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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 March 31, 2003

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 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 March 31, 2003

 

 

Common Stock, $2.50 par value

42,398,954

 

 

SANTANDER BANCORP

CONTENTS

Page No.

Part I: Financial Information

Item 1. Financial Statements (Unaudited)

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

6

Item 2. Management's Discussion and Analysis of Financial Condition and

Results of Operations

20

Item 3. Quantitative and Qualitative Disclosures about Market Risk

35

Item 4. Controls and Procedures

38

Part II: Other Information

39

Item 1. Legal Proceedings

39

Item 2. Changes in Securities

Item 3. Defaults upon Senior Securities

39

Item 4. Submission of Matters to a Vote of Security Holders

39

Item 5. Other Information

39

Item 6. Exhibits and Reports on Form 8-K

39

Signatures

41

Certifications

42

 

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 of 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

Consolidated Balance Sheets (unaudited)

March 31, 2003 and December 31, 2002

(Dollars in thousands, except per share data)

 

March 31, 2003

December 31, 2002

CASH AND CASH EQUIVALENTS:

Cash and due from banks

$ 109,512

$ 98,302

Interest-bearing deposits

197,782

268,620

Federal funds sold and securities purchased under agreements to resell

342,350

263,500

Total cash and cash equivalents

649,644

630,422

INVESTMENT SECURITIES AVAILABLE FOR SALE, at fair value:

Securities pledged that can be repledged

612,299

389,342

Other investment securities available for sale

352,361

882,348

Total investment securities available for sale

964,660

1,271,690

INVESTMENT SECURITIES HELD TO MATURITY, at amortized cost:

Securities pledged that can be repledged

783,738

956,681

Other investment securities held to maturity

121,836

139,677

Total investment securities held to maturity

905,574

1,096,358

LOANS HELD FOR SALE, net

226,311

197,613

LOANS, net

3,814,639

3,597,314

PREMISES AND EQUIPMENT, net

61,606

63,198

ACCRUED INTEREST RECEIVABLE

38,460

41,110

GOODWILL

10,552

10,552

INTANGIBLE ASSETS

5,864

11,129

OTHER ASSETS

115,843

145,814

$ 6,793,153

$ 7,065,200

LIABILITIES AND STOCKHOLDERS' EQUITY

DEPOSITS:

Non-interest bearing

$ 661,532

$ 628,324

Interest bearing

3,393,197

3,891,338

Total deposits

4,054,729

4,519,662

FEDERAL FUNDS PURCHASED AND OTHER BORROWINGS

224,700

245,960

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

1,270,492

1,250,039

COMMERCIAL PAPER ISSUED

249,798

39,991

TERM NOTES

304,794

307,464

ACCRUED INTEREST PAYABLE

26,962

25,050

OTHER LIABILITIES

88,364

99,706

6,219,839

6,487,872

CONTINGENCIES AND COMMITMENTS

STOCKHOLDERS' EQUITY:

Series A Preferred stock, $25 par value; 10,000,000 shares authorized;

2,610,008 shares issued and outstanding

65,250

65,250

Common stock, $2.50 par value; 200,000,000 shares authorized, 46,410,214

shares issued in March 2003 and December 2002; 42,398,954 and 42,566,454

shares outstanding in March 2003 and December 2002, respectively

116,026

116,026

Capital paid in excess of par value

187,742

187,742

Treasury stock at cost, 4,011,260 and 3,843,760 shares in March 2003

and December 2002, respectively

(67,552)

(65,268)

Accumulated other comprehensive loss, net of taxes

(11,341)

(12,692)

Retained earnings-

Reserve fund

116,482

116,482

Undivided profits

166,707

169,788

Total stockholders' equity

573,314

577,328

$ 6,793,153

$ 7,065,200

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

Santander Bancorp

Consolidated Statements of Income (unaudited)

For the Quarters ended March 31, 2003 and 2002

(Dollars in thousands, except per share data)

 

 

For the quarters ended

March 31,

March 31,

2003

2002

INTEREST INCOME:

Loans

$ 60,262

$ 77,820

Investment securities

18,001

16,056

Interest bearing deposits

150

274

Federal funds sold and securities purchased under

agreements to resell

390

1,395

Total interest income

78,803

95,545

INTEREST EXPENSE:

Deposits

16,067

20,843

Securities sold under agreements to repurchase

and other borrowings

19,101

19,775

Subordinated capital notes

-

225

Total interest expense

35,168

40,843

Net interest income

43,635

54,702

PROVISION FOR LOAN LOSSES

12,065

11,972

Net interest income after provision for loan losses

31,570

42,730

OTHER INCOME:

Service charges, fees and other

10,231

10,434

Gain on sale of securities

4,669

8,141

Gain on sale of mortgage servicing rights

125

123

Gain (loss) on derivatives

92

(231)

Other gains and losses

3,156

4,693

Total other income

18,273

23,160

OTHER OPERATING EXPENSES:

Salaries and employee benefits

18,889

19,535

Occupancy costs

3,225

3,330

Equipment expenses

2,219

3,102

Other operating expenses

22,959

21,376

Total other operating expenses

47,292

47,343

Income before (benefit) provision for income tax

2,551

18,547

(BENEFIT) PROVISION FOR INCOME TAX

(611)

4,629

NET INCOME

3,162

13,918

DIVIDENDS TO PREFERRED SHAREHOLDERS

1,142

1,142

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

$ 2,020

$ 12,776

BASIC AND DILUTED EARNINGS PER COMMON SHARE

$ 0.05

$ 0.30

 

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

Santander Bancorp

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

For the Quarter ended March 31, 2003 and the Year ended December 31, 2002

(Dollars in thousands, except per share data)

March 31, 2003

December 31, 2002

Preferred Stock:

Balance at beginning of period

$ 65,250

$ 65,250

Balance at end of period

65,250

65,250

Common Stock:

Balance at beginning of period

116,026

106,212

Stock dividend distributed

-

9,814

Balance at end of period

116,026

116,026

Capital Paid in Excess of Par Value:

Balance at beginning of period

187,742

122,457

Stock dividend distributed

-

65,285

Balance at end of period

187,742

187,742

Treasury stock at cost:

Balance at beginning of period

(65,268)

(53,277)

Stock repurchased at cost

(2,284)

(11,991)

Balance at end of period

(67,552)

(65,268)

Accumulated Other Comprehensive Loss, net of taxes:

Balance at beginning of period

(12,692)

(11,347)

Unrealized net gain on investment securities available

for sale, net of tax

891

7,382

Unrealized net gain (loss) on cash flow hedges, net of tax

460

(180)

Minimum pension liability, net of tax

-

(8,547)

Balance at end of period

(11,341)

(12,692)

Reserve Fund:

Balance at beginning of period

116,482

114,418

Transfer from undivided profits

-

2,064

Balance at end of period

116,482

116,482

Undivided Profits:

Balance at beginning of period

169,788

248,300

Net income

3,162

20,906

Transfers

-

(2,064)

Deferred tax benefit amortization

(4)

(35)

Common stock cash dividends

(5,097)

(17,652)

Preferred stock cash dividends

(1,142)

(4,568)

Stock dividend distributed

-

(75,099)

Balance at end of period

166,707

169,788

Total stockholders' equity

$ 573,314

$ 577,328

 

 

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

Santander Bancorp

Consolidated Statements of Comprehensive Income (Unaudited)

For the Quarters ended March 31, 2003 and 2002

(Dollars in thousands, except per share data)

 

 

For the quarters ended

March 31,

March 31,

2003

2002

Comprehensive income

Net income

$ 3,162

$13,918

Other comprehensive income (loss), net of tax:

Unrealized gains (losses) on investments securities

available for sale, net of tax

2,001

408

Reclassification adjustment for gains and losses

included in net income, net of tax

(1,510)

2,506

Unrealized gains on investments securities transferred

to the held to maturity category, net of amortization

400

-

Unrealized gains (losses) on investment securities

available for sale, net of tax

891

2,914

Unrealized gains (losses) on cash flow hedges, net of tax

460

593

Reclassification adjustment for gains and losses

included in net income, net of tax

-

1,545

Unrealized gains (losses) on cash flow hedges, net of tax

460

2,138

Other comprehensive income (loss), net of tax

1,351

5,052

Comprehensive income

$ 4,513

$18,970

 

 

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

Santander Bancorp

Consolidated Statements of Cash Flows (Unaudited)

For the Quarters ended March 31, 2003 and 2002

(Dollars in thousands, except per share data)

March 31,

March 31,

2003

2002

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$ 3,162

$ 13,918

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

6,027

5,597

Provision for loan losses

12,065

11,972

Gain on sale of securities

(4,669)

(8,141)

Gain on derivatives

(92)

231

Trading losses

-

859

Net premium amortization (discount accretion) on securities

2,235

(3,060)

Net premium amortization on loans

106

97

Purchases and originations of loans held for sale

(142,123)

(112,993)

Proceeds from sales of loans held for sale

19,864

67,750

Repayments of loans held for sale

93,889

59,861

Proceeds from sales of trading securities

-

146,681

Purchases of trading securities

-

(147,540)

Decrease in accrued interest receivable

2,650

240

Decrease (increase) in other assets

27,877

(20,064)

Increase (decrease) in accrued interest payable

1,912

(998)

Decrease in other liabilities

(10,013)

(8)

Total adjustments

9,728

484

Net cash provided by operating activities

12,890

14,402

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sales of investment securities available for sale

556,851

1,181,693

Proceeds from maturities of investment securities available for sale

800,189

2,059,300

Purchases of investment securities available for sale

(1,048,593)

(3,088,840)

Proceeds from maturities of investment securities held to maturity

149,940

266,765

Purchases of investment securities held to maturity

(6,970)

(1,197,444)

Repayment of securities and securities called

49,822

222,303

Purchases of mortgage loans

(236,277)

(19,050)

Net decrease in loans

6,403

137,105

Capital expenditures

(432)

(963)

Net cash provided by (used in) investing activities

270,933

(439,131)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net decrease in deposits

(462,408)

(353,836)

Net (decrease) increase in federal funds purchased and other borrowings

(21,260)

332,000

Net increase (decrease) in securities sold under agreements to repurchase

20,453

(228,930)

Net increase in commercial paper issued

209,807

374,681

Net decrease in term notes

(2,670)

(785)

Repurchase of common stock

(2,284)

(854)

Dividends paid

(6,239)

(5,481)

Net cash (used in) provided by financing activities

(264,601)

116,795

NET CHANGE IN CASH AND CASH EQUIVALENTS

19,222

(307,934)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

630,422

1,146,727

CASH AND CASH EQUIVALENTS, END OF PERIOD

$ 649,644

$ 838,793

 

 

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

SANTANDER BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

 

  1. Summary of Significant Accounting Policies:

The accounting and reporting policies of Santander BanCorp (the Corporation), an 89% owned subsidiary of Santander Central Hispano, S.A. conform with accounting principles generally accepted in the United States of America (hereinafter referred to as "generally accepted accounting principles" or "GAAP") and with general practices within the financial services industry. The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. The results of operations and cash flows for the three-month periods ended March 31, 2003 and 2002 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the Consolidated Financial Statements and footnotes thereto for the year ended December 31, 2002, included in the Corporation's Annual Report on Form 10-K.

The interim consolidated financial statements included herein are unaudited, but reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods presented. Adjustments included herein are of a normal recurring nature and include appropriate estimated provisions. The interim consolidated financial statements as of March 31, 2003 included herein have been prepared on a consistent basis with the year-end audited financial statements as of December 31, 2002. Certain reclassifications have been made to prior periods financial statements to conform them to the current period presentation.

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

Nature of Operations and Use of Estimates

Santander BanCorp is a bank holding company offering a full range of financial services through its wholly owned banking subsidiary Banco Santander Puerto Rico. The Corporation also engages in mortgage banking and insurance agency services through its non-banking subsidiaries, Santander Mortgage Corporation and Santander Insurance Agency, respectively.

The Corporation was reorganized on May 2, 2000 under the laws of the Commonwealth of Puerto Rico to serve as the bank holding company for Banco Santander Puerto Rico and Subsidiaries (the "Bank") and other entities as management deemed appropriate. As a result of this reorganization each of the Bank's outstanding shares of common stock was converted into one share of common stock of the new bank holding company. The reorganization was recorded at historical cost in a manner similar to a pooling of interests. All significant intercompany balances and transactions were eliminated.

On September 26, 2000, the Corporation acquired 100% of the common stock of Santander Insurance Agency, formerly known as Inversiones y Desarrollos del Caribe, Inc. (INDECA) for the purpose of establishing an insurance agency. Santander Insurance Agency was approved by the Commissioner of Insurance of Puerto Rico to operate as an insurance and general agent, effective October 10, 2000.

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation, Santander Insurance Agency, the Bank and the Bank's wholly owned subsidiaries, Santander Mortgage Corporation and Santander International Bank of Puerto Rico. All significant intercompany balances and transactions have been eliminated in consolidation.

Goodwill

 

The Corporation adopted Statement of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets" effective January 1, 2002. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board ("APB") Opinion No. 17, "Intangible Assets". SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. 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. Intangible assets with finite useful lives will continue to be amortized over their useful lives.

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. The Corporation accounts for its derivative instruments following the provisions of Statement of Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities", as amended. The Corporation engages on a limited basis in derivative financial instruments for trading purposes. SFAS No. 133, as amended establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the expos ure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

Earnings Per Common Share

Basic and diluted earnings per common share are computed by dividing net income distributable to common shareholders, 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, after giving retroactive effect to the stock dividend declared on June 17, 2002, were 43,258,960 and 43,290,204 for the quarters ended March 31, 2003 and 2002, respectively. Basic and diluted earnings per share are the same since no stock options or other stock equivalents were outstanding during the periods ended March 31, 2003 and 2002.

Recent Accounting Pronouncements that Affect the Corporation

 

In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145 (SFAS No. 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt".SFAS No. 4 required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002.

SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases", to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment became effective for transactions occurring after May 15, 2002. The implementation of SFAS No. 145 did not have a material effect on the Corporation's consolidated results of operations or consolidated financial position.

 

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (SFAS No. 146), "Accounting for Costs Associated with Exit or Disposal Activities". This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. This Statement applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The Corporation's adoption of this statement did not have a material effect on its consolidated financial position and results of operations.

In November 2002, the FASB issued 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." This interpretation elaborates on the disclosures to be made by a guarantor in the financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Certain guarantee contracts are excluded from both the disclosure and recognition requirements for this Interpretation, including, among others, guarantees related to commercial letters of credit and loan commitments. The initial recognition and initial measurement provisions of FIN 45 are applicable for guarantees issued or modified after December 3 1, 2002. Adoption of the recognition and measurement provisions is not expected to have a significant effect on the Corporation's financial condition and results of operations. The disclosure provisions of FIN 45 were effective for financial statements of fiscal years ending after December 15, 2002 and did not have a significant effect on the Corporation's financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." FIN 46 addresses consolidation by business enterprises of variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not issue voting interests (or other interests with similar rights) or (b) the total equity investment at risk is not sufficient to permit the entity to finance its activities. FIN No. 46 requires an enterprise to consolidate a variable interest entity if that enterprise has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both. Qualifying Special Purpose Entities are exempt from the consolidation requirements. The consolidation requirements of FIN No. 46 apply immediately to vari able interest entities created after January 31, 2003. The consolidation requirements apply to variable interest entities created before February 1, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The Adoption of FIN 46 is not expected to have a significant effect on the Corporation's financial position or results of operations.

2. Investment Securities Available for Sale:

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

March 31, 2003

Gross

Gross

Weighted

Amortized

Unrealized

Unrealized

Fair

Average

Cost

Gains

Losses

Value

Yield

(In thousands)

Treasury and agencies of the United States Government:

Within one year

$ 118,354

$ -

$ 7

$ 118,347

1.18%

After one year but within five years

591,117

3,976

-

595,093

2.01%

709,471

3,976

7

713,440

1.87%

Commonwealth of Puerto Rico and its subdivisions:

Within one year

35,052

-

3

35,049

1.21%

After one year but within five years

7,385

122

-

7,507

3.53%

After five years but within ten years

5,970

53

-

6,023

4.23%

48,407

175

3

48,579

1.93%

Mortgage-backed securities-

Over ten years

202,210

526

95

202,641

4.79%

$ 960,088

$ 4,677

$ 105

$ 964,660

2.47%

December 31, 2002

Gross

Gross

Weighted

Amortized

Unrealized

Unrealized

Fair

Average

Cost

Gains

Losses

Value

Yield

(In thousands)

Treasury and agencies of the United States Government:

Within one year

$ 496,741

$ 3

$ 14

$ 496,730

1.38%

After one year but within five years

722,563

3,873

14

726,422

2.12%

1,219,304

3,876

28

1,223,152

1.86%

Commonwealth of Puerto Rico and its subdivisions:

Within one year

35,052

-

7

35,045

1.37%

After one year but within five years

7,385

92

-

7,477

3.53%

After five years but within ten years

5,970

46

-

6,016

4.23%

48,407

138

7

48,538

2.05%

$ 1,267,711

$ 4,014

$ 35

$1,271,690

1.82%

 

 

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.

 

3. Investment Securities Held to Maturity:

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

 

 

March 31, 2003

Gross

Gross

Weighted

Amortized

Unrealized

Unrealized

Fair

Average

Cost

Gains

Losses

Value

Yield

(In thousands)

Treasury and agencies of the United States Government-

After one year but within five years

$ 783,161

$ 65,172

$ -

$ 848,333

5.04%

783,161

65,172

-

848,333

5.04%

Commonwealth of Puerto Rico and its subdivisions:

Within one year

3,922

23

-

3,945

4.74%

After one year but within five years

23,618

958

-

24,576

5.40%

After five years but within ten years

1,157

9

-

1,166

6.79%

Over ten years

11,271

407

9

11,669

6.40%

39,968

1,397

9

41,356

5.66%

Mortgage-backed securities:

Within one year

14

-

-

14

9.30%

After one year but within five years

6,805

201

-

7,006

4.17%

After five years but within ten years

8,697

704

-

9,401

8.78%

Over ten years

46,729

690

1

47,418

2.91%

62,245

1,595

1

63,839

3.88%

Foreign governments:

Within one year

50

-

-

50

6.20%

After one year but within five years

150

-

-

150

7.14%

200

-

-

200

6.91%

Other securities

20,000

-

-

20,000

3.93%

$ 905,574

$ 68,164

$ 10

$ 973,728

4.64%

 

December 31, 2002

Gross

Gross

Weighted

Amortized

Unrealized

Unrealized

Fair

Average

Cost

Gains

Losses

Value

Yield

(In thousands)

Treasury and agencies of the United States Government:

Within one year

$ 149,363

$ 88

$ -

$ 149,451

2.35%

After one year but within five years

782,892

67,276

-

850,168

5.04%

932,255

67,364

-

999,619

5.04%

Commonwealth of Puerto Rico and its subdivisions:

Within one year

4,104

19

-

4,123

4.79%

After one year but within five years

24,460

760

-

25,220

5.43%

After five years but within ten years

1,159

15

-

1,174

6.79%

Over ten years

11,294

273

-

11,567

6.40%

41,017

1,067

-

42,084

5.68%

Mortgage-backed securities:

Within one year

13

-

-

13

10.47%

After one year but within five years

7,115

185

-

7,300

3.86%

After five years but within ten years

10,034

789

1

10,822

8.70%

Over ten years

79,474

1,389

38

80,825

3.91%

96,636

2,363

39

98,960

4.40%

Foreign governments:

Within one year

50

-

-

50

6.20%

After one year but within five years

150

-

-

150

7.14%

200

-

-

200

6.91%

Other securities

26,250

-

-

26,250

4.87%

$1,096,358

$ 70,794

$ 39

$ 1,167,113

4.64%

 

 

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.

  

4. Loans

The Corporation's loan portfolio at March 31, 2003 and December 31, 2002 consists of the following:

March 31, 2003

December 31, 2002

(In thousands)

Commercial and industrial

$ 1,964,098

$ 1,971,800

Consumer

488,642

525,127

Construction

303,381

309,964

Mortgage

1,128,996

861,324

3,885,117

3,668,215

Unearned income

(11,511)

(12,945)

 

 

 

 

 

(58,967)

(57,956)

$ 3,814,639

$ 3,597,314

 

 

5. Allowance for Loan Losses:

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

For the quarters ended

March 31,

2003

2002

(In thousands)

Balance at beginning of period

$ 57,956

$ 52,857

Provision for loan losses

12,065

11,972

70,021

64,829

Losses charged to the allowance:

Commercial

2,562

4,230

Consumer

11,079

11,525

13,641

15,755

Recoveries:

Commercial

1,417

999

Construction

-

2

Consumer

1,170

2,952

2,587

3,953

Net loans charged-off

11,054

11,802

Balance at end of period

$ 58,967

$ 53,027

 

  1. Other Intangibles Assets

The Corporation's other intangible assets are composed principally of mortgage servicing rights. The estimated aggregate amortization expense for each of the five succeeding years and thereafter of these intangible assets is the following:

Year

Amortization

2003

$ 2,187

2004

681

2005

569

2006

569

2007

554

Thereafter

1,304

Total

$ 5,864

 

7. Short-Term Borrowings:

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

March 31, 2003

Federal Funds

Securities Sold

Commercial

Purchased and

Under Agreements

Paper

Other Borrowings

to Repurchase

Issued

(In thousands)

Amount outstanding at period-end

$ 224,700

$ 1,270,492

$ 249,798

Average indebtedness outstanding during the period

$ 208,719

$ 1,357,801

$ 81,728

Maximum amount outstanding during the period

$ 352,160

$ 1,584,476

$ 249,798

Average interest rate for the period

1.40%

4.22%

1.39%

Average interest rate at period end

1.35%

4.33%

1.34%

December 31, 2002

Federal Funds

Securities Sold

Commercial

Purchased and

Under Agreements

Paper

Other Borrowings

to Repurchase

Issued

(In thousands)

Amount outstanding at year-end

$ 245,960

$ 1,250,039

$ 39,991

Average indebtedness outstanding during the year

$ 331,940

$ 904,012

$ 265,355

Maximum amount outstanding during the year

$ 817,000

$ 1,250,039

$ 724,009

Average interest rate for the year

1.87%

4.98%

1.90%

Average interest rate at year end

1.63%

4.44%

1.51%

 

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

March 31,

December 31,

2003

2002

(In thousands)

Federal funds purchased and other borrowings:

Within thirty days

$ 24,700

$ 45,960

Over ninety days

200,000

200,000

Total

$ 224,700

$ 245,960

Securities sold under agreements to repurchase:

Within thirty days

$ 195,486

$ 175,033

Over ninety days

1,075,006

1,075,006

Total

$ 1,270,492

$ 1,250,039

Commercial paper issued:

Within thirty days

$ 249,798

$ 39,991

Total

$ 249,798

$ 39,991

 

As of March 31, 2003 and December 31, 2002, the weighted average maturity of Federal funds purchased and other borrowings over ninety days was 24.36 months and 27.32 months, respectively.

 

As of March 31, 2003, securities sold under agreements to repurchase (classified by counterparty) were as follows:

 

Fair Value

Weighted

Balance of

of Underlying

Average Maturity

Borrowings

Securities

in Months

(In thousands)

Credit Suisse First Boston Corp.

$ 300,000

$ 341,157

34.48

Federal Home Loan Bank of New York

200,000

274,779

29.54

JP Morgan Securities, Inc.

125,000

142,752

29.47

Lehman Brothers, Inc.

250,006

281,534

100.91

UBS Paine Webber

50,000

50,086

0.03

Salomon Smith Barney, Inc.

345,486

369,384

23.11

$1,270,492

$1,459,692

 

 

The following investment securities were sold under agreements to repurchase:

March 31, 2003

Carrying Value

Fair Value

Weighted

of Underlying

Balance of

of Underlying

Average

Underlying Securities

Securities

Borrowings

Securities

Interest Rate

(In thousands)

Obligations of U.S. Government agencies

and corporations

$ 1,376,577

$ 1,164,530

$ 1,440,183

3.90%

Mortgage-backed Securities

19,460

105,962

19,509

1.81%

Total

$ 1,396,037

$ 1,270,492

$ 1,459,692

3.87%

December 31, 2002

Carrying Value

Fair Value

Weighted

of Underlying

Balance of

of Underlying

Average

Underlying Securities

Securities

Borrowings

Securities

Interest Rate

(In thousands)

Obligations of U.S. Government agencies

and corporations

$ 1,307,390

$ 1,211,340

$ 1,373,830

3.91%

Mortgage-backed Securities

38,633

38,699

39,173

3.81%

Total

$ 1,346,023

$ 1,250,039

$ 1,413,003

3.89%

 

8. Stockholders' Equity:

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 was distributed on July 31, 2002. Cash was paid in lieu of fractional shares. The earnings per share computations for March 2002 presented in the accompanying unaudited consolidated financial statements have been adjusted retroactively to reflect this stock dividend, as follows:

Quarter ended

March 31,

2002

(Dollars and number of shares in thousands, except earnings per common share data)

Net income

$ 13,918

Dividends to preferred stockholders

1,142

Net income available to common

shareholders

$ 12,776

Average number of common shares outstanding

prior to common stock dividend

39,365

Common stock dividend

3,925

Adjusted average number of common shares

43,290

Basic and diluted earnings per common share

$ 0.30

9. Derivative Financial Instruments:

As of March 31, 2003, the Corporation had the following derivative financial instruments outstanding:

Notional Value

Fair Value

Gain (Loss) for the period ended March 31, 2003

Other Comprehensive Income (Loss)* for the period ended March 31, 2003

(In thousands)

CASH FLOW HEDGES

Interest rate swaps

$ 100,000

$ (10,021)

$ -

$ 460

FAIR VALUE HEDGES

Interest rate swaps

284,366

(1,545)

(22)

-

OTHER DERIVATIVES

Options

11,650

116

(56)

-

Embedded options on

stock indexed deposits

(11,096)

(116)

54

-

Forward foreign currency

exchange contracts

6,335

2

-

-

Interest rate caps

20,365

(266)

(8)

-

Customer interest rate caps

(20,365)

266

29

-

Interest Rate Swaps -customer

108,670

1,660

215

Interest Rate Swaps

108,670

(1,191)

(120)

$ 92

$ 460

*Net of tax

 

 

As of December 31, 2002, the Corporation had the following derivative financial instruments outstanding:

Notional Value

Fair Value

Gain (Loss) for the year ended December 31, 2002

Other Comprehensive Income (Loss)* for the year ended December 31, 2002

(In thousands)

CASH FLOW HEDGES

Interest rate swaps

$ 100,000

$ (10,775)

$ (1,347)

$ (2,012)

FAIR VALUE HEDGES

Interest rate swaps

332,687

953

(356)

-

OTHER DERIVATIVES

Options

11,650

172

(814)

-

Embedded options on

stock-indexed deposits

(11,096)

170

1,978

-

Forward foreign currency

exchange contracts

5,841

2

-

1

Interest rate caps

18,856

(248)

(304)

-

Customer interest rate caps

(18,856)

248

464

-

Customer Interest rate swaps

85,623

1,345

1,345

Interest rate swaps

85,623

(1,071)

(1,071)

$ (105)

$ (2,011)

*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. As of March 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 $6.1 million of which the Corporation expects to reclassify into earnings $2.7 million, net of tax, during the next nine months. As of December 31, 2002, the total amount, net of tax, included in accumulated other comprehensive income pertaining to the $100 million interest rate swap was a n unrealized loss of $6.6 million. In addition to the cash flow hedge of $100 million of interest rate swaps originated during July 2000, the Corporation swapped $40 million during 2002 and $835 million during 2001 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 March 31, 2003, the Corporation also had outstanding interest rate swap agreements, with a notional amount of approximately $284.4 million, maturing through the year 2022. The weighted average rate paid and received on these contracts is 1.39% and 4.91%, respectively. As of March 31, 2003, the Corporation had retail fixed rate certificates of deposit amounting to approximately $279.1 million and a $3.8 million fixed rate loan swapped to create a floating rate source of funds. These swaps were designated as fair value hedges. For the quarter ended March 31, 2003, the Corporation recognized a loss of approximately $22,000 on fair value hedges due to hedge ineffectiveness, which is included in other gains and losses in the consolidated statements of income.

As of December 31, 2002, the Corporation had outstanding interest rate swap agreements, with a notional amount of approximately $332.7 million, maturing through the year 2022. The weighted average rate paid and received on these contracts is 1.61% and 5.09%, respectively. As of December 31, 2002, the Corporation had retail fixed rate certificates of deposit amounting to approximately $327.5 million and a $3.9 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, 2002, the Corporation recognized a loss of approximately $393,000 on fair value hedges due to hedge ineffectiveness, which is included in other gains and losses in the consolidated statements of income. Also, during 2002, $50 million of the Corporation's fair value hedges were cancelled, resulting in a gain of $37,000.

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 quarter ended March 31, 2003, a gain of approximately $54,000 was recorded on embedded options on stock-indexed deposits and a loss of approximately $56,000 was recorded on the option contracts. For the year ended December 31, 2002, a gain of approximately $1,978,000 was recorded on embedded options on stock-indexed deposits and a loss of approximately $814,000 was recorded on the option contracts.

Forwards are contracts for the delayed purchase of specified securities at a specified price and time, and qualify for hedge accounting in accordance with SFAS No. 133. The Corporation occasionally enters into foreign currency exchange forwards in order to satisfy the needs of its customers. As of March 31, 2003, the Corporation had foreign currency exchange forwards with a notional amount of $6,335,000. As of March 31, 2003, the total amount, net of tax, included in other comprehensive income (loss) related to these currency exchange forwards was an unrealized gain of $1,246. As of December 31, 2002, the Corporation had foreign currency exchange forwards with a notional amount of $5,841,000. For the year ended December 31, 2002, the Corporation recorded a gain of $2,042, net of the related tax liability of $796 in other comprehensive income (loss).

The Corporation enters into certain derivative transactions with customers. The Corporation entered into interest rate caps, collars and swaps with customers and simultaneously hedged the Bank's position with related and unrelated third parties under the same terms and conditions. For the quarter ended March 31, 2003 and the year ended December 31, 2002, the Corporation recognized a net gain of $116,000 and $434,000, respectively, on these transactions.

 

10. Contingencies and Commitments:

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

 

11. Segment Information:

Types of Products and Services

The Corporation has three reportable segments: Retail Banking, Mortgage Banking, and Investments. 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.

Management Policy in Identifying Reportable Segments

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 quarters ended March 31, 2003 and 2002. None of the following items have been added or deducted in the determination of operating segment profits: general corporate expenses and income taxes. 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 department.

 

March 31, 2003

(In thousands)

Retail

Mortgage

Consolidated

Banking

Banking

Investments

Other

Elimination

Totals

Total external revenue

$ 52,336

$ 19,192

$ 23,358

$ 7,183

$ (4,993)

$ 97,076

Intersegment revenue

958

-

6

283

(1,247)

-

Interest income

43,405

17,801

18,551

15

(969)

78,803

Interest expense

11,941

3,750

20,445

(1,937)

969

35,168

Depreciation and amortization

1,507

391

54

4,075

-

6,027

Segment income before provision for income tax

5,499

13,367

1,296

(13,864)

(3,747)

2,551

Segment assets

2,937,701

1,377,432

2,431,726

786,218

(739,924)

6,793,153

 

March 31, 2002

(In thousands)

Retail

Mortgage

Consolidated

Banking

Banking

Investments

Other

Elimination

Totals

Total external revenue

$ 68,459

$ 21,512

$ 26,898

$ 16,097

$ (14,261)

$ 118,705

Intersegment revenue

743

-

-

62

(805)

-

Interest income

58,688

19,836

17,742

-

(721)

95,545

Interest expense

16,505

5,904

19,155

-

(721)

40,843

Depreciation and amortization

1,814

689

22

3,072

-

5,597

Segment income before provision for income tax

15,810

13,038

6,760

(3,604)

(13,457)

18,547

Segment assets

3,311,847

1,140,750

3,113,883

880,218

(658,506)

7,788,192

 

Reconciliation of Segment Information to Consolidated Amounts

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

 

March 31,

2003

2002

(In thousands)

Revenues-

Total revenues for reportable segments

$ 94,886

$ 116,869

Other revenues

7,183

16,097

Elimination of intersegment revenues

(4,993)

(14,261)

Total consolidated revenues

$ 97,076

$ 118,705

Profit or loss-

Total profit or loss of reportable segments

$ 20,162

$ 35,608

Other profit or loss

(13,864)

(3,604)

Intersegment profits

(3,747)

(13,457)

Consolidated income before tax

$ 2,551

$ 18,547

Assets-

Total assets for reportable segments

$ 6,746,859

$ 7,566,480

Assets not attributed to segments

786,218

880,218

Elimination of intercompany assets

(739,924)

(658,506)

Total consolidated assets

$ 6,793,153

$ 7,788,192

 

 

 

 

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

SANTANDER BANCORP

Selected Financial Data

For the quarter ended

(Dollars in thousands, except per share data)

March 31,

2003

2002

CONDENSED INCOME STATEMENTS

Interest income

$ 78,803

$ 95,545

Interest expense

35,168

40,843

Net interest income

43,635

54,702

Gain on sale of securities

4,669

8,141

Gain on sale of mortgage servicing rights

125

123

Other income

13,479

14,896

Operating expenses

47,292

47,343

Provision for loan losses

12,065

11,972

Income tax

(611)

4,629

Net income

$ 3,162

$ 13,918

PER PREFERRED SHARE DATA

Outstanding shares:

Average

2,610,008

2,610,008

End of period

2,610,008

2,610,008

Cash Dividend per Share

$ 0.44

$ 0.44

PER COMMON SHARE DATA

Net income (1)

$ 0.05

$ 0.30

Book value (1)

$ 11.98

$ 12.47

Outstanding shares (1):

Average

42,258,960

43,290,204

End of period

42,398,954

43,269,514

Cash Dividend per Share

$ 0.11

$ 0.11

AVERAGE BALANCES

Loans held for sale and loans, net of allowance for loans losses

3,809,112

4,339,760

Allowance for loan losses

60,989

55,435

Earning assets

6,111,592

6,560,599

Total assets

6,441,849

6,883,423

Deposits

3,804,612

4,184,251

Borrowings

1,953,170

1,987,943

Preferred equity

65,250

65,250

Common equity

509,140

534,449

PERIOD END BALANCES

Loans held for sale and loans, net of allowance for loans losses

4,040,950

4,244,163

Allowance for loan losses

58,967

53,027

Earning assets

6,660,894

7,543,979

Total assets

6,793,153

7,788,192

Deposits

4,054,729

4,431,336

Borrowings

2,049,784

2,637,602

Preferred equity

65,250

65,250

Common equity

508,064

539,386

SELECTED RATIOS

Performance:

Net interest margin on a tax-equivalent basis

3.19%

3.57%

Efficiency ratio (2)

76.74%

65.08%

Return on average total assets (on an annualized basis)

0.20%

0.82%

Return on average common equity (on an annualized basis)

1.61%

9.69%

Average net loans/average total deposits

100.12%

103.72%

Average earning assets/average total assets

94.87%

95.31%

Average stockholders' equity/average assets

8.92%

8.71%

Fee income to average assets (annualized)

0.64%

0.61%

Capital:

Tier I capital to risk-adjusted assets

12.39%

11.56%

Total capital to risk-adjusted assets

13.64%

12.60%

Leverage Ratio

8.65%

8.56%

Asset quality:

Nonperforming loans to total loans

2.88%

2.45%

Annualized net charge-offs to average loans

1.16%

1.09%

Allowance for loan losses to period-end loans

1.44%

1.23%

Allowance for loan losses to nonperforming loans

49.94%

50.31%

Allowance for loan losses to nonperforming loans plus

accruing loans past-due 90 days or more

48.89%

48.77%

Nonperforming assets to total assets

2.00%

1.42%

Recoveries to charge-offs

18.96%

25.09%

*Per share data is based on the average number of shares outstanding during the periods

(1) After giving retroactive effect to the stock dividend declared on June 17, 2002

(2) Operating expenses divided by net interest income on a tax equivalent basis, plus other income excluding securities gains and losses

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

Critical Accounting Policies

The consolidated financial statements of the Corporation are prepared in accordance with accounting principles generally accepted in the United States of America (hereinafter referred to as "generally accepted accounting principles" or "GAAP") and with general practices within the financial 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's critical accounting policies are detailed in the Financial Review and Supplementary Information section of the Corporation's Form 10-K for the year ended December 31, 2002.

Results of Operations for the Quarter Ended March 31, 2003

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

Santander BanCorp (the Corporation) reported net income of $3.2 million for the first quarter of 2003, compared with $13.9 million for the same period in 2002. Earnings per common share ("EPS") for the first quarter of 2003 were $0.05, based on 42,258,960 average shares. Earnings per common share for the first quarter of 2002 were $0.30, based on 43,290,204 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 three-month period ended March 31, 2003 were 0.20 % and 1.61 %, respectively, compared with 0.82% and 9.69% reported during the first three- month period of 2002.

Results of operations for the first quarter of 2003 show an improvement over fourth quarter 2002 results of operations due in part to management changes and renewed focus and commitment of the management team to regaining profitability and market share during 2003.

Net Interest Income

The Corporation's net interest income for the three-month period ended March 31, 2003 reached $43.6 million, a decrease of 20.2 % over $54.7 for the same period in 2002. The decrease was due to the lower volume of average earning assets coupled with a decrease in the yield of earning assets. These reductions were partially offset by decreases in the cost of funds and in average interest bearing liabilities. Average interest-earning assets for the quarter ended March 31, 2003 decreased by 6.8% when compared to the same quarter of 2002, principally as a result of a significant increase in average investment securities of $281.1 million during the first quarter of 2003 compared to the same period in 2002. During the first quarter of 2002 the Corporation sold $552.2 million of investment securities available for sale. This increase was fully offset by a reduction in average net loans of $530.6 million in 2003 when compared to the same period in 2002. Average interest bearing liabilities also reflected a decrease of 7.4% to $5.1 billion in 2003 from $5.5 billion in 2002.

The net interest margin on a tax-equivalent basis decreased from 3.57% for the quarter ended March 31, 2002 to 3.19% for the quarter ended March 31, 2003. 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, and a decrease in the average balance of interest bearing liabilities as a result of the Corporation's positioning with respect to its interest rate gap.

The table on page 34, Quarter to Date Average Balance Sheet and Summary of Net Interest Income Tax Equivalent Basis, presents average balance sheets, net interest income on a tax equivalent basis and average interest rates for the first quarters of 2003 and 2002. The table on Interest Variance Analysis - Tax Equivalent Basis on page 23, allocates changes in the Corporation's interest income (on a tax-equivalent basis) and interest expense between changes in the average volume of interest earning assets and interest bearing liabilities and changes in their respective interest rates for the first quarter of 2003 compared with the first quarter of 2002.

To permit the comparison of returns on assets with different tax attributes, the interest income on tax-exempt assets has been adjusted by an amount equal to the income taxes which would have been paid had the income been fully taxable. This tax equivalent adjustment is derived using the applicable statutory tax rate and resulted in an adjustment of $4.4 million and $3.0 million for the quarters ended March 31, 2003 and 2002, respectively.

 

Interest Income

The Corporation's interest income on a tax equivalent basis decreased $15.4 million, or 15.6% to $83.2 million for the quarter ended March 31, 2003 from $98.6 million for the quarter ended March 31, 2002. The decrease was attributed to a decrease of $4.0 million in the volume of the Corporation's interest earning assets, together with a decrease in the yield of such assets of $11.4 million. These decreases were only partially offset by a decrease in the volume of average interest bearing liabilities of $3.2 million and in the cost of such liabilities of $2.5 million.

Average interest earning assets had a decrease of 6.8% for the quarter ended March 31, 2003 when compared to the first quarter of 2002. There was an increase in average investment securities of 15.4% or $281.1 million for the first quarter of 2003 compared to the same period in 2002. This increase was partially offset by a reduction in average balance of loans of $530.6 million.

The average yield on earning assets decreased from 6.09% for the quarter ended March 31, 2002 to 5.52% for the quarter ended March 31, 2003. This decrease was due primarily to the decrease in average net interest rates.

 

Interest Expense

The Corporation's interest expense for the quarter ended March 31, 2003 decreased 13.9% to $35.2 from $40.8 million for the quarter ended March 31, 2002. The decrease in interest expense was attributed to a $3.2 million decrease in the volume of interest bearing liabilities and a $2.5 million decrease in cost of funds. There was a decrease of 10.6% in the average balance of interest bearing deposits during the first quarter of 2003 compared to the same period in 2002. The average cost of interest bearing liabilities also reflected a decrease of 21 basis points to 2.78% for the quarter ended March 31, 2003 compared to 2.99% for the same period in 2002. This decrease is related to the decrease in market rates.

Average borrowings, including term and subordinated notes, reflected a decrease of $34.8 million during the quarter ended March 31, 2003 when compared to same period in 2002. In addition, average time deposits and savings and NOW accounts reflected a decrease of $376.0 million. The shift in deposits from time deposits to savings and NOW accounts, which together with the reduction in higher cost borrowings, had a favorable impact on the Corporation's results of operations during the first quarter of 2003.

The following table allocates changes in the Corporation's interest income, on a tax-equivalent basis, and interest expense for the three months ended March 31, 2003 compared to the three months ended March 31, 2002, between changes related to the average volume of interest earning assets and interest bearing liabilities, and changes related to interest rates. Volume and rate variances have been calculated based on the activity in average balances over the period and changes in interest rates on average interest earning assets and average interest bearing liabilities. The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of change in each category.

 

 

INTEREST VARIANCE ANALYSIS

Tax Equivalent Basis

Quarter ended March 31, 2003

Compared to the quarter ended

March 31, 2002

Increase (Decrease) Due to Change In:

Volume

Rate

Total

(In thousands)

Interest Income:

Federal funds purchased and

securities purchased under

agreements to resell

$ (676)

$ (329)

$ (1,005)

Time deposits with other banks

(31)

(93)

(124)

Investment securities

5,762

(2,096)

3,666

Loans, net

(9,059)

(8,858)

(17,917)

Total Interest Income

(4,004)

(11,376)

(15,380)

Interest Expense:

Savings and NOW accounts

930

(1,347)

(417)

Other time deposits

(3,646)

(713)

(4,359)

Borrowings

90

(315)

(225)

Long-term borrowings

(574)

(100)

(674)

Total Interest expense

(3,200)

(2,475)

(5,675)

Net Interest Income

$ (804)

$ (8,901)

$ (9,705)

 

Allowance for Loan Losses

The Corporation systematically assesses the overall risks in its loan portfolio and establishes and maintains an allowance for possible losses thereon. The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on the evaluation of known and inherent risks in the 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 methodology established to evaluate the ade quacy of the allowance for loan losses, management considers that the allowance for loan losses is adequate to absorb probable losses on its loan portfolio.

ALLOWANCE FOR LOAN LOSSES

For the quarters ended

March 31,

2003

2002

(In thousands)

Balance at beginning of year

$ 57,956

$ 52,857

Provision for loan losses

12,065

11,972

70,021

64,829

Losses charged to the allowance:

Commercial

2,562

4,230

Consumer

11,079

11,525

13,641

15,755

Recoveries:

Commercial

1,417

999

Construction

-

2

Consumer

1,170

2,952

2,587

3,953

Net loans charged-off

11,054

11,802

Balance at end of period

$ 58,967

$ 53,027

Ratios:

Allowance for loan losses to period-end loans

1.44%

1.23%

Recoveries to charge-offs

18.96%

25.09%

Annualized net charge-offs to average loans

1.16%

1.09%

 

The Corporation's allowance for loan losses was $59.0 million or 1.44% of loan balances, at March 31, 2003 compared to $58.0 million, or 1.50% of loan balances at December 31, 2002. The decrease in this ratio was partially due to the acquisition of a mortgage loan portfolio of $236 million at the end of the quarter as well as to the lower provision for loan losses resulting from the improvement in nonperforming loans. The coverage ratio (allowance for loan losses to nonperforming loans) was 49.94% at March 31, 2003, from 46.95% at December 31, 2002. Net charge-offs of $11.1 million for the quarter ended March 31, 2003 were offset by a provision for loan losses of $12.1million. The annualized ratio of net charge-offs to average loans for the quarter ended March 31, 2003 increased to 1.16% from 1.09% for the same period in 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 loan portfolio.

The allowance for loan losses is affected by consumer loans originated in previous years under less stringent credit criteria. Although consumer loan charge-offs remain high, there was a slight reduction of $0.5 million in consumer charge-offs for the three-month period ended March 31, 2003 when compared to the same period in 2002.

 

 

Other Income

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

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

OTHER INCOME

For the quarters ended

March 31,

2003

2002

(In thousands)

Service fees on deposit accounts

$ 3,561

$ 3,835

Other service fees:

Credit card fees

2,936

3,439

Mortgage servicing fees

690

318

Trust fees

859

612

Other fees

2,185

2,230

Gain on sale of securities, net

4,669

8,141

Gain on sale of mortgage servicing rights

125

123

Gain (loss) on derivatives

92

(231)

Other gains, net

753

2,189

Other

2,403

2,504

$ 18,273

$ 23,160

 

The Corporation's other income for the quarter ended March 31, 2003 compared to the quarter ended March 31, 2002 reflected a decrease of $4.9 million or 21.1%. The decrease in other income for the first quarter of 2003 when compared with the first quarter of 2002 was principally due to a decrease in the gain on sale of securities of $3.5 million. The decrease in other gains of $1.4 million is principally due to a decrease of $0.9 million in gains on mortgage servicing rights retained on mortgage loans sold during 2003 compared to 2002 and the decrease of $1.0 million in gain on trading securities. These decreases were partially offset by an increase of $0.2 million on the gain on sale of repossessed assets. Service fees on deposit accounts for the first quarter decreased as a result of the decrease in average overdrafts and non-sufficient funds check fees. The decrease in "Other" is principally due to the decrease in rentals of point of sale terminals and in lower technical assistance fees charged to affiliates. These decreases were partially offset by increases in mortgage servicing and trust fees.

  

Operating Expenses

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

Other Operating Expenses

For the quarters ended

March 31,

2003

2002

(In thousands)

Salaries

$ 11,378

$ 12,155

Pension and other benefits

7,511

7,380

Total personnel costs

18,889

19,535

Equipment expenses

2,219

3,102

Professional fees

2,615

1,843

Occupancy costs

3,225

3,330

EDP Servicing Expense

4,331

4,496

Communications

1,501

1,494

Business promotion

1,672

1,673

Other taxes

2,463

2,867

Amortization of intangibles

1,400

1,708

Printing and supplies

419

404

Other operating expenses:

Examinations & FDIC assessment

465

500

Transportation and travel

300

253

All other

7,793

6,138

Other Operating Expenses

28,403

27,808

Total Operating Expenses

$ 47,292

$ 47,343

For the quarter ended March 31, 2003, the Corporation's efficiency ratio on a tax equivalent basis reached a level of 76.74% compared to 65.08% for the same period in 2002, mainly as a result of a decrease in net interest income on a tax equivalent basis.

There was a $0.6 million decrease in personnel costs for the quarter ended March 31, 2003 compared to the same period in 2002. The reduction was due to a decrease in salaries of $0.8 million as result of a reduction in personnel of approximately 199 employees. The increase reflected in pension and other benefits were specifically due to increases in hospitalization insurance of $0.2 million, commissions of $0.2 million and recruiting expenses of $0.2 million. These increases were partially offset by decreases in social security expense and vacations.

Other operating expenses increased $0.6 million for the quarter ended March 31, 2003 compared to the same period in 2002. This increase was mainly due to increases in professional fees and "All Other". The increase of $1.6 million in "All Other" is due to higher software amortization expense of $1.2 million due to increased depreciation costs of new information systems installed in 2002. There was also an increase of $1.6 million for an allowance for disposal costs of repossessed assets. These increases were partially offset by a decrease in credit card expense due to operational changes in the processing of the portfolio, which is now processed internally.

The increases in operating expenses were partially offset by decreases in equipment expenses, occupancy costs and other taxes, as a result of the Corporation's strict cost control program.

  

Provision for Income Tax

The income tax benefit amounted to $0.6 million for the quarter ended March 31, 2003. This tax benefit was composed of a deferred tax benefit of $0.3 million and a current tax provision of $0.3 million compared to a deferred tax benefit of $0.6 million and a current tax provision of $5.2 million for the first quarter of 2002. The decrease in the provision for income tax is due to the lower pretax earnings in 2003.

 

FINANCIAL POSITION MARCH 31, 2003

Assets

The Corporation's assets reached $6.8 billion as of March 31, 2003, a 3.9% decrease when compared to total assets of $7.1 billion at December 31, 2002. This decrease was principally a result of a decrease in the investment portfolio of $497.8 million. This decrease was partially offset by an increase in net loans, including loans held for sale of $246.0 million.

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

March 31,

December 31,

Increase

2003

2002

(Decrease)

(In thousands)

Commercial, industrial and

agricultural

$ 1,949,036

$ 1,954,256

$ (5,220)

Construction

302,127

309,505

(7,378)

Consumer

493,776

530,525

(36,749)

Mortgage

1,354,978

1,058,597

296,381

Gross Loans

4,099,917

3,852,883

247,034

Allowance for loan losses

(58,967)

(57,956)

1,011

Net Loans

$ 4,040,950

$ 3,794,927

$ 246,023

 

 

Net loans, including loans held for sale, at March 31, 2003 were $4.0 billion, reflecting an increase in the loan portfolio of $246.0 million when compared to $3.8 million at December 31, 2002. This increase was principally a result of the purchase of a mortgage loan portfolio of $236 million during the first quarter of 2003.

The Corporation continues to focus its efforts on recapturing market share with a strong emphasis on commercial lending. Consumer lending will also continue to be a focus of growth for the Corporation. There will be a strong focus on providing quality products to customers designed to meet their personal and business needs, while maintaining a strict underwriting criteria. This strict underwriting criteria and strong collection efforts are expected to have a favorable impact on nonperforming assets.

Nonperforming Assets and Past Due Loans

As of March 31, 2003, the Corporation's total nonperforming assets and past due loans decreased to $138.6 million or 3.4% of total loans from $144.9 million or 3.8% of total loans as of December 31, 2002. The decrease in nonperforming assets and past due loans was reflected primarily in the mortgage loan portfolio. Nonperforming loans (excluding other real estate owned) at March 31, 2003 decreased to $118.1 million or 2.9% of total loans from $123.4 million or 3.2% of total loans at December 31, 2002. Accruing loans past-due 90 days or more, at March 31, 2003 decreased $1.4 million from $3.9 million at December 31, 2002. The level of nonperforming loans to total loans at March 31, 2003 stands at 2.88% compared to 3.20% at December 31, 2002. As of March 31, 2003 the coverage ratio (allowance for loan losses to total nonperforming loans) reached 49.94%.

From time to time, the Corporation sells certain nonperforming loans to Crefisa, Inc. ("Crefisa"), an affiliate of the Corporation, at fair value. Such sales amounted to $11.9 million during the first quarter of 2003.

The Corporation continuously monitors nonperforming assets and has deployed additional resources to manage the nonperforming loan portfolio.

  

Nonperforming Assets and Past Due Loans

March 31,

December 31,

2003

2002

(Dollars in thousands)

Commercial, Industrial, Construction, and

Lease Financing

$ 37,385

$ 33,192

Agricultural

7,923

6,289

Mortgage

57,069

68,027

Consumer

15,703

15,930

Total Repossessed Assets

17,943

17,563

Total

$ 136,023

$ 141,001

Accruing loans past-due 90 days or more

$ 2,529

$ 3,928

Nonperforming loans to total loans

2.88%

3.20%

Nonperforming assets plus accruing loans

past due 90 days or more to total loans

3.38%

3.76%

Nonperforming assets to total assets

2.00%

2.00%

Liabilities

As of March 31, 2003, total liabilities reached $6.2 billion, a decrease of $268.0 million over the December 31, 2002 balance. This decrease in total liabilities was principally due to decreases in deposits of $464.9 and federal funds purchased and other borrowings of $21.3 million. These decreases were partially offset by increases in securities sold under agreements to repurchase of $20.5 million and commercial paper issued of $209.8 million.

Deposits

At March 31, 2003, total deposits were $4.1 billion, reflecting a decrease of $464.9 million or 10.3% over December 31, 2002. Average interest bearing deposits for the quarter ended March 31, 2003 were $3.2 billion, a decrease of 10.6% over same period in 2002. 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.

Capital and Dividends

Stockholders' equity was $573.3 million or 8.4% of total assets at March 31, 2003, compared to $577.3 million or 8.2% of total assets at December 31, 2002. This decrease in stockholders' equity was mainly due to the acquisition of treasury stock and the dividends declared and paid.

The Corporation declared cash dividends of $0.11 per common share to all stockholders of record as of March 7th, 2003 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 was distributed on July 31, 2002. Cash was paid in lieu of fractional shares. The earnings per share computations for the quarter ended March 31, 2002, presented in the accompanying unaudited financial statements, have been retroactively adjusted to reflect this stock dividend.

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

As of March 31, 2003, the Corporation was well capitalized under the regulatory framework for prompt corrective action. At March 31, 2003 the Corporation continued to exceed the regulatory risk-based capital requirements for well-capitalized institutions. Tier I capital to risk-adjusted assets and total capital ratios at March 31, 2003 were 12.39% and 13.64%, respectively and the leverage ratio was 8.65%.

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 its then outstanding common shares. During November 2002, the Corporation started a fourth Stock Repurchase program under which it plans to acquire 3% of its outstanding common shares. As of March 31, 2003, a total of 4,011,260 common shares amounting to $67.6 million had been repurchased under these plans.

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

 

Liquidity

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

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

 

Derivative Financial Instruments:

The 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 uses derivative financial instruments principally for hedging purposes.

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 March 31, 2003, the Corporation had the following derivative financial instruments outstanding:

Notional Value

Fair Value

Gain (Loss) for the period ended March 31, 2003

Other Comprehensive Income (Loss)* for the period ended March 31, 2003

(In thousands)

CASH FLOW HEDGES

Interest rate swaps

$ 100,000

$ (10,021)

$ -

$ 460

FAIR VALUE HEDGES

Interest rate swaps

284,366

(1,545)

(22)

-

OTHER DERIVATIVES

Options

11,650

116

(56)

-

Embedded options on

stock indexed deposits

(11,096)

(116)

54

-

Forward foreign currency

exchange contracts

6,335

2

-

-

Interest rate caps

20,365

(266)

(8)

-

Customer interest rate caps

(20,365)

266

29

-

Interest Rate Swaps -customer

108,670

1,660

215

Interest Rate Swaps

108,670

(1,191)

(120)

$ 92

$ 460

*Net of tax

 

  

As of December 31, 2002, the Corporation had the following derivative financial instruments outstanding:

Notional Value

Fair Value

Gain (Loss) for the year ended December 31, 2002

Other Comprehensive Income (Loss)* for the year ended December 31, 2002

(In thousands)

CASH FLOW HEDGES

Interest rate swaps

$ 100,000

$ (10,775)

$ (1,347)

$ (2,012)

FAIR VALUE HEDGES

Interest rate swaps

332,687

953

(356)

-

OTHER DERIVATIVES

Options

11,650

172

(814)

-

Embedded options on

stock-indexed deposits

(11,096)

170

1,978

-

Forward foreign currency

exchange contracts

5,841

2

-

1

Interest rate caps

18,856

(248)

(304)

-

Customer interest rate caps

(18,856)

248

464

-

Customer Interest rate swaps

85,623

1,345

1,345

Interest rate swaps

85,623

(1,071)

(1,071)

$ (105)

$ (2,011)

*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. As of March 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 $6.1 million of which the Corporation expects to reclassify into earnings $2.7 million, net of tax, during the next nine months. As of December 31, 2002, 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 $6.6 million. In addition to the cash flow hedge of $100 million of interest rate swaps originated during July 2000, the Corporation swapped $40 million during 2002 and $835 million during 2001 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 March 31, 2003, the Corporation also had outstanding interest rate swap agreements, with a notional amount of approximately $284.4 million, maturing through the year 2022. The weighted average rate paid and received on these contracts is 1.39% and 4.91%, respectively. As of March 31, 2003, the Corporation had retail fixed rate certificates of deposit amounting to approximately $279.1 million and a $3.8 million fixed rate loan swapped to create a floating rate source of funds. These swaps were designated as fair value hedges. For the quarter ended March 31, 2003, the Corporation recognized a loss of approximately $22,000 on fair value hedges due to hedge ineffectiveness, which is included in other gains and losses in the consolidated statements of income.

As of December 31, 2002, the Corporation had outstanding interest rate swap agreements, with a notional amount of approximately $332.7 million, maturing through the year 2022. The weighted average rate paid and received on these contracts is 1.61% and 5.09%, respectively. As of December 31, 2002, the Corporation had retail fixed rate certificates of deposit amounting to approximately $327.5 million and a $3.9 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, 2002, the Corporation recognized a loss of approximately $393,000 on fair value hedges due to hedge ineffectiveness, which is included in other gains and losses in the consolidated statements of income. Also, during 2002, $50 million of the Corporation's fair value hedges were cancelled, resulting in a gain of $37,000.

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 quarter ended March 31, 2003, a gain of approximately $54,000 was recorded on embedded options on stock-indexed deposits and a loss of approximately $56,000 was recorded on the option contracts. For the year ended December 31, 2002, a gain of approximately $1,978,000 was recorded on embedded options on stock-indexed deposits and a loss of approximately $814,000 was recorded on the option contracts.

Forwards are contracts for the delayed purchase of specified securities at a specified price and time, and qualify for hedge accounting in accordance with SFAS No. 133. The Corporation occasionally enters into foreign currency exchange forwards in order to satisfy the needs of its customers. As of March 31, 2003, the Corporation had foreign currency exchange forwards with a notional amount of $6,335,000. As of March 31, 2003, the total amount, net of tax, included in other comprehensive income (loss) related to these currency exchange forwards was an unrealized gain of $1,246. As of December 31, 2002, the Corporation had foreign currency exchange forwards with a notional amount of $5,841,000. For the year ended December 31, 2002, the Corporation recorded a gain of $2,042, net of the related tax liability of $796 in other comprehensive income (loss).

The Corporation enters into certain derivative transactions with customers. The Corporation entered into interest rate caps, collars and swaps with customers and simultaneously hedged the Bank's position with related and unrelated third parties under the same terms and conditions. For the quarter ended March 31, 2003 and the year ended December 31, 2002, the Corporation recognized a net gain of $116,000 and $434,000, respectively, on these transactions.

 

SANTANDER BANCORP

QUARTER TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME

Tax Equivalent Basis

March 31, 2003

March 31, 2002

Average

Average

Average

Average

Balance

Interest

Rate

Balance

Interest

Rate

(Dollars in thousands)

Interest-bearing deposits

$ 74,791

$ 150

0.81%

$ 85,601

$ 274

1.30%

Federal funds sold and securities purchased

under agreements to resell

123,746

390

1.28%

312,433

1,395

1.81%

Total interest bearing deposits

198,537

540

1.10%

398,034

1,669

1.70%

U.S.Treasury securities

125,713

377

1.22%

515,926

2,266

1.78%

Obligations of other U.S. Government

agencies and corporations

1,723,480

18,061

4.25%

791,123

9,317

4.78%

Obligations of the Commonwealth of

Puerto Rico and political subdivisions

40,014

841

8.52%

24,984

723

11.74%

Collateralized mortgage obligations and

mortgage-backed securities

185,377

1,995

4.36%

419,568

4,890

4.73%

Other

29,359

443

6.12%

71,204

855

4.87%

Total investment securities

2,103,943

21,717

4.19%

1,822,805

18,051

4.02%

Loans (net of unearned income)

3,809,112

60,937

6.49%

4,339,760

78,854

7.37%

Total interest earning assets/ interest income

6,111,592

83,194

5.52%

6,560,599

98,574

6.09%

Total non-interest earning assets

330,257

322,824

Total assets

$ 6,441,849

$6,883,423

Savings and NOW accounts

$ 1,810,937

7,520

1.68%

$1,608,438

7,937

2.00%

Other time deposits

1,369,929

8,547

2.53%

1,948,439

12,906

2.69%

Borrowings

1,648,251

15,172

3.73%

1,638,591

15,397

3.81%

Term notes

304,919

3,929

5.23%

329,352

4,378

5.39%

Subordinated notes

-

-

-

20,000

225

4.56%

Total interest bearing liabilities/interest expense

5,134,036

35,168

2.78%

5,544,820

40,843

2.99%

Total non-interest bearing liabilities

733,423

738,904

Total liabilities

5,867,459

6,283,724

Stockholders' equity

574,390

599,699

Total liabilities and stockholders' equity

$ 6,441,849

$6,883,423

Net interest income

$ 48,026

$ 57,731

Cost of funding earning assets

2.33%

2.52%

Net interest margin

3.19%

3.57%

 

PART I - ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

Asset and Liability Management

 

The Corporation's policy with respect to asset liability management is to maximize its net interest income, return on assets and return on equity while remaining within the established parameters of interest rate and liquidity risks provided by the Board of Directors and the relevant regulatory authorities. Subject to these constraints, the Corporation takes mismatched interest rate positions. The Corporation's asset and liability management policies are developed and implemented by its Asset and Liability Committee ("ALCO"), which is composed of senior members of the Corporation including the President, Chief Accounting 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. A negative gap denotes liability sensitivity, which means that a decrease in interest rates would have a positive effect on net interest income, while an increase in interest rates would have a negative effect on net inter est income. The Corporation is experiencing a slightly negative gap for the period up to one year.

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

 

The following table sets forth the repricing of the Corporation's interest earning assets and interest bearing liabilities at March 31, 2003 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.

As of March 31, 2003

0 to 3

3 months

1 to 3

3 to 5

5 to 10

More than

No Interest

months

to a Year

Years

Years

Years

10 Years

Rate Risk

Total

ASSETS:

(In thousands)

Investment Portfolio

$ 195,837

$ 9,732

$ 688,435

$ 945,616

$ 10,614

$ -

$ 20,000

$1,870,234

Deposits in Other Banks

540,132

-

-

-

-

-

109,512

649,644

Loan Portfolio

Commercial

1,245,851

191,944

163,798

149,906

99,295

8,932

89,310

1,949,036

Construction

222,154

3,483

9,276

11,491

30,389

17,971

7,363

302,127

Consumer

142,919

83,401

169,529

78,404

13,175

114

6,234

493,776

Mortgage

44,101

149,169

447,931

345,173

351,844

(3)

16,763

1,354,978

Fixed and Other Assets

-

-

-

-

-

-

173,358

173,358

Total Assets

2,390,994

437,729

1,478,969

1,530,590

505,317

27,014

422,540

6,793,153

LIABILITIES AND STOCKHOLDERS' EQUITY

External Funds Purchased

Commercial Paper

(249,798)

-

-

-

-

-

-

(249,798)

Repurchase Agreements

(195,486)

(100,000)

(350,000)

(425,006)

(200,000)

-

-

(1,270,492)

Federal Funds

(224,700)

-

-

-

-

-

-

(224,700)

Deposits

Certificates of Deposit

(907,656)

(294,363)

(167,074)

(87,441)

(105,996)

(10,937)

(984)

(1,574,451)

Demand Deposits and Savings Accounts

(249,205)

(381,457)

(462,113)

(718,149)

-

-

(7,822)

(1,818,746)

Transactional Accounts

(290,260)

-

-

(371,272)

-

-

-

(661,532)

Senior and Subordinated Debt

(96,600)

(65,000)

(50,000)

-

-

(93,194)

-

(304,794)

Other Liabilities and Capital

-

-

-

-

-

-

(688,640)

(688,640)

Total Liabilities and Capital

(2,213,705)

(840,820)

(1,029,187)

(1,601,868)

(305,996)

(104,131)

(697,446)

(6,793,153)

Off-Balance Sheet Financial Information

Interest Rate Swaps (Assets)

226,723

88,074

31,334

91,823

163,212

540

-

601,706

Interest Rate Swaps (Liabilities)

(353,658)

(43,074)

(97,753)

(45,469)

(61,212)

(540)

-

(601,706)

Cap's (Assets)

20,365

-

-

20,365

-

-

-

40,730

Cap's Final Maturity (Liabilities)

(20,365)

-

-

(20,365)

-

-

-

(40,730)

Positive (Negative) GAP

50,354

(358,091)

383,363

(24,924)

301,321

(77,117)

(274,906)

-

Cumulative GAP

$ 50,354

$(307,737)

$ 75,626

$ 50,702

$ 352,023

$ 274,906

$ -

$ -

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.

Risk management policy and procedures establish a risk tolerance loss limit of 5.0% for net interest income in a scenario of a 100 basis points (1.0%) increase in market rates. As of March 31, 2003, 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 $6.0 million which represents a 2.85% decrease in net interest income, which is below the established 5.0% loss limit. The Corporation has also established a risk tolerance limit of 9% for net interest income in a scenario of a 200 basis points (2.0%) increase in market rates. As of March 31, 2003, it was determined that the Corporation had a potential loss in net interest income of approximately $9.6 million, which represents a 4.55% decrease in net interest income, which is below the established 9% loss limit.

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 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 March 31, 2003 the Corporation had $1.9 billion in unsecured lines of credit ($1.5 billion available) and $3.9 billion in collateralized lines of credit with banks and financial entities ($2.5 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 March 31, 2003, the Corporation had a liquidity ratio of 19.63%. At March 31, 2003, the Corporation had total available liquid assets of $1.2 billion. The Corporation believes it has sufficient liquidity to meet current obligations.

 

 

PART I - ITEM 4

CONTROLS AND PROCEDURES

 

 

Evaluation of Disclosure Controls and Procedures

Within the 90 days prior to the filing date of this Quarterly Report on Form 10-Q, the Corporation's management, including the Chief Executive Officer and the Chief Accounting Officer (as the Corporation's principal financial officer), conducted an evaluation of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities and Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and the Chief Accounting Officer (as the Corporation's principal financial officer) concluded that the design and operation of these disclosures controls and procedures were effective.

Changes in Internal Controls

There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect the Corporation's internal controls, subsequent to the date the Chief Executive Officer and Chief Accounting Officer (as the Corporation's principal financial officer) completed their evaluation.

PART II - OTHER INFORMATION

  

ITEM I - LEGAL PROCEEDINGS

 

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

 

ITEM 2 - CHANGES IN SECURITIES

Not applicable

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable

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

Not applicable

ITEM 5 - OTHER INFORMATION

Not applicable

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

A.

Exhibit No.

Exhibit Description

Reference

(2)

Agreement and Plan of Merger-Banco Santander Puerto Rico and

Santander Bancorp

a.

(2.1)

Stock Purchase Agreement Santander BanCorp and Banco Santander

Central Hispano, S.A.

b.

(3.1)

Articles of Incorporation

c.

(3.2)

Bylaws

d.

(4.1)

Authoring and Enabling Resolutions 7% Noncumulative Perpetual

Monthly Income Preferred Stock, Series A

e.

(4.2)

Offering Circular for $25,000,000 AFICA Loan Program

f.

(4.3)

Bank Notes Program and Distribution Agreement

g.

(4.4)

Offering Circular for $26,000,000 AFICA Loan Program

h.

(4.5)

Offering Circular for $25,000,000 AFICA Loan Program

i.

(10.1)

Contract for Systems Maintenance between ALTEC and Banco Santander

Puerto Rico

j.

(10.2)

Deferred Compensation Contract - Benito Cantalapiedra

k.

(10.3)

Deferred Compensation Contract - María Calero

l.

(10.4)

Employment Contract - Carlos García

m.

(10.5)

Employment Contract - Roberto Córdova

n.

(10.6)

Employment Contract - Rafael Saldaña

o.

a.

Incorporated by reference to Exhibit (2.0) of the 1999 Third Quarter Form 10Q

b.

Incorporated by reference to Exhibit (2.1) of the 2000 10K

c.

Incorporated by reference to Exhibit (3.1) of the 1998 form 10K

d.

Incorporated by reference to Exhibit (3.2) of the 1998 form 10K

e.

Incorporated by reference to Exhibit (4.1) of the 1998 form 10K

f.

Incorporated by reference to Exhibit (10.1) of the 1999 Third Quarter Form 10Q

g.

Incorporated by reference to Exhibit (10.2) of the 1999 Third Quarter Form 10Q

h.

Incorporated by reference to Exhibit (4.4) of the 2000 10K

i.

Incorporated by reference to Exhibit (4.5) of the 2001 10K

j.

Incorporated by reference to Exhibit (10.1) of the 2002 10K

k.

Incorporated by reference to Exhibit (10.2) of the 2002 10K

l.

Incorporated by reference to Exhibit (10.3) of the 2002 10K

m.

Incorporated by reference to Exhibit (10.4) of the 2002 10K

n.

Incorporated by reference to Exhibit (10.5) of the 2002 10K

o.

Incorporated by reference to Exhibit (10.6) of the 2002 10K

 

B Reports on Form 8-K - The Corporation filed one report on Form 8-K during the quarter ended March 31, 2003.

Item 5 -- Effective February 28, 2003, Mr. Richard Reiss and Ms. Carmen A. Culpeper resigned from the Board of Directors of Santander BanCorp (the "Corporation"). Mr. Reiss also resigned from the Board of Directors of Banco Santander Puerto Rico, the Corporation's banking subsidiary. On the aforementioned date, the Board of Directors of the Corporation and the Bank named Mr. Vicente Gregorio to the their respective Boards of Directors.

Item 7c - Exhibit 99.1 Press Release issued March 6, 2003.

 

 

 

SIGNATURES

 

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

 

  

SANTANDER BANCORP

Name of Registrant

 

 

 

Date:

13-May-03

By:/s/ José Ramón González

President and Chief Executive Officer

Date:

13-May-03

By:/s/ Maria Calero

Executive Vice President and

Chief Accounting Officer

 

  

CERTIFICATION

Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

 

I, José Ramón González, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Santander BanCorp (the "Registrant");
  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
  4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
  1. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
  2. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
  3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
  1. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function):
  1. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
  2. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
  1. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

 

Date:

13-May-03

By:/s/ José Ramón González

President and Chief Executive Officer

 

  

 

CERTIFICATION

Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

 

I, Maria Calero, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Santander BanCorp (the "Registrant");
  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
  4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
  1. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
  2. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
  3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
  1. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function):
  1. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
  2. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
  1. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

  

 

Date:

13-May-03

By:/s/ Maria Calero

Executive Vice President and

Chief Accounting Officer