Def14A-03/26/05
		(10.13	)	Asset Purchase Agreement by and among Wells Fargo & Company, Island Finance Puerto Rico, Inc., Island Finance Sales Finance Corporation and Santander BanCorp and Santander Financial Services, Inc. for the purchase And sale of certain assets of Island Finance Puerto Rico, Inc. and Island Finance Sales Finance Corporation dated as of January 22, 2006	Exhibit 10.1 8K-01/25/06

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Exhibit No.			Exhibit Description	Reference
	(10.14	)	Loan Agreement between Santander BanCorp and Santusa Holding, S.L. For $725 million	Exhibit 10.14
	(14	)	Code of Ethics	Exhibit 14 10KA-12/31/04
	(22	)	Registrant’s Proxy Statement for the April 28, 2005 Annual Meeting of Stockholders	Def14A-05/12/06
	(31.1	)	Certification from the Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002	Exhibit 31.1
	(31.2	)	Certification from the Chief Operating Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002	Exhibit 31.2
	(31.3	)	Certification from the Chief Accounting Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002	Exhibit 31.3
	(32.1	)	Certification from the Chief Executive Officer, Chief Operating Officer and Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Exhibit 32.1

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SIGNATURES

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

SANTANDER BANCORP
Name of Registrant

Dated: May 15, 2006	By:/s/ José Ramón González
	President and Chief Executive Officer
Dated: May 15, 2006	By:/s/ Carlos M. García
	Senior Executive Vice President and
	Chief Operating Officer
Dated: May 15, 2006	By:/s/ María Calero
	Executive Vice President and
	Chief Accounting Officer

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