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(SANTANDER BANCORP COVER)




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(SANTANDER BANCORP HEADER1)




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(SANTANDER BANCORP LOGO) Index Santander BanCorpSelected Financial Data
    
    
    2Vision and Mission
    
    
    4Message from the President
    
    
    4Santander Group Puerto Rico
    
    
    11Corporate Social Responsibility
    
    
    21Board of Directors
    
    
    26Management, Subsidiaries and Affiliates
    
    
    26Selected
Consolidated Financial Information
    
    
    28Managements Discussion and Analysis
of Results of Operations and Financial Condition
    
    
    30Managements Report on Internal Control over
Financial Reporting as of December 31, 2004
    
    
    70Reports of
Independent Registered Public Accounting Firm
    
    
    71Consolidated Financial Statements
    
    
    74Appendix ASantander
Group (Banco Santander Central Hispano, S.A., the Principal
Shareholder of Santander BanCorp)
    
    
    113




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(SANTANDER BANCORP LOGO) Santander BanCorp (SANTANDER BANCORP LOGO) SELECTED FINANCIAL DATA The table on the following page presents selected consolidated financial data and other financial
and operating information
for Santander BanCorp (the Corporation) and certain statistical information as of the dates and for
the periods indicated. This
information should be read in conjunction with the Corporations Consolidated Financial Statements
and the section entitled
Managements Discussion and Analysis of Results of Operations and Financial Condition appearing
elsewhere in the Annual
Report. The selected Balance Sheet and Statement of Income data for the year ended December 31,
2004 and 2003 have
been derived from the Corporations consolidated audited financial statements. The consolidated
Balance Sheet and Statement
of Income data for the years ended December 31, 2002, 2001 and 2000 have been restated to give
retroactive effect to the
acquisition of Santander Securities Corporation by the Corporation on December 30, 2003, which has
been accounted for
in a manner similar to a pooling of interests as described in Note 1 to the accompanying
consolidated financial statements,
and accordingly, such restated data has been derived from combining the separate consolidated
financial statements of the
Corporation and Santander Securities Corporation, and adjusted for any related combining
eliminations. Key Figures (In millions, except per share data and ratios)2004
    
    

2003
    
    

Var.Net income
    
    $
    84.4
    
    
    $
    39.4
    
    
    
    114.1
    %Earnings per share
    
    $
    1.81
    
    
    $
    0.69
    
    
    
    162.3
    %Market capitalization
    
    $
    1,407
    
    
    $
    1,032
    
    
    
    36.3
    %Customer financial assets under management
    
    $
    12,828
    
    
    $
    10,670
    
    
    
    20.2
    %Loans, net
    
    $
    5,584
    
    
    $
    4,215
    
    
    
    32.5
    %Non-performing loans /Total loans
    
    
    1.6
    %
    
    
    2.3
    %
    
    
    (0.7
    ) b.p.Allowance for loan losses to NPL
    
    
    79.05
    %
    
    
    70.85
    %
    
    
    8.2
    b.p.




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(SANTANDER BANCORP LOGO) Year Ended Decmber 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000CONDENSED INCOME STATEMENTSNet interest income
    
    $
    219,168
    
    
    $
    193,230
    
    
    $
    205,438
    
    
    $
    241,744
    
    
    $
    245,314Non-interest income
    
    
    117,239
    
    
    
    119,940
    
    
    
    101,108
    
    
    
    101,761
    
    
    
    75,746Operating expenses
    
    
    217,533
    
    
    
    224,265
    
    
    
    213,875
    
    
    
    210,647
    
    
    
    195,128Net income
    
    
    84,459
    
    
    
    39,445
    
    
    
    25,752
    
    
    
    52,758
    
    
    
    75,860PER COMMON SHARE DATA *(1)Net income
    
    $
    1.81
    
    
    $
    0.69
    
    
    $
    0.45
    
    
    $
    1.09
    
    
    $
    1.51Book value
    
    
    11.92
    
    
    
    10.31
    
    
    
    11.51
    
    
    
    11.54
    
    
    
    11.24Cash dividend per share
    
    
    0.49
    
    
    
    0.44
    
    
    
    0.44
    
    
    
    0.44
    
    
    
    0.44PERIOD END BALANCESTotal assets
    
    $
    8,341,780
    
    
    $
    7,367,300
    
    
    $
    7,126,444
    
    
    $
    7,718,685
    
    
    $
    7,698,288Earning assets
    
    
    8,093,581
    
    
    
    7,088,292
    
    
    
    6,825,093
    
    
    
    7,446,623
    
    
    
    7,407,651Loans held for sale and loans, net of
allowance for
loans losses
    
    
    5,514,355
    
    
    
    4,145,074
    
    
    
    3,795,977
    
    
    
    4,390,077
    
    
    
    4,438,087Allowance for loan losses
    
    
    69,177
    
    
    
    69,693
    
    
    
    56,906
    
    
    
    51,738
    
    
    
    50,597Deposits
    
    
    4,748,139
    
    
    
    4,142,228
    
    
    
    4,518,969
    
    
    
    4,792,634
    
    
    
    4,921,354Borrowings
    
    
    2,863,367
    
    
    
    2,595,033
    
    
    
    1,877,379
    
    
    
    2,189,136
    
    
    
    2,039,472Preferred equity
    
    
    
    
    
    
    
    
    
    
    65,250
    
    
    
    65,250
    
    
    
    65,250Common equity
    
    
    556,003
    
    
    
    480,832
    
    
    
    538,705
    
    
    
    548,544
    
    
    
    551,990SELECTED RATIOSPerformance:Efficiency ratio on a tax-equivalent
basis (2)
    
    
    63.54
    %
    
    
    70.05
    %
    
    
    69.53
    %
    
    
    60.47
    %
    
    
    55.72
    %Return on average total assets
    
    
    1.10
    %
    
    
    0.59
    %
    
    
    0.38
    %
    
    
    0.76
    %
    
    
    0.97
    %Return on average common equity
    
    
    16.90
    %
    
    
    6.08
    %
    
    
    3.79
    %
    
    
    8.71
    %
    
    
    13.59
    %Capital:Tier I capital to risk-adjusted assets
    
    
    9.27
    %
    
    
    8.84
    %
    
    
    12.14
    %
    
    
    10.66
    %
    
    
    10.78
    %Total capital to risk-adjusted assets
    
    
    11.90
    %
    
    
    10.41
    %
    
    
    13.39
    %
    
    
    11 .64
    %
    
    
    11.83
    %Leverage ratio
    
    
    6.36
    %
    
    
    6.04
    %
    
    
    8.87
    %
    
    
    8.79
    %
    
    
    7.43
    %Asset quality:Non-performing loans to total loans
    
    
    1.57
    %
    
    
    2.33
    %
    
    
    3.20
    %
    
    
    2.14
    %
    
    
    1.52
    %Annualized net charge-offs to average
loans
    
    
    0.56
    %
    
    
    0.93
    %
    
    
    1 .41
    %
    
    
    1.44
    %
    
    
    0.91
    %Allowance for loan losses to
period-end loans
    
    
    1.24
    %
    
    
    1.65
    %
    
    
    1.48
    %
    
    
    1.16
    %
    
    
    1.13
    %Allowance for loan losses to
non-performing loans
    
    
    79.05
    %
    
    
    70.85
    %
    
    
    46.10
    %
    
    
    54.34
    %
    
    
    74.29
    %OTHER DATA AT END OF PERIODCustomer financial assets under
management
    
    $
    12,827,700
    
    
    $
    10,669,700
    
    
    $
    9,242,600
    
    
    $
    9,159,700
    
    
    $
    8,877,500Total bank branches
    
    
    65
    
    
    
    66
    
    
    
    66
    
    
    
    65
    
    
    
    75ATMs
    
    
    150
    
    
    
    141
    
    
    
    139
    
    
    
    121
    
    
    
    116
   *
    
    Per share data is based on the average number of shares outstanding during the periods.(1)
    
    Per common share data has been retroactively restated to
reflect a 10% stock dividends declared on July 9, 2004, June 17,2002
and January 11, 2000.(2)
    
    Operating expenses divided by net interest income, on a tax-equivalent basis, plus other income, excluding securities gains and
losses.




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(PICTURE) OUR VISION
To be the leading financial group in Puerto
Rico and other selected markets.
OUR MISSION
To be a client-focused financial group with
integrated services, driven to maximize
shareholder value by providing excellence
in service to our clients, investing in the
communities we serve and developing
our people under the highest standards of
business ethics. José R. González
President and Chief Executive Of?cer




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MESSAGE FROM THE PRESIDENT I am pleased to report to shareholders that
Santander BanCorp (the Corporation)
(NYSE: SAP; Latibex: XSBP) produced
excellent financial results in 2004. We delivered on our promise of a turnaround in profitability. For the year
ended December 31, 2004, the Corporation posted net income of $84.5 million,
an increase of 114% when compared with the previous year. Earnings per
common share (EPS) totaled $1.81, up 162% compared to 2003. Return on
equity (ROE) of 16.9% represented a significant improvement of 1082 basis
points over 2003. Significant advances were
achieved across all the areas
identified as crucial to our
Strategic Plan 2006:our sales
and distribution strategy, our
credit and market risk profile,
and our operating efficiency. In a
year also characterized by a
resurgence of the Corporations
tradition of maintaining strong
relationships with its customers,
our management teams commitment
and focus propelled the
Corporations new momentum.
The efforts of a strong and
dedicated team of employees,
providing superior service to our
valued clients, generated a high
level of performance across all
business segments, and successfully
positioned the Corporation
for long-term sustainable
growth. The Corporations financial
results were mainly driven by
growth in the loan portfolio and
improved asset quality. Also, the
repositioning of the investment
portfolio significantly increased
net interest income, thereby
strengthening the positive
effects of this portion of the
asset portfolio. All of this
combines to produce a stronger
quality of earnings that benefits
our shareholders. On December 31, 2004, the
Corporations stock price closed
at $30.16 per common share,
representing an increase of 36%
from the prior years close after
adjusting for a 10% stock
dividend declared on July 9,
2004, and year-end market
capitalization stood at $1.4
billion. Consolidating the
Turnaround As we delivered on our promise
of profitability in 2004, we also
strengthened our balance sheet.
At December 31, 2004: total
assets reached $8.3 billion, an
increase of 13.2% over the previous
year; return on assets (ROA)
was 1.10%, an improvement of
51 basis points; net loans,




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(SANTANDER BANCORP LOGO) MESSAGE FROM THE PRESIDENT including loans held for sale,
increased by 33.0%, while
deposits grew by 14.6%. The
Corporations customer financial
assets under management  a
measure of market penetration
that includes bank deposits
(excluding brokered deposits),
broker-dealer customer accounts,
mutual fund assets managed,
and trust, institutional and
private accounts under management
 stood at more than
$12.8 billion at December 31,
2004, a 20.2% increase over
2003. Every aspect of the Corporations operations
contributed important gains in 2004 and
positioned us for continued growth. These positive results were due
to an active and engaged
management team that designed
and implemented a systematic
sales management process with
specific objectives. A major initiative
involved database-mining
and client segmentation to
improve cross-selling opportunities
within the existing base of
more than 275,000 customers as
well as product-bundling tailored
to these new segments. Tightening
of credit policies and major
changes in the consumer collection
process also contributed
significantly to net profit and
asset quality. Together, enhanced
collections and credit-approval
procedures in 2004 led to a
decrease of $23.5 million in the
Banks provision for loan losses
for 2004, representing a 47%
reduction versus 2003. Across-the-Board Gains
Achieved Every aspect of the Corporations
operations contributed important
gains in 2004 and positioned us
for continued growth. Santander
BanCorps broad range of financial
services, commercial banking,
mortgage banking, wealth
management and insurance
product distribution generate
ample cross-selling opportunities.
At every level of our organization
it is understood that new sales in
every line of business build a
stronger institution. Banking Business Banco Santander Puerto Rico (the
Bank), the business responsible
for commercial and retail banking
services, operating through our
island-wide, 65-branch network
in Puerto Rico, contributed significantly
to our improvement in
profitability in 2004. In 2004, net loans, including
loans held for sale, increased by
$1.37 billion, reaching a total of
$5.5 billion. Mortgage loans
comprised 46% of the gross loan
portfolio as of December 31,
2004, versus 35% for the same
period a year earlier. Mortgage
loans originated and purchased
continued to grow during 2004,
resulting in an increase of $1.1
billion in this portfolio. Total
deposits grew by almost $606
million, reaching $4.75 billion at
year-end 2004, a 14.6% growth
versus year-end 2003. The Banks
credit card business gained more
than 27,000 new customers, and
the loan portfolio for this
segment increased by 35% to
$129 million at December 31,
2004. The growing customer
base continued to impact cross-selling
of other consumer
products. Asset quality significantly
improved. In January 2004, the
Bank discontinued the outsourcing
of consumer collections and
internalized the process. This
action contributed to reduced
delinquencies, improved recoveries
and operating efficiencies.
The ratio of non-performing
loans to total loans was reduced,
from 2.33% end 2003 to 1.57%
at December 31, 2004, with
recoveries as a percentage of




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MESSAGE
FROM THE PRESIDENT
    

(SANTANDER BANCORP LOGO)
 write-offs improving from 22%
to 33% at the respective dates.
A 40% reduction in annualized
net charge-offs as a percentage
of average loans was also
achieved. At December 31,
2004, the Bank maintained its
allowance for losses at $69.2
million due to the improved
trends in asset quality and credit
risk as well as the decrease in
charge-offs and the improvement
in recoveries. Taking these factors
into consideration, the provision
for loan losses charged to current
operations was reduced from
$49.7 million in 2003 to $26.3
million in 2004, a 47% decline. The Corporations Internet
platform again earned recognition
as one of the best in the
market. Global Finance
magazine named Banco
Santander Puerto Rico the Best
Consumer Internet Bank in
Puerto Rico for the second
consecutive year, based on
website design, functionality,
products offered, customer
usage, and customer acceptance.
The www.santandernet.
com website permits online
customers to see financial
accounts and relationships
among financial services providers,
utilities, airlines (for
frequent-flier miles), as well as
transactions conducted with its
affiliates, Santander Securities
Corporation and Santander
Mortgage Corporation. Santander Mortgage Corporation,
a wholly owned subsidiary
of the Bank, has effectively
positioned itself as the fourth-largest
mortgage loan originator
and servicer in Puerto Rico
(based on information on
mortgage loan production
obtained from the Office of the
Commissioner of Financial Institutions
of Puerto Rico). Broker Dealer Business Santander Securities Corporation,
the second-largest securities
broker-dealer in Puerto Rico,
(based on information on broker dealer
assets under management
obtained from the SEC and the
Office of the Commissioner of
Financial Institutions of Puerto
Rico), which became a wholly
owned subsidiary of Santander
BanCorp on December 30, 2003
 now has $4.5 billion in
customer assets. Santander Asset
Management Corporation, a
subsidiary of Santander Securities
Corporation, launched three new
funds in 2004, representing
approximately $500 million in
total gross assets. As of December
31, 2004, the Corporation
managed approximately $4
billion in mutual fund and
pension assets. Insurance Business The newest business in our
organization, Santander Insurance
Agency, now has a total of
111 licensed insurance agents
serving all branch offices. It
generated $6.8 million in gross
commissions in 2004  a 42%
increase from the prior year. Human Resources Our Human Resources Department
implemented new
programs to provide employees
with additional valuable services
and advancement opportunities,
including: expanding incentive
and recognition programs for
individuals and teams; introducing
new comprehensive health,
prescription drug and life insurance
programs to improve
benefits and reduce costs to
employees; reactivating the
management trainee program;
assigning account executives to
each Bank unit to enhance internal
customer satisfaction, and
offering nearly 17,000 hours of
training through 136 programs. The unity and cohesion of the
senior management team
provides the Corporation with a
thorough understanding of the
nature and requirements of
successful banking in our
market. This team has been
further reinforced with the
addition of Bartolomé Vélez
Reboyras in Retail Banking and
José Álvarez Giraldez in Operations
and Information Technology,
bringing to the Corporation
extensive experience in their
respective fields. Strong Corporate Governance Compliance with Section 404 of
the Sarbanes-Oxley Act regulations
has been successfully
achieved, requiring the investment
of substantial time, effort
and resources. The Corporation
maintains comprehensive,
constant and transparent disclosure
to shareholders, investors,
financial analysts, the media,
regulators, creditors and all
stakeholders. Santander BanCorp
encourages full, open and candid
communication with the Audit
Committee and maintains clear
access to whistle-blower
communication channels. The Management Disclosure
Committee was formed and
includes highly experienced and




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(SANTANDER BANCORP LOGO)
    


MESSAGE FROM THE PRESIDENT
 knowledgeable individuals with
diverse backgrounds in legal,
finance, regulatory compliance,
auditing, accounting and financial
reporting. The Corporation
adheres to strict compliance
with laws and regulations and
the listing requirements of the
New York Stock Exchange. I would like to personally
acknowledge and thank the
members of the Board of Directors
for their valuable contributions
of time, talent and vision.
In 2004, the Board experienced
no changes, retirements or
additions, thus providing
ongoing stability and cohesion. In Puerto Rico, the Corporations social
responsibility programs concentrate on
projects that strongly promote education,
the environment and the value of art. Corporate
Social Responsibility a High Priority Santander BanCorps majority
shareholder, Banco Santander
Central Hispano, S.A. (Grupo
Santander), carries a comprehensive
social responsibility
program focusing primarily on
higher education. In Puerto Rico,
the Corporations social responsibility
programs concentrate on
projects that strongly promote
education, the environment and
the value of art. Since its inception in 2000, the
Corporations Universities
Program has offered grants and
products to students at 10
universities in Puerto Rico. In
2004, more than 12,000 smart
cards were issued through this
program, providing the latest in
technology, serving as a single
mechanism for identification
and building access and ATM
usage on campus, among other
services. The Corporation,
together with Grupo Santander,


awarded $128,550 and
$196,030, respectively, in grants
and fellowships and donations
for facility expansions, laboratories
and technology to universities
in Puerto Rico. The corporate commitment to
education extends into every
part of the business. In late
2004, Santander Securities
Corporation acted as co-lead
manager for the issuance of
$36.6 million in tax-exempt
AFICA bonds to ensure longterm
funding for InterAmerican
University of Puerto Rico for
expansion of facilities and the
construction of new buildings.
The Bank will also finance a part
of the infrastructure plan of the
Sistema Universitario Ana G. Méndez (SUAGM). In 2004, the
Bank closed a bridge loan for
SUAGM, for the acquisition and
improvements of new property,
to be repaid by an AFICA bond
issue. Universia Grupo Santander created the
largest Internet-based university
consortium in the world through
the Universia portal initiative,
involving 10 countries and more
than 800 member universities to
promote the use of the Internet.
The Universia Classroom, a
special classroom equipped with
computers with Internet access
and ancillary technology, is
another extensive support
service designed for both universities
and the community at
large. In 2004, Universia established
eight wireless zones at
five universities in Puerto Rico
and brought the Universia Classroom
total to four. Socially Responsible Initiatives Driven by this commitment to
socially responsible projects,
Santander BanCorp became a
co-founder of ConectaRSE, the
first corporate social responsibility
center in Puerto Rico, which
actively addresses research,




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MESSAGE FROM THE PRESIDENT
    

(SANTANDER BANCORP LOGO)
 education, volunteering and
project alliances. Also, for more
than a decade, the Corporation
has earned an Outstanding
from the FDIC for its Community
Reinvestment Act (CRA) compliance.
CRA initiatives include the
Vamos a Ti (We Bet on You)
micro-business loan program and
Contigo (With You) financial
literacy program, which provides
financial planning tools and
education for low-income
community leaders in more than
120 Puerto Rico communities.
The Bank is one of the most
active and dynamic financial
institutions on the island in
administering this program. Continuing a tradition begun in
2002, the Corporation was the
main sponsor for the International
Coastal Clean-up Day,
involving more than 200
employee volunteers. The Bank
also took the lead for a second
year in the book recycling
project Pasa la Antorcha del
Saber (Pass on the Torch of
Knowledge) held this year in
conjunction with InterAmerican
University of Puerto Rico,
collecting and redistributing
roughly 36,000 books. A Special Note to Our
Shareholders Santander BanCorps strong
commitment to the community
depends on the success and
growth of our business. We
needed to work with speed,
diligence and a clear mission to
execute our turnaround, based
upon our strategic plan established
two years ago. Our year-end
results support our belief in
the success of the plan, and it is
anticipated that the marketplace
will continue to reciprocate with
increased business, improved
profitability across all business
lines, greater value in the stock
market, and enhanced returns to
shareholders. On behalf of the
senior management team and
our employees, please accept our
appreciation for your support. Our confidence remains high,
our momentum keeps building,
and the market has begun to
acknowledge our progress. The
Bankermagazine, based in
London, one of the industrys
most respected publications,
named Banco Santander Puerto
Rico Bank of the Year in Puerto
Rico for 2004, based on growth
and performance in terms of tier-one
capital, assets, return on
equity, effective use of technology,
and positioning for the
future. Thank you for standing by us
we continue to deliver on our
commitment to complete the
turnaround. Today, Santander
BanCorp is ready to build on its
tradition of outstanding
customer relationships and
sustained profitable growth for
shareholders. Sincerely, (-s- Jose R. González)




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##### 



(PICTURE) Banco Santander Puerto Rico is a full-service
banking institution serving more than
275,000 customers.




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##### 



SANTANDER GROUP PUERTO RICO
(SANTANDER BANCORP LOGO) OVERVIEW Santander BanCorp (the Corporation) is a publicly traded financial holding company,
88.7% of which is owned by Grupo Santander, based in Madrid, Spain. The Corporation operates four main businesses, each of which has its own operating
entity: commercial banking through Banco Santander Puerto Rico (the Bank), securities and
asset management through Santander Securities Corporation and its subsidiary Santander Asset
Management Corporation, mortgage banking through Santander Mortgage Corporation, and insurance
product distribution through Santander Insurance Agency. The Corporation achieved significant
gains across its multiple
businesses in 2004, based on a
revenue stream weighted heavily
toward generating increased loan
volume and fee income  a
customer-driven approach
conducive to sustained earnings
growth and profitability. Strong
growth in the loan portfolio and
robust improvement in asset
quality, leading to a lower provision
for loan losses, served as key
drivers in the Corporations ability
to more than double its earnings
for 2004 compared to 2003. The
Corporations customer-focused
approach provides the
foundation for its ongoing strategic
plan. As our 1,600 employees
apply their energies, talent and
enthusiasm toward accomplishing
this plan, the Corporation is
positioned to attain its goal of
serving the total financial needs
of customers, achieving greater
growth and improved efficiency,
and creating value for clients and
shareholders. Banco Santander Puerto Rico Banco Santander Puerto Rico is a
full-service banking institution
serving more than 275,000
customers. It operates the
second-largest branch network in
Puerto Rico, with a total of 65
branches, including a new one
opened in Cataño in 2004.
Banco Santander Puerto Rico
serves as the primary source of
earnings for the Corporation
overall, generating approximately
91% of total earnings in 2004.
Leveraging the inherent scope
and reach of this distribution
channel helped to obtain solid
growth in the consumer banking
business in 2004. As a result of
strong commercial activity and a
focus on regaining market share,
the net loan portfolio, including
loans held for sale, reflected an
increase of 33.0% or $1.4
billion, reaching $5.5 billion at
December 31, 2004, compared
to the figures reported as of
December 31, 2003. Total deposits
reached $4.7 billion as of
December 31, 2004, a 14.6%
increase from the 2003 year-end
total. Customer focus remained central
to the Banks success in 2004.




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(PICTURE) Santander BanCorp
12 ANNUAL EPORT2004
Retail Banking serves all individual clients and small- to medium-sized businesses.
Benjamin Carrero Martinez Vaqueria Hacienda Buenos Aires




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Employees across the strategically
located branch network executed
against a common objective  to
be the leading integrated,
customer-centric financial institution
in Puerto Rico. For nearly
three decades Banco Santander
Puerto Rico has demonstrated
this commitment, building and
affirming its reputation as a full-service
bank that works hard for
its customers. Banco Santander Puerto Rico
operates three principal service
units: commercial banking
through its retail and wholesale
banking units; mortgage banking
through its subsidiary, Santander
Mortgage Corporation; and
treasury and investments. Retail
Banking 
Retail Banking serves all individual
clients and small- to medium-sized
businesses generating
annual sales of less than
$5 million. The consumer sector experienced
a turnaround through initiatives
that simultaneously increased the
loan portfolio and improved
delinquency and performance
ratios. Loans to individuals
increased by $50.1 million, or
12%, to $454.3 million as of
December 31, 2004, over the
prior years total. Delinquencies
of more than 30 days in the
consumer portfolio were reduced
by $10.3 million, or 35%; and
delinquencies in the 90-day and
over category by $2.7 million, or
29%. The improvements in delinquency,
charge-off and recovery
ratios resulted from the
insourcing of the consumer
collections process and improving
the tools used to handle it,
leading to a 43% increase in
recoveries from consumer loans. The small business portfolio also
benefited from enhanced credit-monitoring
processes, including
rigorous tracking of delinquent
accounts. This and the simultaneous
tightening of credit-approval
procedures led to an improvement
in asset quality. Enhanced
collections and credit-approval
procedures in 2004 led to a
reduction in the Banks provision
for loan losses of $23.5 million,
or 47% over the prior year. Ongoing efforts in 2004 to
improve training for all branch
personnel covering products
marketed across business lines to
the customer base improved
cross-selling opportunities. In
addition, innovative and extensive
data mining has assisted the
branch network in identifying
potential customer segments
leading to additional growth
opportunities. In 2004, more than
30,000 customers were identified
and pre-qualified for mortgage
refinancing. For retail customers
classified as professionals, that is,
accountants, doctors, lawyers,
entrepreneurs, and others, data
mining and analysis led to further
segmentation, providing marketing
opportunities for an extensive
array of tailored, pre-approved
products. Offering and cross-selling
various products to
customers proactively and early in
their relationships with the Bank
increased overall sales. The branch network continues to
act as the engine for generating
incremental sales across the
Corporation. The branches
contributed mortgage sales
totaling
$208 million in 2004, an
increase of 20.2% over 2003.
The branches also referred
customers to Santander Securities,
which generated $2 million
in related fee income for the
year. Our penetration of the small-
and medium-size business
segment continues to grow. The
U.S. Small Business Administration,
recognizing the Bank in
2004 as one of the Puerto Ricos
largest small business lenders,
re-certified it as a Preferred
Lender. This important certification
allows the Bank to continue
to provide expedited loan
approval for an entire segment
of small- and medium-size
businesses. Currently, the Bank
serves approximately 21,000 of
these clients. The small- and
medium-size business loan
portfolio reached $1,513 million
in 2004, an increase of 6.0%
over 2003. Wholesale
Banking 
Institutional, corporate and
commercial banking under the
Wholesale Banking business unit
witnessed growth in 2004, due
to a disciplined approach implemented
among its teams that
was specifically designed to gain
new customers through referrals
and working alliances. The
Corporate loan portfolio, including
construction loans, increased
by $99.5 million, or 13.6%, to
$832 million as of December 31,
2004, over the prior years total.
The double-digit growth in loans
was further complemented by an
improvement in asset quality, as
non-performing loans were
reduced to approximately 1% of
total assets.




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(PICTURE) Santander BanCorp
14 ANNUAL EPORT2004
Victor Contreras and son Rey Contreras Carolina Recycling Corp.
The wholesale banking assigns a relationship customer, whether in centralized location




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SANTANDER GROUP PUERTO RICO
(SANTANDER BANCORP LOGO) The Wholesale Banking unit
includes institutional clients in
the public and private sectors,
non-profit organizations and
specialized industries such as
universities, health and financial
institutions, corporate banking
and middle-market clients with
annual sales of more than
$5 million. This unit also oversees
construction loans, and works
together with the mortgage
business line to provide customers
with complete real estate
financing options, from project
construction through final
purchase and delivery of properties
to new owners. Wholesale Banking continues to
make important contributions to
the generation of fee-based
income by providing customers
with total solutions and a mix of
lending, money management,
insurance and investment
products, along with a complete
listing of corporate and personalized
banking services to build
wealth. The unit taps into all the
Corporations resources as
required to achieve the customers
financial objectives, structuring
financial products and
services in a highly customized
manner. Clients have access to
the complete spectrum of
commercial banking products
and services, including cash
management, bank card
products, letters of credit, and
services related to foreign trade. The Wholesale Banking business
model assigns a relationship
manager to each customer
whether in a branch or other
centralized location. By reassigning
employees and adding new
talent as needed, the right
people are in the right place,
serving wholesale customers
well. The branch network also
has become a more productive
source of origination for this
business segment, attributed to
ongoing employee training to
instill the required knowledge of
products and services, along with
the application of clear metrics,
objectives and communications. Through the many initiatives
implemented throughout the
Wholesale Banking unit, the
number of clients increased in
2004, with new loans disbursed
during the year totaling $492
million. Commissions generated
through cash management and
foreign trade-related activity rose
6.8% for the year. Customer satisfaction ratings for
Wholesale Banking, as measured
by El Día Directo, an independent
organization, stood at 95%,
characterizing the business
relationship as very good. The
progress made in achieving a
total customer focus will
continue in 2005 as the primary
engine of continued growth. Santander Mortgage
Corporation
Santander Mortgage Corporation
(Santander Mortgage) has effectively
positioned itself as the
fourth-largest mortgage loan
originator and service provider in
Puerto Rico, based on mortgage
production information obtained
from the Office of the Commissioner
of Financial Institutions of
Puerto Rico. Mortgage loans
originated and purchased continued
to grow during 2004, resulting
in an increase $1.1 billion in
this portfolio. Mortgage loans comprised 46%
of the gross loan portfolio of the
Corporation as of December 31,
2004, versus 35% for the same
period a year earlier. Over the
past two years the mortgage unit
has streamlined its internal
workflow, training employees
based on a clear client-driven
orientation. Through a proactive
approach and effective preparation
involving efficiency improvements
in the loan approval
process, the mortgage unit today
completes more closings in less
time. Santander Mortgage operates on
the principle that the mortgage
application, processing and
closing experience must be pleasant,
fast and easy for the
customer. Advertising that
supports the mortgage business
reinforces this ideal, characterizing
Santander Mortgage as Tu
Mejor Opción Siempre (Your
Best Option Always), in terms of
price, products and service.
Growth in the mortgage business
derives in part from customer
referrals based on these improvements.
However, they are aggressively
complemented by six main
channels of direct production
that feed into Santander
Mortgage for full customer reach
and impact: the branch network,
Santander Mortgages direct sales
force, the new housing market,
realtors, telephone and Internet
banking, and independent
mortgage banks. Maintaining low overhead costs
and leveraging technology to
speed the pre-approval and
processing of loans contributes
greatly to the ability of the
business to maintain competitive




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(PICTURE) Brisas del Campanero II, Toa Baja
Flamboyan Greens, Palmas del Mar, Humacao
walk-up units, Villas del Mar, Loíza Santander Mortgage Corporation is the
fourth-largest mortgage loan originator and
service provider in Puerto Rico. 16
Santander BanCorp
ANNUAL REPORT 2004




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SANTANDER GROUP PUERTO RICO
    

(SANTANDER BANCORP LOGO)
 prices and achieve such strong results. The mortgage unit has been effective in the use of
technology to control costs, generate rapid response to loan applications, and maintain an
efficient loan evaluation and approval process in reaching the
ready to close stage. Simultaneously, staffing has been
increased to handle anticipated growth in demand. All these factors
combined contributed to the success of the mortgage banking
unit in generating new loans and refinancings. Approximately 62% of Santander
Mortgage loan closings during
the year 2004 involved home
purchases, not refinancings. This
fact validates a solid business
strategy in which growth is less
reliant upon interest rate fluctuations.
It is also parallel to local
market realities. Puerto Rico has
a high rate of home ownership,
and most families aspire to
purchase rather than to rent. During 2004, $240 million in
mortgages originated by
Santander Mortgage were either
securitized or sold. Santander
Mortgage has had negligible
loan losses in its mortgage
portfolio in the past five years. Treasury and Investments The Treasury and Investments
group is divided into three main
functions: asset and liability
management, corporate and
institutional treasury products,
and proprietary trading. The asset and liability management
area focuses on matters
relating to on-balance sheet and
off-balance sheet issues such as
liquidity, capital structure, investment
portfolio, debt issuance,
derivative use, and core deposit
behavior, among others. The
treasury products area provides
value-added products to clients
in two main categories: the sale
of derivative products to handle
client hedging needs, and the
sale of structured investment
products distributed through the
branch network and Santander
Securities. The third division in
the group, proprietary trading,
takes directional and relative
value positions in the U.S. fixed-income
market. The Corporations
market risk group, using
best practice value at risk
methodologies, closely monitors
the positions and risks taken by
the proprietary trading desk. Highlights in 2004 include the
following successful financings:
$30 million in S&P-linked notes,
$75 million in subordinated
notes issued through the Puerto
Rico Conservation Trust conduit,
and $32 million in structured
notes sold through the branch
network. Asset
QualityAsset quality and credit risk both
experienced significant improvements
in 2004. The Corporation
internalized its consumer collections
process in January 2004,
improving recoveries and
efficiency. In addition, the Corporation
implemented more stringent
credit criteria, resulting in a
more robust credit process. The
ratio of non-performing loans to
total loans decreased from
2.33% as of December 31,
2003, to 1.57% for 2004  a 76-
basis point improvement with
recoveries as a percentage of
charge-offs improving from 22%
to 33%. Also, the Corporation
achieved an approximately 40%
reduction in annualized net
charge-offs as a percentage of
average loans. The Corporation maintained its
allowance for loan losses at
$69.2 million as of December 31,
2004. The provision for loan
losses charged to current operations
was reduced from $49.7
million for the year 2003 to
$26.3 million for the year 2004,
a 47% drop. This reduction was
based upon consideration of the
improving trends in asset quality
and credit risk, along with a
decrease in charge-offs and an
improvement in recoveries. Wealth Management At Santander Securities Corporation
(Santander Securities) and its
subsidiary, Santander Asset
Management Corporation
(Santander Asset Management),
the customer-centric approach to
doing business means tailoring a
variety of investment, financial
planning and trust services to
customers, helping to maintain
and strengthen their financial
health and well-being. Santander Securities Corporation The decision taken during the
fourth quarter of 2003 to bring
Santander Securities into
Santander BanCorp as a wholly
owned subsidiary proved beneficial,
as the business achieved
important gains and contributed
to the overall success of the
Corporation in 2004. Santander Securities is the
second-largest securities broker-




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(PICTURE) Santander Securities is the second largest
securities broker-dealer in Puerto Rico. 18 Santander BanCorp
ANNUAL REPORT 2004




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SANTANDER GROUP PUERTO RICO
    

(SANTANDER BANCORP LOGO)
 dealer operation in Puerto Rico,
based on information covering
broker-dealer assets under
management obtained from the
SEC and the Office of the
Commissioner of Financial Institutions
of Puerto Rico. Assets
under management in retail
brokerage increased from $3.7
billion at December 31, 2003, to
$4.5 billion at December 31,
2004, an increase of 22%. The
continued support and trust of
these clients allowed Santander
Securities to remain at the
forefront of Puerto Ricos financial
sector once again in 2004. During the year, Santander
Securities maintained a leading
role in the underwriting of
municipal bonds, corporate
notes, common stock and
preferred stock for local issuers,
including Puerto Rico corporations,
the Commonwealth of
Puerto Rico and its agencies and
instrumentalities, despite a
challenging global economic
environment. Santander Securities participated
in the underwriting of over $6.1
billion in new securities, and
lead-managed a $146.9 million
bond issue for the Puerto Rico
Public Finance Corporation,
which was the largest municipal
bond issue placed in the Puerto
Rico capital market during 2004.
Through a consulting agreement
with Lehman Brothers,
Santander Securities also lead-managed
a $1.2 billion bond
issue for the Puerto Rico Public
Finance Corporation in the U.S.
tax-exempt municipal bond
market. More than $1.1 billion in new
investment products were
placed with local investors
during the year, including the
distribution of more than $400
million in common stock of fixed
income investment companies
and related products. Santander Asset Management Corporation Gross assets in investment
companies managed by
Santander Asset Management
increased from $1.8 billion at
December 31, 2003, to $2.6
billion at December 31, 2004,
an increase of 42%. Santander
Securities and Santander Asset
Management combined to
generate 51% of the Corporations
total fee income. Three new funds were launched
in 2004, representing approximately
$580 million of the $780
million increase in total gross
assets under management and
generating approximately $290
million in new equity in the First
Puerto Rico Family of Funds.
These funds invest primarily in
fixed-income securities, including
Puerto Rico and U.S. Government
securities, mortgage- and
asset-backed securities, and
municipal obligations. Santander
Asset Management also continued
to actively service its institutional
accounts, which consist
primarily of educational endowment
funds affiliated with institutions
of higher education. Santander Insurance Agency Santander Insurance Agency, Inc.
(Santander Insurance) established
in 2000, distributes a full slate of
products, including life, disability,
unemployment, property,
casualty, flood, title, auto and
surety bonds, as a corporate
agent and general agent. For the year 2004, Santander
Insurance Agency posted gross
commissions of $6.8 million, up
42% from 2003. Premiums
totaled $17.4 million, up 26.6%
from 2003. The business
employed 21 professionals in
sales, underwriting, accounting
and compliance, distributing
traditional insurance products. In
2004, the Agency achieved the
goal of placing 111 licensed
insurance agents to serve all
branch offices, and is today the
largest financial institution with a
direct sales force in Puerto Rico.
All branch-based Santander Insurance
agents provide quotes
onsite, allowing customers to go
to any branch and obtain a term
life policy instantly. This customer-focused
capability continues to
provide the insurance unit with
important growth opportunities.
Through its agents and servicers,
Santander Insurance also acts as
general agent for back-office
functions, generating significant
commission income. Information Technology In 2003, Banco Santander
Puerto Rico was awarded the
Best Consumer Internet Bank
in Puerto Rico distinction by
Global Finance magazine. Building
on that honor, the Bank
continued expanding its Internet-based presence in 2004 by
adding upgrades for the benefit
of multiple business lines and
their customers, increasing
overall customer usage of
web-based services by 37%, and




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(PICTURE) Santander BanCorp
24 ANNUAL EPORT2004
Santander BanCorp is committed to the communities it serves.




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SANTANDER GROUP PUERTO RICO
    

(SANTANDER BANCORP LOGO)
 earning the same award a
second year running. New functionalities were made
available online in 2004 at www.
santandernet.com, enabling
customers to manage and
browse through all their accounts
at Banco Santander Puerto Rico,
Santander Securities and
Santander Mortgage as well as
accounts at other financial institutions,
public utilities, and
airlines  specifically, frequent
flyer miles accrued with American,
Delta and Continental. Email
alerts of events affecting
customer accounts, including
withdrawals, deposits and
balance inquiries, were added,
along with a new module to
offer pre-approved products to
customers. Businesses within the Corporation
have leveraged the Banks
Internet capabilities to provide
new services. Information
Technology improvements also
supported growth in business
units, such as Retail Banking,
which developed targeted pre-packaged
product offerings to
the demographic groups identified
in the customer base. Human Capital The employees of Santander
BanCorp, proving once again to
be the organizations most
important assets, enabled the
Corporation to achieve the
significant improvements across
its business units in 2004. In
recognition of their value, the
Corporation continued during
the year to emphasize incentive
programs focusing on rewarding
individual efforts and teamwork. Training initiatives at all levels
received special attention, as the
Corporation acknowledged the
value of a well-informed and
well-prepared employee team to
a healthy, growing organization.
Overall, 136 training programs
were given throughout the year,
offering nearly 17,000 total
hours of training across all areas
of operations, including a reactivated
management trainee
program. In addition, a total of
16 students from U.S. and
Puerto Rico universities participated
in a summer trainee
program conducted by the
Corporation. The Corporation believes in
taking an active role in providing
the tools to help staff members
maintain good health for
themselves and their families. In
2004, new prescription drug
and life insurance plans were
introduced, offering improved
benefits and lower costs. A
comprehensive health program
encouraged employees and their
families to participate in sporting
events such as the internationally
recognized Teodoro
Moscoso Marathon and a heart
walk, benefiting the American
Heart Association. Two health
fairs were offered to employees,
one in San Juan and the other in
Mayagüez, as were a number of
orientation sessions on planning
for a healthy retirement. Through ongoing guidance and
improved benefits programs, the
Corporation continued to invest
in its employee base. The goal
remains to continue to build a
Santander BanCorp workforce
that is healthy, informed,
motivated and customer-focused
agents of innovation and
positive change.

Corporate Social Responsibility 

Grupo Santander actively
promotes corporate social
responsibility throughout the
more than 40 countries in which
it operates. Driven by this longstanding
and deep-seated
element of the corporate
culture, Santander BanCorp
actively pursues socially responsible
projects throughout Puerto
Rico, focusing mainly on extending
horizons in higher education.
It also supports other
programs, many of which
emphasize the Corporations
commitment to protecting the
environment and promoting the
value of the arts, and all of
which encourage volunteerism
among its employees. Santander Universities Education remains a top priority
of the Corporations social
responsibility efforts. Santander
Universities, a program actively
sponsored by the Santander
Group, maintains working agreements
with ten of Puerto Ricos
15 universities, two of which
were added in 2004. The
program reaches 92% of the
total university population in
Puerto Rico. In the last four years
the Santander Universities
program has invested close to
$800,000 in initiatives that
support the university community,
including more than
$280,000 in scholarships benefiting
more than 200 students. In
addition, more than $225,000
have gone to promote academic
offerings and research through
chairs and special allocations. In
2004, Santander Universities




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(PICTURE) Santander BanCorp
22 ANNUAL EPORT2004
Universias internet together more than with more than 8.6 in 10 countries. 3




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SANTANDER GROUP PUERTO RICO
    

(SANTANDER BANCORP LOGO)
 invested over $297,000 to
improve laboratories, infrastructure
and university activities. Working to customize features
and benefits, Santander Universities
has issued a new smart
card for students to use as
identification, as a debit card,
and for a variety of other
functions. More than 12,000
smart cards have been issued in
2004 through this program,
providing the latest in technology
and serving as a single
mechanism for identification,
building access, and ATM usage
on campus, among other
services. In 2004 Santander Universities
had 11 ATM-equipped point-of-sale
locations, offering packages
to the university community that
include computer loans for
students, credit cards, savings
accounts, e-banking and Banco
en Casa. To university personnel,
the Bank offers Master Card
Gold credit cards, mortgage
loans, checking and savings
accounts, and lines of credit. A
team of senior managers from
the Corporation is assigned to
directly address the financial
services needs of 87% of the
collective customer base among
university personnel, including
professors, administrative
officers and assistants. All business units participate in
the Corporations education
commitment. In late 2004,
Santander Securities acted as
co-lead manager for the
issuance of $36.6 million in tax-exempt
AFICA bonds to ensure
long-term funding for the InterAmerican University of Puerto
Rico. This will provide financing
for expansion and construction
of facilities serving the universitys
44,000 students. In 2004,
Banco Santander Puerto Rico
closed a bridge loan for the
acquisition and improvement of
new property as part of the
infrastructure plan of the
Sistema Universitario Ana G.
Méndez. The loan is to be
repaid by an AFICA bond issue. Universia Universia, the worlds major
Internet-based network
dedicated to narrowing the
digital gap between generations
in the university community, has
brought together more than 800
universities with more than 8.6
million students in 10 countries.


Through Universia Puerto Rico,
Grupo Santander has invested
more than $4 million, published
12,000 articles of educational
content for the university
community and provided more
than 30,000 free e-mail
accounts at three of the islands
universities. Since the launching of Universia
in Puerto Rico in 2001, more
than 64,000 university students
have registered. The portals activity
is over 1.2 million pages
monthly and thousands of
students and faculty members
use the site as a source of information. In addition, Universia Puerto
Rico has made an investment of
more than $60,000 to build
wireless connection zones and
$90,000 in Universia Classrooms.
During 2004, Universia
collaborated in the establishment
of eight new wireless
zones at five island universities.
Universia Classrooms, consisting
of specially equipped classrooms
with computers and Internet
access, provides another extensive
support service designed for
the university community, as
well as the community at large.
Puerto Rico now has Universia
Classrooms at Inter-American
University of Puerto Rico -
Fajardo, the University of Puerto
Rico  Río Piedras, and the
Jayuya Academic Center of
Sistema Universitario Ana G.
Méndez. In support of e-learning, Universia
produced a Web-based directory
of contacts and resources
among member universities,
which has generated interest at
the rate of 1,000 sign-ups for
classes every day. A new collaborative project
involving Universia, the Puerto
Rico Industrial Development
Corporation and member
universities will generate a
database of research and development
to help universities
provide services to high-tech
companies in a mutually beneficial
environment designed to
stimulate economic expansion.
Through this and other
programs, Universia remains a
model of collaboration between
the private industry and the
university community. Enhancing the Quality of Life
in our Communities


Santander BanCorp is committed
to the communities it serves,
emphasizing support through
ongoing programs that benefit
people and promote and




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(PICTURE) Santander BanCorp
14 ANNUAL EPORT2004
Victor Contreras and son Rey Contreras Carolina Recycling Corp.
The wholesale banking assigns a relationship customer, whether in centralized location




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SANTANDER GROUP PUERTO RICO
    

(SANTANDER BANCORP LOGO)
 exemplify social responsibility.
Our longstanding record of
service to the community is
based upon core beliefs that are
woven into the fabric of our
business operations. The Corporations
community involvement
continued its outstanding path
during 2004. The
Corporation became a co-founder
and member of ConectaRSE,
the first corporate social
responsibility center in Puerto
Rico. Based at Sacred Heart
University, ConectaRSE pursues
four main areas of interest 
research, education, volunteering
and alliances. Community Reinvestment Act
initiatives include the Vamos a
Ti (We Bet On You) micro-business
loan program, offering
loans and small business education
courses to local entrepreneurs.
In 2004, the Vamos a
Ti program concentrated its
efforts in the community of
Jayuya, an underdeveloped
town located in the center of
the island experiencing high
levels of unemployment. Five
loans worth a total of $95,000
were approved in 2004 through
this program. To address this
unique project, Santander
BanCorp worked in tandem
with the U.S. Rural Development
Office, the Jayuya Municipality
and Metropolitan
University to help the people of
Jayuya through financial services
offerings, education and job
creation efforts. The Corporations CRA achievements
also include the
Contigo (With You) financial
literacy program for low-income
community leaders,
reaching more than 120
communities throughout Puerto
Rico. The Bank is one of the
most active and dynamic financial
institutions on the island in
administering this program,
which emphasizes financial
planning tools, education and
opportunities. The Corporation also sponsors
and participates in many initiatives
designed to benefit the
community outside traditional
financial services programs. As
often as possible our programs
incorporate elements that
reflect our interest in promoting
education, in the belief that
learning takes place at all levels
and in many ways. The Pasa la Antorcha del
Saber (Passing the Torch of
Knowledge) book recycling
campaign is one such high-impact
community project, now
in its second year. Sponsored by
Banco Santander Puerto Rico,
and this year organized in
conjunction with InterAmerican
University, the program utilized
the Banks 65 branches as sites
to collect 36,000 used books to
be classified and redistributed
to libraries, schools and retirement
homes. Santander BanCorp has
sponsored the International
Coastal Cleanup Day since
2002. This year, more than 200
employee volunteers joined
others within the community to
collect 17 tons of trash along
35 beaches in Puerto Rico. The Muscular Dystrophy Association
benefited again in 2004
from $30,000 in funds raised
through the Banks branch
network. More than 600
Santander employees make
regular paycheck donations to
United Way. These gifts,
combined with a donation at
the corporate level, brought
over $50,000 to support scores
of community-based programs
and services providing assistance
to individuals and
families. The Corporations growing
commitment to the arts
manifests itself in programs and
initiatives in the plastic arts. In
the annual Taller de Arte Para
Nuestros Niños art workshop,
children of the Corporations
employees create art using a
different technique each year.
The event, provided free to
employees and their families,
has become a very popular
vehicle to celebrate and appreciate
the value of art. Reaching beyond our own
family, and in a continuing
commitment to art, Santander
BanCorp funded a spacious
gallery, Galaría Santander, when
the Puerto Rico Art Museum
was constructed in San Juan. In
2004, the Corporation
sponsored all three of the
gallerys exhibitions, including
that of Henry Klumb, in tribute
to this former resident architect
of the University of Puerto Rico.
The exhibition was the first one
the museum presented on the
Internet, this through the
auspices of Universia.pr.




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##### 



(SANTANDER BANCORP LOGO) Santander BanCorp
Board of Directors Gonzalo de las Heras
    
    Víctor Arbulú Crousillat*Chairman
    
    María CaleroStephen Ferriss*José R. González
    
    Carlos M. GarcíaVice Chairman
    
    Vicente Gregorio*Roberto Valentín*Jesús ZabalzaEnrique R. Ubarri-Baragaño, Esq. Secretary* Member of the Audit Committee
 Management José R. González

President &
Chief Executive Officer Commercial, Wealth
Management, Treasury and
Insurance Business Units
Carlos M. García
Senior Executive Vice President &
Chief Operating Officer Retail Banking
Bartolomé Vélez
Executive Vice President Branch Network
Magalie Enríquez
Senior Vice President
Western Region Hilda Gutiérrez
Senior Vice President
San Juan Region I Carlos Jiménez
Senior Vice President
Eastern Region María S. Rivera
Senior Vice President
Northern Region Humberto Rodríguez
Senior Vice President
San Juan Region II José Muñoz
Senior Vice President
Acting Director
Southern Region Other Retail Banking Areas
Lucio Arreola
Senior Vice President
Consumer Banking and
Credit Cards Pedro la Torre
Vice President
Consumer Loans Alejandro Nadal
Vice President
Group Banking Omar Contreras
Senior Vice President
Middle Market Manuel Maúrtua
Senior Vice President
Preferred Banking Luis Mena
Senior Vice President
Agricultural Loans José Muñoz
Senior Vice President
Small Business Wholesale Banking
Roberto E. Córdova
Executive Vice President Lillian Arroyo
Senior Vice President
Universities Program Irma Cartagena
Senior Vice President
Small Corporates Lilian Díaz
Senior Vice President
Corporate Banking Angel Feliú
Senior Vice President
Business Development Angel Franco
Senior Vice President
Institutional Banking Ariel Lebrón
Senior Vice President
Construction Lending Mortgage Banking
Santander Mortgage
Corporation
Sinesio Díaz Burley
President Bernice Salazar
Senior Vice President
Compliance Víctor Carreras
Senior Vice President
Servicing & Operations Leslie Torres
Senior Vice President
Sales and Business
Development Wealth Management
Santander Securities
Corporation
Carlos M. García
President &
Chief Executive Officer Carlos Capacete
Managing Director and
Chief Operating Officer
Luis Roig Hostas
Chief Financial Officer




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##### 



SANTANDER GROUP PUERTO RICO
    

(SANTANDER BANCORP LOGO)
 Santander Asset Management
Jesús F. Méndez
President &
Chief Executive Officer Trust Services
Jesús F. Méndez
First Senior Vice President Insurance
Santander Insurance Agency
Jorge García García
President Treasury & Investments
Juan P. Pérez Hanley
Senior Vice President &
Treasurer Fernando Bruno
Vice President
Trading and Operations International Banking
Santander International
Bank of Puerto Rico, Inc.
Simón Ergas
First Senior Vice President Other Support Areas
Ralph Conklin
Vice President
Products and Services Guillermo Bonini
Vice President
Internet Banking Nelson Miranda
Vice President
Transactional Blanking Ricardo González
Assistant Vice President
International Services Risk Management
Juan Dávila
Executive Vice President &
Chief Lending Officer José Santoni
First Senior Vice President
Commercial Credit Manuel Lasso
Senior Vice President
Market Risk Beatriz Ramírez de Arellano
Senior Vice President
Credit Risk Management Irving Rivera
Senior Vice President
Corporate Credit Harry Rodríguez
Senior Vice President
Consumer Credit Francisco Ríos
Vice President
Classified AssetsFinance & Administration
María Calero
Executive Vice President &
Chief Accounting Officer Laura Vázquez
First Senior Vice President
Comptroller María Leticia García
Vice President
Assistant Comptroller Eugenio Alonso
Senior Vice President
CRA Officer Juan M. Díaz Soultaire
Senior Vice President
Cost Control, Investor
Relations and
Sarbanes Oxley Officer Cecilio Bueno
Vice President
Administrative Services

Luis Cintrón
Vice President
Real Estate Assets Angel González
Vice President
Security
Vivian Morales
Vice President
Loan Review Florita Nogueras
Director
Treasury Back Office Heriberto Febus
Director
Information Security Operations & Information
Technology
José Alvarez Giraldez
First Senior Vice President Jesús Quiñones
Senior Vice President
Organization and Methods Anthony Boon
Vice President
Information Technology Iván Cruz
Vice President
Branch Operations
Jaime Homs
Vice President
Banking Operations Legal & Compliance
Enrique Ubarri Baragaño, Esq.
Senior Vice President Human Resources
Ivonna J. Pacheco
First Senior Vice President Quality
Nanette Méndez
Assistant Vice President Corporate Communications
Evelyn Vega Sella
Senior Vice President Internal Audit
Diego Begara
Senior Vice President Management Information
Reporting
Mónica Loma
Senior Vice President




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##### 



(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
 SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION The following table presents selected consolidated financial data and other
financial and operating information for the Corporation and subsidiaries and
certain statistical information as of the dates and for the periods indicated.
This information should be read in conjunction with the Corporations
consolidated financial statements and the section entitled Managements
Discussion and Analysis of Results of Operations and Financial Condition
appearing elsewhere in this Annual Report. The selected Balance Sheet and
Statement of Income data for the years ended December 31, 2004 and 2003 have
been derived from the Corporations consolidated audited financial statements.
The consolidated Balance Sheet and Statement of Income data for the years ended
December 31, 2002, 2001 and 2000 have been restated to give retroactive effect
to the acquisition of Santander Securities Corporation by the Corporation on
December 30, 2003, which has been accounted for in a manner similar to a pooling
of interests as described in Note 1 to the accompanying consolidated financial
statements, and accordingly, such restated data has been derived from combining
the separate consolidated financial statements of the Corporation and Santander
Securities Corporation, and adjusted for any related combining eliminations. Santander BanCorp Selected Financial Data Years ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands, except per share data)CONDENSED INCOME STATEMENTSInterest income
    
    $
    359,930
    
    
    $
    325,581
    
    
    $
    365,353
    
    
    $
    486,512
    
    
    $
    613,217Interest expense
    
    
    140,762
    
    
    
    132,351
    
    
    
    159,915
    
    
    
    244,768
    
    
    
    367,903Net interest income
    
    
    219,168
    
    
    
    193,230
    
    
    
    205,438
    
    
    
    241,744
    
    
    
    245,314Security gains (losses)
    
    
    11,475
    
    
    
    10,790
    
    
    
    12,236
    
    
    
    18,282
    
    
    
    (3,801
    )Broker-dealer, asset management and insurance fees
    
    
    51,113
    
    
    
    49,526
    
    
    
    35,277
    
    
    
    30,223
    
    
    
    19,269Other income
    
    
    54,651
    
    
    
    59,624
    
    
    
    53,595
    
    
    
    53,256
    
    
    
    60,278Operating expenses
    
    
    217,533
    
    
    
    224,265
    
    
    
    213,875
    
    
    
    210,647
    
    
    
    195,128Provision for loan losses
    
    
    26,270
    
    
    
    49,745
    
    
    
    63,630
    
    
    
    65,430
    
    
    
    37,000Income tax provision (benefit)
    
    
    8,145
    
    
    
    (285
    )
    
    
    3,289
    
    
    
    6,424
    
    
    
    13,072Cumulative effect of change in accounting principle,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,246
    )
    
    
    Net income
    
    $
    84,459
    
    
    $
    39,445
    
    
    $
    25,752
    
    
    $
    52,758
    
    
    $
    75,860PER PREFERRED SHARE DATAOutstanding shares:Average
    
    
    
    
    
    
    2,610,008
    
    
    
    2,610,008
    
    
    
    2,610,008
    
    
    
    2,610,008End of period
    
    
    
    
    
    
    2,610,008
    
    
    
    2,610,008
    
    
    
    2,610,008
    
    
    
    2,610,008Cash Dividend per Share
    
    $
    
    
    
    $
    2.73
    
    
    $
    1.75
    
    
    $
    1.75
    
    
    $
    1.75PER COMMON SHARE DATA*Net income
    
    $
    1.81
    
    
    $
    0.69
    
    
    $
    0.45
    
    
    $
    1.09
    
    
    $
    1.51Book value
    
    $
    11.92
    
    
    $
    10.31
    
    
    $
    11.51
    
    
    $
    11.54
    
    
    $
    11.24Outstanding shares:Average
    
    
    46,639,104
    
    
    
    46,661,248
    
    
    
    47,310,217
    
    
    
    48,191,869
    
    
    
    50,306,346End of period
    
    
    46,639,104
    
    
    
    46,639,104
    
    
    
    46,806,604
    
    
    
    47,554,164
    
    
    
    49,115,364Cash Dividend per Share
    
    $
    0.49
    
    
    $
    0.44
    
    
    $
    0.44
    
    
    $
    0.44
    
    
    $
    0.44AVERAGE BALANCESLoans held for sale and loans, net of allowance for
loan losses
    
    $
    4,739,858
    
    
    $
    3,941,530
    
    
    $
    4,088,783
    
    
    $
    4,389,189
    
    
    $
    4,522,601Allowance for loan losses
    
    
    73,518
    
    
    
    64,909
    
    
    
    57,633
    
    
    
    53,510
    
    
    
    55,118Earning assets
    
    
    7,317,055
    
    
    
    6,385,148
    
    
    
    6,332,615
    
    
    
    6,609,760
    
    
    
    7,454,399Total assets
    
    
    7,643,860
    
    
    
    6,725,111
    
    
    
    6,715,518
    
    
    
    6,979,349
    
    
    
    7,852,621Deposits
    
    
    4,153,245
    
    
    
    3,749,684
    
    
    
    4,096,818
    
    
    
    4,020,450
    
    
    
    4,116,015Borrowings
    
    
    2,811,152
    
    
    
    2,248,101
    
    
    
    1,865,328
    
    
    
    2,230,561
    
    
    
    3,037,778Preferred equity
    
    
    
    
    
    
    64,175
    
    
    
    65,250
    
    
    
    65,250
    
    
    
    65,250Common equity
    
    
    499,855
    
    
    
    531,973
    
    
    
    559,568
    
    
    
    553,528
    
    
    
    524,675PERIOD END BALANCESLoans held for sale and loans, net of allowance for
loans losses
    
    $
    5,514,355
    
    
    $
    4,145,074
    
    
    $
    3,795,977
    
    
    $
    4,390,077
    
    
    $
    4,438,087Allowance
for loan
losses(1)
    
    
    69,177
    
    
    
    69,693
    
    
    
    56,906
    
    
    
    51,738
    
    
    
    50,597Earning assets
    
    
    8,093,581
    
    
    
    7,088,292
    
    
    
    6,825,093
    
    
    
    7,446,623
    
    
    
    7,407,651Total assets
    
    
    8,341,780
    
    
    
    7,367,300
    
    
    
    7,126,444
    
    
    
    7,718,685
    
    
    
    7,698,288Deposits
    
    
    4,748,139
    
    
    
    4,142,228
    
    
    
    4,518,969
    
    
    
    4,792,634
    
    
    
    4,921,354Borrowings
    
    
    2,863,367
    
    
    
    2,595,033
    
    
    
    1,877,379
    
    
    
    2,189,136
    
    
    
    2,039,472Preferred equity
    
    
    
    
    
    
    
    
    
    
    65,250
    
    
    
    65,250
    
    
    
    65,250Common equity
    
    
    556,003
    
    
    
    480,832
    
    
    
    538,705
    
    
    
    548,544
    
    
    
    551,990
 Continued on the following page




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##### 



CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004  RESULTS
    
    (SANTANDER BANCORP LOGO)
 Continued from the previous page Years
ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands)SELECTED RATIOSPerformance:Net interest
margin(2)
    
    
    3.27
    %
    
    
    3.30
    %
    
    
    3.45
    %
    
    
    4.00
    %
    
    
    3.63
    %Efficiency ratio(3)
    
    
    63.54
    %
    
    
    70.05
    %
    
    
    69.53
    %
    
    
    60.47
    %
    
    
    55.72
    %Return on average total assets
    
    
    1.10
    %
    
    
    0.59
    %
    
    
    0.38
    %
    
    
    0.76
    %
    
    
    0.97
    %Return on average common equity
    
    
    16.90
    %
    
    
    6.08
    %
    
    
    3.79
    %
    
    
    8.71
    %
    
    
    13.59
    %Dividend payout
    
    
    27.07
    %
    
    
    63.77
    %
    
    
    97.78
    %
    
    
    40.37
    %
    
    
    29.14
    %Average net loans/average total deposits
    
    
    114.12
    %
    
    
    105.12
    %
    
    
    99.80
    %
    
    
    109.17
    %
    
    
    109.88
    %Average earning assets/average total assets
    
    
    95.72
    %
    
    
    94.94
    %
    
    
    94.30
    %
    
    
    94.70
    %
    
    
    94.93
    %Average stockholders equity/average assets
    
    
    6.54
    %
    
    
    8.86
    %
    
    
    9.30
    %
    
    
    8.87
    %
    
    
    7.51
    %Fee income to average assets
    
    
    1.18
    %
    
    
    1.31
    %
    
    
    1.12
    %
    
    
    1.00
    %
    
    
    0.74
    %Capital:Tier I capital to risk-adjusted assets
    
    
    9.27
    %
    
    
    8.84
    %
    
    
    12.14
    %
    
    
    10.66
    %
    
    
    10.78
    %Total capital to risk-adjusted assets
    
    
    11.90
    %
    
    
    10.41
    %
    
    
    13.39
    %
    
    
    11.64
    %
    
    
    11.83
    %Leverage ratio
    
    
    6.36
    %
    
    
    6.04
    %
    
    
    8.87
    %
    
    
    8.79
    %
    
    
    7.43
    %Asset quality:Non-performing loans to total loans
    
    
    1.57
    %
    
    
    2.33
    %
    
    
    3.20
    %
    
    
    2.14
    %
    
    
    1.52
    %Annualized net charge-offs to average loans
    
    
    0.56
    %
    
    
    0.93
    %
    
    
    1.41
    %
    
    
    1.44
    %
    
    
    0.91
    %Allowance for loan losses to period-end loans
    
    
    1.24
    %
    
    
    1.65
    %
    
    
    1.48
    %
    
    
    1.16
    %
    
    
    1.13
    %Allowance for loan losses to non-performing loans
    
    
    79.05
    %
    
    
    70.85
    %
    
    
    46.10
    %
    
    
    54.34
    %
    
    
    74.29
    %Allowance for loan losses to non-performing loans
plus accruing loans past-due 90 days or more
    
    
    76.11
    %
    
    
    69.16
    %
    
    
    44.68
    %
    
    
    51.36
    %
    
    
    69.53
    %Non-performing assets to total assets
    
    
    1.10
    %
    
    
    1.40
    %
    
    
    1.98
    %
    
    
    1.30
    %
    
    
    1.02
    %Recoveries to charge-offs
    
    
    32.83
    %
    
    
    22.12
    %
    
    
    15.77
    %
    
    
    14.33
    %
    
    
    22.78
    %EARNINGS TO FIXED CHARGES:Excluding interest on deposits
    
    
    2.85
    x
    
    
    2.22
    x
    
    
    2.47
    x
    
    
    2.64
    x
    
    
    2.37
    xIncluding interest on deposits
    
    
    1.65
    x
    
    
    1.29
    x
    
    
    1.18
    x
    
    
    1.27
    x
    
    
    1.24
    xEARNINGS TO FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:Excluding interest on deposits
    
    
    2.85
    x
    
    
    2.03
    x
    
    
    2.31
    x
    
    
    2.53
    x
    
    
    2.30
    xIncluding interest on deposits
    
    
    1.65
    x
    
    
    1.23
    x
    
    
    l.14
    x
    
    
    1.25
    x
    
    
    1.22
    xOTHER DATA AT END OF PERIOD:Customer financial assets under management
    
    $
    12,827,700
    
    
    $
    10,669,700
    
    
    $
    9,242,600
    
    
    $
    9,159,700
    
    
    $
    8,877,500Branches:Full-service branches
    
    
    64
    
    
    
    64
    
    
    
    64
    
    
    
    62
    
    
    
    60Express branches
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    15Total branches
    
    
    65
    
    
    
    66
    
    
    
    66
    
    
    
    65
    
    
    
    75ATMs
    
    
    150
    
    
    
    141
    
    
    
    139
    
    
    
    121
    
    
    
    116
   *
    
    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, June 17, 2002 and January 11, 2000. Basic and
diluted earning per share are the same.(1)
    
    After retroactive reclassification adjustment of allowance for losses on off balance sheet
items.(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.




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##### 



(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
 MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Description of the Business Santander BanCorp and subsidiaries (the Corporation) is a diversified financial holding
company headquartered in San Juan, Puerto Rico, offering a full range of financial products and
services to consumers and commercial customers through its subsidiaries. The Corporations
subsidiaries are engaged in the following businesses:  
    Commercial Banking  Banco Santander Puerto Rico
    Mortgage Banking  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 The Corporations financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America and with general practices within the financial
services industry, which are described in the notes to the consolidated financial statements. In
preparing the consolidated financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Accounting policies that
are critical to the overall financial statements are fully described in the Critical Accounting
Policies section below. On December 30, 2003 the Corporation acquired 100% of the common stock of Santander Securities
Corporation and subsidiary (Santander Securities) from
Administration de Bancos Latinoamericanos
Santander, S.L. (ABLASA), a wholly-owned subsidiary of Banco Santander Central Hispano, S.A.
(BSCH), the Corporations parent company. This transaction was treated as a reorganization of
companies under common control and as such was recorded at historical cost and accounted for on an
as if pooled basis. Accordingly, the accompanying financial information prior to 2003 has been
restated to give retroactive effect to such transaction as of the beginning of the first period
presented. All significant intercompany balances and transactions were eliminated. On July 9, 2004, the Corporation declared a 10% stock dividend to all common shareholders of
record as of July 20, 2004. All share and per share computations for all periods presented have
been restated to reflect the stock dividend. Forward-Looking Statements This discussion of financial results contains forward-looking statements about the
Corporation. Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They often include words or phrases like would be, will
allow, intends to, will likely result, are expected to, will continue, is anticipated,
estimate, project, believe, or similar expressions and are intended to identify forward
looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The future results of the Corporation could be affected by subsequent events and could differ
materially from those expressed in forward-looking statements. If future events and actual
performance differ from the Corporations assumptions, the actual results could vary significantly
from the performance projected in the forward-looking statements. The Corporation wishes to caution
readers not to place undue reliance on any such forward-looking statements, which speak only as of
the date made, and to advise readers that various factors, including regional and national
conditions, substantial changes in market interest rate levels, credit and other risks of lending
and investment activities, competitive and regulatory factors and legislative changes, could affect
the Corporations financial performance and could cause the Corporations actual results for future
periods to differ materially from those anticipated or projected. The Corporation does not
undertake, and specifically disclaims any obligation, to update any forward-looking statements to
reflect occurrences or unanticipated events or circumstances after the date of such statements. Overview of Managements Discussion and Analysis of Results of Operations and Financial
Condition This overview of managements discussion and analysis highlights selected information in this
document and may not contain all of the information that is important
to the reader. For a more
complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources
and critical accounting estimates, you should carefully read this entire document. All accompanying
tables, financial statements and notes included elsewhere in this report should be considered an
integral part of this analysis. The year 2004 marked the second full year of the Corporations turnaround since present management
was in place. During the past two years, as net income and earnings per share have grown
significantly, the Corporations return on average assets, return on average stockholders equity,
asset quality rations and efficiency ratio have improved. The main ingredients of this turnaround
have been the hiring of new experienced personnel, emphasis on improving




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##### 



CONSOLIDATED
FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    

(SANTANDER BANCORP LOGO)
 the credit quality of the Corporations loan portfolio, the repositioning of the
investment securities portfolio and the Corporations source of funding in order to protect the
Corporations net interest margin, and the acquisition of the Corporations broker-dealer
subsidiary in order to diversify the financial services the Corporation offers its clients as well

as the Corporations sources of revenue and implementing new technology systems that enable
management to better manage the business. During 2004, the Corporation began the implementation of its new business plan for the three-year
period from 2004 through 2006. This plan is based on an integrated business model that focuses on
the Corporations clients and people. The Corporations client-focused business model is based on
three strategic cornerstones: Sales and Distribution, Credit and Market Risk and Operating
Efficiency. The Sales and Distribution cornerstone is aimed at implementing and expanding a
systematic sales management process which focuses on growing the loan portfolio by cross-selling
products and services to the Corporations extensive segmented client base and improving client
profitability. In the area of Credit and Market Risk the Corporation is focused on implementing and
maintaining agile and flexible credit processes, continuous monitoring and improvement of asset
quality, maximizing loan recoveries and maintaining an investment portfolio proportional to the
Corporations asset size. With respect to Operating Efficiency, the Corporation aims to limit
operating expense growth to inflationary levels, while obtaining efficiencies from new operating
systems and investing in and training the best people. The Corporations business plan is based on
improving client information and providing the highest quality services with the best human
resources and information technology, while maintaining superior asset quality. During the next two years, managements efforts will be focused on achieving the objectives
delineated in the business plan. The plan contemplates sustained growth in interest-earning assets,
particularly in the commercial and mortgage lending portfolios, designed to steadily increase
interest income and related revenues. Continued emphasis on the growth of the insurance agency and
broker-dealer segments is also expected to have a positive impact on the Corporations results of
operations. Cost control measures currently in place should limit the growth in operating expenses
and assist in achieving greater operational efficiency. These strategies are expected to enhance
the Corporations profitability and efficiency ratios. The Corporations business plan depends, to a certain extent, on the improvement of general
economic conditions and stable economic growth in Puerto Rico and in the United States. In
addition, the business plan places special emphasis on the very competitive environment for
financial services in Puerto Rico and the United States. On a short-and medium-term basis, we will
continue to focus on differentiating ourselves from our competitors by building
on our established strengths: client satisfaction, product innovation, diversified business units
with high earnings potential from banking, securities, asset management, mortgage and insurance
services, our large client base and branch distribution network and a modern technology
infrastructure. Based on the results of operations and financial condition obtained for the year ended December
31, 2004, as detailed throughout this discussion, management believes it has been successful in
implementing its business plan and plans to continue with the changes that have been implemented
in order to achieve its objectives. Net income for the year ended December 31, 2004 reached $84.5 million or $1.81 per common share.
This represents an increase of 114.1 % over net income for the year ended December 31, 2003, of
$39.4 million or $0.69 per common share. Earnings per common share for the year ended December 31,
2004 increased by $1.12, which more than doubles the prior years earnings per common share. Return
on average common equity (ROE) and return on average assets (ROA) were 16.90% and 1.10%,
respectively, for the year ended December 31, 2004, an increase of 1,082 basis points in ROE and 51
basis points in ROA when compared to ROE and ROA of 6.08% and 0.59%, respectively, for the year
ended December 31, 2003. The efficiency ratio (on a tax-equivalent basis) for the year ended
December 31, 2004, also reflected a significant improvement of 651 basis points, reaching 63.54%,
compared to 70.05% for the year ended December 31, 2003. This improvement in the efficiency ratio
during 2004, when compared to 2003, is a direct result of higher revenues and lower expenses. The increase of $45.0 million or 114.1 % in net income for the year ended December 31, 2004,
compared to the same period in 2003 was principally due to an increase of $25.9 million in net
interest income, a decrease in the provision for loan losses of $23.5 million and a decrease in
operating expenses of $6.7 million. These changes were partially offset by an increase in the
provision for income tax of $8.4 million and a decrease of $2.7 million in other income due
primarily to a decrease in gain on sale of loans. The Corporations principal source of revenues is net interest income, which is the difference
between the interest earned on loans and investments and the interest paid on customer deposits and
other interest-bearing liabilities. Net interest income represents approximately 65.15% of the
Corporations total revenues (defined as net interest income plus non-interest income) for 2004.
Net interest income is affected by the relative amounts of interest-earning assets and
interest-bearing liabilities, and the interest rates earned or paid on these balances. Lending activities are one of the most important aspects of the Corporations operations. As a
result of managements focus on regaining market share, the net loan portfolio,




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(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT
ANALYSIS AND 2004 RESULTS
 including loans held for sale, reflected an increase of 33.0%, or $1.4 billion, reaching
$5.5 billion at December 31, 2004, compared to 2003. The provision for loan losses totaled $26.3
million in 2004, a decrease of $23.5 million compared to $49.7 million in 2003. This decrease in
the provision for loan losses of 47.2% is mainly as a result of lower net charge-offs, improved
non-performing asset ratios and a continued change in the loan portfolio mix towards a higher
proportion of mortgage loans, which have historically proven to be of low risk. The improvements in
the asset quality ratios also reflect the success of managements initiatives for improving credit
quality, such as the revision of underwriting standards and improvements in the collection process.
The ratio of the allowance for loan losses to total loans declined to 1.24% at December 31, 2004,
from 1.65% at December 31, 2003. The decrease in the ratio of the allowance for loan losses to
total loans reflects a reduction in non-performing loans and a significant increase in mortgage
loans, which have historically had low loss ratios. Although the Corporation has diversified its sources of revenues, interest income from the loan
portfolio continues to account for the majority of total revenues, representing 76.6% of total
revenues for 2004. As a result, the primary influence on the Corporations operating results is
the demand for loans in Puerto Rico, which is significantly affected by economic conditions,
competition, the demand and supply of housing, the fiscal policies of the federal and Puerto Rico
governments and interest rate levels. Changes in interest rates, the Corporations principal
market risk, can significantly impact its results of operations by affecting net interest income
and the gains or losses incurred in the sale of loans and securities and in its trading
securities. As described under Risk Management, the Corporation uses derivative instruments to
hedge, to a limited extent, its interest rate risk in order to protect its net interest income
under different interest rate scenarios. The Corporation has continued to diversify its revenue sources, mainly as a result of the
acquisition of Santander Securities, its broker-dealer subsidiary, from an affiliate in December
2003. Santander Securities accounted for 43.6% of the Corporations non-interest income and 13.7%
of its total revenue for 2004. The Corporation also earns revenues from the gain on sale of
securities and loans and from other sources that are not as dependent on interest rate levels, such
as bank service fees on deposit accounts and credit card fees. Non-interest income, including
broker-dealer, asset management and insurance fees, accounted for 34.9% of total revenues for 2004. Operating expenses declined $6.7 million or 3.0% in 2004 compared to 2003. This reduction was due
to a decrease of $8.9 million in other operating expenses and an increase of $2.2 million in
personnel costs. The decrease in other operating expenses was primarily due to a decrease in
electronic data processing servicing, amortization and technical services due to lower servicing
costs. There were also decreases
in amortization of intangibles, repossessed assets provision and expenses, and collections and
related legal costs. These decreases were partially offset by increases in professional services,
partly associated with the implementation of certain provisions of the Sarbanes-Oxley Act as well
as other consulting services, and business promotion. Deposits at December 31, 2004 reflected an increase of $605.9 million or 14.6% compared to deposits
of $4.1 billion as of December 31, 2003. This increase was also in line with the objective of
enhancing customer activity and market share. Total borrowings at December 31, 2004 (comprised of federal funds purchased and other borrowings,
securities sold under agreements to repurchase, commercial paper issued, term and capital notes)
increased $268.3 million compared to total borrowings at December 31, 2003. In order to fund growth
in interest-earning assets, the Corporation undertook several financing transactions during 2004.
During the first quarter of 2004, Banco Santander Puerto Rico (the Bank) issued $30 million in S&P
Linked Notes to obtain long term financing at a reasonable interest rate. Proceeds from the
offering were used to finance the loan portfolio. During the fourth quarter of 2004, the
Corporation issued $75,000,000 of its 6.30% Subordinated Notes due June 2032. The net proceeds from
the sale of these notes were used to refinance existing debt incurred in the acquisition of
Santander Securities Corporation and for other general corporate purposes. Santander BanCorp is a client-focused organization that seeks to earn the trust of customers to
manage their financial assets. As of December 31, 2004, the Corporation had over $12.8 billion in
customer financial assets under management, which represents a 20.2% or $2.2 billion increase over
balances as of December 31, 2003. This is a significant part of the financial assets of Puerto Rico
households and reflects the Corporations strong positioning in its primary market. Customer
financial assets under management include bank deposits (excluding brokered deposits),
broker-dealer customer accounts, mutual fund assets managed, and trust, institutional and private
accounts under management. The growth in customer financial assets and the stability of customer
deposits is a strong indication of the Corporations successful efforts to regain market share and
reposition itself as a leading provider of financial services. SBP common stock price per share increased from $22.14 (after adjustment for the stock dividend) as
of December 31, 2003 to $30.16 as of December 31, 2004, an increase of 36% or $374.2 million in
market capitalization. During the fourth quarter of 2004, Santander BanCorp declared a cash dividend of 16 cents per
common share to its shareholders of record as of December 10, 2004, payable on January 3, 2005,
resulting in a current annualized dividend yield of 2.12%. On July 9, 2004 the Board of Directors
declared a 10% stock dividend to all shareholders of record as of July 20, 2004.




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CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    

(SANTANDER BANCORP LOGO)
 Critical Accounting Policies The consolidated financial statements of Santander Ban-Corp are prepared in accordance with
accounting principles generally accepted in the United States of America and with general practices
within the financial services industry. In preparing the consolidated financial statements,
management is required to make judgements, involving significant estimates and assumptions, in the
application of its accounting policies about matters that are inherently uncertain. Management
arrives at these estimates and assumptions, which may materially affect the reported amounts of
certain assets, liabilities, revenues and expenses, considering the facts and circumstances at a
specific point in time. Changes in those facts and circumstances could produce actual results that
differ from those estimates. Detailed below is a discussion of the Corporations critical
accounting policies. These policies are critical because they are highly dependent upon subjective
or complex judgements, assumptions and estimates. For a complete discussion of the Corporations
significant and critical accounting policies refer to the notes to the consolidated financial
statements and the discussion throughout this document which should be read in conjunction with
this section. Allowance for Loan Losses.The Corporation assesses the overall risks in its loan portfolio and
establishes and maintains a reserve for probable losses thereon. The allowance for loan losses is
maintained at a level sufficient to provide for estimated loan losses based on the evaluation of
known and inherent risks in the Corporations loan portfolio. The Corporations management
evaluates the adequacy of the allowance for loan losses on a monthly basis. The determination of the allowance for loan losses is one of the most complex and critical
accounting estimates the Corporations management makes. The Corporation follows a consistent
methodology and accounts for loan loss contingencies in accordance with Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan  Income Recognition and
Disclosures, and SFAS No. 5, Accounting for Contingencies. The allowance for loan losses has
three different components. An asset-specific reserve based on the provisions of SFAS No. 114, an
expected loss estimate based on the provisions of SFAS No. 5, and an unallocated reserve based on
the effect of probable economic deterioration above and beyond what is reflected in the
asset-specific component of the allowance. Commercial and construction loans exceeding a predetermined monetary threshold are identified for
evaluation of impairment on an individual basis pursuant to SFAS No. 114. The Corporation considers
a loan impaired when interest and/or principal is past due 90 days or more, or, when based on
current information and events it is probable that the Corporation will be unable to collect all
amounts due according to the contractual terms of the loan agreement. The asset-specific reserve on
each individual loan identified as impaired is measured based on the present value of expected future cash flows discounted at
the loans effective interest rate, except as a practical expedient, the Corporation may measure
impairment based on the loans observable market price, or the fair value of the collateral, net of
estimated disposal costs, if the loan is collateral dependent. Most of the asset-specific reserves
of the Corporations impaired loans are measured on the basis of the fair value of the collateral. A reserve for expected losses is determined pursuant to SFAS No. 5 for all loans not evaluated
individually for impairment, based on historical loss experience by loan type, management judgement
of the quantitative factors (historical net charge-offs, statistical loss estimates, etc.), as well
as qualitative factors (current economic conditions, portfolio composition, delinquency trends,
industry concentrations, etc.) The Corporation groups small homogeneous loans by type of loan
(consumer, credit card, mortgage, auto, etc.) and applies a loss factor, which is determined using
an average history of actual net losses over the previous 2 to 3 years and other statistical loss
estimates. Historical loss rates are reviewed at least quarterly and adjusted based on changing
borrower and/or collateral conditions and actual collections and charge-off experience. Historical
loss rates for the different portfolios may be adjusted for significant factors that in
managements judgement reflect the impact of any current conditions on loss recognition. Factors
that management considers in the analysis include the effect of the trends in the nature and volume
of loans (delinquency, charge-offs, non accrual), economic trends, competitive factors, changes in
the mix or type of collateral, asset quality trends, changes in the internal lending policies and
credit procedures, collection practices and examination results from internal and external audit
results, changes in bankruptcy laws and evolving regulatory standards in evaluating the adequacy of
the allowance for loan losses. An additional or unallocated reserve is maintained to cover the effect of probable economic
deterioration above and beyond what is reflected in the asset-specific component of the allowance.
This component represents managements view that given the complexities of the lending portfolio
and the assessment process, including the inherent imprecision in the financial models used in the
loss forecasting process, there are estimable losses that have been incurred but not yet
specifically identified, and as a result not fully provided for in the asset-specific component of
the allowance. The level of the unallocated reserve may change periodically after evaluating
factors impacting assumptions used in the calculation of the asset specific component of the
reserve. The underlying assumptions, estimates and assessments used by management to determine the
components of the allowance for loan losses are continually evaluated and updated to reflect
managements current view of overall economic conditions and other relevant factors impacting
credit quality and inherent losses. Changes in such estimates could significantly impact the
allowance and provision for loan losses. The Cor-




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(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT
ANALYSIS AND 2004 RESULTS
 poration could experience loan losses that are different from the current estimates made
by management. Based on current and expected economic conditions, the expected level of net loan
losses and the methodology established to evaluate the adequacy of the allowance for loan losses,
management considers that the Corporation has established an adequate position in its allowance for
loan losses. Refer to page 49 for further information on the allowance for loan losses. Valuation of Certain Financial Instruments.Certain financial instruments including derivatives,
hedged items, trading and investment securities available for sale, are recorded at fair value and
unrealized gains and losses are recorded in other comprehensive income or other gains and losses,
as appropriate. Fair values for most of the Corporations trading and investment securities are
based on listed market prices, if available. If listed market prices are not available, fair value
is determined based on other relevant factors including price quotations for similar instruments.
For securities where listed market prices are not readily available, the determination of the fair
value requires management judgement as to the benchmark to be used. Significant changes in factors
such as interest rates and accelerated prepayment rates could affect the value of the trading and
investment securities. Management assesses the fair value of its portfolio at least monthly. Any
impairment that is considered other than temporary is recorded in the consolidated income
statement. Fair values for certain derivative contracts are derived from pricing models that consider current
market and contractual prices for the underlying financial instruments, counterparty credit risk,
as well as time value and yield curve or volatility factors underlying the positions. Management
applies judgement in determining the models used and required adjustment to such models, if any, in
the valuation process. The primary risk of material changes to the value of the derivative
instruments is fluctuations in interest rates. However, the Corporation principally uses derivative
instruments as part of a designated hedging program so that a change in the value of a derivative
is generally offset by a corresponding change in the value of the hedged item. Changes in these
estimates may have a significant impact on the carrying amount and the related valuation gains and
losses on these financial instruments. Management believes that its estimates of fair value are reasonable given the process of obtaining
external prices, periodic reviews of internal models by affiliated and unaffiliated experts, and
the consistent application of methodologies. Income taxes.In preparing the consolidated financial statements, the Corporation is required to
estimate income taxes. This involves an estimation of current income tax expense together with an
assessment of temporary differences resulting from differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. The determination of current income tax expense involves estimates and assumptions that require the Corporation to assume certain positions based on its interpretation of
current tax regulations. Changes in assumptions affecting estimates may be required in the future
and estimated tax liabilities may need to be increased or decreased accordingly. The accrual for
tax contingencies is adjusted in light of changing facts and circumstances, such as the progress of
tax audits, case law and emerging legislation. The Corporations effective tax rate includes the
impact of tax contingency accruals and changes to such accruals, including related interest and
penalties, as considered appropriate by management. When particular matters arise, a number of
years may elapse before such matters are audited by the taxing authorities and finally resolved.
Favorable resolution of such matters, or the expiration of the statute of limitations may result in
the release of tax contingencies which are recognized as a reduction to the Corporations effective
rate in the year of resolution. Unfavorable settlement of any particular issue could increase the
effective rate and may require the use of cash in the year of resolution. The determination of deferred tax expense or benefit is based on changes in the carrying amounts of
assets and liabilities that generate temporary differences. The carrying value of the Corporations
net deferred tax assets assumes that the Corporation will be able to generate sufficient future
taxable income based on estimates and assumptions. If these estimates and related assumptions
change, the Corporation may be required to record valuation allowances against its deferred tax
assets resulting in additional income tax expense in the consolidated statements of income.
Management evaluates its deferred tax assets on a quarterly basis and assesses the need for a
valuation allowance. A valuation allowance is established when management believes that it is more
likely than not that some portion of its deferred tax assets will not be realized. Changes in
valuation allowance from period to period are included in the Corporations tax provision in the
period of change. During the year ended December 31, 2004, the Corporation had no recorded
valuation allowances related to its net deferred tax assets (see Note 16 to the consolidated
financial statements). Goodwill and other intangible assets.Tangible and intangible assets with finite useful lives are
amortized over their estimated useful lives. Useful lives are based on managements estimates of
the period that the assets will generate revenue. If circumstances and conditions indicate
deterioration in the value of tangible assets and intangible assets with finite useful lives, the
book value would be adjusted and a loss would be recognized in current operations. Goodwill represents the excess of an acquired companys acquisition cost over the fair value of its
net tangible and intangible assets. Goodwill and intangible assets that have indefinite useful
lives are not amortized but rather are tested at least annually for impairment using a two step
process at each reporting unit. The first step of the goodwill impairment test is used to identify
potential impairment by comparing the fair value of the reporting unit with its carrying




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CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    

(SANTANDER BANCORP LOGO)
 amount, including goodwill. If the fair value of the reporting unit exceeds its carrying
amount, the goodwill of the reporting unit is not considered impaired and the second step of the
impairment test is not performed. If the carrying value of the reporting unit exceeds its fair
value, the second step in the impairment test consists of comparing the implied fair value of the
reporting unit goodwill with the carrying amount of that goodwill. The Corporations goodwill resulted from business acquisitions and consists of $10.5 million that
resulted from the acquisition by the Bank of Banco Central Hispano P.R., and $24.3 million that
resulted from the acquisition by Santander Securities of the acquisition of Merryl Lynchs retail
brokerage business in Puerto Rico. The value of the goodwill is inherent primarily in the
commercial banking segment and the broker-dealer segment, respectively. The sustained value of the goodwill is supported ultimately by revenue from the commercial banking
segment and the broker-dealer segment. A decline in earnings as a result of a lack of growth, or
our inability to deliver cost effective services over sustained periods, could lead to a perceived
impairment of goodwill, which would be evaluated and, if necessary be recorded as a write-down in
the consolidated statement of income. On an annual basis, or more frequently if circumstances dictate, management reviews goodwill and
evaluates events or other developments that may indicate impairment in the carrying amount. The
evaluation for potential impairment is inherently complex, and involves significant judgement in
the use of estimates and assumptions. To determine the fair value of the reporting units being evaluated for goodwill impairment, the
Corporation uses an independent consultant. The determination of the fair value of the reporting
units involves the use of estimates and assumptions including expected results of operations, an
assumed discount rate and an assumed growth rate for the reporting units. Specifically, the
independent consultant prepared analyses regarding the fair value of equity of the Corporations
reporting units, Commercial Banking and Broker-dealer. The consultant used three separate
approaches:  Market Multiple Approach:provides indications of value based upon comparisons of the Reporting
Unit to market values and pricing evidence of public companies in the same or similar lines of
businesses. Market ratios (pricing multiples) and performance fundamentals relating the public
companies stock prices (equity) or enterprise values to certain underlying fundamental data are
applied to the Reporting Unit to determine indications of its fair value.Discounted Cash Flow Approach:calculates the present value of the projected future cash flows
to be generated by the Reporting Unit using appropriate discount rates. The discount rates are intended to reflect all associated risks of realizing the
projected future cash flows. Terminal values are computed as of the end of the last period for
which cash flows are projected to determine an estimate of the values of the Reporting Unit as
of that future point in time. Discounting the terminal values back to the present and adding the
present values of the future cash flows yields indications of the Reporting Units fair value.Comparable Transaction Approach:includes an examination of recent transactions in which
companies involved in the same or similar lines of business to the Reporting Unit were
acquired. Acquisition values and pricing evidence are used in much the same manner as the
Market Multiple Approach for indication of the Reporting Units fair value. Events that may indicate goodwill impairment include significant or adverse changes in the
business, economic or political climate; unanticipated competition; adverse action or assessment by
a regulator; plans for disposition of a segment; among others. In assessing the recoverability of goodwill and other intangibles, the Corporation must make
assumptions regarding estimated future cash flows and other factors to determine the fair value of
the respective assets. If these estimates or their related assumptions change in the future, the
Corporation may be required to record impairment charges for these assets not previously recorded.
Based on managements assessment of the value of the Corporations goodwill at January 1, 2002 and
October 1, 2002, 2003 and 2004, which includes an independent valuation, among others, management
determined that the Corporations goodwill was not impaired. Pension and Other Postemployment Benefits.The
determination of the Corporations obligation and expense for pension and other postretirement
benefits is dependent on the selection of certain assumptions used by actuaries in calculating such
amounts. Those assumptions are described in Note 18 to the consolidated financial statements and
include, among others, the discount rate, expected long-term rate of return on plan assets and
rates of increase in compensation and healthcare costs. Management participates in the
determination of these factors, which normally undergo evaluation against industry assumptions,
among other factors. In accordance with accounting principles generally accepted in the United
States of America, actual results that differ from the Corporations assumptions are accumulated
and amortized over future periods and therefore, generally affect recognized expense and recorded
obligation in such future periods. The Corporation uses an independent actuarial firm for the
determination of the pension and post-retirement benefit costs and obligations. In developing the expected return on plan assets, the Corporation considers the asset allocation,
historical returns




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(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT
ANALYSIS AND 2004 RESULTS
 on the types of assets held in the pension trust, the current economic environment, as
well as input from the Plans actuaries, financial analysts and the Corporations long-term
inflation assumptions and interest rate scenarios. The expected rate of return for plan assets was
set at 8.5%. In selecting a discount rate, the Corporation considers the Moodys Long-term AA
Corporate Bond yield as a guide. At December 31, 2004, the Corporation reduced its discount rate to
6.00% from 6.25% at December 31, 2003. Management believes that the assumptions made are appropriate; however, significant differences in
actual experience or significant changes in assumptions may materially affect pension obligations and future
expense. Results of Operations The following financial discussion is based upon and should be read in conjunction with the
Corporations consolidated financial statements for the years ended December 31, 2004, 2003, and
2002. The following table sets forth the principal components of the Corporations net income for the
years ended December 31, 2004, 2003 and 2002. 2004
    
    
    2003
    
    
    2002(Dollars in thousands)Components of net income:Net interest income
    
    $
    219,168
    
    
    $
    193,230
    
    
    $
    205,438Provision for loan losses
    
    
    26,270
    
    
    
    49,745
    
    
    
    63,630Other income
    
    
    117,239
    
    
    
    119,940
    
    
    
    101,108Other operating expenses
    
    
    217,533
    
    
    
    224,265
    
    
    
    213,875Provision (benefit) for income tax
    
    
    8,145
    
    
    
    (285
    )
    
    
    3,289Net income
    
    $
    84,459
    
    
    $
    39,445
    
    
    $
    25,752
 2004 compared to 2003.The increase of $45.0 million, or 114.1 %, in net income for the
year ended December 31, 2004 compared to the same period in 2003, was principally due to an increase
of $25.9 million in net interest income, mainly as a result of increases in the volume of
interest-earning assets, a decrease in the provision for loan losses of $23.5 million and a
decrease in operating expenses of $6.7 million. These changes were partially offset by an increase
in the provision for income tax of $8.4 million and a decrease of $2.7 million in other income due
primarily to lower gains on sales of loans. 2003 compared to 2002.The Corporations net income increased 53.2% from $25.8 million for the year
ended December 31, 2002, to $39.4 million for the year ended December 31, 2003. This increase was
primarily due to an increase in other income of $18.8 million, mainly attributed to a $14.2 million
increase in the Corporations broker-dealer and asset management subsidiaries, a decrease of $13.9
million in the provision for loan losses, and a reduction of $3.6 million in income tax expense.
These increases were partially offset by a reduction of $12.2 million in net interest income due to
contraction in the net interest margin and spreads, and a $10.4 million increase in other operating
expenses as a result of expenses related to modifications in
the enhancements to the Corporations new electronic data processing platform and higher personnel
costs associated with the increase in revenues of the Corporations broker-dealer subsidiary Net Interest Income The Corporations net interest income was $219.2 million, $193.2 million and $205.4 million
for the years ended December 31, 2004, 2003, and 2002, respectively. To facilitate the comparison of assets with different tax attributes, the interest income on
tax-exempt assets under this heading and under the heading Change in Interest Income and Interest
Expense-Volume and Rate Analysis, has been adjusted by an amount equal to the income taxes which
would have been paid had the interest income been fully taxable. This tax equivalent adjustment is
derived using the applicable statutory tax rate and resulted in an adjustment of $20.2 million in
2004, $17.6 million in 2003 and $13.2 million in 2002. The following table sets forth the principal components of the Corporations net interest income
for the years ended December 31, 2004, 2003 and 2002. 2004
    
    
    2003
    
    
    2002(Dollars in thousands)Interest
income  tax equivalent basis
    
    $
    380,092
    
    
    $
    343,131
    
    
    $
    378,527Interest expense
    
    
    (140,762
    )
    
    
    (132,351
    )
    
    
    (159,915
    )Net interest
income  tax equivalent basis
    
    $
    239,330
    
    
    $
    210,780
    
    
    $
    218,612Net interest margin  tax equivalent basis (1)
    
    
    3.27
    %
    
    
    3.30
    %
    
    
    3.45
    %
   (1)
    Net interest margin for any period equals tax-equivalent net interest income divided by average interest-earning assets for such period.




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CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    

(SANTANDER BANCORP LOGO)
 2004
compared to 2003.The Corporations tax equivalent net interest income for the year ended December
31, 2004 reached $239.3 million, an increase of 13.5% over $210.8 million for the same period in
2003. This improvement was due to an increase in average interest-earning assets of $932 million,
or 14.6%, as a result of an increase in commercial activities as well as a reduction in total cost
of funds of 24 basis points. Although the Corporations net interest margin decreased slightly
during 2004, to 3.27% from 3.30% for 2003, net interest spread experienced an increase of six basis
points for 2004, to 2.96% from 2.90% for 2003. The improvement in the spread was the result of a
larger decrease in the rates paid by the Corporation on its borrowings relative to the decrease in
the rates earned on its loans and securities. The average rate paid by the Corporation on its
interest-bearing liabilities decreased by 24 basis points during 2004, while the average yield on
its interest-earning assets decreased by 18 basis points compared to 2003. The increase in average interest-earning assets was driven primarily by the increase in average
loans. Due to the continued low interest rate scenario the average mortgage loan portfolio
reflected a growth of 56.3% or $724.1 million. During 2004, management continued to place a high
emphasis on the mortgage loan portfolio due to the low interest rate scenario and the active market
for residential real estate in Puerto Rico. In addition, in 2004, the Corporation had purchased
$930.1 million of fixed rate mortgage loans. Average commercial loans also experienced an increase
of 8.4% or $160 million. Construction loans reflected a decrease of 20.1% or $51.9 million due to a
slowdown in the construction sector of the Island and a stronger emphasis by the Corporation on
mortgage lending. The average consumer loan portfolio decreased 9.2% or $42.8 million as a result
of the Corporations withdrawal from the auto loan market and a reduction in average personal loans
that was only partially offset by an increase in the average credit card portfolio. Average
interest-bearing deposits and average investment securities also reflected increases in 2004
compared to 2003 of $43.7 million and $89.9 million, respectively. The Corporations interest income on a tax equivalent basis increased $37.0 million, or 10.8% to
$380.1 million for the year December 31, 2004 from $343.1 million for the year ended December 31,
2003. All portfolios reflected higher tax equivalent interest income primarily as a result of the
higher volume of average interest earning assets. The average rate on interest earning assets
decreased because of lower returns on loans due to high refinancing of mortgage loans during 2004
because of the low interest rate environment. The Corporations interest expense reflected an increase of $8.4 million for the year ended
December 31, 2004 compared to the same period in 2003. This increase was due primarily to increases
in average interest bearing liabilities, and were partially offset by a decrease of 24 basis points
in the cost of funds. Average interest-bearing liabilities increased as a result of the need for funding the increase of
$932 million in average interest-earning assets. The most significant increases in average
interest-bearing liabilities were in commercial paper, brokered CDs and institutional CDs. In
addition there was an increase in average customer deposits during the year. The reduction in the
cost of funds was due to the redemption in 2004 of the AFICA notes that paid interest at rates over
6%, several 936 notes with high rates of interest matured during the year and the Corporations
portfolio of term repurchase agreements was restructured to reduce their cost. In addition, at the
beginning of the year, the Corporation reduced the interest rates on its core deposits. The composition of the Corporations average interest bearing liabilities changed during this
period. Average borrowings increased 31.4% or $632.8 million from $2.0 billion for the year ended
December 31, 2003 to $2.6 billion for the same period in 2004. There was an increase in average
time deposits of 23.1% or $297.1 million and in savings and NOW accounts of 4.5% or $81.8 million.
These increases in average interest bearing deposits were in line with the Corporations objective
of enhancing customer activity and market share. 2003 compared to 2002.The Corporations tax-equivalent net interest income decreased 3.6% from
$218.6 million in 2002 to $210.8 million in 2003. This decrease in the Corporations net interest
income was primarily due to a decrease of 61 basis points in the yield on average interest-earning
assets. This reduction was partially offset by a slight increase in average interest-earning
assets and a 17.2% decrease in interest expense from $159.9 million in 2002 to $132.4 million in
2003. The Corporation restructured its balance sheet to yield more favorable results in net
interest margin by repositioning the investment portfolio to generate higher yields. On the
liability side, there was a shift from higher-costing time deposits to savings and other
interest-bearing deposits and short-term borrowings. The decrease in the Corporations net
interest income on a tax equivalent basis resulted in a decrease in net interest margin on a
tax-equivalent basis from 3.45% for the year ended December 31, 2002 to 3.30% for the year ended
December 31, 2003. Due to the low interest rate scenario and a very active market for residential real estate in
Puerto Rico, management placed a higher emphasis on the mortgage lending portfolio during 2003. As
a result, the average mortgage loan portfolio reflected a 19.7% increase from $1.1 billion for the
year ended December 31, 2002, to $1.3 billion for the year ended December 31, 2003. Average
consumer loans decreased $149.1 million or 24.4% for the year ended December 31, 2003, compared to
the same period in 2002. There was a 24.2% or $105.7 million decrease in average unsecured
personal loans due to the Corporations more stringent lending criteria and renewed emphasis on
the mortgage lending sector. There was a also a decrease in the average auto loan portfolio of
51.0% or $35.1 million as a result of the Corporations strategic decision, during the




---



##### 



(SANTANDER BANCORP LOGO)       CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS year 2000, to withdraw from this lending activity. Average commercial loans also
reflected a 6.6% or $134.3 million decrease in the portfolio during 2003 compared to the same
period in 2002, due to more stringent lending criteria. There was an increase in average investment securities of 11.0% or $219.1 million from $2.0 billion
for the year ended December 31, 2002, to $2.2 billion for the year ended December 31, 2003. During
2003, management restructured its investment portfolio and repositioned it to generate higher
yields by shifting to slightly longer-term durations, not beyond three years. The Corporations tax-equivalent interest income decreased 9.4% from $378.5 million for the year
ended December 31, 2002, to $343.1 million for the year ended December 31, 2003. The decrease in
the Corporations interest income was primarily due to a decrease in the average rate earned on
interest-earning assets from 5.92% for the year ended December 31, 2002, to 5.32% for the year
ended December 31, 2003. There was also a 3.4% decrease in average gross loans that was offset by
an 11.0% increase in average investment securities. The Corporations interest expense decreased 17.2% from $159.9 million for the year ended December
31, 2002 to $132.4 million for the year ended December 31, 2003. The decrease in the Corporations interest
expense was the result of a decrease in the Corporations average rate paid on interest-bearing
liabilities of 52 basis points from 2.99% for the year ended December 31, 2002 to 2.47% for the
year ended December 31, 2003. There was a shift in the composition of the Corporations average interest-bearing liabilities.
Average short-term borrowings increased 34.3% or $514.7 million from $1.5 billion for the year
ended December 31, 2002 to $2.0 billion for the year ended December 31, 2003. There was also an
increase in average savings, NOW and other interest-bearing deposits of 5.9% or $102.5 million from
$1.7 billion in 2002 to $1.8 billion in 2003. These increases were partially offset by a 26.7% or
$467.5 million decrease in average other time deposits in 2003 compared to 2002. There was also a
decrease in average term notes of 35.1% or $113.7 million during 2003 compared to 2002. The following table shows average balances and, where applicable, interest amounts earned on a
tax-equivalent basis and average rates for the Corporations assets and liabilities and
stockholders equity for the years ended December 31, 2004, 2003 and 2002.




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS      
(SANTANDER BANCORP LOGO) Year ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)AssetsInterest-earning assets:Interest-bearing deposits
    
    $
    71,547
    
    
    $
    1,054
    
    
    
    1.47
    %
    
    $
    68,312
    
    
    $
    664
    
    
    
    0.97
    %
    
    $
    85,532
    
    
    $
    1,351
    
    
    
    1.58
    %Federal funds sold and securities
purchased under agreements to
resell
    
    
    209,719
    
    
    
    3,123
    
    
    
    1.49
    %
    
    
    169,304
    
    
    
    1,990
    
    
    
    1.18
    %
    
    
    171,418
    
    
    
    3,049
    
    
    
    1.78
    %Total interest-bearing deposits
    
    
    281,266
    
    
    
    4,177
    
    
    
    1.49
    %
    
    
    237,616
    
    
    
    2,654
    
    
    
    1.12
    %
    
    
    256,950
    
    
    
    4,400
    
    
    
    1.71
    %U.S. Treasury securities
    
    
    5,650
    
    
    
    75
    
    
    
    1.33
    %
    
    
    73,913
    
    
    
    884
    
    
    
    1.20
    %
    
    
    378,073
    
    
    
    6,497
    
    
    
    1.72
    %Obligations of other U.S. government
agencies and corporations
    
    
    1,174,965
    
    
    
    66,536
    
    
    
    5.66
    %
    
    
    1,309,968
    
    
    
    63,202
    
    
    
    4.82
    %
    
    
    1,204,187
    
    
    
    56,080
    
    
    
    4.66
    %Obligations of government of Puerto Rico and
political subdivisions
    
    
    43,962
    
    
    
    3,512
    
    
    
    7.99
    %
    
    
    47,675
    
    
    
    3,593
    
    
    
    7.54
    %
    
    
    40,765
    
    
    
    3,626
    
    
    
    8.89
    %Collateralized mortgage obligations and
mortgage-backed securities
    
    
    1,030,725
    
    
    
    43,055
    
    
    
    4.18
    %
    
    
    735,765
    
    
    
    29,486
    
    
    
    4.01
    %
    
    
    295,404
    
    
    
    13,603
    
    
    
    4.60
    %Other
    
    
    40,629
    
    
    
    2,650
    
    
    
    6.52
    %
    
    
    38,681
    
    
    
    3,007
    
    
    
    7.77
    %
    
    
    68,453
    
    
    
    2,494
    
    
    
    3.64
    %Total investment securities
    
    
    2,295,931
    
    
    
    115,828
    
    
    
    5.04
    %
    
    
    2,206,002
    
    
    
    100,172
    
    
    
    4.54
    %
    
    
    1,986,882
    
    
    
    82,300
    
    
    
    4.14
    %Loans:Commercial
    
    
    2,066,313
    
    
    
    91,617
    
    
    
    4.43
    %
    
    
    1,906,248
    
    
    
    86,376
    
    
    
    4.53
    %
    
    
    2,045,580
    
    
    
    108,443
    
    
    
    5.30
    %Construction
    
    
    205,861
    
    
    
    1 0,848
    
    
    
    5.27
    %
    
    
    257,668
    
    
    
    12,546
    
    
    
    4.87
    %
    
    
    318,692
    
    
    
    18,312
    
    
    
    5.75
    %Consumer
    
    
    420,002
    
    
    
    45,800
    
    
    
    10.90
    %
    
    
    462,755
    
    
    
    58,655
    
    
    
    12.68
    %
    
    
    611,884
    
    
    
    79,825
    
    
    
    13.05
    %Mortgage
    
    
    2,010,168
    
    
    
    103,910
    
    
    
    5.17
    %
    
    
    1,286,112
    
    
    
    75,088
    
    
    
    5.84
    %
    
    
    1,074,170
    
    
    
    75,538
    
    
    
    7.03
    %Lease financing
    
    
    111,032
    
    
    
    7,912
    
    
    
    7.13
    %
    
    
    93,656
    
    
    
    7,640
    
    
    
    8.16
    %
    
    
    96,090
    
    
    
    9,709
    
    
    
    10.10
    %Gross loans
    
    
    4,813,376
    
    
    
    260,087
    
    
    
    5.40
    %
    
    
    4,006,439
    
    
    
    240,305
    
    
    
    6.00
    %
    
    
    4,146,416
    
    
    
    291,827
    
    
    
    7.04
    %Allowance for loan losses
    
    
    (73,518
    )
    
    
    
    
    
    
    
    
    
    
    (64,909
    )
    
    
    
    
    
    
    
    
    
    
    (57,633
    )Loans, net
    
    
    4,739,858
    
    
    
    260,087
    
    
    
    5.49
    %
    
    
    3,941,530
    
    
    
    240,305
    
    
    
    6.10
    %
    
    
    4,088,783
    
    
    
    291,827
    
    
    
    7.14
    %Total interest-earning assets/Interest
income (tax-equivalent basis)
    
    
    7,317,055
    
    
    
    380,092
    
    
    
    5.19
    %
    
    
    6,385,148
    
    
    
    343,131
    
    
    
    5.37
    %
    
    
    6,332,615
    
    
    
    378,527
    
    
    
    5.98
    %Total non interest-earning assets
    
    
    326,805
    
    
    
    
    
    
    
    
    
    
    
    339,963
    
    
    
    
    
    
    
    
    
    
    
    382,903Total assets
    
    $
    7,643,860
    
    
    
    
    
    
    
    
    
    
    $
    6,725,111
    
    
    
    
    
    
    
    
    
    
    $
    6,715,518Liabilities and stockholders equityInterest-bearing liabilities:Savings and NOW accounts
    
    $
    1,916,270
    
    
    $
    25,416
    
    
    
    1.33
    %
    
    $
    1,834,424
    
    
    $
    25,955
    
    
    
    1.41
    %
    
    $
    1,731,965
    
    
    $
    34,646
    
    
    
    2.00
    %Other time deposits
    
    
    1,580,760
    
    
    
    34,863
    
    
    
    2.21
    %
    
    
    1,283,678
    
    
    
    30,075
    
    
    
    2.34
    %
    
    
    1,751,206
    
    
    
    49,762
    
    
    
    2.84
    %Borrowings
    
    
    2,648,854
    
    
    
    74,261
    
    
    
    2.80
    %
    
    
    2,016,044
    
    
    
    63,288
    
    
    
    3.14
    %
    
    
    1,501,310
    
    
    
    56,369
    
    
    
    3.75
    %Term Notes
    
    
    132,947
    
    
    
    5,640
    
    
    
    4.24
    %
    
    
    210,034
    
    
    
    12,608
    
    
    
    6.00
    %
    
    
    323,740
    
    
    
    17,704
    
    
    
    5.47
    %Subordinated Notes
    
    
    29,351
    
    
    
    582
    
    
    
    1.98
    %
    
    
    22,023
    
    
    
    425
    
    
    
    1.93
    %
    
    
    40,278
    
    
    
    1,434
    
    
    
    3.56
    %Total interest-bearing liabilities/ Interest
expense
    
    
    6,308,182
    
    
    
    140,762
    
    
    
    2.23
    %
    
    
    5,366,203
    
    
    
    132,351
    
    
    
    2.47
    %
    
    
    5,348,499
    
    
    
    159,915
    
    
    
    2.99
    %Total non interest-bearing liabilities
    
    
    835,823
    
    
    
    
    
    
    
    
    
    
    
    762,760
    
    
    
    
    
    
    
    
    
    
    
    742,201Total liabilities
    
    
    7,144,005
    
    
    
    
    
    
    
    
    
    
    
    6,128,963
    
    
    
    
    
    
    
    
    
    
    
    6,090,700Stockholders Equity
    
    
    499,855
    
    
    
    
    
    
    
    
    
    
    
    596,148
    
    
    
    
    
    
    
    
    
    
    
    624,818Total liabilities and
stockholders equity
    
    $
    7,643,860
    
    
    
    
    
    
    
    
    
    
    $
    6,725,111
    
    
    
    
    
    
    
    
    
    
    $
    6,715,518Net interest income
    
    
    
    
    
    $
    239,330
    
    
    
    
    
    
    
    
    
    
    $
    210,780
    
    
    
    
    
    
    
    
    
    
    $
    218,612Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.96
    %
    
    
    
    
    
    
    
    
    
    
    2.90
    %
    
    
    
    
    
    
    
    
    
    
    2.99
    %Cost of funding earning assets
    
    
    
    
    
    
    
    
    
    
    1.92
    %
    
    
    
    
    
    
    
    
    
    
    2.07
    %
    
    
    
    
    
    
    
    
    
    
    2.53
    %Net interest margin (tax equivalent
basis)
    
    
    
    
    
    
    
    
    
    
    3.27
    %
    
    
    
    
    
    
    
    
    
    
    3.30
    %
    
    
    
    
    
    
    
    
    
    
    3.45
    %




---



##### 



(SANTANDER BANCORP LOGO)
      CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Changes in Interest Income and Interest Expense-Volume and Rate Analysis The following table allocates changes in the Corporations tax equivalent interest income and
interest expense between changes in the average volume of interest-earning assets and
interest-bearing liabilities and changes in their respective interest rates for the years 2004
compared to 2003 and 2003 compared to 2002. Volume and rate variances have been calculated based on
activities in average balances over the period and changes in interest rates on average
interest-earning assets and average interest-bearing liabilities. 2004 vs. 2003
    
    
    2003 vs. 2002Increase (decrease) due to change in:
    
    
    Increase (decrease) due to change in:Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(In thousands)Interest
Incometax equivalent basis:Federal funds purchased and securities
purchased under agreements to resell
    
    $
    535
    
    
    $
    598
    
    
    $
    1,133
    
    
    $
    (37
    )
    
    $
    (1,022
    )
    
    $
    (1,059
    )Time deposits with other banks
    
    
    33
    
    
    
    357
    
    
    
    390
    
    
    
    (236
    )
    
    
    (451
    )
    
    
    (687
    )Investment securities
    
    
    4,205
    
    
    
    11,451
    
    
    
    15,656
    
    
    
    9,543
    
    
    
    8,329
    
    
    
    17,872Loans, net
    
    
    45,414
    
    
    
    (25,632
    )
    
    
    19,782
    
    
    
    (10,206
    )
    
    
    (41,316
    )
    
    
    (51,522
    )Total interest income
    
    
    50,187
    
    
    
    (13,226
    )
    
    
    36,961
    
    
    
    (936
    )
    
    
    (34,460
    )
    
    
    (35,396
    )Interest Expense:Savings and NOW accounts
    
    
    1,128
    
    
    
    (1,667
    )
    
    
    (539
    )
    
    
    1,949
    
    
    
    (10,640
    )
    
    
    (8,691
    )Other time deposits
    
    
    6,635
    
    
    
    (1,847
    )
    
    
    4,788
    
    
    
    (11,878
    )
    
    
    (7,809
    )
    
    
    (19,687
    )Borrowings
    
    
    18,281
    
    
    
    (7,308
    )
    
    
    10,973
    
    
    
    17,183
    
    
    
    (10,264
    )
    
    
    6,919Long-term borrowings
    
    
    (3,313
    )
    
    
    (3,498
    )
    
    
    (6,811
    )
    
    
    (7,336
    )
    
    
    1,231
    
    
    
    (6,105
    )Total interest expense
    
    
    22,731
    
    
    
    (14,320
    )
    
    
    8,411
    
    
    
    (82
    )
    
    
    (27,482
    )
    
    
    (27,564
    )Net interest
income  tax equivalent basis
    
    $
    27,456
    
    
    $
    1,094
    
    
    $
    28,550
    
    
    $
    (854
    )
    
    $
    (6,978
    )
    
    $
    (7,832
    )
 During 2004, the increase in net interest income on a tax equivalent basis was due
primarily to the increase in the volume of average interest earning assets and lower rates paid on
interest bearing liabilities. These improvements in net interest margin were partially offset by a
decrease in the yield of average interest earning assets and higher average interest-bearing
liabilities. During 2003, the decrease in net interest income on a tax-equivalent basis was primarily due to the
decrease in the rates of average interest-earning assets that was only partially offset by the
decrease in the rates of average interest-bearing liabilities. These decreases were accompanied by
slight decreases in the volume of average interest-earning assets and average interest-bearing
liabilities. Provision for Loan Losses 2004 compared to 2003.The Corporations provision for loan losses for the year ended December 31,
2004 decreased $23.5 million, or 47.2%, compared with 2003. This decrease was the result of the
implementation of more stringent lending criteria, improved collection practices, and changes in
the composition of the loan portfolio, which increased significantly in the residential mortgage
loan segment. The residential mortgage loan portfolio has historically been a lower risk portfolio.
During 2004, net charge-offs were significantly lower than those for 2003, in particular in the
consumer loan category, and the Corporations non-performing asset ratios experienced a significant
improvement, which contributed to the reduction in the provision for loan losses. 2003 compared to 2002.For the year ended December 31, 2003, the provision for loan losses
decreased $13.9 million, or 21.8% compared to 2002. The decrease in the provision for loan losses
was due to the improving credit quality of the Corporations loan portfolio as a result of stricter
lending criteria and improved collection practices, as well as to the changing mix of the loan
portfolio, which experienced an increase in residential mortgage loans and a significant decrease
in the automobile financing segment, which the Corporation decided to exit in 2000. Net charge-offs
were lower in all loan categories during 2003, as compared to 2002, and non-performing asset ratios
improved significantly, reflecting the improvement in credit quality mentioned above. Refer to the discussions under Allowance for Loan Losses and Risk Management for further
analysis of the allowance for loan losses, the allocation of the allowance by loan category and
non-performing assets and related ratios. Other Income Other income consists of service charges on deposit accounts, other service fees, including
mortgage servicing fees and fees on credit cards, broker-dealer, asset management and insurance
fees, gains and losses on sales of securities, gain on sale of mortgage servicing rights, certain
other gains and losses and certain other income. The following table sets forth the components of other income for the years ended December 31,
2004, 2003 and 2002:




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS      
(SANTANDER BANCORP LOGO) Year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Bank service fees on deposit accounts
    
    $
    12,776
    
    
    $
    14,018
    
    
    $
    15,425Other service fees:Credit card fees
    
    
    12,841
    
    
    
    11,941
    
    
    
    12,867Mortgage-servicing fees
    
    
    1,828
    
    
    
    2,178
    
    
    
    1,624Trust fees
    
    
    2,951
    
    
    
    2,690
    
    
    
    2,642Other fees
    
    
    8,581
    
    
    
    8,163
    
    
    
    7,814Broker-dealer, asset management and insurance fees
    
    
    51,113
    
    
    
    49,526
    
    
    
    35,277Gain on sale of securities, net
    
    
    11,475
    
    
    
    10,790
    
    
    
    12,236Gain on sale of loans
    
    
    431
    
    
    
    9,829
    
    
    
    1,461Trading gains
    
    
    124
    
    
    
    1,601
    
    
    
    2,433Gain (loss) on derivatives
    
    
    3,459
    
    
    
    277
    
    
    
    (105
    )Other gains, net
    
    
    8,139
    
    
    
    4,669
    
    
    
    6,395Other
    
    
    3,521
    
    
    
    4,258
    
    
    
    3,039$
    117,239
    
    
    $
    119,940
    
    
    $
    101,108
 The table below details the breakdown of commissions from broker-dealer, asset
management and insurance operations: Year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Broker-dealer
    
    $
    30,180
    
    
    $
    33,732
    
    
    $
    26,804Asset management
    
    
    15,901
    
    
    
    11,031
    
    
    
    4,915Total Santander Securities and subsidiary
    
    
    46,081
    
    
    
    44,763
    
    
    
    31,719Insurance
    
    
    5,032
    
    
    
    4,763
    
    
    
    3,558Total
    
    $
    51,113
    
    
    $
    49,526
    
    
    $
    35,277
 2004 compared to 2003.For the year ended December 31, 2004, other income decreased $2.7
million or 2.3% compared to the same period in 2003. This decrease was the result of lower gain on
sales of loans, trading securities and sales of other real estate owned of $9.4 million, $1.5
million and $1.0 million, respectively, that were partially offset by a increases of $1.6 million
in mortgage servicing rights arising from the sale of mortgage loans, $2.8 million gain on sale of
a building during the first quarter of 2004, $3.2 million in derivative gains and $1.6 million in
fee income from the broker-dealer, asset management and insurance operations. For the year ended December 31, 2004, commissions earned by Santander Securities increased $1.3
million, or 2.9%, and insurance commissions increased $0.3 million, or 5.7%, as compared to the
same period in 2003. Santander Securities business includes securities underwriting and
distribution, sales, trading, financial planning, investment advisory services and securities
brokerage services. In addition, Santander Securities provides portfolio management services
through its wholly owned subsidiary, Santander Asset Management. The broker-dealer, asset
management and insurance operations contributed 43.6% of commissions to the Corporations other
income for the year ended December 31, 2004. For the year ended December 31, 2004, the decrease in broker-dealer commissions is due to the
decrease in underwriting and fixed income activity during the year compared to the year ended
December 31, 2003. The increase in asset management commissions for the year ended December 31,
2004 compared to the same period in 2003 is due to the growth in assets under management resulting
from the issuance of closed-end mutual funds. Gains on sales of loans were principally in the portfolio of mortgage loans held for sale. The
Corporations strategy regarding mortgage loans is directed toward increasing its loan portfolio,
while maintaining its secondary market channels open. Mortgage loan sales are executed from time to
time when interest rate movements permit the Corporation to maximize its returns as was the case in
2004. In March 2004, the Corporation sold the building known as Torre Santander, a seventeen story
building located at 221 Ponce de Leon Avenue, Hato Rey, Puerto Rico, to an unrelated third party in
a sales-leaseback transaction and recognized a gain of $2.8 million, recorded under other gains.
The remaining $4.0 million gain was deferred and is being amortized as a reduction of rent expense
over the term of the related leases through January 2009.




---



##### 



(SANTANDER BANCORP LOGO)       CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Bank service fees on deposit accounts consisting primarily of service charges, overdraft
fees and fees for non-sufficient funds reflected a decrease of $1.2 million to $12.8 million in
2004 from $14.0 million in 2003. This decrease was partially offset by an increase in credit card
fees of $0.9 million in 2004 compared to 2003. In order to attract and maintain our customer base,
deposit products must be priced competitively. Many fees have been reduced in order to maintain a
competitive edge and retain our client base. Additionally, customers have become more sophisticated
in managing their accounts and maintaining their fees at a minimum often deciding on maintaining
compensating balances in lieu of incurring service fees. In order to offset this decrease the
Corporation has emphasized growth in other items of non-interest income including active campaigns
to attract new credit card customers and increase usage of credit card products which has resulted
in an increase in credit card fees in 2004. 2003 compared to 2002.The Corporations other income increased 18.6% from $101.1 million for the
year ended December 31, 2002, to $119.9 million for the year ended December 31,2003. This
improvement was due to increases in commissions from the broker-dealer, asset management and
insurance operations of $14.2 million, an increase in gains on sales of mortgage loans of $6.9
million in several transactions with unrelated third parties, a gain on sale of a loan to an
unrelated third party of $1.4 million and gains on sales of other real estate owned of $2.1
million. These gains were partially offset by a reduction of $3.0 million in mortgage-servicing
assets recognized in 2003 compared to 2002. The increase in broker-dealer, asset management and insurance fees for the year ended December 31,
2003 was due to increases in commissions and fees earned by Santander Securities of $13.0 million
or 41.1%, and an increase in insurance commissions earned by Santander Insurance of $1.2 million or
33.9%. Santander Securities business includes securities underwriting and distribution, sales,
trading, financial planning, investment advisory services and securities brokerage services. In
addition, Santander Securities provides portfolio management services through its wholly-owned
subsidiary, Santander Asset Management Corporation. The broker-dealer and asset management
operations contributed 41.3% of commissions and fees to the Corporations other income for the year
ended December 31, 2003. The increase in broker-dealer commissions was due to a stronger economy and improved investor
confidence and an increase in the underwriting of closed-end mutual funds and fixed income
activity. The increase in asset management commissions is due to the growth in assets under
management resulting from the issuance of closed-end mutual funds. The Corporations gains on sales of loans were principally in the mortgage loan portfolio. The
Corporations strategy regarding mortgage loans is directed toward increasing its loan portfolio,
while maintaining its secondary market channels open. Mortgage loan sales are executed from time to
time when interest rate movements permit the Corporation to maximize its returns, as was the case
in 2003.




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS      
(SANTANDER BANCORP LOGO) Operating Expenses The following table sets forth information as to the Corporations other operating
expenses for the years ended December 31, 2004, 2003 and 2002: Year ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in thousands)Salaries
    
    $
    59,792
    
    
    $
    52,774
    
    
    $
    52,450Pension and other benefits
    
    
    47,042
    
    
    
    48,130
    
    
    
    41,372Expenses deferred as loan origination costs
    
    
    (15,252
    )
    
    
    (11,510
    )
    
    
    (8,606
    )Total personnel costs
    
    
    91,582
    
    
    
    89,394
    
    
    
    85,216Occupancy costs
    
    
    13,959
    
    
    
    13,534
    
    
    
    13,360Equipment expenses
    
    
    6,946
    
    
    
    7,291
    
    
    
    8,855EDP servicing expense, amortization and technical services
    
    
    31,291
    
    
    
    40,502
    
    
    
    32,064Communications
    
    
    8,976
    
    
    
    8,612
    
    
    
    8,742Business promotion
    
    
    10,435
    
    
    
    6,760
    
    
    
    7,028Other taxes
    
    
    8,584
    
    
    
    9,811
    
    
    
    11,027Other operating expenses:Professional fees
    
    
    12,235
    
    
    
    6,642
    
    
    
    5,509Amortization of intangibles
    
    
    1,170
    
    
    
    3,674
    
    
    
    7,165Printing and supplies
    
    
    1,725
    
    
    
    1,722
    
    
    
    1,681Credit card expenses
    
    
    7,561
    
    
    
    7,208
    
    
    
    8,084Insurance
    
    
    2,113
    
    
    
    2,723
    
    
    
    2,466Examinations & FDIC assessment
    
    
    1,108
    
    
    
    1,766
    
    
    
    1,874Transportation and travel
    
    
    2,044
    
    
    
    1,578
    
    
    
    1,310Repossessed assets provision and expenses
    
    
    2,758
    
    
    
    5,387
    
    
    
    2,347Collections and related legal costs
    
    
    2,464
    
    
    
    6,084
    
    
    
    6,264All other
    
    
    12,582
    
    
    
    11,577
    
    
    
    10,883Other operating expenses
    
    
    45,760
    
    
    
    48,361
    
    
    
    47,583Non personnel expenses
    
    
    125,951
    
    
    
    134,871
    
    
    
    128,659Total Operating Expenses
    
    $
    217,533
    
    
    $
    224,265
    
    
    $
    213,875Efficiency
ratio  on a tax equivalent basis
    
    
    63.54
    %
    
    
    70.05
    %
    
    
    69.53
    %Personnel cost to average assets
    
    
    1.20
    %
    
    
    1.33
    %
    
    
    1.27
    %Other operating expenses to average assets
    
    
    1.65
    %
    
    
    2.00
    %
    
    
    1.91
    %Assets per employee
    
    $
    4,799
    
    
    $
    4,590
    
    
    $
    4,519
 2004 compared to 2003.For the year ended December 31, 2004, the efficiency ratio on a
tax equivalent basis improved 651 basis points to 63.54% from 70.05% for the same period in 2003.
This improvement was a result of higher revenues (excluding gains on sales of securities and a
gain on the sale of a building during the first quarter of 2004) and a decrease of $6.7 million in
operating expenses. For the year ended December 31, 2004, there were cost reductions of $6.7 million or 3.0% in
operating expenses compared to the same period in 2003. Non personnel expenses, were reduced by
$8.9 million offset by an increase in personnel expenses of $2.2 million. Personnel costs increased by $2.2 million due to higher salaries, the in-sourcing of collection
services and severance payments, partially offset by a decrease in pension and other benefits and
by an increase in expenses deferred as loan origination costs. The $8.9 million non personnel expense reduction in 2004 was primarily due to a decrease of
$9.2 million or 23% in electronic data processing servicing, amortization and technical services
due to lower servicing costs. There were also decreases in amortization of intangibles of $2.5
million, repossessed assets provision and expenses of $2.6 million and collections and related
legal costs of $3.6 million. These decreases were partially offset by increases in professional
services of $5.6 million, partly associated with the implementation of certain provisions of the
Sarbanes-Oxley Act as well as other consulting services, and an increase in business promotion of
$3.7 million consistent with the Corporations strategy to increase market share and grow the
volume of its business. For the year ended December 31, 2004, the efficiency ratio was 63.54%, compared to 70.05% and
69.53% for 2003 and 2002, respectively. The improvement in 2004 was a result of higher net
interest income and the decrease of




---



##### 



(SANTANDER BANCORP LOGO)       CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS $6.7 million in operating expenses described above. As it continued to grow its asset
base in 2004, the Corporation also focused on controlling expenses, resulting in a decrease in
personnel costs as a percentage of average assets, from 1.33% in 2003 to 1.20% in 2004, and in
other operating expenses as a percentage of average assets, from 2.00% in 2003 to 1.65% in 2004.
Full-time equivalent employees were 1,735 at December 31, 2004, compared to 1,605 and 1,577 at
December 31, 2003 and 2002, respectively. The increase in headcount in 2004 is associated with
bringing in-house the loan collections operations. 2003 compared to 2002.For the year ended December 31, 2003, the Corporations total operating
expenses reflected an increase of 4.9% or $10.4 million from $213.9 million for the year ended
December 31, 2002, to $224.3 million in 2003. Salaries and employee benefits increased $4.2 million due principally to higher commissions and
bonuses paid in the broker-dealer operations. This increase was partially offset by an increase in
deferred loan origination costs. Other operating expenses increased $6.2 million during 2003. This increase was mainly due to
increases in EDP servicing expense, amortization and technical services and All Other, and was
partially offset by a decrease in amortization of intangibles. EDP servicing, amortization and
technical services increased $8.4 million in 2003 compared to 2002 due to expenses incurred to
complete enhancements and corrections to the systems recently installed. There was an increase of
$3.0 million in Repossessed Assets-provisions and expenses due to a reserve for disposal costs of
$2.0 million created in 2003, and an increase of $0.7 million in holding expenses on other real
estate owned. These increases were partially offset by a decrease in amortization of intangibles of
$3.5 million due to the full amortization of core deposit intangibles in 2003 and lower
amortization of mortgage-servicing rights. During the third quarter of 2003, the Corporation sold its software developed for internal use to
an affiliate at book value, for approximately $42 million. As a result of this transaction, the
Corporations expense related to the use of this software is expected to be reduced by
approximately $4.1 million annually. Software amortization related to the software sold was
approximately $7.2 million annually, and the Corporation will pay servicing expense to an affiliate
of approximately $3.1 million annually. Income Taxes In Puerto Rico, the maximum statutory corporate income tax rate applicable to the Corporation
is 39%. However, there is an alternative minimum tax of 22% on the Corporations alternative
minimum taxable income which, in general, applies if the Corporations regular income tax liability
is less than the Corporations alternative minimum tax liability. The Corporation is also subject
to municipal license tax at various rates that do not exceed 1.5% on the Corporations taxable
gross income. Under the Puerto Rico Internal Revenue Code, as amended (the PR Code), the
Corporation and each of its subsidiaries are treated as separate taxable entities and are not
entitled to file consolidated tax returns. The PR Code provides a dividend received deduction of
100% on dividends received from controlled subsidiaries subject to taxation in Puerto Rico. The Corporation is subject to United States federal income tax on its taxable income that is
effectively connected with the Corporations trade or business in the mainland United States. The
Corporation is also subject to United States federal income tax on certain income that is not
effectively connected with the Corporations trade or business in the mainland United States, such
as interest (excluding portfolio interest) and certain dividends earned on United States securities
and loans. Interest derived by the Corporation on obligations of the United States represents
portfolio interest, and is not subject to federal income taxes. Subject to certain limitations, any
federal income tax is creditable against Puerto Rico income taxes. The difference between the statutory marginal tax rate and the effective tax rate is primarily due
to the interest income earned on certain investments and loans which is exempt from income tax (net
of the disallowance of expenses attributable to the exempt income) and to the disallowance of
certain expenses and other items. Puerto Rico international banking entities, or IBEs, are currently exempt from taxation under
Puerto Rico law. During 2004, the Legislature of Puerto Rico and the Governor of Puerto Rico
approved a law amending the IBE Act. This law imposes income taxes at normal statutory rates on
each IBE that operates as a unit of a bank, if the IBEs net income generated after December 31,
2003 exceeds 40% of the banks net income in the taxable year commenced on July 1, 2003, 30% of the
banks net income in the taxable year commencing on July 1, 2004, and 20% of the banks net income
in the taxable year commencing on July 1, 2005, and thereafter. It does not impose income taxation
on an IBE that operates as a subsidiary of a bank. 2004 compared to 2003.The provision for income tax amounted to $8.1 million (or 8.8% of pretax
earnings) for the year ended December 31, 2004 compared to an income tax benefit of $0.3 million
for the same period in 2003. The increase in the provision for income tax was due to higher taxable
income partially offset by a decrease in the accrual for income tax contingencies due to the
expiration of the statute of limitations on certain contigencies in 2004. 2003 compared to2002. The income tax benefit was $0.3 million for the year ended December 31,
2003, as compared with a provision for income taxes of $3.3 million for the year ended December 31,
2002. The tax benefit for 2003 takes into account, among other things, the settlement of an
examination by the taxing authorities and the expiration of certain tax contingencies. The
provision for income taxes




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS      
(SANTANDER BANCORP LOGO) for 2003, before taking into account the effect of the above, represents 14.6% of
pretax earnings for 2003, as compared to 11.3% for the previous year. This increase relates
primarily to the increase in pretax income for subsidiaries. Financial Condition Assets Total assets reached $8.3 billion as of December 31, 2004, a 13.0% increase when compared to total
assets of $7.4 billion, at December 31, 2003. As of December 31, 2004, there was an increase of
$1.4 billion in net loans, including loans held for sale compared to December 31, 2003. The
increase in net loans at December 31, 2004 was partially offset by a decrease in investment
securities of $482 million and a decrease of $8.3 million in premises and equipment and of $34.2
million in other assets compared to December 31, 2003. Net loans, including loans held for sale, at December 31, 2004, were $5.5 billion, reflecting an
increase in the loan portfolio of $1.4 billion, or 33.0%, when compared to $4.1 billion at December
31, 2003. Mortgage loans originated and purchased continued to grow during 2004 resulting in an
increase of $1.1 billion, or 76.7%, in the mortgage loan portfolio. There was a 18.4% increase in
mortgage loan production for the year ended December 31, 2004 compared to the same period in 2003.
The commercial loan portfolio (including construction loans) also reflected an increase of $192.2
million, or 8.6%, for 2004 while consumer loans grew 5.0% to $454.3 million. At December 31, 2004, there was a decrease of $8.3 million
in premises and equipment, due to the sale of a building with a book value of approximately $7.7
million during the first quarter of 2004, and normal depreciation for the period, compared to the
same period in 2003. Other assets reflected a decrease of $34.2 million, mainly due to a decreases
in net securities sold not delivered of $22.0 million, net deferred tax assets of $17.3 million and
prepaid expenses of $5.7 million. These reductions were partially offset by an increase in
derivative assets of $10.4 million. The Corporation continues to focus its efforts on recapturing market share with a strong emphasis
on commercial and mortgage lending. Consumer lending will also continue to be a focus of growth.
There will be a strong emphasis on providing quality products to customers designed to meet their
personal and business needs, while maintaining strict lending criteria. This strict lending
criteria and strong collection efforts are expected to have a favorable impact on non-performing
assets. Short Term Investments and Interest-bearing Deposits in Other Financial Institutions The Corporation sells federal funds, purchases securities under agreements to resell and
deposits funds in interest-bearing accounts in other financial institutions to help meet liquidity
requirements and provide temporary holdings until the funds can be otherwise invested or utilized.
As of December 31, 2004, 2003 and 2002, the Corporation had interest-bearing deposits, federal
funds sold and securities purchased under agreements to resell as detailed below: 2004
    
    
    2003
    
    
    2002(In thousands)Interest-bearing deposits
    
    $
    92,612
    
    
    $
    25,300
    
    
    $
    268,620Federal funds sold
    
    
    231,500
    
    
    
    183,000
    
    
    
    263,500Securities purchased under agreements to resell
    
    
    95,150
    
    
    
    95,750
    
    
    
    $
    419,262
    
    
    $
    304,050
    
    
    $
    532,120
 Investment Portfolio The following tables set forth the Corporations investments in government and corporate
securities and certain other financial investments at December 31, 2004, 2003 and 2002, by
contractual maturity, giving comparative carrying and fair values and average yield for each of the
categories. The Corporation has evaluated the conditions under which it might sell its investment
securities. As a result, some of its investment securities have been classified as available for
sale. The Corporation may decide to sell some of the securities classified as available for sale
either as part of its efforts to manage its interest rate risk, or in response to changes in
interest rates, prepayment risk or similar economic factors. Investment securities available for
sale are carried at fair value and unrealized gains and losses net of taxes on these investments
are included in accumulated other comprehensive income or loss, which is a separate component of
stockholders equity. Gains or losses on sales of investment securities available for sale are recognized when
realized and are computed on the basis of the specific identification method. At December 31, 2004,
2003 and 2002, investment securities available for sale were $2.0 billion, $1.7 billion, and $1.3
billion respectively. Investment securities held to maturity are carried at cost, adjusted for premium amortization and
discount accretion. The Corporation classifies as investment securities held to maturity those
investments for which the Corporation has the intent and ability to hold until maturity. During December of 2004, BSCH communicated to the Corporation that, upon the formal adoption of
International Financial Reporting Standards (IFRS) by the Bank of Spain, it expected to adopt
IFRS effective January 1, 2005, and that, with regards to its consolidated held-to-maturity




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##### 



(SANTANDER BANCORP LOGO)       CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS investment portfolio, it was seriously considering taking advantage of a one-time
transition guidance to reclassify such investment portfolio as available for sale, as permitted by
IFRS. BSCH encouraged the Corporation to conform the classification of such investment portfolio in
the Corporations US GAAP financial statements to the classification pursuant to the one-time
transition guidance under IFRS, effective January 1, 2005. After thorough consideration, in
February of 2005 management of the Corporation determined that it would, subject to its Boards
approval, reclassify its held-to-maturity investment portfolio to the available-for-sale category
under US GAAP. Management of the Corporation believes that because the deliberation process leading
to the February 2005 decision was initiated during December of 2004, at December 31, 2004, the
Corporation could not demonstrate that it had the positive intent to hold the aforesaid investment
portfolio to maturity; the positive intent is required by Statement of Financial Accounting
Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities,
in order for securities scoped under SFAS 115 to be classified as held to maturity. Further,
because such transfer does not qualify under the exemption provisions for the sale or transfer of
held-to-maturity securities under SFAS 115, the reclassification decision by the Corporation is
deemed to have tainted the held-to-maturity category and it will not be permitted to classify
prospectively investment securities scoped under SFAS 115 as held to maturity for a period of two
years. At December 31, 2004, the
securities reclassified from held to maturity to available for sale had a fair value of $840.0
million and an amortized cost of $813.8 million, which resulted in a credit to Other Comprehensive
Income of $16.0 million, net of income taxes, related to the unrealized holding gain. Other investment securities include debt, equity or other securities that do not have readily
determinable fair values and are stated at amortized cost. The Corporation includes in this
category stock owned to comply with regulatory requirements, such as Federal Home Loan Bank (FHLB)
stock. The Corporation acquires certain securities for trading purposes and carries its trading account at
fair value. Financial instruments including, to a limited extent, derivatives, such as options
contracts, are used in dealing and other trading activities and are carried at fair value. The
Corporation classifies as trading those securities that are acquired and held principally for the
purpose of selling them in the near term. Realized and unrealized changes in fair value are
recorded separately in the trading profit or loss account as part of the results of operations in
the period in which the changes occur. At December 31, 2004, 2003 and 2002, the Corporation had
$34.2 million, $42.5 million and $22.7 million of securities held for trading, respectively. The following table presents the composition, book value and market value of the Corporations
investment portfolio by major category as of the dates indicated:




---



##### 



CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    
    (SANTANDER BANCORP LOGO)
 Available for Sale
    
    
    Held to Maturity
    
    
    TotalCarrying
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    CarryingDecember 31, 2004:
    
    Value
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Value
    
    
    Fair Value(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
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    CarryingDecember 31, 2003:
    
    Value
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Value
    
    
    Fair Value(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
 Available for Sale
    
    
    Held to Maturity
    
    
    TotalCarrying
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    CarryingDecember 31, 2002:
    
    Value
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Value
    
    
    Fair Value(In thousands)U.S. Treasury
    
    $
    121,809
    
    
    $
    121,809
    
    
    $
    
    
    
    $
    
    
    
    $
    121,809
    
    
    $
    121,809U.S. Agency Notes
    
    
    1,101,343
    
    
    
    1,101,343
    
    
    
    932,255
    
    
    
    999,619
    
    
    
    2,033,598
    
    
    
    2,100,962P.R. Government Obligations
    
    
    48,538
    
    
    
    48,538
    
    
    
    41,017
    
    
    
    42,084
    
    
    
    89,555
    
    
    
    90,622Mortgage-backed Securities
    
    
    
    
    
    
    
    
    
    
    96,636
    
    
    
    98,960
    
    
    
    96,636
    
    
    
    98,960Foreign Securities
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    200
    
    
    
    200
    
    
    
    200Other Securities
    
    
    
    
    
    
    
    
    
    
    26,250
    
    
    
    26,250
    
    
    
    26,250
    
    
    
    26,250$
    1,271,690
    
    
    $
    1,271,690
    
    
    $
    1,096,358
    
    
    $
    1,167,113
    
    
    $
    2,368,048
    
    
    $
    2,438,803




---



##### 



(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
 The tables below summarize the contractual maturity of the Corporations
available-for-sale, held-to-maturity investment securities and other investment
securities at December 31, 2004, 2003 and 2002: December 31, 2004After One
    
    
    After Five YearsWithin
    
    
    Year but Within
    
    
    but WithinOne Year
    
    
    Five Years
    
    
    Ten Years
    
    
    Over Ten Years
    
    
    TotalAvg
    
    
    
    
    
    
    Avg
    
    
    
    
    
    
    Avg
    
    
    
    
    
    
    Avg
    
    
    Carrying
    
    
    Fair
    
    
    AvgAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Value
    
    
    Value
    
    
    Yield(Dollars in thousands)U.S. Treasury
    
    $
    7,578
    
    
    
    2.16
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    7,578
    
    
    $
    7,578
    
    
    
    2.16
    %U.S. Agency Notes
    
    
    3,057
    
    
    
    2.24
    %
    
    
    1,062,627
    
    
    
    4.56
    %
    
    
    362,247
    
    
    
    4.13
    %
    
    
    
    
    
    
    0.00
    %
    
    
    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
    
    
    
    
    
    
    0.00
    %
    
    
    890
    
    
    
    8.36
    %
    
    
    75
    
    
    
    9.50
    %
    
    
    488,820
    
    
    
    4.30
    %
    
    
    489,785
    
    
    
    489,785
    
    
    
    4.31
    %Foreign Securities
    
    
    75
    
    
    
    6.98
    %
    
    
    75
    
    
    
    5.60
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    150
    
    
    
    150
    
    
    
    6.29
    %Other Securities
    
    
    
    
    
    
    0.00
    %
    
    
    37,500
    
    
    
    1.72
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    37,500
    
    
    
    37,500Total 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 but Within
    
    
    but WithinOne Year
    
    
    Five Years
    
    
    Ten Years
    
    
    Over Ten Years
    
    
    TotalAvg
    
    
    
    
    
    
    Avg
    
    
    
    
    
    
    Avg
    
    
    
    
    
    
    Avg
    
    
    Carrying
    
    
    Fair
    
    
    AvgAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Value
    
    
    Value
    
    
    Yield(Dollars in thousands)U.S. Treasury
    
    $
    1,000
    
    
    
    0.93
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    1,000
    
    
    $
    1,000
    
    
    
    0.93
    %U.S. Agency Notes
    
    
    6,089
    
    
    
    1 .49
    %
    
    
    1,105,887
    
    
    
    4.13
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    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
    
    
    
    
    
    
    0.00
    %
    
    
    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
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    150
    
    
    
    150
    
    
    
    7.14
    %Other Securities
    
    
    
    
    
    
    0.00
    %
    
    
    15,000
    
    
    
    0.81
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    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
    %
 December 31, 2002After One
    
    
    After Five YearsWithin
    
    
    Year but Within
    
    
    but WithinOne Year
    
    
    Five Years
    
    
    Ten Years
    
    
    Over Ten Years
    
    
    TotalAvg
    
    
    
    
    
    
    Avg
    
    
    
    
    
    
    Avg
    
    
    
    
    
    
    Avg
    
    
    Carrying
    
    
    Fair
    
    
    AvgAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Value
    
    
    Value
    
    
    Yield(Dollars in thousands)U.S. Treasury
    
    $
    121,809
    
    
    
    1.42
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    121,809
    
    
    $
    121,809
    
    
    
    1.42
    %U.S. Agency Notes
    
    
    524,284
    
    
    
    1.65
    %
    
    
    1,509,314
    
    
    
    3.64
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    2,033,598
    
    
    
    2,100,962
    
    
    
    3.14
    %P.R. Government
Obligations
    
    
    39,149
    
    
    
    1.73
    %
    
    
    31,937
    
    
    
    4.99
    %
    
    
    7,175
    
    
    
    4.64
    %
    
    
    11,294
    
    
    
    6.40
    %
    
    
    89,555
    
    
    
    90,622
    
    
    
    3.71
    %Mortgage-backed
Securities
    
    
    13
    
    
    
    10.47
    %
    
    
    7,115
    
    
    
    3.86
    %
    
    
    10,034
    
    
    
    8.70
    %
    
    
    79,474
    
    
    
    3.91
    %
    
    
    96,636
    
    
    
    98,960
    
    
    
    4.40
    %Foreign Securities
    
    
    50
    
    
    
    6.20
    %
    
    
    150
    
    
    
    7.14
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    200
    
    
    
    200
    
    
    
    6.91
    %Other Securities
    
    
    
    
    
    
    0.00
    %
    
    
    26,250
    
    
    
    4.87
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    26,250
    
    
    
    26,250
    
    
    
    4.87
    %Total Securities
    
    $
    685,305
    
    
    
    1.61
    %
    
    $
    1,574,766
    
    
    
    3.68
    %
    
    $
    17,209
    
    
    
    7.01
    %
    
    $
    90,768
    
    
    
    4.52
    %
    
    $
    2,368,048
    
    
    $
    2,438,803
    
    
    
    3.14
    %




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS  (SANTANDER BANCORP LOGO)
 Loan Portfolio The following table analyzes the Corporations loans by type of loan and includes loans held
for sale as of December 31, 2004, 2003 and 2002. 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000% 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
    
    $
    1,439,609
    
    
    
    25.8
    %
    
    $
    1,354,879
    
    
    
    32.1
    %
    
    $
    1,220,996
    
    
    
    31.7
    %
    
    $
    1,329,149
    
    
    
    29.9
    %
    
    $
    1,407,866
    
    
    
    31.4
    %Agricultural
    
    
    62,198
    
    
    
    1.1
    %
    
    
    62,925
    
    
    
    1.5
    %
    
    
    67,768
    
    
    
    1.8
    %
    
    
    96,356
    
    
    
    2.2
    %
    
    
    108,130
    
    
    
    2.4
    %SBA
    
    
    72,963
    
    
    
    1.3
    %
    
    
    72,060
    
    
    
    1.7
    %
    
    
    74,160
    
    
    
    1.9
    %
    
    
    78,606
    
    
    
    1.8
    %
    
    
    78,693
    
    
    
    1.8
    %Factor liens
    
    
    16,818
    
    
    
    0.3
    %
    
    
    18,291
    
    
    
    0.4
    %
    
    
    14,026
    
    
    
    0.4
    %
    
    
    19,179
    
    
    
    0.4
    %
    
    
    18,976
    
    
    
    0.4
    %Other
    
    
    11,978
    
    
    
    0.2
    %
    
    
    2,754
    
    
    
    0.1
    %
    
    
    4,699
    
    
    
    0.1
    %
    
    
    4,336
    
    
    
    0.1
    %
    
    
    6,704
    
    
    
    0.1
    %Retail commercial
banking
    
    
    1,603,566
    
    
    
    28.7
    %
    
    
    1,510,909
    
    
    
    35.8
    %
    
    
    1,381,649
    
    
    
    35.9
    %
    
    
    1,527,626
    
    
    
    34.4
    %
    
    
    1,620,369
    
    
    
    36.1
    %Corporate banking
    
    
    632,454
    
    
    
    11.3
    %
    
    
    523,063
    
    
    
    12.4
    %
    
    
    479,614
    
    
    
    12.4
    %
    
    
    615,286
    
    
    
    13.8
    %
    
    
    646,182
    
    
    
    14.4
    %Total Commercial
    
    
    2,236,020
    
    
    
    40.0
    %
    
    
    2,033,972
    
    
    
    48.2
    %
    
    
    1,861,263
    
    
    
    48.3
    %
    
    
    2,142,912
    
    
    
    48.2
    %
    
    
    2,266,551
    
    
    
    50.5
    %Construction
    
    
    199,799
    
    
    
    3.6
    %
    
    
    209,655
    
    
    
    5.0
    %
    
    
    309,505
    
    
    
    8.0
    %
    
    
    327,348
    
    
    
    7.4
    %
    
    
    396,895
    
    
    
    8.8
    %ConsumerPersonal (installment
and other loans)
    
    
    319,204
    
    
    
    5.7
    %
    
    
    287,590
    
    
    
    6.8
    %
    
    
    379,678
    
    
    
    9.8
    %
    
    
    490,939
    
    
    
    11.1
    %
    
    
    532,617
    
    
    
    11.9
    %Automobile
    
    
    6,434
    
    
    
    0.1
    %
    
    
    21,232
    
    
    
    0.5
    %
    
    
    48,384
    
    
    
    1.3
    %
    
    
    92,966
    
    
    
    2.1
    %
    
    
    157,236
    
    
    
    3.5
    %Credit Cards
    
    
    128,622
    
    
    
    2.3
    %
    
    
    95,362
    
    
    
    2.3
    %
    
    
    102,463
    
    
    
    2.7
    %
    
    
    112,588
    
    
    
    2.5
    %
    
    
    111,233
    
    
    
    2.5
    %Total Consumer
    
    
    454,260
    
    
    
    8.1
    %
    
    
    404,184
    
    
    
    9.6
    %
    
    
    530,525
    
    
    
    13.8
    %
    
    
    696,493
    
    
    
    15.7
    %
    
    
    801,086
    
    
    
    17.9
    %MortgageResidential
    
    
    2,573,642
    
    
    
    46.1
    %
    
    
    1,458,271
    
    
    
    34.6
    %
    
    
    1,054,115
    
    
    
    27.4
    %
    
    
    1,161,243
    
    
    
    26.1
    %
    
    
    917,105
    
    
    
    20.4
    %Commercial
    
    
    7,659
    
    
    
    0.2
    %
    
    
    2,836
    
    
    
    0.1
    %
    
    
    4,482
    
    
    
    0.1
    %
    
    
    7,063
    
    
    
    0.2
    %
    
    
    17,332
    
    
    
    0.4
    %Total Mortgage
    
    
    2,581,301
    
    
    
    46.3
    %
    
    
    1,461,107
    
    
    
    34.7
    %
    
    
    1,058,597
    
    
    
    27.5
    %
    
    
    1,168,306
    
    
    
    26.3
    %
    
    
    934,437
    
    
    
    20.8
    %Lease Financing
    
    
    112,152
    
    
    
    2.0
    %
    
    
    105,849
    
    
    
    2.5
    %
    
    
    92,993
    
    
    
    2.4
    %
    
    
    106,756
    
    
    
    2.4
    %
    
    
    89,715
    
    
    
    2.0
    %Total Loans, net of
unearned interest
and deferred fees
    
    $
    5,583,532
    
    
    
    100.0
    %
    
    $
    4,214,767
    
    
    
    100.0
    %
    
    $
    3,852,883
    
    
    
    100.0
    %
    
    $
    4,441,815
    
    
    
    100.0
    %
    
    $
    4,488,684
    
    
    
    100.0
    %
 As a result of managements focus on regaining market
share, the loan portfolio, including loans held for sale,
reflected an increase of 32.5% or $1.4 billion, reaching
$5.6 billion at December 31, 2004, compared to the figures
reported as of December 31, 2003. The mortgage loan port-
folio grew $1.1 billion or 76.7% during 2004 compared to
the December 31, 2003 mortgage loan portfolio. There was
an 18.4% increase in mortgage loan production for the year
ended December 31, 2004 compared to the same period in
2003. The commercial loan portfolio (including construction loans) and the consumer loan portfolio also reflected
increases of $192.2 million or 8.6% and $50.1 million or
12.4%, respectively, as of December 31, 2004, compared to
December 31, 2003. Allowance for Loan Losses The Corporation systematically assesses the overall risks in its
loan portfolio and establishes and maintains an allowance
for probable losses thereon. The allowance for loan losses is
maintained at a level sufficient to provide for estimated loan
losses based on the evaluation of known and inherent risks
in the loan portfolio. Management evaluates the adequacy
of the allowance for loan losses on a monthly basis. This
evaluation involves the exercise of judgment and the use
of assumptions and estimates that are subject to revision,
as more information becomes available. In determining the
allowance, management considers the portfolio risk characteristics, prior loss experience, prevailing and projected
economic conditions, loan impairment measurements and
the results of internal and regulatory agencies loan reviews.
Based on current and expected economic conditions, the
expected level of net loan losses and the methodology
established to evaluate the adequacy of the allowance for
loan losses, management considers that the allowance for
loan losses is adequate to absorb probable losses in the
Corporations loan portfolio.




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Commercial and construction loans over a predetermined
amount are individually evaluated on a quarterly basis
for impairment following the provisions of Statement of
Accounting Standards (SFAS) No. 114, Accounting by
Creditors of a Loan. A loan is impaired when based on
current information and events; it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. The
impairment loss, if any, on each individual loan identified as
impaired is measured based on the present value of expected cash flows discounted at the loans effective interest rate,
except as a practical expedient, we may measure impairment based on the loans observable market price, or the
fair value of the collateral, if the loan is collateral dependent.
Substantially all of the Corporations impaired loans are
measured on the basis of the fair value of the collateral, net
of estimated disposition costs. The Corporation maintains a
detailed analysis of all loans identified as impaired with their
corresponding allowances and the specific component of
the allowance is computed on a quarterly basis. Additions,
deletions or adjustments to the analysis are tracked and
formal justification is documented detailing the rationale for
such adjustments. For small, homogeneous type of loans, a general allowance
is computed based on average historical loss experience or
ratios for each corresponding type of loans (consumer, credit
cards, residential mortgages, auto, etc.). The methodology
of accounting for all probable losses is made in accordance
with the guidance provided by Statement of Accounting
Standards (SFAS) No. 5, Accounting for Contingencies. In
determining the general allowance, the Corporation applies
a loss factor for each type of loan based on the average historical net charge off for the previous two or three years for
each portfolio adjusted for other statistical loss estimates,
as deemed appropriate. Historical loss rates are reviewed
at least quarterly and adjusted based on changes in actual
collections and charge off experience as well as significant
factors that in managements judgement reflect the impact
of any current conditions on loss recognition. Factors that
management considers in the analysis of the general reserve
include the effect of the trends in the nature and volume
of loans (delinquency, charge-offs and non-accrual loans),
changes in the mix or type of collateral, asset quality trends,
changes in the internal lending policies and credit standards,
collection practices and examination results from bank regulatory agencies. The determination of the allowance for loan losses under
SFAS No. 5 is based on historical loss experience by loan
type, management judgment of the quantitative factors
(historical net charge-offs, statistical loss estimates, etc.),
as well as qualitative factors (current economic conditions,
portfolio composition, delinquency trends, industry concentrations, etc.), which result in the final determination of the
provision for loan losses to maintain a level of allowance for
loan losses deemed to be adequate. The Corporations methodology for allocating the allowance among the different parts of the portfolio or different
elements of the allowance is based on the historical loss
percentages for each type or pool of loan (consumer, commercial, construction, mortgage and other), after assigning
the specific allowances for impaired loans on an individual
review process. The sum of specific allowances for impaired
loans plus the general allowances for each type of loan not
specifically examined constitutes the total allowance for
loan losses at the end of any reporting period. An unallocated allowance is maintained to absorb changes
and unexpected losses that may result from certain significant external factors, such as (a) the Corporations moderate concentration in certain industries, especially health
care, and agriculture businesses; (b) the slow growth of
the Puerto Rico economy as evidenced by high unemployment figures; (c) the broad negative effect on the Puerto
Rico economy of the increased price of oil and oil-related
products that could extend well into 2005; (d) interest rate
forecasts and (e) the negative collateral economic effect of
the war in Iraq or additional terrorist attacks, both which
add material risk to the economy and curtail economic
recovery. This allowance is based primarily on historical
experience, current trends in factors such as bankruptcies
and loss trends, among others. On a quarterly basis, management reviews its determination
of the allowance for loan losses which includes the specific
allowance computed according to the provisions of SFAS
No. 114 and the general allowance for small, homogenous
type of loans, which is based on historical loss percentages
for each type or pool of loan. This analysis also considers
loans classified by the internal loan review department,
the internal auditors, the in-house Watch System Unit, and
banking regulators. The Corporation has not changed any aspects of its overall approach in the determination of the allowance for
loan losses, and there have been no material changes in
assumptions or estimation techniques, as compared to prior
periods.




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
( SANTANDER BANCORP LOGO) Year ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands)Balance at beginning of year
    
    $
    69,693
    
    
    $
    56,906
    
    
    $
    51,738
    
    
    $
    50,597
    
    
    $
    55,176Provision for loan losses
    
    
    26,270
    
    
    
    49,916
    
    
    
    63,699
    
    
    
    65,240
    
    
    
    37,09595,963
    
    
    
    106,822
    
    
    
    115,437
    
    
    
    115,837
    
    
    
    92,271Losses charged to the allowance:Commercial and industrial
    
    
    19,250
    
    
    
    9,198
    
    
    
    19,158
    
    
    
    19,576
    
    
    
    9,930Construction
    
    
    
    
    
    
    499
    
    
    
    1,528
    
    
    
    
    
    
    
    Mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    Consumer
    
    
    18,969
    
    
    
    36,544
    
    
    
    45,676
    
    
    
    51,312
    
    
    
    43,664Leasing
    
    
    1,658
    
    
    
    1,434
    
    
    
    3,125
    
    
    
    3,858
    
    
    
    37339,877
    
    
    
    47,675
    
    
    
    69,487
    
    
    
    74,820
    
    

    
    53,967Recoveries:Commercial and industrial
    
    
    5,271
    
    
    
    4,478
    
    
    
    3,443
    
    
    
    4,128
    
    
    
    4,385Construction
    
    
    
    
    
    
    433
    
    
    
    18
    
    
    
    104
    
    
    
    94Mortgage
    
    
    
    
    
    
    7
    
    
    
    1
    
    
    
    
    
    
    
    Consumer
    
    
    7,341
    
    
    
    5,127
    
    
    
    7,044
    
    
    
    6,409
    
    
    
    7,741Leasing
    
    
    479
    
    
    
    501
    
    
    
    450
    
    
    
    80
    
    
    
    7313,091
    
    
    
    10,546
    
    
    
    10,956
    
    
    
    10,721
    
    
    
    12,293Net loans charged-off
    
    
    26,786
    
    
    
    37,129
    
    
    
    58,531
    
    
    
    64,099
    
    
    
    41,674Balance at end of year
    
    $
    69,177
    
    
    $
    69,693
    
    
    $
    56,906
    
    
    $
    51,738
    
    
    $
    50,597Ratios:Allowance for loan losses to year-end loans
    
    
    1.24
    %
    
    
    1.65
    %
    
    
    1.48
    %
    
    
    1.16
    %
    
    
    1.13
    %Recoveries to charge-offs
    
    
    32.83
    %
    
    
    22.12
    %
    
    
    15.77
    %
    
    
    14.33
    %
    
    
    22.78
    %Net charge-offs to average loans
    
    
    0.56
    %
    
    
    0.93
    %
    
    
    1.41
    %
    
    
    1.44
    %
    
    
    0.91
    %Allowance for loan losses to net charge-offs
    
    
    258.26
    %
    
    
    187.71
    %
    
    
    97.22
    %
    
    
    80.72
    %
    
    
    121.41
    %Allowance for loan losses to non-performing loans
    
    
    79.05
    %
    
    
    70.85
    %
    
    
    46.10
    %
    
    
    54.34
    %
    
    
    74.29
    %Provision for loan losses to:Net charge-offs
    
    
    98.07
    %
    
    
    134.44
    %
    
    
    108.83
    %
    
    
    101.78
    %
    
    
    89.01
    %Average loans
    
    
    0.55
    %
    
    
    1.24
    %
    
    
    1.53
    %
    
    
    1.47
    %
    
    
    0.81
    %
 During the third quarter of 2004, the Corporation reclassified its reserves related to
unfunded lending commitments and standby letters of credit from the allowance for loan losses to
other liabilities. Prior period amounts have been reclassified to conform to the current
presentation. Changes in the reserve for unfunded commitments and standby letters of credit were as
follows: Year ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands)Balance at beginning of year
    
    $
    879
    
    
    $
    1,050
    
    
    $
    1,119
    
    
    $
    929
    
    
    
    1,024Provision (credit) for losses on unfunded commitments
and standby letters of credit
    
    
    390
    
    
    
    (171
    )
    
    
    (69
    )
    
    
    190
    
    
    
    (95
    )Balance at end of year
    
    $
    1,269
    
    
    $
    879
    
    
    $
    1,050
    
    
    $
    1,119
    
    
    
    929
 2004 compared to 2003.One of the Corporations specific goals during 2004 was to
continue improving the quality of its loan portfolio by strengthening its collection efforts and
employing more stringent lending criteria. The Corporations allowance for loan losses was $69.2
million, or 1.24% of period-end loans at December 31, 2004, a 41 basis point reduction compared to
$69.7 million, or 1.65% of period-end loans at December 31, 2003. The decrease in this ratio was
partially
due to a significant reduction in net loans charged off as well as lower non-performing loans
during the period. The reduction of $23.6 million, or 47.4% in the provision for loan losses for
the year ended December 31, 2004 was due to an 11.0% decrease in non-performing loans and a 27.9%
reduction in net charge-offs during 2004 compared to 2003. In addition to the improvements in
non-performing loans and net charge-offs, the reduction in the provision for loan losses was due to




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS a significant decrease in the percentage of net consumer loan
charge-offs during 2004, resulting in an improvement in the
loss ratios which are used in the estimation of the allowance
for loan losses for the consumer loan portfolio. The coverage ratio (allowance for loan losses to non-performing loans) improved to 79.05% at December 31, 2004,
from 70.85% at December 31, 2003, due to a net decrease
in non-performing loans of $10.9 million. The portfolio with
the highest level of non-performing loans during the year
was the mortgage loan portfolio, which is fully collateralized
and in which the Corporation has historically experienced
a very low level of charge-offs. Excluding non-performing
mortgage loans this ratio is 135.0% compared to 123.9%
as of December 31, 2003. The annualized ratio of net charge-offs to average loans
for the year ended December 31, 2004 decreased 37 basis
points to 0.56% from 0.93% for the same period in 2003. Net charge-offs for the year ended December 31,
2004 were
significantly lower than those for the same period in 2003
due to more stringent lending criteria, aggressive collection
efforts and continuous monitoring of the loan portfolio. Consumer loan charge-offs continued reflecting improvement
during 2004 with a reduction of $17.6 million or 48.1 %. The allowance for loan losses decreased $0.5 million from
$69.7 million at December 31, 2003 to $69.2 million at
December 31, 2004. At December 31, 2004 impaired loans
(loans evaluated individually for impairment) with related
allowance amounted to approximately $80.1 million and
$4.9 million, respectively. Management expects to continue the positive trend experienced in 2003 and 2004 by continuing to improve the
quality of its loan portfolio, improving collection efforts and
continuing with its stringent lending criteria. 2003 compared to 2002. The Corporations efforts during
2003 were geared towards improving the quality of its loan
portfolio by strengthening its collection efforts and employing more stringent lending criteria, and have had a positive
impact on the allowance for loan losses. During 2003 there
was a reduction in the provision for loan losses of 21.6% or
$13.8 million while maintaining a ratio of allowance for loan
losses to year-end loans of 1.65%, a 17-basis point improvement over the 2002 ratio of 1.48%. The reduction in the
provision for loan losses was due to lower net charge-offs
and a decrease in non-performing loans in 2003. Net charge-offs reflected a 36.6% or
$21.4 million decrease
from $58.5 million in 2002 to $37.1 million in 2003. Losses
charged to the allowance amounted to $69.5 million in
2002 and $47.7 million in 2003, with significant reductions in commercial loan charge-offs of $10.0 million, or
52%, and consumer loan charge-offs of $9.1 million, or
20%. Recoveries reflected a decrease of $0.4 million during
2003. As a result of the improvement in net losses charged
to the allowance in 2003, the recoveries to charge-off ratio
improved from 15.77% in 2002 to 22.12% in 2003 and the
net charge-offs to average loans ratio improved from 1.41 %
in 2002 to 0.93% in 2003. Non-performing loans also reflected an improvement of
$25.1 million or 20.3% from $123.4 million in 2002 to
$98.4 million in 2003. There were improvements in non-performing commercial, construction and consumer loans that
were partially offset by an increase in non-performing mortgage loans. The Corporation has historically experienced a
very low rate of losses on its mortgage loan portfolio and the
increase in non-performing mortgage loans is a reflection of
the increase in the mortgage loan portfolio from $1.1 billion
in 2002 to $1.5 billion in 2003. The improvement
in non-performing loans resulted in an improvement in
the ratio of
the allowance for loan losses to non-performing loans from
46.10% in 2002 to 70.85% in 2003 and in the ratio of
non-performing loans to total loans of 87 basis points from
3.20% in 2002 to 2.33% in 2003. Although the provision for loan losses decreased during
2003, there was a change in the composition of the allowance and the required provision due to changes in loan concentrations and quality. The commercial loan portfolio has
experienced an increase by loan exposure to a single borrower. Loans over $15 million to a single borrower or related
group have increased by $283.2 million from December 31,
2002 to December 31, 2003, reaching $984.0 million as of
that date. Also, the commercial loan portfolio reflected an
increase in the Impaired Classification under the provisions
of SFAS No. 114, resulting in additional specific provisions.
Impaired loans increased from $51.2 million on December
31, 2002 to $80.9 million as of December 31, 2003 with an
increase in the related allowance for impaired loans of $5.8
million, from $3.1 million in 2002 to $8.9 million in 2003.
Refer to note 6 of the consolidated financial statements for
full disclosure of impaired loans under the provisions of SFAS
No. 114. The breakdown by loan category of the allowance
for loan losses highlights an increment of approximately
$4.4 million in the allowance for loan losses pertaining to
commercial loans from 2002 to 2003. The increase in the allowance for loan losses to $69.7 million
in 2003 from $56.9 million in 2002 is a result of significant
reduction in net losses charged to the allowance and in general, to improved asset quality ratios and expected economic
conditions and trends. Management expects to continue the
positive trend experienced in 2003 by continuing to improve
the quality of its loan portfolio, improving collection efforts
and continuing with its stringent lending criteria. The allowance for loan losses to non-performing loans
increased from 70.85% at December 31, 2003, to 79.05%
at December 31, 2004, due to a net increase in non-performing loans of $10.9 million at December 31, 2004. The
portfolio with the highest level of non-performing loans
during the year was the mortgage loan portfolio, which is
fully collateralized and in which the Corporation has




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
( SANTANDER BANCORP LOGO) historically experienced a very low level of charge-offs. When non-performing mortgage loans are excluded, the ratio of allowance for
loan losses to non-performing loans reached 135.0% as of December 31, 2004 compared to 123.9% as of December 31, 2003. Net
charge-offs of $26.8 million were partially offset by a provision of $26.3 million for the year ended 2004. Lower net charge-offs in
2004 together
with the lower non-performing loans resulted in a lower provision for loan losses while still maintaining an allowance for loan
losses to year-end loans of 1.24%. Broken down by major loan categories, the allowance for loan losses for the five years ended December 31, 2004, 2003, 2002, 2001 and
2000 was as follows: 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000% of loans
    
    
    
    
    
    
    % of loans
    
    
    
    
    
    
    % of loans
    
    
    
    
    
    
    % of loans
    
    
    
    
    
    
    % of loansin each
    
    
    
    
    
    
    in each
    
    
    
    
    
    
    in each
    
    
    
    
    
    
    in each
    
    
    
    
    
    
    in eachcategory
    
    
    
    
    
    
    category
    
    
    
    
    
    
    category
    
    
    
    
    
    
    category
    
    
    
    
    
    
    categoryto Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to Total
    
    
    
    
    
    
    to TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Commercial
    
    $
    27,152
    
    
    
    40.0
    %
    
    $
    25,790
    
    
    
    48.2
    %
    
    $
    21,415
    
    
    
    48.3
    %
    
    $
    14,577
    
    
    
    48.2
    %
    
    $
    13,565
    
    
    
    50.5
    %Construction
    
    
    1,208
    
    
    
    3.6
    %
    
    
    1,194
    
    
    
    5.0
    %
    
    
    4,149
    
    
    
    8.0
    %
    
    
    1,756
    
    
    
    7.4
    %
    
    
    2,175
    
    
    
    8.8
    %Consumer
    
    
    30,832
    
    
    
    8.1
    %
    
    
    33,751
    
    
    
    9.6
    %
    
    
    29,711
    
    
    
    13.8
    %
    
    
    26,578
    
    
    
    15.7
    %
    
    
    30,789
    
    
    
    17.9
    %Mortgage
    
    
    6,567
    
    
    
    46.3
    %
    
    
    3,747
    
    
    
    34.7
    %
    
    
    124
    
    
    
    27.5
    %
    
    
    119
    
    
    
    26.3
    %
    
    
    85
    
    
    
    20.8
    %Lease financing
    
    
    2,068
    
    
    
    2.0
    %
    
    
    2,922
    
    
    
    2.5
    %
    
    
    1,833
    
    
    
    2.4
    %
    
    
    1,430
    
    
    
    2.4
    %
    
    
    1,742
    
    
    
    2.0
    %Unallocated
    
    
    1,350
    
    
    
    
    
    
    
    2,289
    
    
    
    
    
    
    
    (326
    )
    
    
    
    
    
    
    7,278
    
    
    
    
    
    
    
    2,241
    
    
    
    $
    69,177
    
    
    
    100.0
    %
    
    $
    69,693
    
    
    
    100.0
    %
    
    $
    56,906
    
    
    
    100.0
    %
    
    $
    51,738
    
    
    
    100.0
    %
    
    $
    50,597
    
    
    
    100.0
    %
 Under the caption Unallocated the Corporation maintains an unallocated reserve for
loan losses of $1.4 million as of December 31, 2004. The unallocated allowance is maintained to
absorb higher than anticipated losses that may result from certain significant external factors
such as (a) the Corporations moderate concentration of loans in certain industries, specially
health care and agriculture; (b) the slow growth of the Puerto Rico economy as evidenced by high
unemployment figures; (c) the broad negative effect on the Puerto Rico economy of the increased
price of oil and oil-related products that could extend well into 2005; (d) interest rates
forecasts; and (e) the negative collateral economic effect of the war with Iraq or additional
terrorist attacks, both which add material risk to the economy and curtail economic recovery. Any loan considered to be impaired is measured by the Corporation at the present value of expected
future cash flows using the loans effective interest rate, or as a practical expedient, at the
loans observable market price or the fair value of the collateral if the loan is collateral
dependent. A loan is impaired when, based on current information and events, it is probable that
the Corporation will be unable to collect all amounts due according to the contractual terms of
the agreement. At December 31, 2004, 2003 and 2002, the portion of the allowance for loan losses
related to impaired loans was $4.9 million, $8.9 million and $3.1 million, respectively. Please
refer to Notes 1 and 6 to the consolidated financial statements for further information. Liabilities The principal sources of funding for the Corporation are its equity capital, core deposits
from retail and commercial
clients, and wholesale deposits and borrowings raised in the interbank and commercial markets. As of December 31, 2004, total liabilities reached $7.8 billion, an increase of $0.9 billion
compared to December 31, 2003. This increase in total liabilities was principally due to increases
in deposits of $605.9 million, in borrowings of $268.3 million and other liabilities of $25.1
million. Federal funds purchased and other borrowings increased $430.3 million and commercial paper
increased $374.6 million. These increases were partially offset by a reduction of $458.8 million in
securities sold under agreements to repurchase and $77.8 million in term and subordinated notes. In order to fund its operations, including cash flow requirements and future growth, the
Corporation undertook several financing transactions during 2004. During the first quarter of 2004,
Banco Santander Puerto Rico issued $30 million in S&P Linked Notes to obtain long term financing at
a reasonable interest rate. Proceeds from the offering were used to finance the loan portfolio.
During the fourth quarter of 2004 the Corporation issued $75,000,000 of its 6.30% Subordinated
Notes due June 2032. The net proceeds from the sale of the Notes were used to refinance existing
debt incurred in the acquisition of Santander Securities Corporation and for other general
corporate purposes. The following table sets forth the Corporations average daily balance of liabilities for the
years ended December 31, 2004, 2003 and 2002 by source, together with the average interest rates
paid thereon.




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Year ended December 31,2004
    
    
    2003
    
    
    2002% of
    
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    
    % ofAverage
    
    
    Total
    
    
    Average
    
    
    Average
    
    
    Total
    
    
    Average
    
    
    Average
    
    
    Total
    
    
    AverageBalance
    
    
    Liabilities
    
    
    Cost
    
    
    Balance
    
    
    Liabilities
    
    
    Cost
    
    
    Balance
    
    
    Liabilities
    
    
    Cost(Dollars in thousands)Savings deposits
    
    $
    1,916,270
    
    
    
    26.8
    %
    
    
    1.33
    %
    
    $
    1,834,424
    
    
    
    29.9
    %
    
    
    1.41
    %
    
    $
    1,731,965
    
    
    
    28.4
    %
    
    
    2.00
    %Time deposits
    
    
    1,580,760
    
    
    
    22.2
    %
    
    
    2.21
    %
    
    
    1,283,678
    
    
    
    21.0
    %
    
    
    2.34
    %
    
    
    1,751,206
    
    
    
    28.8
    %
    
    
    2.84
    %Interest-bearing deposits
    
    
    3,497,030
    
    
    
    49.0
    %
    
    
    1.72
    %
    
    
    3,118,102
    
    
    
    50.9
    %
    
    
    1.80
    %
    
    
    3,483,171
    
    
    
    57.2
    %
    
    
    2.42
    %Federal funds, repos, and
commercial paper
    
    
    2,648,854
    
    
    
    37.1
    %
    
    
    2.80
    %
    
    
    2,016,044
    
    
    
    32.9
    %
    
    
    3.14
    %
    
    
    1,501,310
    
    
    
    24.6
    %
    
    
    3.75
    %Term and subordinated notes
    
    
    162,298
    
    
    
    2.2
    %
    
    
    3.83
    %
    
    
    232,057
    
    
    
    3.8
    %
    
    
    5.62
    %
    
    
    364,018
    
    
    
    6.0
    %
    
    
    5.26
    %Total borrowings
    
    
    2,811,152
    
    
    
    39.3
    %
    
    
    2.86
    %
    
    
    2,248,101
    
    
    
    36.7
    %
    
    
    3.39
    %
    
    
    1,865,328
    
    
    
    30.6
    %
    
    
    4.05
    %Total interest-bearing liabilities
    
    
    6,308,182
    
    
    
    88.3
    %
    
    
    2.23
    %
    
    
    5,366,203
    
    
    
    87.6
    %
    
    
    2.47
    %
    
    
    5,348,499
    
    
    
    87.8
    %
    
    
    2.99
    %Non-interest-bearing deposits
    
    
    656,215
    
    
    
    9.2
    %
    
    
    0.00
    %
    
    
    631,582
    
    
    
    10.3
    %
    
    
    0.00
    %
    
    
    613,647
    
    
    
    10.1
    %
    
    
    0.00
    %Other liabilities
    
    
    179,608
    
    
    
    2.5
    %
    
    
    0.00
    %
    
    
    131,178
    
    
    
    2.1
    %
    
    
    0.00
    %
    
    
    128,554
    
    
    
    2.1
    %
    
    
    0.00
    %Total non interest-bearing
liabilities
    
    
    835,823
    
    
    
    11.7
    %
    
    
    0.00
    %
    
    
    762,760
    
    
    
    12.4
    %
    
    
    0.00
    %
    
    
    742,201
    
    
    
    12.2
    %
    
    
    0.00
    %Total Liabilities
    
    $
    7,144,005
    
    
    
    100.0
    %
    
    
    1.97
    %
    
    $
    6,128,963
    
    
    
    100.0
    %
    
    
    2.16
    %
    
    $
    6,090,700
    
    
    
    100.0
    %
    
    
    2.63
    %
 As of December 31, 2004, total deposits were $4.7 billion, reflecting an increase
of $605.9 million, or 14.6%, over deposits of $4.1 billion as of December 31, 2003. This
increase was in line with the Corporations objective of increasing its market share. The
Corporation continues its efforts to increase its core deposit base by maintaining
competitive interest rates, maximizing the cross selling of products and services by the
segmentation of its client base and the extensive use of alternative marketing tools such
as telephone and internet banking. The following tables set forth additional details on the Corporations average deposit
base for the years ended December 31, 2004, 2003 and 2002. Year ended December 31,Average Total Deposits
    
    2004
    
    
    2003
    
    
    2002(In thousands)Private Demand
    
    $
    595,012
    
    
    $
    567,970
    
    
    $
    562,791Public Demand
    
    
    61,203
    
    
    
    63,612
    
    
    
    50,856Non interest-bearing
    
    
    656,215
    
    
    
    631,582
    
    
    
    613,647Savings Accounts
    
    
    786,006
    
    
    
    769,572
    
    
    
    587,799NOW and Super NOW accounts
    
    
    527,954
    
    
    
    505,403
    
    
    
    450,563Government NOW accounts
    
    
    602,310
    
    
    
    559,449
    
    
    
    693,603Total Savings Accounts
    
    
    1,916,270
    
    
    
    1,834,424
    
    
    
    1,731,965Certificates of deposit:Under $100,000
    
    
    215,446
    
    
    
    261,232
    
    
    
    295,442$100,000 and over
    
    
    1,202,368
    
    
    
    882,809
    
    
    
    1,252,751936
    
    
    38,694
    
    
    
    63,526
    
    
    
    42,075Public time accounts
    
    
    124,252
    
    
    
    76,111
    
    
    
    160,938Total Certificates of Deposit
    
    
    1,580,760
    
    
    
    1,283,678
    
    
    
    1,751,206Total Deposits
    
    $
    4,153,245
    
    
    $
    3,749,684
    
    
    $
    4,096,818




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##### 



CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS (SANTANDER BANCORP LOGO)
 The following table sets forth the amount of time deposits of $100,000 or more as of
December 31, 2004. December 31,2004(In thousands)Three months or less
    
    $
    961,587Over three months through six months
    
    
    165,744Over six months through twelve months
    
    
    77,880Over twelve months
    
    
    587,929Total
    
    $
    1,793,140
 The Corporations most important source of funding is its customer deposits. Average non
interest-bearing deposits, representing 9.2% of the Corporations average total liabilities for the
year ended December 31, 2004, are the least expensive source of funding for the Corporation. Total
average deposits represented 58.2%, 61.2% and 67.3% of total average liabilities of the Corporation
as of December 31, 2004, 2003 and 2002, respectively. For the year ended December 31, 2004, the Corporations customer deposits (average balance)
consisted primarily of $656.2 million in non interest-bearing checking accounts and $3.5 billion of
interest-bearing deposits. The increase in average interest-bearing deposits was primarily in
certificates of deposit greater than $100,000. The average balance of the Corporations total borrowings increased 25.1% from $2.2 billion for the
year ended December 31, 2003, to $2.8 billion for the year ended December 31, 2004, in order to
maintain adequate levels of liquidity and to meet funding requirements. The Corporations current funding strategy is to continue to use various alternative funding
sources taking into account their relative cost, their availability and the general asset and
liability management strategy of the Corporation, placing a stronger emphasis on obtaining client
deposits and reducing reliance on borrowings. For further information regarding the Corporations borrowings, see Notes 12 and 13 to the
consolidated financial statements. Capital and Dividends Stockholders equity decreased in 2003 as a result of the early redemption of preferred stock
of the Bank and the purchase of our broker-dealer affiliate, Santander Securities. On December 26, 2003, Banco Santander redeemed 2,610,008 preferred shares with a par value of $25,
at a price of $26 per share. The preferred shares were cancelled because they carried an above
market interest rate of 7% and the Corporation was able to maintain our well capitalized status
after the cancellation. This transaction was completed with full regulatory approval. During the fourth quarter of 2004 the Corporation issued $75,000,000 of its 6.30% Subordinated
Capital Notes, that qualify for Tier II capital and are due June 2032. The net proceeds from the
sale of the Notes were used to refinance existing debt incurred in the acquisition of Santander
Securities Corporation and for other general corporate purposes. The Corporation does not expect favorable or unfavorable trends that would materially affect our
capital resources. As an investment-grade rated entity by several nationally recognized rating agencies, the
Corporation has access to a variety of capital issuance alternatives in the United States and
Puerto Rico capital markets. The Corporation continuously monitors its capital raising
alternatives. The Corporation may issue additional capital in the future, as needed, to maintain
its well-capitalized status. Stockholders equity was $556.0 million or 6.7% of total assets at December 31, 2004, compared to
$480.8 million or 6.5% of total assets at December 31, 2003. The increase in stockholders equity
was mainly due to net income of $84.5 million for the period and an improvement in accumulated
other comprehensive income of $12.6 million. These increases in stockholders equity were partially
offset by dividends declared and paid of $21.9 million. On July 9, 2004, the Board of Directors declared a 10% stock dividend to all shareholders of record
as of July 20, 2004, payable on August 3, 2004. Cash was paid in lieu of fractional shares. The
earnings per share computations for all periods presented in the accompanying financial information
have been adjusted to reflect this stock dividend. During 2003 and 2002 the Corporation declared and paid annual cash dividends of $0.44 per common
share to common shareholders. During 2004 the Corporation declared and paid cash dividends of $0.49
per common share to its common shareholders. The Corporations current annualized dividend yield
is 2.12%, based on the fourth quarter of 2004 dividend of $0.16 per common share. The Corporation adopted and implemented various Stock Repurchase Programs in May 2000, December
2000 and June 2002. Under these programs the Corporation acquired 3% of the then outstanding common
shares. During November 2002, the Corporation started a fourth Stock Repurchase program under which
it may acquire 3% of its outstanding common shares. In November 2002, the Board of Directors
authorized the Corporation to repurchase up to 928,204 shares, or approximately 3%, of its shares
of outstanding common stock. The Board felt that the Corporations shares of common stock
represented an attractive investment at prevailing market prices at the time of the adoption of the
common stock repurchase program and that, given the relatively small amount of the program, the
stock repurchases would not have a significant impact on liquidity and capital positions. The
program has no
time limitation and management is authorized to effect




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##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS repurchases at its discretion. The authorization permits the Corporation to repurchase
shares from time to time in the open market or in privately negotiated transactions. The timing and
amount of any repurchases will depend on many factors, including the Corporations capital
structure, the market price of the common stock and overall market conditions. All of the
repurchased shares will be held by the Corporation as treasury stock and reserved for future
issuance for general corporate purposes. During the year ended December 31, 2004, the Corporation did not repurchase any shares of common
stock, compared to 167,500 shares of common stock repurchased during the year ended December 31,
2003 at a cost of $2.3 million. As of December 31, 2004, the Corporation had repurchased 4,011,260
shares of its common stock under these programs at a cost of $67.6 million. Management believes
that the repurchase program has not had a significant effect on the Corporations liquidity and
capital positions. The Corporation has a Dividend Reinvestment Plan and a Cash Purchase Plan wherein holders of
common stock have the opportunity to automatically invest cash dividends to purchase more shares
of the Corporations common stock. Shareholders may also make, as frequently as once a month,
optional cash payments for investment in additional shares of the Corporations common stock. During 2004, the Corporations common stock price per share increased from $22.14 at December 31,
2003 to
$30.16 at December 31, 2004, representing a 36% or $374.2 million increase in aggregate
shareholder value. The Corporation is subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporations consolidated financial statements. The regulations require
the Corporation to meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The Corporations capital classification is also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. The Corporations common stock is listed on the New York Stock Exchange (NYSE) and on the Madrid
Stock Exchange (LATIBEX). The symbol on the NYSE and on the LATIBEX for the common stock is SBP
and XSBP, respectively. There were approximately 153 holders of record of the Corporations
common stock as of December 31, 2004, not including beneficial owners whose shares are held in
names of brokers or other nominees. The following table sets forth the high and low market prices of the Corporations common stock
for the periods indicated, after retroactive adjustment for the effect of the stock dividend
declared on July 9, 2004. Cash
    
    
    BookDividends
    
    
    ValuePeriod
    
    High
    
    
    Low
    
    
    per Share
    
    
    per Share20041st 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
    
    
    
    11.5820031st Quarter
    
    $
    12.77
    
    
    $
    11.17
    
    
    $
    0.11
    
    
    $
    11.512nd Quarter
    
    
    15.02
    
    
    
    12.09
    
    
    
    0.11
    
    
    
    11.493rd Quarter
    
    
    18.32
    
    
    
    14.65
    
    
    
    0.11
    
    
    
    11.774th Quarter
    
    
    23.91
    
    
    
    17.45
    
    
    
    0.11
    
    
    
    10.31
 As of December 31, 2004, the Corporation was classified as a well capitalized
institution under the regulatory framework for prompt corrective action. At December 31, 2004, the
Corporation continued to exceed the regulatory risk-based capital requirements for well-capitalized
institutions. Tier I capital to risk-adjusted assets and total capital ratios at December 31, 2004
were 9.27% and
11.90%, respectively, and the leverage ratio was 6.36%. The reduction in the Corporations capital
ratios in 2003 compared to 2002 is due to the redemption of its preferred stock in December 2003
and the corporate reorganization described in Note 1 to the financial statements. Refer to notes 1
and 15 in the consolidated financial statements for additional information.




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##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS (SANTANDER BANCORP LOGO)
 Capital Adequacy Data To be Well CapitalizedFor Minimum Capital
    
    
    Under Prompt CorrectiveAdequacy Purposes
    
    
    Action ProvisionActual
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAmount
    
    
    Ratio
    
    
    Must be
    
    
    Must be
    
    
    Must be
    
    
    Must be(Dollars in thousands)December 31, 2004:Total Capital (to Risk-weighted Assets)Santander BanCorp
    
    $
    641,948
    
    
    
    11.90
    %
    
    3
    $431,496
    
    
    
    3 8.00
    %
    
    
    N/ABanco Santander
    
    
    598,153
    
    
    
    11.19
    %
    
    3
    427,503
    
    
    
    3 8.00
    %
    
    
    3 $534,379
    
    
    
    310.00
    %Tier I (to Risk-weighted Assets)Santander BanCorp
    
    
    499,800
    
    
    
    9.27
    %
    
    3
    215,748
    
    
    
    3 4.00
    %
    
    
    N/ABanco Santander
    
    
    531,311
    
    
    
    9.94
    %
    
    3
    213,751
    
    
    
    3 4.00
    %
    
    3
    320,627
    
    
    
    3 6.00
    %Leverage (to average assets)Santander BanCorp
    
    
    499,800
    
    
    
    6.36
    %
    
    3
    235,601
    
    
    
    3 3.00
    %
    
    
    N/ABanco Santander
    
    
    531,311
    
    
    
    6.83
    %
    
    3
    233,389
    
    
    
    3 3.00
    %
    
    3
    388,982
    
    
    
    3 5.00
    %December 31, 2003:Total Capital (to Risk-weighted Assets)Santander BanCorp
    
    $
    508,148
    
    
    
    10.41
    %
    
    3
    $390,568
    
    
    
    3 8.00
    %
    
    
    N/ABanco Santander
    
    
    524,697
    
    
    
    10.89
    %
    
    3
    369,182
    
    
    
    3 8.00
    %
    
    
    3$461,478
    
    
    
    310.00
    %Tier I (to Risk-weighted Assets)Santander BanCorp
    
    
    431,504
    
    
    
    8.84
    %
    
    3
    195,284
    
    
    
    3 4.00
    %
    
    
    N/ABanco Santander
    
    
    464,364
    
    
    
    9.64
    %
    
    3
    184,591
    
    
    
    3 4.00
    %
    
    3
    276,887
    
    
    
    3 6.00
    %Leverage (to average assets)Santander BanCorp
    
    
    431,504
    
    
    
    6.04
    %
    
    3
    214,460
    
    
    
    3 3.00
    %
    
    
    N/ABanco Santander
    
    

    464,364
    
    
    
    6.59
    %
    
    3
    189,470
    
    
    
    3 3.00
    %
    
    3
    315,783
    
    
    
    3 5.00
    %December 31, 2002:Total Capital (to Risk-weighted Assets)Santander BanCorp
    
    $
    617,968
    
    
    
    13.39
    %
    
    3
    $369,199
    
    
    
    38.00
    %
    
    
    N/ABanco Santander
    
    
    604,892
    
    
    
    12.04
    %
    
    3
    364,297
    
    
    
    38.00
    %
    
    3
    $455,371
    
    
    
    3 10.00
    %Tier I (to Risk-weighted Assets)Santander BanCorp
    
    
    560,280
    
    
    
    12.14
    %
    
    3
    184,599
    
    
    
    3 4.00
    %
    
    
    N/ABanco Santander
    
    
    547,971
    
    
    
    13.29
    %
    
    3
    182,149
    
    
    
    3 4.00
    %

    
    3
    273,224
    
    
    
    3 6.00
    %Leverage (to average assets)Santander BanCorp
    
    
    560,280
    
    
    
    8.87
    %
    
    3
    189,470
    
    
    
    33.00
    %
    
    
    N/ABanco Santander
    
    
    547,971
    
    
    
    8.74
    %
    
    3
    188,166
    
    
    
    3 3.00
    %
    
    3
    313,610
    
    
    
    3 5.00
    %
 Goodwill and Intangible Assets Goodwill and intangible assets were $42.8 million at December 31, 2004, compared with $39.5
million at December 31, 2003. The increase in 2004, was principally due to mortgage servicing
rights arising from the sale of
mortgages. There was no goodwill impairment recognized during 2004 or 2003, refer to notes 1 and 9
of the consolidated financial statements for additional information. Total goodwill and intangibles
at December 31, 2004 and 2003 consisted of: 2004
    
    
    2003
    
    
    2002(In millions)Mortgage-servicing Rights
    
    $
    6.5
    
    
    $
    4.7
    
    
    $
    8.4Advisory-servicing Rights
    
    
    1.5
    
    
    
    
    
    
    
    Core Deposit Intangibles
    
    
    
    
    
    
    
    
    
    
    2.7Goodwill
    
    
    34.8
    
    
    
    34.8
    
    
    
    34.8$
    42.8
    
    
    $
    39.5
    
    
    $
    45.9




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Risk Management The Corporation has specific policies and procedures which structure and delineate the
management of risks, particularly those related to credit, interest rate exposure and liquidity
risk. Risks are identified, measured and monitored through various committees including the Asset
and Liability Committee, Credit and Investment Committees, among others. Credit Risk Management and Loan Quality The lending activity of the Corporation represents its core function, and as such, the
quality and effectiveness of the loan origination and credit risk areas are imperative to
management for the growth and success of the Corporation. The importance of the Corporations
lending activity has been considered when establishing functional responsibilities, organizational
reporting, lending policies and procedures, and various monitoring processes and controls. Critical risk management responsibilities include establishing sound lending standards, monitoring
the quality of the loan portfolio, establishing loan rating systems, assessing reserves and loan
concentrations, supervising document control and accounting, providing necessary training and
resources to credit officers, implementing lending policies and loan documentation procedures,
identifying problem loans as early as possible, and instituting procedures to ensure appropriate
actions to comply with laws and regulations. In addition, the Corporation has an independent Loan Review Department and an independent Internal
Audit Division, each of which conducts monitoring and evaluation of loan portfolio quality, loan
administration, and other related activities, carried on as part of the Corporations lending
activity. Both departments provide periodic reports to the Board of Directors, continuously assess
the validity of information reported to the Board of Directors and maintain compliance with
established lending policies. The Corporation has also established an internal risk rating system and internal classifications which serve as timely identification of the loan quality issues affecting the loan portfolio. Credit extensions for commercial loans are approved by credit committees including the Small Loan Credit Committee, the Regional Credit Committee, the Credit Administration Committee, the Management Credit Committee, and the Board of Directors Credit Committee. A centralized department of the Consumer Lending Division approves all consumer loans. The Corporations collateral requirements for loans depend on the financial strength and liquidity of the prospective borrower and the principal amount and term of the proposed financing. Acceptable collateral includes cash, marketable securities, mortgages on real and personal property, accounts receivable, and inventory. The Corporations gross loan portfolio as of December 31, 2004, 2003 and 2002 amounted to $5.6 billion, $4.2 billion
and $3.9 billion, respectively, which represented 69.0%, 59.5% and 56.5%, respectively, of the
Corporations total earning assets. The loan portfolio is distributed among various types of
credit, including commercial business loans, commercial real estate loans, construction loans,
small business loans, consumer lending and residential mortgage loans. The credit risk exposure
provides for diversification among specific industries, specific types of business, and related
individuals. As of December 31, 2004, there was no obligor group that represented more than 2.5%
of the Corporations total loan portfolio. Obligors resident or having a principal place of
business in Puerto Rico comprised approximately 99% of the Corporations loan portfolio. As of December 31, 2004, the Corporation had over 129,000 consumer loan customers and over 8,500
commercial loan customers. As of such date, the Corporation had 32 clients with commercial loans
outstanding over $10.0 million. Although the Corporation has generally avoided cross-border loans,
the Corporation had approximately $13.5 million in cross-border loans as of December 31, 2004,
which are collateralized with real estate in the United States of America, cash and marketable
securities. The following risk concentration categories existed at year-end. Industry Risk Commercial loans, including commercial real estate and construction loans, amounted to $2.4 billion
as of December 31, 2004. The Corporation accepts various types of collateral to guarantee specific
loan obligations. As of December 31, 2004, the use of real estate as loan collateral has resulted
in a portfolio of approximately $1.4 billion, or 56.2% of the commercial loan portfolio. In
addition, as of such date, loans secured by cash collateral and marketable securities amounted to
$266.4 million, or 10.5% of the commercial loan portfolio. Commercial loans guaranteed by federal
or local government amounted to $104.2 million as of December 31, 2004, which represents 4.1% of
the commercial loan portfolio. The remaining commercial loan portfolio had $205.9 million partially
secured by other types of collateral including, among others, equipment, accounts receivable, and
inventory. As of December 31, 2004, unsecured commercial loans represented $397.3 million or 15.6%
of commercial loans receivable; however, the majority of these loans were backed by personal
guarantees. In addition to the commercial loan portfolio indicated above, as of December 31, 2004, the
Corporation had $1.0 billion in unused commitments under commercial lines of credit. These credit
facilities are typically structured to mature within one year. As of December 31, 2004, stand-by
letters of credit amounted to $244.1 million. The commercial loan portfolio is distributed among the different economic sectors and there are no
concentrations of credit consisting of direct, indirect, or contingent obligations




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
( SANTANDER BANCORP LOGO) in any specific borrower, an affiliated group of borrowers, or borrowers engaged in or
dependent on one industry. The Corporation provides for periodic reviews of industry trends and the
credits susceptibility to external factors. Government Risk As of December 31, 2004, $1.4 billion of the Corporations investment securities represented
exposure to the U.S. government in the form of U.S. Treasury securities and federal agency
obligations. In addition, as of such date, $44.6 million of residential mortgages and $106.6
million in commercial loans were insured or guaranteed by the U.S. Government or its agencies
through the Small Business Administration (SBA)
and Rural Development Programs. The Corporation is one of the largest SBA lenders in Puerto Rico.
Furthermore, as of December 31, 2004, there were $85.8 million of investment securities
representing obligations of the Commonwealth of Puerto Rico, its agencies, instrumentalities and
political subdivisions, $65.5 million of money market deposits with Puerto Rico government banks,
as well as $6.6 million of mortgage loans and $120.3 million in commercial loans issued to or
guaranteed by Puerto Rico government entities. Non-performing Assets and Past Due Loans The following table sets forth non-performing assets as of
December 31, 2004, 2003, 2002, 2001 and 2000. Year ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands)Commercial, Industrial and Agricultural
    
    $
    27,975
    
    
    $
    30,884
    
    
    $
    35,369
    
    
    $
    29,753
    
    
    $
    27,095Construction
    
    
    11,200
    
    
    
    10,085
    
    
    
    31,248
    
    
    
    1,020
    
    
    
    98Mortgage
    
    
    36,252
    
    
    
    42,107
    
    
    
    36,071
    
    
    
    47,954
    
    
    
    22,223Consumer
    
    
    6,808
    
    
    
    9,312
    
    
    
    15,930
    
    
    
    12,361
    
    
    
    13,167Lease Financing
    
    
    2,715
    
    
    
    4,027
    
    
    
    3,735
    
    
    
    3,146
    
    
    
    5,527Restructured Loans
    
    
    2,560
    
    
    
    1,953
    
    
    
    1,085
    
    
    
    978
    
    
    
    Total non-performing loans
    
    
    87,510
    
    
    
    98,368
    
    
    
    123,438
    
    
    
    95,212
    
    
    
    68,110Total repossessed assets
    
    
    3,937
    
    
    
    4,989
    
    
    
    17,563
    
    
    
    4,790
    
    
    
    10,345Non-performing assets
    
    $
    91,447
    
    
    $
    103,357
    
    
    $
    141,001
    
    
    $
    100,002
    
    
    $
    78,455Accruing loans past-due 90 days or more
    
    $
    3,377
    
    
    $
    2,404
    
    
    $
    3,928
    
    
    $
    5,528
    
    
    $
    4,661Non-performing loans to total loans
    
    
    1.57
    %
    
    
    2.33
    %
    
    
    3.20
    %
    
    
    2.14
    %
    
    
    1.52
    %Non-performing loans plus accruing loans past due 90
days or more to total loans
    
    
    1.63
    %
    
    
    2.39
    %
    
    
    3.31
    %
    
    
    2.27
    %
    
    
    1.62
    %Non-performing assets to total assets
    
    
    1.10
    %
    
    
    1.40
    %
    
    
    1.98
    %
    
    
    1.30
    %
    
    
    1.02
    %Interest lost
    
    $
    2,351
    
    
    $
    3,127
    
    
    $
    2,338
    
    
    $
    3,168
    
    
    $
    2,276
 Non-performing assets consist of past-due loans with principal or interest payments over 90 days on which no interest
income is being accrued, renegotiated loans and other real
estate owned. Once a loan is placed on non-accrual status, interest is
recorded as income only to the extent of the Corporations
management expectations regarding the full collectibility
of principal and interest on such loans. The interest income
that would have been realized had these loans been performing in accordance with their original terms amounted to
$2.4 million in 2004, $3.1 million in 2003 and $2.3 million
in 2002. As of December 31, 2004, total non-performing loans and
accruing past due loans (excluding other real estate owned)
decreased to $90.9 million, or 1.63%, of total loans, from
$100.8 million, or 2.39%, of total loans as of December
31, 2003. The most significant decreases in non-performing loans were in the mortgage, commercial and consumer
loan portfolios reflecting decreases of $5.9 million, $2.9
million and $2.5 million, respectively, followed by the leasing
portfolio, which reflected a decrease in non-performing
loans of $1.3 million. These decreases were partially offset
by increases in non-performing construction loans of $1.1
million. Non-performing loans (excluding other real estate
owned) at December 31, 2004 decreased to $87.5 million,
or 1.57%, of total loans from $98.4 million, or 2.33%,
of total loans at December 31, 2003. Repossessed assets
decreased to $3.9 million at December 31, 2004, from $5.0
million at December 31, 2003, as a result of various sales
during the year then ended that generated a gain of $0.9
million. As of December 31, 2004 the coverage ratio (allowance for loan losses to total non-performing loans) improved
to 79.05% from 70.85% as of December 31, 2003. The Corporations policy is to discontinue the accrual of
interest income when collectibility of the related loan
appears doubtful, but in no event is it recognized after three
months on past-due loans except for credit card and residential mortgage loans for which it is not recognized after
four months. Once interest accrual has been discontinued,
income on non-performing loans is recognized only to the
extent that it is collected.




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##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Potential Problem Loans As a general rule, the Corporation closely monitors certain loans not disclosed under
Non-performing Assets and Past Due Loans but that represent a greater than normal credit risk.
These loans are not included under the non-performing category, but management provides close
supervision of their performance. The identification process is implemented through various risk
management procedures, such as periodic review of customer relationships, a risk grading system, an
internal watch system and a loan review process. This classification system enables management to
respond to changing circumstances and to address the risk that may arise from changing business
conditions or any other factors that bear significantly on the overall condition of these loans.
The principal amounts of loans under this category as of December 31, 2004 and 2003, were
approximately $56.3 million and $58.3 million, respectively. Asset and
Liability Management The Corporations policy with respect to asset and liability management is to maximize its
net interest income, return on assets and return on equity while remaining within the established
parameters of interest rate and liquidity risks provided by the Board of Directors and the relevant
regulatory authorities. Subject to these constraints, the Corporation takes mismatched interest
rate positions. The Corporations asset and liability management policies are developed and
implemented by its Asset and Liability Committee (ALCO), which is composed of senior members of
the Corporation including the President, Chief Accounting Officer, Treasurer and other executive
officers of the Corporation. The ALCO reports on a monthly basis to the Board of Directors. Market Risk and Interest Rate Sensitivity A key component of the Corporations asset and liability
policy is the management of interest rate sensitivity. Interest rate sensitivity is the
relationship between market interest rates and net interest income due to the maturity or
repricing characteristics of interest-earning assets and interest-bearing liabilities. For any
given period, the pricing structure is matched when an equal amount of such assets and liabilities
mature or reprice in that period. Any mismatch of interest-earning assets and interest-bearing
liabilities is known as a gap position. A positive gap denotes asset sensitivity, which means that
an increase in interest rates would have a positive effect on net interest income, while a decrease
in interest rates would have a negative effect on net interest income. The Corporation is
experiencing a negative gap at December 31, 2004 with a one-year cumulative gap of $1.1 billion.
This denotes liability sensitivity, which means that an increase in interest rates would have a
negative effect on net interest income while a decrease in interest rates would have a positive
effect on net interest income. The Corporations interest rate sensitivity strategy takes into account not only rates of return
and the underlying degree of risk, but also liquidity requirements, capital costs and additional
demand for funds. The Corporations maturity mismatches and positions are monitored by the ALCO and
are managed within limits established by the Board of Directors. The following table sets forth the
repricing of the Corporations interest earning assets and interest-bearing liabilities at December
31, 2004 and may not be representative of interest rate gap positions at other times. In addition,
variations in interest rate sensitivity may exist within the repricing periods presented due to the
differing repricing dates within the period. In preparing the interest rate gap report, the
following assumptions are made, all assets and liabilities are reported according to their
repricing characteristics. For example, a commercial loan maturing in five years with monthly
variable interest rate payments is stated in the column of up to 90 days. The investment
portfolio is reported considering the effective duration of the securities. Expected prepayments
and remaining terms are considered for the residential mortgage portfolio. Core deposits are
reported in accordance with their effective duration. Effective duration of core deposits is based
on price and volume elasticity to market rates. The Corporation reviews on a monthly basis the
effective duration of core deposits. Assets and liabilities with embedded options are stated based
on full valuation of the asset/liability and the option to ascertain their effective duration.




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
( SANTANDER BANCORP LOGO) Interest Rate Sensitivity asof December 31, 2004More
    
    
    No0 to 3
    
    
    3 months
    
    
    1 to 3
    
    
    3 to 5
    
    
    5 to 10
    
    
    than
    
    
    InterestMonths
    
    
    to a Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    10 Years
    
    
    Rate Risk
    
    
    Total(Dollars in thousands)ASSETS:Investment Portfolio
    
    $
    44,944
    
    
    $
    9,413
    
    
    $
    951,906
    
    
    $
    714,111
    
    
    $
    292,715
    
    
    $
    
    
    
    $
    36,727
    
    
    $
    2,049,816Deposits in Other Banks
    
    
    385,523
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,887
    
    
    
    529,410Loan
PortfolioCommercial
    
    
    1,474,402
    
    
    
    222,763
    
    
    
    159,042
    
    
    
    236,333
    
    
    
    125,621
    
    
    
    40,303
    
    
    
    89,708
    
    
    
    2,348,172Construction
    
    
    178,541
    
    
    
    2,675
    
    
    
    1,812
    
    
    
    4,265
    
    
    
    12,259
    
    
    
    247
    
    
    
    
    
    
    
    199,799Consumer
    
    
    172,170
    
    
    
    66,503
    
    
    
    141,727
    
    
    
    62,048
    
    
    
    6,920
    
    
    
    29
    
    
    
    4,863
    
    
    
    454,260Mortgage
    
    
    965,620
    
    
    
    130,483
    
    
    
    333,220
    
    
    
    304,939
    
    
    
    578,943
    
    
    
    238,692
    
    
    
    29,404
    
    
    
    2,581,301Fixed and Other Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,022
    
    
    
    179,022Total Assets
    
    
    3,221,200
    
    
    
    481,837
    
    
    
    1,587,707
    
    
    
    1,321,696
    
    
    
    1,016,458
    
    
    
    279,271
    
    
    
    433,611
    
    
    
    8,341,780LIABILITIES AND
STOCKHOLDERS EQUITYExternal Funds PurchasedCommercial Paper
    
    
    629,544
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    629,544Repurchase Agreements
    
    
    374,380
    
    
    
    50,000
    
    
    
    700,064
    
    
    
    25,000
    
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    1,349,444Federal Funds
    
    
    755,334
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    780,334DepositsCertificates of Deposit
    
    
    1,137,637
    
    
    
    226,110
    
    
    
    166,801
    
    
    
    259,505
    
    
    
    226,224
    
    
    
    4,644
    
    
    
    (1,932
    )
    
    
    2,018,989Demand Deposits and
Savings Accounts
    
    
    181,166
    
    
    
    410,444
    
    
    
    511,218
    
    
    
    882,303
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,985,131Transactional Accounts
    
    
    437,682
    
    
    
    
    
    
    
    
    
    
    
    306,337
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    744,019Senior and Subordinated Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,457
    
    
    
    72,588
    
    
    
    
    
    
    
    104,045Other Liabilities and Capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    730,274
    
    
    
    730,274Total Liabilities and Capital
    
    
    3,515,743
    
    
    
    711,554
    
    
    
    1,378,083
    
    
    
    1,473,145
    
    
    
    457,681
    
    
    
    77,232
    
    
    
    728,342
    
    
    
    8,341,780Off-Balance Sheet
Financial InformationInterest Rate Swaps (Assets)
    
    
    1,191,796
    
    
    
    9,767
    
    
    
    147,856
    
    
    
    295,080
    
    
    
    231,441
    
    
    
    105,120
    
    
    
    
    
    
    
    1,981,060Interest Rate Swaps (Liabilities)
    
    
    (1,699,299
    )
    
    
    (117,840
    )
    
    
    (52,063
    )
    
    
    (79,660
    )
    
    
    (2,078
    )
    
    
    (30,120
    )
    
    
    
    
    
    
    (1,981,060Caps
    
    
    34,995
    
    
    
    
    
    
    
    
    
    
    
    32,975
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,970Caps Final Maturity
    
    
    (32,975
    )
    
    
    
    
    
    
    
    
    
    
    (34,995
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67,970
    )GAP
    
    
    (800,026
    )
    
    
    (337,790
    )
    
    
    305,417
    
    
    
    61,951
    
    
    
    788,140
    
    
    
    277,039
    
    
    
    (294,731
    )
    
    
    Cumulative GAP
    
    $
    (800,026
    )
    
    $
    (1,137,816
    )
    
    $
    (832,399
    )
    
    $
    (770,448
    )
    
    $
    17,692
    
    
    $
    294,731
    
    
    $
    
    
    
    $
    Cumulative GAP to earning
assets
    
    
    -9.80
    %
    
    
    -13.94
    %
    
    
    -10.20
    %
    
    
    -9.44
    %
    
    
    0.22
    %
    
    
    3.61
    %
 Interest rate risk is the primary market risk to which the Corporation is exposed.
Nearly all of the Corporations interest rate risk arises from instruments, positions and
transactions entered into for purposes other than trading. They include loans, investment
securities, deposits, short-term borrowings, senior and subordinated debt and derivative financial
instruments used for asset and liability management. As part of its interest rate risk management process, the Corporation analyzes on an ongoing basis
the profitability of the balance sheet structure, and how this structure will react under different
market scenarios. In order to carry out this task, management prepares three standardized reports
with detailed information on the sources of interest income and expense: the Financial
Profitability Report, the Net
Interest Income Shock Report, and the Market Value Shock Report. The former deals with
historical data while the latter two deal with expected future earnings. The Financial Profitability Report identifies individual components of the Corporations
non-trading portfolio independently with their corresponding interest income or expense. It uses
the historical information at the end of each month to track the yield of such components and to
calculate net interest income for such time period. The Net Interest Income Shock Report uses a simulation analysis to measure the amount of net
interest income the Corporation would have from its operations throughout the next twelve months
and the sensitivity of these earnings to




---



##### 



(SANTANDER BANCORP LOGO)CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS assumed shifts in market interest rates throughout the same period. The most important
assumptions of this analysis are: (i) rate shifts are parallel and immediate throughout the yield
curve; (ii) rate changes affect all assets and liabilities equally; (iii) interest-bearing demand
accounts and savings passbooks will run off in a period of one year; and (iv) demand deposit
accounts will run off in a period of one to three years. Cash flows from assets and liabilities
are assumed to be reinvested at market rates in similar instruments. The objective is to simulate
a dynamic gap analysis enabling a more accurate interest rate risk assessment. The ALCO has decided to run a negative interest rate gap to capitalize on current spreads between
short and long term interest rates while preparing for higher short-term rates. To that effect, the
investment portfolio was recently restructured, selling Agency guaranteed mortgage backed
securities, and buying medium term Agency notes. This strategy slightly decreased the duration of
the portfolio and shortened the re-pricing gap. The Corporation previously extended the maturity of
various long-term repurchase agreements to lower its duration of equity. The ALCO monitors interest rate gaps in combination with net interest margin (NIM) sensitivity and
duration of market value equity (MVE). NIM sensitivity analysis captures the maximum acceptable net interest margin loss for a
one percent parallel change of all interest rates across the curve. Duration of market value equity
analysis entails a valuation of all interest bearing assets and liabilities under parallel
movements in interest rates. The ALCO has established limits of $20 million of maximum NIM loss for
a 1% parallel shock and $80 million maximum MVE loss for a 1 % parallel shock. As of December 31,
2004, it was determined for purposes of the Net Interest Income Shock Report that the Corporation
had a potential loss in net interest income of approximately $14.0 million if market rates were to
increase 100 basis points immediately and parallel across the yield curve, less than the $20.0
million limit. For purposes of the Market
Value Shock Report it was determined that the Corporation had a potential loss of approximately
$64.2 million if market rates were to increase 100 basis points immediately parallel across the
yield curve, less than the $80.0 million limit. As of December 31, 2004 the Corporation had a liability sensitive profile as explained by the
negative gap, the NIM shock report and the MVE shock report. Management feels comfortable with the
current level of market risk on the balance sheet, and it will change the market risk profile of
the Corporation as market conditions vary. Any decision to reposition the balance sheet is taken by
the ALCO committee, and is subject to compliance with the established risk limits. Some factors
that could lead to shifts in policy could be, but are not limited to, changes in views on interest
rate markets, monetary policy, macroeconomic factors as well as legal, fiscal and other factors
which could lead to shifts in the asset liability mix. Derivatives The Corporation uses derivative financial instruments mostly as hedges of interest rate risk,
changes in fair value of assets and liabilities and to secure future cash flows. Refer to Notes 1
and 20 to the consolidated financial statements for full details of the Corporations derivative
transactions as of December 31, 2004 and 2003. In the normal course of business, the Corporation utilizes derivative instruments to manage
exposure to fluctuations in interest rates, currencies and other markets, to meet the needs of
customers and for proprietary trading activities. The Corporation uses the same credit risk
management procedures to assess and approve potential credit exposures when entering into
derivative transactions as those used for traditional lending. Hedging Activities: The following table summarizes the derivative contracts designated as hedges as of December
31, 2004, 2003 and 2002, respectively:




---



##### 



CONSOLIDATED
FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
( SANTANDER BANCORP LOGO) December 31, 2004OtherComprehensiveNotional
    
    
    
    
    
    
    Gain
    
    
    IncomeAmounts *
    
    
    Fair Value
    
    
    (Loss)
    
    
    (Loss)**(In thousands)Cash Flow HedgesInterest Rate Swaps
    
    $
    100,000
    
    
    $
    (2,244
    )
    
    $
    
    
    
    $
    3,463Fair Value HedgesInterest Rate Swaps
    
    
    1,545,634
    
    
    
    (29,643
    )
    
    
    579
    
    
    
    Totals
    
    $
    1,645,634
    
    
    $
    (31,887
    )
    
    $
    579
    
    
    $
    3,463
 December 31, 2003OtherComprehensiveNotional
    
    
    
    
    
    
    Gain
    
    
    IncomeAmounts *
    
    
    Fair Value
    
    
    (Loss)
    
    
    (Loss)**(In thousands)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
 December 31, 2002OtherComprehensiveNotional
    
    
    
    
    
    
    Gain
    
    
    IncomeAmounts *
    
    
    Fair Value
    
    
    (Loss)
    
    
    (Loss)**(In thousands)Cash Flow HedgesInterest Rate Swaps
    
    $
    100,000
    
    
    $
    (10,775
    )
    
    $
    (1,347
    )
    
    $
    (2,012
    )Fair Value HedgesInterest Rate Swaps
    
    
    332,687
    
    
    
    953
    
    
    
    (356
    )
    
    
    Totals
    
    $
    432,687
    
    
    $
    (9,822
    )
    
    $
    (1,703
    )
    
    $
    (2,012
    )
   *
    
    The notional amount represents the gross sum of long and short**
    
    Net of tax Cash Flow Hedges: The Corporation designates hedges as Cash Flow Hedges when its main purpose is to reduce the
exposure associated with the variability of future cash flows related to fluctuations in short-term
financing rates (such as LIBOR). At the inception of each hedge, management documents the hedging
relationship, including its objective and probable effectiveness. To assess ongoing effectiveness
of the hedges, the Corporation compares the hedged items periodic variable rate with the hedging
items benchmark rate (LIBOR) at every reporting period to determine the effectiveness of the
hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or loss in the income
statement. As of December 31, 2004, the total amount, net of tax, included in accumulated other comprehensive
loss pertaining to the cash flow hedges was an unrealized loss of $1.4 million of which the
Corporation expects to reclassify into earnings $1.4 million, net of tax, during the next year. As
of December 31, 2003, the total amount, net of tax, included
in accumulated other comprehensive income pertaining to the cash flow hedges was an unrealized loss
of $4.8 million. As of December 31, 2002, the total amount, net of tax, included in accumulated
other comprehensive income pertaining to the cash flow hedges was an unrealized loss of $6.6
million. Fair Value Hedges: The Corporation designates hedges as Fair Value Hedges when its main purpose is to hedge the
changes in market value of an associated asset or liability. The Corporation only designates these
types of hedges if at inception it is believed that the relationship in the changes in the market
value of the hedged item and hedging item will offset each other in a highly effective manner. At
the inception of each hedge, management documents the hedging relationship, including its objective
and probable effectiveness. To assess ongoing effectiveness of the hedges, the Corporation marks to
market both the hedging item and the hedged item at every reporting period to determine the
effectiveness of the




---



##### 



( SANTANDER BANCORP LOGO)CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or loss in
the income statement. The fair value hedges have maturities through the year 2032 as of December 31, 2004, and through
the year 2024 as of December 31, 2003. The weighted-average rate paid and received on these
contracts as of December 31, 2004 is 4.64% and 4.07%, respectively, and 1.22% and 4.83%, as of
December 31, 2003, respectively. Of the $1.5 billion and $380.8 million designated as fair value hedges, $586.6 million
and $380.7 million are associated to the swapping of issuance of fixed rate debt as of December 31,
2004 and 2003, respectively. In 2004, $930.1 million fixed rate loans were swapped to create a
floating rate source of funds. The Corporation regularly issues term fixed rate debt, which it in
turn swaps to floating rate debt via interest rate swaps. In these cases the Corporation matches
all of the relevant economic variables (notional, coupon, payment dates and conventions etc.) of
the fixed rate debt it issues to the fixed rate leg of the interest rate swap (which it receives
from the counterparty) and pays the floating rate leg of the interest rate swap. The effectiveness
of these transactions is very high since all of the relevant economic variables are matched. In 2004, $930.1 million fixed rate mortgage loans were purchased and swapped to create synthetic
floating rate mortgage loans. In these transactions the Corporation, purchases fixed rate 1-4
family residential mortgages from local financial institutions, the Sellers, and simultaneously
enters into an agreement to swap the interest payments on the loans with the Sellers. The
Corporation passes on
the coupon payments on the underlying mortgage loans to the Sellers and it in turn receives
uncapped floating rate interest payments (based on 3-month LIBOR plus a spread) on the same
notional as the fixed rate coupons it pays. The net effect of the transaction is the creation of a
synthetic floating rate mortgage in which the Corporation receives 3-month LIBOR plus a spread. The
average spread on the outstanding transactions as of December 31, 2004 was 150 basis points above
3-month LIBOR. Derivative instruments not designated as hedging instruments: Any derivative not associated to hedging activity is booked as a freestanding derivative. In
the normal course of business the Corporation may enter into derivative contracts as both a market
maker or proprietary position taker. The Corporations mission is to meet the clients needs by
providing them with a wide array of financial products, which include derivative contracts. The
Corporations major role in this aspect is to serve as a derivative counterparty to these clients.
Positions taken with these clients are hedged (although not designated as hedges) in the OTC market
with interbank participants or in the organized futures markets. The market and credit risk
associated with this activity is measured, monitored and controlled by the Corporations Market Risk
Group, an independent division from the treasury department. Among other things, this group is
responsible for: policy, analysis, methodology and reporting of anything related to market risk and
credit risk. The following table summarizes the aggregate notional amounts and the reported
derivative assets or liabilities (i.e. the fair value of the derivative contracts) as of December
31, 2004, 2003 and 2002, respectively:




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004
RESULTS(SANTANDER BANCORP LOGO) December 31,2004Notional
    
    
    
    
    
    
    GainAmounts *
    
    
    Fair Value
    
    
    (Loss)(In thousands)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
    
    
    
    
    
    
    GainAmounts *
    
    
    Fair Value
    
    
    (Loss)(In thousands)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
 December 31, 2004OtherComprehensiveNotional
    
    
    
    
    
    
    Gain
    
    
    IncomeAmounts *
    
    
    Fair Value
    
    
    (Loss)
    
    
    (Loss)**(In thousands)Interest Rate ContractsInterest Rate Swaps
    
    $
    171,246
    
    
    $
    274
    
    
    $
    274
    
    
    $
    Interest Rate Caps
    
    
    37,712
    
    
    
    
    
    
    
    160
    
    
    
    Foreign Exchange Contracts
    
    
    5,841
    
    
    
    2
    
    
    
    
    
    
    
    1Equity Derivatives
    
    
    22,746
    
    
    
    342
    
    
    
    1,164
    
    
    
    Totals
    
    $
    237,545
    
    
    $
    618
    
    
    $
    1,598
    
    
    $
    1
   *
    
    The notional amount represents the gross sum of long and short**
    
    Net of tax Liquidity Risk Liquidity risk is the risk that not enough cash will be generated from either assets or
liabilities to meet deposit withdrawals or contractual loan funding. The Corporations general
policy is to maintain liquidity adequate to ensure our ability to honor withdrawals of deposits,
make repayments at maturity of other liabilities, extend loans and meet our own working capital
needs. The Corporations principal sources of liquidity are capital, core deposits from retail and
commercial clients, and wholesale deposits raised in the inter-bank and commercial markets. The
Corporation manages liquidity risk by maintaining diversified short-term and long-term sources
through the Federal funds market, commercial paper program, repurchase agreements and retail
certificate of deposit programs. As of December 31, 2004 the Corporation had $1.6 billion in
unsecured lines of credit ($1.3 billion available) and $4.0 billion in collateralized lines of
credit with banks and financial entities ($2.0 billion available). All securities in portfolio are
highly rated and very liquid, enabling us to treat them as a secondary source of liquidity. The Corporation does not have significant usage or limitations on its ability to upstream or
downstream funds as a method of liquidity. However, we face certain tax constraints when borrowing
funds (excluding the placement of deposits) from BSCH or affiliates because Puerto Ricos tax code
requires local corporations to withhold 29% of the interest income paid to non-resident affiliates.
Banco Santander does not face significant limitations to its ability to downstream funds from the
Corporation or its affiliates. The current intra-group credit line for Banco Santander is $150
million. Liquidity is derived from our capital, reserves and securities portfolio. The Corporation has
established lines of credit with foreign and domestic banks, has access to U.S. markets through
our commercial paper program and also has broadened its relations in the federal funds and
repurchase agreement markets to increase the availability of other sources of funds and to augment
liquidity as necessary.




---



##### 



( SANTANDER BANCORP LOGO)CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS During 2004 the Corporation undertook several financing transactions to fund its
operations, including cash flow requirements and future growth. On October 7, 2004, the Corporation
issued $75 million of its 6.30% Subordinated Notes due June 2032. In addition, during the first
quarter of 2004, Banco Santander issued $30 million in S&P Linked
Notes to obtain long term financing at a reasonable interest rate. The Corporation has a high credit rating, which permits the Corporation to utilize various
alternative funding sources. The Corporations current ratings are as follows:   Standard &Poor's
    
    Fitch IBCAShort-term funding
    
    A-1
    
    F-1Long-term funding
    
    A
    
    A+
 Management monitors liquidity levels each month. The focus is on the liquidity ratio,
which compares net liquid assets (all liquid assets not subject to collateral or repurchase
agreements) against total liabilities plus contingent liabilities. As of December 31, 2004, the
Corporation had a liquidity ratio of 8.5%. At December 31, 2004, the Corporation had total
available liquid assets of $741 million. The Corporation believes its has sufficient liquidity to
meet current obligations. The Corporation does not contemplate material uncertainties in the rolling over of deposits, both
retail and wholesale, and is not engaged in capital expenditures that would materially affect the
capital and liquidity positions. Should any deficiency arise for seasonal or more critical reasons,
the Bank would make
recourse to alternative sources of funding such as the commercial paper program, its lines of
credit with domestic and national banks, unused collateralized lines with Federal Home Loan Banks
and others. Contractual Obligations and Commercial Commitments As disclosed in the notes to the consolidated financial statements, the Corporation has
certain obligations and commitments to make future payments under contracts. At December 31, 2004,
the aggregate contractual obligations and commercial commitments were:   Payments due by Periodas of December 31, 2004MoreLess than
    
    
    
    
    
    
    
    
    
    
    thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 years(In thousands)Contractual Obligations:Federal funds purchased and other
borrowings
    
    $
    780,334
    
    
    $
    330,334
    
    
    $
    350,000
    
    
    $
    100,000
    
    
    $
    Securities sold under agreements to
repurchase
    
    
    1,349,444
    
    
    
    424,438
    
    
    
    400,000
    
    
    
    325,006
    
    
    
    200,000Commercial paper
    
    
    629,544
    
    
    
    629,544
    
    
    
    
    
    
    
    
    
    
    
    Subordinated notes
    
    
    72,588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,588Term notes
    
    
    31,457
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,457Operating lease obligations
    
    
    62,560
    
    
    
    16,150
    
    
    
    19,910
    
    
    
    10,108
    
    
    
    16,392Pension plan contribution
    
    
    3,349
    
    
    
    3,349
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    2,929,276
    
    
    $
    1,403,815
    
    
    $
    769,910
    
    
    $
    435,114
    
    
    $
    320,437Other Commercial Commitments:Lines of credit and financial
guarantees written
    
    
    244,107
    
    
    
    132,841
    
    
    
    80,327
    
    
    
    30,939
    
    
    
    Commitments to extend credit
    
    
    1,024,782
    
    
    
    1,024,782
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,268,889
    
    
    $
    1,157,623
    
    
    $
    80,327
    
    
    $
    30,939
    
    
    $
    




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
( SANTANDER BANCORP LOGO) Maturity and Interest Rate Sensitivity of Interest-Earning Assets as of December 31, 2004 The following table sets forth an analysis by type and time remaining to maturity
of the Corporations loans and securities portfolio as of December 31, 2004. Loans are
stated before deduction of the allowance for loan losses. As of December 31, 2004Maturities and/or Next Repricing DateAfter One Year ThroughFive Years
    
    

After Five YearsFixed
    
    
    Variable
    
    
    Fixed
    
    
    VariableOne Year
    
    
    Interest
    
    
    Interest
    
    
    Interest
    
    
    Interestor Less
    
    
    Rates
    
    
    Rates
    
    
    Rates
    
    
    Rates
    
    
    Total(In thousands)Cash and
Cash Equivalents and other Interest-bearing deposits
    
    $
    529,410
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    529,410Investment Portfolio
    
    
    54,358
    
    
    
    1,624,219
    
    
    
    41,797
    
    
    
    329,442
    
    
    
    
    
    
    
    2,049,816Loans:Commercial
    
    
    1,079,226
    
    
    
    330,749
    
    
    
    412,009
    
    
    
    249,810
    
    
    
    164,226
    
    
    
    2,236,020Construction
    
    
    82,972
    
    
    
    6,031
    
    
    
    91,468
    
    
    
    12,506
    
    
    
    6,822
    
    
    
    199,799Consumer
    
    
    238,872
    
    
    
    203,775
    
    
    
    
    
    
    
    11,613
    
    
    
    
    
    
    
    454,260Mortgage
    
    
    168,673
    
    
    
    638,260
    
    
    
    
    
    
    
    847,382
    
    
    
    926,986
    
    
    
    2,581,301Leasing
    
    
    36,630
    
    
    
    64,671
    
    
    
    4,909
    
    
    
    5,821
    
    
    
    121
    
    
    
    112,152Total
    
    $
    2,190,141
    
    
    $
    2,867,705
    
    
    $
    550,183
    
    
    $
    1,456,574
    
    
    $
    1,098,155
    
    
    $
    8,162,758
 Capital
Expenditures
The following table reflects capital expenditures for the years ended December 31, 2004, 2003 and 2002. 2004
    
    
    2003
    
    
    2002(In thousands)Headquarters/branches
    
    $
    2,478
    
    
    $
    694
    
    
    $
    1,134Data processing equipment
    
    
    2,071
    
    
    
    1,022
    
    
    
    2,150Software
    
    
    5,096
    
    
    
    7,134
    
    
    
    30,049Other furniture and equipment
    
    
    1,947
    
    
    
    1,094
    
    
    
    991Total
    
    $
    11,592
    
    
    $
    9,944
    
    
    $
    34,324
 During 2004, the Corporation increased capital expenditures. Investments were made in
upgrading of facilities as well various projects for new branches and centralized offices. Data
processing equipment increased over 2003 expenditures as obsolete equipment was replaced. Software
expenditures during 2004 were below 2003 levels and were related to certain ancillary applications
including new applications for the treasury department, upgrades to credit card applications and
others. During 2003, there was a significant reduction in capital expenditures primarily in technology.
During 2003 the Corporation invested in its Internet platform as well as certain ancillary
applications which had not been converted in 2002. Other capital expenditures were maintained at a
bare minimum in line with our cost control policy. The Corporation invested aggressively in new technology during 2002 in order to achieve greater
operational efficiency and provide higher quality products and services to customers. The systems conversion
project is part of the BSCHs strategy to homogenize operations throughout its America Division,
which results in superior technical support and operational efficiency. These investments improve
the Corporations position over its competitors. During 2002 all core applications were converted
including teller platform, client information file (CIF), lending, deposits and general ledger.
This represented the most significant portion of the conversion project. Ancillary applications
were converted during 2003. Other capital expenditures were controlled during 2002 as part of the
Corporations cost control policy. Environmental Matters Under various environmental laws and regulations, a lender may be liable as an owner or
operator for the costs of investigation or remediation of hazardous substances at any mortgaged
property or other property of a borrower or at its




---



##### 



(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
 owned or leased property regardless of whether the lender knew of, or was responsible
for, the hazardous substances. In addition, certain cities in which some of the Corporations
assets are located impose a statutory lien, which may be prior to the lien of the mortgage, for
costs incurred in connection with a cleanup of hazardous substances. Some of the Corporations mortgaged properties and owned and leased properties may contain
hazardous substances or are located in the vicinity of properties that are contaminated. As a
result, the value of such properties may decrease, the borrowers ability to repay the loan may be
affected, the Corporations ability to foreclose on certain properties may be affected or the
Corporation may be exposed to potential environmental liabilities. The Corporation, however, is
not aware of any such environmental costs or liabilities that would have a material adverse effect
on the Corporations results of operations or financial condition. Puerto Rico Income Taxes The Corporation is subject to Puerto Rico income tax. The maximum statutory regular corporate
tax rate that the Corporation is subject to under the P.R. Code is 39%. In computing its net
income subject to the regular income tax, the Corporation is entitled to exclude from its gross
income, interest derived on obligations of the Commonwealth of Puerto Rico and its agencies,
instrumentalities and political subdivisions, obligations of the United States Government and its
agencies and instrumentalities, certain FHA and VA loans and certain GNMA securities. In computing
its net income subject to the regular income tax the Corporation is entitled to claim a deduction
for ordinary and necessary expenses, worthless debts, interest and depreciation, among others. The
Corporations deduction for interest is reduced in the same proportion that the average adjusted
basis of its exempt obligations acquired after December 31, 1987, bears to the average adjusted
basis of its total assets. The Corporation is also subject to an alternative minimum tax of 22% imposed on its alternative
minimum tax net income. In general, the Corporations alternative minimum net income is an amount
equal to its net income determined for regular income tax purposes, as adjusted for certain items
of tax preference. To the extent that the Corporations alternative minimum tax for a taxable year
exceeds its regular tax, such excess is required to be paid by the Corporation
as an alternative minimum tax. An alternative minimum tax paid by the Corporation in any taxable
year may be claimed by the Corporation as a credit in future taxable years against the excess of
its regular tax over the alternative minimum tax in such years, and such credits do not expire. Under the P.R. Code, corporations are not permitted to file consolidated tax returns with their
subsidiaries and affiliates. However, the Corporation is entitled to a 100% dividend received
deduction with respect to dividends received from Banco Santander Puerto Rico, Santander Securities
Corporation, Santander Insurance Agency, or any other Puerto Rico corporation subject to tax under
the P.R. Code and in which the Corporation owns at least 80% of the value of its stock or voting
power. Interest paid by the Corporation to non-resident foreign corporations is not subject to Puerto
Rico income tax, provided such foreign corporation is not related to the Corporation. Dividends
paid by the Corporation to non-resident foreign corporations and individuals (whether resident or
not) are subject to a Puerto Rico income tax of 10%. Puerto Rico international banking entities, or IBEs, are currently exempt from taxation under
Puerto Rico law. During 2004, the Legislature of Puerto Rico and the Governor of Puerto Rico
approved a law amending the IBE Act. This law imposes income taxes at normal statutory rates on
each IBE that operates as a unit of a bank, if the IBEs net income generated after December 31,
2003 exceeds 40% of the banks net income in the taxable year commenced on July 1, 2003, 30% of the
banks net income in the taxable year commencing on July 1, 2004, and 20% of the banks net income
in the taxable year commencing on July 1, 2005, and thereafter. It does not impose income taxation
on an IBE that operates as a subsidiary of a bank. United States Income Taxes The Corporation, the Bank, Santander Securities and Santander Insurance Agency are
corporations organized under the laws of Puerto Rico. Accordingly, the Corporation, the Bank,
Santander Securities and Santander Insurance Agency are subject to United States income tax under
the Internal Revenue Code of 1986, as amended to the date hereof (the Code) only on certain
income from sources within the United States or effectively connected with a United States trade
or business.




---



##### 



CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    

(SANTANDER BANCORP LOGO)
 CERTIFICATION PURSUANT TO SECTION 303A.12(a) OF THE
NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL Santander BanCorps Chief Executive Officer, Chief Operating Officer and Chief
Accounting Officer have filed with the Securities and Exchange Commission the
certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits
31.1, 31.2 and 31.3 to Santander BanCorps 2004 Form 10-K. In addition, on May 26,
2004, Santander BanCorps CEO certified to the New York Stock Exchange that he was not
aware of any violation by the Corporation of the NYSE corporate governance listing
standards. The foregoing certification was unqualified. By:
/s/José Ramón González
President and Chief Executive Officer By: /s/
Carlos M. García
Senior Executive Vice President and  Chief
Operating Officer By: /s/
María Calero
Executive Vice President and  Chief
Accounting Officer




---



##### 



(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT
ANALYSIS AND 2004 RESULTS
 (SANTANDER BANCORP LOGO) We, as management of Santander BanCorp and Subsidiaries (the Corporation), are responsible
for establishing and maintaining adequate internal control over financial reporting. Santander
BanCorps internal control system was designed to provide reasonable assurance to the
Corporations management and board of directors regarding the reliability of financial reporting
and the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation. Santander BanCorps management assessed the effectiveness of the Corporations internal
control over financial reporting as of December 31, 2004. In making this assessment, it
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control  Integrated Framework.Based on our assessment we
believe that, as of December 31, 2004, the Corporations internal control over financial
reporting is effective based on those criteria. Santander BanCorps independent registered public accounting firm, Deloitte & Touche LLP,
has issued an audit report on our assessment of the Corporations internal control over
financial reporting. This report appears on page 71. /s/José Ramon González
President and Chief Executive Officer /s/ Carlos
M. García
Senior Executive Vice President  and
Chief Operating Officer /s/ María Calero
Executive Vice President  and
Chief Accounting Officer




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS (SANTANDER BANCORP LOGO) (DELOITTE LOGO)
    
    Deloitte & Touche LLP
1200 Westernbank World Plaza
268 Munoz Rivera AvenueSan Juan, PR 00918-2511USATel:+1 787 759 7171Fax: +1 787 756 6340www.deloitte.com
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
Santander Bancorp
San Juan, Puerto Rico We have audited managements assessment, included in the accompanying Managements Report on Internal Control
over Financial Reporting, that Santander Bancorp and subsidiaries (the Corporation, a Puerto Rico corporation
and a subsidiary of Santander Central Hispano S.A.) maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established
in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Corporations management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the Corporations internal control over
financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, evaluating managements
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions. A companys internal control over financial reporting is a process designed by, or under the supervision of,
the companys principal executive and principal financial officers, or persons performing similar functions,
and effected by the companys board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A companys internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the financial
statements. Member ofDeloitte Touche Tohmatsu




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material
misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion,
managements assessment that the Corporation maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2004, based on the
criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended December 31, 2004 of the Corporation
and our report dated February 28, 2005 expressed an unqualified opinion on those financial statements. (DELOITTE & TOUCHE LLP) San Juan, Puerto Rico
February 28, 2005 Stamp No. 2018198 
affixed to original.




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS (SANTANDER BANCORP LOGO) (DELOITTE LOGO)
    
    Deloitte & Touche LLP
1200 Westernbank World Plaza
268 Munoz Rivera AvenueSan Juan, PR 00918-2511USATel:+1 787 759 7171Fax: +1 787 756 6340www.deloitte.com
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and
Stockholders of 
Santander BanCorp 
San Juan, Puerto Rico We have audited the accompanying consolidated balance sheets of Santander Bancorp and subsidiaries (the Corporation, a
Puerto Rico corporation and a subsidiary of Santander Central Hispano S.A.) as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders equity, other comprehensive income and cash flows for each of the
three years in the period ended December 31, 2004. These financial statements are the responsibility of the Corporations
management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Santander Bancorp and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Corporations internal control over financial reporting as of December 31, 2004 based on the criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 28, 2005 expressed an unqualified opinion on managements assessment of the
effectiveness of the Corporations internal control over financial reporting and an unqualified opinion on the effectiveness
of the Corporations internal control over financial reporting. (DELOITTE & TOUCHE LLP) San Juan, Puerto Rico 
February 28, 2005 Stamp No. 2018197 
affixed to original.




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Consolidated Balance Sheets-December 31, 2004 and 2003
(Dollars in thousands, except share data) 2004
    
    
    2003ASSETSCash and due from banks
    
    $
    110,148
    
    
    $
    99,183Interest-bearing deposits
    
    
    42,612
    
    
    
    15,300Federal funds sold and securities purchased under agreements to resell
    
    
    326,650
    
    
    
    278,750Total cash and cash equivalents
    
    
    479,410
    
    
    
    393,233Interest-bearing Deposits
    
    
    50,000
    
    
    
    10,000Trading Securities
    
    
    34,184
    
    
    
    42,547Investment Securities Available for Sale, at fair value:Securities pledged that can be repledged
    
    
    1,454,858
    
    
    
    1,227,627Other investment securities available for sale
    
    
    523,274
    
    
    
    436,684Total investment securities available for sale
    
    
    1,978,132
    
    
    
    1,664,311Investment Securities Held to Maturity, at amortized cost:Securities pledged that can be repledged
    
    
    
    
    
    
    687,184Other investment securities held to maturity
    
    
    
    
    
    
    145,943Total investment securities held to maturity
    
    
    
    
    
    
    833,127Other Investment Securities, at amortized cost
    
    
    37,500
    
    
    
    Loans Held for Sale, net
    
    
    271,596
    
    
    
    297,201Loans, net
    
    
    5,242,759
    
    
    
    3,847,873Premises and Equipment, net
    
    
    52,854
    
    
    
    61,107Accrued Interest Receivable
    
    
    44,682
    
    
    
    36,398Goodwill
    
    
    34,791
    
    
    
    34,791Intangible Assets
    
    
    8,003
    
    
    
    4,662Other Assets
    
    
    107,869
    
    
    
    142,050$
    8,341,780
    
    
    $
    7,367,300LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Non interest-bearing
    
    $
    744,019
    
    
    $
    700,413Interest-bearing
    
    
    4,004,120
    
    
    
    3,441,815Total deposits
    
    
    4,748,139
    
    
    
    4,142,228Federal Funds Purchased and Other Borrowings
    
    
    780,334
    
    
    
    350,000Securities Sold Under Agreements to Repurchase
    
    
    1,349,444
    
    
    
    1,808,238Commercial Paper Issued
    
    
    629,544
    
    
    
    254,904Subordinated Capital Notes
    
    
    72,588
    
    
    
    15,925Term Notes
    
    
    31,457
    
    
    
    165,966Accrued Interest Payable
    
    
    22,666
    
    
    
    18,728Other Liabilities
    
    
    151,605
    
    
    
    130,479Total liabilities
    
    
    7,785,777
    
    
    
    6,886,468Contingencies and Commitments (Notes 5, 12, 13, 16 and 17)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 in December 2004 and 46,410,214 shares issued in December 2003;
46,639,104 shares outstanding in December 2004 and 42,398,954 shares
outstanding in December 2003.
    
    
    126,626
    
    
    
    116,026Capital paid in excess of par value
    
    
    304,171
    
    
    
    211,742Treasury stock at cost, 4,011,260 shares in December 2004 and 2003.
    
    
    (67,552
    )
    
    
    (67,552
    )Accumulated other comprehensive loss, net of taxes
    
    
    (6,818
    )
    
    
    (19,465
    )Retained
earnings-Reserve fund
    
    
    127,086
    
    
    
    119,432Undivided profits
    
    
    72,490
    
    
    
    120,649Total stockholders equity
    
    
    556,003
    
    
    
    480,832$
    8,341,780
    
    
    $
    7,367,300
 The accompanying notes are an integral part of these financial statements




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS (SANTANDER BANCORP LOGO) Consolidated Statements of Income
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except per share data) 2004
    
    
    2003
    
    
    2002Interest Income:Loans
    
    $
    257,852
    
    
    $
    237,712
    
    
    $
    289,208Investment securities
    
    
    97,901
    
    
    
    85,215
    
    
    
    71,745Interest-bearing deposits
    
    
    1,054
    
    
    
    664
    
    
    
    1,351Federal funds sold and securities purchased under
agreements to resell
    
    
    3,123
    
    
    
    1,990
    
    
    
    3,049Total interest income
    
    
    359,930
    
    
    
    325,581
    
    
    
    365,353Interest Expense:Deposits
    
    
    60,279
    
    
    
    56,030
    
    
    
    84,408Securities sold under agreements to repurchase and other
borrowings
    
    
    79,901
    
    
    
    75,896
    
    
    
    74,173Subordinated capital notes
    
    
    582
    
    
    
    425
    
    
    
    1,334Total interest expense
    
    
    140,762
    
    
    
    132,351
    
    
    
    159,915Net interest income
    
    
    219,168
    
    
    
    193,230
    
    
    
    205,438Provision for Loan Losses
    
    
    26,270
    
    
    
    49,745
    
    
    
    63,630Net interest income after provision for loan losses
    
    
    192,898
    
    
    
    143,485
    
    
    
    141,808Other Income:Bank service charges, fees and other
    
    
    38,977
    
    
    
    38,990
    
    
    
    40,372Broker-dealer, asset management and insurance fees
    
    
    51,113
    
    
    
    49,526
    
    
    
    35,277Gain on sale of securities
    
    
    11,475
    
    
    
    10,790
    
    
    
    12,236Gain on sale of loans
    
    
    431
    
    
    
    9,829
    
    
    
    1,461Gain on sale of building
    
    
    2,754
    
    
    
    
    
    
    
    Other income
    
    
    12,489
    
    
    
    10,805
    
    
    
    11,762Total other income
    
    
    117,239
    
    
    
    119,940
    
    
    
    101,108Other Operating Expenses:Salaries and employee benefits
    
    
    91,582
    
    
    
    89,394
    
    
    
    85,216Occupancy costs
    
    
    13,959
    
    
    
    13,534
    
    
    
    13,360Equipment expenses
    
    
    6,946
    
    
    
    7,291
    
    
    
    8,855EDP servicing, amortization and technical assistance
    
    
    31,291
    
    
    
    40,502
    
    
    
    32,064Communication expenses
    
    
    8,976
    
    
    
    8,612
    
    
    
    8,742Business promotion
    
    
    10,435
    
    
    
    6,760
    
    
    
    7,028Other taxes
    
    
    8,584
    
    
    
    9,811
    
    
    
    11,027Other operating expenses
    
    
    45,760
    
    
    
    48,361
    
    
    
    47,583Total other operating expenses
    
    
    217,533
    
    
    
    224,265
    
    
    
    213,875Income before provision (benefit) for income tax
    
    
    92,604
    
    
    
    39,160
    
    
    
    29,041Provision (Benefit) for Income Tax
    
    
    8,145
    
    
    
    (285
    )
    
    
    3,289Net Income
    
    
    84,459
    
    
    
    39,445
    
    
    
    25,752Dividends to Preferred Shareholders
    
    
    
    
    
    
    7,114
    
    
    
    4,568Net Income Available to Common Shareholders
    
    $
    84,459
    
    
    $
    32,331
    
    
    $
    21,184Basic and Diluted Earnings per Common Share
    
    $
    1.81
    
    
    $
    0.69
    
    
    $
    0.45
 The accompanying notes are an integral part of these financial statements




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Consolidated Statements of Changes in
Stockholders Equity  Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands) 2004
    
    

2003
    
    

2002Preferred Stock:Balance at beginning of year
    
    $
    
    
    
    $
    65,250
    
    
    $
    65,250Preferred stock redemption
    
    
    
    
    
    
    (65,250
    )
    
    
    Balance at end of year
    
    
    
    
    
    
    
    
    
    
    65,250Common Stock:Balance at beginning of year
    
    
    116,026
    
    
    
    116,026
    
    
    
    106,212Stock dividend distributed
    
    
    10,600
    
    
    
    
    
    
    
    9,814Balance at end of year
    
    
    126,626
    
    
    
    116,026
    
    
    
    116,026Capital Paid in Excess of Par Value:Balance at beginning of year
    
    
    211,742
    
    
    
    211,742
    
    
    
    146,457Stock dividend distributed
    
    
    92,429
    
    
    
    
    
    
    
    65,285Balance at end of year
    
    
    304,171
    
    
    
    211,742
    
    
    
    211,742Treasury Stock at cost:Balance at beginning of year
    
    
    (67,552
    )
    
    
    (65,268
    )
    
    
    (53,277
    )Stock repurchased at cost
    
    
    
    
    
    
    (2,284
    )
    
    
    (11,991
    )Balance at end of year
    
    
    (67,552
    )
    
    
    (67,552
    )
    
    
    (65,268
    )Accumulated Other Comprehensive Income, net of taxes:Balance at beginning of year
    
    
    (19,465
    )
    
    
    (12,692
    )
    
    
    (11,347
    )Unrealized net gain (loss) on investment securities available for
sale, net of tax
    
    
    9,094
    
    
    
    (2,789
    )
    
    
    7,382Unrealized net gain on cash flow hedges, net of tax
    
    
    3,463
    
    
    
    1,739
    
    
    
    (180
    )Minimum pension liability, net of tax
    
    
    90
    
    
    
    (5,723
    )
    
    
    (8,547
    )Balance at end of year
    
    
    (6,818
    )
    
    
    (19,465
    )
    
    
    (12,692
    )Reserve Fund:Balance at beginning of year
    
    
    119,432
    
    
    
    116,482
    
    
    
    114,418Transfer from undivided profits
    
    
    7,654
    
    
    
    2,950
    
    
    
    2,064Balance at end of year
    
    
    127,086
    
    
    
    119,432
    
    
    
    116,482Undivided Profits:Balance at beginning of year
    
    
    120,649
    
    
    
    172,415
    
    
    
    246,081Net income
    
    
    84,459
    
    
    
    39,445
    
    
    
    25,752Transfers
    
    
    (7,654
    )
    
    
    (2,950
    )
    
    
    (2,064
    )Deferred tax benefit amortization
    
    
    (13
    )
    
    
    (60
    )
    
    
    (35
    )Common stock cash dividends
    
    
    (21,922
    )
    
    
    (19,087
    )
    
    
    (17,652
    )Preferred stock cash dividends
    
    
    
    
    
    
    (4,504
    )
    
    
    (4,568
    )Preferred stock redemption premium
    
    
    
    
    
    
    (2,610
    )
    
    
    Cash paid on corporate reorganization
    
    
    
    
    
    
    (62,000
    )
    
    
    Stock dividend distributed
    
    
    (103,029
    )
    
    
    
    
    
    
    (75,099
    )Balance at end of year
    
    
    72,490
    
    
    
    120,649
    
    
    
    172,415Total stockholders equity
    
    $
    556,003
    
    
    $
    480,832
    
    
    $
    603,955
 The accompanying notes are an integral part of these financial statements




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) Consolidated Statements of Other Comprehensive
Income   Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands) 2004
    
    
    2003
    
    
    2002Comprehensive incomeNet income
    
    $
    84,459
    
    
    $
    39,445
    
    
    $
    25,752Other comprehensive income (loss), net of tax:Unrealized gains (losses) on investments securities available for sale,
net of tax
    
    
    18,526
    
    
    
    (790
    )
    
    
    2,979Reclassification adjustment for gains and losses included in net income,
net of tax
    
    
    (9,403
    )
    
    
    (2,251
    )
    
    
    4,404Unrealized (losses) gains on investments securities transferred to the
held-to-maturity category, net of amortization
    
    
    (29
    )
    
    
    252
    
    
    
    (1
    )Unrealized gains (losses) on investment securities available for
sale, net of tax
    
    
    9,094
    
    
    
    (2,789
    )
    
    
    7,382Unrealized gains (losses) on cash flow hedges, net of tax
    
    
    3,464
    
    
    
    1,739
    
    
    
    (2,011
    )Reclassification adjustment for losses included in net income, net of
tax
    
    
    (1
    )
    
    
    
    
    
    
    1,831Unrealized gains (losses) on cash flow hedges, net of tax
    
    
    3,463
    
    
    
    1,739
    
    
    
    (180
    )Minimum pension liability, net of tax
    
    
    90
    
    
    
    (5,723
    )
    
    
    (8,547
    )Total other comprehensive loss, net of tax
    
    
    12,647
    
    
    
    (6,773
    )
    
    
    (1,345
    )Comprehensive income
    
    $
    97,106
    
    
    $
    32,672
    
    
    $
    24,407
 The accompanying notes are an integral part of these financial statements




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Consolidated Statements of Cash Flows 
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands) 2004
    
    
    2003
    
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    84,459
    
    
    $
    39,445
    
    
    $
    25,752Adjustments to reconcile net income to net cash used in operating
activities:Depreciation and amortization
    
    
    13,238
    
    
    
    20,691
    
    
    
    25,236Deferred tax provision (benefit)
    
    
    2,136
    
    
    
    (1,709
    )
    
    
    1,789Provision for loan losses
    
    
    26,270
    
    
    
    49,745
    
    
    
    63,630Gain on sale of building
    
    
    (2,754
    )
    
    
    
    
    
    
    Gain on sale of securities
    
    
    (11,475
    )
    
    
    (10,790
    )
    
    
    (12,236
    )Gain on sale of loans
    
    
    (431
    )
    
    
    (9,829
    )
    
    
    (1,461
    )Gain on sale of mortgage-servicing rights
    
    
    (400
    )
    
    
    (457
    )
    
    
    (427
    )Gain (loss) on derivatives
    
    
    (3,459
    )
    
    
    (277
    )
    
    
    105Trading gains
    
    
    (1,193
    )
    
    
    (1,570
    )
    
    
    (584
    )Net premium amortization (discount accretion) on securities
    
    
    3,983
    
    
    
    4,793
    
    
    
    (8,835
    )Net premium amortization on loans
    
    
    4,430
    
    
    
    7,581
    
    
    
    392Purchases and originations of loans held for sale
    
    
    (733,022
    )
    
    
    (621,466
    )
    
    
    (485,430
    )Proceeds from sales of loans held for sale
    
    
    195,034
    
    
    
    278,754
    
    
    
    324,535Repayments of loans held for sale
    
    
    35,233
    
    
    
    44,038
    
    
    
    80,700Proceeds from sales of trading securities
    
    
    2,207,495
    
    
    
    1,824,948
    
    
    
    1,472,015Purchases of trading securities
    
    
    (2,197,939
    )
    
    
    (1,843,201
    )
    
    
    (1,473,481
    )(Increase) decrease in accrued interest receivable
    
    
    (8,284
    )
    
    
    4,783
    
    
    
    (3,530
    )Decrease (increase) in other assets
    
    
    10,322
    
    
    
    11,225
    
    
    
    (53,450
    )Increase (decrease) in accrued interest payable
    
    
    3,938
    
    
    
    (6,357
    )
    
    
    8,144(Decrease) increase in other liabilities
    
    
    (5,451
    )
    
    
    15,565
    
    
    
    (11,689
    )Total adjustments
    
    
    (462,329
    )
    
    
    (233,533
    )
    
    
    (74,577
    )Net cash used in operating activities
    
    
    (377,870
    )
    
    
    (194,088
    )
    
    
    (48,825
    )CASH FLOWS FROM INVESTING ACTIVITIES:Increase in interest-bearing deposits
    
    
    (40,000
    )
    
    
    (10,000
    )
    
    
    Proceeds from sales of investment securities available for sale
    
    
    1,450,058
    
    
    
    1,206,108
    
    
    
    1,632,649Proceeds from maturities of investment securities available for sale
    
    
    1,595,155
    
    
    
    2,685,731
    
    
    
    9,001,349Purchases of investment securities available for sale
    
    
    (2,701,767
    )
    
    
    (4,383,435
    )
    
    
    (10,706,915
    )Proceeds from maturities of investment securities held to maturity
    
    
    47,994
    
    
    
    190,279
    
    
    
    552,381Purchases of investment securities held to maturity
    
    
    (69,739
    )
    
    
    (25,425
    )
    
    
    (1,435,272
    )Repayment of securities and securities called
    
    
    186,792
    
    
    
    237,490
    
    
    
    509,713Proceeds from (payments on) derivative transactions
    
    
    2,943
    
    
    
    (18
    )
    
    
    (3,450
    )Purchases of mortgage loans
    
    
    (857,214
    )
    
    
    (400,982
    )
    
    
    (1,583
    )Net (increase) decrease in loans
    
    
    (18,776
    )
    
    
    259,486
    
    
    
    613,446Proceeds from sales of mortgage-servicing rights
    
    
    400
    
    
    
    457
    
    
    
    427Proceeds from sale of building
    
    
    14,000
    
    
    
    
    
    
    
    Capital expenditures, net
    
    
    (6,258
    )
    
    
    (5,020
    )
    
    
    (4,607
    )Net cash (used in) provided by investing activities
    
    
    (396,412
    )
    
    
    (245,329
    )
    
    
    158,138
 (Continued) The accompanying notes are an integral part of these financial statements




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) Consolidated Statements of Cash FlowsYears Ended December 31, 2004, 2003 and 2002
(Dollars in thousands) 2004
    
    
    2003
    
    
    2002CASH FLOWS FROM FINANCING ACTIVITIES:Net increase (decrease) in deposits
    
    
    611,945
    
    
    
    (367,613
    )
    
    
    (272,077
    )Net increase (decrease)
in federal funds purchased and other borrowings
    
    
    430,334
    
    
    
    104,040
    
    
    
    (239,040
    )Net (decrease) increase in securities sold under agreements
to repurchase
    
    
    (458,794
    )
    
    
    558,199
    
    
    
    273,353Net increase (decrease) in commercial paper issued
    
    
    374,640
    
    
    
    214,913
    
    
    
    (309,185
    )Net decrease in term notes
    
    
    (134,509
    )
    
    
    (141,498
    )
    
    
    (22,310
    )Issuance (payment) of subordinated capital notes
    
    
    58,765
    
    
    
    (18,000
    )
    
    
    (14,575
    )Preferred stock redemption
    
    
    
    
    
    
    (67,860
    )
    
    
    Repurchase of common stock
    
    
    
    
    
    
    (2,284
    )
    
    
    (11,991
    )Dividends paid
    
    
    (21,922
    )
    
    
    (23,591
    )
    
    
    (22,220
    )Capital paid on corporate reorganization
    
    
    
    
    
    
    (62,000
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    860,459
    
    
    
    194,306
    
    
    
    (618,045
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    86,177
    
    
    
    (245,111
    )
    
    
    (508,732
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    393,233
    
    
    
    638,344
    
    
    
    1,147,076CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    479,410
    
    
    $
    393,233
    
    
    $
    638,344
 (Concluded) The accompanying notes are an integral part of these financial statements




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Notes to the Consolidated Financial Statements Years Ended December 31,2004,2003 and
2002 1. Summary of Significant Accounting Policies and Other Matters: The accounting and reporting policies of Santander BanCorp (the Corporation), an 89% owned
subsidiary of Banco Santander Central Hispano, S.A. (BSCH), conform with accounting principles
generally accepted in the United States of America (hereinafter referred to as generally accepted
accounting principles or GAAP) and with general practices within the financial services
industry. Following is a summary of the Corporations most significant accounting policies: Nature of Operations and Use of Estimates Santander BanCorp is a financial holding company offering a full range of financial services
through its wholly owned banking subsidiary Banco Santander Puerto Rico and Subsidiaries (the
Bank). The Corporation also engages in broker-dealer, asset management, mortgage banking,
international banking and insurance agency services through its subsidiaries, Santander Securities
Corporation, Santander Asset Management, Santander Mortgage Corporation, Santander International
Bank and Santander Insurance Agency, respectively. Santander BanCorp is subject to the Federal Bank Holding Company Act and to the regulations,
supervision, and examination of the Federal Reserve Board. In preparing the consolidated financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Acquisition Pursuant to a corporate reorganization, on December 30, 2003 the Corporation acquired 100%
of the common stock of Santander Securities Corporation and subsidiary (Santander Securities)
from Administration de Bancos Latinoamericanos Santander, S.L. (ABLASA), a wholly owned
subsidiary of BSCH. The Corporation acquired Santander Securities for $62 million in cash in a
transaction treated as a reorganization of companies under common control. The reorganization was
recorded at historical cost and accounted for on an as if pooled basis. Accordingly, the
accompanying 2002 financial statements have been restated to give retroactive effect to such
transaction as of the beginning of the first period presented. All significant intercompany
balances and transactions were eliminated. Principles of Consolidation The consolidated financial statements include the accounts of the Corporation, the Bank and
the Banks wholly owned subsidiaries, Santander Mortgage Corporation and Santander International
Bank; Santander Securities Corporation and its wholly owned subsidiary, Santander Asset Management
Corporation; and Santander Insurance Agency. All significant intercompany balances and transactions
have been eliminated in consolidation. Securities Purchased/Sold under Agreements to Resell/Repurchase Repurchase and resell agreements are treated as collateralized financing transactions and
are carried at the amounts at which the assets will be subsequently reacquired or resold. The counterparties to securities purchased under resell agreements maintain effective control over
such securities and accordingly those are not reflected in the Corporations consolidated balance
sheets. The Corporation monitors the market value of the underlying securities as compared to the
related receivable, including accrued interest, and requests additional collateral where deemed
appropriate. The Corporation maintains effective control over assets sold under agreements to repurchase;
accordingly, such securities continue to be carried on the consolidated balance sheets. Investment Securities Investment securities are classified in four categories and accounted for as follows:  
    Debt securities that the Corporation has the intent and ability to
hold to maturity are classified as securities held to maturity and
reported at cost adjusted for premium amortization and discount
accretion. The Corporation may not sell or transfer held-to-maturity
securities without calling into question its intent to hold 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 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,




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO)  in accumulated other comprehensive income. 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. The amortization of premiums is deducted and the accretion of discounts is added to net interest
income based on a method which approximates the interest method over the outstanding period of the
related securities. The cost of securities sold is determined by specific identification. For
securities available for sale, held to maturity and other investment securities, the Corporation
reports separately in the consolidated statements of income, net realized gains or losses on sales
of investment securities and unrealized loss valuation adjustments considered other than
temporary, if any. Derivative Financial Instruments The Corporation uses derivative financial instruments mostly as hedges of interest rate
risk, changes in fair value of assets and liabilities and to secure future cash flows. All of the Corporations derivative instruments are recognized as assets and liabilities at fair
value. If certain conditions are met, the derivative may qualify for hedge accounting treatment
and be designated as one of the following types of hedges: (a) hedge of the exposure to changes in
the fair value of a recognized asset or liability or an unrecognized firm commitment (fair value
hedge); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability
or forecasted transaction (cash flow hedge) or (c) a hedge of foreign currency exposure
(foreign currency hedge). In the case of a qualifying fair value hedge, changes in the value of the derivative instruments
that have been highly effective are recognized in current period earnings along with the change in
value of the designated hedged item. If the hedge relationship is terminated, hedge accounting is
discontinued and any balance related to the derivative is recognized in current operations, and
the fair value adjustment to the hedged item continues to be reported as part of the basis of the
item and is amortized to earnings as a yield adjustment. In the case of a qualifying cash flow
hedge, changes in the value of the derivative instruments that have been highly effective are
recognized in other comprehensive income, until such time as those earnings are affected by the
variability of the cash flows of the underlying hedged item. If the hedge relationship is
terminated, the net derivative gain or loss related to the discontinued cash flow hedge should
continue to be reported in accumulated other
comprehensive income and shall be reclassified into earnings when the cash flows that were hedged
occur, or when the forecasted transaction affects earnings or is no longer expected to occur. In
either a fair value hedge or a cash flow hedge, net earnings may be impacted to the extent the
changes in the value of the derivative instruments do not perfectly offset changes in the value of
the hedged items. If the derivative is not designated as a hedging instrument, the changes in fair
value of the derivative are recorded in earnings. The Corporation does not have foreign currency
hedges as of December 31, 2004. Certain contracts contain embedded derivatives. When the embedded derivative possesses economic
characteristics that are not clearly and closely related to the economic characteristics of the
host contract, it should be bifurcated, carried at fair value, and designated as a trading or
non-hedging derivative instrument. Loans Held for Sale Loans held for sale are recorded at the lower of cost or market computed on the aggregate
portfolio basis. The amount by which cost exceeds market value, if any, is accounted for as a
valuation allowance with changes included in the determination of net income for the period in
which the change occurs. Loans Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for the
allowance for loan losses, unearned finance charges and any deferred fees or costs on originated
loans. Certain mortgage loans are hedged to generate a floating rate source of funds and are
carried at fair value. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and amortized using methods that approximate the interest
method over the term of the loans as an adjustment to interest yield. Discounts and premiums on
purchased loans are amortized to income over the expected lives of the loans using methods that
approximate the interest method. The accrual of interest on loans is discontinued when, in managements opinion, the borrower may
be unable to meet payments as they become due, but in no event is it recognized after 90 days in
arrears on payments of principal or interest, except for credit cards and mortgage loans for which
interest is not recognized after four months. When interest accrual is discontinued, all unpaid
interest is reversed. Interest income is subsequently recognized only to the extent that it is
received. The Corporation leases vehicles and equipment to individual and corporate customers. The finance
method of accounting is used to recognize revenue on lease contracts that meet the criteria
specified in Statement of Financial




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##### 



(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
 Accounting Standards (SFAS) No. 13, Accounting for Leases, as amended. Aggregate
rentals due over the term of the leases less unearned income are included in lease receivable.
Unearned income is amortized to income over the lease term so as to yield a constant rate of return
on the principal amounts outstanding. Lease origination fees and costs are deferred and amortized
over the average life of the portfolio as an adjustment to yield. Off-Balance Sheet Instruments In the ordinary course of business, the Corporation enters into off-balance sheet instruments
consisting of commitments to extend credit, stand by letters of credit and financial guarantees.
Such financial instruments are recorded in the financial statements when they are funded or when
related fees are incurred or received. The Corporation periodically evaluates the credit risks
inherent in these commitments, and establishes loss allowances for such risks if and when these
are deemed necessary. Fees received for providing loan commitments and letters of credit that result in loans are
typically deferred and amortized to interest income over the life of the related loan, beginning
with the initial borrowing. Fees on commitments and letters of credit are amortized to
non-interest income as banking fees and commissions over the commitment period when funding is not
expected. Allowance for Loan Losses The allowance for loan losses is a current estimate of the losses inherent in the present
portfolio based on managements ongoing quarterly evaluations of the loan portfolio. Estimates of
losses inherent in the loan portfolio involve the exercise of judgment and the use of assumptions.
This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. The allowance is increased by a
provision for loan losses, which is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in the estimation process,
managements estimate of credit losses in the loan portfolio and the related allowance may change
in the near term. The Corporation follows a systematic methodology to establish and evaluate the adequacy of the
allowance for loan losses. This methodology consists of several key elements. Larger commercial and construction loans that exhibit potential or observed credit weaknesses are
subject to individual review. Where appropriate, allowances are allocated to individual loans
based on managements estimate of the borrowers ability to repay the loan given the availability
of collateral, other sources of cash flow and legal options available to the Corporation. Included in the review of individual loans are those that are impaired as defined by GAAP. Any
allowances for loans
deemed impaired are measured based on the present value of expected future cash flows discounted at
the loans effective interest rate or on the fair value of the underlying collateral if the loan is
collateral dependent. Commercial business, commercial real estate and construction loans exceeding
a predetermined monetary threshold are individually evaluated for impairment. Other loans are
evaluated in homogeneous groups and collectively evaluated for impairment. Loans that are recorded
at fair value or at the lower of cost or fair value are not evaluated for impairment. Impaired
loans for which the discounted cash flows, collateral value or market price exceeds its carrying
value do not require an allowance. The Corporation evaluates the collectibility of both principal
and interest when assessing the need for loss accrual. Historical loss rates are applied to other commercial loans not subject to individual review. The
loss rates are derived from historical loss trends. Homogeneous loans, such as consumer installments, credit cards and residential mortgage loans are
not individually risk graded. Allowances are established for each pool of loans based on the
expected net charge-offs for one year. Loss rates are based on the average net charge-off history
by loan category, market loss trends and other relevant economic factors. An unallocated allowance is maintained to recognize the imprecision in estimating and measuring
loss when evaluating allowances for individual loans or pools of loans. Historical loss rates for commercial and consumer loans may also be adjusted for significant
factors that, in managements judgment, reflect the impact of any current condition on loss
recognition. Factors which management considers in the analysis include the effect of the national
and local economies, trends in the nature and volume of loans (delinquencies, charge-offs,
non-accrual and problem loans), changes in the internal lending policies and credit standards,
collection practices, and examination results from bank regulatory agencies and the Corporations
internal credit examiners. Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted as
necessary based on changing borrower and/or collateral conditions and actual collection and
charge-off experience. Transfers and Servicing of Financial Assets and Extinguishments of Liabilities Transfers of financial assets are accounted for as sales, when control over the transferred
assets is deemed to be surrendered: (1) the assets have been isolated from the Corporation, (2) the
transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase them before their
maturity. The Corporation recognizes




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##### 



CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    

(SANTANDER BANCORP LOGO)
 the financial assets and servicing assets it controls and the liabilities it has
incurred. At the same time, it ceases to recognize financial assets when control has been
surrendered and liabilities when they are extinguished. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization which
is computed utilizing the straight-line method over the estimated useful lives of the assets that
range between three and fifty years. Leasehold improvements are stated at cost and are amortized
using the straight-line method over the estimated useful lives of the assets or the term of the
lease, whichever is lower. Gains or losses on dispositions are reflected in current operations.
Costs of maintenance and repairs that do not improve or extend the lives of the respective assets
are charged to expense as incurred. Costs of renewals and improvements are capitalized. When assets
are sold or disposed of, their cost and related accumulated depreciation are removed from the
accounts and any gain or loss is reflected in earnings when realized. The Corporation evaluates for impairment its long-lived assets, including certain identifiable
intangibles and long-lived assets to be disposed of, whenever events and circumstances indicate
that the carrying amount of an asset may not be recoverable. Other Real Estate Other real estate, normally obtained through foreclosure or other workout situations, is
included in other assets and stated at the lower of fair value or carrying value minus estimated
costs to sell. Upon foreclosure, the recorded amount of the loan is written-down, if applicable, to
the fair value less estimated costs of disposal of the real estate acquired, by charging the
allowance for loan losses. Subsequent to foreclosure, any losses in the carrying value of the asset
resulting from periodic valuations of the properties are charged to expense in the period incurred.
Gains or losses on disposition of other real estate and related operating income and maintenance
expenses are included in current operations. Goodwill and Intangible Assets Goodwill and other intangible assets that have indefinite useful lives are not amortized but
rather are tested at least annually for impairment. Intangible assets with finite useful lives
continue to be amortized over the period the Corporation expects to benefit from such assets. These
intangible assets are periodically reviewed for other than temporary impairment by determining
whether the unamortized balances can be recovered through undiscounted future net cash flows of the
related assets. Based on managements assessment of the value of the Corporations goodwill at January 1, 2002 and
October 1, 2004, 2003 and 2002, which includes an independent valuation, among others, management
determined that the Corporations goodwill was not impaired. Mortgage-servicing rights The Corporations mortgage-servicing rights (MSRs) are stated at the lower of carrying value
or market at each balance sheet date. On a quarterly basis the Corporation evaluates its MSRs for
impairment and charges any such impairment to current period earnings. In order to evaluate its
MSRs the Corporation stratifies the related mortgage loans on the basis of their risk
characteristics which have been determined to be type of loan (government-guaranteed,
conventional, conforming and non-conforming), interest rates and maturities. Impairment of MSRs is
determined by estimating the fair value of each stratum and comparing it to its carrying value. No
impairment has been identified as of December 31, 2004 or 2003. MSRs are also subject to periodic amortization. The amortization of MSRs is based on the amount
and timing of estimated cash flows to be recovered with respect to the MSRs over their expected
lives. Amortization may be accelerated or decelerated to the extent that changes in interest rates
or prepayment rates warrant. Mortgage Banking Mortgage loan servicing includes collecting monthly mortgagor payments, forwarding payments
and related accounting reports to investors, collecting escrow deposits for the payment of
mortgagor property taxes and insurance, and paying taxes and insurance from escrow funds when due.
No asset or liability is recorded by the Corporation for mortgages serviced, except for
mortgage-servicing rights arising from the sale of mortgages, advances to investors and escrow
balances. The Corporation recognizes as a separate asset the right to service mortgage loans for others
whenever those servicing rights are acquired. The Corporation acquires mortgage-servicing rights
by purchasing or originating loans and selling or securitizing those loans (with the servicing
rights retained) and allocates the total cost of the mortgage loans sold to the mortgage-servicing
rights (included in intangible assets in the accompanying consolidated balance sheets) and the
loans based on their relative fair values. Further, mortgage-servicing rights are assessed for
impairment based on the fair value of those rights. Mortgage-servicing rights are amortized over
the estimated life of the related servicing income. Mortgage loan-servicing fees, which are based
on a percentage of the principal balances of the mortgages serviced, are credited to income as
mortgage payments are collected. Mortgage loans serviced for others are not included in the accompanying consolidated balance
sheets. At December 31, 2004 and 2003, the unpaid principal balances of mortgage loans serviced for
others amounted to approximately $539,850,000 and $437,272,000, respectively. In connection with
these mortgage-servicing activities, the Corporation administered escrow and other custodial funds
which amounted to approximately $1,835,000 and $1,304,000 at December 31, 2004 and 2003,
respectively.




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##### 



(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
 Trust Services In connection with its trust activities, the Corporation administers and is custodian of assets
with a book value of approximately $10,902,000,000 and $8,651,000,000 at December 31, 2004 and
2003. Due to the nature of trust activities, these assets are not included in the Corporations
consolidated balance sheets. Broker-dealer and Asset Management Commissions Commissions of the Corporations broker-dealer operations are composed of brokerage commission
income and expenses recorded on a trade date basis and proprietary securities transactions
recorded on a trade date basis. Investment banking revenues include gains, losses and fees net of
syndicate expenses, arising from securities offerings in which the Corporation acts as an
underwriter or agent. Investment banking management fees are recorded on offering date, sales
concessions on trade date, and underwriting fees at the time the underwriting is completed and the
income is reasonably determinable. Revenues from portfolio and other management and advisory fees
include fees and advisory charges resulting from the asset management of certain funds and are
recognized over the period when services are rendered. Insurance Commissions The Corporations insurance agency operation earns commissions on the sale of insurance
policies issued by unaffiliated insurance companies. Commission revenue is reported net of the
provision for commission returns on insurance policy cancellations, which is based on managements
estimate of future insurance policy cancellations as a result of historical turnover rates by
types of credit facilities subject to insurance. Treasury Stock Treasury stock is recorded at cost and is carried as a reduction of stockholders equity in
the consolidated balance sheets. As of December 31, 2004 treasury stock has not been retired or reissued. Income Taxes The Corporation uses the asset and liability method for the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been recognized in the
Corporations financial statements or tax returns. Deferred income tax assets and liabilities are
determined for differences between financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future. The computation is based on enacted tax
laws and rates applicable to periods in which the temporary differences are expected to be
recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount that is more likely than not to be realized. The Corporation also accounts for
income tax contingencies, if any. Earnings Per Common Share Basic and diluted earnings per common share are computed by dividing net income available to
common stockholders, by the weighted average number of common shares outstanding during the
period. The Corporations average number of common shares outstanding used in the computation of
earnings per common share were 46,639,104; 46,661,248; and 47,310,217 for the years ended December
31, 2004, 2003 and 2002, respectively, after giving retroactive effect to the 10% stock dividends
declared on July 9, 2004 and June 17, 2002. Basic and diluted earnings per common share are the
same since no stock options or other common share equivalents were outstanding during the periods
ended December 31,2004, 2003 and 2002. Statements of Cash Flows All highly liquid instruments with a maturity of three months or less, when acquired or
generated, are considered cash equivalents.   Supplemental Disclosures of Cash Flow Information: 2004
    
    
    2003
    
    
    2002(In thousands)Cash paid during the year for:Interest
    
    $
    136,824
    
    
    $
    138,708
    
    
    $
    155,215Income taxes
    
    $
    11,322
    
    
    $
    4,443
    
    
    $
    502Noncash transactions:Stock dividend (See Note 1 5)
    
    $
    103,029
    
    
    $
    
    
    
    $
    75,099Minimum pension liability (See Note 18)
    
    $
    (90
    )
    
    $
    5,723
    
    
    $
    8,547
 Recent Accounting Pronouncements that Affect the Corporation The adoption of the following accounting pronouncements did not have a material impact on the
Corporations results of operations and financial condition:  
    FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of OthersAn Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34;




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##### 



CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    

(SANTANDER BANCORP LOGO)
  
    FASB Interpretation No. 46(R) (FIN 46R), Consolidation of Variable Interest
EntitiesAn Interpretation of ARB No. 51;  
    SFAS No. 132(R) (revised 2003), Employers Disclosures about Pensions and Other Post-Retirement BenefitsAn Amendment of FASB Statements No. 87, 88,
and 106; and  
    EITF Issue No. 03-1, The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain
Investments. On March 9, 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 105, Application of Accounting Principles to Loan Commitments,which provides guidance
regarding loan commitments that are accounted for as derivative instruments. In this Bulletin, the
SEC determined that an interest rate lock commitment should generally be valued at zero at
inception. The rate locks will continue to be adjusted for changes in value resulting from changes
in market interest rates. The Corporation adopted this new standard prospectively effective April
1, 2004. Under the new accounting guidance, the Corporation no longer recognizes any revenue at the
inception of the rate lock. Profits inherent in the rate lock are recognized at the time of the
sale of the underlying loans. The implementation of the standard did not have a material impact on
results of operations. In September 2004, the EITF reached a consensus on Issue No. 04-10 (EITF 04-10), Determining
Whether To Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds. This issue
addresses the aggregation of segments that do not meet the quantitative thresholds under paragraph
18 of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Under
SFAS 131, if a segment does not meet one of the quantitative thresholds established, it does not
need to be disclosed as a reportable segment. Further, operating segments that do not meet
quantitative thresholds may be aggregated to produce a reportable segment only if the combined
segments share a majority of certain aggregation criteria. EITF
04-10 clarifies that operating segments that do not meet the quantitative thresholds can be
aggregated to produce a reportable segment if:  
    Aggregation is consistent with the objective and basic
principles of SFAS 131,
    The segments have similar economic characteristics,
and
    The segments share a majority of the following aggregation criteria: Be similar in a majority of:  
    Products and services
    Production processes
    Type of customer
    Distribution methods
    Regulatory environment This consensus is effective no later than fiscal years ending after October 13, 2004 (date of
Board ratification). The corresponding information for earlier periods, including interim periods,
shall be restated unless it is impractical to do so. Restatement of previously issued financial
statements is required. The implementation of the standard did not have a material impact on the
Corporations consolidated results of operations, financial position and disclosures. 2. Trading Securities: Proceeds from sales of trading securities during 2004, 2003 and 2002 were approximately
$2,207,495,000; $1,824,948,000; and $1,472,015,000, respectively. Net gains of approximately
$1,166,000; $1,349,000; and $551,000 were realized during 2004, 2003 and 2002, respectively.
Unrealized holding gains recognized for the same periods were $27,000; $221,000; and $33,000,
respectively. Trading losses on futures transactions of $1,069,000 were realized in 2004; and
trading gains on futures transactions of $31,000 and $1,849,000 were realized in 2003 and 2002,
respectively. 3. Investment Securities Available for Sale: The amortized cost, gross unrealized gains and losses, fair value and weighted average yield
of investment securities available for sale by contractual maturity are as follows:




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##### 



(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
 December 31, 2004Gross
    
    
    Gross
    
    
    
    
    
    
    Weighted-Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    
    
    
    
    AverageCost
    
    
    Gains
    
    
    Losses
    
    
    Fair 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 but within five years
    
    
    1,039,811
    
    
    
    25,690
    
    
    
    2,874
    
    
    
    1,062,627
    
    
    
    4.56
    %After five years but within 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 but within five years
    
    
    21,777
    
    
    
    412
    
    
    
    
    
    
    
    22,189
    
    
    
    4.51
    %After five years but within 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 but within five years
    
    
    839
    
    
    
    51
    
    
    
    
    
    
    
    890
    
    
    
    8.36
    %After five years but within 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 securitiesWithin one year
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    6.98
    %After one year but within five years
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    5.60
    %150
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    6.29
    %$
    1,964,182
    
    
    $
    26,458
    
    
    $
    12,508
    
    
    $
    1,978,132
    
    
    
    4.41
    %
 December 31, 2003Gross
    
    
    Gross
    
    
    
    
    
    
    Weighted-Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    
    
    
    
    AverageCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    Yield(Dollars in thousands)Treasury and agencies of the United States
Government:Within one year
    
    $
    4,050
    
    
    $
    23
    
    
    $
    
    
    
    $
    4,073
    
    
    
    1.80
    %After one year but within five years
    
    
    325,426
    
    
    
    
    
    
    
    3,526
    
    
    
    321,900
    
    
    
    1.91
    %329,476
    
    
    
    23
    
    
    
    3,526
    
    
    
    325,973
    
    
    
    1.91
    %Commonwealth of Puerto Rico and its subdivisions:After one year but within five years
    
    
    23,918
    
    
    
    213
    
    
    
    4
    
    
    
    24,127
    
    
    
    5.70
    %After five years but within ten years
    
    
    6,300
    
    
    
    
    
    
    
    
    
    
    
    6,300
    
    
    
    4.52
    %30,218
    
    
    
    213
    
    
    
    4
    
    
    
    30,427
    
    
    
    5.45
    %Mortgage-backed securities:Over ten years
    
    
    1,309,908
    
    
    
    8,512
    
    
    
    10,509
    
    
    
    1,307,911
    
    
    
    4.51
    %$
    1,669,602
    
    
    $
    8,748
    
    
    $
    14,039
    
    
    $
    1,664,311
    
    
    
    4.01
    %
 The number of positions, fair value and unrealized losses at December 31, 2004, of
investment securities available for sale that have been in a continuous unrealized loss
position for less than twelve months and for twelve months or more, are as follows:




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##### 



CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    

(SANTANDER BANCORP LOGO)
 Less than 12 months
    
    
    12 months or more
    
    
    TotalNumber
    
    
    
    
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    Numberof
    
    
    
    
    
    
    Unrealized
    
    
    of
    
    
    
    
    
    
    Unrealized
    
    
    of
    
    
    
    
    
    
    UnrealizedPositions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    Losses
    
    
    Positions
    
    
    Fair Value
    
    
    Losses(Dollars in thousands)Treasury and
agencies of the
United States
Government
    
    
    3
    
    
    $
    95,497
    
    
    $
    1,985
    
    
    
    10
    
    
    $
    518,512
    
    
    $
    2,497
    
    
    
    13
    
    
    $
    614,009
    
    
    $
    4,482Mortgage-backed
securities
    
    
    2
    
    
    
    54,010
    
    
    
    186
    
    
    
    8
    
    
    
    333,277
    
    
    
    7,840
    
    
    
    10
    
    
    
    387,287
    
    
    
    8,0265
    
    
    $
    149,507
    
    
    $
    2,171
    
    
    
    18
    
    
    $
    851,789
    
    
    $
    10,337
    
    
    
    23
    
    
    $
    1,001,296
    
    
    $
    12,508
 The Corporation evaluates its investment securities for other than temporary impairment
on a quarterly basis or earlier if other factors indicative of potential impairment exist. An
impairment charge in the consolidated statements of income is recognized when the decline in the
fair value of the securities below their cost basis is judged to be other than temporary. The
Corporation considers various factors in determining whether it should recognize an impairment
charge, including, but not limited to the length of time and extent to which the fair value has
been less than its cost basis, expectation of recoverability of its original investment in the
securities and the Corporations intent and ability to hold the securities for a period of time
sufficient to allow for any forecasted recovery of fair value up to (or beyond) the cost of the
investment. As of December 31, 2004, management concluded that there was no other-than-temporary impairment in
its investment securities portfolio. The unrealized losses in the Corporations investments in U.S.
Government agencies were caused by interest rate increases. The contractual terms of these
investments do not permit the issuer to settle the securities at a price less than the amortized
cost of the investment. Since the Corporation has the ability and intent to hold these investments
until a recovery of fair value, which may be maturity, the Corporation does not consider these
investments to be other than temporarily impaired at December 31, 2004. The unrealized losses in
the Corporations investment in federal agency mortgage-backed securities were caused by interest
rate increases. The Corporation purchased these investments at a discount relative to their face
amount, and the contractual cash flows of these investments are guaranteed by an agency of the U.S.
government. Accordingly, it is expected that the securities will not be settled at a price less
than the amortized cost of the Corporations investment. The decline in market value is
attributable to changes in interest rates and not credit quality and since the Corporation has the
ability and intent to hold these investments until a recovery of fair value, which may be maturity,
the Corporation does not consider these investments to be other than temporarily impaired at
December 31, 2004. Contractual maturities on certain securities, including mortgage-backed securities, could differ
from actual maturities since certain issuers have the right to call or prepay these securities. The weighted average yield on investment securities available for sale is based on amortized cost,
therefore it does not give effect to changes in fair value. Proceeds from sales of investment securities available for sale were approximately $1,450,058,000;
$1,206,108,000; and $1,632,649,000 in 2004, 2003 and 2002, respectively. Gross gains of
approximately $12,775,000; $9,994,000; and $12,227,000 were realized in 2004, 2003 and 2002,
respectively. Gross losses of approximately $1,314,000 were realized in 2004. 4. Investment Securities
Held to Maturity:


During December of 2004, BSCH communicated to the Corporation that, upon the formal adoption of
International Financial Reporting Standards (IFRS) by the Bank of Spain, it expected to adopt
IFRS effective January 1, 2005, and that, with regards to its consolidated held-to-maturity
investment portfolio, it was seriously considering taking advantage of a one-time transition
guidance to reclassify such investment portfolio as available for sale, as permitted by IFRS. BSCH
encouraged the Corporation to conform the classification of such investment portfolio in the
Corporations US GAAP financial statements to the classification pursuant to the one-time
transition guidance under IFRS, effective January 1, 2005. After thorough consideration, in
February of 2005 management of the Corporation determined that it would, subject to its Boards
approval, reclassify its held-to-maturity investment portfolio to the available-for-sale category
under US GAAP. Management of the Corporation believes that because the deliberation process leading
to the February 2005 decision was initiated during December of 2004, at December 31, 2004, the
Corporation could not demonstrate that it had the positive intent to hold the aforesaid investment
portfolio to maturity; the positive intent is required by Statement of Financial Accounting
Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities,
in order for securities scoped under SFAS 115 to be classified as held to maturity. Further,
because such transfer does not qualify under the exemption provisions for the sale or transfer of
held-to-maturity securities under SFAS 115, the reclassification decision by the Corporation is
deemed to have tainted the held-to-maturity category and it will not be permitted to classify
prospectively investment securities scoped under SFAS 115




---



##### 



(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
 as held to maturity for a period of two years. At December 31, 2004, the securities reclassified from held to maturity to available for sale had a fair value
of $839,961,000 and an amortized cost of $813,788,000, which resulted in a credit to Other
Comprehensive Income of $15,966,000, net of income taxes, related to the unrealized holding gain. The amortized cost, gross unrealized gains and losses, fair
value and weighted average yield of investment securities by contractual maturity are as follows,
there were no investment securities held to maturity at
December 31, 2004: December 31, 2003Gross
    
    
    Gross
    
    
    
    
    
    
    Weighted-Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    
    
    
    
    AverageCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    Yield(Dollars in thousands)Treasury and agencies of the United States Government:Within one year
    
    $
    3,016
    
    
    $
    
    
    
    $
    
    
    
    $
    3,016
    
    
    
    0.87
    %After one year but within five years
    
    
    783,987
    
    
    
    51,636
    
    
    
    
    
    
    
    835,623
    
    
    
    5.04
    %787,003
    
    
    
    51,636
    
    
    
    
    
    
    
    838,639
    
    
    
    5.03
    %Commonwealth of Puerto Rico and its subdivisions:Within one year
    
    
    4,565
    
    
    
    33
    
    
    
    
    
    
    
    4,598
    
    
    
    5.18
    %After one year but within five years
    
    
    16,293
    
    
    
    761
    
    
    
    
    
    
    
    17,054
    
    
    
    5.05
    %Over ten years
    
    
    8,500
    
    
    
    205
    
    
    
    
    
    
    
    8,705
    
    
    
    6.44
    %29,358
    
    
    
    999
    
    
    
    
    
    
    
    30,357
    
    
    
    5.48
    %Mortgage-backed securities:After one year but within five years
    
    
    1,180
    
    
    
    93
    
    
    
    
    
    
    
    1,273
    
    
    
    8.43
    %After five years but within ten years
    
    
    113
    
    
    
    7
    
    
    
    
    
    
    
    120
    
    
    
    9.31
    %Over ten years
    
    
    323
    
    
    
    14
    
    
    
    
    
    
    
    337
    
    
    
    8.40
    %1,616
    
    
    
    114
    
    
    
    
    
    
    
    1,730
    
    
    
    8.48
    %Foreign governments:Within one year
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    7.20
    %After one year but within five years
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    7.11
    %150
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    7.14
    %Other securities
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    0.81
    %$
    833,127
    
    
    $
    52,749
    
    
    $
    
    
    
    $
    885,876
    
    
    
    4.97
    %
 The Corporation evaluates its investment securities for other than temporary
impairment on a quarterly basis or earlier if other factors indicative of potential impairment
exist. An impairment charge in the consolidated statements of income is recognized when the decline
in the fair value of the securities below their cost basis is judged to be other than temporary.
The Corporation considers various factors in determining whether it should recognize an impairment
charge, including, but not limited to the length of time and extent to which the fair value has
been less than its cost basis, expectation of recoverability of its original investment in the
securities and the Corporations intent and ability to hold the securities for a period of time
sufficient to allow for any forecasted recovery in fair value up to (or beyond) the cost of the
investment. Contractual maturities on certain securities, including mortgage-backed securities, could differ
from actual maturities since some issuers have the right to call or prepay these securities. The weighted average yield on investment securities is based on amortized cost; therefore, it does
not give effect to changes in fair value. Proceeds from investment securities held to maturity that were called by the issuer were
approximately $186,792,000; $237,490,000; and $509,713,000 in 2004, 2003 and 2002, respectively.
Gross gains of approximately $15,000; $23,000; and $9,000 were realized in 2004, 2003 and 2002 from
investments securities called. Gross gains of approximately $773,000 were realized in 2003. 5. Assets Pledged: At December 31, 2004, investment securities and loans were pledged to secure public funds.
The classification and carrying amount of pledged assets, which the secured parties are not
permitted to sell or repledge the collateral as of December 31, were as follows:




---



##### 



CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    

(SANTANDER BANCORP LOGO)
   2004
    
    
    2003(In thousands)Investment securities available for sale
    
    $
    504,391
    
    
    $
    321,910Investment securities held to maturity
    
    
    
    
    
    
    130,730Loans
    
    
    154,636
    
    
    
    163,551Other
    
    
    104,535
    
    
    
    94,692$
    763,562
    
    
    $
    710,883
 At December 31, 2004, investment securities with a carrying value of approximately
$1,432,312,000 were pledged to securities sold under agreements to repurchase. At December 31, 2003, investment securities with a carrying value of approximately
$1,914,811,000 and securities purchased under agreements to resell with a carrying value of
approximately $10,175,000 were pledged to secure securities sold under agreements to
repurchase. 6. Loans: The Corporations loan portfolio at December 31 consists of the following: 2004
    
    
    2003(In thousands)Commercial and industrial
    
    $
    2,236,253
    
    
    $
    2,034,323Consumer
    
    
    448,385
    
    
    
    399,957Leasing
    
    
    126,148
    
    
    
    120,959Construction
    
    
    201,041
    
    
    
    211,192Mortgage
    
    
    2,306,473
    
    
    
    1,162,4805,318,300
    
    
    
    3,928,911Unearned income and deferred fees/costs
    
    
    (6,364
    )
    
    
    (11,345
    )Allowance for loan losses
    
    
    (69,177
    )
    
    
    (69,693
    )$
    5,242,759
    
    
    $
    3,847,873
 At December 31, the recorded investment in loans that were considered impaired is as follows: 2004
    
    
    2003(In thousands)Impaired loans with related allowance
    
    $
    13,180
    
    
    $
    17,440Impaired loans that did not require allowance
    
    
    66,950
    
    
    
    63,448Total impaired loans
    
    $
    80,130
    
    
    $
    80,888Allowance for impaired loans
    
    $
    4,883
    
    
    $
    8,895Impaired loans measured based on fair value of collateral
    
    $
    80,130
    
    
    $
    80,358Impaired loans measured based on discounted cash flows
    
    $
    
    
    
    $
    530Interest income recognized on impaired loans
    
    $
    121
    
    
    $
    111
 The average balance of impaired loans for the years ended December 31, 2004 and 2003 was
approximately $78 million and $63 million, respectively. The following schedule reflects the approximate outstanding principal amount and the effect on
earnings of non-accruing loans.




---



##### 



(SANTANDER BANCORP LOGO)
    
    CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
 2004
    
    
    2003
    
    
    2002(In thousands)Principal balance as of December 31
    
    $
    87,510
    
    
    $
    98,368
    
    
    $
    123,438Interest income which would have been recorded had the loans not
been classified as non-accruing
    
    $
    2,351
    
    
    $
    3,127
    
    
    $
    2,338Loans past due ninety days or more and still accruing interest
    
    $
    3,377
    
    
    $
    2,404
    
    
    $
    3,928
 7. Allowance for Loan Losses: Changes in the allowance for loan losses are summarized as follows: 2004
    
    
    2003
    
    
    2002(In thousands)Balance, January 1
    
    $
    69,693
    
    
    $
    56,906
    
    
    $
    51,738Provision for loan losses
    
    
    26,270
    
    
    
    49,916
    
    
    
    63,699Charge-offs
    
    
    (39,877
    )
    
    
    (47,675
    )
    
    
    (69,487
    )Recoveries
    
    
    13,091
    
    
    
    10,546
    
    
    
    10,956Balance, December 31
    
    $
    69,177
    
    
    $
    69,693
    
    
    $
    56,906
 The beginning balance and provision for loan losses for December 31, 2004, 2003 and
2002, detailed above, reflect a reclassification of the reserve for commitments, unused
lines and standby letters of credit to other liabilities as detailed below: 2004
    
    
    2003
    
    
    2002(In thousands)Balance, January 1
    
    $
    879
    
    
    $
    1,050
    
    
    $
    1,119Provision (credit) for
unfunded commitments and
standby letters of credit
    
    
    390
    
    
    
    (171
    )
    
    
    (69
    )Balance, December 31
    
    $
    1,269
    
    
    $
    879
    
    
    $
    1,050
 8. Premises and Equipment: The Corporations premises and equipment at December 31 are as follows: Useful lifein years
    
    
    2004
    
    
    2003(In thousands)Land
    
    
    
    
    
    $
    6,926
    
    
    $
    6,926Buildings
    
    
    50
    
    
    
    38,945
    
    
    
    49,330Equipment
    
    
    1-10
    
    
    
    34,297
    
    
    
    38,252Leasehold improvements
    
    Various
    
    
    22,646
    
    
    
    23,897102,814
    
    
    
    118,405Accumulated depreciation and amortization
    
    
    
    
    
    
    (49,960
    )
    
    
    (57,298
    )$
    52,854
    
    
    $
    61,107
 9. Goodwill and Intangible Assets: Goodwill Goodwill and intangible assets with an indefinite life are tested for impairment at least
annually using a two-step process at each reporting unit. The first step of the goodwill impairment test is used to identify potential impairment by
comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting
unit is not considered impaired and the second step of the impairment test is not performed. If the
carrying value of the reporting unit exceeds its fair value, the second step in the impairment test
consists of comparing the implied fair value of the reporting unit goodwill with the carrying
amount of that goodwill. The Corporation uses the market multiple, the discounted cash flows and
comparable transaction approaches to determine the fair value of each reporting unit.




---



##### 



CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS
    

(SANTANDER BANCORP LOGO)
 The Corporation has assigned goodwill to reporting units at the time of acquisition.
Goodwill is allocated to the Retail Banking segment and the Broker-dealer segment as follows: 2004
    
    
    2003(In thousands)Retail Banking
    
    $
    10,537
    
    
    $
    10,537Broker-dealer
    
    
    24,254
    
    
    
    24,254$
    34,791
    
    
    $
    34,791
 Goodwill assigned to the Retail Banking segment is related to the acquisition of Banco
Central Hispano Puerto Rico (BCHPR) in 1996, and the goodwill assigned to the Broker-dealer
segment is related to the acquisition of Merrill Lynchs retail brokerage business in Puerto
Rico by Santander Securities Corporation in 2000. There has been no impairment in goodwill
for each of the three years in the period ended December 31, 2004. Other Intangible
Assets Other intangible assets subject to amortization at December 31, were as follows: 2004
    
    
    2003(In thousands)Mortgage-servicing rights
    
    $
    6,503
    
    
    $
    4,656Advisory servicing rights
    
    
    1,500
    
    
    
    Core deposits
    
    
    
    
    
    
    6$
    8,003
    
    
    $
    4,662
 Mortgage-servicing rights have an estimated useful life of eight years. The
advisory-servicing rights are related to the Corporations subsidiary acquisition of the
right to serve as the investment advisor for the First Puerto Rico Tax-Exempt Fund, Inc. This
intangible asset is being amortized over a 10-year estimated useful life. The estimated aggregate amortization expense for each of the five succeeding years and
thereafter of these intangible assets is the following: Year
    
    Amortization(In thousands)2005
    
    $
    1,2602006
    
    
    1,2552007
    
    
    1,2172008
    
    
    1,2172009
    
    
    1,217Thereafter
    
    
    1,837$
    8,003
 10. Other Assets: Other assets at December 31 consist of the following: 2004
    
    
    2003(In thousands)Deferred tax assets, net
    
    $
    2,344
    
    
    $
    19,727Accounts receivable
    
    
    61,311
    
    
    
    56,178Securities sold not delivered, net
    
    
    669
    
    
    
    22,715Other real estate
    
    
    3,034
    
    
    
    4,082Software, net
    
    
    12,263
    
    
    
    12,365Prepaid expenses
    
    
    9,447
    
    
    
    15,158Customers liabilities on acceptances
    
    
    2,166
    
    
    
    4,270Other
    
    
    16,635
    
    
    
    7,555$
    107,869
    
    
    $
    142,050




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##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS 11. Savings and Time Deposits: At December 31, 2004 and 2003, interest-bearing deposits, including time deposits,
amounted to $4,004,120,000 and $3,441,815,000, respectively. At December 31, 2004 and
2003, time deposits amounted to approximately $2,018,989,000 and $1,589,368,000,
respectively, of which approximately $636,477,000 and $550,216,000, respectively, mature
after one year. Maturities of time deposits for the next five years and thereafter follow: Year
    
    Amount(In thousands)2005
    
    $
    1,382,5122006
    
    
    54,8622007
    
    
    44,0752008
    
    
    43,6722009
    
    
    100,706Thereafter
    
    
    393,162$
    2,018,989
 The detail of interest expense on savings and time deposits for the years ended
December 31 is as follows: 2004
    
    
    2003
    
    
    2002(In thousands)Savings depositsSavings accounts
    
    $
    15,123
    
    
    $
    15,037
    
    
    $
    18,238NOW and other transaction accounts
    
    
    9,722
    
    
    
    10,515
    
    
    
    15,86824,845
    
    
    
    25,552
    
    
    
    34,106Time depositsDeposits of $100,000 and over
    
    
    30,743
    
    
    
    24,876
    
    
    
    43,212Deposits under $100,000
    
    
    4,691
    
    
    
    5,602
    
    
    
    7,09035,434
    
    
    
    30,478
    
    
    
    50,302$
    60,279
    
    
    $
    56,030
    
    
    $
    84,408
 12. Other Borrowings: Following are summaries of borrowings as of and for the periods indicated: December 31, 2004Federal Funds
    
    
    Securities SoldPurchased and
    
    
    UnderOther
    
    
    Agreements to
    
    
    CommercialBorrowings
    
    
    Repurchase
    
    
    Paper 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
    %
 December
31, 2003Federal Funds
    
    
    Securities SoldPurchased and
    
    
    UnderOther
    
    
    Agreements to
    
    
    CommercialBorrowings
    
    
    Repurchase
    
    
    Paper Issued(Dollars in thousands)Amount
outstanding at year-end
    
    $
    350,000
    
    
    $
    1,808,238
    
    
    $
    254,904Average indebtedness outstanding during the year
    
    $
    318,938
    
    
    $
    1,544,410
    
    
    $
    150,534Maximum amount outstanding during the year
    
    $
    565,000
    
    
    $
    1,959,214
    
    
    $
    275,000Average interest rate for the year
    
    
    1.21
    %
    
    
    3.72
    %
    
    
    1.24
    %Average
interest rate at year-end
    
    
    1.13
    %
    
    
    3.19
    %
    
    
    1.14
    %




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) Federal funds purchased and other borrowings, securities sold under agreements to
repurchase and commercial paper issued mature as follows: 2004
    
    
    2003(In thousands)Federal
funds purchased and other borrowings:Within thirty days
    
    $
    205,334
    
    
    $
    35,000After thirty to ninety days
    
    
    
    
    
    
    45,000Over ninety days
    
    
    575,000
    
    
    
    270,000Total
    
    $
    780,334
    
    
    $
    350,000Securities sold under agreements to repurchase:Within thirty days
    
    $
    374,438
    
    
    $
    823,122Over ninety days
    
    
    975,006
    
    
    
    985,116Total
    
    $
    1,349,444
    
    
    $
    1,808,238Commercial paper issued:Within thirty days
    
    $
    629,544
    
    
    $
    254,904
 As of December 31, 2004 and 2003, the weighted average maturity of Federal funds purchased
and other borrowings over ninety days was 21.18 months and 15.32 months, respectively. As of December 31, 2004, securities sold under agreements to repurchase (classified by
counterparty) were as follows: Fair Value of
    
    
    Weighted-AverageBalance of Borrowings
    
    
    Underlying Securities
    
    
    Maturity in Months(Dollars in thousands)Citigroup Global Markets, Inc.
    
    $
    200,000
    
    
    $
    211,545
    
    
    
    18.48Credit Suisse First Boston LLC
    
    
    300,000
    
    
    
    320,386
    
    
    
    33.20Federal Home Loan Bank New York
    
    
    100,000
    
    
    
    122,951
    
    
    
    39.41Goldman Sachs
    
    
    49,429
    
    
    
    49,868
    
    
    
    0.13JP Morgan Chase Securities, Inc.
    
    
    125,000
    
    
    
    142,891
    
    
    
    23.33Lehman Brothers RS
    
    
    250,006
    
    
    
    280,238
    
    
    
    83.14UBS Financial Services, Inc.
    
    
    98,324
    
    
    
    101,534
    
    
    
    0.36Morgan Stanley
    
    
    226,685
    
    
    
    225,446
    
    
    
    0.13$
    1,349,444
    
    
    $
    1,454,859
    
    
    
    36.39
 The following investment securities were sold under agreements to repurchase: December 31, 2004Carrying
    
    
    
    
    
    
    Fair Value ofValue of Underlying
    
    
    Balance of
    
    
    Underlying
    
    
    Weighted-AverageUnderlying Securities
    
    Securities
    
    
    Borrowings
    
    
    Securities
    
    
    Interest Rate(Dollars in thousands)Obligations of U.S. Government agencies
and corporations
    
    $
    1,062,637
    
    
    $
    994,072
    
    
    $
    1,085,183
    
    
    
    4.54
    %Mortgage-backed securities
    
    
    369,675
    
    
    
    355,372
    
    
    
    369,676
    
    
    
    4.36
    %Total
    
    $
    1,432,312
    
    
    $
    1,349,444
    
    
    $
    1,454,859
    
    
    
    4.49
    %




---



##### 



(SANTANDER BANCORP LOGO)CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS December 31, 2003Carrying Value
    
    
    
    
    
    
    Fair Value of
    
    
    Weighted-of Underlying
    
    
    Balance of
    
    
    Underlying
    
    
    AverageUnderlying Securities
    
    Securities
    
    
    Borrowings
    
    
    Securities
    
    
    Interest Rate(Dollars in thousands)Obligations of U.S. Government agencies and
corporations
    
    $
    830,650
    
    
    $
    764,674
    
    
    $
    874,111
    
    
    
    4.51
    %Mortgage-backed securities
    
    
    1,084,161
    
    
    
    1,033,454
    
    
    
    1,084,161
    
    
    
    4.53
    %Other
    
    
    10,175
    
    
    
    10,110
    
    
    
    10,197
    
    
    
    1.33
    %Total
    
    $
    1,924,986
    
    
    $
    1,808,238
    
    
    $
    1,968,469
    
    
    
    4.51
    %
 13. Subordinated Capital Notes and Term Notes: Subordinated Capital
Notes
 2004
    
    
    2003(In thousands)Subordinated notes with fixed interest of 6.30% maturing June 1, 2032
    
    $
    72,898
    
    
    $
    Subordinated capital notes issued by an affiliate maturing on December
30, 2010, with interest at 2.12%
    
    
    
    
    
    
    12,000Floating-rate notes with interest at 1 % over 1 month LIBOR-2.17% at December
31, 2003Due on demand
    
    
    
    
    
    
    425Maturing on December 30, 2010
    
    
    
    
    
    
    3,50072,898
    
    
    
    15,925Unamortized discount
    
    
    (310
    )
    
    
    $
    72,588
    
    
    $
    15,925
 Term Notes Term notes payable
outstanding at December 31 consisted of the following: 2004
    
    
    2003(In thousands)Term notes
maturing January 29, 2010 linked to the S&P 500 index
    
    $
    30,000
    
    
    $
    Term notes maturing May 31, 2011 with fixed interest of 0.25%
    
    
    
    
    
    
    Linked to
the S&P 500
    
    
    4,000
    
    
    
    Linked to the Dow Jones Euro STOXX 50
    
    
    3,000
    
    
    
    Term notes 1994 Series maturing August 8, 2004 at 6.82%
    
    
    
    
    
    
    50,000Term note with fixed interest of 1 .36% maturing June 24, 2004
    
    
    
    
    
    
    62,000Loans underlying Puerto Rico Industrial, Tourist, Educational, Medical
and Environmental Control Facilities Financing Authority (AFICA)
-sponsored bonds:Series A-with 6.20% fixed interest maturing June 1, 2018
    
    
    
    
    
    
    21,589Series B-with 6.50% fixed interest maturing December 1, 2019
    
    
    
    
    
    
    8,822Series D-with 6.15% fixed interest maturing December 1, 2021
    
    
    
    
    
    
    25,000
    
    
    
    55,41137,000
    
    
    
    167,411Unamortized discount
    
    
    (5,543
    )
    
    
    (1,445
    )$
    31,457
    
    
    $
    165,966
 The 1994 Series term notes outstanding in 2003 contained certain general restrictions
related to financial ratios, among others. The Corporation was in compliance with such
restrictions. Term notes mature after the next five years.




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) 14. Reserve Fund: The Banking Law of Puerto Rico requires that a reserve fund be created and that annual
transfers of at least 10% of the Banks annual net income be made, until such fund equals 100% of
total paid-in capital, on common and preferred stock. Such transfers restrict the retained
earnings, which would otherwise be available for dividends. 15. Preferred Stock and
Common Stock Transactions: Preferred Stock The Corporation has
10,000,000 shares of authorized Series A Preferred Stock with a par value of
$25, of which 2,610,008 were issued and outstanding at December 31, 2002. On December 26, 2003, the
Corporation redeemed the 2,610,008 Series A Preferred Stock at a redemption price of $26.00 per
share. The holders of the Series A Preferred Stock were entitled to receive noncumulative cash
dividends when, as and if declared by the Board of Directors, out of the assets of the Corporation
legally available therefor, at an annual rate of $1.75 per share of Series A Preferred Stock. In
the earnings per common share computation the dividends and redemption premium paid on preferred
stock are deducted from net income. The Corporation paid dividends on preferred stock at the rate
of 7% annually, through the date of redemption. Common Stock During 2004, 2003 and 2002, the Corporation declared and paid quarterly cash
dividends of $0.11 per common share except for the fourth quarter of 2004 when the
Corporation declared a dividend of $0.16 per common share. The Corporation adopted and implemented Stock Repurchase Programs in May 2000, December 2000 and
June
2001. Under these programs, the Corporation acquired 3%of its then outstanding common shares.
During November
2002, the Corporation started a fourth Stock Repurchase Program under which it may acquire 3% of its
outstanding common shares. As of December 31, 2004, 4,011,260 common shares amounting to
approximately $67,552,000 had been repurchased under these programs
and are recorded as treasury
stock and recorded at cost in the accompanying consolidated balance sheets. The Corporation started a Dividend Reinvestment and Cash Purchase Plan in May 2000 under which
holders of common stock have the opportunity to automatically invest cash dividends to purchase
more shares of the Corporation. Stockholders may also make, as frequently as once a month,
optional cash payments for investment in additional shares of common stock. On July 9, 2004, the Board of Directors of the Corporation authorized a 10% stock dividend on
common stock to stockholders of record as of July 20, 2004 amounting to approximately 4.2 million
common shares. The common stock dividend was distributed on August 3, 2004. Cash was paid in lieu
of fractional shares. The earnings per share computations for all periods presented in the
accompanying financial statements have been restated to reflect these stock dividends, as follows: 2004
    
    
    2003
    
    
    2002(Dollars and number of shares in thousands, except earnings per common share)Net income
    
    $
    84,459
    
    
    $
    39,445
    
    
    $
    25,752Dividends to preferred stockholders
    
    
    
    
    
    
    7,114
    
    
    
    4,568Net income available to common stockholders
    
    $
    84,459
    
    
    $
    32,331
    
    
    $
    21,184Average number of common shares outstanding
prior to common stock dividend
    
    
    42,399
    
    
    
    42,421
    
    
    
    43,070Common stock dividend
    
    
    4,240
    
    
    
    4,240
    
    
    
    4,240Adjusted average number of common shares
    
    
    46,639
    
    
    
    46,661
    
    
    
    47,310Basic and diluted earnings per common share
    
    $
    1.81
    
    
    $
    0.69
    
    
    $
    0.45
 16. Income Tax: The Corporation is subject to regular or the alternative minimum tax, whichever is higher. The
effective tax rate is lower than the statutory rate primarily because interest income on certain
United States and Puerto Rico debt securities is exempt from Puerto Rico income taxes. The Corporation is also subject to federal income tax on its United States (U.S.) source income.
However, the Corporation had no taxable U.S. income for each of the three years
in the period ended December 31, 2004. The Corporation is not subject to federal income tax on U.S.
Treasury securities that qualify as portfolio interest, nor to the branch profit tax and the branch
level tax. Puerto Rico international banking entities, or IBEs, are currently exempt from taxation under
Puerto Rico law. During 2004, the Legislature of Puerto Rico and the Governor of Puerto Rico
approved a law amending the IBE Act. This law imposes income taxes at normal statutory rates on
each IBE




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS that operates as a unit of a bank, if the IBEs net income generated after December 31, 2003
exceeds 40 percent of the banks net income in the taxable year commenced on July 1, 2003, 30
percent of the banks net income in the taxable year commencing on July 1, 2004, and 20 percent of
the banks net income in the taxable year commencing on July 1, 2005, and thereafter. It does not
impose income taxation on an IBE that operates as a subsidiary of a bank The Corporation has an IBE that operates as a subsidiary of the Bank, and which is not affected by
the new legislation. However, there cannot be any assurance that the IBE Act will not be modified
in the future in a manner to reduce the tax benefits available to IBEs that operate as a
subsidiary of a bank. The components of the provision for income tax for the years ended December 31 are as follows: 2004
    
    
    2003
    
    
    2002(In thousands)Current tax provision
    
    $
    6,009
    
    
    $
    1,424
    
    
    $
    1,500Deferred tax provision (benefit)
    
    
    2,136
    
    
    
    (1,709
    )
    
    
    1,789Provision (benefit) for income tax
    
    $
    8,145
    
    
    $
    (285
    )
    
    $
    3,289
 The difference between the income tax provision and the amount computed using the
statutory rate is due to the following: 2004
    
    
    2003
    
    
    2002Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate(Dollars in thousands)Income tax at statutory rate
    
    $
    36,115
    
    
    
    39
    %
    
    $
    15,273
    
    
    
    39
    %
    
    $
    11,326
    
    
    
    39
    %Benefits of net tax-exempt income
    
    
    (26,299
    )
    
    
    -28
    %
    
    
    (10,058
    )
    
    
    -26
    %
    
    
    (8,219
    )
    
    
    -28
    %Release of income tax contingencies
    
    
    (5,410
    )
    
    
    -6
    %
    
    
    (6,000
    )
    
    
    -15
    %
    
    
    
    
    
    
    0
    %Other
    
    
    3,739
    
    
    
    4
    %
    
    
    500
    
    
    
    1
    %
    
    
    182
    
    
    
    0
    %Provision (benefit) for income tax
    
    $
    8,145
    
    
    
    9
    %
    
    $
    (285
    )
    
    
    -1
    %
    
    $
    3,289
    
    
    
    11
    %
 The release of income tax contingencies in 2004 and 2003 reflects the
settlement of examinations by the taxing authorities and the expiration of
the statute of limitations for certain tax years. Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Corporations deferred tax assets and liabilities at
December 31, were as follows: 2004
    
    
    2003(In thousands)Deferred Tax Assets-Unrealized loss on securities available for sale
    
    $
    
    
    
    $
    4,677Unrealized loss on derivatives
    
    
    1,051
    
    
    
    3,101Allowance for loan losses
    
    
    5,263
    
    
    
    5,465Additional minimum pension liability
    
    
    9,066
    
    
    
    9,124Other
    
    
    1,893
    
    
    
    51317,273
    
    
    
    22,880Deferred Tax Liabilities-Unrealized
gain on securities available for sale
    
    
    5,440
    
    
    
    Amortization of goodwill
    
    
    3,464
    
    
    
    882Difference in accounting treatment of certain loan
origination activities, mortgage-servicing rights and other
    
    
    6,025
    
    
    
    2,27114,929
    
    
    
    3,153Net deferred tax asset
    
    $
    2,344
    
    
    $
    19,727
 Under the Puerto Rico Income Tax Law, the Corporation and its subsidiaries are
treated as separate taxable entities and are not entitled to file consolidated
tax returns.




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) 17. Contingencies and Commitments: The Corporation is involved as plaintiff or defendant in a variety of routine
litigation incidental to the normal course of business. Management believes, based on
the opinion of legal counsel, that it has adequate defense with respect to such
litigation and that any losses therefrom would not have a material adverse effect on the
consolidated results of operations or consolidated financial position of the
Corporation. The Corporation leases certain operating facilities under non-cancelable operating
leases, including leases with related parties, and has other agreements expiring at
various dates through 2025. Rent expense charged to operations related to these leases
was approximately $5,868,000; $5,457,000; and $5,499,000, for 2004, 2003 and 2002,
respectively. At December 31, 2004, the minimum unexpired commitments are as follows: Year
    

Amount(In thousands)2005
    
    $
    16,1502006
    
    
    11,2852007
    
    
    8,6252008
    
    
    6,7402009
    
    
    3,368Thereafter
    
    
    16,392$
    62,560
 18. Pension Plans: The Corporation maintains a qualified noncontributory defined benefit pension plan
(the Corporations Plan), which covers substantially all eligible employees of the
Corporation and its subsidiaries. The plan was organized in 1978 under the laws of the
Commonwealth of Puerto Rico and is subject to the provisions of the Employee Retirement
Income Security Act of 1974(ERISA). The Corporations policy is to contribute to the plan normal costs that are charged to
operations. However, in no event may contributions exceed the maximum or minimum limits
prescribed by ERISA and the Puerto Rico Income Tax Act. In connection with the acquisition of BCHPR in 1996, the Bank became the administrator
of the acquired financial institutions noncontributory defined benefit pension plan
(the BCH Plan). It is managements intention to keep this pension plan in a frozen
status. Active participants of BCHPRs pension plan who became employees of the Bank
were included in the Banks pension plan effective January 1, 1997. Beneficiaries of
BCHPRs plan are receiving benefits from this plan. This plan is also subject to the
provisions of ERISA. The Corporations Plan uses a December 31 measurement date while the BCH Plan uses a
November 30 measurement date. The following presents the funded status of the Corporations Plan at December 31, 2004
and 2003, based on the actuarial assumptions described below.




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS 2004
    
    
    2003(In thousands)Change in projected benefit obligationProjected benefit obligation at beginning of year
    
    $
    29,670
    
    
    $
    29,191Service cost benefits earned during the year
    
    
    1,258
    
    
    
    1,795Interest cost on projected benefit obligation
    
    
    1,892
    
    
    
    1,971Actuarial loss (gain)
    
    
    2,473
    
    
    
    (2,276
    )Benefit distributions
    
    
    (1,000
    )
    
    
    (1,011
    )Projected benefit obligation at end of year
    
    
    34,293
    
    
    
    29,670Change in plan assets:Fair value of plan assets at beginning of year
    
    
    24,400
    
    
    
    26,719Actual return on plan assets
    
    
    1,636
    
    
    
    (1,309
    )Employer contributions
    
    
    217
    
    
    
    Benefit distributions
    
    
    (1,000
    )
    
    
    (1,011
    )Fair value of plan assets at end of year
    
    
    25,253
    
    
    
    24,399Funded status
    
    
    (9,040
    )
    
    
    (5,271
    )Unrecognized net actuarial gain
    
    
    11,799
    
    
    
    9,329Unrecognized prior service cost
    
    
    (1,213
    )
    
    
    (1,284
    )Unrecognized transition amount
    
    
    (22
    )
    
    
    (24
    )Prepaid pension benefit
    
    $
    1,524
    
    
    $
    2,750Amounts recognized on the balance sheet consist of:Prepaid pension benefit
    
    $
    
    
    
    $
    Accrued benefit liability, net of prepaid benefit cost
    
    
    (4,602
    )
    
    
    (1,477
    )Accumulated other comprehensive income
    
    
    6,126
    
    
    
    4,227Net amount recognized
    
    $
    1,524
    
    
    $
    2,750Increase in minimum liability included in other comprehensive income
    
    $
    1,899
    
    
    $
    4,227Projected benefit obligation
    
    
    34,294
    
    
    
    29,670Accumulated benefit obligation
    
    
    29,855
    
    
    
    25,877Fair value of plan assets
    
    
    25,253
    
    
    
    24,400
 For each of the three years in the period ended December 31, 2004, the pension
costs for the Corporations Plan included the following components: 2004
    
    
    2003
    
    
    2002(In thousands)Service cost during the year
    
    $
    1,259
    
    
    $
    1,795
    
    
    $
    1,313Interest cost on projected benefit obligation
    
    
    1,892
    
    
    
    1,971
    
    
    
    1,762Expected return on assets
    
    
    (2,080
    )
    
    
    (1,822
    )
    
    
    (2,093
    )Net amortization
    
    
    372
    
    
    
    454
    
    
    
    218Net periodic pension cost
    
    $
    1 ,443
    
    
    $
    2,398
    
    
    $
    1,200
 Assumptions used to determine benefit obligation for the Corporations Plan as of December
included: 2004
    
    
    2003
    
    
    2002Discount rate
    
    
    6.00
    %
    
    
    6.25
    %
    
    
    6.75
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.50
    %
    
    
    5.00
    %




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) Assumptions used to determine net periodic pension cost for the Corporations Plan as of
December 31, included: 2004
    
    
    2003
    
    
    2002Discount rate
    
    
    6.25
    %
    
    
    6.75
    %
    
    
    6.50
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.50
    %
    
    
    5.00
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
 In developing the expected long-term rate of return assumption, the Corporation evaluated
input from the Corporations Plan actuaries, financial analysts and the Corporations
long-term inflation assumptions and interest rate scenarios. Projected returns by such
consultants are based on broad equity and bond indices. The Corporation also considered
historical returns on its plan assets. Based on this analysis the Corporation anticipates
that the Plans investment managers will continue to generate long-term returns of at least
8.50%. The Corporations Plan asset allocations at December 31, by asset category are as follows: 2004
    
    
    2003Asset
Category:Equity securities
    
    
    60
    %
    
    
    46
    %Debt securities
    
    
    37
    %
    
    
    41
    %Other
    
    
    3
    %
    
    
    13
    %Total
    
    
    100
    %
    
    
    100
    %
 Expected contribution to the Corporations Plan for 2005 is $1,109,480. The following presents the funded status of the BCH Plan at November 30, 2004 and 2003, based
on the actuarial assumptions described below: 2004
    
    
    2003(In thousands)Change in projected benefit obligationProjected benefit obligation at beginning of year
    
    $
    32,888
    
    
    $
    29,553Interest cost on projected benefit obligation
    
    
    1,990
    
    
    
    1,963Actuarial loss
    
    
    796
    
    
    
    3,096Benefit distributions
    
    
    (2,776
    )
    
    
    (1,724
    )Projected benefit obligation at end of year
    
    
    32,898
    
    
    
    32,888Change in plan assets:Fair value of plan assets at beginning of year
    
    
    20,817
    
    
    
    20,906Actual return on plan assets
    
    
    4,488
    
    
    
    (911
    )Employer contributions
    
    
    2,155
    
    
    
    2,546Benefit distributions
    
    
    (2,776
    )
    
    
    (1,724
    )Fair value of plan assets at end of year
    
    
    24,684
    
    
    
    20,817Funded status
    
    
    (8,214
    )
    
    
    (12,071
    )Contributions after measurement date and/or before end of year
    
    
    
    
    
    
    410Unrecognized actuarial loss
    
    
    17,119
    
    
    
    19,167Prepaid pension benefit
    
    $
    8,905
    
    
    $
    7,506Amounts recognized on the balance sheet consist of:Accrued benefit liability, net of prepaid benefit cost
    
    $
    (8,214
    )
    
    $
    (11,661
    )Accumulated other comprehensive income
    
    
    17,119
    
    
    
    19,167Net amount recognized
    
    $
    8,905
    
    
    $
    7,506(Decrease) increase in minimum liability included in other
comprehensive income
    
    $
    (2,048
    )
    
    $
    5,093Projected benefit obligation
    
    
    32,898
    
    
    
    32,888Accumulated benefit obligation
    
    
    32,898
    
    
    
    32,888Fair value of plan assets
    
    
    24,685
    
    
    
    20,817




---



##### 



(SANTANDER BANCORP LOGO)CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS For each of the three years in the period ended November 30, 2004, the pension costs
for the BCH Plan included the following components. Effective November 30, 1996, the
benefits in this plan were frozen. 2004
    
    
    2003
    
    
    2002(In thousands)Interest cost on projected benefit obligation
    
    $
    1,990
    
    
    $
    1,963
    
    
    $
    1,929Expected return on assets
    
    
    (2,034
    )
    
    
    (1,778
    )
    
    
    (2,146
    )Net amortization
    
    
    391
    
    
    
    692
    
    
    
    401Net periodic pension cost
    
    $
    347
    
    
    $
    877
    
    
    $
    184
 Assumptions used to determine benefit obligations and net periodic pension cost for the
BCH Plan as of November 30 included: 2004
    
    
    2003
    
    
    2002Discount rate
    
    
    6.00
    %
    
    
    6.25
    %
    
    
    6.75
    %Rate of compensation
increase
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected return on
plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %
 In developing the expected long-term rate of return assumption, the Corporation
evaluated input from the BCH Plans actuaries, financial analysts and the Corporations
long-term inflation assumptions and interest rate scenarios. Projected returns by such
consultants are based on broad equity and bond indices. The Corporation also considered
historical returns on its plan assets. Based on this analysis the Corporation anticipates
that the BCH Plans investment managers will continue to generate long-term returns of at
least 8.50%. The Corporations asset allocations for the BCH Plan at November 30 by asset category are
as follows: 2004
    
    
    2003Asset
Category:Equity securities
    
    
    62
    %
    
    
    34
    %Debt securities
    
    
    37
    %
    
    
    57
    %Other
    
    
    1
    %
    
    
    9
    %Total
    
    
    100
    %
    
    
    100
    %
 The Corporations expected contribution to the BCH Plan for 2005 is $2,238,876. The Corporations investment policy with respect to the Corporations Plan and the BCH Plan
is to optimize, without undue risk, the total return on investment of the Plan assets after
inflation, within a framework of prudent and reasonable portfolio risk. The investment
portfolio will be diversified in multiple asset classes to reduce portfolio risk, and
assets may be shifted between asset classes to reduce volatility when warranted by
projections of the economic and/or financial market environment, consistent with ERISA
diversification principles. The Corporations target asset allocations for both plans are
60% equity and 40% fixed/variable income. As circumstances and market conditions change,
these allocations may be amended to reflect the most appropriate distribution given the new
environment consistent with the investment objectives. Equity securities include common stock of the Corporation as a percentage of the carrying
value of the respective plan assets, as detailed below: 2004
    
    
    2003Banco Santander Puerto Rico Employees Retirement Plan
    
    
    7
    %
    
    
    6
    %Banco Central Hispano Puerto Rico Employees Pension Plan
    
    
    10
    %
    
    
    9
    %




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) Expected future benefit payments for the plans at the end of their respective fiscal years
are as follows: Corporations
    
    
    BCHPlan
    
    
    Plan(In thousands)2005
    
    $
    913
    
    
    $
    1,2932006
    
    
    956
    
    
    
    2,2832007
    
    
    996
    
    
    
    1,8332008
    
    
    1,042
    
    
    
    2,3942009
    
    
    1,127
    
    
    
    3,1182009 through 2014
    
    
    7,948
    
    
    
    16,117
 19. Related Party Transactions: The Corporation engages in transactions with affiliated companies in the ordinary course of
its business. At December 31, 2004, 2003 and 2002, the Corporation had the following transactions
with related parties: 2004
    
    
    2003
    
    
    2002(In thousands)Deposits from related parties
    
    $
    170,170
    
    
    $
    124,401
    
    
    $
    751,194Interest-bearing deposits with affiliates
    
    
    471
    
    
    
    870
    
    
    
    1,418Loans to directors, officers, and related parties (on substantially the
same terms and credit risks as loans to third parties)
    
    
    8,886
    
    
    
    7,362
    
    
    
    6,459Technical assistance income for services rendered
    
    
    2,400
    
    
    
    2,600
    
    
    
    2,950Technical assistance expense for services received
    
    
    10,224
    
    
    
    8,470
    
    
    
    585Technical assistance for software development
    
    
    700
    
    
    
    
    
    
    
    Derivative financial instruments purchased from affiliates
    
    
    116,432
    
    
    
    12,087
    
    
    
    11,521Derivative financial instruments sold to affiliates
    
    
    52,350
    
    
    
    2,350
    
    
    
    2,350
 During 2003, the Corporation sold its software developed for internal use to an affiliate at
book value, for approximately $42 million. The affiliate charged the Corporation approximately
$3,076,000 and $1,538,000 for the use of such software in 2004 and 2003, respectively, which
amounts are included above under the caption of technical assistance expense for services
received. During 2003 the Corporation sold loans to an affiliate at book value amounting to
approximately $12,397,000. 20. Derivative Financial Instruments: As of December 31, 2004, the Corporation had the following derivative financial instruments
outstanding: OtherGain (Loss)
    
    
    Comprehensivefor the year
    
    
    Income* forended Dec. 31,
    
    
    the year endedNotional Value
    
    
    Fair Value
    
    
    2004
    
    
    Dec. 31, 2004(In thousands)CASH FLOW HEDGESInterest rate swaps
    
    $
    100,000
    
    
    $
    (2,244
    )
    
    $
    
    
    
    $
    3,463FAIR VALUE HEDGESInterest rate swaps
    
    
    1,545,634
    
    
    
    (29,643
    )
    
    
    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




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS As of December 31, 2003, the Corporation had the following derivative financial
instruments outstanding: OtherGain (Loss)
    
    
    Comprehensivefor the year
    
    
    Income* for theended
    
    
    year endedDecember 31,
    
    
    December 31,Notional Value
    
    
    Fair Value
    
    
    2003
    
    
    2003(In thousands)CASH FLOW HEDGESInterest rate swaps
    
    $
    100,000
    
    
    $
    (7,924
    )
    
    $
    
    
    
    $
    1,739FAIR VALUE HEDGESInterest rate swaps
    
    
    380,789
    
    
    
    (8,140
    )
    
    
    (206
    )
    
    
    OTHER DERIVATIVESOptions
    
    
    11,870
    
    
    
    279
    
    
    
    83
    
    
    
    Embedded options on stock-indexed deposits
    
    
    (11,296
    )
    
    
    (279
    )
    
    
    (98
    )
    
    
    Forward foreign currency exchange contracts
    
    
    6,824
    
    
    
    2
    
    
    
    
    
    
    
    Interest rate caps
    
    
    29,495
    
    
    
    (330
    )
    
    
    75
    
    
    
    Customer interest rate caps
    
    
    (29,495
    )
    
    
    330
    
    
    
    37
    
    
    
    Customer interest rate swaps
    
    
    (122,012
    )
    
    
    554
    
    
    
    1,767
    
    
    
    Interest rate swaps
    
    
    138,012
    
    
    
    83
    
    
    
    (1,381
    )
    
    
    $
    277
    
    
    $
    1,739
   *
    
    Net of tax The Corporations principal objective in holding interest rate swap agreements is the
management of interest rate risk and changes in the fair value of assets and liabilities. The
Corporations policy is that each swap contract be specifically tied to assets or liabilities with
the objective of transforming the interest rate characteristic of the hedged instrument. During
July 2000, the Corporation swapped $100 million of term funds at a fixed spread over U.S. Treasury
securities. These swaps were designated as cash flow hedges and mature through the year 2005. As of
December 31, 2004, the total amount, net of tax, included in accumulated other comprehensive loss
pertaining to the $100 million interest rate swap was an unrealized loss of $1.4 million, which the
Corporation expects to reclassify into earnings during the next year. As of December 31, 2003, the
total amount, net of tax, included in accumulated other comprehensive income pertaining to the $100
million interest rate swap was an unrealized loss of $4.8 million, net of tax. As of December 31, 2004, the Corporation also had outstanding interest rate swap agreements, with a
notional amount of approximately $1.5 billion, maturing through the year 2032. The weighted average
rate paid and received on these contracts is 4.64% and 4.07%, respectively. As of December 31,
2004, the Corporation had retail fixed rate certificates of deposit amounting to approximately
$511.6 million, a subordinated note amounting to approximately $75 million and $930.1 million of
fixed rate loans swapped to create a floating rate source of funds. These swaps were designated as
fair value hedges. For the year ended December 31, 2004, the Corporation recognized a gain of
approximately $579,000 on fair value hedges due to hedge ineffectiveness, which is included in
other income in the consolidated statements of income. As of December 31, 2003, the Corporation had outstanding interest rate swap agreements, with a
notional amount of approximately $380.8 million, maturing through the year 2024. The weighted
average rate paid and received on these contracts was 1.22% and 4.83%, respectively. As of December
31, 2003, the Corporation had retail fixed rate certificates of deposit amounting to approximately
$374.7 million and a $3.5 million fixed rate loan swapped to create a floating rate source of
funds. These swaps were designated as fair value hedges. For the year ended December 31, 2003, the
Corporation recognized a loss of approximately $206,000 on fair value hedges due to hedge
ineffectiveness, which is included in other income in the consolidated statements of income. The Corporation issues certificates of deposit and individual retirement accounts with returns
linked to the Standard and Poors 500 Index, which constitutes an embedded derivative instrument
that is bifurcated from the host deposit and recognized on the balance sheet. The Corporation
enters into option agreements in order to manage the interest rate risk on these deposits; however,
these options have not been designated for hedge accounting, therefore gains and losses on the
market value of both the embedded derivative instruments and the option contracts are marked to
market through earnings and recorded in other gains and losses in the consolidated statements of
income. For the year ended December 31, 2004, a loss of approximately $2,401,000 was recorded on
embedded options on stock-indexed deposits and a gain of approximately $5,325,000 was recorded on
the option contracts. Included in the option gain is the maturity of $2.0 billion in swaptions that
resulted in a gain of approximately $2,943,000. For the year ended December 31, 2003, a loss of
approximately $98,000 was recorded on embedded options on stock-indexed deposits and a gain of
approximately $83,000 was recorded on the option contracts.




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) Forwards are contracts for the delayed purchase of specified securities at a specified
price and time, and qualify for hedge accounting. The Corporation occasionally enters into foreign
currency exchange forwards in order to satisfy the needs of its customers. As of December 31, 2003,
the Corporation had foreign currency exchange forwards with a notional amount of $6,824,000. For
the year ended December 31, 2003, the total amount, included in other comprehensive income (loss)
related to these currency exchange forwards was an unrealized gain of $ 1,368, net of deferred
taxes of $875. There were no forward contracts outstanding at December 31, 2004. The Corporation enters into certain derivative transactions with customers, which includes interest
rate caps, collars and swaps, and simultaneously hedges the Corporations position with related and
unrelated third parties under substantially the same terms and conditions. For the year ended
December 31, 2004 and the year ended December 31, 2003, the Corporation recognized a net loss of
$47,000 and a net gain of $498,000, respectively, on these transactions. The Corporation enters into loan commitments with customers to extend mortgage loans at a specified
rate. These loan commitments are written options and are measured at fair value pursuant to SFAS
133. As of December 31, 2004 the Corporation had loan commitments outstanding for approximately
$2.4 million and recognized a gain of $3,000 on these commitments. 21. Financial Instruments with Off-Balance Sheet Risk: In the normal course of business, the Corporation is a party to transactions of financial
instruments with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments may include commitments to extend credit, standby letters of credit,
financial guarantees and interest rate caps, swaps and floors written. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on
the consolidated balance sheet. The contract or notional amounts of those instruments reflect the
extent of involvement the Corporation has in the different classes of financial instruments. The Corporations exposure to credit loss, in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit and financial
guarantees written, is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as
it does for on-balance sheet instruments. The contract amount of financial instruments, whose
amounts represent credit risk as of December 31, 2004 and 2003, was as follows:   2004
    
    

2003(In thousands)Standby letters of credit and financial guarantees written
    
    $
    244,107
    
    
    $
    273,519Commitments to extend credit, approved loans not yet disbursed
and unused lines of credit
    
    $
    1,024,782
    
    
    $
    1,034,489
 The Corporation issues financial standby letters of credit to guarantee the
performance of its customers to third parties. If the customer fails to meet its financial
performance obligation to the third party, then the Corporation would be obligated to make the
payment to the guaranteed party. At December 31, 2004, the Corporations liabilities include
$2,289,000 which represents the fair value of the obligations undertaken in issuing the guarantees
under the standby letters of credit issued or modified after December 31, 2002, net of the related
amortization at inception. The fair value approximates the fee received from the customer for
issuing the standby letter of credit. The fees are deferred and recognized on a straight-line basis
over the commitment period. Standby letters of credit outstanding at December 31, 2004, had terms
ranging from three months to five years. The contract amounts of the standby letters of credit of
approximately $244,107,000 at December 31, 2004, represent the maximum potential amount of future
payments the Corporation could be required to make under the guarantee in the event of
non-performance by its customers. These standby letters of credit typically expire without being drawn upon. Management does not
anticipate any material losses related to these guarantees. Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customers credit worthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation
upon extension of credit, is based on managements credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, property, plant and
equipment, income-producing commercial properties and real estate. The Corporation holds collateral
as guarantee for most of these financial instruments.




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS 22. Fair Value of Financial Instruments: The following methods and assumptions were used to estimate the fair value of each class of
financial instrument. The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial instrument. Because no market
exists for a significant portion of the Corporations financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the
estimates. In addition, the fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments. In the case of investment
and mortgage-backed securities, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have not been considered
in many of the estimates. Cash and Cash Equivalents and Interest-bearing Deposits The carrying amount of cash and cash equivalents and interest-bearing accounts is a reasonable
estimate of fair value. Trading Securities, Investment Securities Available for Sale, Investment Securities Held to
Maturity and Other Investments The fair value of securities is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar securities. Loans Fair values are estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type such as commercial, consumer, mortgage, construction and other loans.
Each loan category is further segmented into fixed and adjustable interest rate terms and by
performing and non-performing. The fair value of performing loans, except residential mortgages, is calculated by discounting
scheduled cash flows at market discount rates that reflect the credit and interest rate risk
inherent in the loan. For performing residential mortgage loans, fair value is computed by
discounting contractual cash flows adjusted for prepayment estimates using a discount rate based
on secondary market sources adjusted to reflect differences in servicing costs. Mortgage loans available for sale are carried at the lower of cost or market and therefore
approximate fair value. Fair value for significant non-performing loans, and loans with payments in arrears, is based on
recent internal or external appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risks, cash flows, and discount rates are judgmentally determined
using available market information and specific borrower information. Accrued Interest Receivable The carrying amount of accrued interest receivable is a reasonable estimate of its fair value. Deposits The fair value of deposits with no stated maturity, such as demand deposits, savings and NOW
accounts, money market and checking accounts is equal to the amount payable on demand as of
December 31, 2004 and 2003, respectively. The fair value of fixed maturity certificates of deposit
is based on the discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities. Federal Funds Purchased and Other Borrowings The carrying amount of federal funds purchased and other borrowings is a reasonable estimate of
fair value. Securities Sold under Agreement to Repurchase The carrying amount of securities sold under agreement to repurchase is a reasonable estimate
of fair value. Commercial Paper Issued The fair value of commercial paper issued is based on discounted cash flows using an estimated
discount rate based on the Corporations incremental borrowing rates currently offered for similar
debt instruments. Subordinated Capital Notes and Term Notes The fair value of variable rate subordinated capital notes and fluctuating annual rate term
notes is equal to the balance as of December 31, 2004 and 2003, since such notes are tied to
floating rates. The fair value of the fixed annual rate term notes is based on discounted cash
flows, which consider an estimated discount rate currently offered for certain borrowings. Accrued Interest Payable The carrying amount of accrued interest payable is a reasonable estimate of fair value. Standby Letters of Credit and Commitments to Extend Credit The fair value of commitments to extend credit, financial guarantees and letters of credit is
based on judgment regarding future expected loss experience, current economic conditions and the
counterparties credit standings. Interest Rate Swap Agreements and Caps The fair value of interest rate swaps and caps is estimated




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) using the prices currently charged to enter into similar agreements, taking into
consideration the remaining terms of the agreements. Following are the cost and fair value of financial instruments as of December 31: 2004
    
    
    2003Carrying
    
    
    
    
    
    
    CarryingAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(In thousands)Consolidated balance sheet financial instruments:Cash, cash equivalents and all interest-bearing
deposits
    
    $
    529,410
    
    
    $
    529,410
    
    
    $
    403,233
    
    
    $
    403,233Trading securities
    
    $
    34,184
    
    
    $
    34,184
    
    
    $
    42,547
    
    
    $
    42,547Investment securities available for sale
    
    $
    1,978,132
    
    
    $
    1,978,132
    
    
    $
    1,664,311
    
    
    $
    1,664,311Investment securities held to maturity
    
    $
    
    
    
    $
    
    
    
    $
    833,127
    
    
    $
    885,876Other investment securities
    
    $
    37,500
    
    
    $
    37,500
    
    
    $
    
    
    
    $
    Loans held for sale
    
    $
    271,596
    
    
    $
    271,596
    
    
    $
    297,201
    
    
    $
    297,201Loans
    
    $
    5,242,759
    
    
    $
    5,647,539
    
    
    $
    3,847,873
    
    
    $
    3,937,878Accrued interest receivable
    
    $
    44,682
    
    
    $
    44,682
    
    
    $
    36,398
    
    
    $
    36,398Deposits:Non interest-bearing
    
    $
    744,019
    
    
    $
    744,019
    
    
    $
    700,413
    
    
    $
    700,413Interest-bearing
    
    
    4,004,120
    
    
    
    4,037,590
    
    
    
    3,441,815
    
    
    
    3,448,116Total
    
    $
    4,748,139
    
    
    $
    4,781,609
    
    
    $
    4,142,228
    
    
    $
    4,148,529Federal funds purchased and other borrowings
    
    $
    780,334
    
    
    $
    780,334
    
    
    $
    350,000
    
    
    $
    350,000Securities sold under agreements to repurchase
    
    $
    1,349,444
    
    
    $
    1,349,444
    
    
    $
    1,808,238
    
    
    $
    1,808,238Commercial paper issued
    
    $
    629,544
    
    
    $
    629,046
    
    
    $
    254,904
    
    
    $
    255,090Subordinated capital and term notes
    
    $
    104,045
    
    
    $
    98,132
    
    
    $
    181,891
    
    
    $
    191,114Accrued interest payable
    
    $
    22,666
    
    
    $
    22,666
    
    
    $
    18,728
    
    
    $
    18,728
 2004
    
    
    2003Contract or
    
    
    
    
    
    
    Contract orNotional
    
    
    
    
    
    
    NotionalAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(In thousands)Off balance sheet financial instruments:Standby letters of credit and financial
guarantees written
    
    $
    244,107
    
    
    $
    (244
    )
    
    $
    273,519
    
    
    $
    (274
    )Commitments to extend credit, approved
loans not yet disbursed and unused lines of
credit
    
    $
    1,024,782
    
    
    $
    (1,025
    )
    
    $
    1,034,489
    
    
    $
    (1,034
    )
 23. Significant Group Concentrations of Credit Risk: Most of the Corporations business activities are with customers located within Puerto Rico.
The Corporation has a diversified loan portfolio with no significant concentration in any economic
sector. 24. Regulatory Matters: The Corporation and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS a direct material effect on the Corporations consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Bank must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Corporations and the Banks capital classification is also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Corporation
and the Bank to maintain minimum amounts and ratios, as indicated below, of Total and Tier I capital (as defined) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). In managements opinion, the Corporation and
the Bank met all capital adequacy requirements to which they were subject as of December 31, 2004
and 2003. As of December 31, 2004, the Corporation and the Bank qualified as well-capitalized institutions
under the regulatory framework. To be categorized as well capitalized, the institution must
maintain minimum total risk-based, Tier I risk based and Tier I leverage ratios as set forth in the
following table. At December 31, 2004, there are no conditions or events that management believes
to have changed the Corporations and the Banks category since the regulators last notification. At December 31, 2004 and 2003, the Corporations required and actual regulatory
capital amounts and ratios follow: December 31, 2004Well-Required
    
    
    Actual
    
    
    CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Ratio(Dollars in thousands)Total Capital (to Risk Weighted Assets)
    
    $
    431,496
    
    
    
    8
    %
    
    $
    641,948
    
    
    
    11.90
    %
    
    3
    10
    %Tier I Capital (to Risk Weighted Assets)
    
    $
    215,748
    
    
    
    4
    %
    
    $
    499,800
    
    
    
    9.27
    %
    
    3
    6
    %Leverage Ratio
    
    $
    235,601
    
    
    
    3
    %
    
    $
    499,800
    
    
    
    6.36
    %
    
    3
    5
    %
 December 31, 2003Well-Required
    
    
    Actual
    
    
    CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Ratio(Dollars in thousands)Total Capital (to Risk Weighted Assets)
    
    $
    390,568
    
    
    
    8
    %
    
    $
    508,148
    
    
    
    10.41
    %
    
    3
    10
    %Tier I Capital (to Risk Weighted Assets)
    
    $
    195,284
    
    
    
    4
    %
    
    $
    431,504
    
    
    
    8.84
    %
    
    3
    6
    %Leverage Ratio
    
    $
    214,460
    
    
    
    3
    %
    
    $
    431,504
    
    
    
    6.04
    %
    
    3
    5
    %
 At December 31, 2004 and 2003, the Banks required and actual regulatory capital
amounts and ratios follow: December 31, 2004Well-Required
    
    
    Actual
    
    
    CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Ratio(Dollars in thousands)Total Capital (to Risk Weighted Assets)
    
    $
    427,503
    
    
    
    8
    %
    
    $
    598,153
    
    
    
    11.19
    %
    
    3
    10
    %Tier I Capital (to Risk Weighted Assets)
    
    $
    213,751
    
    
    
    4
    %
    
    $
    531,311
    
    
    
    9.94
    %
    
    3
    6
    %Leverage Ratio
    
    $
    233,389
    
    
    
    3
    %
    
    $
    531,311
    
    
    
    6.83
    %
    
    3
    5
    %
 December 31, 2003Well-Required
    
    
    Actual
    
    
    CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Ratio(Dollars in thousands)Total Capital (to Risk Weighted Assets)
    
    $
    385,315
    
    
    
    8
    %
    
    $
    524,697
    
    
    
    10.89
    %
    
    3
    10
    %Tier I Capital (to Risk Weighted Assets)
    
    $
    192,658
    
    
    
    4
    %
    
    $
    464,364
    
    
    
    9.64
    %
    
    3
    6
    %Leverage Ratio
    
    $
    211,442
    
    
    
    3
    %
    
    $
    464,364
    
    
    
    6.59
    %
    
    3
    5
    %




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) 25. Segment Information: Types of Products and
Services
The Corporation has four reportable segments: Commercial Banking, Mortgage Banking, Treasury
and Investments and Broker/dealer. Insurance operations and International Banking are other lines
of business in which the Corporation commenced its involvement during 2000 and 2001, respectively.
However, no separate disclosures are being provided for these operations, since they did not meet
the quantitative thresholds for disclosure of segment information. Measurement of Segment
Profit or Loss and Segment Assets
The Corporations reportable business segments are strategic business units that offer
distinctive products and services that are marketed through different channels. These are
managed separately because of their unique technology, marketing and distribution requirements. The following presents financial information of reportable segments as of and for the years ended
December 31, 2004, 2003 and 2002. General corporate expenses and income taxes have not been added
or deducted in the determination of operating segment profits. The Other column includes the
items necessary to reconcile the identified segments to the reported consolidated amounts. Included
in the Other column are expenses of the internal audit, investors relations, strategic planning,
administrative services, mail, marketing, public relations, electronic data processing departments
and comptrollers departments. The Eliminations column includes all intercompany eliminations for
consolidation. December 31, 2004Commercial
    
    
    Mortgage
    
    
    Treasury and
    
    
    Broker-
    
    
    
    
    
    
    
    
    
    
    ConsolidatedBanking
    
    
    Banking
    
    
    Investments
    
    
    dealer
    
    
    Other
    
    
    Eliminations
    
    
    Total(In thousands)Total external revenue
    
    $
    194,097
    
    
    $
    110,827
    
    
    $
    113,253
    
    
    $
    49,553
    
    
    $
    19,238
    
    
    $
    (9,799
    )
    
    $
    477,169Intersegment revenue
    
    
    5,440
    
    
    
    
    
    
    
    22
    
    
    
    6
    
    
    
    4,331
    
    
    
    (9,799
    )
    
    
    Interest income
    
    
    158,748
    
    
    
    104,441
    
    
    
    99,830
    
    
    
    1,313
    
    
    
    1,164
    
    
    
    (5,566
    )
    
    
    359,930Interest 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
    
    
    
    76,263
    
    
    
    22,351
    
    
    
    15,041
    
    
    
    (59,854
    )
    
    
    (620
    )
    
    
    92,604Segment assets
    
    
    3,320,311
    
    
    
    2,603,898
    
    
    
    2,417,746
    
    
    
    89,233
    
    
    
    218,247
    
    
    
    (307,655
    )
    
    
    8,341,780
 December 31, 2003Commercial
    
    
    Mortgage
    
    
    Treasury and
    
    
    Broker-
    
    
    
    
    
    
    
    
    
    
    ConsolidatedBanking
    
    
    Banking
    
    
    Investments
    
    
    dealer
    
    
    Other
    
    
    Eliminations
    
    
    Total(In thousands)Total external revenue
    
    $
    202,674
    
    
    $
    89,348
    
    
    $
    97,269
    
    
    $
    47,148
    
    
    $
    17,575
    
    
    $
    (8,493
    )
    
    $
    445,521Intersegment revenue
    
    
    4,240
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    4,248
    
    
    
    (8,493
    )
    
    
    Interest income
    
    
    166,344
    
    
    
    76,195
    
    
    
    85,637
    
    
    
    1,115
    
    
    
    510
    
    
    
    (4,220
    )
    
    
    325,581Interest expense
    
    
    32,818
    
    
    
    15,092
    
    
    
    87,520
    
    
    
    845
    
    
    
    296
    
    
    
    (4,220
    )
    
    
    132,351Depreciation and
amortization
    
    
    6,963
    
    
    
    1,192
    
    
    
    229
    
    
    
    459
    
    
    
    11,848
    
    
    
    
    
    
    
    20,691Segment income before
income tax
    
    
    26,302
    
    
    
    63,506
    
    
    
    4,135
    
    
    
    15,158
    
    
    
    (69,941
    )
    
    
    
    
    
    
    39,160Segment assets
    
    
    3,000,808
    
    
    
    1,515,063
    
    
    
    2,801,909
    
    
    
    87,958
    
    
    
    230,512
    
    
    
    (268,950
    )
    
    
    7,367,300
 December 31, 2002Commercial
    
    
    Mortgage
    
    
    Treasury and
    
    
    Broker-
    
    
    
    
    
    
    
    
    
    
    ConsolidatedBanking
    
    
    Banking
    
    
    Investments
    
    
    dealer
    
    
    Other
    
    
    Eliminations
    
    
    Total(In thousands)Total external revenue
    
    $
    255,295
    
    
    $
    82,529
    
    
    $
    88,395
    
    
    $
    34,236
    
    
    $
    11,301
    
    
    $
    (5,295
    )
    
    $
    466,461Intersegment revenue
    
    
    3,370
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    1,906
    
    
    
    (5,295
    )
    
    
    Interest income
    
    
    218,261
    
    
    
    74,242
    
    
    
    75,077
    
    
    
    1,074
    
    
    
    70
    
    
    
    (3,371
    )
    
    
    365,353Interest expense
    
    
    57,917
    
    
    
    19,484
    
    
    
    84,729
    
    
    
    1,156
    
    
    
    
    
    
    
    (3,371
    )
    
    
    159,915Depreciation and
amortization
    
    
    7,576
    
    
    
    3,091
    
    
    
    120
    
    
    
    440
    
    
    
    14,009
    
    
    
    
    
    
    
    25,236Segment income before
income tax
    
    
    32,690
    
    
    
    52,884
    
    
    
    (1,220
    )
    
    
    7,560
    
    
    
    (40,483
    )
    
    
    (22,390
    )
    
    
    29,041Segment assets
    
    
    3,009,560
    
    
    
    1,080,852
    
    
    
    2,929,603
    
    
    
    66,314
    
    
    
    225,698
    
    
    
    (185,583
    )
    
    
    7,126,444




---



##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Reconciliation of Segment Information to Consolidated Amounts Information for the Corporations reportable segments in relation to the consolidated totals
at December 31, follows: 2004
    
    
    2003
    
    
    2002(In thousands)Revenues:Total revenues for reportable segments
    
    $
    467,730
    
    
    $
    436,439
    
    
    $
    460,455Other revenues
    
    
    19,238
    
    
    
    17,575
    
    
    
    11,301Elimination of intersegment revenues
    
    
    (9,799
    )
    
    
    (8,493
    )
    
    
    (5,295
    )Total consolidated revenues
    
    $
    477,169
    
    
    $
    445,521
    
    
    $
    466,461Total income before tax of reportable segments
    
    $
    153,078
    
    
    $
    109,101
    
    
    $
    91,914Income before tax of other segments
    
    
    (59,854
    )
    
    
    (69,941
    )
    
    
    (40,483
    )Elimination of intersegment profits
    
    
    (620
    )
    
    
    
    
    
    
    (22,390
    )Consolidated income before tax
    
    $
    92,604
    
    
    $
    39,160
    
    
    $
    29,041Assets:Total assets for reportable segments
    
    $
    8,431,188
    
    
    $
    7,405,738
    
    
    $
    7,086,329Assets not attributed to segments
    
    
    218,247
    
    
    
    230,512
    
    
    
    225,698Elimination of intersegment assets
    
    
    (307,655
    )
    
    
    (268,950
    )
    
    
    (185,583
    )Total consolidated assets
    
    $
    8,341,780
    
    
    $
    7,367,300
    
    
    $
    7,126,444
 26. Quarterly Results (Unaudited): The following table reflects the unaudited quarterly results of the Corporation during the
years ended December 31, 2004, 2003 and 2002. Net Interest
    
    
    IncomeIncome after
    
    
    (Loss) Before
    
    
    
    
    
    
    Earnings PerInterest
    
    
    Net Interest
    
    
    Provision for
    
    
    Provision for
    
    
    Net Income
    
    
    CommonIncome
    
    
    Income
    
    
    Loan Losses
    
    
    Income Tax
    
    
    (Loss)
    
    
    Share(Dollars in thousands, except per share data)March 31, 2004
    
    $
    85,828
    
    
    $
    53,977
    
    
    $
    45,227
    
    
    $
    27,684
    
    
    $
    25,214
    
    
    $
    0.54June 30, 2004
    
    $
    86,126
    
    
    $
    53,630
    
    
    $
    47,630
    
    
    $
    16,054
    
    
    $
    16,046
    
    
    $
    0.34September 30, 2004
    
    $
    92,449
    
    
    $
    55,939
    
    
    $
    48,919
    
    
    $
    23,466
    
    
    $
    21,869
    
    
    $
    0.47December 31, 2004
    
    $
    95,527
    
    
    $
    55,622
    
    
    $
    51,122
    
    
    $
    25,400
    
    
    $
    21,330
    
    
    $
    0.46March 31, 2003
    
    $
    79,022
    
    
    $
    43,627
    
    
    $
    31,562
    
    
    $
    5,790
    
    
    $
    5,138
    
    
    $
    0.08June 30, 2003
    
    $
    78,924
    
    
    $
    45,891
    
    
    $
    32,176
    
    
    $
    9,275
    
    
    $
    7,022
    
    
    $
    0.14September 30, 2003
    
    $
    81,495
    
    
    $
    48,956
    
    
    $
    39,991
    
    
    $
    14,057
    
    
    $
    11,543
    
    
    $
    0.22December 31, 2003
    
    $
    86,140
    
    
    $
    54,756
    
    
    $
    39,756
    
    
    $
    10,038
    
    
    $
    15,742
    
    
    $
    0.26March 31, 2002
    
    $
    95,850
    
    
    $
    54,667
    
    
    $
    42,695
    
    
    $
    19,707
    
    
    $
    14,805
    
    
    $
    0.29June 30, 2002
    
    $
    96,802
    
    
    $
    56,019
    
    
    $
    39,569
    
    
    $
    10,234
    
    
    $
    8,400
    
    
    $
    0.15September 30, 2002
    
    $
    90,159
    
    
    $
    50,525
    
    
    $
    33,447
    
    
    $
    4,372
    
    
    $
    3,961
    
    
    $
    0.06December 31, 2002
    
    $
    82,542
    
    
    $
    44,227
    
    
    $
    26,097
    
    
    $
    (5,272
    )
    
    $
    (1,414
    )
    
    $
    (0.05
    )
 Quarterly amounts have been restated on a historical basis to give retroactive effect to the
acquisition of Santander Securities Corporation, as discussed in Note 1 to the consolidated
financial statements.




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##### 



CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS (SANTANDER BANCORP GRAPHIC) 27. Santander BanCorp (Parent Company Only) Financial Information: The following condensed financial information presents the financial position of the Parent
Company Only, as of December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2004. The 2004 net income of Santander BanCorp (parent company only) is $621,000 greater than the
consolidated net income of Santander BanCorp and subsidiaries, because it includes a transaction
between Santander BanCorps wholly owned subsidiaries, Banco Santander and Santander Securities,
which has a different accounting treatment in the stand-alone financial statements of each of
these entities. Such transaction is eliminated in consolidation. Santander BanCorp Balance Sheets-December 31, 2004 and 2003
(Dollars in thousands, except share data) 2004
    
    
    2003ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    44
    
    
    $
    12,544Interest-bearing deposits
    
    
    8,078
    
    
    
    Total cash and cash equivalents
    
    
    8,122
    
    
    
    12,544Loans, net
    
    
    43,000
    
    
    
    37,000Investment in Subsidiaries
    
    
    613,180
    
    
    
    535,939Interest Receivable
    
    
    394
    
    
    
    Other
Assets
    
    
    173
    
    
    
    45$
    664,869
    
    
    $
    585,528LIABILITIES AND STOCKHOLDERS EQUITYBorrowings
    
    $
    30,000
    
    
    $
    25,000Term Notes
    
    
    
    
    
    
    62,000Subordinated Notes
    
    
    72,588
    
    
    
    12,000Interest Payable
    
    
    589
    
    
    
    Other Liabilities
    
    
    5,068
    
    
    
    5,696Total liabilities
    
    
    108,245
    
    
    
    104,696STOCKHOLDERS EQUITY:Common stock, $2.50 par value; 200,000,000
shares authorized, 50,650,364 shares issued in
December 2004 and 46,410,214 shares issued in
December 2003; 46,639,104 shares outstanding in
December 2004 and 42,398,954 shares outstanding in
December 2003.
    
    
    126,626
    
    
    
    116,026Capital paid in excess of par value
    
    
    552,195
    
    
    
    459,766Treasury stock at cost, 4,011,260 shares in
December 2004 and 2003.
    
    
    (67,552
   )
    
    
    (67,552
    )Retained earnings-Undivided profits
    
    
    (54,645
    )
    
    
    (27,408
    )Total stockholders equity
    
    
    556,624
    
    
    
    480,832$
    664,869
    
    
    $
    585,528




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##### 



(SANTANDER BANCORP LOGO) CONSOLIDATED FINANCIAL STATEMENT ANALYSIS AND 2004 RESULTS Santander BanCorp Statements of Income
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands) 2004
    
    
    2003
    
    
    2002Interest Income:Loans
    
    $
    1,000
    
    
    $
    404
    
    
    $
    Interest bearing deposits
    
    
    59
    
    
    
    40
    
    
    
    Total interest income
    
    
    1,059
    
    
    
    444
    
    
    
    Interest
Expense:Borrowings
    
    
    1,378
    
    
    
    295
    
    
    
    Term and subordinated notes
    
    
    502
    
    
    
    
    
    
    
    Total interest expense
    
    
    1,880
    
    
    
    295
    
    
    
    Net interest income (loss)
    
    
    (821
    )
    
    
    149
    
    
    
    Other Income:Derivative gains
    
    
    325
    
    
    
    
    
    
    
    Equity in undistributed earnings of subsidiaries
    
    
    87,552
    
    
    
    33,842
    
    
    
    22,415Total other income
    
    
    87,877
    
    
    
    33,842
    
    
    
    22,415Other Operating Expenses:Professional fees
    
    
    1,394
    
    
    
    1,148
    
    
    
    848Other taxes
    
    
    180
    
    
    
    180
    
    
    
    237Other operating expenses
    
    
    275
    
    
    
    332
    
    
    
    146Total other operating expenses
    
    
    1,849
    
    
    
    1,660
    
    
    
    1,231Income before provision for income tax
    
    
    85,207
    
    
    
    32,331
    
    
    
    21,184Provision for Income Tax
    
    
    127
    
    
    
    
    
    
    
    Net Income
    
    $
    85,080
    
    
    $
    32,331
    
    
    $
    21,184




---



##### 



CONSOLIDATED FINANCIAL
STATEMENT ANALYSIS AND 2004 RESULTS
(SANTANDER BANCORP LOGO) Santander BanCorp Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
(Dollars in thousands) 2004
    
    
    2003
    
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    85,080
    
    
    $
    32,331
    
    
    $
    21,184Adjustments to reconcile net income to net cash provided by
operating activities:Equity in undistributed earnings of subsidiaries
    
    
    (87,552
    )
    
    
    (33,842
    )
    
    
    (22,415
    )Dividends received
    
    
    22,945
    
    
    
    27,190
    
    
    
    28,465Deferred tax provision
    
    
    127
    
    
    
    
    
    
    
    Increase in other assets and interest receivable
    
    
    (522
    )
    
    
    (20
    )
    
    
    (Decrease) increase in other liabilities and interest payable
    
    
    (166
    )
    
    
    820
    
    
    
    148Total adjustments
    
    
    (65,168
    )
    
    
    (5,852
    )
    
    
    6,198Net cash provided by operating activities
    
    
    19,912
    
    
    
    26,479
    
    
    
    27,382CASH FLOWS FROM INVESTING ACTIVITIES:Net increase in loans
    
    
    (6,000
    )
    
    
    (37,000
    )
    
    
    Net cash used in investing activities
    
    
    (6,000
    )
    
    
    (37,000
    )
    
    
    CASH FLOWS FROM FINANCING ACTIVITIES:Increase in borrowings
    
    
    5,000
    
    
    
    25,000
    
    
    
    Repayment of subordinated notes
    
    
    (74,000
    )
    
    
    
    
    
    
    Issuance of term and subordinated notes
    
    
    72,588
    
    
    
    74,000
    
    
    
    Repurchase of common stock
    
    
    
    
    
    
    (2,284
    )
    
    
    (11,991
    )Dividends paid
    
    
    (21,922
    )
    
    
    (19,087
    )
    
    
    (17,652
    )Cash paid on corporate reorganization
    
    
    
    
    
    
    (62,000
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (18,334
    )
    
    
    15,629
    
    
    
    (29,643
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (4,422
    )
    
    
    5,108
    
    
    
    (2,261
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    12,544
    
    
    
    7,436
    
    
    
    9,697CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    8,122
    
    
    $
    12,544
    
    
    $
    7,436




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##### 



(SANTANDER BANCORP LOGO)




---



##### 



(SANTANDER BANCORP LOGO) Santander Group (Banco Santander Central
Hispano, S.A., the principal
shareholder) Appendix A




---



##### 



(SANTANDER BANCORP LOGO)
 SANTANDER GROUP IN 2004 2004 has been an excellent year for Santander Group. All business areas achieved positive progress and, from a strategic point of view, the
purchase of Abbey, the sixth largest bank in the United Kingdom, was carried out successfully,
placing Santander among the top ten banks in the world, based on market capitalization. Santander Group obtained net attributable income of EUR 3,136 million, a 20.1% increase
over the previous year, reflecting strong growth in commercial activity. Loans and client deposits
grew by 18% and 13%, respectively. Few banks in the world have Santanders geographic presence, with 59 million clients in the most
dynamic countries of Europe and Latin America, areas that constitute a potential market of 800
million people. Santander has made a commitment in all these countries to contribute to the
advancement of higher education, as well as to develop other initiatives in the cultural, economic
and educational arenas. A Top Bank in Europe Santander Group is the
number one European bank, with 5,900 offices in 15
countries. In Spain, the Santander Central Hispano (Santander) network is the leader, propelled by its
dynamism and innovation, and Banesto is a model bank, showing solid growth year after year.
Together, the Santander and Banesto networks hold a market share of 17.4% of total loans and
customer deposits, including customer financial assets under management, in the banking industry,
as well as in mutual savings banks. In Portugal, Santander Totta is the second most profitable private bank. In the rest of Europe, Santander has continued to broaden its consumer banking business with
acquisitions in Poland and Norway. After 15 years of experience in consumer banking in Europe,
understanding the market thoroughly and using a profitable and efficient business model, Santander
is now the top entity on the European continent in this segment in terms of profits and the third in assets. The Purchase of Abbey The purchase of Abbey profoundly changes the positioning of Santander Group,
placing it in one of the most profitable markets in the world, diversifying its risk, offering new
opportunities for growth, and establishing it as the ninth bank in the world in terms of market
capitalization. The purchase of Abbey adds
18 million new clients, 1.6 million shareholders, 24,000 employees and a
network of 730 offices throughout the United Kingdom. Abbey is a large franchise, the second British bank in terms of mortgage market share and brand
recognition. It is, fundamentally, a retail bank that fits perfectly into the banks multi-local
strategy with a focus on commercial banking.




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##### 



(SANTANDER BANCORP LOGO) Strong Growth in Latin America The year 2004 has been a good one for Latin America, which
has experienced economic growth of more than 5.8%. Santander Groups net profit in the region reached
$1,595 million, with strong growth in client business. Impressive commercial inroads were made throughout the region, with an average growth in loans of
25% in Brazil, Mexico and Chile. Growth was also achieved in the credit card business,
international commerce, asset management and insurance, areas in which regional projects were
launched. Few banks in the world have Santanders geographic presence, with 59 million clients
in the most dynamic countries of Europe and Latin America, areas that constitute a potential
market of 800 million people. The region has set the groundwork for sustained growth, and Santander Group is prepared
to contribute to its growth, promoting banking services for those unbanked in the leading
countries. The Group is moving toward the objective of duplicating its client business and gaining
two points in market share in commercial banking within three years. Growing Contribution in Global Business Global businesses such as private banking, securities, and
international wholesale banking maintain high levels of growth, offering innovative products and
services with high added value in all markets in which the Santander Group has a presence. Strength in the Stock Market The Abbey operation demonstrated the strength of Santander stocks,
since the Group used its own shares to accomplish the largest cross-frontier purchase in European
banking to date. The stockholder base increased strongly with the purchase of Abbey, reaching 2.7 million, an
enormous strengthening and a characteristic that differentiates it with respect to other similarly
sized banks. Santander finished in 2004 with a stock market capitalization of EUR 57,102 million, which places
it among the fifty largest publicly held companies in the world in terms of market capitalization. Corporate Governance  The Group is at the leading edge of international best practices in matters as important as
shareholder rights, commitment for the creation of value, transparency, the structure and the
functioning of the Board of Directors. Corporate Social Responsibility The Corporate Social Responsibility Annual Report details Santander
Group activities and commitment to shareholders, clients, employees, society as a whole and the
environment. The Groups total investment in Corporate Social Responsibility programs in 2004 was
EUR 84.4 million or 2.7% of net attributable income. The priority within all the social activities is higher education. The Santander Universities
project is an unprecedented alliance on a world scale between a company and the university
community. By 2004 there were 409 collaboration agreements with universities in Spain, Portugal and Latin
America, and 812 universities had joined the Universia Internet portal. New Corporate Headquarters The Group inaugurated its new corporate headquarters, Cuidad Grupo
Santander,in Boadilla del Monte near Madrid, transferring 6,500 persons from the Groups central
services to the new site. The new facilities are much more than a new site; they are a reflection of a modern and
international leading company.




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(SANTANDER BANCORP LOGO)
    
    Group History and Profile
 A century and a half creating value 1857
    
    Creation of Banco Santander1925
    
    Opening of an office in Osorno (Palencia), the first Banco Santander outside Cantabria.1935
    
    Banesto has the largest branch network in Spain (400)1946
    
    Acquisition of Banco Mercantil de Santander, its principal competitor. This acquisition provided
the impulse for the national expansion.1950
    
    Banco Santander creates the Ibero-American Department, with offices in Mexico, Argentina, Venezuela
and Cuba1965
    
    Creation of Banco Intercontinental Español, today Bankinter, together with Bank of America, which
was the worlds number one bank.1976
    
    Purchase of its first bank in America, First National Bank of Puerto Rico1982
    
    Acquisition of Banco Español de Chile1986
    
    Banco Santander is the fifth bank in Spain in terms of assets.1987
    
    Acquisition of CC-Bank, German automobile financing entity1988
    
    Alliance of Banco Santander with The Royal Bank of Scotland1989
    
    Launch of Supercuenta Santander, the first interest-earning checking account in Spain, key
product for the Banks strong expansion.1994
    
    Banco Santander acquires, at public auction, Banesto, at the time the fourth-largest bank in Spain.1999
    
    Merger Banco Santander  BCH, first and third Spanish banks, respectively, which give rise to the
Santander Group
 Santander Group Commercial Banking in Europe and America (Group Santander Map)




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(SANTANDER BANCORP LOGO) Recent Relevant Dates 1999  April: Santander begins to trade on the stock market. November: Agreement with Champalimaud Group to acquire the Totta & Acores and Crédito Predial
Portugués. 2000  November: Acquired at auction Banespa, fourth bank in Brazil and second in the state of Sao Paulo. 2001  2002  May: Acquisition of the AKB Group, a German consumer-financing group. August: Merger of Banco de Venezuela and Banco de Caracas to create the leader of the Venezuelan
financial sector December: Strategic alliance with Bank of America in Mexico, which buys 24.9% of Grupo Financiero
Santander Serfin. 2003  March: Grupo Santander achieves control of 100% of the Italian consumer financing company
Finconsumo. May: Acquisition of Coutts & Co.s Latin American private banking business. 2004  July-November: Acquisition of the sixth British bank, Abbey, for EUR 12,541 million, and its
integration to Santander Groups structure. Ratings by Agency Moodys
    
    Aa3
    
    
    P1
    
    
    BStandard & Poors
    
    A+
    
    
    A1Fitch Ratings
    
    AA-
    
    
    F1+
    
    
    BRatings by Government CorporationDeminor Rating
    
    
    
    
    8.0




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(SANTANDER BANCORP LOGO)
    
    Santander Group Selected Data
  Selected Data  2004
    
    
    2003Balance (Euro in millions)Total assets
    
    
    575,397.9
    
    
    
    351,790.5Loans (net)
    
    
    335,207.7
    
    
    
    172,504.0Customer financial assets under management:
    
    
    538,041.7
    
    
    
    323,900.8Customer deposits
    
    
    398,047.0
    
    
    
    214,997.9Off-balance sheet
    
    
    139,994.7
    
    
    
    108,903.0Stockholdersequity
    
    
    32,057.5
    
    
    
    18,363.7Total funds under management
    
    
    715,392.5
    
    
    
    460,693.5Capital and Asset Quality(%)BIS Ratio
    
    
    12.98
    
    
    
    12.43Tier 1
    
    
    7.49
    
    
    
    8.26Non-performing loans to total loans
    
    
    1.05
    
    
    
    1.55Allowance for loan losses to non-performing
loans
    
    
    184.61
    
    
    
    165.19Results (Euro in millions)Net interest income
    
    
    8,635.7
    
    
    
    7,958.3Net interest income plus commissions
    
    
    13,245.0
    
    
    
    12,128.9Net interest income plus commssions and
gains on financial transactions
    
    
    14,197.7
    
    
    
    13,127.7Net operating income
    
    
    6,545.2
    
    
    
    5,720.7Income attributed to the Group (cash basis*)
    
    
    3,600.7
    
    
    
    3,133.3Net income attributed to the Group
    
    
    3,135.6
    
    
    
    2,610.8Return and Efficiency(%)Efficiency Ratio
    
    
    47.44
    
    
    
    49.34ROA
    
    
    1.02
    
    
    
    0.95ROE (cash-basis*)
    
    
    18.35
    
    
    
    17.37ROE
    
    
    15.98
    
    
    
    14.48Stock and market capitalizationNumber of shares (million)
    
    
    6,254
    
    
    
    4,768Stock price (Euro)
    
    
    9.13
    
    
    
    9.39Market capitalization (Euro in millions)
    
    
    57,101.7
    
    
    
    44,775.3Earnings per share (cash-basis*) (Euro)
    
    
    0.7243
    
    
    
    0.6571Earnings per share (Euro)
    
    
    0.6307
    
    
    
    0.5475PER (stock price /net attributed
income per share)
    
    
    14.48
    
    
    
    17.15Other DataNumber of shareholders
    
    
    2,685,317
    
    
    
    1,075,733Number of employees
    
    
    126,488
    
    
    
    103,038Spain
    
    
    33,353
    
    
    
    34,968Remaining countries (except
Abbey)
    
    
    93,135
    
    
    
    68,070Abbey
    
    
    24,361
    
    
    
    N/ANumber of offices
    
    
    9,973
    
    
    
    9,199Spain
    
    
    4,384
    
    
    
    4,369Remaining countries (except Abbey)
    
    
    5,589
    
    
    
    4,830Abbey
    
    
    730
    
    
    
    N/A
   (*)  Before normal goodwill amortization.Nota: The information in this table is not audited. Nonetheless, while creating the consolidated
accounts we have used generally accepted accounting principles and criteria in Spain.




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(SANTANDER BANCORP HEADER2) Investor Information Investor Assistance Investor inquiries and requests for assistance should be directed to the address listed below, or
call the Investor Relations Department at
(787) 777-4462,
Fax (787) 777-4553,
Email: investor.relations@bspr.com Santander BanCorp
Attn. Investor Relations Department
PO Box 362589
San Juan 00936-2589 For more information, visit the Companys website
at www.santandernet.com Transfer Agent Information
Contact our transfer agent, Mellon Investor Services LLC, at the address listed below for the following services:  
    to report lost certificates;
    non-receipt of dividend checks; or
    change in registration Mellon Investor Services LLC.
85 Challenger Road
Ridgefield Park, NJ 07660
Internet site: www.melloninvestor.com For telephone assistance, call: Domestic Shareholders (800) 851-9677
Domestic Hearing Impaired (800) 231-5469
Foreign Shareholders (201) 329-8660
Foreign Hearing Impaired (201) 329-8354 Announcements Stockholders Meeting The annual stockholders meeting of Santander BanCorp will be held on April 28, 2005, at 10:00 a.m.
at the Bankers Club of Puerto Rico, 208 Muñoz Rivera Avenue, Hato Rey, Puerto Rico. Annual and Quarterly Reports and Corporate Code of Conduct To obtain a copy of the Corporations Annual Report, Form 10-Q and Form 10-K for the year ended
December 31, 2004 (without exhibits) as well as our Corporate Code of Conduct, stockholders are
invited to visit our website at www.santandernet.com or contact our Investor Relations Department
at investor.relations@bspr.com or via telephone at (787) 777-4462, Fax (787) 777-4553. Writing: Timothy Hayes
Editing: Anne W. Chevako
Photography: Tomás Gual, Sol M. Meléndez, Wilfredo Pérez
Production and printing supervision: Publishing Resources, Inc. (787) 728-1800
Printing: Cedar Graphics, Inc.
Design: Alvaro Reyero, See the Change, Madrid, Spain
Project direction and coordination: Corporate Communications and Public Relations Department, Santander BanCorp.




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(SANTANDER BANCORP BACK COVER)