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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C., 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
 For Fiscal Year ended December 31, 2005
 Commission File: 001-15849
 SANTANDER BANCORP
    
 Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
 Title of each class
    
    Name of each exchange on
which registeredCommon Stock, $2.50 par value
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
 NONE
 
  þ o
  o þ
  þ o
 þ
  Large accelerated filero
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




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DOCUMENTS INCORPORATED BY REFERENCE
 
  2




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##### 



SANTANDER BANCORP
 PART IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity and Related Stockholders MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Results of Operations and Financial ConditionItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits, Financial Statement SchedulesSIGNATURESEXHIBIT INDEXEX-4.4 PRIVATE PLACEMENT MEMORANDUM SANTANDER BANCORP $50,000,000 6.10% SUBORDINATED NOTESEX-12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-21 SUBSIDIARIES OF THE REGISTRANTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE COOEX-31.3 SECTION 302 CERTIFICATION OF THE CAOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO, COO AND CAO
  3




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Santander BanCorp
 
 PART I
 
 ITEM 1. BUSINESS
 General
     Banco Santander
   4




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Santander Mortgage
  Santander International Bank
  Santander Securities
   Santander Asset Management Corporation
  Santander Insurance Agency
  Operations
  5




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Commercial Banking
 Retail Banking
 Wholesale Banking
 Mortgage Banking
  Treasury
and Investments
 Broker-dealer
  Recent Events
   Forward Looking Statements
 .
 6




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REGULATION AND SUPERVISION
 Holding Company Operations  Federal Regulation
 General
 Bank Holding Company Activities and Other Limitations.
     7




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USA Patriot Act of 2001
    Privacy Policies
  Dividend Restrictions
   8




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Federal Home Loan Bank System
   Limitations on Transactions with Affiliates
     9




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Capital Requirements
   Sarbanes-Oxley
     10




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Banking Operations
 General
     11




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Ownership and Control
   FDIC Capital Requirements
     12




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Cross-Guarantees
  FDIC Deposit Insurance Assessments
      13




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Standards for Safety and Soundness
  Community Reinvestment
  Brokered Deposits
  Federal Limitations on Activities and Investments
  14




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Interstate Branching
 de novo.
 de novo
 Banking Operations-Puerto Rico Regulation
 General
      15




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IBC Act
    16




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Mortgage Banking Operations
   Broker Dealer Operations
  Insurance Agency Operations
  17




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ITEM 1A. RISK FACTORS
  General business, economic and political conditions.
  Competition.
  Interest rate risk.
  18




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Credit Risk.
  Changes in market prices of managed assets.
 Changes in accounting standards.
  Federal and state regulations.
 Governmental fiscal and monetary policy.
 19




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Liquidity risk.
 Operational risk.
 Reputational risk.
 Merger risk.
 Litigation risk.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  Banco Santander Main Building,
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Santander Operations Facility,
 
 ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
  Cash
    
    BookDividends
    
    ValuePeriod
    
    High
    
    Low
    
    per Share
    
    per Share20051st Quarter
    
    $
    33.93
    
    
    $
    26.33
    
    
    $
    0.16
    
    
    $
    11.682nd Quarter
    
    
    27.93
    
    
    
    20.88
    
    
    
    0.16
    
    
    
    12.253rd Quarter
    
    
    29.75
    
    
    
    23.97
    
    
    
    0.16
    
    
    
    12.164th Quarter
    
    
    29.47
    
    
    
    24.00
    
    
    
    0.16
    
    
    
    12.2220041st Quarter
    
    $
    25.50
    
    
    $
    22.33
    
    
    $
    0.11
    
    
    $
    10.902nd Quarter
    
    
    28.41
    
    
    
    21.66
    
    
    
    0.11
    
    
    
    10.543rd Quarter
    
    
    25.11
    
    
    
    21.82
    
    
    
    0.11
    
    
    
    11.284th Quarter
    
    
    30.45
    
    
    
    24.82
    
    
    
    0.16
    
    
    
    11.58
  Dividend Policy and Dividends Paid
   21




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ITEM 6. SELECTED FINANCIAL DATA
  22




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Santander BanCorp and Subsidiaries
Selected Financial Data
 
 Year ended December 31,As Restated(Dollars in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands, except per data share)CONDENSED INCOME STATEMENTSInterest income
    
    $
    439,605
    
    
    $
    363,822
    
    
    $
    335,784
    
    
    $
    387,249
    
    
    $
    513,058Interest expense
    
    
    212,583
    
    
    
    140,762
    
    
    
    132,612
    
    
    
    179,748
    
    
    
    269,663Net interest income
    
    
    227,022
    
    
    
    223,060
    
    
    
    203,172
    
    
    
    207,501
    
    
    
    243,395Security gains
    
    
    17,842
    
    
    
    11,475
    
    
    
    10,790
    
    
    
    12,236
    
    
    
    18,282Loss on extinguishment of debt
    
    
    (5,959
    )
    
    
    
    
    
    
    13,638
    
    
    
    
    
    
    
    Broker-dealer, asset management and insurance fees
    
    
    53,016
    
    
    
    51,113
    
    
    
    49,526
    
    
    
    35,277
    
    
    
    30,223Other income
    
    
    60,459
    
    
    
    54,651
    
    
    
    36,207
    
    
    
    52,545
    
    
    
    45,871Operating expenses
    
    
    221,386
    
    
    
    217,377
    
    
    
    223,815
    
    
    
    210,739
    
    
    
    207,167Provision for loan losses
    
    
    20,400
    
    
    
    26,270
    
    
    
    49,745
    
    
    
    63,630
    
    
    
    65,430Income tax provision (benefit)
    
    
    30,788
    
    
    
    9,724
    
    
    
    (46
    )
    
    
    4,907
    
    
    
    5,545Cumulative effect of change in accounting
principle, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,246
    )Net income
    
    $
    79,806
    
    
    $
    86,928
    
    
    $
    39,819
    
    
    $
    28,283
    
    
    $
    51,383PER PREFERRED SHARE DATAOutstanding shares:Average
    
    
    
    
    
    
    
    
    
    
    2,610,008
    
    
    
    2,610,008
    
    
    
    2,610,008End of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,610,008
    
    
    
    2,610,008Cash Dividend per Share
    
    $
    
    
    
    $
    
    
    
    $
    2.73
    
    
    $
    1.75
    
    
    $
    1.75PER COMMON SHARE DATA*Net income
    
    $
    1.71
    
    
    $
    1.86
    
    
    $
    0.70
    
    
    $
    0.50
    
    
    $
    0.97Book value
    
    $
    12.19
    
    
    $
    11.86
    
    
    $
    10.20
    
    
    $
    12.79
    
    
    $
    12.74Outstanding shares:Average
    
    
    46,639,104
    
    
    
    46,639,104
    
    
    
    46,661,248
    
    
    
    47,310,217
    
    
    
    48,191,869End of period
    
    
    46,639,104
    
    
    
    46,639,104
    
    
    
    46,639,104
    
    
    
    46,806,604
    
    
    
    47,554,164Cash Dividend per Share
    
    $
    0.64
    
    
    $
    0.49
    
    
    $
    0.44
    
    
    $
    0.44
    
    
    $
    0.44AVERAGE BALANCESLoans held for sale and loans, net of allowance
for loan losses
    
    $
    5,871,433
    
    
    $
    4,723,538
    
    
    $
    4,009,801
    
    
    $
    4,385,433
    
    
    $
    4,746,302Allowance for loan losses (1)
    
    
    67,956
    
    
    
    73,518
    
    
    
    64,909
    
    
    
    57,633
    
    
    
    53,510Earning assets
    
    
    7,882,180
    
    
    
    7,300,735
    
    
    
    6,453,419
    
    
    
    6,629,265
    
    
    
    6,966,873Total assets
    
    
    8,285,992
    
    
    
    7,634,471
    
    
    
    6,797,701
    
    
    
    7,013,135
    
    
    
    7,337,308Deposits
    
    
    5,082,520
    
    
    
    4,153,245
    
    
    
    3,749,684
    
    
    
    4,096,818
    
    
    
    4,020,450Borrowings
    
    
    2,415,172
    
    
    
    2,811,152
    
    
    
    2,322,957
    
    
    
    2,167,700
    
    
    
    2,593,644Preferred equity
    
    
    
    
    
    
    
    
    
    
    64,175
    
    
    
    65,250
    
    
    
    65,250Common equity
    
    
    576,226
    
    
    
    495,963
    
    
    
    526,660
    
    
    
    552,803
    
    
    
    546,184PERIOD END BALANCESLoans held for sale and loans, net of allowance
for loans losses
    
    $
    5,954,890
    
    
    $
    5,490,120
    
    
    $
    4,136,670
    
    
    $
    4,044,425
    
    
    $
    4,738,469Allowance for loan losses (1)
    
    
    66,842
    
    
    
    69,177
    
    
    
    69,693
    
    
    
    56,906
    
    
    
    51,738Earning assets
    
    
    7,933,139
    
    
    
    8,069,346
    
    
    
    7,079,888
    
    
    
    7,073,541
    
    
    
    7,795,015Total assets
    
    
    8,271,948
    
    
    
    8,323,647
    
    
    
    7,366,656
    
    
    
    7,375,771
    
    
    
    8,068,132Deposits
    
    
    5,224,650
    
    
    
    4,748,139
    
    
    
    4,142,228
    
    
    
    4,499,431
    
    
    
    4,792,634Borrowings
    
    
    2,212,245
    
    
    
    2,863,367
    
    
    
    2,595,033
    
    
    
    2,130,593
    
    
    
    2,544,206Preferred equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,250
    
    
    
    65,250Common equity
    
    
    568,527
    
    
    
    553,346
    
    
    
    475,706
    
    
    
    533,205
    
    
    
    540,513
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Continued on the following page
 Year ended December 31,As Restated2005
    
    2004
    
    2003
    
    2002
    
    2001(Dollars in thousands)SELECTED RATIOSPerformance:Net interest margin (2)
    
    
    3.02
    %
    
    
    3.33
    %
    
    
    3.42
    %
    
    
    3.33
    %
    
    
    3.82
    %Efficiency ratio (3)
    
    
    62.97
    %
    
    
    62.78
    %
    
    
    67.06
    %
    
    
    68.31
    %
    
    
    60.50
    %Return on average total assets
    
    
    0.96
    %
    
    
    1.14
    %
    
    
    0.59
    %
    
    
    0.40
    %
    
    
    0.70
    %Return on average common equity
    
    
    13.85
    %
    
    
    17.53
    %
    
    
    5.54
    %
    
    
    3.84
    %
    
    
    7.66
    %Dividend payout
    
    
    37.43
    %
    
    
    26.34
    %
    
    
    62.86
    %
    
    
    88.00
    %
    
    
    45.36
    %Average net loans/average total deposits
    
    
    115.52
    %
    
    
    113.73
    %
    
    
    106.94
    %
    
    
    107.04
    %
    
    
    118.05
    %Average earning assets/average total assets
    
    
    95.13
    %
    
    
    95.63
    %
    
    
    94.94
    %
    
    
    94.53
    %
    
    
    94.95
    %Average stockholders equity/average assets
    
    
    6.95
    %
    
    
    6.50
    %
    
    
    8.69
    %
    
    
    8.81
    %
    
    
    8.33
    %Fee income to average assets
    
    
    1.15
    %
    
    
    1.18
    %
    
    
    1.30
    %
    
    
    1.08
    %
    
    
    0.96
    %Capital:Tier I capital to risk-adjusted assets
    
    
    9.09
    %
    
    
    8.63
    %
    
    
    8.47
    %
    
    
    11.51
    %
    
    
    9.82
    %Total capital to risk-adjusted assets
    
    
    12.30
    %
    
    
    11.05
    %
    
    
    10.03
    %
    
    
    12.71
    %
    
    
    10.75
    %Leverage Ratio
    
    
    6.50
    %
    
    
    6.43
    %
    
    
    5.89
    %
    
    
    8.37
    %
    
    
    8.19
    %Asset quality:Non-performing loans to total loans
    
    
    1.22
    %
    
    
    1.57
    %
    
    
    2.34
    %
    
    
    3.01
    %
    
    
    1.99
    %Annualized net charge-offs to average loans
    
    
    0.38
    %
    
    
    0.56
    %
    
    
    0.91
    %
    
    
    1.32
    %
    
    
    1.34
    %Allowance for loan losses to period-end loans
    
    
    1.11
    %
    
    
    1.24
    %
    
    
    1.66
    %
    
    
    1.39
    %
    
    
    1.08
    %Allowance for loan losses to non-performing loans
    
    
    90.72
    %
    
    
    79.05
    %
    
    
    70.85
    %
    
    
    46.10
    %
    
    
    54.34
    %Allowance for loan losses to non-performing loans plus
accruing loans past-due 90 days or more
    
    
    87.17
    %
    
    
    76.11
    %
    
    
    69.16
    %
    
    
    44.68
    %
    
    
    51.36
    %Non-performing assets to total assets
    
    
    0.92
    %
    
    
    1.10
    %
    
    
    1.40
    %
    
    
    1.91
    %
    
    
    1.24
    %Recoveries to charge-offs
    
    
    18.28
    %
    
    
    32.83
    %
    
    
    22.12
    %
    
    
    15.77
    %
    
    
    14.33
    %EARNINGS TO FIXED CHARGES:Excluding interest on deposits
    
    
    3.51
    x
    
    
    2.90
    x
    
    
    2.22
    x
    
    
    2.21
    x
    
    
    2.34
    xIncluding interest on deposits
    
    
    1.51
    x
    
    
    1.68
    x
    
    
    1.30
    x
    
    
    1.18
    x
    
    
    1.24
    xEARNINGS TO FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:Excluding interest on deposits
    
    
    3.51
    x
    
    
    2.90
    x
    
    
    2.04
    x
    
    
    2.10
    x
    
    
    2.26
    xIncluding interest on deposits
    
    
    1.51
    x
    
    
    1.68
    x
    
    
    1.23
    x
    
    
    1.15
    x
    
    
    1.22
    xOTHER DATA AT END OF PERIODCustomer financial assets under management
    
    $
    12,960,000
    
    
    $
    12,827,700
    
    
    $
    10,669,700
    
    
    $
    9,242,600
    
    
    $
    9,159,700Total Branches
    
    
    64
    
    
    
    65
    
    
    
    66
    
    
    
    66
    
    
    
    65ATMs
    
    
    149
    
    
    
    150
    
    
    
    141
    
    
    
    139
    
    
    
    121
 
 *
    
    Share and per share data is based on the average number of shares outstanding during the periods, after
giving retroactive effect to the 10% stock dividends declared on July 9, 2004 and June 17, 2002 .
Basic and diluted earning per share are the same.(1)
    
    After retroactive reclassification adjustment of allowance for losses on off balance sheet items for the years ended December 31, 2003, 2002 and 2001.(2)
    
    On a tax equivalent basis.(3)
    
    Operating expenses divided by net interest income on a tax equivalent basis, plus other
income excluding securities gains and losses, and gain on sale of building in 2004 and loss on extinguishment of debts in 2005. 24




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
    2001
    
    2002
    
    2003
    
    2004(Dollars in thousands)Net Income  as previously reported
    
    $
    52,758
    
    
    $
    25,752
    
    
    $
    39,445
    
    
    $
    84,459Reversal of Gains on Sales of Mortgage Loans
    
    
    (3,009
    )
    
    
    
    
    
    
    
    
    
    
    Reversal of Mortgage Servicing Rights (MSR) Recognized
    
    
    (3,186
    )
    
    
    
    
    
    
    
    
    
    
    Premium amortization and net interest income adjustments
    
    
    1,651
    
    
    
    2,063
    
    
    
    9,942
    
    
    
    3,892Reversal of amortization of mortgage servicing rights and net
servicing fee income (expense)
    
    
    2,290
    
    
    
    2,086
    
    
    
    240
    
    
    
    156Recognition of gain on sale of mortgage servicing rights
    
    
    
    
    
    
    
    
    
    
    4,068
    
    
    
    Reversal of premium on loans purchased and related amortization
    
    
    
    
    
    
    
    
    
    
    (13,637
    )
    
    
    Provision (benefit) for income tax on the above adjustments
    
    
    879
    
    
    
    (1,618
    )
    
    
    (239
    )
    
    
    (1,579
    )Effect of restatement on Net Income for the year
    
    
    (1,375
    )
    
    
    2,531
    
    
    
    374
    
    
    
    2,469Net Income  as restated
    
    $
    51,383
    
    
    $
    28,283
    
    
    $
    39,819
    
    
    $
    86,928Common Stockholders Equity -as previously reported
    
    $
    548,544
    
    
    $
    538,705
    
    
    $
    480,832
    
    
    $
    556,003Cumulative effect of restatement on Common Stockholders Equity
at beginning of the year
    
    
    (6,656
    )
    
    
    (8,031
    )
    
    
    (5,500
    )
    
    
    (5,126
    )Effect of restatement on net income previously reported
    
    
    (1,375
    )
    
    
    2,531
    
    
    
    374
    
    
    
    2,469Cumulative effect of restatement on Common Stockholders Equity
at end of the year
    
    $
    (8,031
    )
    
    $
    (5,500
    )
    
    $
    (5,126
    )
    
    $
    (2,657
    )Common Stockholders Equity  as restated
    
    $
    540,513
    
    
    $
    533,205
    
    
    $
    475,706
    
    
    $
    553,346Basic and Diluted Earnings per Share as Previously Reported
    
    $
    1.00
    
    
    $
    0.45
    
    
    $
    0.69
    
    
    $
    1.81Basic and Diluted Earnings per Share as Restated
    
    $
    0.97
    
    
    $
    0.50
    
    
    $
    0.70
    
    
    $
    1.86
 25




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##### Table of Contents



Description of the Business
  
    
    Commercial Banking  Banco Santander Puerto Rico
 
    
    Mortgage Banking  Santander Mortgage Corporation
 
    
    Securities Brokerage and Investment Banking  Santander Securities Corporation
 
    
    Asset Management  Santander Asset Management Corporation
 
    
    Insurance  Santander Insurance Agency, Inc.
 
    
    International Banking  Santander International Bank of Puerto Rico, Inc.
 Basis of Presentation
   Forward-Looking Statements
   26




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Overview of Managements Discussion and Analysis of Financial Condition and Results of Operations
         27




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28




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Critical Accounting Policies
  Allowance for Loan Losses.
      29




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##### Table of Contents



Valuation of Certain Financial Instruments.
   Transfers of Financial Assets
 Income taxes.
  30




---



##### Table of Contents



Goodwill and other intangible assets.
     Market Multiple Approach:
 Discounted Cash Flow Approach:
 Comparable Transaction Approach:
   31




---



##### Table of Contents



Pension and Other Postemployment Benefits.
   Results of Operations
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Components of net income:Net interest income
    
    $
    227,022
    
    
    $
    223,060
    
    
    $
    203,172Provision for loan losses
    
    
    20,400
    
    
    
    26,270
    
    
    
    49,745Other income
    
    
    125,358
    
    
    
    117,239
    
    
    
    110,161Other operating expenses
    
    
    221,386
    
    
    
    217,377
    
    
    
    223,815Provision (benefit) for income tax
    
    
    30,788
    
    
    
    9,724
    
    
    
    (46
    )Net income
    
    $
    79,806
    
    
    $
    86,928
    
    
    $
    39,819
 2005 compared to 2004
 32




---



##### Table of Contents



2004 compared to 2003
 Net Interest Income
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Interest income  tax equivalent basis
    
    $
    450,664
    
    
    $
    383,984
    
    
    $
    353,333Interest expense
    
    
    (212,583
    )
    
    
    (140,762
    )
    
    
    (132,611
    )Net interest income  tax equivalent basis
    
    $
    238,081
    
    
    $
    243,222
    
    
    $
    220,722Net interest margin  tax equivalent basis (1)
    
    
    3.02
    %
    
    
    3.33
    %
    
    
    3.42
    %
 
 (1)
    
    Net interest margin for any period equals tax-equivalent net interest income divided by average interest-earning
assets for such period. 2005 compared to 2004
   33




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##### Table of Contents



2004 compared to 2003
   34




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##### Table of Contents



35




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##### Table of Contents



Year ended December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInterest-earning assets:Interest bearing deposits
    
    $
    133,622
    
    
    $
    4,065
    
    
    
    3.04
    %
    
    $
    71,547
    
    
    $
    1,054
    
    
    
    1.47
    %
    
    $
    68,312
    
    
    $
    664
    
    
    
    0.97
    %Federal funds sold and securities
purchased under agreements to resell
    
    
    135,928
    
    
    
    4,187
    
    
    
    3.08
    %
    
    
    209,719
    
    
    
    3,123
    
    
    
    1.49
    %
    
    
    169,304
    
    
    
    1,990
    
    
    
    1.18
    %Total interest-bearing deposits
    
    
    269,550
    
    
    
    8,252
    
    
    
    3.06
    %
    
    
    281,266
    
    
    
    4,177
    
    
    
    1.49
    %
    
    
    237,616
    
    
    
    2,654
    
    
    
    1.12
    %U.S. Treasury securities
    
    
    8,353
    
    
    
    262
    
    
    
    3.14
    %
    
    
    5,650
    
    
    
    75
    
    
    
    1.33
    %
    
    
    73,913
    
    
    
    884
    
    
    
    1.20
    %Obligations
of other U.S. government
agencies and corporations
    
    
    857,421
    
    
    
    42,275
    
    
    
    4.93
    %
    
    
    1,174,965
    
    
    
    66,536
    
    
    
    5.66
    %
    
    
    1,309,968
    
    
    
    63,202
    
    
    
    4.82
    %Obligations of government of Puerto Rico
and political subdivisions
    
    
    80,529
    
    
    
    4,323
    
    
    
    5.37
    %
    
    
    43,962
    
    
    
    3,512
    
    
    
    7.99
    %
    
    
    47,675
    
    
    
    3,593
    
    
    
    7.54
    %Collateralized mortgage obligations and
mortgage backed securities
    
    
    747,944
    
    
    
    32,200
    
    
    
    4.31
    %
    
    
    1,030,725
    
    
    
    43,055
    
    
    
    4.18
    %
    
    
    735,765
    
    
    
    29,486
    
    
    
    4.01
    %Other
    
    
    46,950
    
    
    
    1,672
    
    
    
    3.56
    %
    
    
    40,629
    
    
    
    2,650
    
    
    
    6.52
    %
    
    
    38,681
    
    
    
    3,007
    
    
    
    7.77
    %Total investment securities
    
    
    1,741,197
    
    
    
    80,732
    
    
    
    4.64
    %
    
    
    2,295,931
    
    
    
    115,828
    
    
    
    5.04
    %
    
    
    2,206,002
    
    
    
    100,172
    
    
    
    4.54
    %Loans :Commercial
    
    
    3,220,447
    
    
    
    178,994
    
    
    
    5.56
    %
    
    
    2,670,644
    
    
    
    127,809
    
    
    
    4.79
    %
    
    
    2,061,009
    
    
    
    96,339
    
    
    
    4.67
    %Construction
    
    
    202,226
    
    
    
    15,418
    
    
    
    7.62
    %
    
    
    205,861
    
    
    
    10,848
    
    
    
    5.27
    %
    
    
    257,668
    
    
    
    12,546
    
    
    
    4.87
    %Consumer
    
    
    511,094
    
    
    
    48,631
    
    
    
    9.52
    %
    
    
    420,002
    
    
    
    45,800
    
    
    
    10.90
    %
    
    
    462,755
    
    
    
    58,655
    
    
    
    12.68
    %Mortgage
    
    
    1,887,420
    
    
    
    110,994
    
    
    
    5.88
    %
    
    
    1,389,517
    
    
    
    71,610
    
    
    
    5.15
    %
    
    
    1,199,622
    
    
    
    75,327
    
    
    
    6.28
    %Lease financing
    
    
    118,202
    
    
    
    7,643
    
    
    
    6.47
    %
    
    
    111,032
    
    
    
    7,912
    
    
    
    7.13
    %
    
    
    93,656
    
    
    
    7,640
    
    
    
    8.16
    %Gross loans
    
    
    5,939,389
    
    
    
    361,680
    
    
    
    6.09
    %
    
    
    4,797,056
    
    
    
    263,979
    
    
    
    5.50
    %
    
    
    4,074,710
    
    
    
    250,507
    
    
    
    6.15
    %Allowance for loan losses
    
    
    (67,956
    )
    
    
    
    
    
    
    
    
    
    
    (73,518
    )
    
    
    
    
    
    
    
    
    
    
    (64,909
    )Loans, net
    
    
    5,871,433
    
    
    
    361,680
    
    
    
    6.16
    %
    
    
    4,723,538
    
    
    
    263,979
    
    
    
    5.59
    %
    
    
    4,009,801
    
    
    
    250,507
    
    
    
    6.25
    %Total interest-earning assets/ interest
income (tax-equivalent basis)
    
    
    7,882,180
    
    
    
    450,664
    
    
    
    5.72
    %
    
    
    7,300,735
    
    
    
    383,984
    
    
    
    5.26
    %
    
    
    6,453,419
    
    
    
    353,333
    
    
    
    5.48
    %Total non-interest-earning assets
    
    
    403,812
    
    
    
    
    
    
    
    
    
    
    
    333,736
    
    
    
    
    
    
    
    
    
    
    
    344,282Total assets
    
    $
    8,285,992
    
    
    
    
    
    
    
    
    
    
    $
    7,634,471
    
    
    
    
    
    
    
    
    
    
    $
    6,797,701Liabilities and stockholders equityInterest-bearing liabilities:Savings and NOW accounts
    
    $
    1,945,095
    
    
    $
    38,939
    
    
    
    2.00
    %
    
    $
    1,916,270
    
    
    $
    25,416
    
    
    
    1.33
    %
    
    $
    1,834,424
    
    
    $
    25,955
    
    
    
    1.41
    %Other time deposits
    
    
    1,476,996
    
    
    
    46,488
    
    
    
    3.15
    %
    
    
    1,193,078
    
    
    
    23,932
    
    
    
    2.01
    %
    
    
    1,007,737
    
    
    
    21,386
    
    
    
    2.12
    %Brokered deposits
    
    
    996,741
    
    
    
    36,785
    
    
    
    3.69
    %
    
    
    387,682
    
    
    
    10,931
    
    
    
    2.82
    %
    
    
    275,941
    
    
    
    8,689
    
    
    
    3.15
    %Borrowings
    
    
    2,295,932
    
    
    
    85,740
    
    
    
    3.73
    %
    
    
    2,648,854
    
    
    
    74,261
    
    
    
    2.80
    %
    
    
    2,016,044
    
    
    
    63,288
    
    
    
    3.14
    %Term Notes
    
    
    37,158
    
    
    
    1,229
    
    
    
    3.31
    %
    
    
    132,947
    
    
    
    5,640
    
    
    
    4.24
    %
    
    
    284,890
    
    
    
    12,868
    
    
    
    4.52
    %Subordinated Notes
    
    
    82,082
    
    
    
    3,402
    
    
    
    4.14
    %
    
    
    29,351
    
    
    
    582
    
    
    
    1.98
    %
    
    
    22,023
    
    
    
    425
    
    
    
    1.93
    %Total interest-bearing liabilities
interest expense
    
    
    6,834,004
    
    
    
    212,583
    
    
    
    3.11
    %
    
    
    6,308,182
    
    
    
    140,762
    
    
    
    2.23
    %
    
    
    5,441,059
    
    
    
    132,611
    
    
    
    2.44
    %Total non interest-bearing liabilities
    
    
    875,762
    
    
    
    
    
    
    
    
    
    
    
    830,326
    
    
    
    
    
    
    
    
    
    
    
    765,807Total liabilities
    
    
    7,709,766
    
    
    
    
    
    
    
    
    
    
    
    7,138,508
    
    
    
    
    
    
    
    
    
    
    
    6,206,866Stockholders Equity
    
    
    576,226
    
    
    
    
    
    
    
    
    
    
    
    495,963
    
    
    
    
    
    
    
    
    
    
    
    590,835Total liabilities and stockholders equity
    
    $
    8,285,992
    
    
    
    
    
    
    
    
    
    
    $
    7,634,471
    
    
    
    
    
    
    
    
    
    
    $
    6,797,701Net interest income
    
    
    
    
    
    $
    238,081
    
    
    
    
    
    
    
    
    
    
    $
    243,222
    
    
    
    
    
    
    
    
    
    
    $
    220,722Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.61
    %
    
    
    
    
    
    
    
    
    
    
    3.03
    %
    
    
    
    
    
    
    
    
    
    
    3.03
    %Cost of funding earning assets
    
    
    
    
    
    
    
    
    
    
    2.70
    %
    
    
    
    
    
    
    
    
    
    
    1.93
    %
    
    
    
    
    
    
    
    
    
    
    2.05
    %Net interest margin (tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    3.02
    %
    
    
    
    
    
    
    
    
    
    
    3.33
    %
    
    
    
    
    
    
    
    
    
    
    3.42
    %
 36




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##### Table of Contents



Changes in Interest Income and Interest Expense-Volume and Rate Analysis
  2005 vs. 2004
    
    
    2004 vs. 2003Increase (decrease) due to change in:
    
    
    Increase (decrease) due to change in:Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)Interest Income  tax equivalent basis:Federal funds purchased and securities
purchased under agreements to resell
    
    $
    (1,390
    )
    
    $
    2,454
    
    
    $
    1,064
    
    
    $
    535
    
    
    $
    598
    
    
    $
    1,133Time deposits with other banks
    
    
    1,352
    
    
    
    1,659
    
    
    
    3,011
    
    
    
    33
    
    
    
    357
    
    
    
    390Investment securities
    
    
    (26,289
    )
    
    
    (8,807
    )
    
    
    (35,096
    )
    
    
    4,205
    
    
    
    11,451
    
    
    
    15,656Loans, net
    
    
    68,768
    
    
    
    28,933
    
    
    
    97,701
    
    
    
    41,637
    
    
    
    (28,165
    )
    
    
    13,472Total interest income
    
    
    42,441
    
    
    
    24,239
    
    
    
    66,680
    
    
    
    46,410
    
    
    
    (15,759
    )
    
    
    30,651Interest Expense:Savings and NOW accounts
    
    
    388
    
    
    
    13,135
    
    
    
    13,523
    
    
    
    1,128
    
    
    
    (1,667
    )
    
    
    (539
    )Other time deposits
    
    
    25,060
    
    
    
    23,350
    
    
    
    48,410
    
    
    
    6,635
    
    
    
    (1,847
    )
    
    
    4,788Borrowings
    
    
    (10,835
    )
    
    
    22,314
    
    
    
    11,479
    
    
    
    18,281
    
    
    
    (7,308
    )
    
    
    10,973Long-term borrowings
    
    
    (1,671
    )
    
    
    80
    
    
    
    (1,591
    )
    
    
    (5,685
    )
    
    
    (1,386
    )
    
    
    (7,071
    )Total interest expense
    
    
    12,942
    
    
    
    58,989
    
    
    
    71,821
    
    
    
    20,359
    
    
    
    (12,208
    )
    
    
    8,151Net interest income (expense)  tax equivalent basis
    
    $
    29,499
    
    
    $
    (34,750
    )
    
    $
    (5,141
    )
    
    $
    26,051
    
    
    $
    (3,551
    )
    
    $
    22,500
   Provision for Loan Losses
 2005 compared to 2004.
 2004 compared to 2003
 37




---



##### Table of Contents



Other Income
   Year ended December 31,2005
    
    
    2004
    
    
    2003(Dollars In thousands)Bank service fees on deposit accounts
    
    $
    12,883
    
    
    $
    12,776
    
    
    $
    14,018Other service fees:Credit card fees
    
    
    15,242
    
    
    
    12,841
    
    
    
    11,941Mortgage-servicing fees
    
    
    2,283
    
    
    
    1,828
    
    
    
    1,968Trust fees
    
    
    2,912
    
    
    
    2,951
    
    
    
    2,690Other fees
    
    
    8,952
    
    
    
    8,581
    
    
    
    8,163Broker-dealer, asset management and
insurance fees
    
    
    53,016
    
    
    
    51,113
    
    
    
    49,526Gain on sale of securities, net
    
    
    17,842
    
    
    
    11,475
    
    
    
    10,790Loss on extinguishment of debt
    
    
    (5,959
    )
    
    
    
    
    
    
    (13,637
    )Gain on sale of loans
    
    
    7,876
    
    
    
    431
    
    
    
    9,829Trading gains
    
    
    277
    
    
    
    124
    
    
    
    1,601Gain on derivatives
    
    
    1,963
    
    
    
    3,459
    
    
    
    277Other gains, net
    
    
    4,774
    
    
    
    8,139
    
    
    
    8,737Other
    
    
    3,297
    
    
    
    3,521
    
    
    
    4,258$
    125,358
    
    
    $
    117,239
    
    
    $
    110,161
 The table below details the breakdown of commissions from broker-dealer, asset
management and insurance operations:
 Year ended December 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Broker-dealer
    
    $
    25,542
    
    
    $
    30,180
    
    
    $
    33,732Asset management
    
    
    20,119
    
    
    
    15,901
    
    
    
    11,031Total Santander Securities and subsidiary
    
    
    45,661
    
    
    
    46,081
    
    
    
    44,763Insurance
    
    
    7,355
    
    
    
    5,032
    
    
    
    4,763Total
    
    $
    53,016
    
    
    $
    51,113
    
    
    $
    49,526
 2005 compared to 2004.
  38




---



##### Table of Contents



2004 compared to 2003.
      39




---



##### Table of Contents



Operating Expenses
  Year ended December 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Salaries
    
    $
    58,547
    
    
    $
    57,376
    
    
    $
    50,304Pension and other benefits
    
    
    48,775
    
    
    
    49,458
    
    
    
    50,600Expenses deferred as loan origination costs
    
    
    (12,320
    )
    
    
    (15,252
    )
    
    
    (11,510
    )Total personnel costs
    
    
    95,002
    
    
    
    91,582
    
    
    
    89,394Occupancy costs
    
    
    16,811
    
    
    
    13,959
    
    
    
    13,534Equipment expenses
    
    
    3,802
    
    
    
    3,775
    
    
    
    3,633EDP servicing expense, amortization and
technical services
    
    
    31,589
    
    
    
    34,462
    
    
    
    44,160Communications
    
    
    8,232
    
    
    
    8,976
    
    
    
    8,612Business promotion
    
    
    11,065
    
    
    
    10,435
    
    
    
    6,760Other taxes
    
    
    8,443
    
    
    
    8,584
    
    
    
    9,811Other operating expenses:Professional fees
    
    
    9,844
    
    
    
    12,235
    
    
    
    6,642Amortization of intangibles
    
    
    1,697
    
    
    
    1,170
    
    
    
    3,491Printing and supplies
    
    
    1,775
    
    
    
    1,725
    
    
    
    1,722Credit card expenses
    
    
    8,844
    
    
    
    7,561
    
    
    
    7,208Insurance
    
    
    2,461
    
    
    
    2,113
    
    
    
    2,723Examinations & FDIC assessment
    
    
    1,809
    
    
    
    1,108
    
    
    
    1,766Transportation and travel
    
    
    2,242
    
    
    
    2,044
    
    
    
    1,578Repossessed assets provision and expenses
    
    
    1,871
    
    
    
    2,758
    
    
    
    5,387Collections and related legal costs
    
    
    1,461
    
    
    
    2,464
    
    
    
    6,084All other
    
    
    14,438
    
    
    
    12,426
    
    
    
    11,310Other operating expenses
    
    
    46,442
    
    
    
    45,604
    
    
    
    47,911Non personnel expenses
    
    
    126,384
    
    
    
    125,795
    
    
    
    134,421Total Operating Expenses
    
    $
    221,386
    
    
    $
    217,377
    
    
    $
    223,815Efficiency ratio-on a tax equivalent basis
    
    
    62.97
    %
    
    
    62.78
    %
    
    
    67.06
    %Personnel cost to average assets
    
    
    1.15
    %
    
    
    1.20
    %
    
    
    1.32
    %Other operating expenses to average assets
    
    
    1.53
    %
    
    
    1.65
    %
    
    
    1.98
    %Assets per employee
    
    $
    5,199
    
    
    $
    4,797
    
    
    $
    4,590
 2005
compared to 2004
    40




---



##### Table of Contents



2004 compared to 2003
     Income Taxes
     41




---



##### Table of Contents



2005
compared to 2004.
 2004
compared to 2003
 Financial Condition
 Assets
   Short Term Investments and Interest-bearing Deposits in Other Financial Institutions
  2005
    
    
    2004
    
    
    2003(Dollars in thousands)Interest-bearing deposits
    
    $
    109,867
    
    
    $
    92,612
    
    
    $
    25,300Federal funds sold
    
    
    15,000
    
    
    
    231,500
    
    
    
    183,000Securities purchased under agreements to resell
    
    
    77,429
    
    
    
    95,150
    
    
    
    95,750$
    202,296
    
    
    $
    419,262
    
    
    $
    304,050
 Investment Portfolio
   42




---



##### Table of Contents



Accounting for Certain Investments in Debt and Equity Securities
    43




---



##### Table of Contents



Available for Sale
    
    
    Held to Maturity
    
    
    TotalCarrying
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Carrying
    
    
    FairDecember 31, 2005:
    
    Value
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Value
    
    
    Value(Dollars in thousands)U.S. Treasury
    
    $
    24,576
    
    
    $
    24,576
    
    
    $
    
    
    
    $
    
    
    
    $
    24,576
    
    
    $
    24,576U.S. Agency Notes
    
    
    727,199
    
    
    
    727,199
    
    
    
    
    
    
    
    
    
    
    
    727,199
    
    
    
    727,199P.R. Government
Obligations
    
    
    53,600
    
    
    
    53,600
    
    
    
    
    
    
    
    
    
    
    
    53,600
    
    
    
    53,600Mortgage-backed Securities
    
    
    754,231
    
    
    
    754,231
    
    
    
    
    
    
    
    
    
    
    
    754,231
    
    
    
    754,231Foreign Securities
    
    
    75
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    75$
    1,559,681
    
    
    $
    1,559,681
    
    
    $
    
    
    
    $
    
    
    
    $
    1,559,681
    
    
    $
    1,559,681
 Available for Sale
    
    
    Held to Maturity
    
    
    TotalCarrying
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Carrying
    
    
    FairDecember 31, 2004:
    
    Value
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Value
    
    
    Value(Dollars in thousands)U.S. Treasury
    
    $
    7,578
    
    
    $
    7,578
    
    
    $
    
    
    
    $
    
    
    
    $
    7,578
    
    
    $
    7,578U.S. Agency Notes
    
    
    1,427,931
    
    
    
    1,427,931
    
    
    
    
    
    
    
    
    
    
    
    1,427,931
    
    
    
    1,427,931P.R. Government
Obligations
    
    
    52,688
    
    
    
    52,688
    
    
    
    
    
    
    
    
    
    
    
    52,688
    
    
    
    52,688Mortgage-backed Securities
    
    
    489,785
    
    
    
    489,785
    
    
    
    
    
    
    
    
    
    
    
    489,785
    
    
    
    489,785Foreign Securities
    
    
    150
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    150$
    1,978,132
    
    
    $
    1,978,132
    
    
    $
    
    
    
    $
    
    
    
    $
    1,978,132
    
    
    $
    1,978,132
 Available for Sale
    
    
    Held to Maturity
    
    
    TotalCarrying
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Carrying
    
    
    FairDecember 31, 2003:
    
    Value
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Value
    
    
    Value(Dollars in thousands)U.S. Treasury
    
    $
    1,000
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    
    
    
    $
    1,000
    
    
    $
    1,000U.S. Agency Notes
    
    
    324,973
    
    
    
    324,973
    
    
    
    787,003
    
    
    
    838,639
    
    
    
    1,111,976
    
    
    
    1,163,612P.R. Government
Obligations
    
    
    30,427
    
    
    
    30,427
    
    
    
    29,358
    
    
    
    30,357
    
    
    
    59,785
    
    
    
    60,784Mortgage-backed Securities
    
    
    1,307,911
    
    
    
    1,307,911
    
    
    
    1,616
    
    
    
    1,730
    
    
    
    1,309,527
    
    
    
    1,309,641Foreign Securities
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    150
    
    
    
    150
    
    
    
    150Other Securities
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    15,000$
    1,664,311
    
    
    $
    1,664,311
    
    
    $
    833,127
    
    
    $
    885,876
    
    
    $
    2,497,438
    
    
    $
    2,550,187
  44




---



##### Table of Contents



December 31, 2005After One
    
    
    After Five YearsWithin
    
    
    Year to
    
    
    toOne Year
    
    
    Five Years
    
    
    Ten Years
    
    
    Over Ten Years
    
    
    TotalCarrying
    
    
    Avg
    
    
    Carrying
    
    
    Avg
    
    
    Carrying
    
    
    Avg
    
    
    Carrying
    
    
    Avg
    
    
    Carrying
    
    
    Fair
    
    
    AvgValue
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Value
    
    
    Yield(Dollars in thousands)U.S. Treasury
    
    $
    24,576
    
    
    
    3.85
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    24,576
    
    
    $
    24,576
    
    
    
    3.85
    %U.S. Agency Notes
    
    
    254,610
    
    
    
    2.96
    %
    
    
    259,152
    
    
    
    3.68
    %
    
    
    213,437
    
    
    
    4.15
    %
    
    
    
    
    
    
    
    
    
    
    727,199
    
    
    
    727,199
    
    
    
    3.57
    %P.R. Government
Obligations
    
    
    12,790
    
    
    
    4.93
    %
    
    
    9,877
    
    
    
    4.07
    %
    
    
    27,215
    
    
    
    4.83
    %
    
    
    3,718
    
    
    
    6.35
    %
    
    
    53,600
    
    
    
    53,600
    
    
    
    4.82
    %Mortgage-backed
Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    754,231
    
    
    
    5.00
    %
    
    
    754,231
    
    
    
    754,231
    
    
    
    5.00
    %Foreign Securities
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    5.60
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    75
    
    
    
    5.60
    %Other Securities
    
    
    41,862
    
    
    
    5.00
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,862
    
    
    
    41,862
    
    
    
    5.00
    %Total Securities
    
    $
    333,838
    
    
    
    3.36
    %
    
    $
    269,104
    
    
    
    3.70
    %
    
    $
    240,652
    
    
    
    4.22
    %
    
    $
    757,949
    
    
    
    5.01
    %
    
    $
    1,601,543
    
    
    $
    1,601,543
    
    
    
    4.33
    %
 December 31, 2004After One
    
    
    After Five YearsWithin
    
    
    Year to
    
    
    toOne Year
    
    
    Five Years
    
    
    Ten Years
    
    
    Over Ten Years
    
    
    TotalCarrying
    
    
    Avg
    
    
    Carrying
    
    
    Avg
    
    
    Carrying
    
    
    Avg
    
    
    Carrying
    
    
    Avg
    
    
    Carrying
    
    
    Fair
    
    
    AvgValue
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Value
    
    
    Yield(Dollars in thousands)U.S. Treasury
    
    $
    7,578
    
    
    
    2.16
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    7,578
    
    
    $
    7,578
    
    
    
    2.16
    %U.S. Agency Notes
    
    
    3,057
    
    
    
    2.24
    %
    
    
    1,062,627
    
    
    
    4.56
    %
    
    
    362,247
    
    
    
    4.13
    %
    
    
    
    
    
    
    
    
    
    
    1,427,931
    
    
    
    1,427,931
    
    
    
    4.45
    %P.R. Government
Obligations
    
    
    8,470
    
    
    
    4.42
    %
    
    
    22,189
    
    
    
    4.51
    %
    
    
    13,800
    
    
    
    4.24
    %
    
    
    8,229
    
    
    
    6.42
    %
    
    
    52,688
    
    
    
    52,688
    
    
    
    4.73
    %Mortgage-backed
Securities
    
    
    
    
    
    
    
    
    
    
    890
    
    
    
    8.36
    %
    
    
    75
    
    
    
    9.50
    %
    
    
    488,820
    
    
    
    4.30
    %
    
    
    489,785
    
    
    
    489,785
    
    
    
    4.31
    %Foreign Securities
    
    
    75
    
    
    
    6.98
    %
    
    
    75
    
    
    
    5.60
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    150
    
    
    
    6.29
    %Other Securities
    
    
    
    
    
    
    
    
    
    
    37,500
    
    
    
    1.72
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,500
    
    
    
    37,500
    
    
    
    1.72
    %Total Securities
    
    $
    19,180
    
    
    
    4.94
    %
    
    $
    1,123,281
    
    
    
    4.29
    %
    
    $
    376,122
    
    
    
    4.13
    %
    
    $
    497,049
    
    
    
    4.33
    %
    
    $
    2,015,632
    
    
    $
    2,015,632
    
    
    
    4.41
    %
 December 31, 2003After One
    
    
    After Five YearsWithin
    
    
    Year to
    
    
    toOne Year
    
    
    Five Years
    
    
    Ten Years
    
    
    Over Ten Years
    
    
    TotalCarrying
    
    
    Avg
    
    
    Carrying
    
    
    Avg
    
    
    Carrying
    
    
    Avg
    
    
    Carrying
    
    
    Avg
    
    
    Carrying
    
    
    Fair
    
    
    AvgValue
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Value
    
    
    Yield(Dollars in thousands)U.S. Treasury
    
    $
    1,000
    
    
    
    0.93
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1,000
    
    
    $
    1,000
    
    
    
    0.93
    %U.S. Agency Notes
    
    
    6,089
    
    
    
    1.49
    %
    
    
    1,105,887
    
    
    
    4.13
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,111,976
    
    
    
    1,163,612
    
    
    
    4.12
    %P.R. Government
Obligations
    
    
    4,565
    
    
    
    5.18
    %
    
    
    40,420
    
    
    
    5.43
    %
    
    
    6,300
    
    
    
    4.52
    %
    
    
    8,500
    
    
    
    6.44
    %
    
    
    59,785
    
    
    
    60,784
    
    
    
    5.46
    %Mortgage-backed
Securities
    
    
    
    
    
    
    
    
    
    
    1,180
    
    
    
    8.43
    %
    
    
    113
    
    
    
    9.31
    %
    
    
    1,308,234
    
    
    
    4.51
    %
    
    
    1,309,527
    
    
    
    1,309,641
    
    
    
    4.51
    %Foreign Securities
    
    
    50
    
    
    
    7.20
    %
    
    
    100
    
    
    
    7.11
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    150
    
    
    
    7.14
    %Other Securities
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    0.81
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    0.81
    %Total Securities
    
    $
    11,704
    
    
    
    2.91
    %
    
    $
    1,162,587
    
    
    
    4.14
    %
    
    $
    6,413
    
    
    
    4.61
    %
    
    $
    1,316,734
    
    
    
    4.52
    %
    
    $
    2,497,438
    
    
    $
    2,550,187
    
    
    
    4.34
    %
 45




---



##### Table of Contents



Loan Portfolio
  Year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Commercial, industrial and
agriculturalRetail commercial bankingMiddle-market
    
    $
    1,574,459
    
    
    
    26.1
    %
    
    $
    1,439,609
    
    
    
    25.9
    %
    
    $
    1,354,879
    
    
    
    32.2
    %
    
    $
    1,220,996
    
    
    
    29.8
    %
    
    $
    1,329,149
    
    
    
    27.8
    %Agricultural
    
    
    61,531
    
    
    
    1.0
    %
    
    
    62,198
    
    
    
    1.1
    %
    
    
    62,925
    
    
    
    1.5
    %
    
    
    67,768
    
    
    
    1.7
    %
    
    
    96,356
    
    
    
    2.0
    %SBA
    
    
    69,763
    
    
    
    1.2
    %
    
    
    72,963
    
    
    
    1.3
    %
    
    
    72,060
    
    
    
    1.7
    %
    
    
    74,160
    
    
    
    1.8
    %
    
    
    78,606
    
    
    
    1.6
    %Factor liens
    
    
    16,696
    
    
    
    0.3
    %
    
    
    16,818
    
    
    
    0.3
    %
    
    
    18,291
    
    
    
    0.4
    %
    
    
    14,026
    
    
    
    0.3
    %
    
    
    19,179
    
    
    
    0.4
    %Other
    
    
    40,072
    
    
    
    0.7
    %
    
    
    11,978
    
    
    
    0.2
    %
    
    
    2,754
    
    
    
    0.1
    %
    
    
    4,699
    
    
    
    0.1
    %
    
    
    4,336
    
    
    
    0.1
    %Retail commercial banking
    
    
    1,762,521
    
    
    
    29.3
    %
    
    
    1,603,566
    
    
    
    28.8
    %
    
    
    1,510,909
    
    
    
    35.9
    %
    
    
    1,381,649
    
    
    
    33.7
    %
    
    
    1,527,626
    
    
    
    31.9
    %Corporate banking
    
    
    1,205,664
    
    
    
    20.0
    %
    
    
    1,598,443
    
    
    
    28.8
    %
    
    
    753,839
    
    
    
    17.9
    %
    
    
    585,946
    
    
    
    14.3
    %
    
    
    921,015
    
    
    
    19.2
    %Total Commercial
    
    
    2,968,185
    
    
    
    49.3
    %
    
    
    3,202,009
    
    
    
    57.6
    %
    
    
    2,264,748
    
    
    
    53.8
    %
    
    
    1,967,595
    
    
    
    48.0
    %
    
    
    2,448,641
    
    
    
    51.1
    %Construction
    
    
    213,705
    
    
    
    3.5
    %
    
    
    199,799
    
    
    
    3.6
    %
    
    
    209,655
    
    
    
    5.0
    %
    
    
    309,505
    
    
    
    7.5
    %
    
    
    327,348
    
    
    
    6.8
    %ConsumerPersonal (installment and other
loans)
    
    
    397,169
    
    
    
    6.6
    %
    
    
    319,204
    
    
    
    5.7
    %
    
    
    287,590
    
    
    
    6.8
    %
    
    
    379,678
    
    
    
    9.3
    %
    
    
    490,939
    
    
    
    10.3
    %Automobile
    
    
    610
    
    
    
    0.0
    %
    
    
    6,434
    
    
    
    0.1
    %
    
    
    21,232
    
    
    
    0.5
    %
    
    
    48,384
    
    
    
    1.2
    %
    
    
    92,966
    
    
    
    1.9
    %Credit Cards
    
    
    169,416
    
    
    
    2.8
    %
    
    
    128,622
    
    
    
    2.3
    %
    
    
    95,362
    
    
    
    2.3
    %
    
    
    102,463
    
    
    
    2.5
    %
    
    
    112,588
    
    
    
    2.4
    %Total Consumer
    
    
    567,195
    
    
    
    9.4
    %
    
    
    454,260
    
    
    
    8.2
    %
    
    
    404,184
    
    
    
    9.6
    %
    
    
    530,525
    
    
    
    12.9
    %
    
    
    696,493
    
    
    
    14.6
    %MortgageResidential
    
    
    2,141,358
    
    
    
    35.6
    %
    
    
    1,583,418
    
    
    
    28.5
    %
    
    
    1,219,091
    
    
    
    29.0
    %
    
    
    1,196,231
    
    
    
    29.2
    %
    
    
    1,203,906
    
    
    
    25.2
    %Commercial
    
    
    6,121
    
    
    
    0.1
    %
    
    
    7,659
    
    
    
    0.1
    %
    
    
    2,836
    
    
    
    0.1
    %
    
    
    4,482
    
    
    
    0.1
    %
    
    
    7,063
    
    
    
    0.1
    %Total Mortgage
    
    
    2,147,479
    
    
    
    35.7
    %
    
    
    1,591,077
    
    
    
    28.6
    %
    
    
    1,221,927
    
    
    
    29.1
    %
    
    
    1,200,713
    
    
    
    29.3
    %
    
    
    1,210,969
    
    
    
    25.3
    %Lease Financing
    
    
    125,168
    
    
    
    2.1
    %
    
    
    112,152
    
    
    
    2.0
    %
    
    
    105,849
    
    
    
    2.5
    %
    
    
    92,993
    
    
    
    2.3
    %
    
    
    106,756
    
    
    
    2.2
    %Total Loans, net of unearned interest
and deferred fees
    
    $
    6,021,732
    
    
    
    100.0
    %
    
    $
    5,559,297
    
    
    
    100.0
    %
    
    $
    4,206,363
    
    
    
    100.0
    %
    
    $
    4,101,331
    
    
    
    100.0
    %
    
    $
    4,790,207
    
    
    
    100.0
    %
   Allowance for Loan Losses
  46




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47




---



##### Table of Contents



Year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Balance at beginning of year
    
    $
    69,177
    
    
    $
    69,693
    
    
    $
    56,906
    
    
    $
    51,738
    
    
    $
    50,597Provision for loan losses
    
    
    20,400
    
    
    
    26,270
    
    
    
    49,916
    
    
    
    63,699
    
    
    
    65,24089,577
    
    
    
    95,963
    
    
    
    106,822
    
    
    
    115,437
    
    
    
    115,837Losses charged to the allowance:Commercial and industrial
    
    
    8,044
    
    
    
    19,250
    
    
    
    9,198
    
    
    
    19,158
    
    
    
    19,576Construction
    
    
    1,438
    
    
    
    
    
    
    
    499
    
    
    
    1,528
    
    
    
    Mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74Consumer
    
    
    17,351
    
    
    
    18,969
    
    
    
    36,544
    
    
    
    45,676
    
    
    
    51,312Leasing
    
    
    986
    
    
    
    1,658
    
    
    
    1,434
    
    
    
    3,125
    
    
    
    3,85827,819
    
    
    
    39,877
    
    
    
    47,675
    
    
    
    69,487
    
    
    
    74,820Recoveries:Commercial and industrial
    
    
    1,686
    
    
    
    5,271
    
    
    
    4,478
    
    
    
    3,443
    
    
    
    4,128Construction
    
    
    
    
    
    
    
    
    
    
    433
    
    
    
    18
    
    
    
    104Mortgage
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    1
    
    
    
    Consumer
    
    
    2,646
    
    
    
    7,341
    
    
    
    5,127
    
    
    
    7,044
    
    
    
    6,409Leasing
    
    
    752
    
    
    
    479
    
    
    
    501
    
    
    
    450
    
    
    
    805,084
    
    
    
    13,091
    
    
    
    10,546
    
    
    
    10,956
    
    
    
    10,721Net loans charged-off
    
    
    22,735
    
    
    
    26,786
    
    
    
    37,129
    
    
    
    58,531
    
    
    
    64,099Balance at end of year
    
    $
    66,842
    
    
    $
    69,177
    
    
    $
    69,693
    
    
    $
    56,906
    
    
    $
    51,738Ratios:Allowance for loan losses to year-end loans
    
    
    1.11
    %
    
    
    1.24
    %
    
    
    1.66
    %
    
    
    1.39
    %
    
    
    1.08
    %Recoveries to charge-offs
    
    
    18.28
    %
    
    
    32.83
    %
    
    
    22.12
    %
    
    
    15.77
    %
    
    
    14.33
    %Net charge-offs to average loans
    
    
    0.38
    %
    
    
    0.56
    %
    
    
    0.91
    %
    
    
    1.32
    %
    
    
    1.34
    %Allowance for loan losses to net charge-offs
    
    
    294.00
    %
    
    
    258.26
    %
    
    
    187.71
    %
    
    
    97.22
    %
    
    
    80.72
    %Allowance for loan losses to non-performing loans
    
    
    90.72
    %
    
    
    79.05
    %
    
    
    70.85
    %
    
    
    46.10
    %
    
    
    54.34
    %Provision for loan losses to:Net charge-offs
    
    
    89.73
    %
    
    
    98.07
    %
    
    
    134.44
    %
    
    
    108.83
    %
    
    
    101.78
    %Average loans
    
    
    0.34
    %
    
    
    0.55
    %
    
    
    1.23
    %
    
    
    1.43
    %
    
    
    1.36
    %
  Year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Balance at beginning of year
    
    $
    1,269
    
    
    $
    879
    
    
    $
    1,050
    
    
    $
    1,119
    
    
    $
    929Provision for credit losses
    
    
    397
    
    
    
    390
    
    
    
    (171
    )
    
    
    (69
    )
    
    
    190Balance at end of year
    
    $
    1,666
    
    
    $
    1,269
    
    
    $
    879
    
    
    $
    1,050
    
    
    $
    1,119
 2005 compared to 2004
 48




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2004 compared to 2003
      49




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##### Table of Contents



Year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001% of loans
    
    
    
    
    
    
    % of loans
    
    
    
    
    
    
    % of loans
    
    
    
    
    
    
    % of loans
    
    
    
    
    
    
    % of loansin each
    
    
    
    
    
    
    in each
    
    
    
    
    
    
    in each
    
    
    
    
    
    
    in each
    
    
    
    
    
    
    in eachcategory to
    
    
    
    
    
    
    category to
    
    
    
    
    
    
    category to
    
    
    
    
    
    
    category to
    
    
    
    
    
    
    category toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in thousands)Commercial
    
    $
    27,765
    
    
    
    49.3
    %
    
    $
    29,469
    
    
    
    57.6
    %
    
    $
    26,219
    
    
    
    53.8
    %
    
    $
    21,415
    
    
    
    48.0
    %
    
    $
    14,577
    
    
    
    51.1
    %Construction
    
    
    1,456
    
    
    
    3.5
    %
    
    
    1,208
    
    
    
    3.6
    %
    
    
    1,194
    
    
    
    5.0
    %
    
    
    4,149
    
    
    
    7.5
    %
    
    
    1,756
    
    
    
    6.8
    %Consumer
    
    
    30,664
    
    
    
    9.4
    %
    
    
    30,832
    
    
    
    8.2
    %
    
    
    33,751
    
    
    
    9.6
    %
    
    
    29,711
    
    
    
    12.9
    %
    
    
    26,578
    
    
    
    14.6
    %Mortgage
    
    
    2,415
    
    
    
    35.7
    %
    
    
    4,250
    
    
    
    28.6
    %
    
    
    3,318
    
    
    
    29.1
    %
    
    
    124
    
    
    
    29.3
    %
    
    
    119
    
    
    
    25.3
    %Lease financing
    
    
    2,128
    
    
    
    2.1
    %
    
    
    2,068
    
    
    
    2.0
    %
    
    
    2,922
    
    
    
    2.5
    %
    
    
    1,833
    
    
    
    2.3
    %
    
    
    1,430
    
    
    
    2.2
    %Unallocated
    
    
    2,414
    
    
    
    
    
    
    
    1,350
    
    
    
    
    
    
    
    2,289
    
    
    
    
    
    
    
    (326
    )
    
    
    
    
    
    
    7,278
    
    
    
    $
    66,842
    
    
    
    100.0
    %
    
    $
    69,177
    
    
    
    100.0
    %
    
    $
    69,693
    
    
    
    100.0
    %
    
    $
    56,906
    
    
    
    100.0
    %
    
    $
    51,738
    
    
    
    100.0
    %
   Liabilities
     50




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Year ended December 31,2005
    
    
    2004
    
    
    2003% of
    
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    
    % ofAverage
    
    
    Total
    
    
    Average
    
    
    Average
    
    
    Total
    
    
    Average
    
    
    Average
    
    
    Total
    
    
    AverageBalance
    
    
    Liabilities
    
    
    Cost
    
    
    Balance
    
    
    Liabilities
    
    
    Cost
    
    
    Balance
    
    
    Liabilities
    
    
    Cost(Dollars in thousands)Savings deposits
    
    $
    1,945,095
    
    
    
    25.2
    %
    
    
    2.00
    %
    
    $
    1,916,270
    
    
    
    26.8
    %
    
    
    1.33
    %
    
    $
    1,834,424
    
    
    
    29.6
    %
    
    
    1.41
    %Time deposits
    
    
    2,473,737
    
    
    
    32.1
    %
    
    
    3.37
    %
    
    
    1,580,760
    
    
    
    22.1
    %
    
    
    2.21
    %
    
    
    1,283,678
    
    
    
    20.7
    %
    
    
    2.34
    %Interest-bearing deposits
    
    
    4,418,832
    
    
    
    57.3
    %
    
    
    2.77
    %
    
    
    3,497,030
    
    
    
    48.9
    %
    
    
    1.73
    %
    
    
    3,118,102
    
    
    
    50.3
    %
    
    
    1.79
    %Federal funds, repos, and
commercial paper and other borrowings
    
    
    2,295,932
    
    
    
    29.8
    %
    
    
    3.73
    %
    
    
    2,648,854
    
    
    
    37.1
    %
    
    
    2.80
    %
    
    
    2,016,044
    
    
    
    32.5
    %
    
    
    3.14
    %Term and subordinated notes
    
    
    119,240
    
    
    
    1.5
    %
    
    
    3.74
    %
    
    
    162,298
    
    
    
    2.3
    %
    
    
    3.83
    %
    
    
    306,913
    
    
    
    4.9
    %
    
    
    4.33
    %Total borrowings
    
    
    2,415,172
    
    
    
    31.3
    %
    
    
    3.73
    %
    
    
    2,811,152
    
    
    
    39.4
    %
    
    
    2.86
    %
    
    
    2,322,957
    
    
    
    37.4
    %
    
    
    3.30
    %Total interest-bearing liabilities
    
    
    6,834,004
    
    
    
    88.6
    %
    
    
    3.11
    %
    
    
    6,308,182
    
    
    
    88.3
    %
    
    
    2.23
    %
    
    
    5,441,059
    
    
    
    87.7
    %
    
    
    2.44
    %Non-interest-bearing deposits
    
    
    663,688
    
    
    
    8.6
    %
    
    
    0.00
    %
    
    
    656,215
    
    
    
    9.3
    %
    
    
    0.00
    %
    
    
    631,582
    
    
    
    10.1
    %
    
    
    0.00
    %Other liabilities
    
    
    212,074
    
    
    
    2.8
    %
    
    
    0.00
    %
    
    
    174,111
    
    
    
    2.4
    %
    
    
    0.00
    %
    
    
    134,225
    
    
    
    2.2
    %
    
    
    0.00
    %Total non-interest-bearing liabilities
    
    
    875,762
    
    
    
    11.4
    %
    
    
    0.00
    %
    
    
    830,326
    
    
    
    11.7
    %
    
    
    0.00
    %
    
    
    765,807
    
    
    
    12.3
    %
    
    
    0.00
    %Total Liabilities
    
    $
    7,709,766
    
    
    
    100.0
    %
    
    
    2.76
    %
    
    $
    7,138,508
    
    
    
    100.0
    %
    
    
    1.97
    %
    
    $
    6,206,866
    
    
    
    100.0
    %
    
    
    2.13
    %
   Year ended December 31,Average Total Deposits
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Private Demand
    
    $
    626,829
    
    
    $
    595,012
    
    
    $
    567,970Public Demand
    
    
    36,859
    
    
    
    61,203
    
    
    
    63,612Non-interest bearing
    
    
    663,688
    
    
    
    656,215
    
    
    
    631,582Savings Accounts
    
    
    859,623
    
    
    
    786,006
    
    
    
    769,572NOW and Super NOW accounts
    
    
    470,595
    
    
    
    527,954
    
    
    
    505,403Government NOW accounts
    
    
    614,877
    
    
    
    602,310
    
    
    
    559,449Total Savings Accounts
    
    
    1,945,095
    
    
    
    1,916,270
    
    
    
    1,834,424Certificates of deposit:Under $100,000
    
    
    231,916
    
    
    
    215,446
    
    
    
    261,232$100,000 and over
    
    
    2,038,505
    
    
    
    1,202,368
    
    
    
    882,809936
    
    
    32,745
    
    
    
    38,694
    
    
    
    63,526Public time accounts
    
    
    170,571
    
    
    
    124,252
    
    
    
    76,111Total Certificates of Deposit
    
    
    2,473,737
    
    
    
    1,580,760
    
    
    
    1,283,678Total Deposits
    
    $
    5,082,520
    
    
    $
    4,153,245
    
    
    $
    3,749,684
 51




---



##### Table of Contents



2005
    
    
    2004(Dollars in thousands)Three months or less
    
    $
    842,274
    
    
    $
    961,587Over three months through six months
    
    
    288,137
    
    
    
    165,744Over six months through twelve months
    
    
    381,474
    
    
    
    77,880Over twelve months
    
    
    850,115
    
    
    
    587,929Total
    
    $
    2,362,000
    
    
    $
    1,793,140
      Capital and Dividends
     52




---



##### Table of Contents



53




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##### Table of Contents



To be Well CapitalizedFor Minimum Capital
    
    
    
    
    
    Under Prompt CorrectiveActual
    
    
    
    
    
    Adequacy
    
    
    
    
    
    Action ProvisionAmount
    
    Ratio
    
    
    
    
    
    Amount
    
    RatioCapital Adequacy Data
    
    Amount
    
    Ratio
    
    
    
    
    
    Must be
    
    Must be
    
    
    
    
    
    Must be
    
    Must be(Dollars in thousands)December 31, 2005:Total Capital (to Risk Weighted Assets)Santander BanCorp
    
    $
    726,939
    
    
    
    12.30
    %
    
    
    3
    
    
    $
    472,889
    
    
    
    38.00
    %
    
    
    
    
    
    
    N/ABanco Santander
    
    
    638,181
    
    
    
    11.05
    %
    
    
    3
    
    
    
    462,187
    
    
    
    38.00
    %
    
    
    3
    
    
    
    577,734
    
    
    
    310.00
    %Tier I (to Risk Weighted Assets)Santander BanCorp
    
    
    537,319
    
    
    
    9.09
    %
    
    
    3
    
    
    
    236,445
    
    
    
    34.00
    %
    
    
    
    
    
    
    N/ABanco Santander
    
    
    570,056
    
    
    
    9.87
    %
    
    
    3
    
    
    
    231,093
    
    
    
    34.00
    %
    
    
    3
    
    
    
    346,640
    
    
    
    36.00
    %Leverage (to average assets)Santander BanCorp
    
    
    537,319
    
    
    
    6.50
    %
    
    
    3
    
    
    
    177,333
    
    
    
    33.00
    %
    
    
    
    
    
    
    N/ABanco Santander
    
    
    570,056
    
    
    
    7.05
    %
    
    
    3
    
    
    
    173,320
    
    
    
    33.00
    %
    
    
    3
    
    
    
    288,867
    
    
    
    >5.00
    %December 31, 2004:Total Capital (to Risk Weighted Assets)Santander BanCorp
    
    $
    647,799
    
    
    
    11.05
    %
    
    
    3
    
    
    $
    468,849
    
    
    
    38.00
    %
    
    
    
    
    
    
    N/ABanco Santander
    
    
    604,003
    
    
    
    9.78
    %
    
    
    3
    
    
    
    494,003
    
    
    
    38.00
    %
    
    
    3
    
    
    
    617,504
    
    
    
    310.00
    %Tier I (to Risk Weighted Assets)Santander BanCorp
    
    
    505,650
    
    
    
    8.63
    %
    
    
    3
    
    
    
    234,424
    
    
    
    34.00
    %
    
    
    
    
    
    
    N/ABanco Santander
    
    
    537,161
    
    
    
    8.70
    %
    
    
    3
    
    
    
    247,002
    
    
    
    34.00
    %
    
    
    3
    
    
    
    370,503
    
    
    
    36.00
    %Leverage (to average assets)Santander BanCorp
    
    
    505,650
    
    
    
    6.43
    %
    
    
    3
    
    
    
    175,818
    
    
    
    33.00
    %
    
    
    
    
    
    
    N/ABanco Santander
    
    
    537,161
    
    
    
    6.90
    %
    
    
    3
    
    
    
    185,251
    
    
    
    33.00
    %
    
    
    3
    
    
    
    308,752
    
    
    
    >5.00
    %December 31, 2003:Total Capital (to Risk Weighted Assets)Santander BanCorp
    
    $
    501,133
    
    
    
    10.03
    %
    
    
    3
    
    
    $
    399,574
    
    
    
    38.00
    %
    
    
    
    
    
    
    N/ABanco Santander
    
    
    517,683
    
    
    
    10.50
    %
    
    
    3
    
    
    
    394,321
    
    
    
    38.00
    %
    
    
    3
    
    
    
    492,901
    
    
    
    310.00
    %Tier I (to Risk Weighted Assets)Santander BanCorp
    
    
    423,099
    
    
    
    8.47
    %
    
    
    3
    
    
    
    199,787
    
    
    
    34.00
    %
    
    
    
    
    
    
    N/ABanco Santander
    
    
    455,960
    
    
    
    9.25
    %
    
    
    3
    
    
    
    197,161
    
    
    
    34.00
    %
    
    
    3
    
    
    
    295,742
    
    
    
    36.00
    %Leverage (to average assets)Santander BanCorp
    
    
    423,099
    
    
    
    5.89
    %
    
    
    3
    
    
    
    149,840
    
    
    
    33.00
    %
    
    
    
    
    
    
    N/ABanco Santander
    
    
    455,960
    
    
    
    6.41
    %
    
    
    3
    
    
    
    147,870
    
    
    
    33.00
    %
    
    
    3
    
    
    
    246,451
    
    
    
    >5.00
    %
 54




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##### Table of Contents



Goodwill and Intangible Assets
  2005
    
    
    2004
    
    
    2003(Dollars in millions)Mortgage Servicing Rights
    
    $
    8.0
    
    
    $
    6.5
    
    
    $
    4.7Advisory Servicing Rights
    
    
    1.3
    
    
    
    1.5
    
    
    
    Intangible Pension Assets
    
    
    0.8
    
    
    
    
    
    
    
    Goodwill
    
    
    34.8
    
    
    
    34.8
    
    
    
    34.8$
    44.9
    
    
    $
    42.8
    
    
    $
    39.5
 Contractual Obligations and Commercial Commitments
  Payments due by Periodas of December 31, 2005MoreLess than
    
    
    
    
    
    
    
    
    
    
    thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 years(Dollars in thousands)Contractual Obligations:Federal funds purchased and other borrowings
    
    $
    768,846
    
    
    $
    118,846
    
    
    $
    650,000
    
    
    $
    
    
    
    $
    Securities sold under agreements to repurchase
    
    
    947,767
    
    
    
    597,761
    
    
    
    150,006
    
    
    
    
    
    
    
    200,000Commercial paper
    
    
    334,319
    
    
    
    334,319
    
    
    
    
    
    
    
    
    
    
    
    Subordinated notes
    
    
    121,098
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,098Term notes
    
    
    40,215
    
    
    
    
    
    
    
    
    
    
    
    25,658
    
    
    
    14,557Operating lease obligations
    
    
    55,812
    
    
    
    14,975
    
    
    
    15,949
    
    
    
    7,603
    
    
    
    17,285Pension plan contribution
    
    
    5,367
    
    
    
    5,367
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,273,424
    
    
    $
    1,071,268
    
    
    $
    815,955
    
    
    $
    33,261
    
    
    $
    352,940Other Commercial Commitments:Lines of credit and financial guarantees written
    
    
    211,657
    
    
    
    169,658
    
    
    
    40,530
    
    
    
    426
    
    
    
    1,043Commitments to extend credit
    
    
    1,461,258
    
    
    
    1,461,258
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,672,915
    
    
    $
    1,630,916
    
    
    $
    40,530
    
    
    $
    426
    
    
    $
    1,043
 55




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##### Table of Contents



Recent Accounting Pronouncements
  
 ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Risk Management
  Credit Risk Management and Loan Quality
         56




---



##### Table of Contents



Industry Risk
    Government Risk
  57




---



##### Table of Contents



Non-performing Assets and Past Due Loans
  Year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Commercial, Industrial and Agricultural
    
    $
    14,326
    
    
    $
    27,975
    
    
    $
    30,884
    
    
    $
    35,369
    
    
    $
    29,753Construction
    
    
    3,414
    
    
    
    11,200
    
    
    
    10,085
    
    
    
    31,248
    
    
    
    1,020Mortgage
    
    
    45,292
    
    
    
    36,252
    
    
    
    42,107
    
    
    
    36,071
    
    
    
    47,954Consumer
    
    
    4,747
    
    
    
    6,808
    
    
    
    9,312
    
    
    
    15,930
    
    
    
    12,361Lease Financing
    
    
    3,340
    
    
    
    2,715
    
    
    
    4,027
    
    
    
    3,735
    
    
    
    3,146Restructured Loans
    
    
    2,560
    
    
    
    2,560
    
    
    
    1,953
    
    
    
    1,085
    
    
    
    978Total non-performing loans
    
    
    73,679
    
    
    
    87,510
    
    
    
    98,368
    
    
    
    123,438
    
    
    
    95,212Total repossessed assets
    
    
    2,706
    
    
    
    3,937
    
    
    
    4,989
    
    
    
    17,563
    
    
    
    4,790Non-performing assets
    
    $
    76,385
    
    
    $
    91,447
    
    
    $
    103,357
    
    
    $
    141,001
    
    
    $
    100,002Accruing loans past-due 90 days or more
    
    $
    2,999
    
    
    $
    3,377
    
    
    $
    2,404
    
    
    $
    3,928
    
    
    $
    5,528Non-performing loans to total loans
    
    
    1.22
    %
    
    
    1.57
    %
    
    
    2.34
    %
    
    
    3.01
    %
    
    
    1.99
    %Non-performing loans plus accruing loans
past due 90 days or more to total loans
    
    
    1.27
    %
    
    
    1.63
    %
    
    
    2.40
    %
    
    
    3.11
    %
    
    
    2.10
    %Non-performing assets to total assets
    
    
    0.92
    %
    
    
    1.10
    %
    
    
    1.40
    %
    
    
    1.91
    %
    
    
    1.24
    %Interest lost
    
    $
    2,111
    
    
    $
    2,351
    
    
    $
    3,127
    
    
    $
    2,338
    
    
    $
    3,168
      58




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##### Table of Contents



Potential Problem Loans
  Asset and Liability Management
  Market Risk and Interest Rate Sensitivity
   59




---



##### Table of Contents



Interest Rate SensitivityAs of December 31, 20050 to 3
    
    
    3 months
    
    
    1 to 3
    
    
    3 to 5
    
    
    5 to 10
    
    
    More than
    
    
    No InterestMonths
    
    
    to a Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    10 Years
    
    
    Rate Risk
    
    
    Total(Dollars in thousands)ASSETS:Investment Portfolio
    
    $
    280,055
    
    
    $
    52,432
    
    
    $
    200,762
    
    
    $
    972,755
    
    
    $
    84,892
    
    
    $
    
    
    
    $
    48,326
    
    
    $
    1,639,222Deposits in Other Banks
    
    
    202,296
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136,731
    
    
    
    339,027Loan PortfolioCommercial
    
    
    1,915,772
    
    
    
    259,472
    
    
    
    247,001
    
    
    
    363,630
    
    
    
    176,357
    
    
    
    79,031
    
    
    
    52,090
    
    
    
    3,093,353Construction
    
    
    191,419
    
    
    
    3,665
    
    
    
    2,431
    
    
    
    9,285
    
    
    
    6,905
    
    
    
    
    
    
    
    
    
    
    
    213,705Consumer
    
    
    226,479
    
    
    
    77,159
    
    
    
    168,897
    
    
    
    73,290
    
    
    
    16,196
    
    
    
    36
    
    
    
    5,138
    
    
    
    567,195Mortgage
    
    
    69,661
    
    
    
    221,833
    
    
    
    536,335
    
    
    
    448,707
    
    
    
    717,924
    
    
    
    152,926
    
    
    
    93
    
    
    
    2,147,479Fixed and Other Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271,967
    
    
    
    271,967Total Assets
    
    
    2,885,682
    
    
    
    614,561
    
    
    
    1,155,426
    
    
    
    1,867,667
    
    
    
    1,002,274
    
    
    
    231,993
    
    
    
    514,345
    
    
    
    8,271,948LIABILITIES AND
STOCKHOLDERS EQUITYExternal Funds PurchasedCommercial Paper
    
    
    334,319
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    334,319Repurchase Agreements
    
    
    597,761
    
    
    
    
    
    
    
    150,006
    
    
    
    
    
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    947,767Federal
Funds and other borrowings
    
    
    768,846
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    768,846DepositsCertificates of Deposit
    
    
    902,391
    
    
    
    699,808
    
    
    
    250,396
    
    
    
    274,514
    
    
    
    390,599
    
    
    
    117,302
    
    
    
    (28,506
    )
    
    
    2,606,504Demand Deposits and
    
    
    
    
    
    
    
    
    
    
    

        
    

    
    
    
    
    
    
    

            
    
    
        
    
    
    Savings Accounts
    
    
    143,626
    
    
    
    114,102
    
    
    
    28,024
    
    
    
    386,473
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    672,225Transactional Accounts
    
    
    429,540
    
    
    
    261,852
    
    
    
    510,219
    
    
    
    743,769
    
    
    
    
    
    
    
    
    
    
    
    541
    
    
    
    1,945,921Senior and Subordinated Debt
    
    
    702
    
    
    
    
    
    
    
    
    
    
    
    25,422
    
    
    
    135,188
    
    
    
    
    
    
    
    1
    
    
    
    161,313Other Liabilities and Capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    835,053
    
    
    
    835,053Total Liabilities and Capital
    
    
    3,177,185
    
    
    
    1,075,762
    
    
    
    938,645
    
    
    
    1,430,178
    
    
    
    725,787
    
    
    
    117,302
    
    
    
    807,089
    
    
    
    8,271,948Off-Balance Sheet
Financial InformationInterest Rate Swaps (Assets)
    
    
    1,340,301
    
    
    
    1,001,587
    
    
    
    268,126
    
    
    
    240,006
    
    
    
    395,836
    
    
    
    339,437
    
    
    
    
    
    
    
    3,585,293Interest Rate Swaps (Liabilities)
    
    
    (2,513,743
    )
    
    
    (696,587
    )
    
    
    (99,788
    )
    
    
    (34,935
    )
    
    
    (123,165
    )
    
    
    (117,075
    )
    
    
    
    
    
    
    (3,585,293
    )Caps
    
    
    37,571
    
    
    
    
    
    
    
    
    
    
    
    35,851
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,422Caps Final Maturity
    
    
    (35,851
    )
    
    
    
    
    
    
    
    
    
    
    (37,571
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73,422
    )GAP
    
    
    (1,463,225
    )
    
    
    (156,201
    )
    
    
    385,119
    
    
    
    640,840
    
    
    
    549,158
    
    
    
    337,053
    
    
    
    (292,744
    )
    
    
    Cumulative GAP
    
    $
    (1,463,225
    )
    
    $
    (1,619,426
    )
    
    $
    (1,234,307
    )
    
    $
    (593,467
    )
    
    $
    (44,309
    )
    
    $
    292,744
    
    
    $
    
    
    
    $
    Cumulative GAP to earning assets
    
    
    -18.29
    %
    
    
    -20.24
    %
    
    
    -15.43
    %
    
    
    -7.42
    %
    
    
    -0.55
    %
    
    
    3.66
    %
    60




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##### Table of Contents



Derivatives
   61




---



##### Table of Contents



Hedging Activities:
  December 31, 2005OtherComprehensiveNotional
    
    
    
    
    
    
    Gain
    
    
    Income(Dollars in thousands)
    

    Amounts *
    
    
    Fair Value
    
    
    (Loss)
    
    
    (Loss)**Cash Flow HedgesForeign Currency
    
    $
    117,725
    
    
    $
    2,182
    
    
    $
    
    
    
    $
    (36
    )Interest Rate Swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,369Fair Value HedgesInterest Rate Swaps
    
    
    1,408,772
    
    
    
    (26,880
    )
    
    
    28
    
    
    
    Totals
    
    $
    1,526,497
    
    
    $
    (24,698
    )
    
    $
    28
    
    
    $
    1,333
 December 31, 2004OtherComprehensiveNotional
    
    
    
    
    
    
    Gain
    
    
    Income(Dollars in thousands)
    
    Amounts *
    
    
    Fair Value
    
    
    (Loss)
    
    
    (Loss)**Cash Flow HedgesInterest Rate Swaps
    
    $
    100,000
    
    
    $
    (2,242
    )
    
    $
    
    
    
    $
    3,463Fair Value HedgesInterest Rate Swaps
    
    
    618,648
    
    
    
    (9,764
    )
    
    
    579
    
    
    
    Totals
    
    $
    718,648
    
    
    $
    (12,006
    )
    
    $
    579
    
    
    $
    3,463
 December 31, 2003OtherComprehensiveNotional
    
    
    
    
    
    
    Gain
    
    
    Income(Dollars in thousands)
    
    Amounts *
    
    
    Fair Value
    
    
    (Loss)
    
    
    (Loss)**Cash Flow HedgesInterest Rate Swaps
    
    $
    100,000
    
    
    $
    (7,924
    )
    
    $
    
    
    
    $
    1,739Fair Value HedgesInterest Rate Swaps
    
    
    380,789
    
    
    
    (8,140
    )
    
    
    (206
    )
    
    
    Totals
    
    $
    480,789
    
    
    $
    (16,064
    )
    
    $
    (206
    )
    
    $
    1,739
 
 *
    
    The notional amount represents the gross sum of long and short**
    
    Net of tax Cash Flow Hedges:
  62




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##### Table of Contents



Fair Value Hedges:
    Derivative instruments not designated as hedging instruments:
  63




---



##### Table of Contents



December 31, 2005Notional
    
    
    
    
    
    
    Gain(Dollars in thousands)
    
    Amounts *
    
    
    Fair Value
    
    
    (Loss)Interest Rate ContractsInterest Rate Swaps
    
    $
    2,176,521
    
    
    $
    171
    
    
    $
    (344
    )Interest Rate Caps
    
    
    73,422
    
    
    
    2
    
    
    
    13Other
    
    
    7,270
    
    
    
    (40
    )
    
    
    (43
    )Equity Derivatives
    
    
    269,917
    
    
    
    
    
    
    
    2,310Totals
    
    $
    2,527,130
    
    
    $
    133
    
    
    $
    1,936
 December 31, 2004Notional
    
    
    
    
    
    
    Gain(Dollars in thousands)
    
    Amounts *
    
    
    Fair Value
    
    
    (Loss)Interest Rate ContractsInterest Rate Swaps
    
    $
    335,426
    
    
    $
    568
    
    
    $
    (69
    )Interest Rate Caps
    
    
    67,971
    
    
    
    (16
    )
    
    
    22Other
    
    
    2,415
    
    
    
    3
    
    
    
    3Equity Derivatives
    
    
    138,895
    
    
    
    
    
    
    
    2,924Totals
    
    $
    544,707
    
    
    $
    555
    
    
    $
    2,880
 December 31, 2003Notional
    
    
    
    
    
    
    Gain(Dollars in thousands)
    
    Amounts *
    
    
    Fair Value
    
    
    (Loss)Interest Rate ContractsInterest Rate Swaps
    
    $
    260,024
    
    
    $
    637
    
    
    $
    386Interest Rate Caps
    
    
    62,990
    
    
    
    
    
    
    
    112Foreign Exchange Contracts
    
    
    6,824
    
    
    
    2
    
    
    
    Equity Derivatives
    
    
    23,166
    
    
    
    
    
    
    
    (15
    )Totals
    
    $
    353,004
    
    
    $
    639
    
    
    $
    483
 
 *
    
    The notional amount represents the gross sum of long and short  Liquidity Risk
  64




---



##### Table of Contents



Standard
    
    Fitch&
Poors
    
    IBCAShort-term funding
    
    A-1
    
    F1Long-term funding
    
    A
    
    A+
   65




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##### Table of Contents



Maturity and Interest Rate Sensitivity of Interest-Earning Assets as of December 31, 2005
  As of December 31, 2005Maturities and/or Next Repricing DateAfter One YearThrough Five Years
    
    
    After Five YearsOne Year
    
    
    Fixed
    
    
    Variable
    
    
    Fixed
    
    
    Variableor Less
    
    
    Interest Rates
    
    
    Interest Rates
    
    
    Interest Rates
    
    
    Interest Rates
    
    
    Total(Dollars in thousands)Cash and Cash Equivalents and
other Interest-bearing deposits
    
    $
    339,027
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    339,027Investment Portfolio
    
    
    332,487
    
    
    
    1,173,517
    
    
    
    
    
    
    
    133,218
    
    
    
    
    
    
    
    1,639,222Loans:Commercial
    
    
    1,176,090
    
    
    
    513,985
    
    
    
    556,501
    
    
    
    276,975
    
    
    
    444,635
    
    
    
    2,968,186Construction
    
    
    94,851
    
    
    
    11,716
    
    
    
    90,573
    
    
    
    6,905
    
    
    
    9,660
    
    
    
    213,705Consumer
    
    
    303,637
    
    
    
    242,187
    
    
    
    
    
    
    
    21,370
    
    
    
    
    
    
    
    567,194Mortgage
    
    
    291,494
    
    
    
    985,042
    
    
    
    
    
    
    
    870,943
    
    
    
    
    
    
    
    2,147,479Leasing
    
    
    36,119
    
    
    
    75,795
    
    
    
    4,516
    
    
    
    8,738
    
    
    
    
    
    
    
    125,168Total
    
    $
    2,573,705
    
    
    $
    3,002,242
    
    
    $
    651,590
    
    
    $
    1,318,149
    
    
    $
    454,295
    
    
    $
    7,999,981
 Capital Expenditures
  2005
    
    
    2004
    
    
    2003(Dollars in thousands)Headquarters/branches
    
    $
    4,194
    
    
    $
    2,478
    
    
    $
    694Data processing equipment
    
    
    2,583
    
    
    
    2,071
    
    
    
    1,022Software
    
    
    6,111
    
    
    
    5,096
    
    
    
    7,134Other furniture and equipment
    
    
    3,138
    
    
    
    1,947
    
    
    
    1,094Total
    
    $
    16,026
    
    
    $
    11,592
    
    
    $
    9,944
   66




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##### Table of Contents



Environmental Matters
   Puerto Rico Income Taxes
       United States Income Taxes
  67




---



##### Table of Contents



CERTIFICATION PURSUANT TO SECTION 303A.12(a) OF THE
NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL
  
 
 
 68




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 Deloitte & Touche LLP1200 Westernbank World Plaza263 Munoz Rivera AvenueSan Juan, PR 00918-2511USATel:+1 787 759 7171Fax:+1 767 756 6340www.deloitte.com
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Member of
Deloitte Touche & Tohmatsu
 69




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##### Table of Contents



70




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##### Table of Contents



Deloitte & Touche LLP1200 Westernbank World Plaza268 Munoz Rivers AvenueSan Juan, PR 00918-2511USATel:+1 787 759 7171Fax:+1 787 756 6340www.deloitte.com
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
  
 Member of
Deloitte Touche Tohmatsu
 71




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##### Table of Contents



SANTANDER BANCORP AND SUBSIDIARIES
 Consolidated Balance Sheets-December 31, 2005 and 2004
 2005
    
    
    2004As restated*ASSETSCash and due from banks
    
    $
    136,731
    
    
    $
    110,148Interest-bearing deposits
    
    
    8,833
    
    
    
    42,612Federal funds sold and securities purchased under agreements to resell
    
    
    92,429
    
    
    
    326,650Total cash and cash equivalents
    
    
    237,993
    
    
    
    479,410Interest-bearing Deposits
    
    
    101,034
    
    
    
    50,000Trading Securities
    
    
    37,679
    
    
    
    34,184Investment Securities Available for Sale,at fair value:Securities pledged that can be repledged
    
    
    995,032
    
    
    
    1,454,858Other investment securities available for sale
    
    
    564,649
    
    
    
    523,274Total investment securities available for sale
    
    
    1,559,681
    
    
    
    1,978,132Other Investment Securities,at amortized cost
    
    
    41,862
    
    
    
    37,500Loans Held for Sale,net
    
    
    213,102
    
    
    
    271,596Loans,net
    
    
    5,741,788
    
    
    
    5,218,524Accrued Interest Receivable
    
    
    77,962
    
    
    
    44,682Premises and Equipment,net
    
    
    55,867
    
    
    
    52,854Goodwill
    
    
    34,791
    
    
    
    34,791Intangible Assets
    
    
    10,092
    
    
    
    8,003Other Assets
    
    
    160,097
    
    
    
    113,971$
    8,271,948
    
    
    $
    8,323,647LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Non interest-bearing
    
    $
    672,225
    
    
    $
    744,019Interest-bearing
    
    
    4,552,425
    
    
    
    4,004,120Total deposits
    
    
    5,224,650
    
    
    
    4,748,139Federal Funds Purchased and Other Borrowings
    
    
    768,846
    
    
    
    780,334Securities Sold Under Agreements to Repurchase
    
    
    947,767
    
    
    
    1,349,444Commercial Paper Issued
    
    
    334,319
    
    
    
    629,544Term Notes
    
    
    40,215
    
    
    
    31,457Subordinated Capital Notes
    
    
    121,098
    
    
    
    72,588Accrued Interest Payable
    
    
    65,160
    
    
    
    22,666Other Liabilities
    
    
    201,366
    
    
    
    136,129Total liabilities
    
    
    7,703,421
    
    
    
    7,770,301Contingencies
and Commitments (Notes 6, 13, 14, 16, 17, 18 and 19)STOCKHOLDERS EQUITY:Series A Preferred stock, $25 par value; 10,000,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364 shares issued;
46,639,104 shares outstanding in December 2005 and 2004
    
    
    126,626
    
    
    
    126,626Capital paid in excess of par value
    
    
    304,171
    
    
    
    304,171Treasury stock at cost, 4,011,260 shares in December 2005 and 2004
    
    
    (67,552
    )
    
    
    (67,552
    )Accumulated other comprehensive loss, net of taxes
    
    
    (41,591
    )
    
    
    (6,818
    )Retained earnings:Reserve fund
    
    
    133,759
    
    
    
    126,820Undivided profits
    
    
    113,114
    
    
    
    70,099Total stockholders equity
    
    
    568,527
    
    
    
    553,346$
    8,271,948
    
    
    $
    8,323,647
 
 72




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##### Table of Contents



Santander BanCorp and Subsidiaries
 Consolidated Statements of Income
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003As restated*
    
    
    As restated*Interest Income:Loans
    
    $
    359,415
    
    
    $
    261,744
    
    
    $
    247,915Investment securities
    
    
    71,938
    
    
    
    97,901
    
    
    
    85,215Interest-bearing deposits
    
    
    4,065
    
    
    
    1,054
    
    
    
    664Federal funds sold and securities purchased under agreements to resell
    
    
    4,187
    
    
    
    3,123
    
    
    
    1,990Total interest income
    
    
    439,605
    
    
    
    363,822
    
    
    
    335,784Interest Expense:Deposits
    
    
    122,212
    
    
    
    60,279
    
    
    
    56,030Securities sold under agreements to repurchase and other borrowings
    
    
    86,969
    
    
    
    79,901
    
    
    
    75,896Subordinated capital notes
    
    
    3,402
    
    
    
    582
    
    
    
    686Total interest expense
    
    
    212,583
    
    
    
    140,762
    
    
    
    132,612Net interest income
    
    
    227,022
    
    
    
    223,060
    
    
    
    203,172Provision for Loan Losses
    
    
    20,400
    
    
    
    26,270
    
    
    
    49,745Net interest income after provision for loan losses
    
    
    206,622
    
    
    
    196,790
    
    
    
    153,427Other Income:Bank service charges, fees and other
    
    
    42,272
    
    
    
    38,977
    
    
    
    38,780Broker-dealer, asset management and insurance fees
    
    
    53,016
    
    
    
    51,113
    
    
    
    49,526Gain on sale of securities
    
    
    17,842
    
    
    
    11,475
    
    
    
    10,790Loss on extinguishment of debt
    
    
    (5,959
    )
    
    
    
    
    
    
    Gain on sale of loans
    
    
    7,876
    
    
    
    431
    
    
    
    260Gain on sale of building
    
    
    
    
    
    
    2,754
    
    
    
    Other income
    
    
    10,311
    
    
    
    12,489
    
    
    
    10,805Total other income
    
    
    125,358
    
    
    
    117,239
    
    
    
    110,161Other Operating Expenses:Salaries and employee benefits
    
    
    95,002
    
    
    
    91,582
    
    
    
    89,394Occupancy costs
    
    
    16,811
    
    
    
    13,959
    
    
    
    13,534Equipment expenses
    
    
    3,802
    
    
    
    3,775
    
    
    
    3,633EDP servicing, amortization and technical assistance
    
    
    31,589
    
    
    
    34,462
    
    
    
    44,160Communication expenses
    
    
    8,232
    
    
    
    8,976
    
    
    
    8,612Business promotion
    
    
    11,065
    
    
    
    10,435
    
    
    
    6,760Other taxes
    
    
    8,443
    
    
    
    8,584
    
    
    
    9,811Other operating expenses
    
    
    46,442
    
    
    
    45,604
    
    
    
    47,911Total other operating expenses
    
    
    221,386
    
    
    
    217,377
    
    
    
    223,815Income before provision (benefit) for income tax
    
    
    110,594
    
    
    
    96,652
    
    
    
    39,773Provision (Benefit) for Income Tax
    
    
    30,788
    
    
    
    9,724
    
    
    
    (46
    )Net Income
    
    
    79,806
    
    
    
    86,928
    
    
    
    39,819Dividends to Preferred Shareholders
    
    
    
    
    
    
    
    
    
    
    7,114Income Available to Common Shareholders
    
    $
    79,806
    
    
    $
    86,928
    
    
    $
    32,705Basic and Diluted Earnings per Common Share
    
    $
    1.71
    
    
    $
    1.86
    
    
    $
    0.70
 
 73




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##### Table of Contents



Santander BanCorp and Subsidiaries
 Consolidated Statements of Changes in Stockholders Equity
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003As restated*
    
    
    As restated*Preferred Stock:Balance at beginning of year
    
    $
    
    
    
    $
    
    
    
    $
    65,250Preferred stock redemption
    
    
    
    
    
    
    
    
    
    
    (65,250
    )Balance at end of year
    
    
    
    
    
    
    
    
    
    
    Common Stock:Balance at beginning of year
    
    
    126,626
    
    
    
    116,026
    
    
    
    116,026Stock dividend distributed
    
    
    
    
    
    
    10,600
    
    
    
    Balance at end of year
    
    
    126,626
    
    
    
    126,626
    
    
    
    116,026Capital Paid in Excess of Par Value:Balance at beginning of year
    
    
    304,171
    
    
    
    211,742
    
    
    
    211,742Stock dividend distributed
    
    
    
    
    
    
    92,429
    
    
    
    Balance at end of year
    
    
    304,171
    
    
    
    304,171
    
    
    
    211,742Treasury Stock at cost:Balance at beginning of year
    
    
    (67,552
    )
    
    
    (67,552
    )
    
    
    (65,268
    )Stock repurchased at cost
    
    
    
    
    
    
    
    
    
    
    (2,284
    )Balance at end of year
    
    
    (67,552
    )
    
    
    (67,552
    )
    
    
    (67,552
    )Accumulated
Other Comprehensive Loss, net of taxes:Balance at beginning of year
    
    
    (6,818
    )
    
    
    (19,465
    )
    
    
    (12,692
    )Unrealized net (loss) gain on investment securities available
for sale, net of tax
    
    
    (34,031
    )
    
    
    9,094
    
    
    
    (2,789
    )Unrealized net gain on cash flow hedges, net of tax
    
    
    1,333
    
    
    
    3,463
    
    
    
    1,739Minimum pension (benefits) liability, net of tax
    
    
    (2,075
    )
    
    
    90
    
    
    
    (5,723
    )Balance at end of year
    
    
    (41,591
    )
    
    
    (6,818
    )
    
    
    (19,465
    )Reserve Fund:Balance at beginning of year
    
    
    126,820
    
    
    
    118,919
    
    
    
    115,932Transfer from undivided profits
    
    
    6,939
    
    
    
    7,901
    
    
    
    2,987Balance at end of year
    
    
    133,759
    
    
    
    126,820
    
    
    
    118,919Undivided Profits:Balance at beginning of year
    
    
    70,099
    
    
    
    116,036
    
    
    
    167,465Net income
    
    
    79,806
    
    
    
    86,928
    
    
    
    39,819Transfer to
reserve fund
    
    
    (6,939
    )
    
    
    (7,901
    )
    
    
    (2,987
    )Deferred tax benefit amortization
    
    
    (3
    )
    
    
    (13
    )
    
    
    (60
    )Common stock cash dividends
    
    
    (29,849
    )
    
    
    (21,922
    )
    
    
    (19,087
    )Preferred stock cash dividends
    
    
    
    
    
    
    
    
    
    
    (4,504
    )Preferred stock redemption premium
    
    
    
    
    
    
    
    
    
    
    (2,610
    )Cash paid on corporate reorganization
    
    
    
    
    
    
    
    
    
    
    (62,000
    )Stock dividend distributed
    
    
    
    
    
    
    (103,029
    )
    
    
    Balance at end of year
    
    
    113,114
    
    
    
    70,099
    
    
    
    116,036Total stockholders equity
    
    $
    568,527
    
    
    $
    553,346
    
    
    $
    475,706
 
 74




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##### Table of Contents



Santander BanCorp and Subsidiaries
 Consolidated Statements of Comprehensive Income
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003As restated*
    
    
    As restated*Comprehensive incomeNet income
    
    $
    79,806
    
    
    $
    86,928
    
    
    $
    39,819Other comprehensive (loss) income, net of tax:Unrealized (losses) gains on investment securities available for sale, net of tax
    
    
    (18,298
    )
    
    
    18,526
    
    
    
    (790
    )Reclassification adjustment for gains included in net income, net of tax
    
    
    (15,733
    )
    
    
    (9,403
    )
    
    
    (2,251
    )Unrealized (losses) gains on investment securities transferred to the held-to-
maturity category, net of amortization
    
    
    
    
    
    
    (29
    )
    
    
    252Unrealized (losses) gains on investment securities available for sale, net of tax
    
    
    (34,031
    )
    
    
    9,094
    
    
    
    (2,789
    )Unrealized gains on derivative used for cash flow hedges, net of tax
    
    
    1,333
    
    
    
    3,463
    
    
    
    1,739Minimum pension liability, net of tax
    
    
    (2,075
    )
    
    
    90
    
    
    
    (5,723
    )Total other comprehensive (loss) income, net of tax
    
    
    (34,773
    )
    
    
    12,647
    
    
    
    (6,773
    )Comprehensive income
    
    $
    45,033
    
    
    $
    99,575
    
    
    $
    33,046
 
 75




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##### Table of Contents



Santander BanCorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003As restated*
    
    
    As restated*CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    79,806
    
    
    $
    86,928
    
    
    $
    39,819Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    13,184
    
    
    
    13,238
    
    
    
    20,508Deferred tax provision (benefit)
    
    
    2,854
    
    
    
    3,715
    
    
    
    (1,470
    )Provision for loan losses
    
    
    20,400
    
    
    
    26,270
    
    
    
    49,745Gain on sale of building
    
    
    
    
    
    
    (2,754
    )
    
    
    Gain on sale of securities
    
    
    (17,842
    )
    
    
    (11,475
    )
    
    
    (10,790
    )Gain on sale of loans
    
    
    (7,876
    )
    
    
    (431
    )
    
    
    (9,829
    )Gain on sale of mortgage-servicing rights
    
    
    (83
    )
    
    
    (400
    )
    
    
    (4,525
    )Gain on derivatives
    
    
    (1,964
    )
    
    
    (3,459
    )
    
    
    (277
    )Trading gains
    
    
    (805
    )
    
    
    (1,193
    )
    
    
    (1,570
    )Net premium amortization on securities
    
    
    3,586
    
    
    
    3,983
    
    
    
    4,793Net premium amortization on loans
    
    
    1,155
    
    
    
    873
    
    
    
    1,655Purchases and originations of loans held for sale
    
    
    (748,086
    )
    
    
    (733,022
    )
    
    
    (621,466
    )Proceeds from sales of loans
    
    
    253,902
    
    
    
    195,465
    
    
    
    288,323Repayments of loans held for sale
    
    
    12,196
    
    
    
    35,233
    
    
    
    34,469Proceeds from sales of trading securities
    
    
    1,610,299
    
    
    
    2,207,495
    
    
    
    1,824,948Purchases of trading securities
    
    
    (1,612,989
    )
    
    
    (2,197,939
    )
    
    
    (1,843,201
    )Net change in:(Increase) decrease in accrued interest receivable
    
    
    (33,280
    )
    
    
    (8,284
    )
    
    
    6,396(Increase) decrease in other assets
    
    
    (10,303
    )
    
    
    10,402
    
    
    
    6,742Increase (decrease) in accrued interest payable
    
    
    42,494
    
    
    
    3,938
    
    
    
    (7,970
    )Increase (decrease) in other liabilities
    
    
    12,245
    
    
    
    (5,530
    )
    
    
    338Total adjustments
    
    
    (460,913
    )
    
    
    (463,875
    )
    
    
    (263,181
    )Net cash used in operating activities
    
    
    (381,107
    )
    
    
    (376,947
    )
    
    
    (223,362
    )CASH FLOWS FROM INVESTING ACTIVITIES:Increase in interest-bearing deposits
    
    
    (51,034
    )
    
    
    (40,000
    )
    
    
    (10,000
    )Proceeds from sales of investment securities available for sale
    
    
    906,150
    
    
    
    1,450,058
    
    
    
    1,206,108Proceeds from maturities of investment securities available for sale
    
    
    23,250,923
    
    
    
    1,595,155
    
    
    
    2,685,731Purchases of investment securities available for sale
    
    
    (23,949,534
    )
    
    
    (2,701,767
    )
    
    
    (4,383,435
    )Proceeds from maturities of investment securities held to maturity
    
    
    
    
    
    
    47,994
    
    
    
    190,279Purchases of investment securities held to maturity and other investments
    
    
    (4,362
    )
    
    
    (69,739
    )
    
    
    (25,425
    )Repayment of securities and securities called
    
    
    173,462
    
    
    
    186,792
    
    
    
    237,490Proceeds from (payments on) derivative transactions
    
    
    2,303
    
    
    
    2,943
    
    
    
    (18
    )Purchases of mortgage loans
    
    
    (289,881
    )
    
    
    (40,625
    )
    
    
    (211
    )Net decrease (increase) in loans
    
    
    292,987
    
    
    
    (836,288
    )
    
    
    121,665Proceeds from sales of mortgage-servicing rights
    
    
    83
    
    
    
    400
    
    
    
    457Proceeds from sale of building
    
    
    
    
    
    
    14,000
    
    
    
    Purchases of premises and equipment
    
    
    (9,076
    )
    
    
    (6,258
    )
    
    
    (5,020
    )Net cash provided by (used in) investing activities
    
    
    322,021
    
    
    
    (397,335
    )
    
    
    17,621
 (Continued)
 76




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##### Table of Contents



Santander BanCorp and Subsidiaries
 Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003As restated*
    
    
    As restated*CASH FLOWS FROM FINANCING ACTIVITIES:Net increase (decrease) in deposits
    
    
    489,835
    
    
    
    611,945
    
    
    
    (348,075
    )Net (decrease) increase in federal funds purchased and other borrowings
    
    
    (11,488
    )
    
    
    430,334
    
    
    
    104,040Net (decrease) increase in securities sold under agreements to repurchase
    
    
    (401,677
    )
    
    
    (458,794
    )
    
    
    558,199Net (decrease) increase in commercial paper issued
    
    
    (295,225
    )
    
    
    374,640
    
    
    
    214,913Net increase (decrease) in term notes
    
    
    8,758
    
    
    
    (134,509
    )
    
    
    (394,712
    )Issuance (payment) of subordinated capital notes
    
    
    49,852
    
    
    
    58,765
    
    
    
    (18,000
    )Preferred stock redemption
    
    
    
    
    
    
    
    
    
    
    (67,860
    )Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (2,284
    )Dividends paid
    
    
    (22,386
    )
    
    
    (21,922
    )
    
    
    (23,591
    )Capital paid on corporate reorganization
    
    
    
    
    
    
    
    
    
    
    (62,000
    )Net cash (used in) provided by financing activities
    
    
    (182,331
    )
    
    
    860,459
    
    
    
    (39,370
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (241,417
    )
    
    
    86,177
    
    
    
    (245,111
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    479,410
    
    
    
    393,233
    
    
    
    638,344CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    237,993
    
    
    $
    479,410
    
    
    $
    393,233(Concluded)
 
 77




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##### Table of Contents



Santander BanCorp and Subsidiaries
 Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004 and 2003
 1. Summary of Significant Accounting Policies and Other Matters:
   Nature of Operations and Use of Estimates
    Principles of Consolidation
  Cash and Cash equivalents
  Securities Purchased/Sold under Agreements to Resell/Repurchase
    78




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##### Table of Contents



Investment Securities
  
    
    Debt securities that the Corporation has the intent and ability to hold to maturity are
classified as securities held to maturity and reported at cost adjusted for premium
amortization and discount accretion. The Corporation may not sell or transfer
held-to-maturity securities without calling into question its intent to hold other
securities to maturity, unless a nonrecurring or unusual event that could not have been
reasonably anticipated has occurred.
    
    Debt and equity securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in 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 values, are classified as other investment securities in the consolidated balance
sheets. These securities are stated at cost. Stock that is owned by the Corporation to
comply with regulatory requirements, such as Federal Home Loan Bank (FHLB) stock, is
included in this category.
  Derivative Financial Instruments
     79




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##### Table of Contents



Loans Held for Sale
  Loans
     Off-Balance Sheet Instruments
   Allowance for Loan Losses
    80




---



##### Table of Contents



Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
  Premises and Equipment
   Other Real Estate
  81




---



##### Table of Contents



Goodwill and Intangible Assets
   Mortgage-servicing Rights
   Mortgage Banking
    Trust Services
  Broker-dealer and Asset Management Commissions
  82




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##### Table of Contents



Insurance Commissions
  Treasury Stock
  Income Taxes
  Earnings Per Common Share
  Statements of Cash Flows
  2005
    
    
    2004
    
    
    2003(Dollars in thousands)Cash paid during the year for:Interest
    
    $
    195,157
    
    
    $
    136,824
    
    
    $
    138,708Income taxes
    
    $
    6,713
    
    
    $
    11,322
    
    
    $
    4,443Noncash transactions:Stock
dividend (See Note 16)
    
    $
    
    
    
    $
    103,029
    
    
    $
    Minimum
pension liability (See Note 19)
    
    $
    2,075
    
    
    $
    (90
    )
    
    $
    5,723
 Recent Accounting
Pronouncements that Affect the Corporation
  
    
    Financial Accounting Standard Board (FASB) Staff Position (FSP) 115-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments.In November 2005, the FASB issued FSP 115-1 to provide
additional guidance on when an investment in a debt or equity security should be considered
impaired and when that impairment should be considered other-than-temporary and recognized
as a loss in earnings. Specifically, the guidance clarifies that an investor should
recognize an impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell has not been made. This FSP also includes
accounting considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The guidance in this FSP amends FASB
Statements No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and No. 124, Accounting for Certain Investments
Held by Not-for-Profit Organizations, and APB Opinion
No. 18, The
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Equity Method of Accounting for Investments in Common
Stock. The guidance in this FSP is
applicable for investments in debt and equity securities that are within the scope of SFAS
No. 115, certain debt and equity securities that are within the scope of SFAS No. 124 and
equity securities that are not subject to the scope of SFAS No. 115 and 124 and not
accounted for under the equity method pursuant to Opinion 18 and related interpretations.
This FSP nullifies certain requirements of EITF Issue 03-1, Meaning of Other Than Temporary
Impairment and supersedes EITF Topic No. D-44, Recognition of Other-Than-Temporary
Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The
Corporation evaluates investments that are under the scope of this accounting guidance on a
quarterly basis.
    
    Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in
a Transfer.In December 2003, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer (SOP 03-3). This statement addresses accounting for differences
between contractual cash flows and cash flows expected to be collected from an investors
initial investment in loans or debt securities acquired in a transfer if those differences
are attributable, at least in part, to credit quality. SOP 03-3 does not apply to loans
originated by the entity. SOP 03-3 limits the yield that may be accreted (accretable yield)
to the excess of the investors estimate of undiscounted expected principal, interest, and
other cash flows (cash flows expected at acquisition to be collected) over the investors
initial investment in the loan. SOP 03-3 requires that the excess of contractual cash flows
over cash flows expected to be collected (nonaccretable difference) not be recognized as an
adjustment of yield, loss accrual, or valuation allowance. SOP 03-3 prohibits investors
from displaying accretable securities, yield and nonaccretable difference in the balance
sheet. Subsequent substantial increases in cash flows expected to be collected generally
should be recognized prospectively through adjustment of the loans yield over its
remaining life. Decreases in cash flows expected to be collected should be recognized as
impairments.SOP 03-3 prohibits carrying over or the creation of valuation allowances in the initial
accounting of all loans acquired in a transfer that are within the scope of this statement.
The prohibition of the valuation allowance carryover applies to the purchase of an
individual loan, a pool of loans, a group of loans, and loans acquired in a purchase
business combination, subject to certain exceptions stipulated in the statement. The
adoption of the provisions of SOP 03-3 in 2005 did not have a material impact on the
Corporations financial condition or results of operations.
    
    SFAS No. 123-R Share-Based Payment.In December 2004, the FASB issued a revision to
SFAS No. 123, Accounting for Stock-Based Compensation, SFAS No. 123-R, Share-Based
Payment. SFAS No. 123-R focuses primarily on transactions in which an entity exchanges its
equity instruments for employee services and generally establishes standards for the
accounting of transactions in which an entity obtains goods or services in share-based
payment transactions. SFAS No. 123-R requires companies to (1) use fair value to measure
stock-based compensation awards and (2) cease using the intrinsic value method of
accounting, which APB 25 allowed and resulted in no expense for many awards of stock
options for which the exercise price of the option did not exceed the price of the
underlying stock at the grant date. In addition, SFAS No. 123-R retains the modified grant
date model from SFAS No. 123. Under that model, compensation cost is measured at the grant
date fair value of the award and is adjusted to reflect actual forfeitures and the outcome
of certain conditions. The fair value of an award is not remeasured after its initial
estimation on the grant date, except in the case of a liability award or if the award is
modified, based on specific criteria included in SFAS No. 123-R. Also, SFAS 123-R clarifies
the financial impact of vesting and/or acceleration clauses due at retirement. Under the
revised SFAS, the expense should be fully accrued for any employee that is eligible to
retire regardless of the actual retirement experience of the employer. In April 2005, the
Securities and Exchange Commission (SEC) approved a rule that delays the effective date of
SFAS No. 123-R to annual, rather than interim, periods that begin after June 15, 2005.
Management is currently evaluating the effect of the adoption of SFAS No. 123-R, but does
not expect the adoption to have a material effect on the Corporations financial condition,
results of operations or cash flows due to the fact that in 2002, the Corporation
voluntarily adopted the fair value recognition method under SFAS No. 123. The Corporation
will prospectively apply SFAS No. 123-R to its financial statements as of January 1, 2006.
    
    SFAS No. 153 Exchanges of Nonmonetary Assets.In December 2004, the FASB issued SFAS
No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting
for Nonmonetary Transactions. This statement amends the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets exchanged and more
broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the exchange. The
entitys future cash flows are expected to significantly change if either of the following
criteria is met: a) the configuration (risk, timing, and amount) of the future cash flows
of the asset(s) received differs significantly from the configuration of the future cash
flows of the asset(s) transferred; b) the entity-specific value of the asset(s) received
differs from the entity-specific value of the asset(s) transferred, and the difference is
significant in relation to the fair values of the assets exchanged. A qualitative
assessment will, in some cases, be conclusive in determining that the estimated cash flows
of
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the entity are expected to significantly change as a result of the exchange. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The adoption of this statement is not expected to have a material impact on the
Corporations financial condition or results of operations.
    
    SFAS No. 155, Accounting for Certain Hybrid Financial Instruments  an amendment of
FASB Statements No. 133 and 140.In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No.
133 and 140. This statement amends SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. SFAS No. 155 resolves issues addressed in
Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets. SFAS No. 155:
 
    
    Permits fair value remeasurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation;
    
    Clarifies which interest-only strips and principal-only strips are not subject to
the requirements of Statement 133;
    
    Establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation;
    
    Clarifies that concentrations of credit risk in the form of subordination are not
embedded derivatives;
    
    Amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.
   
    
    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. Statement 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 affected 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. Earlier application is permitted for accounting
changes and corrections of errors occurring in fiscal years beginning after June 1, 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 Corporation is currently evaluating the impact that this new accounting
pronouncement may have on its financial condition and results of operations, primarily with
respect to the presentation of the impact of the change in the reporting period of
non-banking subsidiaries in 2006, which was described under Principles of Consolidation
in the Note 1 to the consolidated financial statements.
    
    FIN No. 47, Accounting for Conditional Asset
Retirement Obligations  an interpretation
of FASB Statement No. 143.In March 2005, the FASB issued an 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
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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.
    
    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 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.
 2. Restatement of Previously Issued Financial Statements:
 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
 a replacement of FASB Statement 125
 
    
    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 statement of
cash flows.The adjustments to correct the sale transactions did not have an effect on the 2004 and 2003
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 2004 and 2003 consolidated
balance sheets. The
adjustments to correct the December 31, 2003 consolidated statement of income resulted in an
increase in net interest income of $3.8 million. The increase in net interest income was
primarily the result of the reversal of amortization of the premiums paid. There was no effect on the
2004 consolidated statement 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 years ended
December 31, 2004 and 2003.
    
    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 a decrease in other income of $9.7 million for the year ended December 31, 2003 and an
increase in net interest income of $3.8 million and $6.0 million for the years ended
December 31, 2004 and 2003, respectively.
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
    
    During 2003 and 2004, the Corporation purchased mortgage loans amounting to $391 million
from one unrelated local financial institution and $600 million from another unrelated
financial institution. The transactions involved guarantees of payment of an uncapped
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 years ended December 31, 2003 and 2004. The adjustments
to correct the 2004 consolidated balance sheet for the purchase transactions resulted in a
$19.9 million decrease in loans, net and other liabilities. This
decrease was primarily the result of the derecognized balance of the guaranteed swap
derivative. As of December 31, 2005 the current outstanding balance of these loans was
$638 million.
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December 31, 2004As PreviouslyReported
    
    As Restated(Amounts in thousands)Selected Balance Sheet Data:Loans, net
    
    $
    5,242,759
    
    
    $
    5,218,524Other Assets
    
    
    107,869
    
    
    
    113,971Total Assets
    
    
    8,341,780
    
    
    
    8,323,647Other Liabilities
    
    
    151,605
    
    
    
    136,129Total
Liabilities
    
    
    7,785,777
    
    
    
    7,770,301Reserve Fund
    
    
    127,086
    
    
    
    126,820Undivided Profits
    
    
    72,490
    
    
    
    70,099Total
Retained Earnings
    
    
    199,576
    
    
    
    196,919Total
Stockholders Equity
    
    
    556,003
    
    
    
    553,346Capital:Tier 1 capital
to risk-adjusted assets
    
    
    9.27
    %
    
    
    9.09
    %Total capital
to risk-adjusted assets
    
    
    11.90
    %
    
    
    12.30
    %Leverage
ratio
    
    
    6.36
    %
    
    
    6.50
    %
 December 31, 2004
    
    December 31, 2003As Previously
    
    
    
    
    
    As PreviouslyReported
    
    As Restated
    
    Reported
    
    As Restated(Dollars in thousands, except per share data)For the year endedTotal Interest Income
    
    $
    359,930
    
    
    $
    363,822
    
    
    $
    325,581
    
    
    $
    335,784Total Other Income
    
    
    117,239
    
    
    
    117,239
    
    
    
    119,940
    
    
    
    110,161Total Other Operating Expenses
    
    
    217,533
    
    
    
    217,377
    
    
    
    224,265
    
    
    
    223,815Income
before taxes provision (benefit)
    
    
    92,604
    
    
    
    96,652
    
    
    
    39,160
    
    
    
    39,773Net income
    
    
    84,459
    
    
    
    86,928
    
    
    
    39,445
    
    
    
    39,819Basic and Diluted Earnings per Common Share
    
    
    1.81
    
    
    
    1.86
    
    
    
    0.69
    
    
    
    0.70Cash Used in Operating ActivitiesNet income
    
    
    84,459
    
    
    
    86,928
    
    
    
    39,445
    
    
    
    39,819Depreciation and amortization
    
    
    13,238
    
    
    
    13,238
    
    
    
    20,691
    
    
    
    20,508Deferred tax
provision (benefit)
    
    
    2,136
    
    
    
    3,715
    
    
    
    (1,709
    )
    
    
    (1,470
    )Gain on sale
of mortgage-servicing rights
    
    
    (400
    )
    
    
    (400
    )
    
    
    (457
    )
    
    
    (4,525
    )Proceeds on sale of loans
    
    
    195,034
    
    
    
    195,465
    
    
    
    278,754
    
    
    
    288,323Net premium amortization on loan
    
    
    4,430
    
    
    
    873
    
    
    
    7,581
    
    
    
    1,655Repayment of loan held for sale
    
    
    35,233
    
    
    
    35,233
    
    
    
    44,038
    
    
    
    34,469Change in accrued interest receivable
    
    
    (8,284
    )
    
    
    (8,284
    )
    
    
    4,783
    
    
    
    6,396Change in other assets
    
    
    10,322
    
    
    
    10,402
    
    
    
    11,225
    
    
    
    6,742Change in interest payable
    
    
    3,938
    
    
    
    3,938
    
    
    
    (6,357
    )
    
    
    (7,970
    )Change in other liabilities
    
    
    (5,451
    )
    
    
    (5,530
    )
    
    
    15,565
    
    
    
    338Net Cash Used in Operating Activities
    
    
    (377,870
    )
    
    
    (376,947
    )
    
    
    (194,088
    )
    
    
    (223,362
    )Cash Provided by (Used in) Investing ActivitiesPurchases of mortgage loans
    
    
    (857,214
    )
    
    
    (40,625
    )
    
    
    (400,982
    )
    
    
    (211
    )Change in loans
    
    
    (18,776
    )
    
    
    (836,288
    )
    
    
    259,486
    
    
    
    121,665Net Cash Provided by (Used in) Investing Activities
    
    
    (396,412
    )
    
    
    (397,335
    )
    
    
    (245,329
    )
    
    
    17,621Cash Provided by (Used in) Financing ActivitiesChange in deposits
    
    
    611,945
    
    
    
    611,945
    
    
    
    (367,613
    )
    
    
    (348,074
    )Change in term notes
    
    
    (134,509
    )
    
    
    (134,509
    )
    
    
    (141,498
    )
    
    
    (394,712
    )Net Cash Provided by (Used in) Financing Activities
    
    
    860,459
    
    
    
    860,459
    
    
    
    194,306
    
    
    
    (39,370
    )
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3. Trading Securities:
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4. Investment Securities Available for Sale:
  December 31, 2005Gross
    
    
    Gross
    
    
    
    
    
    
    WeightedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    AverageCost
    
    
    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 securitiesAfter one year to five years
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    5.60
    %$
    1,597,419
    
    
    $
    102
    
    
    $
    37,840
    
    
    $
    1,559,681
    
    
    
    4.42
    %
 December 31, 2004Gross
    
    
    Gross
    
    
    
    
    
    
    WeightedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    AverageCost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Yield(Dollars in thousands)Treasury and agencies of the United States Government:Within one year
    
    $
    10,632
    
    
    $
    3
    
    
    $
    
    
    
    $
    10,635
    
    
    
    2.18
    %After one year to five years
    
    
    1,039,811
    
    
    
    25,690
    
    
    
    2,874
    
    
    
    1,062,627
    
    
    
    4.56
    %After five years to ten years
    
    
    363,855
    
    
    
    
    
    
    
    1,608
    
    
    
    362,247
    
    
    
    4.13
    %1,414,298
    
    
    
    25,693
    
    
    
    4,482
    
    
    
    1,435,509
    
    
    
    4.43
    %Commonwealth of Puerto Rico and its subdivisions:Within one year
    
    
    8,412
    
    
    
    58
    
    
    
    
    
    
    
    8,470
    
    
    
    4.42
    %After one year to five years
    
    
    21,777
    
    
    
    412
    
    
    
    
    
    
    
    22,189
    
    
    
    4.51
    %After five years to ten years
    
    
    13,800
    
    
    
    
    
    
    
    
    
    
    
    13,800
    
    
    
    4.24
    %Over ten years
    
    
    8,118
    
    
    
    111
    
    
    
    
    
    
    
    8,229
    
    
    
    6.42
    %52,107
    
    
    
    581
    
    
    
    
    
    
    
    52,688
    
    
    
    4.73
    %Mortgage-backed securities:After one year to five years
    
    
    839
    
    
    
    51
    
    
    
    
    
    
    
    890
    
    
    
    8.36
    %After five years to ten years
    
    
    70
    
    
    
    4
    
    
    
    
    
    
    
    74
    
    
    
    9.50
    %Over ten years
    
    
    496,718
    
    
    
    129
    
    
    
    8,026
    
    
    
    488,821
    
    
    
    4.30
    %497,627
    
    
    
    184
    
    
    
    8,026
    
    
    
    489,785
    
    
    
    4.31
    %Foreign securities
Within one year
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    6.98
    %After one year to five years
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    5.60
    %150
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    6.29
    %$
    1,964,182
    
    
    $
    26,458
    
    
    $
    12,508
    
    
    $
    1,978,132
    
    
    
    4.41
    %
 90




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##### Table of Contents



Less than 12 months
    
    
    12 months or more
    
    
    TotalNumber
    
    
    
    
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    Numberof
    
    
    Fair
    
    
    Unrealized
    
    
    of
    
    
    Fair
    
    
    Unrealized
    
    
    of
    
    
    Fair
    
    
    UnrealizedPositions
    
    
    Value
    
    
    Losses
    
    
    Positions
    
    
    Value
    
    
    Losses
    
    
    Positions
    
    
    Value
    
    
    Losses(Dollars in thousands)Treasury and agencies
of the United States
Government
    
    
    3
    
    
    $
    369,267
    
    
    $
    5,713
    
    
    
    10
    
    
    $
    354,779
    
    
    $
    10,727
    
    
    
    13
    
    
    $
    724,046
    
    
    $
    16,440Commonwealth of Puerto
Rico and its subdivisions
    
    
    17
    
    
    
    25,588
    
    
    
    558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    25,588
    
    
    
    558Mortgage-backed
securities
    
    
    21
    
    
    
    443,107
    
    
    
    7,285
    
    
    
    10
    
    
    
    311,124
    
    
    
    13,557
    
    
    
    31
    
    
    
    754,231
    
    
    
    20,84241
    
    
    $
    837,962
    
    
    $
    13,556
    
    
    
    20
    
    
    $
    665,903
    
    
    $
    24,284
    
    
    
    61
    
    
    $
    1,503,865
    
    
    $
    37,840
      91




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##### Table of Contents



5. Investment Securities Held to Maturity:
  6. Assets Pledged:
  2005
    
    
    2004(Dollars in thousands)Investment securities available for sale
    
    $
    321,789
    
    
    $
    504,391Loans
    
    
    294,433
    
    
    
    154,636Other
    
    
    18,830
    
    
    
    104,535$
    635,052
    
    
    $
    763,562
  7. Loans:
  2005
    
    
    2004(Dollars in thousands)Commercial and industrial
    
    $
    2,968,178
    
    
    $
    3,202,242Consumer
    
    
    564,198
    
    
    
    448,385Leasing
    
    
    137,855
    
    
    
    126,148Construction
    
    
    217,304
    
    
    
    201,041Mortgage
    
    
    1,929,203
    
    
    
    1,316,2495,816,738
    
    
    
    5,294,065Unearned income and deferred fees/costs
    
    
    (8,108
    )
    
    
    (6,364
    )Allowance for loan losses
    
    
    (66,842
    )
    
    
    (69,177
    )Loans, net
    
    $
    5,741,788
    
    
    $
    5,218,524
 92




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##### Table of Contents



2005
    
    
    2004(Dollars in thousands)Impaired loans with related allowance
    
    $
    6,800
    
    
    $
    13,180Impaired loans that did not require allowance
    
    
    41,976
    
    
    
    66,950Total impaired loans
    
    $
    48,776
    
    
    $
    80,130Allowance for impaired loans
    
    $
    2,227
    
    
    $
    4,883Impaired loans measured based on fair value of collateral
    
    $
    48,776
    
    
    $
    80,130Impaired loans measured based on discounted cash flows
    
    $
    
    
    
    $
    Interest income recognized on impaired loans
    
    $
    24
    
    
    $
    121
   2005
    
    
    2004
    
    
    2003(Dollars in thousands)Principal balance as of December 31
    
    $
    73,679
    
    
    $
    87,510
    
    
    $
    98,368Interest income which would have been recorded had the
loans not been classified as non-accruing
    
    $
    2,111
    
    
    $
    2,351
    
    
    $
    3,127Loans past due ninety days or more and still accruing interest
    
    $
    2,999
    
    
    $
    3,377
    
    
    $
    2,404
 8. Allowance for Loan Losses:
  2005
    
    
    2004
    
    
    2003(Dollars in thousands)Balance, January 1
    
    $
    69,177
    
    
    $
    69,693
    
    
    $
    56,906Provision for loan losses
    
    
    20,400
    
    
    
    26,270
    
    
    
    49,916Charge-offs
    
    
    (27,819
    )
    
    
    (39,877
    )
    
    
    (47,675
    )Recoveries
    
    
    5,084
    
    
    
    13,091
    
    
    
    10,546Balance, December 31
    
    $
    66,842
    
    
    $
    69,177
    
    
    $
    69,693
  93




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##### Table of Contents



2005
    
    
    2004
    
    
    2003(Dollars in thousands)Balance, January 1
    
    $
    1,269
    
    
    $
    879
    
    
    $
    1,050Provision (credit) for unfunded commitments
and standby letters of credit
    
    
    397
    
    
    
    390
    
    
    
    (171
    )Balance, December 31
    
    $
    1,666
    
    
    $
    1,269
    
    
    $
    879
 9. Premises and Equipment:
  Useful lifein years
    
    
    2005
    
    
    2004(Dollars in thousands)Land
    
    
    
    
    
    $
    6,926
    
    
    $
    6,926Buildings
    
    
    50
    
    
    
    39,278
    
    
    
    38,945Equipment
    
    
    3-10
    
    
    
    48,140
    
    
    
    45,248Leasehold improvements
    
    Various
    
    
    24,886
    
    
    
    22,646119,230
    
    
    
    113,765Accumulated depreciation and amortization
    
    
    
    
    
    
    (63,363
    )
    
    
    (60,911
    )$
    55,867
    
    
    $
    52,854
 94




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##### Table of Contents



10. Goodwill and Intangible Assets:
 Goodwill
   2005
    
    
    2004(Dollars in thousands)Commercial Banking
    
    $
    10,537
    
    
    $
    10,537Broker-dealer
    
    
    24,254
    
    
    
    24,254$
    34,791
    
    
    $
    34,791
  Other Intangible Assets
 2005
    
    
    2004(Dollars in thousands)Mortgage-servicing rights
    
    $
    7,974
    
    
    $
    6,503Advisory-servicing rights
    
    
    1,300
    
    
    
    1,500Intangible pension asset
    
    
    818
    
    
    
    $
    10,092
    
    
    $
    8,003
  95




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##### Table of Contents



Year
    
    Amortization(in thousands)2006
    
    $
    1,5962007
    
    
    1,5962008
    
    
    1,5962009
    
    
    1,5332010
    
    
    1,202Thereafter
    
    
    1,751$
    9,274
 11. Other Assets:
  2005
    
    
    2004(Dollars in thousands)Deferred tax assets, net
    
    $
    19,635
    
    
    $
    4,043Accounts receivable
    
    
    65,728
    
    
    
    61,311Securities sold not delivered, net
    
    
    72
    
    
    
    669Other real estate
    
    
    2,249
    
    
    
    3,034Software, net
    
    
    11,095
    
    
    
    12,263Prepaid expenses
    
    
    8,468
    
    
    
    9,447Customers liabilities on acceptances
    
    
    3,669
    
    
    
    2,166Derivative assets
    
    
    47,436
    
    
    
    17,443Other
    
    
    1,745
    
    
    
    3,595$
    160,097
    
    
    $
    113,971
 12. Deposits:
   Year
    
    Amount(In thousands)2006
    
    $
    1,587,0372007
    
    
    118,3202008
    
    
    133,1262009
    
    
    111,0842010
    
    
    160,399Thereafter
    
    
    496,538$
    2,725,350
 96




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Carrying
    
    
    Interest
    
    
    Carrying
    
    
    Interest
    
    
    Carrying
    
    
    InterestAmount
    
    
    Expense
    
    
    Amount
    
    
    Expense
    
    
    Amount
    
    
    Expense(Dollars in thousands)Non
interest-bearingPrivate demand
    
    $
    644,794
    
    
    $
    
    
    
    $
    697,722
    
    
    $
    
    
    
    $
    636,905
    
    
    $
    Public demand
    
    
    27,431
    
    
    
    
    
    
    
    46,297
    
    
    
    
    
    
    
    63,508
    
    
    
    672,225
    
    
    
    
    
    
    
    744,019
    
    
    
    
    
    
    
    700,413
    
    
    
    Savings depositsSavings
    
    
    855,579
    
    
    
    18,072
    
    
    
    812,213
    
    
    
    15,123
    
    
    
    766,581
    
    
    
    15,037Now and other transactions
    
    
    1,090,342
    
    
    
    19,563
    
    
    
    1,172,918
    
    
    
    9,722
    
    
    
    1,085,866
    
    
    
    10,5151,945,921
    
    
    
    37,635
    
    
    
    1,985,131
    
    
    
    24,845
    
    
    
    1,852,447
    
    
    
    25,552Certificates of depositsUnder $100,000
    
    
    244,504
    
    
    
    8,592
    
    
    
    225,849
    
    
    
    4,691
    
    
    
    238,294
    
    
    
    5,602$100,000 and over
    
    
    2,362,000
    
    
    
    75,985
    
    
    
    1,793,140
    
    
    
    30,743
    
    
    
    1,351,074
    
    
    
    24,8762,606,504
    
    
    
    84,577
    
    
    
    2,018,989
    
    
    
    35,434
    
    
    
    1,589,368
    
    
    
    30,478$
    5,224,650
    
    
    $
    122,212
    
    
    $
    4,748,139
    
    
    $
    60,279
    
    
    $
    4,142,228
    
    
    $
    56,030
 13. Other Borrowings:
  December 31, 2005Federal Funds
    
    
    Securities Sold
    
    
    CommercialPurchased and
    
    
    Under Agreements
    
    
    PaperOther Borrowings
    
    
    to Repurchase
    
    
    Issued(Dollars in thousands)Amount outstanding at year-end
    
    $
    768.846
    
    
    $
    947,767
    
    
    $
    334,319Average indebtedness outstanding during the year
    
    $
    821.251
    
    
    $
    1,051,350
    
    
    $
    423,331Maximum amount outstanding during the year
    
    $
    975.155
    
    
    $
    1,565,269
    
    
    $
    830,000Average interest rate for the year
    
    
    3.37
    %
    
    
    4.24
    %
    
    
    3.20
    %Average interest rate at year-end
    
    
    4.26
    %
    
    
    4.71
    %
    
    
    4.35
    %
 December 31, 2004Federal Funds
    
    
    Securities Sold
    
    
    CommercialPurchased and
    
    
    Under Agreements
    
    
    PaperOther Borrowings
    
    
    to Repurchase
    
    
    Issued(Dollars in thousands)Amount outstanding at year-end
    
    $
    780,334
    
    
    $
    1,349,444
    
    
    $
    629,544Average indebtedness outstanding during the year
    
    $
    571,251
    
    
    $
    1,625,700
    
    
    $
    454,186Maximum amount outstanding during the year
    
    $
    1,033,051
    
    
    $
    2,052,790
    
    
    $
    675,000Average interest rate for the year
    
    
    1.75
    %
    
    
    3.48
    %
    
    
    1.53
    %Average interest rate at year-end
    
    
    2.09
    %
    
    
    4.11
    %
    
    
    2.38
    %
 97




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##### Table of Contents



2005
    
    
    2004(Dollars in thousands)Federal funds purchased
and other borrowings:Within thirty days
    
    $
    
    
    
    $
    205,334Over thirty
days within ninety days
    
    
    118,846
    
    
    
    Over ninety days
    
    
    650,000
    
    
    
    575,000Total
    
    $
    650,000
    
    
    $
    780,334Securities sold under
agreements to
repurchase:Within thirty days
    
    $
    597,761
    
    
    $
    374,438Over ninety days
    
    
    350,006
    
    
    
    975,006Total
    
    $
    947,767
    
    
    $
    1,349,444Commercial paper issued:Within thirty days
    
    $
    334,319
    
    
    $
    629,544
   Weighted-Fair Value of
    
    
    AverageBalance of
    
    
    Underlying
    
    
    MaturityBorrowings
    
    
    Securities
    
    
    in Months(Dollars in thousands)Wachovia Securities
    
    $
    313,937
    
    
    $
    325,994
    
    
    
    0.34Credit Suisse First Boston LLC
    
    
    86,106
    
    
    
    89,354
    
    
    
    0.33Federal Home Loan Bank New
York
    
    
    100,000
    
    
    
    97,363
    
    
    
    27.52Lehman Brothers RS
    
    
    250,006
    
    
    
    275,764
    
    
    
    74.19UBS Financial Services Inc.
    
    
    197,718
    
    
    
    206,557
    
    
    
    0.34$
    947,767
    
    
    $
    995,032
    
    
    
    22.69
 98




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##### Table of Contents



December 31, 2005Carrying
    
    
    
    
    
    
    Fair
    
    
    Weighted-Value of
    
    
    
    
    
    
    Value of
    
    
    AverageUnderlying
    
    
    Balance of
    
    
    Underlying
    
    
    InterestUnderlying Securities
    
    Securities
    
    
    Borrowings
    
    
    Securities
    
    
    Rate(Dollars in thousands)Obligations of 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
    %
 December 31, 2004Carrying
    
    
    
    
    
    
    Fair
    
    
    Weighted-Value of
    
    
    
    
    
    
    Value of
    
    
    AverageUnderlying
    
    
    Balance of
    
    
    Underlying
    
    
    InterestUnderlying Securities
    
    Securities
    
    
    Borrowings
    
    
    Securities
    
    
    Rate(Dollars in thousands)Obligations of U.S. Government agencies and corporations
    
    $
    1,085,183
    
    
    $
    994,072
    
    
    $
    1,085,183
    
    
    
    4.54
    %Mortgage-backed securities
    
    
    369,675
    
    
    
    355,372
    
    
    
    369,675
    
    
    
    4.36
    %Total
    
    $
    1,454,858
    
    
    $
    1,349,444
    
    
    $
    1,454,858
    
    
    
    4.49
    %
 14. Subordinated Capital Notes and Term Notes:
 Subordinated Capital Notes
  2005
    
    
    2004(Dollars in thousands)Subordinated notes
with fixed interest
of 6.30% maturing
June 1, 2032
    
    $
    72,034
    
    
    $
    72,898Subordinated notes
with fixed interest
of 6.10% maturing
June 1, 2032
    
    
    49,522
    
    
    
    121,556
    
    
    
    72,898Unamortized discount
    
    
    (458
    )
    
    
    (310
    )$
    121,098
    
    
    $
    72,588
 99




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##### Table of Contents



Term Notes
  2005
    
    
    2004(Dollars in thousands)Term notes maturing January 29, 2010 linked to the S&P 500 index
    
    $
    30,000
    
    
    $
    30,000Term notes maturing May 31, 2011 with fixed interest of 0.25%Linked to the S&P 500
    
    
    4,000
    
    
    
    4,000Linked to the Dow Jones Euro STOXX 50
    
    
    3,000
    
    
    
    3,000Term notes maturing May 25, 2012 linked to the Euro STOXX
    
    
    5,000
    
    
    
    Term notes maturing May 25, 2012 linked to the NIKKEI
    
    
    5,000
    
    
    
    47,000
    
    
    
    37,000Unamortized discount
    
    
    (6,785
    )
    
    
    (5,543
    )$
    40,215
    
    
    $
    31,457
  15. Reserve Fund:
  16. Common Stock Transactions:
     100




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##### Table of Contents



2005
    
    
    2004
    
    
    2003(Dollars and number of shares in thousands, except earningsper common share)Net income
    
    $
    79,806
    
    
    $
    86,928
    
    
    $
    39,819Dividends to preferred stockholders
    
    
    
    
    
    
    
    
    
    
    7,114Net income available to common stockholders
    
    $
    79,806
    
    
    $
    86,928
    
    
    $
    32,705Average number of common shares outstanding
prior to common stock dividend
    
    
    42,399
    
    
    
    42,399
    
    
    
    42,421Common stock dividend
    
    
    4,240
    
    
    
    4,240
    
    
    
    4,240Adjusted average number of common shares
    
    
    46,639
    
    
    
    46,639
    
    
    
    46,661Basic and diluted earnings per common share
    
    $
    1.71
    
    
    $
    1.86
    
    
    $
    0.70
 17. Income Tax:
       2005
    
    
    2004
    
    
    2003(Dollars in thousands)Current tax provision
    
    $
    27,934
    
    
    $
    6,009
    
    
    $
    1,424Deferred tax provision (benefit)
    
    
    2,854
    
    
    
    3,715
    
    
    
    (1,470
    )Provision (benefit) for income tax
    
    $
    30,788
    
    
    $
    9,724
    
    
    $
    (46
    )
 101




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in thousands)Income tax at statutory rate
    
    $
    42,231
    
    
    
    39
    %
    
    $
    36,115
    
    
    
    39
    %
    
    $
    15,273
    
    
    
    39
    %Benefits of net tax-exempt income
    
    
    (18,263
    )
    
    
    -17
    %
    
    
    (26,299
    )
    
    
    -28
    %
    
    
    (10,058
    )
    
    
    -26
    %Release of income tax contingencies
    
    
    
    
    
    
    0
    %
    
    
    (5,410
    )
    
    
    -6
    %
    
    
    (6,000
    )
    
    
    -15
    %Effect of 2.5% surtax
    
    
    1,867
    
    
    
    2
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %Other
    
    
    4,953
    
    
    
    5
    %
    
    
    5,318
    
    
    
    6
    %
    
    
    739
    
    
    
    2
    %Provision (benefit) for income tax
    
    $
    30,788
    
    
    
    29
    %
    
    $
    9,724
    
    
    
    11
    %
    
    $
    (46
    )
    
    
    0
    %
   2005
    
    
    2004(Dollars in thousands)Deferred Tax Assets-Unrealized loss on securities available for sale
    
    $
    12,438
    
    
    $
    Unrealized loss on derivatives
    
    
    
    
    
    
    1,051Allowance for loan losses
    
    
    4,352
    
    
    
    5,263Minimum pension liability
    
    
    10,392
    
    
    
    9,066Other
    
    
    2,985
    
    
    
    3,59230,167
    
    
    
    18,972Deferred Tax Liabilities-Unrealized gain on securities available for sale
    
    
    
    
    
    
    5,440Unrealized gain on derivatives
    
    
    487
    
    
    
    Amortization of goodwill
    
    
    4,604
    
    
    
    3,464Difference in accounting treatment of certain loan origination
activities, mortgage-servicing rights and other
    
    
    5,441
    
    
    
    6,02510,532
    
    
    
    14,929Net deferred tax asset
    
    $
    19,635
    
    
    $
    4,043
  18. Contingencies and Commitments:
   102




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Year
    
    Amount(In thousands)2006
    
    $
    14,9752007
    
    
    8,3212008
    
    
    7,6282009
    
    
    4,0742010
    
    
    3,529Thereafter
    
    
    17,285$
    55,812
 19. Pension Plans:
     103




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##### Table of Contents



2005
    
    
    2004(Dollars in thousands)Change in projected benefit obligation:Projected benefit obligation at beginning of year
    
    $
    34,294
    
    
    $
    29,670Service cost-benefits earned during the year
    
    
    1,670
    
    
    
    1,259Interest cost on projected benefit obligation
    
    
    2,106
    
    
    
    1,892Plan change
    
    
    2,095
    
    
    
    Actuarial (gain) loss
    
    
    (778
    )
    
    
    2,473Benefit distributions
    
    
    (1,100
    )
    
    
    (1,000
    )Projected benefit obligation at end of year
    
    
    38,287
    
    
    
    34,294Change in plan assets:Fair value of plan assets at beginning of year
    
    
    25,253
    
    
    
    24,400Actual return on plan assets
    
    
    570
    
    
    
    1,636Employer contributions
    
    
    1,110
    
    
    
    217Benefit distributions
    
    
    (1,100
    )
    
    
    (1,000
    )Fair value of plan assets at end of year
    
    
    25,833
    
    
    
    25,253Funded status
    
    
    (12,454
    )
    
    
    (9,040
    )Unrecognized net actuarial gain
    
    
    12,198
    
    
    
    11,799Unrecognized prior service cost
    
    
    818
    
    
    
    (1,213
    )Unrecognized transition amount
    
    
    (20
    )
    
    
    (22
    )Prepaid pension benefit
    
    $
    542
    
    
    $
    1,524Amounts
recognized on the consolidated balance sheets consist of:Accrued benefit liability, net of prepaid benefit cost
    
    $
    (8,013
    )
    
    $
    (4,602
    )Accumulated other comprehensive income
    
    
    7,737
    
    
    
    6,126Intangible pension assets
    
    
    818
    
    
    
    Net amount recognized
    
    $
    542
    
    
    $
    1,524Increase in minimum liability included in
other comprehensive income
    
    $
    1,612
    
    
    $
    1,899Projected benefit obligation
    
    
    38,287
    
    
    
    34,294Accumulated benefit obligation
    
    
    33,847
    
    
    
    29,855Fair value of plan assets
    
    
    25,833
    
    
    
    25,253
  2005
    
    
    2004
    
    
    2003(Dollars in thousands)Service cost during the year
    
    $
    1,670
    
    
    $
    1,259
    
    
    $
    1,795Interest cost on projected benefit obligation
    
    
    2,106
    
    
    
    1,892
    
    
    
    1,971Expected return on assets
    
    
    (2,210
    )
    
    
    (2,080
    )
    
    
    (1,822
    )Net amortization
    
    
    525
    
    
    
    372
    
    
    
    454Net periodic pension cost
    
    $
    2,091
    
    
    $
    1,443
    
    
    $
    2,398
 104




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2005
    
    2004
    
    2003Discount rate
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.25
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.50
    %
  2005
    
    2004
    
    2003Discount rate
    
    
    6.00
    %
    
    
    6.25
    %
    
    
    6.75
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.50
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
   2005
    
    2004Asset Category:Equity securities
    
    
    62
    %
    
    
    60
    %Debt securities
    
    
    37
    %
    
    
    31
    %Other
    
    
    1
    %
    
    
    9
    %Total
    
    
    100
    %
    
    
    100
    %
  105




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##### Table of Contents



2005
    
    
    2004(Dollars in thousands)Change in projected benefit obligationProjected benefit obligation at beginning of year
    
    $
    32,898
    
    
    $
    32,888Interest cost on projected benefit obligation
    
    
    1,936
    
    
    
    1,990Actuarial loss
    
    
    547
    
    
    
    796Benefit distributions
    
    
    (2,414
    )
    
    
    (2,776
    )Projected benefit obligation at end of year
    
    
    32,967
    
    
    
    32,898Change in plan assets:Fair value of plan assets at beginning of year
    
    
    24,684
    
    
    
    20,817Actual return on plan assets
    
    
    409
    
    
    
    4,488Employer contributions
    
    
    2,046
    
    
    
    2,155Benefit distributions
    
    
    (2,414
    )
    
    
    (2,776
    )Fair value of plan assets at end of year
    
    
    24,725
    
    
    
    24,684Funded status
    
    
    (8,242
    )
    
    
    (8,214
    )Unrecognized actuarial gain
    
    
    18,909
    
    
    
    17,119Prepaid pension benefit
    
    $
    10,667
    
    
    $
    8,905Amounts
recognized on the consolidated balance sheets consist of:Accrued benefit liability, net of prepaid benefit cost
    
    $
    (8,242
    )
    
    $
    (8,214
    )Accumulated other comprehensive income
    
    
    18,909
    
    
    
    17,119Net amount recognized
    
    $
    10,667
    
    
    $
    8,905(Decrease) increase in minimum liability included
in other comprehensive income
    
    $
    1,790
    
    
    $
    (2,048
    )Projected benefit obligation
    
    
    32,967
    
    
    
    32,898Accumulated benefit obligation
    
    
    32,967
    
    
    
    32,898Fair value of plan assets
    
    
    24,725
    
    
    
    24,684
  2005
    
    
    2004
    
    
    2003(Dollars in thousands)Interest cost on projected benefit obligation
    
    $
    1,936
    
    
    $
    1,990
    
    
    $
    1,963Expected return on assets
    
    
    (2,092
    )
    
    
    (2,034
    )
    
    
    (1,778
    )Net amortization
    
    
    440
    
    
    
    391
    
    
    
    692Net periodic pension cost
    
    $
    284
    
    
    $
    347
    
    
    $
    877
 106




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2005
    
    2004
    
    2003Discount rate
    
    
    6.00
    %
    
    
    6.00
    %
    
    
    6.25
    %Rate of compensation increase
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
   2005
    
    2004Asset Category:Equity securities
    
    
    65
    %
    
    
    59
    %Debt securities
    
    
    35
    %
    
    
    37
    %Other
    
    
    0
    %
    
    
    4
    %Total
    
    
    100
    %
    
    
    100
    %
    2005
    
    2004Banco Santander Puerto Rico Employees Retirement Plan
    
    
    6
    %
    
    
    7
    %Banco Central Hispano Puerto Rico Employees Pension Plan
    
    
    10
    %
    
    
    10
    %
 107




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##### Table of Contents



Corporations
    
    BCHPlan
    
    Plan(Dollars in thousands)2006
    
    $
    1,085
    
    
    $
    1,3062007
    
    
    1,161
    
    
    
    2,3302008
    
    
    1,269
    
    
    
    1,8642009
    
    
    1,335
    
    
    
    2,0592010
    
    
    1,491
    
    
    
    2,8902011 through 2015
    
    
    10,251
    
    
    
    16,313
 20. Related Party Transactions:
  2005
    
    2004
    
    2003(Dollars in thousands)Deposits from related parties
    
    $
    40,905
    
    
    $
    170,170
    
    
    $
    124,401Interest-bearing deposits with affiliates
    
    
    389
    
    
    
    471
    
    
    
    870Other
borrowings with an affiliate
    
    
    118,846
    
    
    
    
    
    
    
    Loans to directors, officers, and related parties
(on substantially the same terms and credit risks
as loans to third parties)
    
    
    5,929
    
    
    
    8,886
    
    
    
    7,362Technical assistance income for services rendered
    
    
    2,214
    
    
    
    2,400
    
    
    
    2,600Technical assistance expense for services received
    
    
    11,841
    
    
    
    10,224
    
    
    
    8,470Technical assistance expense for software development
    
    
    384
    
    
    
    700
    
    
    
    Notional value of derivative financial instruments
purchased from affiliates
    
    
    972,183
    
    
    
    116,432
    
    
    
    12,087Notional value of derivative financial instruments
sold to affiliates
    
    
    732,052
    
    
    
    52,350
    
    
    
    2,350
  108




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21. Derivative Financial Instruments:
  OtherGain (Loss) for
    
    
    Comprehensivethe year
    
    
    Income* for theNotional
    
    
    
    
    
    
    ended
    
    
    year endedValue
    
    
    Fair Value
    
    
    Dec. 31, 2005
    
    
    Dec. 31, 2005(Dollars in thousands)CASH FLOW HEDGESInterest rate swaps
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,369Foreign currency swaps
    
    
    117,725
    
    
    
    2,182
    
    
    
    
    
    
    
    (36
    )FAIR VALUE HEDGESInterest rate swaps
    
    
    1,408,772
    
    
    
    (26,880
    )
    
    
    28
    
    
    
    OTHER DERIVATIVESOptions
    
    
    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  OtherGain (Loss) for
    
    
    Comprehensivethe year
    
    
    Income* for theNotional
    
    
    
    
    
    
    ended
    
    
    year endedValue
    
    
    Fair Value
    
    
    Dec. 31, 2004
    
    
    Dec. 31, 2004(Dollars in thousands)CASH FLOW HEDGESInterest rate swaps
    
    $
    100,000
    
    
    $
    (2,242
    )
    
    $
    
    
    
    $
    3,463FAIR VALUE HEDGESInterest rate swaps
    
    
    618,648
    
    
    
    (9,764
    )
    
    
    579
    
    
    
    OTHER DERIVATIVESOptions
    
    
    69,770
    
    
    
    6,880
    
    
    
    5,325
    
    
    
    Embedded options on stock-indexed deposits
    
    
    (69,125
    )
    
    
    (6,881
    )
    
    
    (2,401
    )
    
    
    Interest rate caps
    
    
    34,996
    
    
    
    (54
    )
    
    
    239
    
    
    
    Customer interest rate caps
    
    
    (32,975
    )
    
    
    38
    
    
    
    (217
    )
    
    
    Customer interest rate swaps
    
    
    (167,713
    )
    
    
    (937
    )
    
    
    (1,491
    )
    
    
    Interest rate swaps
    
    
    167,713
    
    
    
    1,505
    
    
    
    1,422
    
    
    
    Loan commitments
    
    
    2,415
    
    
    
    3
    
    
    
    3
    
    
    
    $
    3,459
    
    
    $
    3,463
 
 *
    
    Net of tax  109




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110




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22. Financial Instruments with Off-Balance Sheet Risk:
    2005
    
    
    2004(Dollars in thousands)Standby letters of credit and financial guarantees written
    
    $
    211,657
    
    
    $
    244,107Commitments to extend credit, approved loans not yet
disbursed and unused lines of credit
    
    $
    1,461,258
    
    
    $
    1,024,782
   111




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23. Fair Value of Financial Instruments:
   Cash and Cash Equivalents and Interest-bearing Deposits
  Trading Securities, Investment Securities Available for Sale and Other Investments
  Loans
     Accrued Interest Receivable
  Deposits
  112




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Federal Funds Purchased and Other Borrowings
  Securities Sold under Agreement to Repurchase
  Commercial Paper Issued
  Subordinated Capital Notes and Term Notes
  Accrued Interest Payable
  Standby Letters of Credit and Commitments to Extend Credit
  Interest Rate Swap Agreements and Caps
  113




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##### Table of Contents



2005
    
    
    2004Carrying
    
    
    
    
    
    
    CarryingAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(Dollars in thousands)Consolidated
balance sheets financial instruments:Cash, cash equivalents and all interest-
bearing deposits
    
    $
    339,027
    
    
    $
    339,027
    
    
    $
    529,410
    
    
    $
    529,410Trading securities
    
    $
    37,679
    
    
    $
    37,679
    
    
    $
    34,184
    
    
    $
    34,184Investment securities available for sale
    
    $
    1,559,681
    
    
    $
    1,559,681
    
    
    $
    1,978,132
    
    
    $
    1,978,132Other investment securities
    
    $
    41,862
    
    
    $
    41,862
    
    
    $
    37,500
    
    
    $
    37,500Loans held for sale
    
    $
    213,102
    
    
    $
    213,102
    
    
    $
    271,596
    
    
    $
    271,596Loans
    
    $
    5,741,788
    
    
    $
    5,834,452
    
    
    $
    5,218,524
    
    
    $
    5,622,442Accrued interest receivable
    
    $
    77,962
    
    
    $
    77,962
    
    
    $
    44,682
    
    
    $
    44,682Deposits:Non interest-bearing
    
    $
    672,225
    
    
    $
    672,225
    
    
    $
    744,019
    
    
    $
    744,019Interest-bearing
    
    
    4,552,425
    
    
    
    4,576,746
    
    
    
    4,004,120
    
    
    
    4,037,590Total
    
    $
    5,224,650
    
    
    $
    5,248,971
    
    
    $
    4,748,139
    
    
    $
    4,781,609Federal funds purchased and other borrowings
    
    $
    768.846
    
    
    $
    768.846
    
    
    $
    780,334
    
    
    $
    780,334Securities sold under agreements to repurchase
    
    $
    947,767
    
    
    $
    947,767
    
    
    $
    1,349,444
    
    
    $
    1,349,444Commercial paper issued
    
    $
    334,319
    
    
    $
    334,282
    
    
    $
    629,544
    
    
    $
    629,046Subordinated capital and term notes
    
    $
    161,313
    
    
    $
    161,921
    
    
    $
    104,045
    
    
    $
    98,132Accrued interest payable
    
    $
    65,160
    
    
    $
    65,160
    
    
    $
    22,666
    
    
    $
    22,666
 2005
    
    
    2004Contract or
    
    
    
    
    
    
    Contract orNotional
    
    
    
    
    
    
    NotionalAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(Dollars in thousands)Off balance sheet financial instruments:Standby letters of credit and financial
guarantees written
    
    $
    211,657
    
    
    $
    (1,424
    )
    
    $
    244,107
    
    
    $
    (2,283
    )Commitments to extend credit, approved loans
not yet disbursed and unused lines of credit
    
    $
    1,461,258
    
    
    $
    (1,461
    )
    
    $
    1,024,782
    
    
    $
    (1,025
    )
 24. Significant Group Concentrations of Credit Risk:
  114




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25. Regulatory Matters:
    115




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##### Table of Contents



December 31, 2005Required
    
    Actual
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Ratio(Dollars in thousands)Total Capital (to Risk Weighted Assets)
    
    $
    472,889
    
    
    
    8
    %
    
    $
    726,939
    
    
    
    12.30
    %
    
    
    3
    
    
    
    10
    %Tier I Capital (to Risk Weighted Assets)
    
    $
    236,445
    
    
    
    4
    %
    
    $
    537,319
    
    
    
    9.09
    %
    
    
    3
    
    
    
    6
    %Leverage Ratio
    
    $
    177,333
    
    
    
    3
    %
    
    $
    537,319
    
    
    
    6.50
    %
    
    
    3
    
    
    
    5
    %
 December 31, 2004Required
    
    Actual
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Ratio(Dollars in thousands)Total Capital (to Risk Weighted Assets)
    
    $
    468,849
    
    
    
    8
    %
    
    $
    647,799
    
    
    
    11.05
    %
    
    
    3
    
    
    
    10
    %Tier I Capital (to Risk Weighted Assets)
    
    $
    234,424
    
    
    
    4
    %
    
    $
    505,650
    
    
    
    8.63
    %
    
    
    3
    
    
    
    6
    %Leverage Ratio
    
    $
    175,818
    
    
    
    3
    %
    
    $
    505,650
    
    
    
    6.43
    %
    
    
    3
    
    
    
    5
    %
  December 31, 2005Required
    
    Actual
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Ratio(Dollars in thousands)Total Capital (to Risk Weighted Assets)
    
    $
    462,187
    
    
    
    8
    %
    
    $
    638,181
    
    
    
    11.05
    %
    
    
    3
    
    
    
    10
    %Tier I Capital (to Risk Weighted Assets)
    
    $
    231,093
    
    
    
    4
    %
    
    $
    570,056
    
    
    
    9.87
    %
    
    
    3
    
    
    
    6
    %Leverage Ratio
    
    $
    173,320
    
    
    
    3
    %
    
    $
    570,056
    
    
    
    7.05
    %
    
    
    3
    
    
    
    5
    %
 December 31, 2004Required
    
    Actual
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Ratio(Dollars in thousands)Total Capital (to Risk Weighted Assets)
    
    $
    494,003
    
    
    
    8
    %
    
    $
    604,003
    
    
    
    9.78
    %
    
    
    3
    
    
    
    10
    %Tier I Capital (to Risk Weighted Assets)
    
    $
    247,002
    
    
    
    4
    %
    
    $
    537,161
    
    
    
    8.70
    %
    
    
    3
    
    
    
    6
    %Leverage Ratio
    
    $
    185,251
    
    
    
    3
    %
    
    $
    537,161
    
    
    
    6.90
    %
    
    
    3
    
    
    
    5
    %
 116




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26. Segment Information:


Types of Products and Services
  Measurement of Segment Profit or Loss and Segment Assets
   December 31, 2005Commercial
    
    Mortgage
    
    Treasury and
    
    
    
    
    
    
    
    
    
    
    
    
    
    ConsolidatedBanking
    
    Banking
    
    Investments
    
    Broker-dealer
    
    Other
    
    Eliminations
    
    Total(Dollars in thousands)Total external revenue
    
    $
    243,011
    
    
    $
    173,477
    
    
    $
    90,838
    
    
    $
    49,714
    
    
    $
    24,963
    
    
    $
    (17,040
    )
    
    $
    564,963Intersegment revenue
    
    
    10,496
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,544
    
    
    
    (17,040
    )
    
    
    Interest income
    
    
    204,405
    
    
    
    164,261
    
    
    
    77,447
    
    
    
    1,697
    
    
    
    3,055
    
    
    
    (11,260
    )
    
    
    439,605Interest expense
    
    
    71,495
    
    
    
    67,974
    
    
    
    74,951
    
    
    
    2,003
    
    
    
    7,655
    
    
    
    (11,495
    )
    
    
    212,583Depreciation and
amortization
    
    
    5,774
    
    
    
    1,808
    
    
    
    642
    
    
    
    731
    
    
    
    4,229
    
    
    
    
    
    
    
    13,184Segment income
before income tax
    
    
    58,646
    
    
    
    93,177
    
    
    
    11,192
    
    
    
    13,835
    
    
    
    (65,326
    )
    
    
    (930
    )
    
    
    110,594Segment assets
    
    
    3,441,832
    
    
    
    2,837,931
    
    
    
    1,887,680
    
    
    
    90,109
    
    
    
    305,247
    
    
    
    (290,851
    )
    
    
    8,271,948
 December 31, 2004Commercial
    
    Mortgage
    
    Treasury and
    
    
    
    
    
    
    
    
    
    
    
    
    
    ConsolidatedBanking
    
    Banking
    
    Investments
    
    Broker-dealer
    
    Other
    
    Eliminations
    
    Total(Dollars in thousands)Total external revenue
    
    $
    194,097
    
    
    $
    114,719
    
    
    $
    113,253
    
    
    $
    49,553
    
    
    $
    19,238
    
    
    $
    (9,799
    )
    
    $
    481,061Intersegment revenue
    
    
    5,440
    
    
    
    
    
    
    
    22
    
    
    
    6
    
    
    
    4,331
    
    
    
    (9,799
    )
    
    
    Interest income
    
    
    158,748
    
    
    
    108,333
    
    
    
    99,830
    
    
    
    1,313
    
    
    
    1,164
    
    
    
    (5,566
    )
    
    
    363,822Interest expense
    
    
    34,499
    
    
    
    23,141
    
    
    
    85,802
    
    
    
    1,107
    
    
    
    1,884
    
    
    
    (5,671
    )
    
    
    140,762Depreciation and
amortization
    
    
    6,139
    
    
    
    1,211
    
    
    
    237
    
    
    
    511
    
    
    
    5,140
    
    
    
    
    
    
    
    13,238Segment income
before income tax
    
    
    39,423
    
    
    
    80,311
    
    
    
    22,351
    
    
    
    15,041
    
    
    
    (59,854
    )
    
    
    (620
    )
    
    
    96,652Segment assets
    
    
    3,320,311
    
    
    
    2,585,765
    
    
    
    2,417,746
    
    
    
    89,233
    
    
    
    218,247
    
    
    
    (307,655
    )
    
    
    8,323,647
 117




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##### Table of Contents



December 31, 2003Commercial
    
    Mortgage
    
    Treasury and
    
    
    
    
    
    
    
    
    
    
    
    
    
    ConsolidatedBanking
    
    Banking
    
    Investments
    
    Broker-dealer
    
    Other
    
    Eliminations
    
    Total(Dollars in thousands)Total external revenue
    
    $
    202,674
    
    
    $
    89,772
    
    
    $
    97,269
    
    
    $
    47,148
    
    
    $
    17,575
    
    
    $
    (8,493
    )
    
    $
    445,945Intersegment revenue
    
    
    4,240
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    4,248
    
    
    
    (8,493
    )
    
    
    Interest income
    
    
    166,344
    
    
    
    86,398
    
    
    
    85,637
    
    
    
    1,115
    
    
    
    510
    
    
    
    (4,220
    )
    
    
    335,784Interest expense
    
    
    32,818
    
    
    
    15,353
    
    
    
    87,520
    
    
    
    845
    
    
    
    296
    
    
    
    (4,220
    )
    
    
    132,612Depreciation and
amortization
    
    
    6,963
    
    
    
    1,009
    
    
    
    229
    
    
    
    459
    
    
    
    11,848
    
    
    
    
    
    
    
    20,508Segment income
before income tax
    
    
    26,302
    
    
    
    64,119
    
    
    
    4,135
    
    
    
    15,158
    
    
    
    (69,941
    )
    
    
    
    
    
    
    39,773Segment assets
    
    
    3,000,808
    
    
    
    1,514,419
    
    
    
    2,801,909
    
    
    
    87,958
    
    
    
    230,512
    
    
    
    (268,950
    )
    
    
    7,366,656
 Reconciliation of Segment Information to Consolidated Amounts
  2005
    
    
    2004
    
    
    2003(Dollars in thousands)Revenues:Total revenues for reportable segments
    
    $
    557,040
    
    
    $
    471,622
    
    
    $
    436,863Other revenues
    
    
    24,963
    
    
    
    19,238
    
    
    
    17,575Elimination of intersegment revenues
    
    
    (17,040
    )
    
    
    (9,799
    )
    
    
    (8,493
    )Total consolidated revenues
    
    $
    564,963
    
    
    $
    481,061
    
    
    $
    445,945Total income before tax of reportable segments
    
    $
    176,850
    
    
    $
    157,126
    
    
    $
    109,714Income before tax of other segments
    
    
    (65,326
    )
    
    
    (59,854
    )
    
    
    (69,941
    )Elimination of intersegment profits
    
    
    (930
    )
    
    
    (620
    )
    
    
    Consolidated income before tax
    
    $
    110,594
    
    
    $
    96,652
    
    
    $
    39,773Assets:Total assets for reportable segments
    
    $
    8,257,552
    
    
    $
    8,413,055
    
    
    $
    7,405,094Assets not attributed to segments
    
    
    305,247
    
    
    
    218,247
    
    
    
    230,512Elimination of intersegment assets
    
    
    (290,851
    )
    
    
    (307,655
    )
    
    
    (268,950
    )Total consolidated assets
    
    $
    8,271,948
    
    
    $
    8,323,647
    
    
    $
    7,366,656
 118




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##### Table of Contents



27. Quarterly Results (Unaudited):
  Quarters Ended 2005March 31
    
    June 30
    
    September 30
    
    December 31As
    
    
    
    
    
    As
    
    
    
    
    
    AsPreviously
    
    
    
    
    
    Previously
    
    
    
    
    
    Previously
    
    
    
    
    
    AsReported
    
    As Restated
    
    Reported
    
    As Restated
    
    Reported
    
    As Restated
    
    Reported(Dollars in thousands, except per share data)Interest Income
    
    $
    100,750
    
    
    $
    101,388
    
    
    $
    103,456
    
    
    $
    104,050
    
    
    $
    111,953
    
    
    $
    112,470
    
    
    $
    121,697Net Interest Income
    
    
    55,470
    
    
    
    56,108
    
    
    
    53,668
    
    
    
    54,262
    
    
    
    55,060
    
    
    
    55,577
    
    
    
    61,075Net Interest Income
after Provision
for Loan Losses
    
    
    48,770
    
    
    
    49,408
    
    
    
    49,618
    
    
    
    50,212
    
    
    
    50,410
    
    
    
    50,927
    
    
    
    56,075Income before Provision
for Income Tax
    
    
    32,467
    
    
    
    33,130
    
    
    
    27,396
    
    
    
    28,016
    
    
    
    23,152
    
    
    
    23,693
    
    
    
    25,755Net income
    
    
    25,509
    
    
    
    25,914
    
    
    
    19,255
    
    
    
    19,633
    
    
    
    17,065
    
    
    
    17,395
    
    
    
    16,864Earnings per Common Share
    
    
    0.55
    
    
    
    0.56
    
    
    
    0.41
    
    
    
    0.42
    
    
    
    0.37
    
    
    
    0.37
    
    
    
    0.36
 Quarters Ended 2004March 31
    
    June 30
    
    September 30
    
    December 31As
    
    
    
    
    
    As
    
    
    
    
    
    As
    
    
    
    
    
    AsPreviously
    
    
    
    
    
    Previously
    
    
    
    
    
    Previously
    
    
    
    
    
    PreviouslyReported
    
    As Restated
    
    Reported
    
    As Restated
    
    Reported
    
    As Restated
    
    Reported
    
    As Restated(Dollars in thousands, except per share data)Interest Income
    
    $
    85,827
    
    
    $
    87,033
    
    
    $
    86,126
    
    
    $
    87,249
    
    
    $
    92,449
    
    
    $
    93,319
    
    
    $
    95,527
    
    
    $
    96,221Net Interest Income
    
    
    53,976
    
    
    
    55,182
    
    
    
    53,630
    
    
    
    54,753
    
    
    
    55,939
    
    
    
    56,809
    
    
    
    55,622
    
    
    
    56,316Net Interest Income
after Provision
for Loan Losses
    
    
    45,226
    
    
    
    46,432
    
    
    
    47,630
    
    
    
    48,753
    
    
    
    48,919
    
    
    
    49,789
    
    
    
    51,122
    
    
    
    51,816Income before Provision
for Income Tax
    
    
    27,684
    
    
    
    28,937
    
    
    
    16,054
    
    
    
    17,217
    
    
    
    23,466
    
    
    
    24,372
    
    
    
    25,400
    
    
    
    26,126Net income
    
    
    25,215
    
    
    
    25,978
    
    
    
    16,046
    
    
    
    16,755
    
    
    
    21,869
    
    
    
    22,422
    
    
    
    21,330
    
    
    
    21,773Earnings per Common Share
    
    
    0.54
    
    
    
    0.56
    
    
    
    0.34
    
    
    
    0.36
    
    
    
    0.47
    
    
    
    0.48
    
    
    
    0.46
    
    
    
    0.47
 Quarters Ended 2003March 31
    
    June 30
    
    September 30
    
    December 31As
    
    
    
    
    
    As
    
    
    
    
    
    As
    
    
    
    
    
    AsPreviously
    
    
    
    
    
    Previously
    
    
    
    
    
    Previously
    
    
    
    
    
    PreviouslyReported
    
    As Restated
    
    Reported
    
    As Restated
    
    Reported
    
    As Restated
    
    Reported
    
    As Restated(Dollars in thousands, except per share data)Interest Income
    
    $
    79,022
    
    
    $
    83,284
    
    
    $
    78,924
    
    
    $
    81,274
    
    
    $
    81,495
    
    
    $
    83,589
    
    
    $
    86,140
    
    
    $
    87,637Net Interest Income
    
    
    43,627
    
    
    
    47,628
    
    
    
    45,891
    
    
    
    48,241
    
    
    
    48,956
    
    
    
    51,050
    
    
    
    54,756
    
    
    
    56,253Net Interest Income
after Provision
for Loan Losses
    
    
    31,562
    
    
    
    35,563
    
    
    
    32,176
    
    
    
    34,526
    
    
    
    39,991
    
    
    
    42,085
    
    
    
    39,756
    
    
    
    41,253Income before Provision
for Income Tax
    
    
    5,790
    
    
    
    277
    
    
    
    9,275
    
    
    
    11,697
    
    
    
    14,057
    
    
    
    16,212
    
    
    
    10,038
    
    
    
    11,587Net income
    
    
    5,138
    
    
    
    1,775
    
    
    
    7,022
    
    
    
    8,499
    
    
    
    11,543
    
    
    
    12,858
    
    
    
    15,742
    
    
    
    16,687Earnings per Common Share
    
    
    0.08
    
    
    
    0.01
    
    
    
    0.14
    
    
    
    0.16
    
    
    
    0.22
    
    
    
    0.25
    
    
    
    0.26
    
    
    
    0.28
  119




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28. Subsequent Events:
    29. Santander BanCorp (Parent Company Only) Financial Information :
   120




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##### Table of Contents



SANTANDER BANCORP
 Balance
Sheet Information  December 31, 2005 and 2004
 2005
    
    
    2004ASSETSCash and due from banks
    
    $
    9,326
    
    
    $
    44Interest-bearing deposits
    
    
    45,000
    
    
    
    8,078Total cash and cash equivalents
    
    
    54,326
    
    
    
    8,122Loans,net
    
    
    139,435
    
    
    
    43,000Investment in Subsidiaries
    
    
    627,005
    
    
    
    610,522Interest Receivable
    
    
    1,705
    
    
    
    394Other Assets
    
    
    2,585
    
    
    
    173$
    825,056
    
    
    $
    662,211LIABILITIES AND STOCKHOLDERS EQUITYBorrowings
    
    $
    118,846
    
    
    $
    30,000Subordinated Notes
    
    
    120,973
    
    
    
    72,588Interest Payable
    
    
    1,178
    
    
    
    589Other Liabilities
    
    
    13,984
    
    
    
    5,068Total liabilities
    
    
    254,981
    
    
    
    108,245STOCKHOLDERS EQUITY:Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364 shares issued;
46,639,104 shares outstanding at December 31, 2005 and 2004
    
    
    126,626
    
    
    
    126,626Capital paid in excess of par value
    
    
    552,195
    
    
    
    552,195Treasury stock at cost, 4,011,260 shares in December 31, 2005 and 2004.
    
    
    (67,552
    )
    
    
    (67,552
    )Accumulated other comprehensive loss, net of tax
    
    
    (36
    )
    
    
    Retained
earnings
Undivided profits
    
    
    (41,158
    )
    
    
    (57,303
    )Total stockholders equity
    
    
    570,075
    
    
    
    553,966$
    825,056
    
    
    $
    662,211
 121




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##### Table of Contents



Santander BanCorp
 Statements
of Income Information
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Interest Income:Loans
    
    $
    5,629
    
    
    $
    1,000
    
    
    $
    404Interest bearing deposits
    
    
    848
    
    
    
    59
    
    
    
    40Total interest income
    
    
    6,477
    
    
    
    1,059
    
    
    
    444Interest Expense:Borrowings
    
    
    4,253
    
    
    
    1,378
    
    
    
    295Term and subordinated notes
    
    
    3,402
    
    
    
    502
    
    
    
    Total interest expense
    
    
    7,655
    
    
    
    1,880
    
    
    
    295Net interest income (loss)
    
    
    (1,178
    )
    
    
    (821
    )
    
    
    149Other Income:Derivative gains
    
    
    (122
    )
    
    
    325
    
    
    
    Equity in earnings of subsidiaries
    
    
    83,617
    
    
    
    90,021
    
    
    
    34,216Total other income
    
    
    83,495
    
    
    
    90,346
    
    
    
    34,216Other Operating Expenses:Professional fees
    
    
    1,149
    
    
    
    1,394
    
    
    
    1,148Other taxes
    
    
    285
    
    
    
    180
    
    
    
    180Other operating expenses
    
    
    202
    
    
    
    275
    
    
    
    332Total other operating expenses
    
    
    1,636
    
    
    
    1,849
    
    
    
    1,660Income before provision for income tax
    
    
    80,681
    
    
    
    87,676
    
    
    
    32,705Provision (benefit) for Income Tax
    
    
    (55
    )
    
    
    127
    
    
    
    Net Income
    
    $
    80,736
    
    
    $
    87,549
    
    
    $
    32,705
 122




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Santander BanCorp
 Statements
of Cash Flows Information
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    80,736
    
    
    $
    87,549
    
    
    $
    32,705Adjustments to reconcile net income to net cash provided by operating activities:Equity in earnings of subsidiaries, net of dividends received
    
    
    (51,225
    )
    
    
    (67,076
    )
    
    
    (7,026
    )Deferred tax provision (benefit)
    
    
    (55
    )
    
    
    127
    
    
    
    Increase in other assets and interest receivable
    
    
    (3,759
    )
    
    
    (522
    )
    
    
    (20
    )Decrease (increase) other liabilities and interest payable
    
    
    9,560
    
    
    
    (166
    )
    
    
    820Total adjustments
    
    
    (45,479
    )
    
    
    (67,637
    )
    
    
    (6,226
    )Net cash provided by operating activities
    
    
    35,257
    
    
    
    19,912
    
    
    
    26,479CASH FLOWS FROM INVESTING ACTIVITIES:Net increase in loans
    
    
    (96,435
    )
    
    
    (6,000
    )
    
    
    (37,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Increase in borrowings
    
    
    88,846
    
    
    
    5,000
    
    
    
    25,000Repayment of subordinated notes
    
    
    
    
    
    
    (74,000
    )
    
    
    Issuance of term and subordinated notes
    
    
    48,385
    
    
    
    72,588
    
    
    
    74,000Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (2,284
    )Dividends paid
    
    
    (29,849
    )
    
    
    (21,922
    )
    
    
    (19,087
    )Cash paid on corporate reorganization
    
    
    
    
    
    
    
    
    
    
    (62,000
    )Net cash provided by (used in) financing activities
    
    
    107,382
    
    
    
    (18,334
    )
    
    
    15,629NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    46,204
    
    
    
    (4,422
    )
    
    
    5,108CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    8,122
    
    
    
    12,544
    
    
    
    7,436CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    54,326
    
    
    $
    8,122
    
    
    $
    12,544
 123




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.









ITEM 9A. CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
     Change in Internal Control Over Financial Reporting
 Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities a replacement of FASB Statement 125
  
    
    The Corporations Board of Directors has revised the duties and responsibilities of the
Investment Committee (IC) to include oversight of all transfers of financial assets with no
readily available fair value and in excess of a quantitative
 124




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##### Table of Contents








threshold.The members of the IC include the Corporations key officers, including the Director of Legal and Compliance.
    
    The IC formally assesses and approves the accounting and financial reporting implications
of financial asset transfers, which may include engaging external experts in legal and
accounting matters for reviewing complex transactions.
    
    The recording of such transactions by the Accounting Department is subject to the formal
approval by the IC and the acknowledgement of the Corporate Controller.









ITEM 9B. OTHER INFORMATION


PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  125




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
 A. The following documents are incorporated by reference from Item 8 hereof:(1) Consolidated Financial Statements:Reports of Independent Registered Public Accounting FirmConsolidated Balance Sheets at December 31, 2005 and 2004, as restatedConsolidated Statements of Income for the Years EndedDecember 31, 2005, 2004, and 2003, as restatedConsolidated Statements of Changes in Stockholders Equityfor the Years Ended December 31, 2005, 2004 and 2003, as restatedConsolidated Statements of Comprehensive Incomefor the Years Ended December 31, 2005, 2004 and 2003, as restatedConsolidated Statements of Cash Flows for the YearsEnded December 31 2005, 2004 and 2003, as restatedNotes to Consolidated Financial StatementsDecember 31, 2005, 2004 and 2003, as restated(2) Financial Statement Schedules are not presented because the information is not
applicable or is included in the Consolidated Financial Statements described in A (1)
above or in the notes thereto.(3) The
exhibits listed on the Exhibit Index on page 128 of this report are filed
herewith or are incorporated herein by reference.
 126




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##### Table of Contents



SIGNATURES
  SANTANDER BANCORP
 Dated: 04/27/2006
    
    By:
    
    S/JOSE RAMON GONZALEZDirector and Vice ChairmanPresident and Chief Executive OfficerDated: 04/27/2006
    
    By:
    
    S/CARLOS M. GARCIADirectorSenior Executive Vice President andChief Operating OfficerDated: 04/27/2006
    
    By:
    
    S/ MARIA CALERODirectorExecutive Vice President andPrincipal Accounting Officer
  S:\GONZALO DE LAS HERAS
    
    Chairman
    
    04/27/2006S:\ JESUS M. ZABALZA
    
    Director
    
    04/27/2006S:\ VICTOR ARBULU
    
    Director
    
    04/27/2006S:\ ROBERTO VALENTIN
    
    Director
    
    04/27/2006S:\ STEPHEN FERRISS
    
    Director
    
    04/27/2006
 127




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##### Table of Contents

--------------------------------------------------------------------------------

EXHIBIT INDEX
 Exhibit No.
    
    Description
    
    Reference(2.0)
    
    Agreement and Plan of Merger-Banco Santander Puerto Rico andSantander BanCorp
    
    Exhibit 3.3 8-A12B(2.1)
    
    Stock Purchase Agreement Santander BanCorp and Banco SantanderCentral Hispano, S.A.
    
    Exhibit 2.1 10K-12/31/00(2.2)
    
    Stock Purchase Agreement dated as of November 28, 2003 by and amongSantander BanCorp,  Administración de Bancos LatinoamericanosSantander, S.L. and Santander Securities Corporation
    
    Exhibit 2.2 10Q-06/30/04(2.3)
    
    Settlement Agreement between Santander BanCorp and Administraciónde 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 PerpetualMonthly 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 GrowthNotes Linked to the S&P 500 Index
    
    Exhibit 4.6 10Q-03/31/04(4.3)
    
    Private Placement Memorandum Santander BanCorp $75,000,000 6.30%Subordinated Notes
    
    Exhibit 4.3 10KA-12/31/04(4.4)
    
    Private Placement Memorandum Santander BanCorp $50,000,000 6.10%Subordinated Notes
    
    Exhibit 4.4(10.1)
    
    Contract for Systems Maintenance between ALTEC & BancoSantander Puerto Rico
    
    Exhibit 10A 10K-12/31/02(10.2)
    
    Deferred Compensation Contract-Benito Cantalapiedra
    
    Exhibit 10B 10K-12/31/02(10.3)
    
    Deferred Compensation
Contract-María Calero
    
    Exhibit 10C 10K-12/31/02(10.4)
    
    Employment Contract-Carlos
García
    
    Exhibit 10D 10K-12/31/02(10.5)
    
    Employment Contract-Roberto Córdova
    
    Exhibit 10E 10K-12/31/02(10.6)
    
    Information Processing Services Agreement between America LatinaTecnologia de Mexico, SA and Banco Santander Puerto Rico, SantanderInternational Bank of Puerto Rico and Santander Investment InternationalBank, Inc.
    
    Exhibit 10A 10Q-06/30/03(10.7)
    
    Employment Contract-José Ramón González
    
    Exhibit 10B 10Q-06/30/03(10.8)
    
    Employment Contract-Lillian Díaz
    
    Exhibit 10.10 10KA-12/31/04(10.9)
    
    Employment Contract-Bartolomé Vélez
    
    Exhibit 10.11 10KA-12/31/04(10.10)
    
    Technology Assignment Agreement between CREFISA, Inc. and BancoSantander Puerto Rico
    
    Exhibit 10.12 10KA-12/31/04(10.11)
    
    Altair System License Agreement between CREFISA, Inc. and BancoSantander Puerto Rico
    
    Exhibit 10.13 10KA-12/31/04(10.12)
    
    Employment Contract-Anthony Boon
    
    Exhibit 10.14 10Q-03/31/04(10.13)
    
    Deferred Compensation Contract-Anthony Boon
    
    Exhibit 10.15 10Q-03/31/04(12)
    
    Computation of Ratio of Earnings to Fixed Charges
    
    Exhibit 12(13)
    
    Registrants Annual Report to Shareholders for the Year EndedDecember 31, 2004
    
    Exhibit 13 10-KA-12/31/04(14)
    
    Code of Ethics
    
    Exhibit 14 10-KA-12/31/04(21)
    
    Subsidiaries of the Registrant
    
    Exhibit 21(22)
    
    Registrants Proxy Statement for the April 28, 2005 AnnualMeeting of Stockholders
    
    Def14A-04/30/06(31.1)
    
    Certification from the Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002
    
    Exhibit 31.1(31.2)
    
    Certification from the Chief Operating Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002
    
    Exhibit 31.2(31.3)
    
    Certification from the Chief Accounting Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002
    
    Exhibit 31.3(32.1)
    
    Certification from the Chief Executive Officer, Chief  Operating Officer andChief Accounting Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002
    
    Exhibit 32.1
 128