Santander
BanCorp
To our Shareholders:
We are very pleased to announce that on May, 2000 Santander BanCorp was authorized by the Federal Reserve Bank of New York to become a financial holding company. In view of our new position, we are now implementing a strategic plan geared toward expanding our operations by entering a broader range of financial services including insurance and securities and we will definitely take advantage of these new opportunities. During the third quarter of 2000, we are planning to become an active participant in the local insurance business.
Santander BanCorp is a financial holding company created upon the internal reorganization of Banco Santander Puerto Rico, which became a wholly owned subsidiary of Santander BanCorp. As a result of this reorganization, all the former shareholders of Banco Santander Puerto Rico became shareholders of an equal number of shares of Santander BanCorp.
We will continue to enhance our institution´s virtual banking facilities to better service our clients´ needs; online banking is one of our top priorities. We have organized a department specialized in the development of new projects for the area of Electronic Banking. It will provide the means to maximize the benefits and services offered through our website in order to meet the demands of today´s market in the developing technology. We are among the first local financial institutions to introduce the Internet web site with Electronic Banking functions for individual customers through Santandernet.com, as well as the first to offer business transactions for commercial clients via Santander Global Net.
For the quarter ended June 30, 2000, net income amounted to $19.5 million or 43 cents per share, compared with $19.7 million or44 cents per share reported for the same quarter of 1999. For the second quarter ended June 30, 2000, Return on Average Assets and Return on Average Common Equity were 1.00% and 14.93%, respectively. For the same quarter in 1999, these ratios were 1.04% and 15.98%, respectively. The Efficiency Ratio1 improved by 136 basis points to 52.98% when compared to 54.34% for the same period in 1999.
For the six-month period ended June 30, 2000, net income amounted to $39.0 million or 86 cents per share. For the same period in 1999, net income amounted to $39.1 million or 87 cents per share. The net income for the first half of 2000 was favorably impacted by the increase in service fees and the gains on the sale of mortgage loans. However, these were offset by an increase of $8.1 million in the provision for loan losses and a $3.8 million loss on the sale of securities. For the six-month period ended June 30, 2000, the Return on Average Assets and Return on Average Common Equity were 0.99% and 15.08%, respectively. The Efficiency Ratio1 for the first half of 2000, improved by 122 basis points to a level of 52.53%.
Earnings Results
Net interest income1 for the second quarter and for the first six-month of 2000 amounted to $67.5 million and $137.1 million, respectively. Despite the impact that various interest rate increases had over the past year, the net interest income decreased by only 2.9% and 2.4%, respectively, when compared to the same figures in 1999. The impact of the higher interest scenario was minimized as a result of the Company´s strategy of reducing its investment portfolio while increasing the volume of higher yielding loans. The strategy also included substituting higher cost funding instruments for lower paying deposits. Net interest margin for the second quarter of 2000 was 3.65% and 3.66% for the six-month period ended June 30, 2000, compared to 3.83% and 3.97%, respectively, for the same period in 1999.
The provision for loan losses for the second quarter and six-month period ended June 30, 2000 totaled $9.8 million and $17.5 million, respectively. The adjustments to this provision resulted primarily from the continuous evaluation of the quality of our loan portfolio, which considered higher consumer loan charge-offs experienced during the six month period ended June 30, 2000 as compared to the same period in 1999. Net charged-off to average loans was 0.22% for the quarter and 0.45% for the six-month period ended June 30, 2000.
During the quarter and six-month period ended June 30, 2000, other operating income, excluding the gain (loss) on the sale of securities and the mortgage servicing rights, increased by 48.3% to $14.6 million and by 45.6% to $27.9 million, respectively, when compared to the same period in 1999. This growth is primarily due to the increase in fee income from credit card and other services as well as a $2.0 million and $4.4 million gain on the sale of mortgage loans, during the quarter and semester ended June 30, 2000, respectively.
Focused on Strategies for Growth
Total assets as of June 30, 2000 reached $7.8 billion, a 0.50% decrease compared to the balance reported as of the same date in 1999. This slight decrease was attributable to the reduction in the investment portfolio.
As of June 30, 2000, the loan portfolio totaled $4.6 billion, representing an increase of $400 million or 9.50% from June 30, 1999. This continued growth in loan volume was especially significant in the commercial and construction areas, despite the competitive local environment.
The commercial and industrial loan portfolio grew 13% or $278 million from June 30, 1999 to June 30, 2000. During the first semester of the year, the Company has taken certain strategic moves in order to achieve a quicker response to its business customers´ needs. Our commercial business division has undergone a major reorganization.
The construction loan portfolio grew $132 million or 50.8% from loans outstanding as of June 30, 1999. Approximately 65% of the growth was due to new residential housing project loans guaranteed by FHA (Federal Housing Administration). The outstanding continued growth of the construction portfolio holds pares with the healthy expansion of Puerto Rico´s construction industry.
The mortgage loan portfolio, amounting to $964 million in June 30, 2000, experienced a 4.2% or $43 million reduction compared to June 30, 1999. This reduction is basically attributed to the sale of mortgage loans totaling $50 million and to fewer advances under warehousing lines of credit.
From June 30, 1999 to June 30, 2000, consumer loans grew 3.8%. Increases in the personal loan category of 5.7% and credit card growth of 12.8% were offset by a reduction of 5.4% in the automobile-lending category. Based on a lower margin and increased delinquency for the auto lending operation, under a higher interest scenario, the Company elected to discontinue promoting this product and focus the resources on more profitable products.
Deposits as of June 30, 2000 amounted to $4.2 billion representing an increase of 11.38% or $428.7 million over the $3.8 billion reported as of June 30, 1999. This growth is the result of the Bank´s marketing efforts to increase its deposit base by actively launching new products to maximize cross selling.
Asset Quality and Financial Strength
Asset quality remained above the industry average. The level of non-performing loans to total loans stood at 1.05% when compared to 1.02% as of June 30, 1999, slightly higher than the all-time low of 0.98% experienced at year-end 1999. This increase has resulted in a coverage ratio (allowance for loan losses to total non-performing loans) of 109.75% compared to 129.75% as of June 30, 1999. The Company´s intention is to provide for a reserve for loan losses of 100% of non-performing loans and leases. When real estate collateral is considered, this ratio amounts to 155.39%.
Commercial and industrial net loan losses remained at a low level, reflecting the historical performance and strong credit quality of this portfolio.
As part of the Company´s Asset and Liability Management strategy, interest rate swaps and caps have been arranged to reduce the exposure to interest rate fluctuations. The Company considers adequate the current level of coverage provided by the caps and swaps, as to comply with its internal sensitivity policies on net interest margin. As of June 30, 2000, Tier I capital to risk-adjusted assets, total capital to risk-adjusted assets (BIS ratio) and leverage ratios reached 10.39%, 11.52% and 7.17%, respectively.
Dividend Distributions and Shareholders´ Programs
During the second quarter of 2000, Santander BanCorp declared another cash dividend of 11 cents for stockholders as of record date June 9, 2000. Also, during the first quarter of 2000, Banco Santander Puerto Rico distributed a 10% stock dividend for common shareholders as of record date January 31, 2000 and a cash dividend of 11 cents per share for those at February 29, 2000. The Company´s solid performance has allowed the Board of Directors to declare dividends on a quarterly basis.
Along with these dividend payments, a Stock Repurchase Program is being implemented. The Company plans to acquire up to 3% of the outstanding common shares. During the second quarter ended June 30, 2000, the Company repurchased approximately 200,000 common shares at a cost of $2.6 million.
Santander BanCorp has further underlined its commitment to create shareholder value by adopting a Dividend Reinvestment and Cash Purchase Plan, whereby holders of common stock have the opportunity to automatically invest their cash dividends to purchase more shares of SBP. Also, registered shareholders may make, as frequently as once a month, optional cash payments for investment in additional shares of common stock.
If the current economic conditions and the higher interest rate environment prevail, the Company is prepared to continue performing at the same profitability level. We feel enthusiastic about the short and long-term potential of Santander BanCorp. We envision the year 2000 as one with far-reaching opportunities of growth and expansion for Santander BanCorp. Our goals and purpose are concentrated in shaping 2000 to be a great year for the Company, our shareholders, our customers and the community.
/s/Juan Arenado
President and Chief Executive Officer
| (DOLLARS IN THOUSANDS) | June 30, 2000 | June 30, 1999 | December 31, 1999 |
| (Unaudited) | (Unaudited) | (Audited) | |
| ASSETS | |||
| CASH AND CASH EQUIVALENTS: | |||
| Cash and due from banks | $ 137,861 | 137,005 | 190,435 |
| Interest bearing deposits | 19,017 | 57,361 | 104,676 |
| Federal funds sold and securities purchased under | |||
| agreements to resell | 77,000 | 46,000 | 20,000 |
| Total cash and cash equivalents | 233,878 | 240,366 | 315,111 |
| INTEREST BEARING DEPOSITS | - | 10,450 | 200 |
| INVESTMENT SECURITIES AVAILABLE | - | ||
| FOR SALE, at market value | 1,032,990 | 1,303,556 | 1,249,582 |
| INVESTMENT SECURITIES HELD TO | |||
| MATURITY, at cost | 1,724,159 | 1,893,190 | 1,778,939 |
| LOANS, net | 4,600,599 | 4,201,314 | 4,509,046 |
| ALLOWANCE FOR LOAN LOSSES | (52,876) | (55,412) | (56,200) |
| BANK PREMISES AND EQUIPMENT, net | 78,338 | 83,165 | 82,447 |
| ACCRUED INTEREST RECEIVABLE | 59,919 | 54,475 | 58,150 |
| OTHER ASSETS | 132,037 | 117,548 | 101,075 |
| 7,809,044 | 7,848,652 | 8,038,350 | |
| LIABILITIES AND STOCKHOLDERS´ EQUITY | |||
| DEPOSITS: | |||
| Demand | 821,798 | 860,536 | 841,719 |
| Savings | 1,266,551 | 1,293,730 | 1,281,869 |
| Time | 2,106,798 | 1,612,176 | 1,937,664 |
| Total deposits | 4,195,147 | 3,766,442 | 4,061,252 |
| FEDERAL FUNDS PURCHASED AND OTHER | |||
| BORROWINGS | 279,920 | 660,000 | 576,000 |
| SECURITIES SOLD UNDER AGREEMENT TO | |||
| REPURCHASE | 1,527,605 | 1,792,317 | 1,873,876 |
| COMMERCIAL PAPER ISSUED | 698,360 | 518,507 | 413,374 |
| SUBORDINATED CAPITAL NOTES | 20,000 | 55,525 | 30,000 |
| TERM NOTES | 414,111 | 389,651 | 414,001 |
| ACCRUED INTEREST PAYABLE | 27,869 | 37,617 | 44,721 |
| OTHER LIABILITIES | 74,342 | 100,857 | 78,510 |
| 7,237,354 | 7,320,916 | 7,491,734 | |
| STOCKHOLDERS´ EQUITY: | |||
| Prefered stock $25 par value; 10,000,000 shares | |||
| authorized, 2,610,008 outstanding | 65,250 | 65,250 | 65,250 |
| Common stock, $2.50 par value; $200,000,000 | |||
| shares authorized, 42,484,870 and 38,622,651 | |||
| shares issued and outstanding in 2000 and | |||
| 1999, respectively. | 106,212 | 96,557 | 96,557 |
| Common stock dividend distributable, 3,862,219 | |||
| shares | - | - | 9,656 |
| Capital paid in excess of par value | 122,457 | 71,282 | 122,457 |
| Treasury stock-at cost, 199,100 shares | (2,582) | - | - |
| Accumulated other comprehensive income (loss) | (26,010) | (15,908) | (26,356) |
| Retained earnings- | |||
| Reserve fund | 101,971 | 93,924 | 101,971 |
| Redemption fund | - | 39,096 | 10,000 |
| Undivided profits | 204,392 | 177,535 | 167,081 |
| Total stockholders´ equity | 571,690 | 527,736 | 546,616 |
| 7,809,044 | 7,848,652 | 8,038,350 |
| (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) | For the six months ended | For the quarter ended | ||
| (Unaudited) | 30-Jun-00 | 30-Jun-99 | 30-Jun-00 | 30-Jun-99 |
| INTEREST INCOME: | ||||
| Loans | $213,134 | $173,567 | $108,666 | $87,918 |
| Investment securities | 87,970 | 89,886 | 43,050 | 45,059 |
| Interest bearing deposits | 1,258 | 1,808 | 270 | 909 |
| Federal funds sold and securities purchased under | ||||
| agreements to resell | 1,380 | 432 | 730 | 313 |
| Total interest income | 303,742 | 265,693 | 152,716 | 134,199 |
| INTEREST EXPENSE: | ||||
| Deposits | 79,041 | 57,845 | 42,619 | 28,980 |
| Securities sold under agreements to repurchase | ||||
| and other borrowings | 97,853 | 80,958 | 47,088 | 42,423 |
| Subordinated capital notes | 611 | 1,642 | 310 | 775 |
| Total interest expense | 177,505 | 140,445 | 90,017 | 72,178 |
| Net interest income | 126,237 | 125,248 | 62,699 | 62,021 |
| PROVISION FOR LOAN LOSSES | ||||
| 17,500 | 9,400 | 9,750 | 3,400 | |
| Net interest income after provision for loan losses | 108,737 | 115,848 | 52,949 | 58,621 |
| OTHER INCOME: | ||||
| Service charges, fees and other | 19,466 | 16,360 | 10,204 | 8,333 |
| (Loss) gain on sale of securities | -3,813 | 280 | 8 | 110 |
| Gain on sale of mortgage servicing rights | 957 | 1,061 | 472 | 510 |
| Other | 8,481 | 2,830 | 4,429 | 1,537 |
| Total other income | 25,091 | 20,531 | 15,113 | 10,490 |
| OTHER OPERATING EXPENSES: | ||||
| Salaries and employee benefits | 35,603 | 36,998 | 17,471 | 18,549 |
| Occupancy costs | 7,592 | 7,533 | 3,827 | 3,799 |
| Equipment expenses | 6,719 | 6,521 | 3,352 | 3,221 |
| Other operating expenses | 37,284 | 35,331 | 19,125 | 17,851 |
| Total other operating expenses | 87,198 | 86,383 | 43,775 | 43,420 |
| Income before provision for income tax | 46,630 | 49,996 | 24,287 | 25,691 |
| PROVISION FOR INCOME TAX | 7,669 | 10,867 | 4,781 | 5,971 |
| NET INCOME | $38,961 | $39,129 | $19,506 | $19,720 |
| INCOME AVAILABLE TO COMMON SHAREHOLDERS | $36,677 | $36,845 | $18,364 | $18,578 |
| EARNINGS PER COMMON SHARE | $0.86 | $0.87 | $0.43 | $0.44 |
| Six Months Ended | Quarter Ended | |||
| June 30, 2000 | June 30, 1999 | June 30, 2000 | June 30, 1999 | |
| Per share data: (1) | ||||
| Earnings per common share | $ 0.86 | $ 0.87 | $ 0.43 | $ 0.44 |
| Average common shares outstanding | 42,466,005 | 42,484,870 | 42,447,140 | 42,484,870 |
| Common shares outstanding at end of period | 42,285,770 | 42,484,870 | 42,285,770 | 42,484,870 |
| Cash Dividend per Share: | ||||
| Preferred stock | $ 0.87 | $ 0.87 | $ 0.44 | $ 0.44 |
| Common stock | $ 0.22 | $ 0.22 | $ 0.11 | $ 0.11 |
| Performance: | ||||
| Net interest margin (2) | 3.66% | 3.97% | 3.65% | 3.83% |
| Return on average assets (3) | 0.99% | 1.05% | 1.00% | 1.04% |
| Return on average common equity (3) | 15.08% | 16.06% | 14.93% | 15.98% |
| Efficiency Ratio (4) | 52.53% | 53.75% | 52.98% | 54.34% |
| Capital: | ||||
| Tier I capital to risk-adjusted assets | 10.39% | 10.11% | 10.39% | 10.11% |
| Total capital to risk-adjusted assets | 11.52% | 11.37% | 11.52% | 11.37% |
| Leverage ratio | 7.17% | 6.69% | 7.17% | 6.69% |
| Asset Quality: | ||||
| Non-performing loans to total loans | 1.05% | 1.02% | 1.05% | 1.02% |
| Non-performing loans plus accruing loans | ||||
| past-due 90 days or more to loans | 1.16% | 1.10% | 1.16% | 1.10% |
| Allowance for loan losses to non- | ||||
| performing loans | 109.75% | 129.75% | 109.75% | 129.75% |
| Allowance for loans losses to period- | ||||
| end loans | 1.15% | 1.32% | 1.15% | 1.32% |
| Other: | ||||
| Tax equivalent adjustment (in thousands) | $ 10,850 | $ 15,200 | $ 4,817 | $ 7,506 |
| (1) Per share data is based on the average number of shares outstanding | ||||
| during the period giving retroactive effect to the stock dividend declared on | ||||
| January 11, 2000. Basic and diluted earnings per share are the same. | ||||
| (2) On a tax-equivalent basis. | ||||
| (3) Ratios for the quarters and semester are annualized. | ||||
| (4) Operating expenses divided by net interest income, on a tax equivalent basis, | ||||
| plus other income, excluding gain on sale of securities. | ||||
Investor Assistance
Investors´ requests and inquires for assistance should be directed to the address listed below or call the Investor Relations Department at (787) 250-2590 or 250-2584.
Santander BanCorp
Attn. Investor Relations Department
PO Box 362589
San Juan, PR 00936-2589
E-mail: investor.relatons@bspr.com
For more information, visit the Company´s website at www.santandernet.com
Transfer Agent Information:
For assistance to report lost certificates, non-receipt of dividends checks or change in registration contact our transfer agent, ChaseMellon Shareholder Services, at the address listed below:
ChaseMellon Shareholder Services L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660
Domestick Shareholders (800) 851-9677
Foreign Shareholders (201) 329-8660
This earnings report may contain certain forward-looking statements with respect to the financial condition, results of operations and business of Santander BanCorp that are subject to various risk factors which could cause future results to differ materially from current management expectations or estimates. Such factors include, but are not limited, to the possibility that adverse general economic conditions or that an adverse interest rate environment could develop.
