SANTANDER BANCORP - 10-Q Quarterly Report

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UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2004

Commission File: 001-15849

SANTANDER BANCORP

(Exact name of Corporation as specified in its charter)

Commonwealth of Puerto Rico	66-0573723

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

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

(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code:

(787) 759-7070

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

Yes X No______

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

Yes X No______

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

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

Title of each class	Outstanding as of November 1, 2004

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

SANTANDER BANCORP

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

Signatures			51

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

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

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

PART I - ITEM 1

FINANCIAL STATEMENTS

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

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

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

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


The accompanying notes are an integral part of these financial statements

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

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

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

The accompanying notes are an integral part of these financial statements

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

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


The accompanying notes are an integral part of these financial statements

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

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

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

SANTANDER BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(Dollars in thousands)
	For the nine month periods ended
				As restated
		September 30,		September 30,
		2004		2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	63,130	$	23,704
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		9,940		16,661
Deferred tax provision		1,318		124
Provision for loan losses		21,770		34,745
Gain on sale of building		(2,754)		-
Gain on sale of securities		(11,465)		(10,012)
(Loss) gain on sale of loans		84		(6,845)
Gain on sale of mortgage servicing rights		(284)		(327)
Gain on derivatives		(198)		(246)
Trading gains		(908)		(919)
Net premium amortization on securities		2,825		4,093
Net premium amortization on loans		3,623		5,864
Purchases and originations of loans held for sale		(534,850)		(474,885)
Proceeds from sales of loans held for sale		126,512		248,760
Repayments of loans held for sale		36,438		29,361
Proceeds from sales of trading securities		1,704,903		1,077,680
Purchases of trading securities		(1,674,871)		(1,083,536)
(Increase) decrease in accrued interest receivable		(8,956)		4,604
Decrease in other assets		3,888		48,941
Increase (decrease) in accrued interest payable		4,518		(2,152)
(Decrease) increase in other liabilities		(1,873)		22,916
Total adjustments		(320,340)		(85,173)
Net cash used in operating activities		(257,210)		(61,469)

CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest bearing deposits		(40,000)		-
Proceeds from sales of investment securities available for sale		1,450,058		1,206,108
Proceeds from maturities of investment securities available for sale		1,584,455		2,626,642
Purchases of investment securities available for sale		(2,585,303)		(4,263,980)
Proceeds from maturities of investment securities held to maturity		35,825		153,234
Purchases of investment securities held to maturity		(52,566)		(25,431)
Repayment of securities and securities called		170,071		158,085
Payments on derivative transactions		-		(18)
Purchases of mortgage loans		(756,682)		(326,289)
Net decrease in loans		47,100		240,939
Proceeds from sales of mortgage servicing rights		284		327
Proceeds from sale of building		14,000		-
Capital expenditures		(1,772)		(2,578)
Net cash used in investing activities		(134,530)		(232,961)

(Continued)

The accompanying notes are an integral part of these financial statements

SANTANDER BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(Dollars in thousands)
	For the nine month periods ended
				As restated
		September 30,		September 30,
		2004		2003

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		377,312		(823,339)
Net increase in federal funds purchased and other borrowings		372,000		221,040
Net (decrease) increase in securities sold under agreements to repurchase		(506,611)		671,854
Net increase in commercial paper issued		344,472		184,816
Net increase (decrease) in term notes		(41,685)		(168,063)
Payment of subordinated capital notes		-		(30,000)
Repurchase of common stock		-		(2,284)
Dividends paid		(9,330)		(17,849)
Net cash provided by financing activities		536,158		36,175

NET CHANGE IN CASH AND CASH EQUIVALENTS		144,418		(258,261)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		393,233		638,043
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	537,651	$	379,782

				(Concluded)

The accompanying notes are an integral part of these financial statements

SANTANDER BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE QUARTER AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004

Summary of Significant Accounting Policies:

The accounting and reporting policies of Santander BanCorp (the "Corporation"), an 89% owned subsidiary of Banco Santander Central Hispano, S.A. ("Santander Group") 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 generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The results of operations and cash flows for the nine-month periods ended September 30, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the C onsolidated Financial Statements and footnotes thereto for the year ended December 31, 2003, 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 September 30, 2004 included herein have been prepared on a consistent basis with the year-end audited financial statements as of December 31, 2003. Certain reclassifications have been made to prior periods financial statements to conform them to the current period presentation.

Acquisition and Restatement

Pursuant to a corporate reorganization, on December 30, 2003 the Corporation acquired 100% of the common stock of Santander Securities Corporation and subsidiary ("Santander Securities") from Administración de Bancos Latinoamericanos Santander, S.L. (ABLASA), a wholly-owned subsidiary of Santander Group. The Corporation acquired Santander Securities for $62 million in cash in a transaction treated as a reorganization of companies under common control. The reorganization was recorded at historical cost and accounted for on an "as if pooled" basis. Accordingly, the accompanying consolidated financial statements for the three and nine-month periods ended September 30, 2003, were restated to give retroactive effect to such transaction as of the beginning of the first period presented. All significant intercompany balances and transactions were eliminated.

Net interest income, total other income and net income for the separate companies for the nine-month periods and the quarters ended September 30, 2004 and 2003 were as follows:

	For the nine month periods ended					For the quarters ended
		Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
	(In thousands)
Net interest income:
Santander BanCorp and Subsidiaries	$	163,152	$	138,430	$	55,863	$	48,878
Santander Securities Corporation and Subsidiary		321		44		45		78
Eliminations		73		-		31		-
Combined	$	163,546	$	138,474	$	55,939	$	48,956

Total other income:
Santander BanCorp and Subsidiaries	$	54,067	$	57,783	$	17,341	$	16,788
Santander Securities Corporation and Subsidiary		35,734		34,587		11,688		14,831
Eliminations		(1,794)		(571)		(631)		(190)
Combined	$	88,007	$	91,799	$	28,398	$	31,429

Net Income:
Santander BanCorp and Subsidiaries	$	56,888	$	16,701	$	19,820	$	8,200
Santander Securities Corporation and Subsidiary		6,894		7,003		2,080		3,343
Eliminations		(652)		-		(31)		-
Combined	$	63,130	$	23,704	$	21,869	$	11,543

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

Nature of Operations and Use of Estimates

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

Santander BanCorp is subject to the Federal Bank Holding Company Act and to the regulations, supervision, and examination of the Federal Reserve Board.

In preparing the consolidated financial statements, 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, income taxes, 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, the Bank and the Bank's wholly owned subsidiaries, Santander Mortgage Corporation and Santander International Bank, Santander Securities Corporation and its wholly owned subsidiary, Santander Asset Management Corporation, and Santander Insurance Agency. All significant intercompany balances and transactions have been eliminated in consolidation.

Goodwill and Intangible Assets

Goodwill and other intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually for impairment. At September 30, 2004 and December 31, 2003 goodwill totaled $34,791,000. Goodwill was composed of $10,537,000 related to the acquisition of Banco Central Hispano Puerto Rico in 1996 and $24,254,000 related to the acquisition of Merrill Lynch's retail brokerage business in Puerto Rico by Santander Securities Corporation in 2000.

Intangible assets at September 30, 2004 were composed of mortgage servicing rights of $5,949,000 with an estimated useful life of eight years. At December 31, 2003 intangible assets were composed of $6,000 of core deposit intangibles and $4,656,000 of mortgage servicing rights with an estimated useful life of eight years. Core deposit intangibles were fully amortized during 2004.

Mortgage Servicing Rights

The Corporation's mortgage servicing rights (MSRs) are stated at the lower of carrying value or market at each balance sheet date. On a quarterly basis the Corporation evaluates its MSRs for impairment and charges any such impairment to current period earnings. In order to evaluate its MSRs the Corporation stratifies the related mortgage loans on the basis of their risk characteristics which have been determined to be type of loan (government-guaranteed, conventional, conforming and non-conforming), interest rates and maturities. Impairment of MSRs is determined by estimating the fair value of each stratum and comparing it to its carrying value. No impairment has been identified as of September 30, 2004 or December 31, 2003.

MSRs are also subject to periodic amortization. The amortization of MSRs is based on the amount and timing of estimated cash flows to be recovered with respect to the MSRs over their expected lives. Amortization may be accelerated or decelerated to the extent that changes in interest rates or prepayment rates warrant.

Broker-dealer and Asset Management Commissions

Commissions of the Corporation's broker-dealer operations are composed of brokerage commission income and expenses recorded on a trade date basis and proprietary securities transactions recorded on a trade date basis. Investment banking revenues include gains, losses and fees net of syndicate expenses, arising from securities offerings in which the Corporation acts as an underwriter or agent. Investment banking management fees are recorded on offering date, sales concessions on trade date, and underwriting fees at the time the underwriting is completed and the income is reasonably determinable. Revenues from portfolio and other management and advisory fees includes fees and advisory charges resulting from the asset management of certain funds.

Insurance Commissions

The Corporation's insurance agency operation earns commissions on the sale of insurance policies issued by unaffiliated insurance companies. These commissions are recorded when earned.

Derivative Financial Instruments

The Corporation uses derivative financial instruments mostly as hedges of interest rate risk, changes in fair value of assets and liabilities and to secure future cash flows.

All of the Corporation's derivative instruments are recognized as assets and liabilities at fair value. If certain conditions are met, the derivative may qualify for hedge accounting treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment ("fair value hedge"); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability or forecasted transaction ("cash flow hedge") or (c) a hedge of foreign currency exposure ("foreign currency hedge").

In the case of a qualifying fair value hedge, changes in the value of the derivative instruments that have been highly effective are recognized in current period earnings along with the change in value of the designated hedged item. In the case of a qualifying cash flow hedge, changes in the value of the derivative instruments that have been highly effective are recognized in other comprehensive income, until such time as those earnings are affected by the variability of the cash flows of the underlying hedged item. In either a fair value hedge or a cash flow hedge, net earnings may be impacted to the extent the changes in the value of the derivative instruments do not perfectly offset changes in the value of the hedged items. If the derivative is not designated as a hedging instrument, the changes in fair value of the derivative are recorded in earnings.

Certain contracts contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it should be bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.

Earnings Per Common Share

Basic and diluted earnings per common share are computed by dividing net income available 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 were 46,639,104 for each of the quarters ended September 30, 2004 and 2003, respectively, and 46,639,104 and 46,668,710 for the nine-month periods ended September 30, 2004 and 2003, respectively after giving retroactive effect to a 10% stock dividend declared on July 9, 2004. Basic and diluted earnings per common share are the same since no stock options or other stock equivalents were outstanding during the periods ended September 30, 2004 and 2003.

Recent Accounting Pronouncements which Affect the Corporation

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), to address perceived weaknesses in accounting for entities commonly known as special-purpose or off-balance-sheet. In addition to numerous FASB Staff Positions written to clarify and improve the application of FIN 46, the FASB recently announced a deferral for certain entities, and an amendment to FIN 46 entitled FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R).

FIN 46 establishes consolidation criteria for entities for which "control" is not easily discernable under Accounting Research Bulletin 51, Consolidated Financial Statements, which is based on the premise that holders of the equity of an entity control the entity by virtue of voting rights. FIN 46 provides guidance for identifying the party with a controlling financial interest resulting from arrangements or financial interests rather than from voting interests. FIN 46 defines the term "variable interest entity" (VIE) and is based on the premise that if a business enterprise absorbs a majority of the VIE's expected losses and/or receives a majority of its expected residual returns (measures of risk and reward), that enterprise (the primary beneficiary) has a controlling financial interest in the VIE. The assets, liabilities, and results of the activities of the VIE should be included in the consolidated financial statements of the primary beneficiary.

The Corporation applied FIN 46R in the first interim period ending after March 15, 2004. The Board defined SPEs as entities that have previously been accounted for under any of the following accounting literature:

Emerging Issues Task Force (EITF) Issue No. 90-15, Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions
EITF Issue No. 96-21, Implementation Issues in Accounting for Leasing Transactions involving Special-Purpose Entities
EITF Issue 97-1, Implementation Issues in Accounting for Lease Transactions, including Those involving Special-Purpose Entities
EITF Topic D-14, Transactions involving Special-Purpose Entities

Adoption of this new method of accounting for variable interest entities did not have a material impact on the Corporation's consolidated results of operations and financial position.

In December of 2003, the FASB revised SFAS No.132 (SFAS 132), "Employers' Disclosures about Pensions and Other Post-retirement Benefits", to require additional disclosures related to pensions and post retirement benefits. While retaining the existing disclosure requirements for pensions and post-retirement benefits, additional disclosures are required related to pension plan assets, obligations, contributions and net benefit costs, beginning with fiscal years ending after December 15, 2003. Additional disclosures pertaining to benefit payments are required for fiscal years ending after June 30, 2004. The SFAS 132 revisions also include additional disclosure requirements for interim financial reports beginning after December 15, 2003. The Corporation has implemented the revised interim disclosures in these financial statements and will implement the annual benefit payment disclosures in subsequent annual financial statements.

Emerging Issues Task Force ("EITF") Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1"), provides application guidance that should be used to determine when an investment is considered impaired, whether that impairment is other-than-temporary, and the recognition of an impairment loss. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In September 2004, the FASB delayed the accounting requirements of EITF 03-1 until additional implementation guidance is issued and goes into effect.

On March 9, 2004, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," which provides guidance regarding loan commitments that are accounted for as derivative instruments. In this Bulletin, the SEC determined that an interest rate lock commitment should generally be valued at zero at inception. The rate locks will continue to be adjusted for changes in value resulting from changes in market interest rates. The Corporation adopted this new standard prospectively effective April 1, 2004. Under the new accounting guidance, the Corporation no longer recognizes any revenue at the inception of the rate lock. Profits inherent in the rate lock are recognized at the time of the sale of the underlying loans. The implementation of the standard did not have a material impact on results of operations.

In September 2004, the EITF reached a consensus on Issue No. 04-10 (EITF 04-10), "Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds." This issue addresses the aggregation of segments that do not meet the quantitative thresholds under paragraph 18 of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Under SFAS 131, if a segment does not meet one of the quantitative thresholds established, it does not need to be disclosed as a reportable segment. Further, operating segments that do not meet quantitative thresholds may be aggregated to produce a reportable segment only if the combined segments share a majority of certain aggregation criteria. EITF 04-10 clarifies that operating segments that do not meet the quantitative thresholds can be aggregated to produce a reportable segment if:

Aggregation is consistent with the objective and basic principles of SFAS 131
The segments have similar economic characteristics, and
The segments share a majority of the following aggregation criteria:

Be similar in a majority of:

Products and services
Production processes
Type of customer
Distribution methods
Regulatory environment

This consensus is effective no later than fiscal years ending after October 13, 2004 (date of Board ratification). The corresponding information for earlier periods, including interim periods, shall be restated unless it is impractical to do so. Restatement of previously issued financial statements is required. The Corporation is currently evaluating its reportable segments.

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:

	September 30, 2004
					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	$	10,585	$		1	$	-	$	10,586	1.78	%
After one year but within five years		255,075			3		1,937		253,141	3.04	%
After five year but within ten years		364,362			-		954		363,408	4.13	%
		630,022			4		2,891		627,135	3.64	%

Commonwealth of Puerto Rico and its subdivisions:
Within one year		1,225			3		-		1,228	3.10	%
After one year but within five years		12,705			172		-		12,877	3.90	%
After five years but within ten years		6,300			-		-		6,300	4.52	%
		20,230			175		-		20,405	4.05	%
Mortgage-backed securities:
Over ten years		412,170			-		7,858		404,312	4.04	%

	$	1,062,422	$		179	$	10,749	$	1,051,852	3.80	%

	December 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	$	4,050	$	23		$	-	$	4,073	1.80	%
After one year but within five years		325,426		-			3,526		321,900	1.91	%
		329,476		23			3,526		325,973	1.91	%
Commonwealth of Puerto Rico and its subdivisions:
After one year but within five years		23,918		213			4		24,127	5.70	%
After five years but within ten years		6,300		-			-		6,300	4.52	%
		30,218		213			4		30,427	5.45	%
Mortgage-backed securities:
Over ten years		1,309,908		8,512			10,509		1,307,911	4.51	%
	$	1,669,602	$	8,748		$	14,039	$	1,664,311	4.01	%

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.

The number of positions, fair value and unrealized losses at September 30, 2004, of investment securities available for sale that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, are as follows:

	Less than 12 months					12 months or more				Total
	Number					Number					Number
	of		Fair		Unrealized	of		Fair		Unrealized	of		Fair		Unrealized
	Positions		Value		Losses	Positions		Value		Losses	Positions		Value		Losses
Treasury and agencies of the
United States Government	12	$	508,940	$	1,583	2	$	64,018	$	1,308	14	$	572,958	$	2,891

Mortgage-backed securities	3		85,981		666	7		318,331		7,192	10		404,312		7,858
	15	$	594,921	$	2,249	9	$	382,349	$	8,500	24	$	977,270	$	10,749

The Corporation evaluates its investment securities for other than temporary impairment on a quarterly basis or earlier if other factors indicative of potential impairment exist. An impairment charge in the consolidated statements of income is recognized when the decline in the fair value of the securities below their cost basis is judged to be other-than-temporary. The Corporation considers various factors in determining whether it should recognize an impairment charge including, but not limited to the length of time and extent to which the fair value has been less than its cost basis, expectation of recoverability of its original investment in the securities and the Corporation's intention and ability to hold the securities for a period of time sufficient to allow for any anticipated recovery in fair value.

As of September 30, 2004, management concluded that there was no other-than-temporary impairment in its investment securities portfolio. The unrealized losses in the Corporation's investments in U.S. Government agencies were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Since the Corporation has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Corporation does not consider these investments to be other-than-temporarily impaired at September 30, 2004. The unrealized losses in the Corporation's investment in federal agency mortgage backed securities were caused by interest rate increases. The Corporation purchased these investments at a discount relative to their face amount, and the contractual cash flows of these investments are guaranteed by an agency of the U.S. government. Accordingly, it i s expected that the securities will not be settled at a price less than the amortized cost of the Corporation's investment. The decline in market value is attributable to changes interest rates and not credit quality and since the Corporation has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Corporation does not consider these investments to be other-than-temporarily impaired at September 30, 2004.

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:

	September 30, 2004
				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	$	3,042	$	-	$	-	$	3,042	1.71	%
After one year but within five years		784,888		35,842		-		820,730	5.04	%
		787,930		35,842		-		823,772	5.03	%
Commonwealth of Puerto Rico and its subdivisions:
Within one year		6,143		94		-		6,237	4.91	%
After one year but within five years		10,126		357		-		10,483	5.13	%
Over ten years		8,262		144		-		8,406	6.43	%
		24,531		595		-		25,126	5.52	%
Mortgage-backed securities:
After one year but within five years		640		50		-		690	8.88	%
After five years but within ten years		378		16		-		394	7.76	%
Over ten years		239		10		1		248	8.45	%
		1,257		76		1		1,332	8.46	%
Foreign governments:
Within one year		75		-		-		75	6.98	%
After one year but within five years		75		-		-		75	5.60	%
		150		-		-		150	6.29	%
Other Securities:
Within one year		24,302		-		-		24,302	1.58	%
After one year but within five years		8,198		-		-		8,198	1.58	%
		32,500		-		-		32,500	1.58	%

	$	846,368	$	36,513	$	1	$	882,880	4.91	%

		December 31, 2003
				Gross		Gross			Weighted
		Amortized		Unrealized		Unrealized		Fair	Average
		Cost		Gains		Losses		Value	Yield
		(Dollars in thousands)
Treasury and agencies of the United States Government:
Within one year	$	3,016	$	-	$	-	$	3,016	0.87	%
After one year but within five years		783,987		51,636		-		835,623	5.04	%
		787,003		51,636		-		838,639	5.03	%
Commonwealth of Puerto Rico and its subdivisions:
Within one year		4,565		33		-		4,598	5.18	%
After one year but within five years		16,293		761		-		17,054	5.05	%
Over ten years		8,500		205		-		8,705	6.44	%
		29,358		999		-		30,357	5.48	%
Mortgage-backed securities:
After one year but within five years		1,180		93		-		1,273	8.43	%
After five years but within ten years		113		7		-		120	9.31	%
Over ten years		323		14		-		337	8.40	%
		1,616		114		-		1,730	8.48	%
Foreign governments:
Within one year		50		-		-		50	7.20	%
After one year but within five years		100		-		-		100	7.11	%
		150		-		-		150	7.14	%
Other securities, within one year		15,000		-		-		15,000	0.81	%

	$	833,127	$	52,749	$	-	$	885,876	4.97	%

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.

At September 30, 2004, the Corporation had one investment security held to maturity that had been in a continuous unrealized loss position for twelve months or more. This was a mortgage backed security with a fair value of $48,000 and an unrealized loss of $1,000.

The Corporation evaluates its investment securities for other than temporary impairment on a quarterly basis or earlier if other factors indicative of potential impairment exist. An impairment charge in the consolidated statements of income is recognized when the decline in the fair value of the securities below their cost basis is judged to be other-than-temporary. The Corporation considers various factors in determining whether it should recognize an impairment charge including, but not limited to the length of time and extent to which the fair value has been less than its cost basis, expectation of recoverability of its original investment in the securities and the Corporation's intent and ability to hold the securities for a period of time sufficient to allow for any anticipated recovery in fair value.

4. Loans

The Corporation's loan portfolio at September 30, 2004 and December 31, 2003 consists of the following:

		September 30, 2004		December 31, 2003
		(in thousands)

Commercial and industrial	$	2,098,125	$	2,034,323
Consumer		441,560		399,957
Leasing		129,061		120,959
Construction		205,679		211,192
Mortgage		2,121,722		1,162,480
		4,996,147		3,928,911
Unearned income and deferred fees/costs		(7,354)		(11,345)
Allowance for loan losses		(70,731)		(69,693)
	$	4,918,062	$	3,847,873

5. Allowance for Loan Losses:

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

		For the nine month periods ended				For the quarters ended
		Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
		(in thousands)

Balance at beginning of period	$	69,693	$	56,906	$	67,057	$	60,936
Provision for loan losses		21,770		35,001		7,020		9,221
		91,463		91,907		74,077		70,157
Losses charged to the allowance:
Commercial		14,848		6,426		1,806		1,349
Construction		-		499		-		-
Consumer		14,821		27,546		4,488		7,493
Leasing		1,212		1,001		375		540
		30,881		35,472		6,669		9,382
Recoveries:
Commercial		4,013		2,640		1,467		781
Construction		-		433		-		433
Mortgage		-		7		-		7
Consumer		5,767		3,702		1,716		1,416
Leasing		369		414		140		219
		10,149		7,196		3,323		2,856
Net loans charged off		20,732		28,276		3,346		6,526
Balance at end of period	$	70,731	$	63,631	$	70,731	$	63,631

Other Assets

Other assets at September 30,2004 and December 31, 2003 consist of the following:

		September 30, 2004		December 31, 2003
		(in thousands)

Deferred tax assets, net	$	15,280	$	19,727
Accounts receivable		44,726		56,178
Securities sold not delivered, net		22,285		22,715
Other real estate		2,642		4,082
Other repossessed assets		873		907
Software		10,815		12,365
Prepaid expenses		16,650		16,858
Customers' liabilities on acceptances		2,626		4,270
Other		8,741		4,948
	$	124,638	$	142,050

7. Borrowings:

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

	September 30, 2004
		Federal Funds		Securities Sold		Commercial
		Purchased and		Under Agreements		Paper
		Other Borrowings		to Repurchase		Issued
		(Dollars in thousands)

Amount outstanding at period end	$	722,000	$	1,301,627	$	599,376
Average indebtedness outstanding during the period	$	482,354	$	1,733,398	$	404,241
Maximum amount outstanding during the period	$	1,033,051	$	2,052,790	$	675,000
Average interest rate for the period		1.58	%	3.31	%	1.27	%
Average interest rate at period end		1.65	%	4.04	%	1.78	%

	December 31, 2003
		Federal Funds		Securities Sold		Commercial
		Purchased and		Under Agreements		Paper
		Other Borrowings		to Repurchase		Issued
		(Dollars in thousands)

Amount outstanding at period end	$	350,000	$	1,808,238	$	254,904
Average indebtedness outstanding during the period	$	318,938	$	1,544,410	$	150,534
Maximum amount outstanding during the period	$	565,000	$	1,959,214	$	275,000
Average interest rate for the period		1.21	%	3.72	%	1.24	%
Average interest rate at period end		1.13	%	3.19	%	1.14	%

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

		September 30, 2004		December 31, 2003
		(in thousands)

Federal funds purchased and other borrowings:
Within thirty days	$	147,000	$	35,000
After thirty to ninety days		25,000		45,000
Over ninety days		550,000		270,000
Total	$	722,000	$	350,000
Securities sold under agreements to repurchase:
Within thirty days	$	326,621	$	823,122
Over ninety days		975,006		985,116
Total	$	1,301,627	$	1,808,238
Commercial paper issued:
Within thirty days	$	599,376	$	254,904

As of September 30, 2004 and December 31, 2003, the weighted average maturity of Federal funds purchased and other borrowings over ninety days was 15.32 months and 12.54 months, respectively.

As of September 30, 2004, securities sold under agreements to repurchase (classified by counterparty) were as follows:

				Fair Value of	Average
		Balance of		Underlying	Maturity
		Borrowings		Securities	in Months
		(Dollars in thousands)

Citigroup Global Markets Inc.	$	200,000	$	213,232	19.84
Credit Suisse First Boston LLC		300,000		325,031	33.92
Federal Home Loan Bank New York		100,000		124,692	42.43
Goldman Sachs, NY		74,296		75,505	0.23
JP Morgan Chase Securities, Inc.		125,000		144,628	35.63
Lehman Brothers RS		250,006		278,822	89.67
Morgan Stanley		252,325		251,452	0.23
	$	1,301,627	$	1,413,362	42.21

The following investment securities were sold under agreements to repurchase:

		September 30, 2004
		Carrying				Fair	Weighted
		Value of				Value of	Average
		Underlying		Balance of		Underlying	Interest
Underlying Securities		Securities		Borrowings		Securities	Rate
		(Dollars in thousands)

Obligations of U.S. Government agencies and corporations	$	1,103,026	$	1,026,893	$	1,134,134	4.51	%
Mortgage-backed securities		279,228		274,734		279,228	4.01	%
Total	$	1,382,254	$	1,301,627	$	1,413,362	4.41	%

		December 31, 2003
		Carrying				Fair	Weighted
		Value of				Value of	Average
		Underlying		Balance of		Underlying	Interest
Underlying Securities		Securities		Borrowings		Securities	Rate
		(Dollars in thousands)

Obligations of U.S. Government agencies and corporations	$	830,650	$	764,674	$	874,111	4.51	%
Mortgage-backed securities		1,084,161		1,033,454		1,084,161	4.53	%
Other		10,175		10,110		10,197	1.33	%
Total	$	1,924,986	$	1,808,238	$	1,968,469	4.51	%

8. Derivative Financial Instruments:

As of September 30, 2004, the Corporation had the following derivative financial instruments outstanding:

								Other
						Gain (Loss) for		Comprehensive
						the nine months		*Income for the**
		Notional				ended		nine months ended
		Value		Fair Value		Sept. 30, 2004		Sept. 30, 2004
		(In thousands)
CASH FLOW HEDGES
Interest rate swaps	$	100,000	$	(3,647)	$	-	$	2,607
FAIR VALUE HEDGES
Interest rate swaps		429,707		(5,557)		(49)		-
OTHER DERIVATIVES
Options		69,770		4,647		(1,746)		-
Embedded options on stock-indexed deposits		(69,125)		(4,647)		1,823		-
Interest rate caps		(35,196)		(167)		127		-
Customer interest rate caps		29,103		139		(129)		-
Customer interest rate swaps		(120,653)		684		130		-
Interest rate swaps		120,653		122		39		-
Loan commitments		2,642		2,646		3
					$	198	$	2,607
* Net of tax

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

								Other
						Gain (Loss) for		Comprehensive
						the year		*Income for the**
						ended		year ended
		Notional		Fair		December 31,		December 31,
		Value		Value		2003		2003
		(In thousands)
CASH FLOW HEDGES
Interest rate swaps	$	100,000	$	(7,924)	$	-	$	1,739
FAIR VALUE HEDGES
Interest rate swaps		380,789		(8,140)		(206)		-
OTHER DERIVATIVES
Options		11,870		279		83		-
Embedded options on stock-indexed deposits		(11,296)		(279)		(98)		-
Forward foreign currency exchange contracts		6,824		2		-		-
Interest rate caps		31,495		(330)		75		-
Customer interest rate caps		(31,495)		330		37		-
Customer interest rate swaps		(122,012)		554		1,767		-
Interest rate swaps		138,012		83		(1,381)		-
					$	277	$	1,739
*Net of tax

The Corporation's principal objective in holding interest rate swap agreements is the management of interest rate risk and changes in the fair value of assets and liabilities. The Corporation's policy is that each swap contract be specifically tied to assets or liabilities with the objective of transforming the interest rate characteristic of the hedged instrument. During July 2000, the Corporation swapped $100 million of term funds at a fixed spread over U.S. Treasury securities. These swaps were designated as cash flow hedges and mature through the year 2005. As of September 30, 2004, the total amount, net of tax, included in accumulated other comprehensive loss pertaining to the $100 million interest rate swap was an unrealized loss of $2.2 million of which the Corporation expects to reclassify into earnings $1.3 million, net of tax, during the next three months. As of December 31, 2003, the total amount, net of tax, included in accumulated other comprehensive income pertaining to the $100 million interest rate swap was an unrealized loss of $4.8 million.

As of September 30, 2004, the Corporation also had outstanding interest rate swap agreements, with a notional amount of approximately $429.7 million, maturing through the year 2024. The weighted average rate paid and received on these contracts is 1.78% and 4.40%, respectively. As of September 30, 2004, the Corporation had retail fixed rate certificates of deposit amounting to approximately $420.2 million and a $3.3 million fixed rate loan swapped to create a floating rate source of funds. These swaps were designated as fair value hedges. For the nine-month period ended September 30, 2004, the Corporation recognized a loss of approximately $49,000 on fair value hedges due to hedge ineffectiveness, which is included in other income in the consolidated statements of income.

As of December 31, 2003, the Corporation had outstanding interest rate swap agreements, with a notional amount of approximately $380.8 million, maturing through the year 2024. The weighted average rate paid and received on these contracts was 1.22% and 4.83%, respectively. As of December 31, 2003, the Corporation had retail fixed rate certificates of deposit amounting to approximately $374.7 million and a $3.5 million fixed rate loan swapped to create a floating rate source of funds. These swaps were designated as fair value hedges. For the year ended December 31, 2003, the Corporation recognized a loss of approximately $206,000 on fair value hedges due to hedge ineffectiveness, which is included in other income in the consolidated statements of income.

The Corporation issues certificates of deposit and individual retirement accounts with returns linked to the Standard and Poor's 500 index, which constitutes an embedded derivative instrument that is bifurcated from the host deposit and recognized on the balance sheet. The Corporation enters into option agreements in order to manage the interest rate risk on these deposits; however, these options have not been designated for hedge accounting, therefore gains and losses on the market value of both the embedded derivative instruments and the option contracts are marked to market through earnings and recorded in other gains and losses in the consolidated statements of income. For the nine-month period ended September 30, 2004, a gain of approximately $1,823,000 was recorded on embedded options on stock-indexed deposits and a loss of approximately $1,746,000 was recorded on the option contracts. For the year ended December 31, 2003, a loss of approximately $98,000 was recorded on embedded options on stock-ind exed deposits and a gain of approximately $83,000 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. The Corporation occasionally enters into foreign currency exchange forwards in order to satisfy the needs of its customers. As of December 31, 2003, the Corporation had foreign currency exchange forwards with a notional amount of $6,824,000. For the year ended December 31, 2003, the total amount, included in other comprehensive income (loss) related to these currency exchange forwards was an unrealized gain of $1,368, net of deferred taxes of $875. There were no forward contracts outstanding at the end of the nine-month period ended September 30, 2004.

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 substantially the same terms and conditions. For the nine-month period ended September 30, 2004 and the year ended December 31, 2003, the Corporation recognized net gains of $167,000 and $498,000, respectively, on these transactions.

The Corporation enters into loan commitments with customers to extend mortgage loans at a specified rate. These loan commitments are written options and are measured at fair value pursuant to SFAS 133. As of September 30, 2004 the Corporation had loan commitments outstanding for approximately $2.6 million and recognized a gain of $3,000 on these commitments.

9. 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.

10. Pension Plans:

The Corporation maintains a qualified noncontributory defined benefit pension plan (the "Plan"), which covers substantially all active employees of the Corporation, and a frozen qualified noncontributory defined benefit plan acquired in connection with the 1996 acquisition of Banco Central Hispano de Puerto Rico (the "Central Hispano Plan").

The components of net periodic benefit cost for the Plan for the nine months and the quarter ended September 30, 2004 and 2003 were as follows:

		For the nine months ended				For the quarter ended
		September 30,				September 30,
		2004		2003		2004		2003
	(Dollars in thousands)
Service cost	$	999	$	1,347	$	333	$	449
Interest cost		1,372		1,479		457		493
Expected return on plan assets		(1,227)		(1,368)		(409)		(456)
Net amortization		(57)		341		(19)		114
Periodic benefit cost	$	1,087	$	1,799	$	362	$	600

The Plan's required minimum contribution to be paid during 2004 for the 2004 plan year is zero (using 2004 "rate relief" interest rate of 7.11%). This is because the funded status of the plan for 2003 is such that no quarterly installments are required and the 2004 contribution may therefore be paid in 2005. However, there is a pending amount payable in 2004 for the 2003 plan year. This amount is $216,909, and was paid by September 15, 2004.

The components of net periodic benefit cost for the Central Hispano Plan for the nine months and the quarter ended September 30, 2004 and 2003 were as follows:

		For the nine months ended				For the quarter ended
		September 30,				September 30,
		2004		2003		2004		2003
	(Dollars in thousands)

Interest cost	$	1,484	$	1,473	$	495	$	491
Expected return on plan assets		(921)		(1,335)		(307)		(445)
Net amortization		-		519		-		173
Periodic benefit cost	$	563	$	657	$	188	$	219

For the Central Hispano Plan the required minimum contributions during 2004 for the 2004 plan year have not yet been determined. The estimated payments for the 2004 plan year are $488,007 quarterly starting March 15, 2004 for a total of $1,952,058. There is a pending amount payable in 2004 for the 2003 plan year. This amount is $281,204 and was paid by August 15, 2004.

11. Guarantees:

The Corporation issues financial standby letters of credit to guarantee the performance of its customers to third parties. If the customer fails to meet its financial performance obligation to the third party, then the Corporation would be obligated to make the payment to the guaranteed party. In accordance with the provisions of FIN 45, the Corporation recorded a liability of $2,652,000 at September 30, 2004, which represents the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit issued or modified after December 31, 2002, net of the related amortization at inception. The fair value approximates the fee received from the customer for issuing the standby letter of credit. The fees are deferred and recognized on a straight-line basis over the commitment period. Standby letters of credit outstanding at September 30, 2004 had terms ranging from six months to three years. The contract amounts of the standby letters of credit of approximately $231,311,000 at September 30, 2004, represent the maximum potential amount of future payments the Corporation could be required to make under the guarantee in the event of non-performance by its customers. These standby letters of credit typically expire without being drawn upon. Management does not anticipate any material losses related to these guarantees.

12. Segment Information:

Types of Products and Services

The Corporation has four reportable segments: Commercial Banking, Mortgage Banking, Treasury and Investments and Broker/dealer. Insurance operations and International Banking are other lines of business in which the Corporation commenced its involvement during 2000 and 2001, respectively. However, no separate disclosures are being provided for these operations, since they did not meet the quantitative thresholds for disclosure of segment information.

Measurement of Segment Profit or Loss and Segment Assets

The Corporation's reportable business segments are strategic business units that offer distinctive products and services that are marketed through different channels. These are managed separately because of their unique technology, marketing and distribution requirements.

The following presents financial information of reportable segments as of and for the quarters ended September 30, 2004 and 2003. General corporate expenses and income taxes have not been added or deducted in the determination of operating segment profits. The "Other" column includes the items necessary to reconcile the identified segments to the reported consolidated amounts. Included in the "Other" column are expenses of the internal audit, investors' relations, strategic planning, administrative services, mail, marketing, public relations, electronic data processing departments and comptroller's departments.

		September 30, 2004
		Commercial		Mortgage		Treasury and								Consolidated
		Banking		Banking		Investments		Broker-dealer		Other		Eliminations		Total
		(In thousands)
Total external revenue	$	141,889	$	77,217	$	88,397	$	36,828	$	14,133	$	(6,054)	$		352,410
Intersegment revenue		3,554		-		4		6		2,490		(6,054)			-
Interest income		115,730		72,824		77,581		1,094		794		(3,620)			264,403
Interest expense		24,740		14,891		62,938		773		1,209		(3,694)			100,857
Depreciation and
amortization		4,692		864		177		242		3,965		-			9,940
Segment income
before income tax		26,486		54,564		21,529		11,301		(46,024)		(651)			67,205
Segment assets		3,185,613		2,434,435		2,349,530		91,645		899,027		(999,215)			7,961,035

		As restated
		September 30, 2003
		Commercial		Mortgage		Treasury and								Consolidated
		Banking		Banking		Investments		Broker-dealer		Other		Eliminations		Total
		(In thousands)
Total external revenue	$	153,134	$	67,063	$	69,387	$	35,222	$	10,880	$	(4,446)	$			331,240
Intersegment revenue		19,016		-		6		-		1,424		(20,446)				-
Interest income		126,636		56,301		58,645		634		252		(3,027)				239,441
Interest expense		28,482		11,748		63,036		590		138		(3,027)				100,967
Depreciation and
amortization		4,885		937		147		355		10,337		-				16,661
Segment income
before income tax		21,120		48,837		2,072		11,480		(54,386)		-				29,123
Segment assets		2,938,656		1,414,965		2,798,967		83,778		777,808		(804,987)				7,209,187

Reconciliation of Segment Information to Consolidated Amounts

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

				As restated
		September 30, 2004		Sept. 30, 2003
Revenues:
Total revenues for reportable segments	$	344,331	$	324,806
Other revenues		14,133		10,880
Elimination of intersegment revenues		(6,054)		(4,446)
Total consolidated revenues	$	352,410	$	331,240

Total income before tax of reportable segments	$	113,880	$	83,509
Income before tax of other segments		(46,024)		(54,386)
Elimination of intersegment profits		(651)		-
Consolidated income before tax	$	67,205	$	29,123

Assets:
Total assets for reportable segments	$	8,061,223	$	7,236,366
Assets not attributed to segments		899,027		777,808
Elimination of intersegment assets		(999,215)		(804,987)
Total consolidated assets	$	7,961,035	$	7,209,187

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

Santander BanCorp
Selected Financial Data


	Nine month periods ended					Quarters ended
	September 30,					September 30,
		2004		2003 (1)		2004		2003 (1)
CONDENSED INCOME STATEMENTS
Interest income	$	264,403	$	239,441	$	92,449	$	81,495
Interest expense		100,857		100,967		36,510		32,539
Net interest income		163,546		138,474		55,939		48,956
Gain on sale of securities		11,465		10,012		2,462		4
Other income		76,542		81,787		25,936		31,425
Operating expenses		162,578		166,405		53,851		57,363
Provision for loan losses		21,770		34,745		7,020		8,965
Income tax		4,075		5,419		1,597		2,514
Net income	$	63,130	$	23,704	$	21,869	$	11,543
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	$	-	$	1.31	$	-	$	0.44
PER COMMON SHARE DATA*
Net income	$	1.35	$	0.43	$	0.47	$	0.22
Book value	$	11.28	$	11.77	$	11.28	$	11.77
Outstanding shares:
Average		46,639,104		46,668,710		46,639,104		46,639,104
End of period		46,639,104		46,639,104		46,639,104		46,639,104
Cash Dividend per Share	$	0.33	$	0.33	$	0.11	$	0.11
AVERAGE BALANCES
Loans held for sale and loans, net of allowance for loans losses	$	4,564,864	$	3,921,344	$	4,941,830	$	3,929,057
Allowance for loan losses		73,576		63,491		73,200		66,512
Earning assets		7,235,495		6,237,689		7,594,167		6,079,040
Total assets		7,547,614		6,588,055		7,907,551		6,830,030
Deposits		4,094,189		3,710,076		4,185,367		3,681,144
Borrowings		2,797,027		2,154,126		3,047,510		2,430,099
Preferred equity		-		65,250		-		65,250
Common equity		489,888		530,124		507,619		520,097
PERIOD END BALANCES
Loans held for sale and loans, net of allowance for loans losses	$	5,201,079	$	4,064,402	$	5,201,079	$	4,064,402
Allowance for loan losses		70,731		63,631		70,731		63,631
Earning assets		7,700,373		6,974,703		7,700,373		6,974,703
Total assets		7,961,035		7,209,981		7,961,035		7,209,981
Deposits		4,516,193		3,690,353		4,516,193		3,690,353
Borrowings		2,763,209		2,757,026		2,763,209		2,757,026
Preferred equity		-		65,250		-		65,250
Common equity		526,237		549,088		526,237		549,088


Continued on following page

*Continued from previous page*
		Nine month periods ended				Quarters ended
		September 30,				September 30,
		2004		2003 (1)		2004		2003 (1)
SELECTED RATIOS
Performance:
Net interest margin on a tax-equivalent basis		3.28	%	3.23	%	3.19	%	3.27	%
Efficiency ratio (2)		64.65	%	71.53	%	61.97	%	67.63	%
Return on average total assets (on an annualized basis)		1.12	%	0.48	%	1.10	%	0.67	%
Return on average common equity (on an annualized basis)		17.21	%	5.11	%	17.14	%	7.93	%
Dividend payout		24.44	%	75.95	%	23.40	%	49.33	%
Average net loans/average total deposits		111.50	%	105.69	%	118.07	%	106.73	%
Average earning assets/average total assets		95.86	%	94.68	%	96.04	%	94.91	%
Average stockholders' equity/average assets		6.49	%	9.04	%	6.42	%	8.57	%
Fee income to average assets (annualized)		1.19	%	1.35	%	1.14	%	1.47	%
Capital:
Tier I capital to risk-adjusted assets		9.32	%	11.90	%	9.32	%	11.90	%
Total capital to risk-adjusted assets		10.87	%	13.16	%	10.87	%	13.16	%
Leverage Ratio		6.13	%	7.86	%	6.13	%	7.86	%
Asset quality:
Non-performing loans to total loans		1.84	%	2.61	%	1.84	%	2.61	%
Annualized net charge-offs to average loans		0.60	%	0.95	%	0.27	%	0.65	%
Allowance for loan losses to period-end loans		1.34	%	1.57	%	1.34	%	1.57	%
Allowance for loan losses to non-performing loans		73.05	%	60.78	%	73.05	%	60.78	%
Allowance for loan losses to non-performing loans plus
accruing loans past-due 90 days or more		70.87	%	58.99	%	70.87	%	58.99	%
Non-performing assets to total assets		1.26	%	1.53	%	1.26	%	1.53	%
Recoveries to charge-offs		32.86	%	20.29	%	49.83	%	30.44	%
OTHER DATA AT END OF PERIOD
Customer financial assets under management	$	12,065,000	$	9,866,600	$	12,065,000	$	9,866,600
Total branches		65		67		65		67
ATMs		149		140		149		140


*Per share data is based on the average number of shares outstanding during the periods, after
giving retroactive effect to the 10% stock dividend declared on July 9, 2004.
(1) Restated to include Santander Securities Corporation and Subsidiary
(2) Operating expenses divided by net interest income on a tax equivalent basis, plus other
income excluding securities gains and losses, and gain on sale of building in 2004

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.

General

The Corporation's results of operations for the nine months ended September 30, 2004 reflected a significant improvement over 2003 operations and were aligned with its business plans. The Corporation's business plan is based on an integrated business model that focuses on our clients and our people. Our client-focused business model is based on three strategic cornerstones: Sales and Distribution, Credit and Market Risk and Operating Efficiency. The Sales and Distribution cornerstone is based on implementing and expanding throughout the Corporation a systematic sales management process which focuses on growing our loan portfolio by cross-selling products and services to our extensive segmented client base and improving client profitability. In the area of Credit and Market Risk we are focusing on implementing and maintaining agile and flexible credit processes, continuous monitoring and improvement of asset quality, maximizing loan recoveries and maintaining an investment portfolio adequate to our ass et size. With respect to Operating Efficiency, we aim to limit operating expense growth to inflation levels, while obtaining efficiencies from new operating systems and investing in and training the best people. Our business plan is grounded in client orientation and providing the highest quality service with the best human resources and information technology, while maintaining superior asset quality.

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 services 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 periods. 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, 2003.

The consolidated financial statements for the quarter and nine-month period ended September 30, 2003, have been restated to give retroactive effect to the acquisition of Santander Securities Corporation by Santander BanCorp on December 30, 2003. The earnings per share computations for all periods presented in the accompanying financial information have been adjusted retroactively to reflect the 10% stock dividend declared by the Board of Directors on July 9, 2004 (refer to the section on "Capital and Dividends" below).

Results of Operations for Nine-Month Period and the Quarter Ended September 30, 2004

Santander BanCorp is the financial holding company for Banco Santander Puerto Rico and Subsidiaries (the Bank), Santander Securities Corporation and Subsidiary, and Santander Insurance Agency, Inc. During the last quarter of 2003 the Corporation acquired Santander Securities Corporation and its subsidiary, Santander Asset Management Corporation thereby positioning the Corporation as a full service provider of a broad range of financial services under the Santander BanCorp umbrella.

Santander BanCorp (the Corporation) reported net income of $63.1 million for the nine-month period ended September 30, 2004, compared with $23.7 million for the same period in 2003, an improvement of 166.3%. Earnings per common share (EPS) for the nine-month period ended September 30, 2004 were $1.35, based on 46,639,104 average shares. Earnings per common share for the first nine months of 2003 were $0.43, based on 46,668,710 average shares outstanding. Return on average total assets (ROA) on an annualized basis and return on average common equity (ROE) on an annualized basis for the nine-month period ended September 30, 2004 were 1.12% and 17.21%, respectively, compared with 0.48% and 5.11% reported during the same nine-month period of 2003.

For the third quarter of 2004, the Corporation reported net income of $21.9 million, compared with $11.5 million for the same period in 2003, an improvement of 89.5%. Earnings per common share (EPS) for the quarter ended September 30, 2004 were $0.47, based on 46,639,104 average shares. Earnings per common share for the third quarter of 2003 were $0.22, based on 46,639,104 average shares outstanding. Return on average total assets (ROA) on an annualized basis and return on average common equity (ROE) on an annualized basis for the quarter ended September 30, 2004 were 1.10% and 17.14%, respectively, compared with 0.67% and 7.93% reported during the same quarter of 2003.

The increase of $39.4 million or 166.3% in net income for the nine month period ended September 30, 2004 compared to the same period in 2003 was principally due to an increase of $25.1 million in net interest income, a decrease in the provision for loan losses of $13.0 million, a decrease in operating expenses of $3.8 million and a decrease in the provision for income tax of $1.3 million. These changes were partially offset by a decrease of $3.8 million in other income due primarily to lower gains on sales of loans.

The $10.3 million improvement in net income for the third quarter of 2004 compared to the same period in 2003 was principally due to an increase of $7.0 million in net interest income, a decrease of $1.9 million in the provision for loan losses, a $3.5 million decrease in operating expenses and a $0.9 million decrease in the provision for income tax. These changes were partially offset by a decrease of $3.0 million in other income due primarily to lower gains on sales of securities and loans.

Net Interest Income

The Corporation's net interest income for the nine-month period ended September 30, 2004 reached $163.5 million, an increase of 18.1% over $138.5 million for the same period in 2003. This improvement was due to an increase in average interest earning assets of $998 million or 16.0% and a decrease in total cost of funds of 42 basis points. For the nine months ended September 30, 2004, there was an increase in net interest margin on a tax equivalent basis of 5 basis points to 3.28% from 3.23 % for the nine-months ended September 30, 2003.

The Corporation's net interest income for the quarter ended September 30, 2004 reached $55.9 million, an increase of 14.3% over the $49.0 million reported for the same period in 2003. This increase was due primarily to higher average interest earning assets of $1.1 billion or 17.2% and a decrease of 16 basis points in total cost of funds. Average net loans increased 25.8% or $1.0 billion. This increase was offset by an increase in average interest-bearing liabilities of $1.1 billion in 2004 when compared to the same period in 2003. Average interest-bearing deposits increased 16.9% or $510.5 million and average short-term borrowings increased 26.5% or $604.5 million. The net interest margin on a tax-equivalent basis decreased from 3.27% for the quarter ended September 30, 2003 to 3.19% for the quarter ended September 30, 2004.

The table on page 43, 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 third quarter of 2004 and 2003. The table on Interest Variance Analysis - Tax Equivalent Basis on page 29, allocates changes in the Corporation's interest income (on a tax-equivalent basis) and interest expense between changes in the average volume of interest earning assets and interest bearing liabilities and changes in their respective interest rates for the third quarter of 2004 compared with the same period of 2003.

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 adjustments of $5.0 million and $4.4 million for the quarters ended September 30, 2004 and 2003, respectively. For the nine-month periods ended September 30, 2004 and 2003 the tax equivalent adjustments were $14.1 million and $12.4 million, respectively.

Interest Income

The Corporation's interest income on a tax equivalent basis increased $26.7 million, or 10.6% to $278.5 million for the nine months ended September 30, 2004 from $251.8 million for the nine months ended September 30, 2003. The increase of $26.7 million in tax equivalent interest income is composed of an increase in the volume of interest earning assets of $39.2 million and a decrease in the yield on such assets of $12.5 million.

For the quarter ended September 30, 2004, the Corporation's interest income on a tax equivalent basis increased $11.5 million, or 13.4% to $97.5 million for the quarter ended September 30, 2004 from $85.9 million for the quarter ended September 30, 2003. The increase in interest income on a tax equivalent basis was attributed to an increase in the volume of interest earning assets of $14.9 million that was partially offset by a decrease of $3.4 million attributed to the lower yields on interest earning assets. The most significant changes were in the Corporation's average loan portfolio.

Average interest earning assets increased 17.2% for the quarter ended September 30, 2004 compared to the third quarter of 2003. This increase was primarily in the average net loans which rose 25.8% or $1.0 billion for the third quarter of 2004 compared to the same period in 2003. There was also an increase in average investment securities of 2.5% or $57.4 million for the third quarter of 2004 compared to the third quarter of 2003. Average interest bearing deposits also increased $41.4 million during the second quarter of 2004.

The average yield on interest earning assets decreased from 5.26% for the quarter ended September 30, 2003 to 5.11% for the quarter ended September 30, 2004. The investment portfolio reflected an increase in yields of 45 basis points while the yield on the loan portfolio decreased 58 basis points during the third quarter of 2004 compared to the same period in 2003. These decreases were due primarily to the decrease in market rates.

Interest Expense

The Corporation's interest expense for the quarter ended September 30, 2004 increased by 12.2% to $36.5 million from $32.5 million for the quarter ended September 30, 2003. This increase in interest expense was attributed to a decrease in the cost of funds of $3.1 million that was partially offset by an increase of $7.1 million in the volume of interest bearing liabilities. There was an increase of 16.9% or $510.5 million in the average balance of interest bearing deposits during the third quarter of 2004 compared to the same period in 2003. This increase in average deposits is a result of the Corporation's efforts to increase its market share and client base consistent with its strategic plan. There was also an increase of $604.5 million or 26.5% in average borrowings. The average cost of interest bearing liabilities also reflected a decrease of 16 basis points to 2.21% for the quarter ended September 30, 2004 compared to 2.37% for the same period in 2003. This decrease is related to the decrease in market rates.

The following table allocates changes in the Corporation's interest income, on a tax-equivalent basis, and interest expense for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003, 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
on a Tax Equivalent Basis
		Quarter ended September 30, 2004
		Compared to the Quarter Ended
		September 30, 2003
		Increase (Decrease) Due to Change in:
		Volume		Rate		Total
Interest income, on a tax equivalent basis:		(In thousands)
Federal funds sold and securities purchased
under agreements to resell	$	60	$	240	$	300
Time deposits with other banks		68		120		188
Investment securities		662		2,607		3,269
Loans		14,141		(6,359)		7,782
Total interest income, on a tax equivalent basis		14,931		(3,392)		11,539

Interest expense:
Savings and NOW accounts		275		326		601
Other time deposits		2,389		(374)		2,015
Borrowings		4,205		(1,312)		2,893
Long-term borrowings		235		(1,773)		(1,538)
Total interest expense		7,104		(3,133)		3,971

Net interest income, on a tax equivalent basis	$	7,827	$	(259)	$	7,568

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, loan impairment measurements 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 establ ished to evaluate the adequacy of the allowance for loan losses, management considers that the allowance for loan losses is adequate to absorb probable losses on its loan portfolio.

Commercial and construction loans over a predetermined amount are individually evaluated on a quarterly basis for impairment following the provisions of SFAS No. 114, "Accounting by Creditors of a Loan". A loan is impaired when based on current information and events; it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. The impairment loss, if any, on each individual loan identified as impaired is measured based on the present value of expected cash flows discounted at the loan's effective interest rate, except as a practical expedient, we may measure impairment based on the loan's observable market price, or the fair value of the collateral, if the loan is collateral dependent. Substantially all of the Corporation's impaired loans are measured on the basis of the fair value of the collateral, net of estimated disposition costs. The Corporation maintains a detailed analysis of all loans identified as impaired with their cor responding allowances and the specific component of the allowance is computed on a quarterly basis. Additions, deletions or adjustment to the working paper are tracked and formal justification is documented detailing the rationale for such adjustment.

For small-homogeneous type loans, a general allowance is computed based on average historical loss experience or ratios for each corresponding type of loans (consumer, credit cards, residential mortgages, auto, etc.) The methodology of accounting for all probable losses is made in accordance with the guidance provided by Statement of Accounting Standards (SFAS) No. 5, "Accounting for Contingencies". In determining the general allowance, the Corporation applies a loss factor for each type of loan based on the average historical net charge off for the previous two or three years for each portfolio adjusted for other statistical loss estimates, as deemed appropriate. Historical loss rates are reviewed at least quarterly and adjusted based on changes in actual collections and charge off experience as well as significant factors that in management's judgement reflect the impact of any current conditions on loss recognition. Factors that management considers in the analysis of the general reserve include the effect of the trends in the nature and volume of loans (delinquency, charge-offs and non-accrual loans), changes in the mix or type of collateral, asset quality trends, changes in the internal lending policies and credit standards, collection practices and examination results from bank regulatory agencies.

The determination of the allowance for loan losses under SFAS No. 5 for the Corporation is based on historical loss experience by loan type, management judgment of the quantitative factors (historical net charge-offs, statistical loss estimates, etc.), as well as qualitative factors (current economic conditions, portfolio composition, delinquency trends, industry concentrations, etc.) which results in the final determination of the provision for loan losses to maintain a level of allowance for loan losses deemed to be adequate.

Our methodology for allocating the allowance among the different parts of the portfolio or different elements of the allowance is based on the historical loss percentages for each type or pool of loan (consumer, commercial, construction, mortgage and other), after assigning the specific allowances for impaired loans on an individual review process. The sum of specific allowances for impaired loans plus the general allowances for each type of loan not specifically examined and the unallocated allowance constitutes our total allowance for loan losses at the end of any reporting period.

An unallocated allowance is maintained to absorb changes and unexpected losses that may result from certain significant external factors, such as (a) the Corporation's moderate concentration in certain industries, especially health care, and agriculture businesses; (b) the slow growth of the Puerto Rico economy as evidenced by high unemployment figures; (c) the broad negative effect on the Puerto Rico economy of the increased price of oil and oil-related products that could extend well into 2005; (d) interest rates forecasts (e) uncertainties associated with an election year; and (f) the negative collateral economic effect of the war the Iraq or additional terrorist attacks, both which add material risk to the economy and curtail economic recovery. This allowance is based primarily on historical experience, current trends in factors such as bankruptcies and loss trends among others.

On a quarterly basis, management reviews its determination of the allowance for loan losses which includes the specific allowance computed according to the provisions of SFAS #114 and the general allowance for small-homogenous type loans, which is based on historical loss percentages for each type or pool of loan. This analysis also considers loans classified by the internal loan review department, the internal auditors, the in-house Watch System Unit, and banking regulators.

The Corporation has not changed any aspects of its overall approach in the determination of the allowance for loan losses, and there have been no material changes in assumptions or estimation techniques, as compared to prior periods.


ALLOWANCE FOR LOAN LOSSES

	For the nine-month periods ended					For the quarters ended
		September 30,				September 30,
		2004		2003		2004		2003
		(In thousands)

Balance at beginning of period	$	69,693	$	56,906	$	67,057	$	60,936
Provision for loan losses		21,770		35,001		7,020		9,221
		91,463		91,907		74,077		70,157
Losses charged to the allowance:
Commercial and industrial		14,848		6,426		1,806		1,349
Construction		-		499		-		-
Mortgage		-		-		-		-
Consumer		14,821		27,546		4,488		7,493
Leasing		1,212		1,001		375		540
		30,881		35,472		6,669		9,382
Recoveries:
Commercial and industrial		4,013		2,640		1,467		781
Construction		-
Construction		-		433		-		433
Mortgage		-		7		-		7
Consumer		5,767		3,702		1,716		1,416
Leasing		369		414		140		219
		10,149		7,196		3,323		2,856
Net loans charged-off		20,732		28,276		3,346		6,526
Balance at end of period	$	70,731	$	63,631	$	70,731	$	63,631

Ratios:
Allowance for loan losses to period-end loans		1.34	%	1.57	%	1.34	%	1.57	%
Recoveries to charge-offs		32.86	%	20.29	%	49.83	%	30.44	%
Annualized net charge-offs to average loans		0.60	%	0.95	%	0.27	%	0.65	%

During the third quarter of 2004 the Corporation reclassified its reserves related to unfunded lending commitments and standby letters of credit from the allowance for loan losses to other liabilities. Prior period amounts have been reclassified to conform to the current presentation. Changes in the reserve for unfunded commitments and standby letters of credit were as follows:

	For the nine-month periods ended					For the quarters ended
		September 30,				September 30,
		2004		2003		2004		2003
		(In thousands)
Balance at beginning of period	$	879	$	1,050	$	879	$	1,050
Provision for credit losses		480		(256)		480		(256)
Balance at end of period	$	1,359	$	794	$	1,359	$	794

One of the Corporation's specific goals during 2004 is to continue improving the quality of its loan portfolio by strengthening its collection efforts and employing more stringent lending criteria. The Corporation's allowance for loan losses was $70.7 million or 1.34% of period-end loans at September 30, 2004 a 23 basis point reduction compared to $63.6 million, or 1.57% of period-end loans at September 30, 2003. The decrease in this ratio was partially due to a significant reduction in net loans charged off as well as lower non-performing loans during the period. The reduction of $13.2 million or 37.8% in the provision for loan losses for the nine-month period ended September 30, 2004 and $2.2 million or 23.9% for the quarter then ended, was due to an 8.7% decrease in non-performing loans and an 26.7% reduction in net charge-offs during the first nine months of 2004 compared to the same period in 2003. In addition to the improvements in non-performing loans and net charge-offs, the reduction in the provi sion for loan losses was due to a significant decrease in the percentage of net consumer loan charge-offs during the first three quarters of 2004, resulting in a reduction in the loss ratios used by the Corporation in the determination of the provision for loan losses. The coverage ratio (allowance for loan losses to non-performing loans) increased to 73.05% at September 30, 2004, from 60.78% at September 30, 2003. At December 31, 2003 the coverage ratio was 71.74%. The annualized ratio of net charge-offs to average loans for the nine months ended September 30, 2004 decreased 35 basis points to 0.60% from 0.95% for the same period in 2003.

Net charge-offs for the nine months ended September 30, 2004 were significantly lower than those for the same period in 2003 due to more stringent lending criteria, aggressive collection efforts and continuous monitoring of the loan portfolio. Consumer loan charge-offs continued reflecting improvement during 2004. For the quarter ended September 30, 2004 net charge-offs also reflected a 48.7% reduction from $6.5 million at September 30, 2003 to $3.3 million at September 30, 2004.

At September 30, 2004 the allowance for loan losses was $70.7 million which was slightly higher than the $69.7 million at December 31, 2003 and increased $7.1 million from $63.6 million at September 30, 2003. At September 30, 2004 impaired loans with related allowance amounted to approximately $72,752,000 and $7,284,000, respectively. At December 31, 2003 impaired loans with related allowance amounted to $80,888,000 and $8,895,000.

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.

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, broker-dealer, asset management and insurance fees, gains and losses on sales of securities, gain on sale of mortgage servicing rights, certain other gains and losses and certain other income.

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

	For the nine-month periods ended					For the quarters ended
				As restated				As restated
		Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,
		2004		2003		2004		2003
	(In thousands)

Bank service fees on deposit accounts	$	9,611	$	10,634	$	3,170	$	3,500
Other service fees:
Credit card fees		9,358		8,979		3,122		2,966
Mortgage servicing fees		1,339		1,721		521		553
Trust fees		2,228		2,124		746		647
Other fees		6,413		6,183		2,166		2,058
Broker/dealer, asset management, and insurance fees		38,176		36,769		12,911		15,551
Gain on sale of securities, net		11,465		10,012		2,462		4
Gain on sale of loans		(84)		6,845		(240)		2,833
Gain on sale of mortgage servicing rights		284		327		88		142
Gain on mortgage servicing rights recognized		2,006		1,215		2,006		-
Trading gains		16		1,249		(185)		528
Gain (loss) on derivatives		198		246		426		4
Other gains, net		4,329		2,344		360		1,524
Other		2,668		3,151		845		1,119
	$	88,007	$	91,799	$	28,398	$	31,429

The Corporation's other income for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003 reflected a decrease of $3.0 million or 9.6%. This reduction was principally due to decreases of $3.1 million in gain on sale of loans and $2.6 million in fee income from the broker-dealer, asset management and insurance operations. These decreases were partially offset by an increase of $2.5 million in gain on sale of securities.

For the nine months ended September 30, 2004, other income decreased $3.8 million compared to the same period in 2003. This decrease was the result of lower gain on sale of loans and trading gains of $6.9 million and $1.2 million, respectively, that were only partially offset by a gain of $2.8 million on sale of a building during the first quarter of 2004, an increase of $1.5 million in gain on sale of securities and an increase of $1.4 million in fee income from the broker-dealer, asset management and insurance operations.

The decreases in broker-dealer, asset management and insurance fees for the quarter ended September 30, 2004 were due to decreases in commissions earned by Santander Securities of $3.0 million or 20.8% and increases in insurance commissions of $0.4 million or 42.5%. For the nine months ended September 30, 2004, SSC commissions increased $0.5 million or 1.4% and insurance commissions increased $0.9 million or 30.2%. SSC business includes securities underwriting and distribution, sales, trading, financial planning, investment advisory services and securities brokerage services. In addition, SSC provides portfolio management services through its wholly owned subsidiary, Santander Asset Management Corporation. The Broker-dealer, asset management and insurance operations contributed 45.5% of commissions to the Corporation's other income for the quarter ended September 30, 2004 and 43.4% for the nine-month period then ended.

The table below details the breakdown of commissions from broker-dealer, asset management and insurance operations:

		For the nine month periods ended				For the quarters ended
		Sept. 30, 2004		Sept. 30, 2003		Sept. 30, 2004		Sept. 30, 2003
		(In thousands)
Broker-dealer	$	22,794	$	25,794	$	7,503	$	11,604
Asset management		11,307		7,844		4,057		2,999
Total SSC		34,101		33,638		11,560		14,603
Insurance		4,075		3,131		1,351		948
Total	$	38,176	$	36,769	$	12,911	$	15,551

The decrease in broker-dealer commissions is due to the decrease in underwriting activity and a reduction in fixed income activity during the quarter and nine-month period ended September 30, 2004 compared to the same periods in 2003. The increase in asset management commissions is due to the growth in assets under management resulting from the issuance of closed end mutual funds.

The Corporation's gains on sales of loans were principally in the mortgage loan portfolio. The Corporation's strategy regarding mortgage loans is directed toward increasing its loan portfolio, while maintaining its secondary market channels open. Mortgage loan sales are executed from time to time when interest rate movements permit the Corporation to maximize its returns as was the case in 2003.

In March 2004, the Corporation sold the building known as Torre Santander, a seventeen story building located at 221 Ponce de León Avenue, Hato Rey, Puerto Rico, to an unrelated third party in a sales-leaseback transaction and recognized a gain of $2.8 million, recorded under other gains. A deferred gain of $4.0 million was recorded and will be amortized as a reduction of rent expense over the term of the related leases through January 2009.

Operating Expenses

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

OPERATING EXPENSES

		Nine-month periods ended				Quarters ended
				As restated				As restated
		Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,
		2004		2003		2004		2003
	(In thousands)

Salaries	$	44,891	$	39,354	$	14,791	$	13,112
Pension and other benefits		35,927		35,399		11,692		12,845
Expenses deferred as loan origination costs		(11,781)		(8,560)		(3,675)		(2,975)
Total personnel costs		69,037		66,193		22,808		22,982

Equipment expenses		5,317		5,631		1,715		1,861
Professional fees		8,722		4,746		3,526		1,929
Occupancy costs		10,109		10,117		3,439		3,495
EDP Servicing Expense		23,219		29,375		7,121		10,233
Communications		6,792		6,276		2,202		2,165
Business promotion		7,140		4,911		2,828		1,668
Other taxes		6,574		7,525		2,049		2,368
Amortization of intangibles		685		3,455		274		781
Printing and supplies		1,292		1,269		421		410
Credit card expenses		5,622		5,331		1,973		1,736
Insurance		1,552		2,028		687		675
Other operating expenses:
Examinations & FDIC assessment		708		1,352		325		433
Transportation and travel		1,611		1,121		514		410
Repossessed assets provision and expenses		2,002		3,975		404		1,136
Collections and related legal costs		2,234		4,621		765		1,737
Provision for errors and fraud		3,246		1,834		610		930
All other		6,716		6,645		2,190		2,414
Other Operating Expenses		93,541		100,212		31,043		34,381
Total Operating Expenses	$	162,578	$	166,405	$	53,851	$	57,363

For the quarter ended September 30, 2004, the Corporation's efficiency ratio on a tax equivalent basis was 61.97% compared to 67.63% for the same period in 2003. This 566 basis point improvement in the 2004 ratio was the result of lower operating expenses and higher revenues. For the nine-month period ended September 30, 2004, the Efficiency Ratio on a tax equivalent basis improved 668 basis points to 64.65% from 71.53% for the same period in 2003. This improvement was a result of higher revenues (excluding gains on sales of securities and a gain on the sale of a building during the first quarter of 2004) and a decrease of $3.8 million in operating expenses.

Operating expenses decreased $3.5 million or 6.1% from $57.4 million for the quarter ended September 30, 2003 to $53.9 million for the quarter ended September 30, 2004. Personnel expenses remained relatively stable during the third quarter of 2004 compared to the third quarter of 2003. There was an increase in salaries of $1.7 million that was offset by a decrease in pension and other benefits of $1.2 million and an increase in expenses deferred as loan origination costs of $0.7 million. The increase in salaries was due to the annual salary revision of approximately 3.5%, the in-sourcing of the collections operation by the Corporation for approximately $0.5 million and severance payments for approximately $0.3 million. The decrease of $1.2 million in pension and other benefits was due primarily to a reduction in commissions of $1.2 million.

Other operating expenses decreased $3.3 million or 9.7% from $34.4 million for the quarter ended September 30, 2003 to $31.0 million for the quarter ended September 30, 2004. This decrease was due primarily to a decrease in EDP servicing, amortization and technical services of $3.1 million due to lower servicing costs, a decrease of $1.0 million in collections and related legal costs as a result of in-sourcing of the collections function, a decrease of $0.7 million in repossessed assets provisions and expenses and a decrease in amortization of intangibles of $0.5 million. These decreases were partially offset by increases of $1.6 million in professional services, partly associated with the implementation of certain provisions of the Sarbanes-Oxley Act as well as other consulting services, and an increase of $1.2 million in advertising and promotion consistent with our strategy to increase market share and grow the volume of our business.

For the nine-month period ended September 30, 2004, there was a reduction in operating expenses of $3.8 million or 2.3% compared to the same period in 2003. This decrease consisted of an increase in personnel costs of $2.8 million and a decrease in other operating expenses of $6.7 million. The increase in personnel costs was due primarily to higher salaries of $3.1 million, in-sourcing of collection services of $1.2 million, and severance payments of $1.3 million. These increases were partially offset by an increase in expenses deferred as loan origination costs of $3.2 million due to higher loan origination in the Corporation's credit card, consumer loan and mortgage loan portfolios. The $6.7 million reduction in other operating expenses was due primarily to decreases in EDP servicing, amortization and technical expenses of $6.2 million, amortization of intangibles of $2.8 million, lower repossessed asset expenses (including provision for losses) of $2.0 million and lower collection costs and related leg al costs of $2.4 million. The decrease in EDP expenses was due to lower servicing costs during 2004 as a result of receiving EDP servicing from an affiliate at lower rates and the completion of all systems conversions during 2003 that required the retention of two separate service providers. Also, there were lower software amortization costs as a result of the sale of the Company's software platform to an affiliate during 2003. The reduction in amortization of intangibles results from having fully amortized core deposit intangibles at the beginning of 2004. The reduction in repossessed asset expenses is due to a reduction in repossessed assets as of September 30, 2004. The decrease in collection costs of $2.4 million was a result of the in-sourcing of the collections operation. These decreases were partially offset by increases in professional services of $4.0 million, partly associated with the implementation of certain provisions of the Sarbanes-Oxley Act as well as other legal and consulting services, bus iness promotion of $2.2 million, consistent with our strategy to increase market share and grow the volume of our business, and the provision for errors and fraud of $1.4 million.

Provision for Income Tax

The Corporation and each of its subsidiaries are treated as separate taxable entities and are not allowed to file consolidated tax returns in Puerto Rico. The maximum statutory marginal corporate income tax rate is 39%. However, there is an alternative minimum tax of 22%. The difference between the statutory marginal tax rate and the effective tax rate is primarily due to the interest income earned on certain investments and loans, which is exempt from income tax (net of the disallowance of expenses attributable to the exempt income) and to the disallowance of certain expenses and other items.

The provision for income tax amounted to $1.6 million for the quarter ended September 30, 2004 compared to $2.5 million for the same period in 2003. For the nine-month period ended September 30, 2004 the provision for income tax amounted to $4.1 million compared to $5.4 million for the same period in 2003. The decrease in the provision for income tax was due to the release of income tax contingencies related to the closing of an investigation by the Puerto Rico Treasury Department of the Bank's income tax returns for the years 2001 and 2000. For Puerto Rico income tax purposes, all fiscal years through 2001 are closed and no longer subject to examination by the Puerto Rico Treasury Department. In addition, for the quarter and nine-month period ended September 30, 2004, the Corporation's taxable income is significantly lower than that for the same periods in 2003 due to a change in the composition of the Corporation's taxable and exempt assets over those periods.

FINANCIAL POSITION - SEPTEMBER 30, 2004

Assets

The Corporation's assets reached $8.0 billion as of September 30, 2004, an 8.1% increase when compared to total assets of $7.4 billion at December 31, 2003 and a 10.4% increase when compared to total assets of $7.2 billion at September 30, 2003. As of September 30, 2004 there was an increase of $1.1 billion and $1.2 billion in net loans, including loans held for sale compared to December 31 and September 30, 2003 balances, respectively. The increase in net loans at September 30, 2004 was partially offset by a decrease in investment securities of $599.2 million and a decrease of $11.2 million in premises and equipment compared to December 31, 2003. There was also a decrease of $17.4 million in other assets due to a reduction in accounts receivable and net deferred tax assets.

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

		September 30,		December 31,		Increase
		2004		2003		(Decrease)
		(In thousands)

Commercial and industrial	$	2,097,878	$	2,033,972	$	63,906
Construction		204,215		209,655		(5,440)
Mortgage		2,407,461		1,461,107		946,354
Consumer		447,925		404,184		43,741
Leasing		114,331		105,849		8,482
Gross Loans		5,271,810		4,214,767		1,057,043
Allowance for loan losses		(70,731)		(69,693)		(1,038)
Net Loans	$	5,201,079	$	4,145,074	$	1,056,005

Net loans, including loans held for sale, at September 30, 2004 were $5.2 billion, reflecting an increase in the loan portfolio of $1.1 billion or 25.5% when compared to $4.1 billion at December 31, 2003. Mortgage loans originated and purchased continued to grow during the third quarter of 2004 resulting in an increase of $946.4 million or 64.8%, in the mortgage loan portfolio. There was a 12.2% increase in mortgage loan production for the nine-month period ended September 30, 2004 compared to the same period in 2003. The commercial and industrial loan portfolio also reflected an increase of $63.9 million or 3.1% for the nine months ended September 30, 2004 while consumer loans grew 10.8% to $447.9 million.

As of September 30, 2004, there was a decrease of $11.2 million in premises and equipment when compared to December 31, 2003, due to the sale of a building with a book value of approximately $7.7 million during the first quarter of 2004, and normal depreciation for the period. Other assets as of September 30, 2004 reflected a decrease of $17.4 million mainly due to a decrease in securities sold not delivered compared to other assets as of December 31, 2003.

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

Non-performing Assets and Past Due Loans

As of September 30, 2004, the Corporation's total non-performing loans and accruing past due loans (excluding other real estate owned) decreased to $99.8 million or 1.89% of total loans from $100.8 million or 2.39% of total loans as of December 31, 2003. Non-performing mortgage and consumer loans decreased of $2.6 million each and leasing reflected a decrease of $1.0 million. These decreases were partially offset by increases in non-performing commercial and industrial loans of $2.8 million, construction loans of $1.2 million and renegotiated loans of $0.6 million. Non-performing loans (excluding other real estate owned) at September 30, 2004 decreased to $96.8 million or 1.84% of total loans from $98.4 million or 2.33% of total loans at December 31, 2003. Repossessed assets decreased to $3.5 million at September 30, 2004, from $5.0 million at December 31, 2003, as a result of various sales during the nine-month period then ended, that generated a gain of $0.6 million. As of September 30, 2004 the cov erage ratio (allowance for loan losses to total non-performing loans) improved to 73.05% from 71.74% as of December 31, 2003 and 60.78% as of September 30, 2003.

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


Non-performing Assets and Past Due Loans

		September 30,		December 31,
		2004		2003
	(Dollars in thousands)

Commercial and Industrial	$	33,730	$	30,884
Construction		11,321		10,085
Mortgage		39,521		42,107
Consumer		6,720		9,312
Leasing		2,978		4,027
Restructured Loans		2,560		1,953
Total non-performing loans		96,830		98,368
Repossessed Assets		3,515		4,989
Total non-performing assets	$	100,345	$	103,357

Accruing loans past-due 90 days or more	$	2,968	$	2,404

Non Performing loans to total loans		1.84	%	2.33	%
Non Performing loans plus accruing loans
past due 90 days or more to total loans		1.89	%	2.39	%
Non Performing assets to total assets		1.26	%	1.40	%

Liabilities

As of September 30, 2004, total liabilities reached $7.4 billion, an increase of $0.5 billion compared to the December 31, 2003 balance. This increase in total liabilities was principally due to increases in deposits of $374.0 million or 9.03%, in borrowings (comprised of federal funds purchased and other borrowings, securities sold under agreements to repurchase, commercial paper issued, term and capital notes) of $168.2 million and other liabilities of $2.6 million. Federal funds purchased and other borrowings increased $372.0 million and commercial paper increased $344.5 million. These increases were partially offset by a reduction of $506.6 million in securities sold under agreements to repurchase and $41.7 million in term notes.

Deposits

At September 30, 2004, total deposits were $4.5 billion, reflecting an increase of $374.0 million or 9.03% over deposits of $4.1 billion as of December 31, 2003. This increase was in line with the Corporation's objective of increasing its market share. The Corporation continues its efforts to increase its core deposit base by maintaining competitive interest rates, maximizing the cross selling of products and services by the segmentation of its client base and the extensive use of alternative marketing tools such as telephone and internet banking.

Capital and Dividends

Stockholder's equity decreased in 2003 as a result of the early redemption of preferred stock at Banco Santander Puerto Rico and the purchase of our broker dealer affiliate Santander Securities by Santander Bancorp.

On December 26, 2003, Banco Santander Puerto Rico, the Corporation's bank subsidiary, redeemed 2,610,008 preferred shares with a par value of $25, at a price of $26 per share. The preferred shares were cancelled because they carried an above market interest rate of 7% and the Corporation was able to maintain its "well capitalized" status after the cancellation. This transaction was completed with full regulatory approval.

The Corporation expects no favorable or unfavorable trends that would materially affect its capital resources.

As an investment-grade rated entity by several nationally recognized rating agencies, the Corporation has access to a variety of capital issuance alternatives in the United States and Puerto Rico capital markets. The Corporation continuously monitors its capital issuance alternatives. It may issue capital in the future, as needed, to maintain its "well-capitalized" status.

Stockholders' equity was $526.2 million or 6.6% of total assets at September 30, 2004, compared to $480.8 million or 6.5% of total assets at December 31, 2003. The increase in stockholders' equity was mainly due to net income for the period and was partially offset by an increase in unrealized net losses on investment securities available for sale and dividends declared and paid.

On July 9, 2004 the Board of Directors declared a 10% stock dividend to all shareholders of record as of July 20, 2004. The common stock dividend was distributed on August 3, 2004. Cash was paid in lieu of fractional shares. The earnings per share computations for all periods presented in the accompanying financial information have been adjusted retroactively to reflect this stock dividend.

The Corporation declared cash dividends of $0.11 per common share to all stockholders of record as of September 10, 2004 and expects to continue to pay quarterly dividends. This has resulted in an annualized dividend yield of 1.76%.

The Corporation adopted and implemented various Stock Repurchase Programs in May 2000, December 2000 and June 2001. Under these programs the Corporation acquired 3% of its then outstanding common shares. During November 2002, the Corporation started a fourth Stock Repurchase program under which it plans to acquire 3% of its outstanding common shares. In November 2002, the Corporation's Board of Directors authorized the Corporation to repurchase up to 928,204 shares, or approximately 3%, of its shares of outstanding common stock, of which 325,100 shares have been purchased. During 2003 the Corporation purchased 167,500 shares under the repurchase plan. The Board felt that the Corporation's shares of common stock represented an attractive investment at prevailing market prices at the time of the adoption of the common stock repurchase program and that, given the relatively small amount of the program, the stock repurchases would not have any significant impact on the Corporation's liquidity and capital posi tions. The program has no time limitation and management is authorized to effect repurchases at its discretion. The authorization permits the Corporation to repurchase shares from time to time in the open market or in privately negotiated transactions. The timing and amount of any repurchases will depend on many factors, including the Corporation's capital structure, the market price of the common stock and overall market conditions. All of the repurchased shares will be held by the Corporation as treasury stock and reserved for future issuance for general corporate purposes. The Corporation does not currently intend to reissue any of its treasury stock.

During the nine months ended September 30, 2004, the Corporation did not repurchase any shares of common stock, compared to 167,500 shares of common stock repurchased during the nine months ended September 30, 2003 at a cost of $2.3 million. As of September 30, 2004, the Corporation had repurchased 4,011,260 shares of its common stock under these programs at a cost of $67.6 million. The Corporation's management believes that the repurchase program will not have a significant effect on the Corporation's liquidity and capital positions.

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

During the nine-month period ended September 30, 2004, the Corporation's common stock price per share increased from $21.84 (after adjustment for the stock dividend) as of December 31, 2003, to $25.00, representing a $147.4 million increase in aggregate shareholder value.

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 September 30, 2004, the Corporation was well capitalized under the regulatory framework for prompt corrective action. At September 30, 2004 the Corporation continued to exceed the regulatory risk-based capital requirements for well-capitalized institutions. Tier I capital to risk-adjusted assets and total capital ratios at September 30, 2004 were 9.32% and 10.87%, respectively, and the leverage ratio was 6.13%.

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 Corporation uses derivative financial instruments mostly as hedges of interest rate risk, changes in fair value of assets and liabilities and to secure future cash flows. Refer to Notes 1 and 8 to the accompanying consolidated financial statements for additional details of the Corporation's derivative transactions as of September 30, 2004 and December 31, 2003.

In the normal course of business, the Corporation utilizes derivative instruments to manage exposure to fluctuations in interest rates, currencies and other markets, to meet the needs of customers and for proprietary trading activities. The Corporation uses the same credit risk management procedures to assess and approve potential credit exposures when entering into derivative transactions as those used for traditional lending.

Hedging Activities:

The following table summarizes the derivative contracts designated as hedges as of September 30, 2004 and December 31, 2003, respectively:

										Gain (Loss) for				Other Comprehensive
										the nine-month				Income (Loss) for**
		Notional Amounts *				Fair Value				period ended				the period ended
		2004		2003		2004		2003		2004		2003		2004		2003
(In thousands)
Cash Flow Hedges
Interest Rate Swaps	$	100,000	$	100,000	$	(3,647)	$	(7,924)	$	-	$	-	$	2,607	$	1,739
Fair Value Hedges
Interest Rate Swaps		429,707		380,789		(5,557)		(8,140)		(49)		(206)		-		-

Totals	$	529,707	$	480,789	$	(9,204)	$	(16,064)	$	(49)	$	(206)	$	2,607	$	1,739

* The notional amount represents the gross sum of long and short
** Net of tax

Cash Flow Hedges:

The Corporation designates hedges as Cash Flow Hedges when its main purpose is to reduce the exposure associated with the variability of future cash flows related to fluctuations in short term financing rates (such as LIBOR). At the inception of each hedge, management documents the hedging relationship, including its objective and probable effectiveness. To assess ongoing effectiveness of the hedges, the Corporation compares the hedged item's periodic variable rate with the hedging item's benchmark rate (LIBOR) at every reporting period to determine the effectiveness of the hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or loss in the income statement.

As of September 30, 2004, the total amount, net of tax, included in accumulated other comprehensive loss pertaining to the cash flow hedges was an unrealized loss of $2.2 million of which the Corporation expects to reclassify into earnings $1.3 million, net of tax, during the next three months. As of December 31, 2003, the total amount, net of tax, included in accumulated other comprehensive income pertaining to the cash flow hedges was an unrealized loss of $4.8 million.

Fair Value Hedges:

The Corporation designates hedges as Fair Value Hedges when its main purpose is to hedge the changes in market value of an associated asset or liability. The Corporation only designates these types of hedges if at inception it is believed that the relationship in the changes in the market value of the hedged item and hedging item will offset each other in a highly effective manner. At the inception of each hedge, management documents the hedging relationship, including its objective and probable effectiveness. To assess ongoing effectiveness of the hedges, the Corporation marks to market both the hedging item and the hedged item at every reporting period to determine the effectiveness of the hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or loss in the income statement.

The fair value hedges have maturities through the year 2024 as of September 30, 2004 and December 31, 2003. The weighted-average rate paid and received on these contracts is 1.78% and 4.40%, and 1.22% and 4.83%, as of September 30, 2004 and December 31, 2003, respectively.

Of the $429.7 and $380.7 million designated as fair value hedges $426.5 and $377.3 million are associated to the swapping of issuance of fixed rate debt as of September 30, 2004 and December 31, 2003, respectively. The Corporation regularly issues term fixed rate debt, which it in turn swaps to floating rate debt via interest rate swaps. In these cases the Corporation matches all of the relevant economic variables (notional, coupon, payment dates and conventions etc.) of the fixed rate debt it issues to the fixed rate leg of the interest rate swap (which it receives from the counterparty) and pays the floating rate leg of the interest rate swap. The effectiveness of these transactions is very high since all of the relevant economic variables are matched.

Derivative instruments not designated as hedging instruments:

Any derivative not associated to hedging activity is booked as a freestanding derivative. In the normal course of business the Corporation may enter into derivative contracts as both a market maker or proprietary position taker. The Corporation's mission is to meet the clients' needs by providing them with a wide array of financial products, which include derivative contracts. The Corporation's major role in this aspect is to serve as a derivative counterparty to these clients. Positions taken with these clients are hedged (although not designated as hedges) in the OTC market with interbank participants or in the organized futures markets. The market and credit risk associated with this activity is measured, monitored and controlled by the Corporations Market Risk Group, an independent division from the treasury department. Among other things, this group is responsible for: policy, analysis, methodology and reporting of anything related to market risk and credit risk. The following table summarize s the aggregate notional amounts and the reported derivative assets or liabilities (i.e. the fair value of the derivative contracts) as of September 30, 2004 and December 31, 2003, respectively:

										Gain (Loss) for
		Notional Amounts *				Fair Value				the period ended
(In thousands)		2004		2003		2004		2003		2004		2003

Interest Rate Contracts
Interest Rate Swaps	$	241,306	$	260,024	$	806	$	637	$	169	$	386
Interest Rate Caps		64,299		62,990		(28)		-		(2)		112
Other		2,642		-		2,643		-		3		-
Foreign Exchange Contracts		-		6,824		-		2		-		-
Equity Derivatives		138,895		23,166		-		-		77		(15)

Totals	$	447,142	$	353,004	$	3,421	$	639	$	247	$	483

* The notional amount represents the gross sum of long and short

SANTANDER BANCORP
QUARTER TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
Tax Equivalent Basis

								As restated
		September 30, 2004						September 30, 2003
		Average			Average			Average			Average
		Balance		Interest	Rate			Balance		Interest	Rate
		(Dollars in thousands)

Interest bearing deposits	$	78,344	$	338	1.72	%	$	57,252	$	150	1.04	%
Federal funds sold and securities purchased
under agreements to resell		204,764		799	1.55	%		184,412		499	1.07	%
Total interest bearing deposits		283,108		1,137	1.60	%		241,664		649	1.07	%
U.S.Treasury securities		8,076		27	1.33	%		38,616		103	1.06	%
Obligations of other U.S.government
agencies and corporations		1,177,629		16,490	5.57	%		1,161,792		15,203	5.19	%
Obligations of government of Puerto Rico
and political subdivisions		48,167		921	7.61	%		47,731		783	6.51	%
Collateralized mortgage obligations and
mortgage backed securities		1,100,014		11,531	4.17	%		1,034,220		9,621	3.69	%
Other		35,343		458	5.16	%		29,511		448	6.02	%
Total investment securities		2,369,229		29,427	4.94	%		2,311,870		26,158	4.49	%
Loans (net of unearned income)		4,941,830		66,910	5.39	%		3,929,057		59,128	5.97	%
Total interest earning assets/ interest
income (on a tax equivalent basis)		7,594,167		97,474	5.11	%		6,482,591		85,935	5.26	%
Total non-interest earning assests		313,384						347,439
Total assets	$	7,907,551					$	6,830,030

Savings and NOW accounts	$	1,925,289	$	6,447	1.33	%	$	1,840,672	$	5,846	1.26	%
Other time deposits		1,607,637		8,957	2.22	%		1,181,788		6,942	2.33	%
Borrowings		2,886,927		19,740	2.72	%		2,282,472		16,847	2.93	%
Term Notes		144,658		1,341	3.69	%		142,006		2,914	8.14	%
Subordinated Notes		15,925		25	0.62	%		5,621		(10)	(0.71)	%
Total interest bearing liabilities/interest expense		6,580,436		36,510	2.21	%		5,452,559		32,539	2.37	%

Total non-interest bearing liabilities		819,496						792,124
Total liabilities		7,399,932						6,244,683
Stockholders' Equity		507,619						585,347
Total liabilities and stockholders' equity	$	7,907,551					$	6,830,030
Net interest income, on a tax equivalent basis			$	60,964					$	53,396
Cost of funding earning assets					1.91	%					1.99	%
Net interest margin, on a tax equivalent basis					3.19	%					3.27	%

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. The ALCO reports on a monthly basis to the members 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. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.

The Corporation's one-year cumulative GAP position at September 30, 2004, was negative $1.0 billion or 13.1% of total assets. This is a one-day position that is continually changing and is not indicative of the Corporation's position at any other time. This denotes liability sensitivity, which means that an increase in interest rates would have a negative effect on net interest income while a decrease in interest rates would have a positive effect on net interest income. While the GAP position is a useful tool in measuring interest rate risk and contributes toward effective asset and liability management, shortcomings are inherent in GAP analysis since certain assets and liabilities may not move proportionally as interest rates change.

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 September 30, 2004 and may not be representative of interest rate gap positions at other times. In addition, variations in interest rate sensitivity may exist within the repricing period presented due to the differing repricing dates within the period. In preparing the interest rate gap report, the following assumptions are made, all assets and liabilities are reported according to their repricing characteristics. For example, a commercial loan maturing in five years with monthly variable interest rate payments is stated in the column of "up to 90 days". The investment portfolio is reported considering the effective duration of the securities. Expected prepayments and remaining terms are considered for the residential mortgage portfolio. Core deposits are reported in accordance with their effective duration. Duration is based on price and volume elasticity to market rates. The Corp oration reviews on a monthly basis the effective duration of core deposits. Assets and liabilities with embedded options are stated based on full valuation of the asset/liability and the option to ascertain their effective duration.

SANTANDER BANCORP
MATURING GAP ANALYSIS
As of September 30, 2004

		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
	(dollars in thousands)
ASSETS:
Investment Portfolio	$	27,177	$	8,307	$	930,496	$	611,828	$	301,335	$	-	$	32,500	$	1,911,643
Deposits in Other Banks		384,602		50,000		-		-		-		-		153,049		587,651
Loan Portfolio
Commercial		1,389,872		197,030		159,181		198,707		115,750		64,937		86,732		2,212,209
Construction		174,610		3,218		15,286		4,194		6,124		783		-		204,215
Consumer		159,814		66,279		139,968		63,606		8,093		45		10,120		447,925
Mortgage		882,588		106,643		275,177		265,359		540,811		327,185		9,698		2,407,461
Fixed and Other Assets		-		-		-		-		-		-		189,931		189,931
Total Assets	$	3,018,663	$	431,477	$	1,520,108	$	1,143,694	$	972,113	$	392,950	$	482,030	$	7,961,035

LIABILITIES AND STOCKHOLDERS' EQUITY
External Funds Purchased
Commercial Paper	$	599,376	$	-	$	-	$	-	$	-	$	-	$	-	$	599,376
Repurchase Agreements		326,621		50,000		550,006		175,000		200,000		-		-		1,301,627
Federal Funds		722,000		-		-		-		-		-		-		722,000
Deposits
Certificates of Deposit		984,397		296,268		205,349		163,240		184,033		17,359		6,526		1,857,172
Demand Deposits and Savings Accounts		191,031		393,854		504,578		869,565		-		-		-		1,959,028
Transactional Accounts		416,134		-		-		283,923		-		-		(64)		699,993
Term and Subordinated Debt		90,121		-		-		-		46,749		2,880		456		140,206
Other Liabilities and Capital		-		-		-		-		-		-		681,633		681,633
Total Liabilities and Capital	$	3,329,680	$	740,122	$	1,259,933	$	1,491,728	$	430,782	$	20,239	$	688,551	$	7,961,035
Off-Balance Sheet Financial Information
Interest Rate Swaps (Assets)	$	226,463	$	5,400	$	101,938	$	191,958	$	214,222	$	31,031	$	-	$	771,012
Interest Rate Swaps (Liabilities)		549,316		108,577		8,567		56,662		16,859		31,031		-		771,012
Caps		33,196		-		-		31,103		-		-		-		64,299
Caps Final Maturity		31,103		-		-		33,196		-		-		-		64,299
GAP	$	(631,777)	$	(411,822)	$	353,546	$	(214,831)	$	738,694	$	372,711	$	(206,521)	$	-
Cumulative GAP	$	(631,777)	$	(1,043,599)	$	(690,053)	$	(904,884)	$	(166,190)	$	206,521	$	-	$	-
Cumulative interest rate gap to
earning assets		(8.13)	%	(13.43)	%	(8.88)	%	(11.64)	%	(2.14)	%	2.66	%

Interest rate risk is the primary market risk to which the Corporation is exposed. Nearly all of the Corporation's interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. They include loans, investment securities, deposits, short-term borrowings, senior and subordinated debt and derivative financial instruments used for asset and liability management.

As part of its interest rate risk management process, the Corporation analyzes on an ongoing basis the profitability of the balance sheet structure, and how this structure will react under different market scenarios. In order to carry out this task, management prepares three standardized reports with detailed information on the sources of interest income and expense: the "Financial Profitability Report", the "Net Interest Income Shock Report"and the "Market Value Shock Report". The former deals with historical data while the latter two deal with expected future earnings.

The Financial Profitability Report identifies individual components of the Corporation's non-trading portfolio independently with their corresponding interest income or expense. It uses the historical information at the end of each month to track the yield of such components and to calculate net interest income for such time period.

The Net Interest Income Shock Report uses a simulation analysis to measure the amount of net interest income the Corporation would have from its operations throughout the next twelve months and the sensitivity of these earnings to 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 five years. Cash flows from assets and liabilities are assumed to be reinvested at market rates in similar instruments. The object is to simulate a dynamic gap analysis enabling a more accurate interest rate risk assessment.

The ALCO has decided to run a negative interest rate gap to capitalize on current spreads between short and long term interest rates. To that effect, the investment portfolio was restructured, selling short term Agency debentures, and buying Agency guaranteed mortgage backed securities. This strategy increased the duration of the portfolio and extended the re-pricing gap. In recent months, the Corporation extended the maturity of various long-term repurchase agreements to lower its duration of equity.

The ALCO monitors interest rate gaps in combination with net interest margin (NIM) sensitivity and duration of market value equity (MVE).

NIM sensitivity analysis captures the maximum acceptable net interest margin loss for a one percent parallel change of all interest rates across the curve. Duration of market value equity analysis entails a valuation of all interest bearing assets and liabilities under parallel movements in interest rates. The ALCO has established limits of $20 million of maximum NIM loss for a 1% parallel shock and $80 million maximum MVE loss for a 1% parallel shock.

Risk management policy and procedures establish a risk tolerance loss limit of $20.0 million for net interest income in a scenario of a 100 basis points (1.0%) increase in market rates and of $80.0 million for market value in the same scenario of a 100 basis point increase in market rates. As of September 30, 2004, it was determined for purposes of the Net Interest Income Shock Report that the Corporation had a potential loss in net interest income of approximately $12.1 million if market rates were to increase 100 basis points immediately parallel across the yield curve, less than the $20.0 million limit. For purposes of the Market Value Shock Report it was determined that the Corporation had a potential loss of approximately $61.2 million if market rates were to increase 100 basis points immediately parallel across the yield curve, less than the $80.0 million 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 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. The principal sources of liquidity for the Corporation are capital, core deposits from retail and commercial clients, and wholesale deposits raised in the inter-bank and commercial markets. The Corporation manages liquidity risk by maintaining diversified short-term and long-term sources through the Federal funds market, commercial paper program, repurchase agreements and retail certificate of deposit programs. As of September 30, 2004 the Corporation had $1.6 billion in unsecured lines of credit ($540 million available) and $3.6 billion in collateralized lines of credit with banks and financial entities ($2.1 billion availab le). All securities in portfolio are highly rated and very liquid enabling the Corporation to treat them as a secondary source of liquidity.

The Corporation does not have significant usage or limitations on the ability to upstream or downstream funds as a method of liquidity. However, the Corporation faces certain tax constraints when borrowing funds (excluding the placement of deposits) from its Parent Company or affiliates because Puerto Rico's tax code requires local corporations to withhold 29% of the interest income paid to non-resident affiliates. Banco Santander Puerto Rico (BSPR), the Corporation's Banking subsidiary, does not face significant limitations to the ability to downstream funds from its parent company or its affiliates. The current intra-group credit line for BSPR is $150 million.

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.

During the first quarter of 2004, BSPR issued $30 million in S&P Linked Notes to obtain long term financing at a reasonable interest rate. Proceeds from the offering were used to finance the loan portfolio.

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 September 30, 2004, the Corporation had a liquidity ratio of 9.5%. At September 30, 2004, the Corporation had total available liquid assets of $796 million. The Corporation believes it has sufficient liquidity to meet current obligations.

The Corporation does not contemplate material uncertainties in the rolling over of deposits, both retail and wholesale, and is not engaged in capital expenditures that would materially affect the capital and liquidity positions. Should any deficiency arise for seasonal or more critical reasons, the Bank would make recourse to alternative sources of funding such as the commercial paper program, its lines of credit with domestic and national banks, unused collateralized lines with Federal Home Loan Banks and others.

PART I. ITEM 4

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporation's management, including the Chief Executive Officer, the Chief Operating 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-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer, the Chief Operating Officer and the Chief Accounting Officer (as the Corporation's principal financial officer) concluded that the design and operation of these disclosure controls and procedures were effective.

Changes in Internal Controls

There have been no changes in the Corporation's internal controls over financial reporting during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Corporation's internal controls over financial reporting.

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 - USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5 - OTHER INFORMATION

None

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

A.	Exhibit No.	Exhibit Description	Reference

	(2.0)	Agreement and Plan of Merger-Banco Santander Puerto Rico and
		Santander Bancorp	Exhibit 3.3 8-A12B
	(2.1)	Stock Purchase Agreement Santander BanCorp and Banco Santander
		Central Hispano, S.A.	Exhibit 2.1 10K-12/31/00
	(2.2)	Stock Purchase Agreement dated as of November 28, 2003 by and among
		Santander BanCorp, Administración de Bancos Latinoamericanos
		Santander, S.L. and Santander Securities Corporation	Exhibit 2.2 10Q-06/30/04
	(2.3)	Settlement Agreement between Santander BanCorp and Administración
		de Bancos Latinoamericanos Santander, S.L.	Exhibit 2.3 10Q-06/30/04
	(3.1)	Articles of Incorporation	Exhibit 3.1 8-A12B
	(3.2)	Bylaws	Exhibit 3.1 8-A12B
	(4.1)	Authoring and Enabling Resolutions 7% Noncumulative Perpetual
		Monthly Income Preferred Stock, Series A	Exhibit 4.1 10Q-06/30/04
	(4.2)	Offering Circular for $50,000,000 AFICA Loan Program	Exhibit 4.2 10Q-06/30/04
	(4.3)	Offering Circular for $26,000,000 AFICA Loan Program	Exhibit 4.410K-12/31/00
		Offering Circular for $25,000,000 AFICA Loan Program	Exhibit 4.410K-12/31/01
		Offering Circular for $30,000,000 Banco Santander PR Stock Market Growth
		Notes Linked to the S&P 500 Index	Exhibit 4.610Q-03/31/04
	(10.1)	Contract for Systems Maintenance between ALTEC and Banco Santander
		Puerto Rico	Exhibit 10A10K-12/31/02
	(10.2)	Deferred Compensation Contract - Benito Cantalapiedra	Exhibit 10B10K-12/31/02
	(10.3)	Deferred Compensation Contract - María Calero	Exhibit 10C10K-12/31/02
	(10.4)	Employment Contract - Carlos García	Exhibit 10D10K-12/31/02
	(10.5)	Employment Contract - Roberto Córdova	Exhibit 10E10K-12/31/02
	(10.6)	Employment Contract - Rafael Saldaña	Exhibit 10F10K-12/31/02
	(10.7)	Information Processing Services Agreement between America Latina Tecnologia
		de Mexico SA and Banco Santander Puerto Rico, Santander International Bank
		of Puerto Rico and Santander Investment International Bank, Inc	Exhibit 10A10Q-06/30/03
	(10.8)	Employment Contract - José Ramón González	Exhibit 10B10Q-06/30/03
	(10.9)	Deferred Compensation Contract - Rafael Saldaña	Exhibit 10.9 10K-12/31/03
	(10.10)	Employment Contract - Lillian Díaz	Exhibit 10.1010K-12/31/03
	(10.11)	Employment Contract - Bartolomé Vélez	Exhibit 10.1110K-12/31/03
	(10.12)	Technology Assignment Agreement between CREFISA, Inc. and Banco
		Santander Puerto Rico	Exhibit 10.1210K-12/31/03
	(10.13)	Altair System License Agreement between CREFISA, Inc. and Banco
		Santander Puerto Rico	Exhibit 10.1310K-12/31/03
	(10.14)	Employment Contract-Anthony Boon	Exhibit 10.1410Q-03/31/04
	(10.15)	Deferred Compensation Contract - Anthony Boon	Exhibit 10.1510Q-03/31/04
	(31.1)	Certification from the Chief Executive Officer pursuant to Section 302 of
		The Sarbanes-Oxley Act of 2002	Exhibit 31.1
	(31.2)	Certification from the Chief Operating Officer pursuant to Section 302 of
		The Sarbanes-Oxley Act of 2002	Exhibit 31.2
	(31.3)	Certification from the Chief Accounting Officer pursuant to Section 302 of
		The Sarbanes-Oxley Act of 2002	Exhibit 31.3
	(32.1)	Section 1350 Certification from the Chief Executive Officer, Chief Operating
		Officer and Chief Accounting Officer	Exhibit 32.1

Reports on Form 8-K - The Corporation filed three reports on Form 8-K during the quarter ended September 30, 2004.

Item Reported - July 16, 2004

Item 5 - Santander BanCorp reported that on July 9, 2004 the Board of Directors of the Company declared a 10% stock dividend to all stockholders of record as of July 20, 2004 to be distributed on August 3, 2004.

Item 7c - Exhibit 99.1 Press release issued July 13, 2004

Item Reported - July 23, 2004

Item 7c - Exhibit 99.1 Press release issued July 22, 2004

Item 12 - Santander BanCorp reported its financial results for the second quarter of 2004

Item reported - July 29, 2004

Item 7c - Slideshow Presentation to institutional investors and analysts on July 28, 2004

Item 9 - On July 28, 2004, Mr. Carlos García, Senior Executive Vice President and Chief Operating Officer of Santander BanCorp (hereinafter the "Corporation") made a presentation to institutional investors and analysts. In said presentation, Mr. García discussed an overview of the Corporation and its performance during the first semester of 2004.

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


Dated:	November 1, 2004	By:/s/	José Ramón González
			President and Chief Executive Officer



Dated:	November 1, 2004	By:/s/	Carlos M. García
			Senior Executive Vice President and
			Chief Operating Officer



Dated:	November 1, 2004	By:/s/	María Calero
			Executive Vice President and
			Chief Accounting Officer