SANTANDER BANCORP - 10-Q Quarterly Report

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UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2004

Commission File: 001-15849

SANTANDER BANCORP

(Exact name of Corporation as specified in its charter)

Commonwealth of Puerto Rico	66-0573723

(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code:

(787) 759-7070

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

Yes X No______

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

Yes X No______

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

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

Title of each class	Outstanding as of November 1, 2004

Common Stock, $2.50 par value	46,639,104

SANTANDER BANCORP

CONTENTS
			Page No.
Part I:	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets	1
		Consolidated Statements of Income	2
		Consolidated Statements of Changes in Stockholders' Equity	3
		Consolidated Statements of Comprehensive Income	4
		Consolidated Statements of Cash Flows	5
		Notes to Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and
		Results of Operations	24
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
	Item 4.	Controls and Procedures	48
Part II:	Other Information
	Item 1.	Legal Proceedings	49
	Item 2.	Use of Proceeds and Issuer Purchases of Equity Securities	49
	Item 3.	Defaults upon Senior Securities	49
	Item 4.	Submission of Matters to a Vote of Security Holders	49
	Item 5.	Other Information	49
	Item 6.	Exhibits and Reports on Form 8-K	50

Signatures			51

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

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

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

PART I - ITEM 1

FINANCIAL STATEMENTS

SANTANDER BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(Dollars in thousands, except per share data)

		September 30,		December 31,
ASSETS		2004		2003
CASH AND CASH EQUIVALENTS:
Cash and due from banks	$	153,049	$	99,183
Interest-bearing deposits		45,452		15,300
Federal funds sold and securities purchased under agreements to resell		339,150		278,750
Total cash and cash equivalents		537,651		393,233
INTEREST BEARING DEPOSITS		50,000		10,000
TRADING SECURITIES		13,423		42,547
INVESTMENT SECURITIES AVAILABLE FOR SALE, at fair value:
Securities pledged that can be repledged		696,946		1,227,627
Other investment securities available for sale		354,906		436,684
Total investment securities available for sale		1,051,852		1,664,311
INVESTMENT SECURITIES HELD TO MATURITY, at amortized cost:
Securities pledged that can be repledged		685,308		687,184
Other investment securities held to maturity		161,060		145,943
Total investment securities held to maturity		846,368		833,127
LOANS HELD FOR SALE, net		283,017		297,201
LOANS, net		4,918,062		3,847,873
PREMISES AND EQUIPMENT, net		49,930		61,107
ACCRUED INTEREST RECEIVABLE		45,354		36,398
GOODWILL		34,791		34,791
INTANGIBLE ASSETS		5,949		4,662
OTHER ASSETS		124,638		142,050
	$	7,961,035	$	7,367,300

LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Non-interest bearing	$	699,993	$	700,413
Interest-bearing		3,816,200		3,441,815
Total deposits		4,516,193		4,142,228
FEDERAL FUNDS PURCHASED AND OTHER BORROWINGS		722,000		350,000
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE		1,301,627		1,808,238
COMMERCIAL PAPER ISSUED		599,376		254,904
TERM NOTES		124,281		165,966
SUBORDINATED CAPITAL NOTES		15,925		15,925
ACCRUED INTEREST PAYABLE		23,246		18,728
OTHER LIABILITIES		132,150		130,479
Total liabilities		7,434,798		6,886,468

STOCKHOLDERS' EQUITY:
Series A preferred stock, $25 par value; 10,000,000 shares authorized, none outstanding		-		-
Common stock, $2.50 par value; 200,000,000 shares authorized; 50,650,364 and 46,410,214 shares issued
in September 2004 and December 2003, respectively; 46,639,104 shares outstanding in September 2004
and 42,398,954 shares outstanding in December 2003		126,626		116,026
Capital paid in excess of par value		304,171		211,742
Treasury stock at cost, 4,011,260 shares in September 2004 and December 2003.		(67,552)		(67,552)
Accumulated other comprehensive loss, net of taxes		(22,719)		(19,465)
Retained earnings-
Reserve fund		119,432		119,432
Undivided profits		66,279		120,649
Total stockholders' equity		526,237		480,832
	$	7,961,035	$	7,367,300


The accompanying notes are an integral part of these financial statements

SANTANDER BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE NINE MONTH PERIODS AND THE QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
(Dollars in thousands, except per share data)

	For the nine month periods ended					For the quarters ended
				As restated				As restated
		September 30,		September 30,		September 30,		September 30,
		2004		2003		2004		2003
INTEREST INCOME:
Loans	$	184,995	$	180,153	$	66,242	$	58,617
Investment securities		76,817		57,274		25,070		22,229
Interest bearing deposits		573		559		338		150
Federal funds sold and securities purchased under
agreements to resell		2,018		1,455		799		499
Total interest income		264,403		239,441		92,449		81,495
INTEREST EXPENSE:
Deposits		42,115		42,923		15,404		12,788
Securities sold under agreements to repurchase and other borrowings		58,688		57,649		21,081		19,761
Subordinated capital notes		54		395		25		(10)
Total interest expense		100,857		100,967		36,510		32,539
Net interest income		163,546		138,474		55,939		48,956
PROVISION FOR LOAN LOSSES		21,770		34,745		7,020		8,965
Net interest income after provision for loan losses		141,776		103,729		48,919		39,991
OTHER INCOME:
Bank service charges, fees and other		28,949		29,641		9,725		9,724
Broker-dealer, asset management and insurance fees		38,176		36,769		12,911		15,551
Gain on sale of securities		11,465		10,012		2,462		4
Gain (loss) on sale of loans		(84)		6,845		(240)		2,833
Gain on sale of building		2,754		-		-		-
Other income		6,747		8,532		3,540		3,317
Total other income		88,007		91,799		28,398		31,429
OPERATING EXPENSES:
Salaries and employee benefits		69,037		66,193		22,808		22,982
Occupancy costs		10,109		10,117		3,439		3,495
Equipment expenses		5,317		5,631		1,715		1,861
EDP servicing, amortization and technical expenses		23,219		29,375		7,121		10,233
Communication expenses		6,792		6,276		2,202		2,165
Business promotion		7,140		4,911		2,828		1,668
Other taxes		6,574		7,525		2,049		2,368
Other operating expenses		34,390		36,377		11,689		12,591
Total operating expenses		162,578		166,405		53,851		57,363
Income before provision for income tax		67,205		29,123		23,466		14,057
PROVISION FOR INCOME TAX		4,075		5,419		1,597		2,514
NET INCOME		63,130		23,704		21,869		11,543
DIVIDENDS TO PREFERRED SHAREHOLDERS		-		3,426		-		1,142
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	63,130	$	20,278	$	21,869	$	10,401
BASIC AND DILUTED EARNINGS PER COMMON SHARE*	$	1.35	$	0.43	$	0.47	$	0.22

* After giving retroactive effect to the 10% stock dividend declared on July 9, 2004.

The accompanying notes are an integral part of these financial statements

SANTANDER BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2004 AND THE YEAR ENDED DECEMBER 31, 2003
(Dollars in thousands)

		September 30, 2004		December 31, 2003
Preferred Stock:
Balance at beginning of period	$	-	$	65,250
Preferred stock redemption		-		(65,250)
Balance at end of period		-		-
Common Stock:
Balance at beginning of period		116,026		116,026
Stock dividend distributed		10,600		-
Balance at end of period		126,626		116,026
Capital Paid in Excess of Par Value:
Balance at beginning of period		211,742		211,742
Stock dividend distributed		92,429		-
Balance at end of period		304,171		211,742
Treasury Stock at cost:
Balance at beginning of period		(67,552)		(65,268)
Stock repurchased at cost		-		(2,284)
Balance at end of period		(67,552)		(67,552)
Accumulated Other Comprehensive Income, net of taxes:
Balance at beginning of period		(19,465)		(12,692)
Unrealized net gain (loss) on investment securities available
for sale, net of tax		(5,861)		(2,789)
Unrealized net gain on cash flow hedges, net of tax		2,607		1,739
Minimum pension liability, net of tax		-		(5,723)
Balance at end of period		(22,719)		(19,465)
Reserve Fund:
Balance at beginning of period		119,432		116,482
Transfer from undivided profits		-		2,950
Balance at end of period		119,432		119,432
Undivided Profits:
Balance at beginning of period		120,649		172,415
Net income		63,130		39,445
Transfers		-		(2,950)
Deferred tax benefit amortization		(11)		(60)
Common stock cash dividends		(14,460)		(19,087)
Preferred stock cash dividends		-		(4,504)
Preferred stock redemption premium		-		(2,610)
Return of capital on corporate reorganization		-		(62,000)
Stock dividend distributed		(103,029)		-
Balance at end of period		66,279		120,649
Total stockholders' equity	$	526,237	$	480,832


The accompanying notes are an integral part of these financial statements

SANTANDER BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE NINE MONTH PERIODS AND THE QUARTERS ENDED SEPTEMBER 30, 2004 AND 2003
(Dollars in thousands)

	For the nine month periods ended					For the quarters ended
				As restated				As restated
		September 30,		September 30,		September 30,		September 30,
		2004		2003		2004		2003

Net income	$	63,130	$	23,704	$	21,869	$	11,543
Other comprehensive income (loss), net of tax:
Unrealized (losses) gains on investments securities
available for sale, net of tax		4,030		7,956		(3,856)		5,955
Reclassification adjustment for losses included
in net income, net of tax		(9,864)		(2,247)		(8,424)		(737)
Unrealized (losses) gains on investments securities transferred
to the held to maturity category, net of amortization		(27)		352		(16)		(48)
Unrealized losses on investment securities
available for sale, net of tax		(5,861)		6,061		(12,296)		5,170
Unrealized gains (losses) on cash flow hedges, net of tax		2,609		764		2,099		304
Reclassification adjustment for losses included
in net income, net of tax		(2)		-		(1)		-
Unrealized gains (losses) on cash flow hedges, net of tax		2,607		764		2,098		304
Minimum Pension Liability, net of tax		-		-		-
Other comprehensive loss, net of tax		(3,254)		6,825		(10,198)		5,474
Comprehensive income (loss)	$	59,876	$	30,529	$	11,671	$	17,017

SANTANDER BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(Dollars in thousands)
	For the nine month periods ended
				As restated
		September 30,		September 30,
		2004		2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	63,130	$	23,704
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		9,940		16,661
Deferred tax provision		1,318		124
Provision for loan losses		21,770		34,745
Gain on sale of building		(2,754)		-
Gain on sale of securities		(11,465)		(10,012)
(Loss) gain on sale of loans		84		(6,845)
Gain on sale of mortgage servicing rights		(284)		(327)
Gain on derivatives		(198)		(246)
Trading gains		(908)		(919)
Net premium amortization on securities		2,825		4,093
Net premium amortization on loans		3,623		5,864
Purchases and originations of loans held for sale		(534,850)		(474,885)
Proceeds from sales of loans held for sale		126,512		248,760
Repayments of loans held for sale		36,438		29,361
Proceeds from sales of trading securities		1,704,903