- Net interest income increased $14.2 million or 23.2% compared to the fourth quarter of 2005 and $63.6 million or 28.0% compared to the year ended December 31, 2005. SAN JUAN, Puerto Rico, March 16 /PRNewswire-FirstCall/ -- Santander BanCorp (NYSE: SBP; LATIBEX: XSBP) ("the Corporation") reported today its unaudited financial results for the quarter and the year ended December 31, 2006. Net income for the fourth quarter of 2006 reached $10.1 million, compared to net income of $16.9 million reported during the fourth quarter of 2005. For the year ended December 31, 2006 net income reached $43.2 million compared to $79.8 million reported for the same period in 2005. Net interest margin on a tax equivalent basis increased by 51 basis points to 3.67% for the quarter ended December 31, 2006, compared to the fourth quarter of 2005. For the year ended December 31, 2006, net interest margin on a tax equivalent basis expanded by 61 basis points to 3.63%, compared to the same period in 2005. The $6.8 million decrease in net income for the quarter ended December 31, 2006, was principally due to: (i) an increase in operating expenses of $17.8 million (of which $12.8 million relate to the Island Finance operation); (ii) a $2.5 million decrease in net interest income after provision for loan losses, (iii) partially offset by a $10.3 million increase in other income and a $3.3 million decrease in income tax expense. Increases in net interest income, provision for loan losses and operating expenses were mainly due to the operations of Santander Financial Services, Inc. ("Island Finance"). The $36.6 million decrease in net income for the year ended December 31, 2006 was principally due to: (i) a decrease of $11.8 million in gain on sale of securities (net of loss on extinguishment of debt); (ii) an increase in operating expenses of $56.4 million comprised of $44.4 million pertaining to the Island Finance operation, and $10.4 million related to the personnel reduction program implemented during the third quarter of 2006; (iii) a $5.9 million decrease in gain on sale of loans; and partially offset by an increase of $18.4 in net interest income after provision for loan losses and a decrease in income tax expense of $8.2 million. The increase in net interest income, provision for loan losses and operating expenses during the period is primarily associated with the Island Finance operation. During the fourth quarter of 2006, the Corporation sold to an unaffiliated third party the servicing rights with respect to the following Trust Division accounts: personal trusts, customers employee benefit plans, guardianship accounts, insurance trusts, escrow accounts, and securities custody accounts. No gain or loss was recognized on this transaction. The Trust Division will focus its efforts on the transfer & paying agent and IRA's accounts services. Financial Results The Corporation's financial results for the quarter and the year ended December 31, 2006 were impacted by the following: * The Corporation experienced a net interest margin(1) expansion of 51 basis points including the Island Finance business and a 44 basis point reduction excluding Island Finance, for the quarter ended December 31, 2006 versus the same period in the prior year. For the year ended December 31, 2006, the Corporation's net interest margin(1) increased 61 basis points including the Island Finance business and decreased 22 basis points excluding Island Finance, when compared to the same period in 2005. The reduction in the Corporation's net interest income excluding Island Finance was mainly impacted by the settlement of approximately $910 million in commercial loans secured by mortgages in November 2005 and May 2006, that had a net spread of approximately 1.5%. In May 2006 the Corporation settled $608.2 million in loans to Doral Financial Corporation ("Doral") that resulted in a charge-off of $5.3 million. In November 2005 the Corporation settled $301.3 million in commercial loans secured by mortgages to R&G Financial Corporation ("R&G") that resulted in a termination penalty payment of $6.0 million to the Corporation. * For the quarter ended December 31, 2006, non-interest income increased $10.3 million primarily due to: a gain on sale of an FDIC assessment credit of $1.9 million, increases in Island Finance revolving loan annual fees of $1.7 million, trading gains of $1.3 million, gain on sale of loans of $1.8 million, insurance fees of $4.4 million, mortgage servicing rights recognized of $0.8 million and technical assistance fees to affiliates of $0.6 million. Non-interest income decreased $6.9 million during the year ended December 31, 2006, compared with the same period in the prior year, mainly due to a decrease in gain on sale of securities (net of the loss on extinguishment of debt) of $11.8 million, a decrease in gain on sale of loans of $5.8 million,, a decrease in gain (loss) on derivative transactions of $2.4 million and lower recognition of mortgage servicing rights of $1.0 million partially offset by higher insurance fees of $4.4 million, bank service charges and other fees of $6.8 million, gain on sale of trading securities of $1.0 million and an a gain sale of an FDIC assessment credit of $1.9 million (included in other income). * The Corporation experienced an increase in operating expenses related to the Island Finance operation and to a personnel reduction program. Excluding the Island Finance operation and expenses related to the personnel reduction program, operating expenses increased by $4.5 million or 8.1% and $1.4 million or 0.7%, respectively, for the quarter and the year ended December 31, 2006. The increase for the quarter ended December 31, 2006 is mainly due to an increase in $0.9 in pension expense due to a plan curtailment, personnel reduction expenses of $0.7 million, long term incentive plan expense of $0.8 million and an increase in EDP servicing, amortization and technical services of $2.2 million. * A personnel reduction program, including an early retirement plan, was implemented at Banco Santander Puerto Rico, our banking subsidiary, resulting in a reduction in personnel with estimated annual savings of approximately $6 to $8 million. The after-tax cost of the program was $0.7 million and $10.4 million, respectively, for the quarter and for the year ended December 31, 2006. In addition, during the last quarter of 2006 the Corporation froze its defined benefit pension plan, recognizing a loss of $0.9 million on plan curtailment related to unrecognized prior service costs. The Corporation also recognized $0.8 million pursuant to a Long Term Incentive Plan to certain employees. * The Corporation's income tax expense decreased $3.3 million and $8.2 million for the three and twelve month periods ended December 31, 2006, respectively. These decreases were due to lower net income before tax. The effective income tax rate was 34.3% for the year ended December 31, 2006 versus 27.8% for the same period in 2005. The increase in the effective rate was due to lower exempt income in 2006, more favorable tax rates on capital gains transactions in 2005 and the special income taxes imposed by the Government of Puerto Rico for taxable year 2006. * The Corporation grew its net loan portfolio by 16.8% year over year, excluding the acquisition of the Island Finance loan portfolio and the settlement of the commercial loans secured by mortgages. Residential mortgage production for the quarter increased by 27.9% over the same period in the previous year to $244.5 million. Net income for the quarter ended December 31, 2006 was $10.1 million or $0.22 per common share compared to net income for the quarter ended December 31, 2005 of $16.9 million or $0.36 per common share. Annualized Return on Average Common Equity (ROE) and Return on Average Assets (ROA) were 6.86% and 0.44%, respectively, for the quarter ended December 31, 2006, compared to 11.51% and 0.80%, respectively, for the fourth quarter of 2005. The Efficiency Ratio(2) for the quarters ended December 31, 2006 and 2005 was 65.66% and 63.00%, respectively. Net income for the year ended December 31, 2006 was $43.2 million or $0.93 per common share compared to net income for the year ended December 31, 2005 of $79.8 million or $1.71 per common share. Annualized Return on Average Common Equity (ROE) and Return on Average Assets (ROA) were 7.66% and 0.49%, respectively, for the year ended December 31, 2006, compared to 13.85% and 0.96%, respectively, for the year ended December 31, 2005. The Efficiency Ratio(2) for the year ended December 31, 2006 and 2005 was 66.84% and 62.97%, respectively. Income Statement The $6.8 million or 40.4% reduction in net income for the quarter ended December 31, 2006 compared to the same period in 2005 was principally due to increases in the provision for loan losses of $16.7 million and operating expenses of $17.8 million. These changes were partially offset by increases in net interest income of $14.2 million and $10.3 million in non-interest income, as well as a decrease in the provision for income tax of $3.3 million. Net interest margin(3) for the fourth quarter of 2006 was 3.67% compared with 3.16% for the fourth quarter of 2005. This increase of 51 basis points in net interest margin(3) was mainly due to an increase of 171 basis points in the yield on average interest earning assets and an increase in average interest earning assets of $553.8 million, primarily as a result of the acquisition of the assets of Island Finance on February 28, 2006. There was an increase of 124 basis points in the average cost of interest bearing liabilities and an increase in average interest bearing liabilities of $688.0 million. Interest income(3) increased $45.0 million or 36.4% during the fourth quarter of 2006 compared to the same period in 2005, while interest expense also increased $29.7 million or 49.1%. For the fourth quarter of 2006 average interest earning assets increased $553.8 million or 7.0% and average interest bearing liabilities increased $688.0 million or 10.0% compared to the same period in 2005. The increment in average interest earning assets compared to the fourth quarter of 2005 was driven by an increase in average net loans of $644.4 million, which was partially offset by a decrease in average investments of $52.4 million and average interest bearing deposits of $38.2 million. The increase in average net loans was due to an increase of $515.9 million or 24.4% in average mortgage loans as a result of the Corporation's continued emphasis on growing this portfolio by strengthening its residential mortgage production capabilities. There was also an increase of $664.2 million or 119.6% in the average consumer loan portfolio as a result of the acquisition of Island Finance. These increases were partially offset by a decrease in the commercial loan portfolio of $504.9 million or 14.7% due to the settlement with Doral of $608.2 million of commercial loans secured by mortgages during the second quarter of 2006 and the settlement with R&G of $301.3 million of commercial loans secured by mortgages during the fourth quarter of 2005. Excluding the settlement of the loans with Doral and R&G, the average commercial loan portfolio grew $326.1 million or 12.5%. The increase in average interest bearing liabilities of $688.0 million for the quarter ended December 31, 2006, was driven by an increase in average borrowings of $560.2 million compared to the quarter ended December 31, 2005. This increase was due to an increase in borrowings of $614.3 million incurred in connection with to the acquisition of Island Finance and the refinancing of other existing debt of the Corporation, an increase in average FHLB Advances of $58.1 million partially offset by reductions in average repurchase agreements of $94.0 million and average commercial paper of $18.1 million. For the year ended December 31, 2006, net income decreased $36.6 million or 45.9% compared to 2005 due to increases in the provision for loan losses of $45.2 million and in operating expenses of $56.4 million, together with a decrease of $6.9 million in non-interest income, partially offset by an increase in net interest income of $63.6 million and a decrease in provision for income tax of $8.2 million. For the year ended December 31, 2006, net interest margin(4) was 3.63% compared with 3.02% for the same period in 2005. This increase of 61 basis points in net interest margin(4) was mainly due to an increase of 187 basis points in the yield on average interest earning assets primarily as a result of the acquisition of the assets of Island Finance. There was an increase of 133 basis points in the average cost of interest bearing liabilities. Interest income(4) increased $176.6 million or 39.2% during the year ended December 31, 2006 compared to 2005, while interest expense increased $115.1 million or 54.2% over the same period. For the year ended December 31, 2006 average interest earning assets increased $380.6 million or 4.8% and average interest bearing liabilities increased $549.2 million or 8.0% compared to the same period in 2005. The increment in average interest earning assets compared to the year ended December 31, 2005 was driven by an increase in average net loans of $567.8 million, which was partially offset by decreases in average investment securities and average interest bearing deposits of $103.6 million and $83.6 million, respectively. The increase in average net loans was due to an increase of $538.2 million or 28.5% in average mortgage loans as a result of the Corporation's continued emphasis of growing this portfolio by strengthening its residential mortgage production capabilities. There was also an increase of $590.2 million or 115.5% in the average consumer loan portfolio as a result of the acquisition of Island Finance. These increases were partially offset by a decrease in the commercial loan portfolio of $541.1 million or 15.3% due to the settlement with Doral of $608.2 million of commercial loans secured by mortgages during the second quarter of 2006 and the settlement with R&G of $301.3 million of commercial loans secured by mortgages during the fourth quarter of 2005. Excluding the settlement of the loans with Doral and R&G, the average commercial loan portfolio grew $426.3 million or 16.6%. The provision for loan losses increased $16.7 million or 333.4% from $5.0 million for the quarter ended December 31, 2005 to $21.7 million for the fourth quarter in 2006 and $45.2 million or 221.5% from $20.4 million for the year ended December 31, 2005 to $65.6 million for the year ended December 31, 2006. The increase in the provision for loan losses was due primarily to the Island Finance operation which registered a provision for loan losses of $15.7 million and $43.2 million for the quarter and ten months (from acquisition) ended December 31, 2006. For the quarter ended December 31, 2006, non-interest income reached $35.4 million compared to $25.1 million reported for the same period in 2005. This $10.3 million or 40.9% increase in non-interest income for the fourth quarter of 2007 compared to the same period in 2005, was mainly due to: a gain on sale of an FDIC assessment credit of $1.9 million; increases in bank service charges, fees and other of $2.8 million; trading gains of $1.3 million; gain on sale of loans of $1.8 million; broker-dealer, asset management and insurance fees of $1.4 million; mortgage servicing rights recognized of $0.8 million; and technical assistance fees to affiliates of $0.6 million. For the year ended December 31, 2006, non-interest income decreased $6.9 million or 5.5% compared to the same period in 2005. This decrease was due to lower gains on sale of securities (net of the loss on extinguishment of debt) of $11.8 million and lower gain on sale of loans of $5.9 million. There was a loss on derivatives in 2006 of $0.5 million compared to a gain in 2005 of $2.0 million, due primarily to a loss on valuation of mortgage loans available for sale of $1.2 million in 2006. Insurance fees reflected an increase of $4.4 million due primarily to the effect of the Island Finance operation on the insurance operations for the period. Bank service charges, fees and other increased $6.8 million, or 16.1% for the year ended December 31, 2006. These increases were primarily in fees on deposit accounts, credit cards, mortgages, trust fees and account analysis. The Corporation recognized a gain on sale of an FDIC assessment credit of $1.9 million during the fourth quarter of 2006. For the quarter and the year ended December 31, 2006, the Efficiency Ratio(5) was 65.66% and 66.84%, respectively, reflecting increases of 266 and 387 basis points, respectively compared to Efficiency Ratios(5) of 63.00% and 62.97% for the three and twelve month periods ended December 31, 2005. These increases were mainly the result of higher operating expenses during the quarter and the year ended December 31, 2006 resulting in part from expenses related to a personnel reduction program. Payments pursuant to the personnel reduction program reached $0.7 million and $10.4 million for the quarter and the year ended December 31, 2006, respectively. Excluding these personnel reduction expenses, the Efficiency Ratio(5) for the three and twelve month periods ended December 31, 2006 was 63.99% and 63.96%, a 99 basis point increase for both the quarter and the year ended December 31, 2006, respectively compared to the same periods in 2005. In addition, during the fourth quarter of 2006, operating expenses were impacted by a pension plan curtailment pursuant to the Corporation's decision to freeze its defined benefit pension plan, resulting in the recognition of an additional expense of $0.9 million. The Corporation also recognized $0.8 million pursuant to a Long Term Incentive Plan to certain employees. This plan is sponsored by the Corporation's parent company, Banco Santander Central Hispano, S.A. ("Santander"), and consists of a target cash bonus to participating employees based on the value and earnings of the shares of Santander. The Corporation is accruing the bonus which will be paid by the Parent Company and such payment will be reflected in the Corporation's capital when the target cash bonuses are paid. Operating expenses increased $17.8 million or 32.2% from $55.4 million for the quarter ended December 31, 2005 to $73.3 million for the quarter ended December 31, 2006. This increase was due primarily to the Island Finance operation which reflected operating expenses of $12.8 million for the quarter ended December 31, 2006. During the fourth quarter of 2006 there were increases in salaries and employee benefits of $7.5 million together with an increase in other operating expenses of $10.3 million. Island Finance salaries and employee benefits for the quarter ended December 31, 2006 were $6.0 million and other operating expenses were $6.7 million. Excluding Island Finance expenses, operating expenses for the fourth quarter of 2006 compared to the same period in 2005 reflected an increase of $5.1 million or 9.3% comprised of an increase in personnel expenses of $1.5 million and an increase in non-personnel expenses of $3.6 million. The increase in personnel expenses, excluding Island Finance, for the fourth quarter of 2006 compared to the fourth quarter of 2005 was due to an increase of $0.9 million in pension expense due to a plan curtailment, personnel reduction expenses of $0.7 million and an increase of $0.8 million in deferred compensation pursuant to the long term incentive plan described above. These increases were partially offset by an increase in costs deferred to originate loans of $0.7 million. The $3.6 million increase in non-personnel expenses (excluding Island Finance expenses) was primarily due to increases in EDP servicing, amortization and technical services of $2.2 million, other taxes of $0.7 million, business promotion and repossessed assets provision and expenses of $0.5 million each. For the year ended December 31, 2006, operating expenses increased $56.4 million or 25.5% from $221.4 million for the year ended December 31, 2005 to $277.8 million for the same period in 2006. This increase was due to operating expenses of Island Finance of $44.5 million and expenses related to a personnel reduction program of $10.4 million in 2006. Island Finance salaries and employee benefits were $21.1 million for the ten months (since acquisition) ended December 31, 2006 and other operating expenses were $23.4 million. Excluding Island Finance expenses and expenses related to personnel reductions, operating expenses reflected an increase of $1.5 million or 0.7% for the year ended December 31, 2006 compared to December 31, 2005 comprised of a decrease in personnel expenses of $4.8 million and an increase in non- personnel expenses of $6.3 million. Decrease in personnel expenses was due mainly due to decreases in accruals for performance compensation of $4.4 million and $1.5 million in temporary personnel, partially offset by an increase of $0.9 million in the pension plan expense due to plan curtailment. The increase in non-personnel expenses was due to increases of $4.1 million in EDP servicing amortization and technical services, $1.5 million in credit card expenses and $1.0 million in other taxes. Island Finance On February 28, 2006 the Corporation acquired substantially all the assets and business operations in Puerto Rico of Island Finance. As a result of this acquisition the Corporation increased its presence throughout Puerto Rico to 131 branches due to Island Finance's extensive branch network, and also diversified and increased its loan portfolio, consumer client base and improved its net interest margin. The table below presents condensed results of operations and selected financial information of Island Finance for the quarter and the ten months (since acquisition) ended December 31, 2006 including certain adjustments that are non GAAP such as insurance commissions related to the Island Finance loan portfolio and interest expense mark-up charged by the Corporation. Ten months Quarter Ended Ended Santander Financial Services Dec-06 Dec-06 Condensed Statement of Income ($ in thousands) Interest income $35,004 $118,154 Interest expense (10,282) (34,738) Net interest income 24,722 83,416 Provision for loan losses (15,695) (43,208) Net interest income after provision for loan losses 9,027 40,208 Other income 2,804 3,006 Operating expenses (12,705) (44,501) Net loss before tax and non GAAP adjustments (874) (1,287) Income tax benefit (336) (486) Net loss of Santander Financial $(538) $(801) Other indirect enterprise adjustments: Credit insurance commission, net of income tax $768 $2,894 Interest expense mark-up, net of income tax $763 $2,505 Other Selected Information Total Assets $805,173 $805,173 Net loans 583,986 583,986 Allowance for loan losses 41,281 41,281 Non performing loans 24,731 24,731 Net interest margin 16.35% 16.59% Balance Sheet Total assets as of December 31, 2006 increased $916.2 million or 11.1% to $9.2 billion compared to total assets of $8.3 billion as of December 31, 2005. As of December 31, 2006, there was an increase of $881.8 million in net loans, including loans held for sale (further explained below) compared to December 31, 2005 balances. The investment securities portfolio decreased $141.0 million, from $1.6 billion as of December 31, 2005 to $1.5 billion as of December 31, 2006. The net loan portfolio, including loans held for sale, reflected an increase of 14.8% or $881.8 million, reaching $6.8 billion at December 31, 2006, compared to the figures reported as of December 31, 2005. The mortgage loan portfolio at December 31, 2006 grew $507.0 million or 23.6% compared to December 31, 2005. Mortgage loans originated during the fourth quarter of 2006 reached $244.5 million or 27.9% more than the same quarter last year. Mortgage loans originated during the year ended December 31, 2006 reached $911.6 million or 21.9% more than the same period last year. Construction loans increased $221.5 million or 103.6% as of December 31, 2006 compared to December 31, 2005. The consumer loan portfolio also reflected growth of $664.3 million or 117.1%, as of December 31, 2006, compared to December 31, 2005 due primarily to the acquisition of Island Finance. The commercial loan portfolio decreased $249.5 million or 7.5% compared to December 31, 2005, as a result of the settlement of commercial loans secured by mortgages with Doral during the second quarter of 2006. Period End Loan Balances % of Dec06/Dec 05 total Dec-06 Dec-05 $ Var % Var Dec-06 ($ in thousands) Commercial: Retail $1,948,788 1,887,689 $61,099 3.2% 28.1% Corporate 673,566 567,436 106,130 18.7% 9.7% Commercial loan secured by mortgages settled in 2Q06 - 638,228 (638,228) -100.0% Construction 435,182 213,705 221,477 103.6% 6.3% 3,057,536 3,307,058 (249,522) -7.5% 44.0% Consumer: Consumer 606,214 567,195 39,019 6.9% 8.7% Consumer Finance 625,266 - 625,266 n.a. 9.0% 1,231,480 567,195 664,285 117.1% 17.7% Mortgage (mainly residential) 2,654,540 2,147,479 507,061 23.6% 38.2% Total Loans $6,943,556 $6,021,732 $921,824 15.3% 100.0% Deposits of $5.3 billion at December 31, 2006 reflected an increase of 1.7%, compared to deposits of $5.2 billion as of December 31, 2005. Total borrowings at December 31, 2006 (comprised of federal funds purchased and other borrowings, securities sold under agreements to repurchase, commercial paper issued, and term and capital notes) increased $742.3 million or 33.6% compared to borrowings at December 31, 2005. The increase in borrowings was due to debt of $725 million incurred pursuant to the acquisition of Island Finance, the refinancing of other existing debt of the Corporation and the private placement of $125 million Trust Preferred Securities classified as borrowings in the consolidated financial statements. In December 2006, the Corporation and Santander Financial Services, entered into a Bridge Facility Agreement (the "Agreement") with National Australia Bank Limited (the "Lender"). The proceeds of the Agreement were used to refinance the outstanding indebtedness incurred in connection with the previously announced amended and restated loan agreement with Lloyds TBS Bank plc and for general corporate purposes. Under the Agreement, the Corporation and Santander Financial had available $275 million and $525 million, respectively, all of which was drawn. The amounts drawn under the Agreement (the "Loan") bear interest at an annual rate equal to the applicable LIBOR rate plus 0.10% per annum. Pursuant to the Agreement, the Company and Santander Financial will pay the Lender a facility fee (the "Facility Fee") of 0.02% of the principal amount of the Loan within three days of the execution of the Agreement. The entire principal balance of the Loan is due and payable on September 21, 2007. The Loan is guaranteed by Santander, the parent of the Corporation. The Corporation will pay Santander a guarantee fee equal to 10 basis points (0.1%) of the principal amount of the Loan. Financial Strength Non-performing loans to total loans as of December 31, 2006 was 1.54%, a 32 basis point increase compared to the 1.22% reported as of December 31, 2005. Non-performing loans at December 31, 2006 amounted to $106.9 million comprised of Island Finance non-performing loans of $24.7 million and $82.1 million of non-performing loans of the Bank. The Corporation's non-performing loans (excluding Island Finance non-performing loans) reflected an increase of $8.4 million or 11.5% compared to non-performing loans as of December 31, 2005. The increase of non-performing loans (excluding Island Finance non- performing loans) is principally due to non-performing residential mortgages, which increased $6.0 million, when compared to December 31, 2005. Island Finance loans acquired pursuant to the Asset Purchase Agreement on February 28, 2006 are subject to a guarantee by Wells Fargo of up to $21.0 million (maximum reimbursement amount) for net losses in excess of $34.0 million, occurring on or prior to the 15th month anniversary of the acquisition. The Corporation is provided with an additional guarantee of up to $7.0 million for net losses incurred in the acquired loan portfolio in excess of $34.0 million during months 16 to 18 of the anniversary, subject to the maximum aggregate reimbursement amount of $21.0 million. As of December 31, 2006, the Corporation had $12.8 million remaining under this guarantee. The allowance for loan losses represents 1.54% of total loans as of December 31, 2006, a 43 basis point increase over the 1.11% reported as of December 31, 2005. The allowance for loan losses to total loans excluding mortgage loans as of December 31, 2006 was 2.49% compared to 1.73% at December 31, 2005. The allowance for loan losses to total non-performing loans at December 31, 2006 increased 929 basis points to 100.01% compared to 90.72% at December 31, 2005. This increase was the result of a 59.9% increase in the allowance for loan losses from $66.8 million as of December 31, 2005 to $106.9 million as of December 31, 2006. Excluding non-performing mortgage loans(6) (for which the Company has historically had a minimal loss experience) this ratio is 235.8% at December 31, 2006 compared to 235.5% as of December 31, 2005. As of December 31, 2006, total capital to risk-adjusted assets (BIS ratio) reached 10.93% and Tier I capital to risk-adjusted assets and leverage ratios were 7.87% and 5.81%, respectively. Customer Financial Assets under Control As of December 31, 2006, the Company had $14.2 billion in Customer Financial Assets under Control. Customer Financial Assets under Control include bank deposits (excluding brokered deposits), broker-dealer customer accounts, mutual fund assets managed, and trust, institutional and private accounts under management. Included in the $14.2 billion referred to above, approximately $1.2 billion from the trust business recently sold would be transferred either to the acquiring financial institution or any other institution that the trust client elects during the first semester of 2007. Shareholder Value During the quarter ended December 31, 2006, Santander BanCorp declared a cash dividend of 16 cents per common share, resulting in a current annualized dividend yield of 3.6%. Market capitalization reached approximately $0.8 billion (including affiliated holdings) as of December 31, 2006. There were no stock repurchases during 2006 and 2005 under the Stock Repurchase Program. As of December 31, 2006, the Company had acquired, as treasury stock, a total of 4,011,260 shares of common stock, amounting to $67.6 million. Institutional Background Santander BanCorp is a publicly held financial holding company that is traded on the New York Stock Exchange (SBP) and on Latibex (Madrid Stock Exchange) (XSBP). 91% of the outstanding common stock of Santander BanCorp is owned by Banco Santander Central Hispano, S.A (Santander). The Company has five wholly owned subsidiaries, Banco Santander Puerto Rico, Santander Securities Corporation, Santander Financial Services, Inc., Santander Insurance Agency, Inc. and Island Insurance Corporation. Banco Santander Puerto Rico has been operating in Puerto Rico for nearly three decades. It offers a full array of services through 61 branches in the areas of commercial, mortgage and consumer banking, supported by a team of over 1,100 employees. Santander Securities offers securities brokerage services and provides portfolio management services through its wholly owned subsidiary Santander Asset Management Corporation. Santander Financial Services, Inc. offers consumer finance products through its network of 70 branches throughout the Island. Santander Insurance Agency offers life, health and disability coverage as a corporate agent and also operates as a general agent. For more information, visit the Company's website at http://www.santandernet.com/. Santander (SAN.MC, STD.N) is the largest bank in the Euro Zone by market capitalization and seventh in the world by profit. Founded in 1857, Santander has EUR 833,873 million in assets and EUR 1,000,996 million in managed funds, 67 million customers, 10,852 branches and a presence in 40 countries. It is the largest financial group in Spain and Latin America, and is the sixth largest bank in the United Kingdom, through its Abbey subsidiary, and operates in Portugal, where it is the third largest banking group. Through Santander Consumer Finance, it also operates a leading consumer finance franchise in Germany, Italy, Spain and nine other European countries. In 2006, Santander registered euro 7,596 million in net attributable profits, an increase of 22% from the previous year. In Latin America, Santander manages over US$250 billion in banking business volumes (loans, deposits, mutual funds, pension funds and managed funds) through 4,370 offices. In 2006, Santander reported US$1,409 million in net attributable income in Latin America, 29% higher than the prior year. (1) On a tax-equivalent basis. (2) On a tax-equivalent basis, excluding gains on sale of securities, also excluding FDIC Assessment Credits and Tax Credits in 2006 and loss on extinguishment of debt realized during 2005. (3) On a tax-equivalent basis. (4) On a tax-equivalent basis. (5) On a tax-equivalent basis, excluding gains on sales of securities, also excluding FDIC Assessment Credit and Tax Credits in 2006 and loss on extinguishment of debt realized during 2005. (6) Mortgage loans include residential mortgages, commercial loans with real estate collateral and consumer loans with real estate collateral. They exclude construction loans. This news release contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industry in which the Company operates, its beliefs and its management's assumptions. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Except as otherwise required under federal securities laws and the rules and regulations of the SEC, the Company does not have any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. SANTANDER BANCORP CONSOLIDATED BALANCE SHEETS (UNAUDITED) AS OF DECEMBER 31, 2006 AND 2005 (Dollars in thousands, except share data) ASSETS Variance 12/06- 31-Dec-06 31-Dec-05 12/05 CASH AND CASH EQUIVALENTS: Cash and due from banks $125,077 $136,731 -8.52% Interest-bearing deposits 780 8,833 -91.17% Federal funds sold and securities purchased under agreements to resell 73,407 92,429 -20.58% Total cash and cash equivalents 199,264 237,993 -16.27% INTEREST-BEARING DEPOSITS 51,455 101,034 -49.07% TRADING SECURITIES 50,792 37,679 34.80% INVESTMENT SECURITIES AVAILABLE FOR SALE, at fair value 1,409,789 1,559,681 -9.61% OTHER INVESTMENT SECURITIES, at amortized cost 50,710 41,862 21.14% LOANS HELD FOR SALE, net 196,277 213,102 -7.90% LOANS, net 6,747,279 5,808,630 16.16% ALLOWANCE FOR LOAN LOSSES (106,863) (66,842) 59.87% ACCRUED INTEREST RECEIVABLE 102,244 77,962 31.15% PREMISES AND EQUIPMENT, net 56,299 55,867 0.77% GOODWILL 148,300 34,791 326.26% INTANGIBLE ASSETS 47,427 10,092 369.95% OTHER ASSETS 235,195 160,097 46.91% $9,188,168 $8,271,948 11.08% LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS: Non interest-bearing $746,089 $672,225 10.99% Interest-bearing 4,567,885 4,552,425 0.34% Total deposits 5,313,974 5,224,650 1.71% FEDERAL FUNDS PURCHASED AND OTHER BORROWINGS 1,628,400 768,846 111.80% SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 830,569 947,767 -12.37% COMMERCIAL PAPER ISSUED 209,549 334,319 -37.32% TERM NOTES 244,468 40,215 507.90% CAPITAL NOTES 41,529 121,098 -65.71% ACCRUED INTEREST PAYABLE 91,245 65,160 40.03% OTHER LIABILITIES 249,214 201,366 23.76% 8,608,948 7,703,421 11.75% STOCKHOLDERS' EQUITY: Series A Preferred stock, $25 par value; 10,000,000 shares authorized, none issued or outstanding - - N/A Common stock, $2.50 par value; 200,000,000 shares authorized; 50,650,364 shares issued; 46,639,104 shares outstanding. 126,626 126,626 0.00% Capital paid in excess of par value 304,171 304,171 0.00% Treasury stock at cost, 4,011,260 shares (67,552) (67,552) 0.00% Accumulated other comprehensive loss, net of taxes (44,213) (41,591) 6.30% Retained earnings- Reserve fund 137,511 133,759 2.81% Undivided profits 122,677 113,114 8.45% Total stockholders' equity 579,220 568,527 1.88% $9,188,168 $8,271,948 11.08% SANTANDER BANCORP CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE TWELVE AND THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005 (Dollars in thousands, except per share data) For the twelve For the three months ended months ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2006 2005 2006 2005 INTEREST INCOME: Loans $535,327 $359,415 $145,046 $102,461 Investment securities 74,023 71,938 18,424 17,215 Interest-bearing deposits 4,439 4,065 1,172 1,324 Federal funds sold and securities purchased under agreements to resell 4,531 4,187 974 697 Total interest income 618,320 439,605 165,616 121,697 INTEREST EXPENSE: Deposits 173,380 122,212 47,776 36,661 Securities sold under agreements to repurchase and other borrowings 139,960 86,969 38,689 22,653 Subordinated capital notes 14,374 3,402 3,895 1,308 Total interest expense 327,714 212,583 90,360 60,622 Net interest income 290,606 227,022 75,256 61,075 PROVISION FOR LOAN LOSSES 65,583 20,400 21,670 5,000 Net interest income after provision for loan losses 225,023 206,622 53,586 56,075 OTHER INCOME (LOSS): Bank service charges, fees and other 49,078 42,272 13,835 11,005 Broker-dealer, asset management and insurance fees 56,973 53,016 13,896 12,458 Gain on sale of securities, net 106 17,842 20 4 Loss on extinguishment of debt - (5,959) - - Gain on sale of mortgage servicing rights 170 83 101 14 Gain on sale of loans 1,994 7,876 1,809 2 Other income 10,148 10,228 5,717 1,635 Total other income 118,469 125,358 35,378 25,118 OPERATING EXPENSES: Salaries and employee benefits 121,711 95,002 30,281 22,715 Occupancy costs 22,476 16,811 5,763 4,230 Equipment expenses 4,797 3,802 1,190 1,099 EDP servicing, amortization and technical assistance 40,084 31,589 11,390 7,862 Communication expenses 11,358 8,232 3,590 2,032 Business promotion 11,613 11,065 3,073 2,826 Other taxes 11,514 8,443 3,459 2,150 Other operating expenses 54,230 46,442 14,535 12,523 Total operating expenses 277,783 221,386 73,281 55,437 Income before provision for income tax 65,709 110,594 15,683 25,756 PROVISION FOR INCOME TAX 22,540 30,788 5,624 8,892 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $43,169 $79,806 $10,059 $16,864 EARNINGS PER COMMON SHARE $0.93 $1.71 $0.22 $0.36 SANTANDER BANCORP SELECTED CONSOLIDATED FINANCIAL INFORMATION: (DOLLARS IN THOUSANDS) For the Quarters Ended 31-Dec 31-Dec 30-Sep 4Q06/4Q05 4Q06/3Q6 2006 2005 2006 Variation Variation Interest Income $165,616 $121,697 $162,086 36.1% 2.2% Tax equivalent adjustment 2,850 1,807 1,951 57.7% 46.1% Interest income on a tax equivalent basis 168,466 123,504 164,037 36.4% 2.7% Interest expense 90,360 60,622 87,378 49.1% 3.4% Net interest income on a tax equivalent basis 78,106 62,882 76,659 24.2% 1.9% Provision for loan losses 21,670 5,000 20,400 333.4% 6.2% Net interest income on a tax equivalent basis after provision 56,436 57,882 56,259 -2.5% 0.3% Other operating income 33,549 25,112 30,776 33.6% 9.0% Gain on sale of securities 20 4 26 400.0% -23.1% Gain on sale of loans 1,809 2 188 90350.0% 862.2% Other operating expenses 73,281 55,437 75,606 32.2% -3.1% Income on a tax equivalent basis before income taxes 18,533 27,563 11,643 -32.8% 59.2% Provision for income taxes 5,624 8,892 966 -36.8% 482.2% Tax equivalent adjustment (2,850) (1,807) (1,951) 57.7% 46.1% NET INCOME $10,059 $16,864 $8,726 -40.4% 15.3% SELECTED RATIOS: Per share data (1): Earnings per common share $0.22 $0.36 $0.19 Average common shares outstanding 46,639,104 46,639,104 46,639,104 Common shares outstanding at end of period 46,639,104 46,639,104 46,639,104 Cash Dividends per Share $0.16 $0.16 $0.16 Years Ended December 31, 2006 2005 Variation Interest Income $618,320 $439,605 40.7% Tax equivalent adjustment 8,986 11,059 -18.7% Interest income on a tax equivalent basis 627,306 450,664 39.2% Interest expense 327,714 212,583 54.2% Net interest income on a tax equivalent basis 299,592 238,081 25.8% Provision for loan losses 65,583 20,400 221.5% Net interest income on a tax equivalent basis after provision 234,009 217,681 7.5% Other operating income 116,369 105,599 10.2% Gain on sale of securities 106 11,883 99.1% Gain on sale of loans 1,994 7,876 74.7% Other operating expenses 277,783 221,386 25.5% Income on a tax equivalent basis before income taxes 74,695 121,653 -38.6% Provision for income taxes 22,540 30,788 -26.8% Tax equivalent adjustment (8,986) (11,059) -18.7% NET INCOME $43,169 $79,806 -45.9% SELECTED RATIOS: Per share data (1): Earnings per common share $0.93 $1.71 Average common shares outstanding 46,639,104 46,639,104 Common shares outstanding at end of period 46,639,104 46,639,104 Cash Dividends per Share $0.64 $0.64 (1) Per share data is based on the average number of shares outstanding during the period. Basic and diluted earnings per share are the same. SANTANDER BANCORP 2005 YTD QTD QTD YTD QTD 31-Dec 31-Dec 30-Sep 31-Dec 31-Dec SELECTED RATIOS 2006 2006 2006 2005 2005 Net interest margin (1) 3.63% 3.67% 3.66% 3.02% 3.16% Return on average assets (2) 0.49% 0.44% 0.39% 0.96% 0.80% Return on average common equity(2) 7.66% 6.86% 6.08% 13.85% 11.51% Efficiency Ratio (1,3) 66.84% 65.66% 70.25% 62.97% 63.00% Non-interest income to revenues 16.08% 17.60% 16.05% 22.19% 17.11% Capital: Total capital to risk- adjusted assets - 10.93% 11.19% - 12.30% Tier I capital to risk- adjusted assets - 7.87% 8.14% - 9.09% Leverage ratio - 5.81% 5.96% - 6.50% Non-performing loans to total loans - 1.54% 1.63% - 1.22% Non-performing loans plus accruing loans past-due 90 days or more to loans - 1.84% 1.90% - 1.27% Allowance for loan losses to non-performing loans - 100.01% 86.53% - 90.72% Allowance for loans losses to period-end loans - 1.54% 1.41% - 1.11% OTHER SELECTED FINANCIAL DATA 12/31/2006 12/31/2005 (dollars in millions) Customer Financial Assets Under Control: Bank deposits (excluding brokered deposits) $3,968.6 $3,965.6 Broker-dealer customer accounts 5,648.0 4,923.0 Mutual fund and assets managed 2,936.0 2,795.0 Trust, institutional and private accounts assets under management 1,601.0 1,158.0 Total $14,153.6 $12,841.6 (1) On a tax-equivalent basis. (2) Ratios for the quarters are annualized. (3) Operating expenses divided by net interest income, on a tax equivalent basis, plus other income, excluding gain on sale of securities, loss on extinguishment of debt in 2005 and gain on sale of building for 1Q04. DATASOURCE: Santander BanCorp CONTACT: Maria Calero, +1-787-777-4437, or Evelyn Vega, +1-787-777-4546, both of Santander BanCorp Web site: http://www.santandernet.com/

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