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 June 30, 2002

Commission File: 001–15849

SANTANDER BANCORP

(Exact name of Corporation as specified in its charter)

Registrant´s telephone number, including area code:

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

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.

The accompanying notes are an integral part of these consolidated financial statements

The accompanying notes are an integral part of these consolidated financial statements

The accompanying notes are an integral part of these consolidated financial statements

The accompanying notes are an integral part of these consolidated financial statements

The accompanying notes are an integral part of these consolidated financial statements

Results of Operations

This financial discussion contains an analysis of the consolidated financial position and consolidated results of operations of the Corporation and should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report.

 Critical Accounting Policies

The consolidated financial statements of the Corporation are prepared in accordance with accounting principles generally accepted in the United States of America (hereinafter referred to as "generally accepted accounting principles") and with general practices within the financial industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Corporation believes that of its significant accounting policies detailed in Note 1 to the consolidated financial statements, the following may involve a higher degree of judgement and complexity.

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. 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 on its loan portfolio. In determining the allowance, management considers the portfolio risk characteristics, prior loss experience, prevailing and projected economic conditions and loan impairment measurements. Any significant changes in these considerations wo uld have an impact on the allowance for loan losses.

Financial Instruments. Certain financial instruments including derivatives, hedged items 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 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. Fair value for certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments as well as time value and yield curve or volatility factors underlying the positions.

Income taxes. In preparing the consolidated financial statements the Corporation is required to estimate income taxes. This involves an estimation of current 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 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 in the future, 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 the realization of the deferred tax assets on a quarterly basis and assesses the need for a valuation allowance. For the quarter ended June 30, 2002, the Corporati on had no recorded valuation allowances related to its net deferred tax assets.

Impairment of long–lived assets, goodwill and other intangible assets. The Corporation´s long–lived assets include premises and equipment, goodwill and other intangible assets. Premises, equipment 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 the book value would be adjusted and a loss would be recognized in current operations.

On January 1, 2002 the Corporation adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment by comparing the fair values of those assets with their recorded amounts. In assessing the recoverability of goodwill and other intangibles the Corporation must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Corporation may be required to record impairment charges for these assets not previously recorded. The Corporation assessed the value of goodwill and determined that its goodwill was not impaired upon the initial application of SFAS No. 142.

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 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. In accordance with generally accepted accounting principles, 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. Management believes that the assumptions made are appropriate, however, significant differences in actual experience or significant changes in assumptions may materially affect pension and other postretirement obligations and future expense.

Santander BanCorp is the bank holding company for Banco Santander Puerto Rico and Subsidiaries (the Bank).

Santander BanCorp (the Corporation) reported net income of $7.4 million for the second quarter of 2002, compared with $14.5 million for the same period in 2001. Earnings per common share (EPS) for the second quarter of 2002 were $0.14, based on 43,283,275 average shares after giving retroactive effect to the stock dividend declared on June 17, 2002. For the six months period ended June 30, 2002, the Corporation reported net income of $21.3 million. For the second semester of 2001 the Corporation reported net income of $26.3 million after the effect of the cumulative effect of change in accounting principle resulting from the implementation of Statement of Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities", as amended. Net income before cumulative effect of change in accounting principle for the six–month period ended June 30, 2001 reached $34.5 million. Earnings per common share for the first six–month of 2002 were $0.44, based on 43,277 ,663 average shares outstanding, after giving retroactive effect to the stock dividend declared on June 17, 2002. Return on average total assets (ROA) on an annualized basis and return on average common equity (ROE) on an annualized basis for the six–month period ended June 30, 2002 were 0.62% and 7.04%, respectively, compared with 0.72% and 9.14% reported during the first six months of 2001. ROA and ROE before cumulative effect of change in accounting principle for the first semester of 2001 were 0.95% and 12.28%, respectively.

The Corporation´s net interest income decreased 10.0% to $56.0 million for the quarter ended June 30, 2002 from $62.2 million for the quarter ended June 30, 2001. For the first semester of 2002, the Corporation net interest income reached $110.7 million, a decrease of 10.4% over $123.6 for the same period in 2001. The increases were due to the lower volume of average earning assets coupled with a decrease in the yield of earning assets. These decreases were partially offset by decreases in the cost of funds and in average interest bearing liabilities. The decrease reported for the semester was due to a 6.3% reduction in average interest earning assets, as well as a decrease in the yield of those assets of approximately 206 basis points. There was a significant reduction in average investment securities of $115.5 million during the second quarter of the year compared to the same period in 2001. There was also a reduction in average net loans of $179.7 million in 2002 compared to the same period in 2001. These decreases were partially offset by an increase in average interest bearing deposits of $52.2 million during the second quarter of 2002 compared to the same period in 2001. Average interest bearing liabilities also reflected a decrease of 5.5% to $5.5 billion in 2002 from $5.8 billion in 2001. The most significant decrease in average interest bearing liabilities was in other borrowings.

To permit the comparison of returns on assets with different tax attributes, the interest income on tax–exempt assets under this heading has been adjusted by an amount equal to the income taxes which would have been paid had the income been fully taxable. This tax equivalent adjustment is derived using the applicable statutory tax rate and resulted in an adjustment of $4.0 million and $7.0 million for the quarters ended June 30, 2002 and 2001, respectively. The tax equivalent adjustments for the six–month period ended June 30, 2002 and 2001 were $7.0 million and $13.5 million, respectively.

The net interest margin on a tax–equivalent basis decreased from 4.09% for the quarter ended June 30, 2001 to 3.68% for the quarter ended June 30, 2002. This decrease was primarily due to a decrease in the yield on earning assets as well as a decrease in earning assets. These decreases were partially offset by decreases in the cost of funds and in the cost of funding earning assets (due to decreases in the prime rate) and a decrease in the average balance of interest bearing liabilities.

The table on page 37, Quarter to Date Average Balance Sheet and Summary of Net Interest Income – Tax Equivalent Basis, presents average balance sheets, net interest income on a tax equivalent basis and average interest rates for the second quarter of 2002 and 2001. The table on Interest Variance Analysis – Tax Equivalent Basis on page 29, allocates changes in the Corporation´s interest income (on a tax–equivalent basis) and interest expense between changes in the average volume of interest earning assets and interest bearing liabilities and changes in their respective interest rates for the second quarter of 2002 compared with the first quarter of 2001. Volume and rate variances have been calculated based on the activity in average balances over the period and changes in interest rates on average interest earning assets and average interest bearing liabilities.

The Corporation´s interest income on a tax equivalent basis decreased $34.5 million, or 25.6% to $100.5 million for the quarter ended June 30, 2002 from $134.9 million for the quarter ended June 30, 2001. The decrease was attributed to a decrease of $8.1 million in the volume of the Corporation´s interest earning assets, together with a decrease in the yield of such assets of $26.3 million. These decreases were only partially offset by a decrease in the volume of average interest bearing liabilities of $4.9 million and in the cost of such liabilities of $20.3 million.

Average interest earning assets decreased to $6.5 billion for the quarter ended June 30, 2002, compared with $6.8 billion for the same quarter in 2001, due primarily to a reduction in average balance of loans of $179.7 million. The decrease in the average balance of loans was due primarily to decreases in construction and consumer loans of $61.6 million and $134.8 million, respectively. These decreases were partially offset by an increase in mortgage loans of $84.0 million for the same periods.

The average balance of investment securities decreased 5.2% from $2.2 billion for the second quarter of 2001 to $2.1 billion during the same quarter in 2002. This decrease was mainly due to maturities of $2.3 billion and sales of $449.9 million. The decrease was partially offset by purchases of $2.5 billion.

The average yield on earning assets decreased from 7.98% for the quarter ended June 30, 2001 to 6.16% for the quarter ended June 30, 2002. This decrease was due to the decrease in average interest rates and loan balances.

The Corporation´s average interest bearing liabilities decreased $320.3 million from $5.8 billion for the quarter ended June 30, 2001, to $5.5 billion for the quarter ended June 30, 2002. Average borrowings reflected a significant decrease of $495.9 million from $2.1 billion in June 2001 to $1.6 billion in June 2002. These decreases were partially offset by increases of $62.8 million and $219.5 million in time deposits and savings and NOW accounts, respectively. The increase in deposits and the reduction in higher cost borrowings had a favorable impact on the Corporation´s results of operations during the second quarter of 2002.

Interest expense for the quarter ended June 30, 2002 decreased 38.4% to $40.5 from $65.7 million for the quarter ended June 30, 2001. The decrease in interest expense was attributed to a $4.9 million decrease in the volume of interest bearing liabilities and a $20.3 million decrease in cost of funds.

There was an increase in the average balance of deposits during the second quarter of 2002 compared to the same period in 2001. The average cost of interest bearing liabilities also reflected a significant decrease of 157 basis points to 2.94% for the quarter ended June 30, 2002 compared to 4.51% for the same period in 2001. This decrease is a direct result of the reductions in prime rate throughout 2002.

The following table allocates changes in the Corporation´s interest income, on a tax–equivalent basis, and interest expense for the three months ended June 30, 2002 compared to the three months ended June 30, 2001, between changes related to the average volume of interest earning assets and interest bearing liabilities, and changes related to interest rates. Volume and rate variances have been calculated based on the activity in average balances over the period and changes in interest rates on average interest earning assets and average interest bearing liabilities. The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of change in each category.

The Corporation systematically assesses the overall risks in its loan portfolio and establishes and maintains an allowance for possible losses thereon. The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on the evaluation of known and inherent risks in the Corporation´s loan portfolio. The Corporation´s management evaluates the adequacy of the allowance for loan losses on a monthly basis. This evaluation involves the exercise of judgement and the use of assumptions and estimates that are subject to revision, as more information becomes available. In determining the allowance, management considers the portfolio risk characteristics, prior loss experience and collection practices, prevailing and projected economic conditions, and results of the Corporation´s internal and regulatory agencies´ loan reviews. Based on current and expected economic conditions, the expected level of net loan losses and the methodolog y 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 on its loan portfolio.

The Corporation´s allowance for loan losses was $53.3 million or 1.29% of loan balances, at June 30, 2002 compared to $52.9 million, or 1.19% of loan balances at December 31, 2001. The coverage ratio (allowance for loan losses to non–performing loans) was 53.69% at June 30, 2002, down from 55.52% at December 31, 2001, due to an increase in non–performing assets. Net charge–offs of $16.2 million for the quarter ended June 30, 2002 and $28.0 for the six–month period ended June 30, 2002 were partially offset by a provision of $16.5 million during the quarter ended June 30, 2002 and $28.4 million for the six–month period ended June 30, 2002. Although the Corporation´s provision and allowance for loan losses will fluctuate from time to time based on economic conditions, net charge–off levels, and changes in the level and mix of the loan portfolio, management considers that the allowance for loan losses is adequate to absorb probable losses on its loa n portfolio.

For the quarter ended June 30, 2002, the provision for loan losses was $16.5 million compared to $17.2 million for the same quarter in 2001, and $28.4 million compared to $30.3 million for the six–month periods ended June 30, 2002 and 2001, respectively. The increase in commercial loans charge–offs during the second quarter of 2002 was primarily due to an agricultural loan charge–off. The reserve for loan losses is affected by consumer loans originated in previous years under less stringent credit criteria. Although consumer loan charge–offs are still high, there was a reduction of $4.3 million in net consumer charge–offs for the first semester of 2002 compared to the same period in 2001. There was a decrease of $1.9 million in the provision for loan losses for the semester ended June 30, 2002 compared to the same period in 2001. This decrease in the provision was due to a decrease in net charge–offs of $2.6 million during the first semester of 2002 when compared with t he same period in the prior year, as well as to a decrease in average loans during the period.

The allowance for loan losses stands at 1.29% of total loans as of June 30, 2002 an increase from 1.15% as of June 30, 2001. This allowance represents 53.69% of total non–performing loans, and if the estimated fair value of real estate collateral is considered, this ratio would reach 112.37%. The annualized ratio of net charge–offs to average loans for the quarter ended June 30, 2002 increased to 1.52% from 1.26% for the same period in 2001.

Other income consists of service charges on the Corporation´s deposit accounts, other service fees, including mortgage servicing fees and fees on credit cards, gains and losses on sales of securities, gain on sale of mortgage servicing rights and other gains and losses.

The following table sets forth the components of the Corporation´s other income for the quarters and six–month period ended June 30, 2002 and 2001.

The Corporation´s other income for the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001 reflected an increase of $2.7 million or 18.0%. For the six–month period ended June 30, 2002 there was an increase in other income of $7.1 million or 20.9% compared to the same period of 2001. The increase in other income for the second quarter of 2002 when compared with the second quarter of 2001 was due to a $3.5 million increase in the gain on sale of securities. For the six–month period ended June30, 2002, the gain on sale of securities surpasses the gain reported for the same period in 2001 by $6.6 million. Other service fees increased during the quarter ended June 30, 2002 due primarily to an increase in credit card fees. Service fees on deposit accounts decreased as a result of the decrease in average overdrafts. These decreases were partially offset by increase in credit card, mortgage servicing, trust and other fees. The increase in credit card fees was due to operational changes in the processing of the portfolio, which is now processed internally, thereby leading to the recognition of gross fees. Second quarter gains were partially offset by lower gains on sales of mortgage loans during 2002 compared to 2001. There was also a higher loss recorded on the valuation of derivative instruments of $1.5 million for the second quarter of 2002 compared to $.8 million for the second quarter of 2001. The increase in other is principally due to higher technical assistance fees paid by affiliates and increases in the rentals of point of sale terminals.

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

For the quarter and six–month periods ended June 30, 2002, the Corporation´s efficiency ratio on a tax equivalent basis reached a level of 65.83% and 65.45%, respectively compared to 52.52% and 52.74% for the same periods in 2001, respectively, mainly as a result of a decrease in net interest income on a tax equivalent basis coupled with an increase in operating expenses.

For the quarter ended June 30, 2002 total operating expenses reflected an increase of $4.5 million or 10.3% compared to the same period in 2001. Personnel costs reflected an increase of $2.5 million for the quarter ended June 30, 2002, and $4.0 for the six–month period ended June 30, 2002 as compared to the same periods in 2001. This increase was due to an increase in salaries of approximately 3.5% and increases in overtime and temporary help due to special projects related to information systems conversions.

Other operating expenses reflected an increase of $2.1 million during the quarter ended June 30, 2002 and $4.6 million for the six–month period ended June 30, 2002 when compared with the same periods in 2001. The increases in the second quarter of 2002 were mainly due to increases in "All Other", amortization of intangibles, equipment expenses, EDP servicing expense, and travel and transportation. The increase of $.8 million in "All Other" is due to higher software amortization expense due to a decrease in useful life of existing software that will be replaced, higher collection fees on loans due to legal cost related to the foreclosure of an agricultural loan and higher credit card processing expenses. Amortization of intangibles increased because of higher amortization of mortgage servicing rights due to higher refinancing of the portfolio. The increase in equipment maintenance and EDP servicing expenses is a result of the Corporation´s information systems conversion project. The increase in travel and transportation is due to lodging and transportation costs incurred to train all of the Corporations´ personnel in the new information systems.

The provision for income tax amounted to $1.5 million (or 16.6% of pretax earnings) for the quarter ended June 30, 2002 compared to $1.6 million (or 10.0% of pretax earnings) for the same period in 2001. The decrease in income tax expense is principally due to lower pretax income in 2002. The difference between the Corporation´s statutory and effective tax rates is due primarily to the benefits of net tax–exempt interest income.

The Corporation´s assets reached $7.5 billion as of June 30, 2002, a 2.0% decrease when compared to total assets of $7.7 billion at December 31, 2001. This decrease was principally a result of a decrease in net loans of $317.8 million during the six–month period ended June 30, 2002, which was partially offset by an increase in the investment portfolio of $284.3 million due to the Corporation´s effort to replace the securities that were partially called during 2001.

The composition of the loan portfolio was as follows:

Net loans at June 30, 2002 were $4.1 billion, reflecting a decrease in the loan portfolio of $317.8 million compared to $4.4 million at December 31, 2001. The decrease in the loan portfolio is mainly due to more stringent credit criteria, the run–off of the consumer auto loan portfolio which was discontinued in 2000 and the sale of residential mortgage loans during the period.

The Corporation´s average loan portfolio for the six–month period ended June 30, 2002 compared to the same period of 2001 reflects a decrease of $138.8 million. The downward trend in the Corporation´s lending activity and the Corporation´s strategic decision to withdraw from the auto–lending sector was partially offset by increases in the average mortgage loan portfolio of $114.7 million.

As of June 30, 2002, the Corporation´s total non–performing assets and past due loans increased to $111.9 million or 2.7% of total loans from $100.0 million or 2.3% of total loans as of December 31, 2001. The increase in non–performing assets and past due loans was reflected primarily in repossessed assets as a result of the foreclosure of an agricultural loan charged–off during the quarter. There were also increases in non–performing commercial and residential mortgage loan portfolios. Non–performing loans (excluding other real estate owned) at June 30, 2002 increased to $99.2 million or 2.4% of total loans from $95.2 million or 2.1% of total loans at December 31, 2001. Repossessed assets increased $7.9 million during the first semester of 2002. Accruing loans past–due 90 days or more, at June 30, 2002 decreased $1.1 million from $5.5 million at December 31, 2001. The level of non–performing loans to total loans at June 30, 2002 stands at 2 .41% compared to 2.14% at December 31, 2001. As of June 30, 2002 the coverage ratio (allowance for loan losses to total non–performing loans) reached 53.69%, and if the estimated fair value of real estate collateral is considered, this ratio would reflect a coverage of 112.37%. The Corporation continuously monitors non–performing assets and has deployed additional resources to manage the non–performing loan portfolio.

As of June 30, 2002, total liabilities reached $6.9 billion, a decrease of $169.8 million over the December 31, 2001 balance. This decrease in total liabilities was principally due to decreases in federal funds purchased and other borrowings of $103.9 million, commercial paper issued of $174.3 million; partially offset by increases in securities sold under agreements to repurchase of $98.3 million and in deposits of $37.2 million.

At June 30, 2002, total deposits were $4.8 billion, reflecting a slight increase of $37.2 million or .8% over December 31, 2001. Average deposits for the quarter ended June 30, 2002 were $4.2 billion, an increase of 7.5% over same period in 2001. The Corporation continues its efforts to increase its deposit base by implementing a direct marketing campaign to maximize 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.

Stockholders´ equity was $606.9 million or 8.1% of total assets at June 30, 2002, compared to $592 million or 7.7% of total assets at December 31, 2001. This increase in stockholder´s equity was due to the net income generated during the six–month period ended June 30, 2002 and a decrease in accumulated other comprehensive loss resulting from an improvement in the fair value of securities available for sale and cash flow hedges. This increase was partially offset by the acquisition of treasury stock and cash dividends paid on common and preferred stock.

The Corporation declared cash dividends of $0.11 per common share to all stockholders of record as of June 7, 2002 and expects to continue to pay quarterly dividends.

On June 17, 2002, the Board of Directors of Santander BanCorp declared a 10% stock dividend on common stock to shareholders of record as of July 9, 2002. The common stock dividend will be distributed on July 31, 2002. Cash will be paid in lieu of fractional shares. The earnings per share computations for all periods presented in the accompanying unaudited financial statements have been retroactively adjusted to reflect this stock dividend as follows:

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

As of June 30, 2002, the Corporation was well capitalized under the regulatory framework for prompt corrective action. At June 30, 2002 the Corporation continues to exceed the regulatory risk–based capital requirements for well–capitalized institutions. Tier I capital to risk–adjusted assets and total capital ratios at June 30, 2002 were 11.82% and 12.89%, respectively and the leverage ratio was 8.61%.

Santander BanCorp was incorporated under the laws of the Commonwealth of Puerto Rico and is an 80.5% directly and indirectly owned subsidiary of Banco Santander Central Hispano, S.A. (BSCH). Santander BanCorp was created for the purpose of effecting a corporate reorganization and to serve as a bank holding company. Santander BanCorp now serves as the bank holding company for Banco Santander Puerto Rico and Subsidiaries (the Bank).

On September 26, 2000 the Corporation acquired 100% of the common stock of Inversiones y Desarrollos del Caribe, Inc. (INDECA) now doing business as Santander Insurance Agency, for the purpose of establishing an insurance agency. Santander Insurance Agency has been approved by the Commissioner of Insurance of Puerto Rico to operate as an Insurance and General Agent, effective October 10, 2000.

The Corporation adopted and implemented a Stock Repurchase Program in May 2000 and a second Program in December 2000. Under these programs the Corporation acquired 3% of its then outstanding common shares. During June 2001, the Corporation started a third Stock Repurchase Program under which it plans to acquire 3% of its outstanding common shares. As of June 30, 2002, 3,227,700 common shares amounting to $55,781,000 had been repurchased under these plans. With the Dividend Reinvestment and Cash Purchase Plans holders of common stock have the opportunity to automatically invest cash dividends to purchase more shares of the Corporation. Shareholders may also make, as frequently as once a month, optional cash payments for investment in additional shares of common stock.

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

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

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

Market Risk and Interest Rate Sensitivity

A key component of the Corporation´s asset and liability policy is the management of interest rate sensitivity. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the maturity or repricing characteristics of interest earning assets and interest bearing liabilities. For any given period, the pricing structure is matched when an equal amount of such assets and liabilities mature or reprice in that period. Any mismatch of interest earning assets and interest bearing liabilities is known as a gap position. A positive gap denotes asset sensitivity, which means that an increase in interest rates would have a positive effect on net interest income, while a decrease in interest rates would have a negative effect on net interest income. The Corporation is experiencing a positive gap, which denotes asset sensitivity and means that an increase in interest rates would have a positive effect on net interest income while a decrease in interest rates would ha ve a negative effect on net interest income. The decrease in interest margin from a reduction in interest rates would not be material.

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

The following table sets forth the repricing of the Corporation´s interest earning assets and interest bearing liabilities at June 30, 2002 and may not be representative of interest rate gap positions at other times. In addition, variations in interest rate sensitivity may exist within the repricing period presented due to the differing repricing dates within the period.

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 how profitable the balance sheet structure is and how this structure will react under different market scenarios. In order to carry out this task, management prepares two standardized reports with detailed information on the sources of interest income and expense: the "Financial Profitability Report", and the "Net Interest Income Shock Report." The former deals with historical data while the latter deals 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 assumed shifts in market interest rates throughout the same period. The important assumptions of this analysis are: ( i ) rate shifts are parallel and immediate throughout the yield curve; (ii) rate changes affect all assets and liabilities equally; (iii) interest bearing demand accounts and savings passbooks will only partially run off in a period of one year; and (iv) demand deposit accounts will run off in a period of ten years. Cash flows from assets and liabilities are assumed to be reinvested at market rates in similar instruments. The object is to simulate a dynamic gap analysis enabling a more accurate interest rate risk assessment.

The Corporation has established a risk tolerance loss limit of 5.0% for net interest income in a scenario of a 100 basis point (1.0%) increase in market rates. As of June 30, 2002, 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 $5.6 million which represents a 2.67% decrease in net interest income, which is below the established 5.0% limit. The Corporation has also established a risk tolerance limit of 9% for net interest income in a scenario of a 200 basis point (2.0%) increase in market rates. As of June 30, 2002, it was determined that the Corporation had a potential loss in net interest income of approximately $11.1 million, which represents a 5.30% decrease in net interest income, which is below the established 9% limit.

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 principal sources of funding for the Corporation are capital, core deposits from retail and commercial clients, and wholesale deposits raised in the interbank 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 June 30, 2002 the Corporation had $2.9 billion in unsecured lines of credit ($1.7 billion available) and $4.1 billion in collateralized lines of credit with banks and financial entities ($2.8 billion available). All securities in portfolio are highly rated and very liquid enabling the Corporation to treat them as a secondary source of liquidity.

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

Management monitors liquidity levels each month. The focus is on the liquidity ratio, which compares net liquid assets (all liquid assets not subject to collateral or repurchase agreements) against total liabilities plus contingent liabilities. As of June 30, 2002, the Corporation had a liquidity ratio of 15.37%. At June 30, 2002, the Corporation had total available liquid assets of $932 million. The Corporation believes it has sufficient liquidity to meet current obligations.

The operations of the Corporation are subject to the risk of interest rate fluctuations to the extent that interest–earning assets (including investment securities) and interest–bearing liabilities mature or reprice at different times or in differing amounts. Risk management activities are aimed at optimizing net interest income, given levels of interest rate risk consistent with the Corporation´s business strategies. The Corporation has only limited involvement with derivative financial instruments and uses them principally for hedging purposes.

Asset–liability risk management activities are conducted in the context of the Corporation´s liability sensitivity to interest rate changes. This liability sensitivity arises due to interest–bearing liabilities repricing more frequently than interest bearing assets. The opposite applies when rates are rising.

To achieve its risk management objectives, the Corporation uses a combination of derivative financial instruments, including interest rate swaps, caps, forward contracts and options. The Corporation is exposed to credit losses in the event of nonperformance by counterparties in certain derivative instruments. However, based on the periodic assessment of counterparties´ credit worthiness, the Corporation does not anticipate nonperformance by such counterparties.

As of June 30, 2002, the Corporation had the following derivative financial instruments outstanding:

As of December 31, 2001, the Corporation had the following derivative financial instruments outstanding:

Interest rate caps are similar to option contracts that require the writer to pay the purchaser at specified future dates, the amount (if any) by which a specified market interest rate exceeds the fixed cap rate applied to a notional principal amount. The purchaser pays a premium for transferring the risk of unfavorable interest rate changes to the option writer. The Corporation´s principal objective in holding interest rate caps is the management of interest rate risk and to secure future cash flows, specifically to control the Corporation´s cost of funds, related to Commercial Paper issued and Securities Sold Under Agreements to Repurchase, and to close the gap in a scenario of interest rates to the upside.

Interest rate swaps involve the exchange of fixed and floating interest rate payments without an exchange of the underlying principal. Net interest settlements of interest rate swaps are recorded as an adjustment to interest income or interest expense of the hedged item.

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. 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. The Corporation swapped $835 million during 2001 and $40 million during 2002 to hedge the rollover of a series of fixed–rate short–term debt instruments and these swaps were designated as cash flow hedges. During 2002, $875 million of these cash flow hedges were cancelled due to the fact that the forecasted timing of rate increases did not occur within the time frame expected by management. A loss of $1,347,000 was recognized on the cancellation of these swaps.

As of June 30, 2002, the Corporation had outstanding interest rate swap agreements, with a notional amount of approximately $340,767,000, maturing through the year 2022. The weighted average rate paid and received on these contracts is 1.90% and 4.75%, respectively. As of June 30, 2002, the Corporation had retail fixed rate certificates of deposit amounting to approximately $334.9 million swapped to create a floating rate source of funds and a $4.1 million variable rate loan was fixed at a spread over U.S. Treasury securities. These swaps were designated as fair value hedges. For the semester ended June 30, 2002, the Corporation recognized a loss of approximately $405,000 on fair value hedges due to hedge ineffectiveness which is included in other gains and losses 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 in accordance with SFAS No. 133. 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 on the consolidated statements of income. For the year ended December 31, 2001, the Corporation recognized a gain of approximately $140,000 and a loss of approximately $174,000 on the embedded derivative instruments and the option contracts, respectively related to the cumulative effect of a change in accounting principle. For the semester en ded June 30, 2002, a gain of approximately $641,000 was recorded on embedded options on stock indexed deposits and a loss of approximately $676,000 was recorded on the option contracts.

Forwards are contracts for the delayed purchase of specified securities at a specified price and time. These contracts qualify for hedge accounting in accordance with SFAS No. 133. The Corporation occasionally enters into foreign currency exchange contracts in order to satisfy the needs of its customers, and at the same time enters into foreign currency exchange contracts with a related party under the same terms and conditions. As of June 30, 2002, the Corporation had foreign currency exchange contracts with a notional amount of $5,596,000. For the six–month period ended June 30, 2002, the Corporation recorded a gain of $1,454 net of the related tax liability of $567 in other comprehensive income (loss).

The Corporation occasionally enters into certain derivative transactions with customers. During 2002 the Corporation entered into interest rate caps with customers and simultaneously hedged the caps with interest rate caps with a related and unrelated third party under the same terms and conditions. The Corporation recognized a net gain of $38,000 on this transaction.

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 or insurance protection with respect to such litigation and that any losses therefrom, whether or not insured, would not have a material adverse effect on the business or financial condition of the Corporation.

Not applicable

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Santander BanCorp´s Annual Meeting of Stockholders was held on April 30, 2002. A quorum was obtained with 38,394,348 shares represented in person or by proxy, which represented 97.57% of all votes eligible to be cast at the meeting. The following results were obtained for the proposals voted at the meeting:

The following four directors were elected for a three year term, ending April 2004:

A resolution to ratify the appointment of Arthur Andersen, LLP as the Corporation´s independent public accountants for fiscal year 2002, was approved with the following results:

Not applicable

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

Name of Corporation

The foregoing certification is being furnished solely pursuant to 12 U.S.C. sec. 1350 and is not being filed as part of the Report or as a separate disclosure document.