This financial discussion contains an analysis of the consolidated financial condition 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.

Santander BanCorp (the Corporation) reported net income of $20.0 million for the third quarters of 2000 and 1999. Earnings per common share (EPS) for the third quarter of 2000 were $0.45, based on 42,348,183 average shares outstanding, after giving retroactive effect to the January 11, 2000 10% stock dividend declared (see Note 8 to the Consolidated Financial Statements). Santander BanCorp is the bank holding company for Banco Santander Puerto Rico and Subsidiary (the Bank). For the nine month period ended September 30, 2000 the Corporation reported net income of $59.0 million compared to $59.1 for the same period in 1999. 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, 2000 were 1.03% and 14.73%, respectively, compared with 1.01% and 15.90% reported during the third quarter of 1999. For the nine month period ended September 30, 2000 ROA and ROE were at 1.00% and 14.93% respectively compared to 1.04% and 16.00% for the same period in 1999.

In spite of the higher interest rate environment the Corporation has been able to maintain satisfactory earnings for the year compared to the previous year which had a more favorable rate environment. This has been due to effective asset liability management strategies, growth in loans and deposits coupled with reductions in borrowings and investments and a very aggressive cost control program.

The Corporation´s net interest income reflected a decrease of 3.9% to $60.2 million for the quarter ended September 30, 2000 from $62.7 million for the quarter ended September 30, 1999. Net interest income for the nine month period ended September 30, 2000 reached $186.5 million, a decrease of 0.8% over $188.0 million for the same period in 1999. During the first quarter of 1999 the Bank recognized extraordinary interest income of $2.1 million related to the recovery of a charged off loan. Excluding this item the increase in net interest income for the nine month period ended September 30, 2000 was 0.3%.

The decrease in the Corporation´s net interest income for the third quarter of 2000 was due to the higher cost of funding earning assets. During the third quarter of the year there has been a shift in the composition of average interest earning assets from lower yielding investment securities to higher yielding loans. Average loans for the third quarter of 2000 reflected an increase of $333 million, while investments decreased by $426 million compared to the same quarter of 1999. The shift in assets has resulted in a decrease of $114 million in average earning assets for the third quarter of 2000, which reached $7.4 billion compared to $7.5 billion for the third quarter of 1999. There was also a decrease in the quarterly average interest bearing liabilities of 1.4% to $6.4 billion for the quarter ended September 30, 2000 from $6.5 billion for the same period in 1999. However, there was also a favorable shift in the composition of liabilities from higher cost borrowings to deposits.

To permit the comparison of assets with different tax attributes, the interest income on tax-exempt assets under this heading has been adjusted by an amount equal to the income taxes which would have been paid had the income been fully taxable. This tax equivalent adjustment is derived using the applicable statutory tax rate and resulted in an adjustment of $9.1 million and $7.0 million for the quarters ended September 30, 2000 and 1999, respectively.

The net interest margin on a tax-equivalent basis increased from 3.69% for the quarter ended September 30, 1999 to 3.74% for the quarter ended September 30, 2000. This increase was primarily due to an increase in the yield of earning assets.

The table on page 31, Quarterly Average Balance Sheet and Summary of Net Interest Income, presents average balance sheets, net interest income on a tax equivalent basis and interest rates for the third quarter of 2000 and 1999. The table on Interest Variance Analysis on a Tax Equivalent Basis on page 22, 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 2000 compared with the third quarter of 1999. Volume and rate variances have been calculated based on the activity in average balances over the period and changes in interest rates on average interest earning assets and average interest bearing liabilities.

The Corporation´s interest income on a tax equivalent basis increased $14.2 million, or 9.5% to $163.6 million for the quarter ended September 30, 2000 from $149.4 million for the quarter ended September 30, 1999. Of this increase, $1.1 million was attributed to an increase in the volume of the Corporation´s interest earning assets, together with an increase in the yield of these assets of $13.1 million. The growth in average interest earning assets was in the loan portfolio and was partially offset by a $426 million decrease in the average investment portfolio.

Average interest earning assets declined to $7.4 billion for the quarter ended September 30, 2000, compared with $7.5 billion for the same quarter in 1999. Due in part to a sale of $342 million in Treasury Notes during the first quarter of 2000, average investment securities decreased 13.5% from $3.2 billion in September 1999 to $2.7 billion during the same quarter in 2000.

The average volume of loans increased by $333 million for the quarter ended September 30, 2000 as compared with the same period in 1999. The increase in average loans was due primarily to increases in average commercial, construction, corporate and consumer loans of $177.6 million, $118.9 million, $62.1 million, and $11.2 million respectively, for the quarter ended September 30, 2000 as compared to the same period in 1999. These increases were partially offset by a decrease in average mortgage loans of $39.1 million for the same periods.

The average yield on earning assets increased from 7.91% for the quarter ended September 30, 1999 to 8.82% for the quarter ended September 30, 2000. This increase is due to the increase in the higher yielding loan portfolio as well as higher rates during this quarter.

The Corporation´s average interest bearing liabilities decreased $92 million from $6.5 billion for the quarter ended September 30, 1999, to $6.4 billion for the quarter ended September 30, 2000. There was a significant increase in average time deposits of $410 million from $1.7 billion during the third quarter of 1999 to $2.1 billion in September 2000. Borrowings reflected a decrease of $447 million from $3.4 billion in September 1999 to $2.9 billion in September 2000. This shift in liabilities from higher costing borrowings to deposits has had a favorable impact on the Corporation´s results of operations during 2000.

Interest expense increased 18.25% to $94.3 million for the quarter ended September 30, 2000 from $79.8 million for the quarter ended September 30, 1999. Of the $14.6 million increase in interest expense, there was a $15.8 million increase in cost of funds together with a $1.2 million decrease in the volume of interest bearing liabilities.

There was a significant increase in deposits during the third quarter of 2000 compared to the same period in 1999. During this period, the Corporation was able to fund its increase in average loans with deposits, which bear more favorable rates of interest than borrowings. The decrease in average interest earning assets together with the increase in the cost of funds caused the increase in the cost of funding earning assets. The average cost of interest bearing liabilities also reflected an increase to 5.82% for the three-month period ended September 30, 2000 compared to 4.84% for the same period in 1999.

The following table 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 three months ended September 30, 2000 compared to the three months ended September 30, 1999. Volume and rate variances have been calculated based on the activity in average balances over the period and changes in interest rates on average interest earning assets and average interest bearing liabilities. The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of change in each category.

INTEREST VARIANCE ANALYSIS Tax-equivalent basis
(In thousands)	Three months ended September 30, 2000
	Compared to the Three Months Ended
	September 30, 1999
	Increase(Decrease) Due to Change in:
	Volume	Rate	Total
Interest income:
Federal funds sold and securities purchased
under agreements to resell	$ 476	$ 158	$ 634
Time deposits with other banks	(371)	(336)	(707)
Investment securities	(6,971)	1,640	(5,331)
Loans	7,933	11,698	19,631
Total interest income	1,067	13,160	14,227
Interest expense:
Savings and NOW accounts	(449)	3,478	3,029
Other time deposits	5,804	3,540	9,344
Borrowings	(6,602)	7,894	1,292
Long-term borrowings	(11)	903	892
Total interest expense	(1,258)	15,815	14,557
Net interest income	$ 2,325	$ (2,655)	$ (330)
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of change in each category.

The Corporation assesses the overall risks in its loan portfolio and establishes and maintains a reserve 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. In determining the allowance, management considers the portfolio risk characteristics, prior loss experience, prevailing and projected economic conditions and loan impairment measurements. Based on current and expected economic conditions, the expected level of net loan losses and the methodology established to evaluate the adequacy of the allowance for loan losses, management considers that the Corporation has established an adequate position in its allowance for loan losses. The following table sets forth an analysis of the activity in the allowance for possible loan losses during the periods indicated:

	Quarter ended		Nine months ended
	September 30		September 30
(Dollars in thousands)	2000	1999	2000	1999
Balance at beginning of period	$ 52,876	$ 55,412	$ 56,200	$ 53,457
Provision for loan losses	8,750	7,200	26,250	16,600
	61,626	62,612	82,450	70,057
Losses charged to the allowance
Commercial	2,255	1,569	6,887	6,391
Construction	-	-	-	10
Mortgage	-	-	-	-
Consumer	10,280	9,027	33,037	23,609
	12,535	10,596	39,924	30,010
Recoveries
Commercial	1,360	1,314	3,615	9,800
Construction	94	-	94	-
Mortgage	-	14	-	14
Consumer	1,393	1,742	5,703	5,225
	2,847	3,070	9,412	15,039
Net loans charged-off	9,688	7,526	30,512	14,971
Balance at end of period	$ 51,938	$ 55,086	$ 51,938	$ 55,086
Loans:
Outstanding at period end	$ 4,606,764	$ 4,458,365	$ 4,606,764	$ 4,458,365
Average	4,594,616	4,263,958	4,582,935	4,059,955
Ratios:
Allowance for loan losses to period-end loans	1.13%	1.24%	1.13%	1.24%
Recoveries to charge-offs	22.71%	28.97%	23.57%	50.11%
Net charge-offs to average loans	0.21%	0.18%	0.67%	0.37%

For the quarter ended September 30, 2000, the provision for loan losses was $8.8 million compared to $7.2 million for the same quarter in 1999, and $26.3 million compared to $16.6 million for the nine month periods ended September 30, 2000 and 1999, respectively. This increase in the provision was due to the higher net charge offs of $2.2 million during the third quarter of 2000 compared with the third quarter of 1999 and $15.5 million for the nine month period ended September 30, 2000 compared to the same period in 1999. During the first quarter of 1999, the Bank recovered $3.9 million of a loan which had been previously charged off from the commercial loan portfolio resulting in the low level of net charge offs for 1999 and therefore the lower provision for that year.

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

The following table sets forth the components of the Corporation´s other income for the three and nine month periods ended September 30, 2000 and 1999.

The Corporation´s other income reflected an increase of $6.2 million or 57.7% for the quarter ended September 30, 2000 compared to the quarter ended September 30, 1999 and $10.8 million or 34.4% for the nine month period ended September 30, 2000 compared to the same period in 1999. This increase in other income was due to a gain of $4.5 million for the quarter ended September 30, 2000 ($8.9 million for the nine month period) recognized pursuant to the sale of a mortgage loan portfolio of $100.1 million for the quarter ended September 30, 2000 ($275.9 for the nine month period). Mortgage servicing rights on those portfolios were retained and recognized, and the Bank´s subsidiary was also able to recognize certain deferred fees. For the third quarter of the year the Corporation also recorded a gain of $1.1 million on the disposition of a branch.

Other increases in other income were reflected in "Service charges on deposit accounts", "Credit card fees", and "Mortgage servicing fees". Service charges on deposit accounts have experienced a healthy $0.9 million increase due to adjusted fee schedules especially as relates to the super cash accounts, and strict compliance with fee policies. The increase in credit card fees was due in part to a 11.2% increase in the average credit card portfolio to $106.6 million for the quarter ended September 30, 2000 from $95.9 million in September 1999. Mortgage servicing fees increased due to the recognition of mortgage servicing rights of $4.5 million recognized on the mortgage loan portfolio sold.

For the nine months ended September 30, 2000 the previously mentioned gains and increases in fees were partially offset by a loss of $3.8 million recorded on the sale of $342 million of Treasury Notes available for sale. These securities were sold and substituted for higher yielding Agency notes in an effort to manage the Corporation´s interest rate risk.

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

For the quarter ended September 30, 2000, the Corporation´s efficiency ratio attained a level of 51.16%, an enhancement of 114 basis points over the 52.30% ratio attained as of September 30, 1999. For the nine month period ended September 30, 2000 the efficiency ratio was 52.07% compared to 53.27% for the same period in 1999. The improvement in operating efficiency was the direct result of an aggressive cost control program, after a full analysis of the Corporation´s operating system, augmentation in productivity and an increase in revenues.

For the quarter and nine-month period ended September 30, 2000 operating expenses had an increase of 5.0% and 2.3%, respectively when compared to the same period in 1999. During the third quarter of 2000 there was a $1.3 million expense for a bonus accrual for employees laid off as a result of the reorganization process. After adjusting operating expenses to exclude this adjustment, the increase in operating expenses for the quarter and the nine-month period would be 1.94% and 1.27%, respectively. The implementation of an aggressive cost control program focused toward low cost distribution channels and the streamlining of operations, were the main factors contributing to the low increase in operating expenses.

Personnel costs reflected an increase of $0.1 million for the quarter and a decrease of $1.3 million for the nine-month period compared to the same periods in the previous year. The increase reflected in personnel costs during the third quarter was due to a bonus of $1.3 million accrued for employees laid off. This increase was partially offset by decreases in salaries, overtime and temporary help as well as a decrease in prepaid pension cost due to the recognition of prepaid pension cost in 2000 of $1.1 million.

During the quarter ended September 30, 2000 other operating expenses reflected an increase of $2.0 million or 8.2% to $26.2 million compared to $24.2 million for the same period in 1999. The increase in operating expenses was due to increases in occupancy costs, business promotion, other taxes and other operating expenses that were partially offset by a significant decrease in professional fees and communication expenses. The increase in occupancy costs is primarily related to increases in rent, maintenance and utilities. Business promotion increased specifically in advertising due to aggressive marketing campaigns for new deposit products including "Super CD", "Super Cash", ETA accounts, and several IRA deposit products as well as the cost of prizes related to the Super Cash accounts. The increase in other taxes was in municipal license tax due to higher volume of business and in personal property taxes due to higher cash reserves maintained during the 2000 year change to cover for possible contingencies. The increase in "All other" expenses is due to higher commissions paid on loans, interchange fee expense and lower deferral of certain loan origination expenses. These increases were partially offset by decrease in general insurance expenses due to the recognition of the increase in the cash surrender value of bank owned life insurance policies on certain executives. The decrease in professional fees and communications expense is a direct result of the Corporation´s aggressive cost control program.

The provision for income tax amounted to $4.3 million (or 17.7% of pretax earnings) for the quarter ended September 30, 2000 which was comparable to $4.3 million (or 17.6% of pretax earnings) for the same period in 1999. The slight increase in income tax expense was due to a slightly higher pretax income in 2000. The difference between the Corporation´s statutory and effective tax rates is due primarily to the benefits of net tax-exempt interest income.

The Corporation´s assets reached $7.8 billion as of September 30, 2000, a 2.83% decrease compared to total assets of $8.0 billion at December 31, 1999. This decrease was a result of a decrease in cash and cash equivalents of $39.0 million, and $325.0 million in the investment portfolio. These decreases were partially offset by an increase in net loans of $102.0 million.

The composition of the loan portfolio was as follows:

Net loans at September 30, 2000 were $4,555 million, reflecting an increase in the loan portfolio of $102 million compared to $4,453 million at December 31, 1999. The most significant increases in the loan portfolio were in the commercial and construction loan portfolios, which reflected increases of $112 million and $42 million, respectively, compared to December 31, 1999. These increases were partially offset by decreases in the consumer and mortgage loan portfolios of $49 million and $8 million, respectively. The commercial and industrial sectors are the backbone of the lending activity of the Corporation as continued growth has been experienced over several consecutive quarters. Construction lending for the nine months ended September 30, 2000 grew from $353.5 million at year-end to $395.9 million, an increase of 12%. The outstanding growth in the construction loan portfolio is consistent with the expansion of the construction sector in the local economy. The decrease in consumer loans was reflected in the auto loan portfolio with a reduction of $36.8 million and in the personal loan portfolio with a reduction of $19.6 million. These decreases were partially offset by an increase in credit card loans of $7.6 million at September 30, 2000 compared to December 31, 1999. Based on the highly competitive environment for auto lending activity, the Corporation has elected to discontinue offering this product and dedicating attention to those areas that offer greater profitability. The net decrease in the mortgage loan portfolio is due to lower advances under warehousing lines of credit and normal principal amortization of commercial real estate loans.

Asset quality continues to be one of the Corporation´s strongest components and remains above the industry average. As of September 30, 2000, the Corporation´s total non-performing assets increased to $66.7 million or 1.5% of total loans from $52.3 million or 1.2% of total loans as of December 31, 1999. The increase in non-performing assets was reflected primarily in the commercial, agricultural and consumer loan portfolios, and in repossessed assets. These increases were partially offset by decreases in non-performing mortgage loans and in renegotiated loans. Non-performing loans (excluding renegotiated loans and other real estate owned) at September 30, 2000 increased to $58.2 million or 1.3% of total loans from $44.1 million or 1.0% of total loans at December 31, 1999. Repossessed assets increased $0.6 million during the first nine months of 2000 while renegotiated loans registered a decrease during the quarter of $0.2 million. Accruing loans past-due 90 days or more increased $1.2 million from $3.4 million at December 31, 1999. The increase in non-performing loans is symmetrical to the increase in the average loan portfolio of 10% over 1999 average loans. The level of non-performing loans to total loans stands at 1.26% as compared to the all-time low of 0.98% experienced at year-end 1999. The Corporation´s objective regarding the coverage ratio (allowance for loan losses to non-performing loans) is to provide for a reserve for loan losses of 100% of non-performing loans and leases. As of September 30, 2000 this ratio (allowance for loan losses to total non-performing loans) reached 89.31%.

The Corporation´s allowance for loan losses reached $51.9 million, or 1.1% of loans, at September 30, 2000 compared to $56.2 million, or 1.3% of loans at year-end 1999. The allowance for loan losses equaled 89.31% of non-performing loans at the end of the third quarter of 2000, down from 126.7% at December 31, 1999, due to higher net charge-offs during 2000 as well as higher non-performing assets. The Corporation´s objective regarding this ratio is to provide for a reserve for loan losses of 100% of non-performing loans and leases. Net charge-offs of $30.5 million were partially offset by a provision of $26.3 million during the first nine months of the year. 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 Corporation has established an adequate position in its allowance for loan losses.

As of September 30, 2000, total liabilities amounted to $7.2 billion, a decrease of $269 million over year-end balances. The decrease in liabilities was due to decreases in federal funds purchased and other borrowings of $101 million and in securities sold under agreements to repurchase of $887 million, that were partially offset by increases in deposits of $352 million and commercial paper issued of $384 million.

At September 30, 2000, total deposits were $4.4 billion, reflecting an increase of $352 million or 8.7% from $4.1 billion at December 31, 1999. Total deposits at September 30, 2000 reflected an increase of 13.0% over $3.9 billion in deposits reported at September 30, 1999. Average deposits for the quarter ended September 30, 2000 were $4.1 billion, an increase of 8.6% from the same period in 1999. This growth in deposits is the result of the Corporation´s efforts to increase its deposit base by actively launching new products during the previous quarters, together with a direct marketing campaign to maximize the cross selling of products and services. The launching of the Super CD, ETA, new IRA products, and Super Cash Savings and Checking accounts have been instrumental in this effort.

Stockholders´ equity was $587 million or 7.5% of total assets at September 30, 2000, compared to $547 million or 6.8% of total assets at December 31, 1999. The increase was due to the net income generated during the nine months ended September 30, 2000 and improvement in valuation of securities available for sale. These increases were partially offset by the effect of the cash dividends on preferred and common stock during the period and the repurchase of common stock during the period.

During 2000, the Corporation´s dividend distribution was 10% greater than in 1999. On January 11, 2000, the Board of Directors of the Corporation declared a 10% stock dividend on common stock to shareholders of record as of January 31, 2000. The common stock dividend was distributed on February 22, 2000. Cash was paid in lieu of fractional shares. The earnings per share computations for all periods presented in the schedules and financial reports have been retroactively restated to reflect the stock dividend. The Corporation declared cash dividends of $0.11 per common share to all stockholders of record as of February 29, 2000, June 9, 2000 and September 8, 2000.

The Corporation expects to continue to pay quarterly dividends as follows:

Fourth Quarter January 2, 2001 to shareholders of record as of December 8, 2000

The Corporation is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation. 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, 2000 the most recent notification from the Federal Deposit Insurance Corporation categorized the Corporation as well capitalized under the regulatory framework for prompt corrective action. At September 30, 2000 the Corporation continues to exceed the regulatory risk-based capital requirements for well-capitalized institutions. Tier I capital to risk-adjusted assets and total capital ratios at September 30, 2000 were 10.74% and 11.78%, respectively and the leverage ratio was 7.44%.

During 1998, the Bank issued 500,000 common shares at $21.50 in connection with its initial public offering of 7,250,000 shares of which 6,750,000 were offered by Santusa Holding, S.L., a shareholder of the Bank. As of September 30, 2000 Banco Santander Central Hispano, S.A. directly and indirectly held 34,894,866 shares of common stock or 82.1% of the Corporation´s outstanding common stock.

Santander BanCorp was incorporated under the laws of the Commonwealth of Puerto Rico and is an 82.1% directly and indirectly owned subsidiary of Banco Santander Central Hispano, S.A. (BSCH). Santander BanCorp was created for the purpose of effecting a corporate reorganization and to serve as a bank holding company. On May 2^nd, 2000 the corporate reorganization took place and Santander BanCorp now serves as the bank holding company for Banco Santander Puerto Rico and Subsidiary (the Bank). As a result of this reorganization each of the Bank´s outstanding shares of common stock was converted into one share of common stock of the new bank holding company. This reorganization was carried out pursuant to an Agreement and Plan of Merger by and between the Corporation and the Bank. Santander BanCorp is subject to the Federal Bank Holding Company Act and to the regulations, supervision, and examination of the Federal Reserve Board.

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

A Stock Repurchase Program and a Dividend Reinvestment and Cash Purchase Plan were adopted and implemented immediately after Santander BanCorp became the holding company of the Bank on May 2^nd, 2000. Under the Stock Repurchase Program the Corporation plans to acquire 3% of its outstanding common shares. As of September 30, 2000 the Stock Repurchase Program had reached almost 60% of its targeted objective to repurchase up to 1,274,546 of the Corporation´s issued and outstanding shares of common stock. With the Dividend Reinvestment and Cash Purchase Plans holders of common stock have the opportunity to automatically invest cash dividends to purchase more shares of the Corporation. Shareholders may also make, as frequently as once a month, optional cash payments for investment in additional shares of common stock.

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

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

The Corporation´s policy with respect to asset liability management is to maximize its net interest income, return on assets and return on equity while remaining within the established parameters of interest rate and liquidity risks provided by the Board of Directors and the relevant regulatory authorities. Subject to these constraints, the Corporation takes mismatched interest rate positions. The Corporation´s asset and liability management policies are developed and implemented by its Asset and Liability Committee ("ALCO"), which is composed of senior members of the Corporation including the President, Treasurer and other executive officers of the Corporation. Senior members of the Corporation´s Treasury area meet each week with the Investment Committee to discuss market conditions and strategies. In addition, the Corporation´s Comptroller reports monthly to the ALCO on the status of all Corporation positions. The ALCO reports at least monthly to the Board of Directors.

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 and 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. Commercial banks (including the Bank) typically generate a negative gap, which denotes liability sensitivity and 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.

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, 2000 and may not reflect interest rate gap positions at other times. In addition, variations in interest rate sensitivity may exist within the repricing period presented due to the differing repricing dates within the period.

	As of September 30, 2000
	0 to 3	3 months	1 to 3	3 to 5	5 to 10	More than	No Interest
	months	to a Year	Years	Years	Years	10 Years	Rate Risk	Total
ASSETS:
Investment Portfolio	$ 482,260	$ 9,430	$ 1,265,085	$ 576,127	$ 279,052	$ 11,939	$ 79,638	$ 2,703,531
Deposits in Other Banks	139,210	-	-	-	-	-	136,903	276,113
Loan Portfolio
Commercial	1,408,084	144,919	255,734	302,028	210,514	65,210	-	2,386,489
Construction	330,052	5,484	3,427	7,175	48,612	1,190	-	395,940
Consumer	188,556	124,428	285,875	184,247	63,236	117	-	846,459
Mortgage	62,562	88,020	247,252	216,100	356,679	7,263	-	977,876
Fixed and Other Assets	-	-	-	-	-	-	224,165	224,165
Total Assets	$ 2,610,724	$ 372,281	$ 2,057,373	$ 1,285,677	$ 958,093	$ 85,719	$ 440,706	$ 7,810,573
LIABILITIES AND STOCKHOLDERS' EQUITY
External Funds Purchased
Commercial Paper	$ 797,439	$ -	$ -	$ -	$ -	$ -	$ -	$ 797,439
Repurchase Agreements	486,888	175,000	325,006	-	-	-	-	986,894
Federal Funds	475,000	-	-	-	-	-	-	475,000
Deposits
Certificates of Deposit	1,481,179	507,890	154,435	111,104	54,890	22,883	-	2,332,381
Demand Deposits and Savings Accounts	101,532	-	-	-	1,138,250	-	-	1,239,782
Transactional Accounts	270,077	-	570,638	-	-	-	-	840,715
Senior and Subordinated Debt	241,600	-	65,000	50,000	-	97,728	-	454,328
Other Liabilities and Capital	-	-	-	-	-	-	684,034	684,034
Total Liabilities and Capital	$ 3,853,715	$ 682,890	$ 1,115,079	$ 161,104	$ 1,193,140	$ 120,611	$ 684,034	$ 7,810,573
Off-Balance Sheet Financial Information
Interest Rate Swaps (Assets)	$ 140,903	$ -	$ -	$ -	$ 50,000	$ 20,000	$ -	$ 210,903
Interest Rate Swaps (Liabilities)	71,350	35,000		104,553	-	-	-	210,903
Cap's	1,425,000	-	-	-	-	-	-	1,425,000
Cap's Final Maturity	175,000	175,000	1,075,000	-	-	-	-	1,425,000
GAP	76,562	-520,609	-132,706	1,020,020	-185,047	-14,892	-243,328	-
Cumulative GAP	$ 76,562	$ (444,047)	$ (576,753)	$ 443,267	$ 258,220	$ 243,328	$ -	$ -

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

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

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

The Net Interest Income Shock Report uses a simulation analysis to measure the amount of net interest income the Corporation would have from its operations throughout the next twelve months and the sensitivity of these earnings to assumed shifts in market interest rates throughout the same period. The important assumptions of this analysis are: ( i ) rate shifts are parallel and immediate throughout the yield curve; (ii) rate changes affect all assets and liabilities equally; (iii) interest bearing demand accounts and savings passbooks will run off in a period of one year; and (iv) demand deposit accounts will run off in a period of ten years. Cash flows from assets and liabilities are assumed to be reinvested at market rates in similar instruments. The object is to simulate a dynamic gap analysis enabling a more accurate interest rate risk assessment.

Risk management policy and procedures establish a risk tolerance loss limit of 3.0% for net interest income in a scenario of a 100 basis point (1.0%) increase in market rates. As of September 30, 2000, 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 $2.4 million which represents a 0.82% decrease in net interest income, which is below the established 3% limit. The Corporation has also established a risk tolerance limit of 9% for net interest income in a scenario of a 200 basis point (2.0%) increase in market rates. As of September 30, 2000, it was determined that the Corporation had a potential loss in net interest income of approximately $6.3 million, which represents a 2.12% decrease in net interest income, which is below the established 9% limit.

Liquidity risk is the risk that not enough cash will be generated from either assets or liabilities to meet deposit withdrawals or contractual loan funding. The principal sources of funding for the Corporation are capital, core deposits from retail and commercial clients, and wholesale deposits raised in the interbank and commercial markets. The Corporation manages liquidity risk by maintaining diversified short term and long term sources through the Federal funds market, commercial paper program, repurchase agreements and retail certificate of deposit programs. As of September 30, 2000 the Corporation had $1.7 billion in unsecured lines of credit ($1.0 billion available) and $5.7 billion in collateralized lines of credit with banks and financial entities ($4.7 billion available). All securities in portfolio are highly rated and very liquid enabling the Corporation to treat them as a secondary source of liquidity.

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

Management monitors liquidity levels each month. The focus is on the liquidity ratio, which presents total liquid assets over net volatile liabilities and core deposits. Liquid assets include short-term investments, free marketable securities and cash accounts. At September 30, 2000 the Corporation had total available liquid assets of $868 million. Net volatile liabilities are composed of borrowings and time deposits with balances over $100,000 (excluding those secured by assets.) As of September 30, 2000 the liquidity ratio for the Corporation was 18.9%. The Corporation believes it has sufficient liquidity to meet current obligations.

The Corporation enters into interest rate swap contracts as part of its asset and liability management. The Corporation´s policy is that each swap contract be specifically tied to an asset or liability with the objective of transforming the interest rate risk characteristic of the instrument. For additional information on the Corporation´s derivatives refer to Notes 1 and 9 of the financial statements.

As of September 30, 2000 the Corporation had swap agreements in place for notional amounts of $210.9 million. Retail certificates of deposit amounting to $68.7 million had been swapped to create a floating rate source of funds. $35.0 million of floating-rate medium term notes had been fixed at a spread over U.S. Treasury Securities, $100 million of floating-rate term federal funds purchased had been fixed at a spread over Libor, and $5.9 million of fixed-rate short term loans had been swapped to create a floating rate source of funds at a spread over Libor.

The Corporation has entered into a series of derivative transactions, in which a total of $1.4 billion in Caps were purchased against the one month Libor (the Index). $350 million were at a level of 5.25% for up to 1 year, $500 million were at a level of 5.75% for 2 years, and $575 million were at a level of 6.5% for 2 years. The purpose of these transactions is to hedge the Corporation´s cost of funds, specifically the Commercial Paper Program and Repurchase Agreements, and to close the gap in a scenario of interest rates to the upside. The total premium paid was $27.7 million, which is being amortized on a monthly basis throughout the life of the Caps.

The Corporation had an open option contract with a notional amount of $5,000,000 and a short option contract for a notional amount of $2,350,000 maturing in five years. The net premium paid on these transactions was approximately $620,000.

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

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