Santander Holdings USA (SOV) 10-Q 2011 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    .

Commission File Number: 001-16581

SANTANDER HOLDINGS USA, INC.

(Exact name of registrant as specified in its charter)

Virginia (State or other jurisdiction of incorporation or organization)	23-2453088 (I.R.S. Employer Identification No.)
75 State Street, Boston, Massachusetts (Address of principal executive offices)	02109 (Zip Code)

(617) 346-7200
Registrant’s telephone number including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ. Noo.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso. Noo.*

* Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filerþ Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yeso. Noþ.

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at April 30, 2011
Common Stock (no par value)	517,107,043 shares

FORWARD LOOKING STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Santander Holdings USA, Inc. (“SHUSA” or the “Company”). SHUSA may from time to time make forward-looking statements in SHUSA’s filings with the Securities and Exchange Commission (the “SEC” or the “Commission”) (including this Quarterly Report on Form 10-Q and the Exhibits hereto), in its reports to shareholders (including its Annual Report on Form 10-K for the fiscal year ended December 31, 2010) and in other communications by SHUSA, which are made in good faith by SHUSA, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Some of the statements made by SHUSA, including any statements preceded by, followed by or which include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “will,” “would,” “believe,” “expect,” “hope,” “anticipate,” “estimate,” “intend,” “plan,” “strive,” “hopefully,” “try,” “assume” or similar expressions constitute forward-looking statements.

These forward-looking statements include statements with respect to SHUSA’s vision, mission, strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business of SHUSA and are not historical facts. Although SHUSA believes that the expectations reflected in these forward-looking statements are reasonable, these statements are not guarantees of future performance and involve risks and uncertainties which are subject to change based on various important factors (some of which are beyond SHUSA’s control). Among the factors which could cause SHUSA’s financial performance to differ materially from that expressed in the forward-looking statements are:

• the strength of the United States economy in general and the strength of the regional and local economies in which SHUSA conducts operations, which may affect, among other things, the level of non-performing assets, charge-offs, and provision for credit losses;

• the effects of, or policies determined by the Federal Deposit Insurance Corporation, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

• inflation, interest rate, market and monetary fluctuations, which may, among other things reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets;

• adverse movements and volatility in debt and equity capital markets;

• adverse changes in the securities markets, including those related to the financial condition of significant issuers in our investment portfolio;

• revenue enhancement initiatives may not be successful in the marketplace or may result in unintended costs;

• changing market conditions may force us to alter the implementation or continuation of cost savings or revenue enhancement strategies;

• SHUSA’s timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers;

• the willingness of customers to substitute competitors’ products and services and vice versa;

• the ability of SHUSA and its third party vendors to convert and maintain SHUSA’s data processing and related systems on a timely and acceptable basis and within projected cost estimates;

• the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretation of generally accepted accounting principles in the United States;

• the impact of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” enacted in July 2010, which is a significant development for the banking industry, and the reach of which will be unknown until the rulemaking processes mandated by the legislation are complete (although the impact will involve higher compliance costs and certain elements, such as the debit interchange legislation, are likely to negatively affect our revenue and earnings);

1

FORWARD LOOKING STATEMENTS
(continued)

• additional legislation and regulations may be enacted or promulgated in the future, and we are unable to predict the form such legislation or regulation may take or to the degree which we need to modify our businesses or operations to comply with such legislation or regulation;

• the cost and other effects of the consent order issued by the Office of Thrift Supervision to Sovereign Bank requiring the Bank to take certain steps to improve its mortgage servicing and foreclosures practices, as is further described in Item 2;

• technological changes;

• competitors of SHUSA may have greater financial resources and develop products and technology that enable those competitors to compete more successfully than SHUSA;

• changes in consumer spending and savings habits;

• acts of terrorism or domestic or foreign military conflicts and acts of God, including natural disasters;

• regulatory or judicial proceedings;

• changes in asset quality;

• the outcome of ongoing tax audits by federal, state and local income tax authorities may require additional taxes be paid by SHUSA as compared to what has been accrued or paid as of period end; and

• SHUSA’s success in managing the risks involved in the foregoing.

If one or more of the factors affecting SHUSA’s forward-looking information and statements proves incorrect, then its actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Therefore, SHUSA cautions you not to place undue reliance on any forward-looking information and statements. The effect of these factors is difficult to predict. Factors other than these also could adversely affect our results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. New factors emerge from time to time and we cannot assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward looking statement. Any forward looking statements only speak as of the date of this document and SHUSA undertakes no obligation to update any forward-looking information and statements, whether written or oral, to reflect any change. All forward-looking statements attributable to SHUSA are expressly qualified by these cautionary statements.

2

INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2011 and December 31, 2010		4
Consolidated Statements of Operations for the three-month periods ended March 31, 2011 and 2010		5-6
Consolidated Statement of Stockholder’s Equity for the three-month period ended March 31, 2011		7
Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2011 and 2010		8-9
Notes to Consolidated Financial Statements		10–41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		42–63
Item 3. Quantitative and Qualitative Disclosures About Market Risk		64
Item 4. Controls and Procedures		64
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		65
Item 1A. Risk Factors		65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		65
Item 6. Exhibits		66
SIGNATURES		67
EXHIBITS INDEX		68
Ex-31.1 Certification
Ex-31.2 Certification
Ex-32.1 Certification
Ex-32.2 Certification

3

PART 1 — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited at March 31, 2011, audited at December 31, 2010)

	March 31,			December 31,
	2011			2010
	(in thousands)
ASSETS
Cash and amounts due from depository institutions	$	3,289,957		$	1,705,895
Investment securities:
Available-for-sale		13,393,767			13,371,848
Other investments		583,630			614,241
Loans held for investment		66,463,415			65,017,884
Allowance for loan losses		(2,207,347	)		(2,197,450	)
Net loans held for investment		64,256,068			62,820,434
Loans held for sale		100,706			150,063
Premises and equipment, net		618,476			595,951
Accrued interest receivable		376,910			406,617
Goodwill		4,124,351			4,124,351
Core deposit intangibles and other intangibles, net of accumulated amortization of $1,011,471 and $997,671 at March 31, 2011 and December 31, 2010, respectively		175,140			188,940
Bank owned life insurance		1,530,074			1,519,462
Other assets		4,038,954			4,154,013
TOTAL ASSETS	$	92,488,033		$	89,651,815
LIABILITIES
Deposits and other customer accounts	$	46,995,157		$	42,673,293
Borrowings and other debt obligations		31,523,489			33,630,117
Advance payments by borrowers for taxes and insurance		165,235			104,125
Other liabilities		2,246,068			1,983,610
TOTAL LIABILITIES		80,929,949			78,391,145
STOCKHOLDER’S EQUITY
Preferred stock; no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at March 31, 2011 and at December 31, 2010		195,445			195,445
Common stock; no par value; 800,000,000 shares authorized; 517,107,043 shares issued at March 31, 2011 and at December 31, 2010		11,117,794			11,117,328
Warrants and employee stock options issued		285,435			285,435
Accumulated other comprehensive loss		(229,606	)		(234,190	)
Retained earnings/(deficit)		163,870			(128,984	)
TOTAL SHUSA STOCKHOLDER’S EQUITY		11,532,938			11,235,034
Noncontrolling interest		25,146			25,636
TOTAL STOCKHOLDER’S EQUITY		11,558,084			11,260,670
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	92,488,033		$	89,651,815

See accompanying notes to unaudited consolidated financial statements.

4

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three-Month Period
	Ended March 31,
	2011		2010
	(in thousands)
INTEREST INCOME:
Interest on loans	$	1,203,410	$	1,011,225
Interest-earning deposits		1,140		356
Investment securities:
Available-for-sale		114,996		114,227
Other investments		77		453
TOTAL INTEREST INCOME		1,319,623		1,126,261
INTEREST EXPENSE:
Deposits and customer accounts		58,282		68,292
Borrowings and other debt obligations		278,914		300,211
TOTAL INTEREST EXPENSE		337,196		368,503
NET INTEREST INCOME		982,427		757,758
Provision for credit losses		307,772		412,707
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		674,655		345,051
NON-INTEREST INCOME:
Consumer banking fees		172,877		91,635
Commercial banking fees		44,622		45,623
Mortgage banking income		9,594		19,673
Capital markets revenue		6,382		4,375
Bank owned life insurance		13,873		13,545
Miscellaneous income		2,968		1,409
TOTAL FEES AND OTHER INCOME		250,316		176,260
Gains on the sale of investment securities		61,862		26,327
Net gain on investment securities recognized in earnings		61,862		26,327
TOTAL NON-INTEREST INCOME		312,178		202,587
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits		198,148		166,171
Occupancy and equipment expenses		83,538		79,478
Technology expense		30,504		25,976
Outside services		36,287		27,174
Marketing expense		9,297		6,802
Other administrative expenses		95,026		57,314
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES		452,800		362,915

5

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(continued)

	Three-Month Period
	Ended March 31,
	2011		2010
	(in thousands)
OTHER EXPENSES:
Amortization of intangibles	$	13,800	$	16,773
Deposit insurance premiums and other costs		23,590		23,842
Equity method investments		2,784		8,150
Loss on debt extinguishment		82		1,117
TOTAL OTHER EXPENSES		40,256		49,882
INCOME BEFORE INCOME TAXES		493,777		134,841
Income tax provision		176,714		41,680
NET INCOME	$	317,063	$	93,161
Less:
Net income attributable to noncontrolling interest		20,559		5,643
Net income attributable to SHUSA	$	296,504	$	87,518

See accompanying notes to unaudited consolidated financial statements.

6

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2011

(Unaudited)

(in thousands)

												Accumulated						Total
	Common						Warrants					Other			Retained			Stock-
	Shares		Preferred		Common		& Stock		Noncontrolling			Comprehensive			Earnings			Holder’s
	Outstanding		Stock		Stock		Options		Interest			Loss			(Deficit)			Equity
Balance, December 31, 2010		517,107	$	195,445	$	11,117,328	$	285,435	$	25,636		$	(234,190	)	$	(128,984	)	$	11,260,670
Comprehensive income:
Net income		—		—		—		—		20,559			—			296,504			317,063
Change in unrealized gain/loss, net of tax:
Investment securities available-for-sale		—		—		—		—		—			(18,844	)		—			(18,844	)
Pension liabilities		—		—		—		—		—			396			—			396
Cash flow hedges		—		—		—		—		—			23,032			—			23,032
Total comprehensive income																			321,647
Stock issued in connection with employee benefit and incentive compensation plans		—		—		466		—		—			—			—			466
Dividends to noncontrolling interest		—		—		—		—		(21,049	)		—			—			(21,049	)
Dividends on preferred stock		—		—		—		—		—			—			(3,650	)		(3,650	)
Balance, March 31, 2011		517,107	$	195,445	$	11,117,794	$	285,435	$	25,146		$	(229,606	)	$	163,870		$	11,558,084

See accompanying notes to unaudited consolidated financial statements.

7

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three-Month Period
	Ended March 31,
	2011			2010
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	317,063		$	93,161
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Provision for credit losses		307,772			412,707
Depreciation and amortization		105,025			54,377
Net amortization/accretion of investment securities and loan premiums and discounts		(42,530	)		(43,602	)
Net gain on sale of loans		(5,702	)		(8,251	)
Net gain on investment securities		(61,862	)		(26,327	)
Loss on debt extinguishments		82			1,117
Net loss on real estate owned and premises and equipment		3,449			3,261
Stock-based compensation		245			641
Origination and purchases of loans held for sale, net of repayments		(281,124	)		(203,843	)
Proceeds from sales of loans held for sale		335,784			253,558
Net change in: Accrued interest receivable		29,707			(2,420	)
Other assets and bank owned life insurance		269,987			(59,154	)
Other liabilities		31,466			432,766
Net cash provided by operating activities	$	1,009,362		$	907,991
CASH FLOWS FROM INVESTING ACTIVITIES:
Adjustments to reconcile net cash (used in)/provided by investing activities:
Proceeds from sales of available-for-sale investment securities	$	1,917,691		$	1,186,008
Proceeds from repayments and maturities of available-for-sale investment securities		1,508,436			1,340,809
Purchases of available-for-sale investment securities		(3,030,850	)		(3,156,240	)
Net change in other investments		30,611			22,242
Net change in restricted cash		33,181			—
Purchase of loans held for investment		(1,934,670	)		(1,963,602	)
Net change in loans other than purchases and sales		(160,351	)		1,476,650
Proceeds from sales of premises and equipment		3,020			1,121
Purchases of premises and equipment		(42,345	)		(33,871	)
Proceeds from sales of real estate owned		16,673			12,915
Net cash used in investing activities	$	(1,658,604	)	$	(1,113,968	)

8

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three-Month Period
	Ended March 31,
	2011			2010
	(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Adjustments to reconcile net cash provided by/(used in) financing activities:
Net increase/(decrease) in deposits and other customer accounts	$	4,321,864		$	(2,286,747	)
Net increase/(decrease) in borrowings		(1,315,461	)		633,320
Net proceeds from senior notes, subordinated notes and credit facility		4,280,311			2,148,089
Repayments of borrowings and other debt obligations		(5,076,870	)		(2,070,884	)
Net increase in advance payments by borrowers for taxes and insurance		61,110			45,383
Cash dividends paid to preferred stockholders		(3,650	)		(3,650	)
Cash dividends paid to noncontrolling interest		(34,000	)		—
Proceeds from the issuance of common stock, net of transaction costs		—			750,000
Net cash provided by/(used in) financing activities	$	2,233,304		$	(784,489	)
Net change in cash and cash equivalents	$	1,584,062		$	(990,466	)
Cash and cash equivalents at beginning of period		1,705,895			2,323,290
Cash and cash equivalents at end of period	$	3,289,957		$	1,332,824

	Three-Month Period
	Ended March 31,
	2011		2010
	(in thousands)
Supplemental Disclosures:
Net income taxes paid	$	106,614	$	(36,039	)
Interest paid	$	339,421	$	370,595

	Three-Month Period
	Ended March 31,
	2011		2010
	(in thousands)
Non Cash Transactions:
Foreclosed real estate	$	20,502	$	26,897
Other repossessed assets	$	436,424	$	374,276
Receipt of available for sale mortgage backed securities in exchange for mortgage loans held for investment	$	399,208	$	291,997
Consolidation of commercial mortgage backed securitization portfolio	$	—	$	(860,486	)
Dividends declared	$	21,049	$	—

See accompanying notes to unaudited consolidated financial statements.

9

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements of Santander Holdings USA, Inc. and Subsidiaries (“SHUSA” or the “Company”) include the accounts of Santander Holdings USA, Inc. and its subsidiaries, including the following subsidiaries: Sovereign Bank (the “Bank”), Santander Consumer USA, Inc (“SCUSA”), Independence Community Bank Corp. (“Independence”), and Sovereign Delaware Investment Corporation. All intercompany balances and transactions have been eliminated in consolidation. SHUSA is a wholly owned subsidiary of Banco Santander SA (“Santander”). Santander is a retail and commercial bank, based in Spain, with a presence in ten main markets throughout the world. At the end of 2010, Santander was the largest bank in the euro zone and 10th in the world by market capitalization. Founded in 1857, Santander had over 95 million customers, 14,082 branches — more than any other international bank — and approximately 179,000 employees, at December 2010. It is the largest financial group in Spain and Latin America. Furthermore, it has relevant positions in the United Kingdom, Portugal, Poland, the Northeast U.S. and, through its Santander Consumer Finance arm, in Germany.

In July 2009, Santander contributed SCUSA, a majority owned subsidiary to SHUSA. As Santander controls both SHUSA and SCUSA, the transaction was reflected as if it had actually occurred on January 1, 2009. Since Santander acquired SHUSA on January 31, 2009, this is the earliest period both entities were under common control.

These consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in conformity with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal and recurring nature necessary to present fairly the consolidated balance sheets, statements of operations, statement of stockholder’s equity and statements of cash flows for the periods indicated, and contain adequate disclosure to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s latest annual report on Form 10-K.

The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year.

There have been no significant changes to the Company’s accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2010. See Note 13 for a discussion of recent accounting developments during the first quarter of 2011.

10

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(2) INVESTMENT SECURITIES

The following tables present the composition and fair value of investment securities available-for-sale at the dates indicated:

	March 31, 2011
	Amortized		Unrealized		Unrealized		Fair
	Cost		Appreciation		Depreciation		Value
Investment Securities:
U.S. Treasury and government agency securities	$	12,998	$	1	$	—	$	12,999
Debentures of FHLB, FNMA, and FHLMC		19,340		660		—		20,000
Corporate debt securities		2,004,451		43,770		9,878		2,038,343
Asset-backed securities		3,202,758		38,289		13,525		3,227,522
State and municipal securities		1,923,539		3,652		114,299		1,812,892
Mortgage-backed securities:
U.S. government agencies		821,017		97		8,932		812,182
FHLMC and FNMA debt securities		4,102,067		21,017		26,284		4,096,800
Non-agency securities		1,475,096		5,503		107,570		1,373,029
Total investment securities available-for-sale	$	13,561,266	$	112,989	$	280,488	$	13,393,767

	December 31, 2010
	Amortized		Unrealized		Unrealized		Fair
	Cost		Appreciation		Depreciation		Value
Investment Securities:
U.S. Treasury and government agency securities	$	12,997	$	—	$	—	$	12,997
Debentures of FHLB, FNMA, and FHLMC		24,291		708		—		24,999
Corporate debt securities		2,148,919		66,924		13,056		2,202,787
Asset-backed securities		3,097,959		37,849		11,205		3,124,603
State and municipal securities		2,000,974		1,609		120,303		1,882,280
Mortgage-backed securities:
U.S. government agencies		364,331		75		10		364,396
FHLMC and FNMA debt securities		4,254,734		51,473		7,204		4,299,003
Non-agency securities		1,607,514		260		146,991		1,460,783
Total investment securities available-for-sale	$	13,511,719	$	158,898	$	298,769	$	13,371,848

Investment securities available-for-sale with an estimated fair value of $4.1 billion and $5.7 billion were pledged as collateral for borrowings, standby letters of credit, interest rate agreements and certain public deposits at March 31, 2011 and December 31, 2010, respectively.

The following tables disclose the aggregate amount of unrealized losses as of March 31, 2011 and December 31, 2010 on securities in SHUSA’s investment portfolio classified according to the amount of time that those securities have been in a continuous loss position:

	At March 31, 2011
	Less than 12 months					12 months or longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Investment Securities:
Corporate debt securities	$	497,080	$	(5,492	)	$	107,547	$	(4,386	)	$	604,627	$	(9,878	)
Asset-backed securities		614,080		(6,454	)		167,433		(7,071	)		781,513		(13,525	)
State and municipal securities		1,281,292		(76,853	)		243,927		(37,446	)		1,525,219		(114,299	)
Mortgage-backed securities:
U.S. government agencies		806,124		(8,932	)		—		—			806,124		(8,932	)
FHLMC and FNMA debt securities		2,526,581		(25,994	)		23,365		(290	)		2,549,946		(26,284	)
Non-agency securities		29,766		(1,262	)		1,084,917		(106,308	)		1,114,683		(107,570	)
Total investment securities available-for-sale	$	5,754,923	$	(124,987	)	$	1,627,189	$	(155,501	)	$	7,382,112	$	(280,488	)

11

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(2) INVESTMENT SECURITIES (continued)

	At December 31, 2010
	Less than 12 months					12 months or longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Investment Securities:
Corporate debt securities	$	535,892	$	(12,356	)	$	9,426	$	(700	)	$	545,318	$	(13,056	)
Asset-backed securities		660,683		(4,498	)		96,005		(6,707	)		756,688		(11,205	)
State and municipal securities		1,420,899		(83,641	)		245,067		(36,662	)		1,665,966		(120,303	)
Mortgage-backed securities:
U.S. government agencies		5,380		(10	)		—		—			5,380		(10	)
FHLMC and FNMA debt securities		947,311		(7,078	)		13,537		(126	)		960,848		(7,204	)
Non-agency securities		62,744		(3,879	)		1,358,715		(143,112	)		1,421,459		(146,991	)
Total investment securities available-for-sale	$	3,632,909	$	(111,462	)	$	1,722,750	$	(187,307	)	$	5,355,659	$	(298,769	)

As of March 31, 2011, management has concluded that the unrealized losses above on its investment securities (which totaled 241 individual securities) are temporary in nature since they are not related to the underlying credit quality of the issuers, the principal and interest on these securities are from investment grade issuers, the Company does not intend to sell these investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.

The unrealized losses on the Company’s state and municipal bond portfolio were $114.3 million at March 31, 2011 compared to $120.3 million at December 31, 2010. This portfolio consists of 100% general obligation bonds of states, cities, counties and school districts. The portfolio has a weighted average underlying credit risk rating of AA-. These bonds are insured with various companies and as such, carry additional credit protection. The Company has determined that the unrealized losses on the portfolio are due to an increase in credit spreads since acquisition, principally for obligors in certain geographic locations.

The unrealized losses on the non-agency securities portfolio were $107.6 million at March 31, 2011 compared with $147.0 million at December 31, 2010. Other than what is described in the following paragraph, this portfolio consists primarily of highly rated non-agency mortgage-backed securities from a diverse group of issuers in the private-label market. The Company has determined that the unrealized losses on the portfolio are due to an increase in credit spreads since acquisition and liquidity issues in the marketplace. The Company has concluded these unrealized losses are temporary in nature on the majority of this portfolio since we believe based on modeled projections, that there is sufficient credit subordination associated with these securities.

Proceeds from sales of investment securities and the realized gross gains and losses from those sales are as follows (in thousands):

	Three-Month Period
	Ended March 31,
	2011			2010
Proceeds from sales	$	1,917,691		$	1,186,008
Gross realized gains	$	61,997		$	26,917
Gross realized losses		(130	)		(594	)
Net realized (losses)/gains	$	61,867		$	26,323

Not included in the 2011 amounts above were losses of $7 thousand and gains of $2 thousand. Not included in the 2010 amounts above were gains of $4 thousand. All amounts are unrelated to the Treasury investment activity.

At March 31, 2011 and December 31, 2010, SHUSA had fourteen investments in certain non-agency mortgage backed securities with ending book values of $826.1 million and $874.3 million, respectively, for which the Company does not expect to collect all of its scheduled principal. Cumulative credit losses for these securities recognized in earnings were $210.9 million at March 31, 2011 and December 31, 2010.

12

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(2) INVESTMENT SECURITIES (continued)

The following table displays changes in credit losses for debt securities recognized in earnings for the three months ended March 31, 2011, and expected to be recognized in earnings over the remaining life of the securities.

	Three Months			Three Months
	Ending			Ending
	March 31, 2011			March 31, 2010
Beginning balance at December 31, 2010 and December 31, 2009	$	140,156		$	206,155
Additions for amount related to credit loss for which an other-than-temporary-impairment was not previously recognized		—			—
Reductions for securities sold during the period		—			—
Reductions for increases in cash flows expected to be collected and recognized over the remaining life of security (1)		(6,187	)		(24,143	)
Additional increases to credit losses for previously recognized other-than-temporary-impairment charges when there is no intent to sell the security		—			—
Ending balance at March 31, 2011 and March 31, 2010	$	133,969		$	182,012

(1) For the three-month period ended March 31, 2011, SHUSA accreted into interest income $3.9 million of the expected increase in cash flow on certain non-agency securities. SHUSA expects to recognize an additional $63.4 million of cash flow on the non-agency securities over their remaining lives.

The fourteen bonds that SHUSA has recorded other-than-temporary impairments on have a weighted average S&P credit rating of CC at March 31, 2011 and CCC at December 31, 2010. Each of these securities contains various levels of credit subordination. The underlying mortgage loans that comprise these investment securities were primarily originated in the years 2005 through 2007. Approximately 36.2% of these loans were jumbo loans, and approximately 70.3% of the collateral backing these securities were limited documentation loans. A summary of the key assumptions utilized to forecast future expected cash flows on the securities determined to have other-than-temporary-impairment were as follows at March 31, 2011 and December 31, 2010.

	March 31, 2011			December 31, 2010
Loss severity		53.21	%		49.21	%
Expected cumulative loss percentage		23.97	%		22.99	%
Cumulative loss percentage to date		5.20	%		4.72	%
Weighted average FICO		710			711
Weighted average LTV		68.5	%		68.4	%

Contractual maturities of SHUSA’s investment securities available for sale at March 31, 2011 are as follows (in thousands):

	Amortized		Fair
	Cost		Value
Due within one year	$	148,531	$	150,871
Due after 1 within 5 years		3,581,895		3,629,311
Due after 5 within 10 years		1,331,688		1,340,602
Due after 10 years/ no maturity		8,499,152		8,272,983
Total	$	13,561,266	$	13,393,767

Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties.

13

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(3) LOANS

The following table presents the composition of the loans held for investment portfolio by type of loan and by fixed and adjustable rates at the dates indicated:

	March 31, 2011					December 31, 2010
	Amount		Percent			Amount		Percent
Commercial real estate loans	$	10,999,003		16.6	%	$	11,311,167		17.4	%
Commercial and industrial loans		10,119,115		15.2			9,931,143		15.3
Multi-family loans		6,908,979		10.4			6,746,558		10.4
Other		1,125,679		1.7			1,170,044		1.8
Total commercial loans held for investment		29,152,776		43.9			29,158,912		44.9
Residential mortgages		11,520,161		17.3			11,029,650		17.0
Home equity loans and lines of credit		6,938,772		10.5			7,005,539		10.7
Total consumer loans secured by real estate		18,458,933		27.8			18,035,189		27.7
Auto loans		16,345,942		24.5			16,714,124		25.7
Other		2,505,764		3.8			1,109,659		1.7
Total consumer loans held for investment		37,310,639		56.1			35,858,972		55.1
Total loans held for investment (1)	$	66,463,415		100.0	%	$	65,017,884		100.0	%
Total loans held for investment with:
Fixed rate	$	42,649,849		64.2	%	$	41,405,419		63.7	%
Variable rate		23,813,566		35.8			23,612,465		36.3
Total loans held for investment (1)	$	66,463,415		100.0	%	$	65,017,884		100.0	%

(1) Total loans held for investment includes deferred loan origination costs, net of deferred loan fees and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. These items resulted in a net decrease in loan balances of $784.6 million and $920.7 million at March 31, 2011 and December 31, 2010, respectively. The reason for the variance was due primarily to loans acquired by Sovereign Bank during the first quarter of 2011. Loans pledged as collateral for borrowings totaled $49.5 billion at March 31, 2011 and $47.7 billion at December 31, 2010.

On January 5, 2011, Sovereign Bank purchased $1.7 billion of marine and recreational vehicle loans.

The entire loans held for sale portfolio at March 31, 2011 and December 31, 2010 consists of fixed rate residential mortgages. The balance at March 31, 2011 was $100.7 million compared to $150.1 million at December 31, 2010.

14

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(3) LOANS (continued)

The following tables present the activity in the allowance for credit losses for the periods indicated and the composition of non-performing assets at the dates indicated:

	Three-Month Period
	Ended March 31,
	2011		2010
Allowance for loan losses, beginning of period	$	2,197,450	$	1,818,224
Allowance established in connection with reconsolidation of previously unconsolidated securitized assets		—		25,644
Charge-offs:
Commercial		112,339		174,604
Consumer		218,045		258,373
Total Charge-offs		330,384		432,977
Recoveries:
Commercial		6,900		9,880
Consumer		76,834		79,393
Total Recoveries		83,734		89,273
Charge-offs, net of recoveries		246,650		343,704
Provision for loan losses (1)		256,547		432,196
Allowance for loan losses, end of period		2,207,347		1,932,360
Reserve for unfunded lending commitments, beginning of period		300,621		259,140
Provision for unfunded lending commitments (1)		51,225		(19,489	)
Reserve for unfunded lending commitments, end of period		351,846		239,651
Total allowance for credit losses, end of period	$	2,559,193	$	2,172,011

(1) SHUSA defines the provision for credit losses on the consolidated statement of operations is the sum of the total provision for loan losses and provision for unfunded lending commitments.

	March 31,		December 31,
	2011		2010
Non-accrual loans:
Consumer:
Residential mortgages	$	578,850	$	602,027
Home equity loans and lines of credit		121,806		125,310
Auto loans and other consumer loans		399,958		592,650
Total consumer loans		1,100,614		1,319,987
Commercial		461,357		528,333
Commercial real estate		569,165		653,221
Multi-family		199,668		224,728
Total commercial loans		1,230,190		1,406,282
Total non-performing loans		2,330,804		2,726,269
Other real estate owned		153,799		143,149
Other repossessed assets		58,216		79,854
Total other real estate owned and other repossessed assets		212,015		223,003
Total non-performing assets	$	2,542,819	$	2,949,272

15

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(3) LOANS (continued)

Impaired loans are generally defined as all Troubled Debt Restructurings (“TDRs”) plus commercial non-accrual loans in excess of $1 million and residential mortgage loans with specific reserves. Impaired and past due loans are summarized as follows:

	March 31,		December 31,
	2011		2010
Impaired loans with a related allowance	$	1,733,365	$	1,836,993
Impaired loans without a related allowance		235,611		299,501
Total impaired loans	$	1,968,976	$	2,136,494
Allowance for impaired loans	$	415,254	$	417,873
Total loans past due 90 days as to interest or principal and accruing interest	$	—	$	169

SHUSA, through its SCUSA subsidiary, acquires certain auto loans at a substantial discount from par from manufacturer-franchised dealers or other companies engaged in non-prime lending activities. Part of this discount is attributable to the expectation that not all contractual cash flows will be received from the borrowers. These loans are accounted for under the Receivable topic of the FASB Accounting Standards Codification (Section 310-30) “Loans and Debt Securities Acquired with Deteriorated Credit Quality”. The excess of cash flows expected over the estimated fair value at acquisition is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans using the constant effective yield method. The difference between contractually required payments and the undiscounted cash flows expected to be collected at acquisition is referred to as the nonaccretable difference.

Changes in the actual or expected cash flows of purchased impaired loans from the date of acquisition will either impact the accretable yield or result in an impairment charge to the provision for credit losses in the period in which the changes are deemed probable. Subsequent decreases to the net present value of expected cash flows will generally result in an impairment charge to the provision for credit losses, resulting in an increase to the ALLL, and a reclassification from accretable yield to nonaccretable difference. Subsequent increases in the net present value of cash flows will result in a recovery of any previously recorded ALLL, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield, which is recognized prospectively over the remaining lives of the loans. Prepayments are treated as a reduction of cash flows expected to be collected and a reduction of projections of contractual cash flows such that the nonaccretable difference is not affected. Thus, for decreases in cash flows expected to be collected resulting from prepayments, the effect will be to reduce the yield prospectively.

A rollforward of the nonaccretable and accretable yield on loans accounted for under Section 310-30 is shown below (in thousands) for the quarters ended March 31, 2011 and March 31, 2010:

	Contractual			Nonaccretable			Accretable			Carrying
	Receivable Amount			Yield			(Yield)/Premium			Amount
Balance at January 1, 2011	$	9,147,004		$	(966,463	)	$	210,459		$	8,391,000
Customer repayments		(958,654	)		—			—			(958,654	)
Charge-offs		(177,211	)		100,452			—			(76,759	)
Accretion of loan discount		—			—			(44,322	)		(44,322	)
Transfers between nonaccretable and accretable yield		—			29,750			(29,750	)		—
Settlement adjustments		9,725			666			(262	)		10,129
Balance at March 31, 2011	$	8,020,864		$	(835,595	)	$	136,125		$	7,321,394

(1) Carrying amount includes principal and accrued interest.

	Contractual			Nonaccretable			Accretable			Carrying
	Receivable Amount			Yield			Yield/Premium			Amount
Balance at January 1, 2010	$	2,042,594		$	(225,949	)	$	(35,207	)	$	1,781,438
Additions (Loans acquired during the period)		1,028,294			(122,481	)		—			905,813
Customer repayments		(240,732	)		—			—			(240,732	)
Charge-offs		(32,462	)		32,462			—			—
Accretion of loan discount		—			—			3,446			3,446
Balance at March 31, 2010	$	2,797,694		$	(315,968	)	$	(31,761	)	$	2,449,965

16

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(3) LOANS (continued)

GAAP requires that entities disclose information about the credit quality of its financing receivables at disaggregated levels, specifically defined as “portfolio segments” and “classes” based on management’s systematic methodology for determining its allowance for credit losses. As such, compared to the financial statement categorization of loans, SHUSA utilizes an alternate categorization for purposes of modeling and calculating the allowance for credit losses and for tracking the credit quality, delinquency and impairment status of the underlying commercial and consumer loan populations.

In disaggregating its financing receivables portfolio, SHUSA’s methodology starts with the commercial and consumer segments. The commercial segmentation reflects line of business distinctions. “Corporate banking” includes the majority of C&I loans as well as related owner-occupied real estate. “Middle market commercial real estate” represents the portfolio of specialized lending for investment real estate. “Continuing care retirement communities” is the portfolio of financing for continuing care retirement communities. “Santander real estate capital” is the real estate portfolio of the specialized lending group in Brooklyn, NY. “Remaining commercial” represents principally the commercial equipment and vehicle funding business.

The consumer segmentation reflects product structure with minor variations from the financial statement categories. “Home mortgages” is generally residential mortgages, “Self-originated home equity” excludes purchased home equity portfolios, and “Indirect auto” excludes self-originated direct auto loans. “Indirect purchased” represents an acquired portfolio of marine and recreational vehicle contracts. Direct auto loans and purchased home equity loans make up the majority of balances in “Remaining consumer”.

The activity in the allowance for loan losses for the period ended March 31, 2011 was as follows (in thousands):

	Commercial			Consumer			Unallocated		Total
Allowance for loan losses:
Allowance for loan losses, beginning of period	$	905,786		$	1,275,982		$	15,682	$	2,197,450
Provision for loan losses		79,642			167,136			9,769		256,547
Charge-offs		(112,339	)		(218,045	)		—		(330,384	)
Recoveries		6,900			76,834			—		83,734
Charge-offs, net of recoveries		(105,439	)		(141,211	)		—		(246,650	)
Allowance for loan losses, end of period	$	879,989		$	1,301,907		$	25,451	$	2,207,347
Ending balance, individually evaluated for impairment	$	274,295		$	140,959		$	—	$	415,254
Ending balance, collectively evaluated for impairment		605,694			1,023,348			25,451		1,654,493
Purchased impaired loans		—			137,600			—		137,600
Financing receivables:
Ending balance	$	29,152,776		$	37,411,345		$	—	$	66,564,121
Ending balance, evaluated at fair value		—			100,706			—		100,706
Ending balance, individually evaluated for impairment		1,027,017			941,959			—		1,968,976
Ending balance, collectively evaluated for impairment		28,125,759			29,113,454			—		57,239,213
Purchased impaired loans		—			7,255,226			—		7,255,226

17

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(3) LOANS (continued)

Non-accrual loans disaggregated by class of financing receivables are summarized as follows (in thousands):

	March 31,		December 31,
	2011		2010
Non-accrual loans:
Consumer:
Home mortgages	$	578,850	$	602,027
Self-originated home equity		66,599		63,686
Indirect auto		374,772		563,002
Indirect purchased		19,303		—
Remaining consumer		61,090		91,272
Total consumer loans		1,100,614		1,319,987
Commercial:
Corporate banking		588,495		653,943
Middle market commercial real estate		321,645		379,898
Continuing care retirement communities		108,409		126,704
Santander real estate capital		175,895		203,802
Remaining commercial		35,746		41,935
Total commercial loans		1,230,190		1,406,282
Total non-performing loans	$	2,330,804	$	2,726,269

Delinquencies disaggregated by class of financing receivables are summarized as follows (in thousands) as of March 31, 2011:

			60-89										Recorded
	30-59		Days		Greater						Total		Investment
	Days Past		Past		Than 90		Total				Financing		> 90 Days and
	Due		Due		Days		Past Due		Current		Receivables		Accruing
Corporate banking	$	67,501	$	39,087	$	376,335	$	482,923	$	14,197,962	$	14,680,885	$	—
Middle market commercial real estate		68,474		8,994		193,810		271,278		3,625,798		3,897,076		—
Continuing care retirement communities		8,903		—		84,090		92,993		397,283		490,276		—
Santander real estate capital		62,679		—		139,626		202,305		9,065,265		9,267,570		—
Remaining commercial		3,877		666		34,540		39,083		777,886		816,969		—
Home mortgages		206,220		101,684		578,851		886,755		10,732,545		11,619,300		—
Self-originated home equity		19,621		10,185		66,599		96,405		6,412,938		6,509,343		—
Indirect auto		985,319		275,157		109,490		1,369,966		14,758,593		16,128,559		—
Indirect purchased		31,399		12,397		9,620		53,416		2,202,649		2,256,065		—
Remaining consumer		27,727		8,227		61,090		97,044		801,034		898,078		—
Total	$	1,481,720	$	456,397	$	1,654,051	$	3,592,168	$	62,971,953	$	66,564,121	$	—

Delinquencies disaggregated by class of financing receivables are summarized as follows (in thousands) as of December 31, 2010:

			60-89										Recorded
	30-59		Days		Greater						Total		Investment
	Days Past		Past		Than 90		Total				Financing		> 90 Days and
	Due		Due		Days		Past Due		Current		Receivables		Accruing
Corporate banking	$	83,039	$	51,675	$	425,824	$	560,538	$	14,192,156	$	14,752,694	$	—
Middle market commercial real estate		37,619		24,980		187,393		249,992		3,530,116		3,780,108		169
Continuing care retirement communities		13,300		—		107,579		120,879		460,168		581,047		—
Santander real estate capital		119,795		27,819		161,583		309,197		8,881,740		9,190,937		—
Remaining commercial		5,491		32,982		8,312		46,785		807,341		854,126		—
Home mortgages		238,829		106,756		602,027		947,612		10,230,512		11,178,124		—
Self-originated home equity		18,540		12,774		63,686		95,000		6,461,605		6,556,605		—
Indirect auto		1,455,595		412,774		140,238		2,008,607		14,762,568		16,771,175		—
Remaining consumer		52,751		26,116		71,492		150,359		1,352,772		1,503,131		—
Total	$	2,024,959	$	695,876	$	1,768,134	$	4,488,969	$	60,678,978	$	65,167,947	$	169

18

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(3) LOANS (continued)

Impaired loans disaggregated by class of financing receivables are summarized as follows (in thousands):

			Unpaid		Related		Average
	Recorded		Principal		Specific		Recorded
March 31, 2011	Investment		Balance		Reserves		Investment
With no related allowance recorded:
Corporate banking	$	99,699	$	99,699	$	—	$	116,927
Middle market commercial real estate		43,458		43,458		—		52,730
Continuing care retirement communities		983		983		—		983
Santander real estate capital		19,696		19,696		—		27,151
Remaining commercial		959		959		—		480
Home mortgages		70,816		70,816		—		69,287
With an allowance recorded:
Corporate banking		189,220		348,833		159,613		188,258
Middle market commercial real estate		223,121		276,647		53,526		240,380
Continuing care retirement communities		80,241		107,425		27,184		92,163
Santander real estate capital		74,960		94,775		19,815		85,772
Remaining commercial		20,385		34,542		14,157		23,192
Home mortgages		572,306		708,305		135,999		558,692
Indirect auto		157,878		162,838		4,960		180,161
Total:
Commercial	$	752,722	$	1,027,017	$	274,295	$	828,036
Consumer		801,000		941,959		140,959		808,140
Total	$	1,553,722	$	1,968,976	$	415,254	$	1,636,176

We did not recognize any interest income on impaired loans, including TDRs that have not returned to performing status. We recognized interest income on approximately $414.6 million of TDRs that were returned to performing status as of March 31, 2011.

					Related
	Recorded		Unpaid Principal		Specific
December 31, 2010	Investment		Balance		Reserves
With no related allowance recorded:
Corporate banking	$	134,154	$	134,154	$	—
Middle market commercial real estate		62,002		62,002		—
Continuing care retirement communities		983		983		—
Santander real estate capital		34,605		34,605		—
Remaining commercial		—		—		—
Home mortgages		67,757		67,757		—
With an allowance recorded:
Corporate banking		187,296		345,322		158,026
Middle market commercial real estate		257,639		317,378		59,739
Continuing care retirement communities		104,084		125,720		21,636
Santander real estate capital		96,583		123,581		26,998
Remaining commercial		25,998		39,818		13,820
Home mortgages		545,077		678,956		133,879
Indirect auto		202,443		206,218		3,775
Total:
Commercial	$	903,344	$	1,183,563	$	280,219
Consumer		815,277		952,931		137,654
Total	$	1,718,621	$	2,136,494	$	417,873

19

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(3) LOANS (continued)

Commercial credit quality disaggregated by class of financing receivables is summarized according to standard regulatory classifications as follows:

PASS.Asset is well protected by the current net worth and paying capacity of the obligor or guarantors, if any, or by the fair value, less costs to acquire and sell any underlying collateral in a timely manner.

SPECIAL MENTION.Asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for an asset at some future date. Special Mention assets are not adversely classified.

SUBSTANDARD.Asset is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Well- defined weakness or weaknesses that jeopardize the liquidation of the debt. Characterized by distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

DOUBTFUL.Exhibits the inherent weaknesses of a substandard credit. Additional characteristics that make collection or liquidation in full highly questionable and improbable, on the basis of currently known facts, conditions and values. Possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the credit, an estimated loss cannot yet be determined.

LOSS.Credit is considered uncollectible and of such little value that it does not warrant consideration as an active asset. There may be some recovery or salvage value, but there is doubt as to whether, how much or when the recovery would occur.

Regulatory classifications by class of financing receivables are summarized as follows (in thousands):

			Middle		Continuing
			market		care		Santander
	Corporate		commercial		retirement		real estate		Remaining
March 31, 2011	banking		real estate		communities		capital		commercial		Total
Regulatory Rating
Pass	$	12,882,169	$	2,450,772	$	239,810	$	8,608,356	$	742,234	$	24,923,341
Special Mention		701,611		659,806		78,680		286,697		10,527		1,737,321
Substandard		874,724		613,855		63,378		313,347		63,247		1,928,551
Doubtful		220,105		172,443		108,409		59,169		961		561,087
Loss		2,276		200		—		—		—		2,476
Total	$	14,680,885	$	3,897,076	$	490,277	$	9,267,569	$	816,969	$	29,152,776

			Middle		Continuing
			market		care		Santander
	Corporate		commercial		retirement		real estate		Remaining
December 31, 2010	banking		real estate		communities		capital		commercial		Total
Regulatory Rating
Pass	$	12,709,768	$	2,306,926	$	307,890	$	8,482,219	$	765,493	$	24,572,296
Special Mention		796,484		652,330		55,886		320,727		12,488		1,837,915
Substandard		1,043,379		632,901		90,567		312,130		74,629		2,153,606
Doubtful		201,248		187,951		126,704		75,861		1,517		593,281
Loss		1,814		—		—		—		—		1,814
Total	$	14,752,693	$	3,780,108	$	581,047	$	9,190,937	$	854,127	$	29,158,912

20

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(3) LOANS (continued)

Consumer credit quality disaggregated by class of financing receivables is summarized as follows (in thousands):

	Home		Self-originated		Indirect		Indirect		Remaining
March 31, 2011	mortgages		home equity		auto		purchased		consumer		Total
Performing	$	11,040,450	$	6,442,744	$	15,753,787	$	2,236,762	$	836,988	$	36,310,731
Nonperforming		578,850		66,599		374,772		19,303		61,090		1,100,614
Total	$	11,619,300	$	6,509,343	$	16,128,559	$	2,256,065	$	898,078	$	37,411,345

	Home		Self-originated		Indirect		Remaining
December 31, 2010	mortgages		home equity		auto		consumer		Total
Performing	$	10,576,097	$	6,492,919	$	15,931,345	$	1,688,687	$	34,689,048
Nonperforming		602,027		63,686		563,002		91,272		1,319,987
Total	$	11,178,124	$	6,556,605	$	16,494,347	$	1,779,959	$	36,009,035

(4) DEPOSIT PORTFOLIO COMPOSITION

The following table presents the composition of deposits and other customer accounts at the dates indicated:

	March 31, 2011								December 31, 2010
						Weighted								Weighted
						Average								Average
	Amount		Percent			Rate			Amount		Percent			Rate
Demand deposit accounts	$	7,364,500		15.7	%		—	%	$	7,141,527		16.7	%		—	%
NOW accounts		5,702,840		12.1			0.12			5,689,021		13.3			0.13
Money market accounts		14,826,734		31.6			0.67			14,272,645		33.5			0.66
Savings accounts		3,528,935		7.5			0.11			3,463,061		8.1			0.11
Certificates of deposit		8,432,501		17.9			1.36			7,827,485		18.4			1.25
Total retail and commercial deposits		39,855,510		84.8			0.56			38,393,739		90.0			0.53
Wholesale NOW accounts		106,000		0.2			0.33			87,000		0.2			0.35
Wholesale certificates of deposit		3,224,828		6.9			0.48			537,217		1.3			0.71
Total wholesale deposits		3,330,828		7.1			0.47			624,217		1.5			0.66
Government deposits		2,017,338		4.3			0.33			1,889,397		4.4			0.43
Customer repurchase agreements		1,791,481		3.8			0.34			1,765,940		4.1			0.27
Total deposits	$	46,995,157		100.0	%		0.54	%	$	42,673,293		100.0	%		0.52	%

21

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(5) BORROWINGS AND OTHER DEBT OBLIGATIONS

The following table presents information regarding borrowings and other debt obligations at the dates indicated:

	March 31, 2011					December 31, 2010
			Effective					Effective
	Balance		Rate			Balance		Rate
Sovereign Bank borrowings and other debt obligations:
Overnight federal funds purchased	$	1,444,000		0.13	%	$	954,000		0.19	%
Federal Home Loan Bank (FHLB) advances		9,849,749		4.28			9,849,041		4.10
Securities sold under repurchase agreements, maturing through August 2018a		—		—			1,389,382		0.31
Reit preferred b		147,892		14.11			147,530		14.20
2.75% senior notes, due January 2012 c		1,348,557		3.92			1,348,111		3.92
3.750% subordinated debentures, due March 2014 d		—		—			219,530		3.75
5.125% subordinated debentures, due March 2013 d		486,438		5.26			485,276		5.28
4.375% subordinated debentures, due August 2013 d		—		—			271,945		4.38
8.750% subordinated debentures, due May 2018 d		496,265		8.82			496,170		8.82
Holding company borrowings and other debt obligations:
SCUSA Subordinated revolving credit facility, due December 2011		100,000		2.01			100,000		2.01
SCUSA Subordinated revolving credit facility, due December 2011		150,000		2.01			150,000		2.05
SCUSA Warehouse lines with Santander and related subsidiaries e		3,667,396		2.26			4,148,355		1.57
SCUSA Warehouse line, due May 2011f		399,932		1.20			475,825		1.62
SCUSA Warehouse line, due May 2011f		249,660		1.20			23,660		3.11
SCUSA Warehouse line, due May 2011 f		346,600		1.36			129,600		3.40
SCUSA Warehouse line, due June 2011 f		457,934		1.75			516,000		1.71
SCUSA Warehouse line, due August 2011 f		549,335		2.60			209,390		5.85
SCUSA Warehouse line, due September 2017 f		952,165		1.99			1,077,475		1.96
Asset-backed notesg		7,735,889		2.26			8,050,022		2.35
TALF loan		169,143		2.53			196,589		2.22
Commercial paperh		550,000		1.00			968,355		0.98
Subordinated notes, due March 2020 i		751,775		5.96			751,355		5.96
2.50% senior notes, due June 2012 j		249,444		3.73			249,332		3.73
Santander senior line of credit, due April 2011 k		250,000		0.69			250,000		0.69
Junior subordinated debentures due to Capital Trust Entitiesl		1,171,315		6.49			1,173,174		6.50
Total borrowings and other debt obligations	$	31,523,489		3.25	%	$	33,630,117		3.07	%

a	Included in borrowings and other debt obligations are sales of securities under repurchase agreements. Repurchase agreements are treated as financings with the obligations to repurchase securities sold reflected as a liability in the balance sheet. The dollar amount of securities underlying the agreements remains recorded as an asset, although the securities underlying the agreements are delivered to the brokers who arranged the transactions. In certain instances, the broker may have sold, loaned, or disposed of the securities to other parties in the normal course of their operations, and have agreed to deliver to SHUSA substantially similar securities at the maturity of the agreements. The broker/dealers who participate with SHUSA in these agreements are primarily broker/dealers reporting to the Federal Reserve Bank of New York.
b	On August 21, 2000, SHUSA received approximately $140 million of net proceeds from the issuance of $161.8 million of 12% Series A Noncumulative Preferred Interests in Sovereign Real Estate Investment Trust (“SREIT”), a subsidiary of Sovereign Bank, that holds primarily residential real estate loans. The preferred stock was issued at a discount, and is being amortized over the life of the preferred shares using the effective yield method. The preferred shares may be redeemed at any time on or after May 16, 2020, at the option of SHUSA subject to the approval of the OTS. Under certain circumstances, the preferred shares are automatically exchangeable into preferred stock of Sovereign Bank. The offering was made exclusively to institutional investors. The proceeds of this offering were principally used to repay corporate debt.
c	In December 2008, Sovereign Bank issued $1.4 billion in 3 year fixed rate FDIC-guaranteed senior unsecured notes under the TLG Program. The fixed rate note bears interest at a rate of 2.75% and matures on January 17, 2012.

22

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(5) BORROWINGS AND OTHER DEBT OBLIGATIONS (continued)

d	Sovereign Bank has issued various subordinated notes. These debentures are non-callable fixed rate notes that are due between March 2013 through May 2018. These notes are not subject to redemption prior to their maturity dates except in the case of the insolvency or liquidation of Sovereign Bank, and then only with prior regulatory approval. These subordinated notes qualify as Tier 2 regulatory capital for Sovereign Bank. Under the current OTS rules, 5 years prior to maturity, 20% of the balance of the subordinated note will no longer qualify as Tier 2 capital. In each successive year prior to maturity, an additional 20% of the subordinated note will no longer qualify as Tier 2 capital. Prior to December 31, 2010, the Company received approval from the OTS to repurchase $271.9 million of 4.375% fixed rate/floating rate subordinated bank notes due August 1, 2013 and $219.5 million of 3.75% fixed rate/floating rate subordinated bank notes due April 1, 2014. These notes were subsequently repurchased during the first quarter of 2011. The 4.375% notes were redeemable in whole or in part as of August 1, 2008 and the 3.75% notes were redeemable in whole or in part as of April 1, 2009. In anticipation of this repurchase, the Company wrote off $5.2 million of unamortized discounts, purchase marks and deferred issuance costs through loss on debt extinguishment at December 31, 2010.
e	During 2011, the Company, through its SCUSA subsidiary, amended warehouse lines with Santander, acting through its New York branch, to release excess collateral and modify the fee structure of the warehouses. In addition, on December 31, 2010, the Company amended a warehouse line with Santander to increase availability to $3.7 billion and extend the maturity date to December 31, 2011.
f	During 2011, the Company, through its SCUSA subsidiary amended two warehouse line of credit agreements to extend the maturity dates to May 2011.
	SCUSA borrowings of $13.0 billion and $14.2 billion were collateralized by automobile retail installment contracts, recreational vehicle and marine retail installment contracts and commercial loans at March 31, 2011 and December 31, 2010, respectively.
g	SHUSA, through its SCUSA subsidiary, has entered into various securitization transactions involving their retail automotive installment loans that do not meet the criteria for sale accounting. These transactions are accounted for as secured financings and therefore both the securitized retail installment contracts and the related securitization debt, issued by the special purpose entities, remain on the consolidated balance sheet. The securitized retail automotive installment loans are available to satisfy the related securitization debt and are not available to creditors. SCUSA had $7.7 billion of this variable rate securitized debt outstanding at March 31, 2011 which had a weighted average interest rate of 2.26%. The maturity of this debt is based on the timing of repayments from the securitized assets.
h	During 2010, SHUSA initiated a holding company level commercial paper issuance program, which is backed by committed lines from Santander, which at March 31, 2011 had an outstanding balance of $550.0 million and an effective rate of 1.00%.
i	In March 2010, the Company issued a $750 million subordinated note to Santander, which matures in March 2020. This subordinated note bears interest at 5.75% until March 2015 and then bears interest at 6.25% until maturity. Interest is being recognized at the effective interest rate of 5.96%.
j	In December 2008, SHUSA issued $250 million in 3.5 year fixed rate senior unsecured notes with the FDIC-guarantee under the TLG Program at a rate of 2.50% which mature on June 15, 2012.
k	The Company has entered into two line of credit agreements with Banco Santander with a total borrowing capacity of up to $2.5 billion. The $1.0 billion line matures in September 2011 with an outstanding balance of $250 million due in April 2011 and bearing a rate of 0.69% at March 31, 2011. The $1.5 billion line matures in September 2012 and has no outstanding balance at March 31, 2011. The Company is in compliance with all covenants of its credit agreements with Santander.

23

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(5) BORROWINGS AND OTHER DEBT OBLIGATIONS (continued)

^l The total balance of junior subordinated debentures due to Capital Trust Entities at December 31, 2010 was $1.2 billion. Included in this balance is the Trust PIERS. On February 26, 2004, SHUSA completed the offering of $700 million of Trust PIERS, and in March 2004, the Company raised an additional $100 million of Trust PIERS under this offering. The offering was completed through Sovereign Capital Trust IV (the “Trust”), a special purpose entity established to issue the Trust PIERS. Each Trust PIERS had an issue price of $50 and represents an undivided beneficial ownership interest in the assets of the Trust, which consist of:

• Junior subordinated debentures issued by SHUSA, each of which will have a principal amount at maturity of $50, and which have a stated maturity of March 1, 2034; and

• Warrants to purchase shares of common stock from SHUSA at any time prior to the close of business on March 1, 2034, by delivering junior subordinated debentures (or, in the case of warrant exercises before March 5, 2007, cash equal to the accreted principal amount of a junior subordinated debenture).

As a result of the acquisition by Santander, which closed on January 30, 2009, the warrant holders are entitled to receive Santander ADRs upon the exercise of their warrants. Holders may convert each of their Trust PIERS into ADRs representing 0.5482 ordinary shares of Santander, which is equivalent to the conversion ratio of 1.71 shares of the Company common stock per warrant prior to the acquisition if: (1) during any calendar quarter if the closing sale price of Santander ADRs over a specified measurement period meet certain criteria; (2) prior to March 1, 2029, during the five-business-day period following any 10-consecutive-trading-day period in which the average daily trading price of the Trust PIERS for such 10-trading-day period was less than 105% of the average conversion value of the Trust PIERS during that period and the conversion value for each day of that period was less than 98% of the issue price of the Trust PIERS; (3) during any period in which the credit rating assigned to the Trust PIERS by either Moody’s or Standard & Poor’s is below a specified level; (4) if the Trust PIERS have been called for redemption or (5) upon the occurrence of certain corporate transactions. The Trust PIERS and the junior subordinated debentures will have a distribution rate of 4.375% per annum of their issue price, subject to deferral. In addition, contingent distributions of $.08 per $50 issue price per Trust PIERS will be due during any three-month period commencing on or after March 1, 2007 under certain conditions. The Trust PIERS could not be redeemed by SHUSA prior to March 5, 2007, except upon the occurrence of certain special events. On any date after March 5, 2007, SHUSA may, if specified conditions are satisfied, redeem the Trust PIERS, in whole but not in part, for cash for a price equal to 100% of their issue price plus accrued and unpaid distributions to the date of redemption, if the closing price of Santander ADSs has exceeded a price per share that is equal to 130% of the effective conversion price, subject to adjustment, for a specified period. The effective conversion price as of January 30, 2009 was $91.21 per share.

The proceeds from the Trust PIERS of $800 million, net of transaction costs of approximately $16.3 million, were allocated pro rata between “Junior Subordinated debentures due Capital Trust Entities” in the amount of $498.3 million and “Warrants and employee stock options issued” in the amount of $285.4 million based on estimated fair values. The difference between the carrying amount of the subordinated debentures and the principal amount due at maturity is being accreted into interest expense using the effective interest method over the period to maturity of the Trust PIERS which is March 2, 2034. The effective interest rate of the subordinated debentures is 6.59%.

On April 19, 2011, SHUSA completed the public offer and sale of $500 million aggregate principal amount of its 4.625% Senior Notes due in 2016.

(6) DERIVATIVES

SHUSA uses derivative instruments as part of its interest rate risk management process to manage risk associated with its financial assets and liabilities, its mortgage banking activities, and to assist its commercial banking customers with their risk management strategies and for certain other market exposures.

One of SHUSA’s primary market risks is interest rate risk. Management uses derivative instruments to mitigate the impact of interest rate movements on the value of certain liabilities, assets and on probable forecasted cash flows. These instruments primarily include interest rate swaps that have underlying interest rates based on key benchmark indices and forward sale or purchase commitments. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated interest rate environment.

Interest rate swaps are generally used to convert fixed rate assets and liabilities to variable rate assets and liabilities and vice versa. SHUSA utilizes interest rate swaps that have a high degree of correlation to the related financial instrument.

24

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(6) DERIVATIVES (continued)

As part of its overall business strategy, Sovereign Bank originates fixed rate residential mortgages. It sells a portion of this production to Federal Home Loan Mortgage Corporation (“FHLMC”), Fannie National Mortgage Association (“FNMA”), and private investors. The loans are exchanged for cash or marketable fixed rate mortgage-backed securities which are generally sold. This helps insulate SHUSA from the interest rate risk associated with these fixed rate assets. SHUSA uses forward sales, cash sales and options on mortgage-backed securities as a means of hedging against changes in interest rate on the mortgages that are originated for sale and on interest rate lock commitments.

To accommodate customer needs, SHUSA enters into customer-related financial derivative transactions primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers.

Through the Company’s capital markets and mortgage-banking activities, it is subject to trading risk. The Company employs various tools to measure and manage price risk in its trading portfolios. In addition, the Board of Directors has established certain limits relative to positions and activities. The level of price risk exposure at any given point in time depends on the market environment and expectations of future price and market movements, and will vary from period to period.

Fair Value Hedges. SHUSA has historically entered into pay-variable, receive-fixed interest rate swaps to hedge changes in fair values of certain brokered certificate of deposits and certain debt obligations. SHUSA had no fair value hedges outstanding at March 31, 2011 or December 31, 2010. At March 31, 2011, SHUSA has $32.1 million of deferred net after tax losses on terminated derivative instruments that were hedging fair value changes. These losses will continue to be deferred in other liabilities and will be reclassified into interest expense over the remaining lives of the hedged assets and liabilities.

Cash Flow Hedges. SHUSA hedges exposures to changes in cash flows associated with forecasted interest payments on variable-rate liabilities, through the use of pay-fixed, receive variable interest rate swaps. The last of the hedges is scheduled to expire in January 2016. SHUSA includes all components of each derivatives gain or loss in the assessment of hedge effectiveness. For the three months ended March 31, 2011 and March 31, 2010, no hedge ineffectiveness was recognized as income in earnings associated with cash flow hedges. At March 31, 2011, SHUSA has $15.5 million of deferred net after tax losses on terminated derivative instruments that were hedging the future cash flows on certain borrowings. These losses will continue to be deferred in accumulated other comprehensive income and will be reclassified into interest expense as the future cash flows occur, unless it becomes probable that the forecasted interest payments will not occur, in which case, the losses in AOCI will be recognized immediately. As of March 31, 2011, SHUSA expects approximately $7.2 million of the deferred net after-tax loss on derivative instruments included in accumulated other comprehensive income to be reclassified to earnings during the next twelve months. The effective portion of gains and losses on derivative instruments designated as cash flow hedges recorded in other comprehensive income and reclassified into earnings resulted in an increase of $48.4 million to interest expense for the three-month period ended March 31, 2011. The effective portion of the unrealized gain/(loss) recognized in other comprehensive income on cash flow hedges was $79.5 million for the three-month period ended March 31, 2011. See Note 7 for further detail of the amounts included in accumulated other comprehensive income.

Other Derivative Activities. SHUSA’s derivative portfolio also includes mortgage banking interest rate lock commitments and forward sale commitments used for risk management purposes and derivatives executed with commercial banking customers, primarily interest rate swaps and foreign currency contracts.

In June 2010, SHUSA sold its Visa Inc. Class B common shares resulting in a gain of $14.0 million. In conjunction with the sale of its Visa, Inc. Class B shares, SHUSA entered into a total return swap in which SHUSA will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. This total return swap is accounted for as a free standing derivative. The fair value of the total return swap was calculated using a discounted cash flow model based on unobservable inputs consisting of management’s estimate of the probability of certain litigation scenarios, timing of litigation settlements and payments related to the swap.

SCUSA has entered into interest rate swap agreements to hedge variable rate liabilities associated with securitization trust agreements. SCUSA has over time repurchased $489.7 million of borrowings from the securitization trust; however, the trust documents have prevented SCUSA from terminating the associated interest rate swap agreements. Therefore, SCUSA has designated the hedges, whose notional value was $25.7 million as of March 31, 2011, as trading hedges and record changes in the market value of these hedges through earnings. SHUSA recorded expense of $1.2 million for the three-month period ended March 31, 2011 associated with these positions.

25

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(6) DERIVATIVES (continued)

Additionally, SCUSA has derivative positions with notionals totaling $1.4 billion and $1.7 billion which were not designated to obtain hedge accounting treatment at March 31, 2011 and December 31, 2010. SHUSA recorded expense of $3.6 million for the three-month period ended March 31, 2011 associated with these positions.

All derivative contracts are valued using either cash flow projection models or observable market prices. Pricing models used for valuing derivative instruments are regularly validated by testing through comparison with third parties.

Shown below is a summary of the derivatives designated as accounting hedges at March 31, 2011 and December 31, 2010:

	Notional						Receive			Pay			Life
	Amount		Asset		Liability		Rate			Rate			(Years)
March 31, 2011
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	$	10,082,253	$	918	$	141,767		0.21	%		2.31	%		3.0
December 31, 2010
Cash flow hedges:
Pay fixed — receive floating interest rate swaps	$	9,892,675	$	—	$	174,362		0.22	%		2.38	%		3.0

Summary information regarding other derivative activities at March 31, 2011 and December 31, 2010 follows:

	March 31,			December 31,
	2011			2010
	Asset			Asset
Consolidated Balance Sheet Position:	(Liability)			(Liability)
Mortgage banking derivatives:
Forward commitments to sell loans	$	(834	)	$	3,488
Interest rate lock commitments		1,250			734
Total mortgage banking risk management		416			4,222
Swaps receive fixed		259,165			294,834
Swaps pay fixed		(256,020	)		(295,735	)
Other		80			64
Net customer related interest rate hedges		3,225			(837	)
VISA total return swap		(4,081	)		(4,081	)
Foreign exchange contracts		9,549			7,358
Total	$	9,109		$	6,662

26

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(6) DERIVATIVES (continued)

The following financial statement line items were impacted by SHUSA’s derivative activity as of and for the three months ended March 31, 2011:

	Balance Sheet Effect at	Income Statement Effect For The Three Months Ended
Derivative Activity	March 31, 2011	March 31, 2011
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Increases to other assets, other liabilities and deferred taxes of $0.9 million, $141.7 million and $50.7 million, respectively, and a decrease to stockholder’s equity of $87.6 million.	Decrease in net interest income of $48.4 million.
Other hedges:
Forward commitments to sell loans	Increase to other liabilities of $0.8 million.	Decrease in mortgage banking revenues of $4.3 million.
Interest rate lock commitments	Increase to mortgage loans of $1.3 million.	Increase in mortgage banking revenues of $0.5 million.
Net customer related hedges	Increase to other assets of $3.2 million.	Increase in capital markets revenue of $4.1 million.
Total return swap associated with sale of Visa, Inc. Class B shares	Increase to other liabilities of $4.1 million	No income statement effect.
Foreign exchange	Increase to other assets of $9.5 million.	Increase in commercial banking fees of $2.2 million.

The following financial statement line items were impacted by SHUSA’s derivative activity as of and for the three months ended March 31, 2010:

	Balance Sheet Effect at	Income Statement Effect For The Three Months Ended
Derivative Activity	March 31, 2010	March 31, 2010
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Increases to other liabilities and deferred taxes of $192.7 million and $69.3 million, respectively, and a decrease to stockholders’ equity of $120.6 million.	Decrease in net interest income of $73.0 million.
Other hedges:
Forward commitments to sell loans	Increase to other liabilities of $5 thousand.	Decrease in mortgage banking revenues of $2.0 million.
Interest rate lock commitments	Increase to mortgage loans of $1.1 million.	Increase in mortgage banking revenues of $0.8 million.
Net customer related hedges	Increase to other assets of $2.3 million.	Increase in capital markets revenue of $1.9 million.
Forward commitments to sell and purchase precious metals inventory	Insignificant balance sheet effect at March 31, 2010.	No income statement effect.
Foreign exchange	Increase to other assets of $5.1 million.	Increase in commercial banking fees of $0.8 million.

27

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(7) OTHER COMPREHENSIVE INCOME/(LOSS)

The following table presents the components of other comprehensive income, net of related tax, for the periods indicated (in thousands):

	Total Other									Total Accumulated
	Comprehensive Income									Other Comprehensive Income
	For the Three Months Ended									December 31,						March 31,
	March 31, 2011									2010						2011
	Pretax			Tax			Net			Beginning			Net			Ending
	Activity			Effect			Activity			Balance			Activity			Balance
Change in accumulated losses/(gains) on cash flow hedge derivative financial instruments	$	41,500		$	(16,008	)	$	25,492
Reclassification adjustment for net gains on cash flow hedge derivative financial instruments		(3,784	)		1,324			(2,460	)
Net unrealized losses on cash flow hedge derivative financial instruments		37,716			(14,684	)		23,032		$	(124,940	)	$	23,032		$	(101,908	)
Change in unrealized gains/(losses) on investment securities available-for-sale		(89,489	)		28,450			(61,039	)
Reclassification adjustment for net gains included in net income		61,862			(19,667	)		42,195
Net unrealized gains/(losses) on investment securities available-for-sale		(27,627	)		8,783			(18,844	)		(92,775	)		(18,844	)		(111,619	)
Amortization of defined benefit plans		647			(251	)		396			(16,475	)		396			(16,079	)
Total, March 31, 2011	$	10,736		$	(6,152	)	$	4,584		$	(234,190	)	$	4,584		$	(229,606	)

	Total Other									Total Accumulated
	Comprehensive Income									Other Comprehensive Income
	For the Three Months Ended									December 31,					March 31,
	March 31, 2010									2009					2010
	Pretax			Tax			Net			Beginning			Net		Ending
	Activity			Effect			Activity			Balance			Activity		Balance
Change in accumulated losses/(gains) on cash flow hedge derivative financial instruments	$	25,170		$	(8,084	)	$	17,086
Reclassification adjustment for net gains on cash flow hedge derivative financial instruments		(3,655	)		1,279			(2,376	)
Net unrealized losses on cash flow hedge derivative financial instruments		21,515			(6,805	)		14,710		$	(157,576	)	$	14,710	$	(142,866	)
Change in unrealized gains/(losses) on investment securities available-for-sale		30,330			(11,053	)		19,277
Reclassification adjustment for net gains included in net income		26,327			(9,594	)		16,733
Net unrealized gains/(losses) on investment securities available-for-sale		56,657			(20,647	)		36,010			(176,399	)		36,010		(140,389	)
Amortization of defined benefit plans		474			(172	)		302			(15,894	)		302		(15,592	)
Total, March 31, 2010	$	78,646		$	(27,624	)	$	51,022		$	(349,869	)	$	51,022	$	(298,847	)

SHUSA had $20.6 million and $5.6 million of noncontrolling interest in other comprehensive income/(loss) and $(229.6) million and $(298.8) million of accumulated other comprehensive income as of March 31, 2011 and March 31, 2010, respectively.

28

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(8) MORTGAGE SERVICING RIGHTS

At both March 31, 2011 and December 31, 2010, SHUSA serviced residential real estate loans for the benefit of others totaling $14.5 billion and $14.7 billion, respectively. The recorded servicing asset at March 31, 2011 and December 31, 2010 was $147.8 million and $148.7 million, respectively. For the three months ended March 31, 2011, SHUSA recorded recoveries of $1.7 million on our mortgage servicing rights resulting from changes in expected prepayments on our mortgages due to changes in residential mortgage rates. The following table presents a summary of the activity of the asset established for the Company’s residential mortgage servicing rights.

	Three Months Ended
	March 31,
	2011			2010
Gross book balance at beginning of period	$	173,549		$	179,643
Mortgage servicing assets recognized		9,101			5,724
Amortization and permanent impairment		(9,036	)		(12,952	)
Gross balance at end of period	$	173,614		$	172,415
Valuation allowance		(25,843	)		(37,399	)
Book balance at end of period	$	147,771		$	135,016

The fair value of our residential mortgage servicing rights is estimated using a discounted cash flow model. This model estimates the present value of the future net cash flows of the servicing portfolio based on various assumptions. The most important assumptions in the valuation of residential mortgage servicing rights are anticipated loan prepayment rates (CPR) and the positive spread received for holding escrow related balances. Increases in prepayment speeds result in lower valuations of mortgage servicing rights. The escrow related credit spread is the estimated reinvestment yield earned on the serviced loan escrow deposits. Increases in escrow related credit spreads result in higher valuations of mortgage servicing rights. For each of these items, SHUSA must make assumptions based on current market information and future expectations. All of the assumptions are based on standards that the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources. Additionally, an independent appraisal of the fair value of the Company’s residential mortgage servicing rights is obtained annually and is used by management to evaluate the reasonableness of the assumptions used in the Company’s discounted cash flow model.

Listed below are the most significant assumptions that were utilized by SHUSA in its evaluation of residential mortgage servicing rights for the periods presented.

	March 31, 2011			December 31, 2010			March 31, 2010			December 31, 2009
CPR		16.49	%		16.82	%		21.56	%		24.44	%
Escrow credit spread		2.40	%		2.41	%		3.06	%		3.17	%

A valuation allowance is established for the excess of the cost of each residential mortgage servicing asset stratum over its estimated fair value. Activity in the valuation allowance for mortgage servicing rights for the three months ended March 31, 2011 consisted of the following:

	Three Months Ended
	March 31,
	2011			2010
Balance as of December 31, 2010	$	27,525		$	52,089
Net decrease in valuation allowance for mortgage servicing rights		(1,682	)		(14,690	)
Balance as March 31, 2011	$	25,843		$	37,399

SHUSA originates and has previously sold multi-family loans in the secondary market to Fannie Mae while retaining servicing. At March 31, 2011 and December 31, 2010, SHUSA serviced $10.8 billion and $11.2 billion of loans for Fannie Mae, respectively, and as a result has recorded servicing assets of $2.4 million and $3.7 thousand, respectively. SHUSA recorded servicing asset amortization of $2.1 million and $2.4 million related to the multi-family loans sold to Fannie Mae for the three months ended March 31, 2011 and 2010, respectively. SHUSA recorded multi-family servicing recoveries of $4.5 million for the three-month period ended March 31, 2011, compared to recoveries of $0.4 million for the corresponding period in the prior year. In September 2009, the Bank elected to stop selling multi-family loans to Fannie Mae and retains all production for the loan portfolio.

29

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(8) MORTGAGE SERVICING RIGHTS (continued)

SHUSA had gains on the sale of mortgage, multi-family and home equity loans of $5.2 million for the three-month period ended March 31, 2011, compared with gains on the sale of mortgage, multi-family and home equity loans of $7.8 million for the corresponding period ended March 31, 2010. SHUSA has recourse reserves of $150.6 million associated with multi-family loans sold to Fannie Mae, on which SHUSA’s maximum credit exposure is $217.7 million.

(9) BUSINESS SEGMENT INFORMATION

The Company’s segments are focused principally around the customers Sovereign Bank and SCUSA serve. The Retail Banking segment is primarily comprised of our branch locations and our residential mortgage business. Our branches offer a wide range of products and services to customers and each attracts deposits by offering a variety of deposit instruments including demand and NOW accounts, money market and savings accounts, certificates of deposits and retirement savings products. Our branches also offer certain consumer loans such as home equity loans and other consumer loan products. It also provides business banking loans and small business loans to individuals. Our Specialized Business segment is primarily comprised of leases to commercial customers, our New York multi-family and national commercial real estate lending group, our automobile dealer floor plan lending group and our indirect automobile lending group. The Corporate segment (formerly known as Middle Market) provides the majority of Sovereign Bank’s commercial lending platforms such as commercial real estate loans and commercial industrial loans and also contains the Company’s related commercial deposits. The Global Banking segment (included in the Other category prior to the third quarter of 2010) includes business with large corporate domestic and foreign clients which have larger loan sizes than commercial clients of Sovereign prior to 2009. The Other category includes earnings from the investment portfolio (excluding any investments purchased by SCUSA), interest expense on Sovereign Bank’s borrowings and other debt obligations (excluding any borrowings held by SCUSA), amortization of intangible assets and certain unallocated corporate income and expenses.

SCUSA is a specialized consumer finance company engaged in the purchase, securitization and servicing of retail installment contracts originated by automobile dealers and direct origination of retail installment contracts over the internet.

For segment reporting purposes, SCUSA continues to be managed as a separate business unit with its own systems and processes. With the exception of this segment, SHUSA’s segment results are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense to each of our segments. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept. The provision for credit losses recorded by each segment is based on the net charge-offs of each line of business and changes in specific reserve levels for loans in the segment and the difference between the provision for credit losses recognized by the Company on a consolidated basis and the provision recorded by the business line recorded in the Other category. Other income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct expenses as well as certain allocated corporate expenses are accounted for within each segment’s financial results. Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Where practical, the results are adjusted to present consistent methodologies for the segments.

30

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(9) BUSINESS SEGMENT INFORMATION (continued)

The following tables present certain information regarding the Company’s segments.

	SHUSA excluding SCUSA
For the Three-Month Period Ended				Specialized						Global
March 31, 2011	Retail(1)			Business			Corporate			Banking			Other			SCUSA		Total
Net interest income/(expense)	$	191,371		$	73,593		$	77,062		$	11,839		$	81,952		$	546,610	$	982,427
Fees and other income		98,575			13,988			13,718			8,053			9,415			106,567		250,316
Provision for credit losses		66,988			83,434			35,769			4,689			(4,850	)		121,742		307,772
General and administrative expenses		254,407			10,363			35,766			3,467			3,925			144,872		452,800
Income/(loss) before income taxes(1)		(26,810	)		(9,205	)		16,575			11,696			116,078			385,443		493,777
Intersegment revenue/(expense)(2)		(26,314	)		(122,299	)		(14,275	)		(1,405	)		164,293			—		—
Total average assets	$	23,384,455		$	15,012,338		$	10,236,053		$	2,617,999		$	24,116,716		$	16,315,558	$	91,683,119

	SHUSA excluding SCUSA
For the Three-Month Period Ended				Specialized						Global
March 31, 2010	Retail(1)			Business			Corporate			Banking			Other		SCUSA		Total
Net interest income/(expense)	$	179,072		$	63,334		$	89,600		$	3,157		$	63,370	$	359,225	$	757,758
Fees and other income		118,423			9,135			18,598			1,229			6,182		22,693		176,260
Provision for credit losses		65,573			79,195			55,894			1,052			5,286		205,707		412,707
General and administrative expenses		238,910			9,212			35,185			3,653			2,848		73,107		362,915
Income/(loss) before income taxes(1)		(39,593	)		(19,521	)		15,531			(323	)		76,564		102,183		134,841
Intersegment revenue/(expense)(2)		(22,875	)		(140,221	)		(19,459	)		(226	)		182,781		—		—
Total average assets	$	21,720,885		$	14,747,463		$	11,983,933		$	977,123		$	24,851,457	$	8,779,135	$	83,059,996

(1)	The Retail Segment fees and other income includes residential servicing right recoveries of $1.7 million for the three months ended March 31, 2011, compared to recoveries of $14.7 million in the corresponding period in the prior year. See Note 8 for further discussion on these items.
(2)	Intersegment revenue/(expense) represent charges or credits for funds used or provided by each of the segments and are included in net interest income.

(10) INCOME TAXES

Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. If based on the available evidence in future periods, it is more likely that not that all or a portion of the Company’s deferred tax assets will not be realized, a deferred tax valuation allowance would be established. Consideration is given to all positive and negative evidence related to the realization of the deferred tax assets.

Items considered in this evaluation include historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earning trends and the timing of reversals of temporary differences. The evaluation is based on current tax laws as well as expectations of future performance.

The income taxes topic of the FASB Accounting Standards Codification suggests that additional scrutiny should be given to deferred tax assets of an entity with cumulative pre-tax losses during the three most recent years and is widely considered significant negative evidence that is objective and verifiable and therefore, difficult to overcome. During the three years ended December 31, 2008, we had cumulative pre-tax losses and considered this factor in our analysis of deferred tax assets at year-end. Additionally, based on the continued economic uncertainty that existed at that time, it was determined that it was probable that the Company would not generate significant pre-tax income in the near term on a stand-alone basis. As a result of these facts, SHUSA recorded a $1.4 billion valuation allowance against its deferred tax assets for the year-ended December 31, 2008.

31

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(10) INCOME TAXES (continued)

During 2009, Santander contributed SCUSA into the Company. SCUSA generated pretax income of $332.2 million in 2009 compared to $261.6 million and $260.8 million in 2008 and 2007. As a result of this contribution, SHUSA updated its deferred tax realizability analysis by incorporating future projections of taxable income that will be generated by SCUSA. As a result of incorporating future taxable income projections of SCUSA, the Company was able to reduce its deferred tax valuation allowance by $1.3 billion for the year ended December 31, 2009. Due to the profitability of SHUSA in 2010 and expected future growth in profits of SHUSA by the end of 2010, SHUSA began to consider the projected taxable income of the total company, and not just that of SCUSA, in its realizability analysis. As a result, the company was able to reduce its deferred tax valuation allowance by $309.0 million for the year ended December 31, 2010. SHUSA continues to maintain a valuation allowance of $99.3 million at March 31, 2011 and December 31, 2010 related to deferred tax assets subject to carry forward periods. Management has determined it is more likely than not these deferred tax assets will remain unused after the carry forward periods have expired.

At March 31, 2011, the Company had net unrecognized tax benefits related to uncertain tax positions of $119.9 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Federal			Accrued			Unrecognized
	State and			Interest and			Income Tax
(in thousands)	Local Tax			Penalties			Benefits
Gross unrecognized tax benefits at December 31, 2010	$	110,363		$	26,588		$	136,951
Additions based on tax positions related to the current year		548			—			548
Additions for tax positions of prior years		839			4,131			4,970
Reductions for tax positions of prior years		—			(3,015	)		(3,015	)
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations		—			—			—
Settlements		(4,262	)		(307	)		(4,569	)
Gross unrecognized tax benefits at March 31, 2011	$	107,488		$	27,397			134,885
Less: Federal, state and local income tax benefits								(14,983	)
Net unrecognized tax benefits that if recognized would impact the effective tax rate at March 31, 2011							$	119,902

SHUSA recognizes penalties and interest accrued related to unrecognized tax benefits within income tax expense on the Consolidated Statement of Operations. During the three-month period ended March 31, 2011, SHUSA recognized an increase of approximately $0.8 million in interest and penalties compared to an increase of $0.7 million for the corresponding period in the prior year.

SHUSA is subject to the income tax laws of the Unites States, its states and municipalities and certain foreign countries. These tax laws are complex and are potentially subject to different interpretations by the taxpayer and the relevant Governmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws.

32

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(10) INCOME TAXES (continued)

Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. SHUSA reviews its tax balances quarterly and as new information becomes available, the balances are adjusted, as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions. On June 17, 2009, SHUSA filed a lawsuit against the United States in Federal District Court seeking a refund of assessed taxes paid for tax years 2003-2005 related to two separate financing transactions with an international bank totaling $1.2 billion. As a result of these two financing transactions, SHUSA was subject to foreign taxes of $154.0 million during the years 2003 through 2005 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the IRS disallowed. The IRS also disallowed SHUSA’s deductions for interest expense and transaction costs, totaling $24.9 million in tax liability, and assessed interest and penalties totaling approximately $70.8 million. In 2006 and 2007, SHUSA was subject to an additional $87.6 million and $22.5 million of foreign taxes, respectively, as a result of the two financing transactions, and SHUSA’s entitlement to foreign tax credits in these amounts will be determined by the outcome of the 2003-2005 litigation. In addition, the outcome of the litigation will determine whether SHUSA is subject to additional tax liability of $37.1 million related to interest expense and transaction cost deductions, and whether SHUSA will be subject to interest and penalties for 2006 and 2007. The audit for 2006-2007 is currently winding up and is expected to close in 2011. SHUSA continues to believe that it is entitled to claim these foreign tax credits taken with respect to the transactions and also continues to believe it is entitled to tax deductions for the related issuance costs and interest deductions based on tax law. SHUSA maintains its tax reserve at $96.7 million as of March 31, 2011. SHUSA believes this reserve amount adequately provides for any potential exposure to the IRS related to these items. However, as the Company continues to go through the litigation process, we will continue to evaluate the appropriate tax reserve levels for this position and any changes made to the tax reserves may materially affect SHUSA’s income tax provision, net income and regulatory capital in future periods.

(11) RELATED PARTY TRANSACTIONS

See Note 5 for a listing of the various debt agreements SHUSA has with Santander.

In March 2010, SHUSA issued to Santander, 3 million shares of SHUSA’s Common Stock, raising proceeds of $750 million.

In December, 2010, SHUSA issued 3 million shares of common stock to Santander which raised proceeds of $750 million and declared a $750 million dividend to Santander. This was a non-cash transaction

SHUSA has $1.9 billion of public securities that consists of trust preferred security obligations and preferred stock issuances. Santander owns approximately 40.2% of these securities as of March 31, 2011.

Santander has provided guarantees on the covenants, agreements and obligations of SCUSA under the governing documents where SCUSA is a party for the securitizations. This includes, but is not limited to, the obligations of SCUSA as servicer and transferor to repurchase certain receivables.

SHUSA has entered into interest rate swap agreements with Santander to hedge interest rate risk on floating rate tranches of its securitizations and FHLB advances which have a notional value of $9.7 billion at March 31, 2011.

In 2006, Santander extended a total of $425 million in unsecured lines of credit to Sovereign Bank for federal funds and Eurodollar borrowings and for the confirmation of standby letters of credit issued by Sovereign Bank. This line is at a market rate and in the ordinary course of business and can be cancelled by either Sovereign Bank or Santander at any time and can be replaced by Sovereign Bank at any time. In the first quarter of 2009, this line was increased to $2.5 billion. During the three months ended March 31, 2011 and 2010, respectively, the average unfunded balance outstanding under these commitments was $362.2 million and $404.1 million. As of March 31, 2011, there was no outstanding balance on the unsecured lines of credit for federal funds and Eurodollar borrowings. Sovereign Bank paid approximately $2.8 million in fees to Santander in the three-month period ended March 31, 2011 in connection with these commitments compared to $3.1 million in fees in the corresponding period in the prior year.

33

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(11) RELATED PARTY TRANSACTIONS (continued)

The Company, and its affiliates, have entered into various service agreements with Santander and its affiliates. Each of the agreements was done in the ordinary course of business and on market terms. The agreements are as follows:

• Nw Services Co., a Santander affiliate doing business as Aquanima, is under contract with Sovereign Bank to provide procurement services, with fees paid in the three months ended March 31, 2011 in the amount of $1.1 million.

• Santander, acting through its New York branch, is under contract with Sovereign Bank to provide investment advisory and support for derivative transactions, with fees paid in the three months ended March 31, 2011 in the amount of $4.0 thousand.

• Geoban, S.A., a Santander affiliate, is under contract with Sovereign Bank to provide services in the form of debit card disputes and claims support, and consumer and mortgage loan set-up and review, with fees paid in the three months ended March 31, 2011 in the amount of $48.0 thousand.

• Ingenieria De Software Bancario S.L., a Santander affiliate, is under contract with Sovereign Bank to provide information technology development, support and administration, with fees paid in the three months ended March 31, 2011 in the amount of $27.6 million.

• Produban Servicios Informaticos Generales S.L., a Santander affiliate, is under contract with Sovereign Bank to provide professional services, and administration and support of information technology production systems, telecommunications and internal/external applications, with fees paid in the three months ended March 31, 2011 in the amount of $20.7 million.

• Santander Back-Offices Globales Mayoristas S.A., a Santander affiliate, is under contract with Sovereign Bank to provide logistical support for Sovereign Bank’s derivative and hedging transactions and programs. In the three months ended March 31, 2011, fees in the amount of $90.8 thousand were paid to Santander Back-Offices Globales Mayoristas S.A. with respect to this agreement.

• Santander Global Facilities (“SGF”), a Santander affiliate, is under contract with Sovereign Bank to provide administration and management of employee benefits and payroll functions for Sovereign Bank and other affiliates including employee benefits and payroll processing services provided by third party vendors through sponsorship by SGF. In the three months ended March 31, 2011, fees in the amount of $1.3 million were paid to SGF with respect to this agreement.

• SGF is under contract with Sovereign Bank to provide property management services. In the three months ended March 31, 2011, fees in the amount of $1.3 million were paid to SGF with respect to this agreement.

In 2010, SHUSA extended a $10 million unsecured loan to Servicios de Cobranza, Recuperacion y Seguimiento, S.A. DE C.V. At March 31, 2011 the principal balance was $10 million. Servicios de Cobranza, Recuperacion y Seguimiento, S.A. DE C.V. paid $44.0 thousand in interest and $160.7 thousand in fees to SHUSA in connection with this loan during the three-months ended March 31, 2011.

34

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(12) FAIR VALUE

The fair value measurement and disclosures topic of the FASB Accounting Standards Codification emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the US accounting regulations established a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The most significant instruments that the Company carries at fair value include investment securities, derivative instruments and loans held for sale. The majority of the securities in the Company’s available-for-sale portfolios are priced via independent providers, whether those are pricing services or quotations from market-makers in the specific instruments. In obtaining such valuation information from third parties, the Company has evaluated the valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in the Company’s principal markets. The Company’s principal markets for its investment securities are the secondary institutional markets with an exit price that is predominantly reflective of bid level pricing in these markets.

The Company’s residential loan held for sale portfolio had an aggregate fair value of $100.7 million at March 31, 2011. The contractual principal amount of these loans totaled $100.0 million. The difference in fair value compared to the principal balance was $0.7 million which was recorded in mortgage banking revenues during the three-month period ended March 31, 2011. Substantially all of these loans are current and none are in non-accrual status. The fair value of these loans is estimated based upon the anticipated exit prices for these loans in the secondary market to agency buyers such as Fannie Mae and Freddie Mac. Practically all of our residential loans held for sale portfolio is sold to these two agencies.

Currently, the Company uses derivative instruments to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs such as the forward swap curve.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurement of its derivatives. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2011, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that the majority of its derivative valuations are classified in Level 2 of the fair value hierarchy.

When estimating the fair value of its loans held for sale portfolio, interest rates and general conditions in the principal markets for the loans are the most significant underlying variables that will drive changes in the fair values of the loans, not borrower-specific credit risk since substantially all of the loans are current.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(12) FAIR VALUE (continued)

The following tables present the assets that are measured at fair value on a recurring basis by level within the fair value hierarchy as reported on the consolidated balance sheet at March 31, 2011 and December 31, 2010, respectively. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands).

	Fair Value Measurements at March 31, 2011 Using:
	Quoted Prices in Active		Significant Other			Significant
	Markets for Identical		Observable Inputs			Unobservable Inputs			Balance at
	Assets (Level 1)		(Level 2)			(Level 3)			March 31, 2011
Financial Assets:
US Treasury and government agency securities	$	—	$	12,999		$	—		$	12,999
Debentures of FHLB, FNMA and FHLMC		—		20,000			—			20,000
Corporate debt		—		2,038,343			—			2,038,343
Asset-backed securities		—		3,175,817			51,705			3,227,522
State and municipal securities		—		1,812,892			—			1,812,892
Mortgage backed securities		—		4,909,315			1,372,696			6,282,011
Total investment securities available-for-sale		—		11,969,366			1,424,401			13,393,767
Loans held for sale		—		100,706			—			100,706
Derivatives		—		292,061			1,250			293,311
Total Financial Assets		—		12,362,133			1,425,651			13,787,784
Financial Liabilities:
Derivatives		—		(436,160	)		(6,639	)		(442,799	)
Total	$	—	$	11,925,973		$	1,419,012		$	13,344,985

	Fair Value Measurements at December 31, 2010 Using:
	Quoted Prices in Active		Significant Other			Significant			Balance at
	Markets for Identical		Observable Inputs			Unobservable Inputs			December 31,
	Assets (Level 1)		(Level 2)			(Level 3)			2010
Financial Assets:
US Treasury and government agency securities	$	—	$	12,997		$	—		$	12,997
Debentures of FHLB, FNMA and FHLMC		—		24,999			—			24,999
Corporate debt		—		2,202,787			—			2,202,787
Asset-backed securities		—		3,073,194			51,409			3,124,603
State and municipal securities		—		1,882,280			—			1,882,280
Mortgage backed securities		—		4,663,744			1,460,438			6,124,182
Total investment securities available for sale		—		11,860,001			1,511,847			13,371,848
Loans held for sale		—		150,063			—			150,063
Derivatives		—		326,893			734			327,627
Total Financial Assets		—		12,336,957			1,512,581			13,849,538
Financial Liabilities:
Derivatives		—		(508,839	)		(8,685	)		(517,524	)
Total	$	—	$	11,828,118		$	1,503,896		$	13,332,014

SHUSA’s Level 3 assets are primarily comprised of certain non-agency mortgage backed securities. These investments are thinly traded and SHUSA determines the estimated fair values for these securities by evaluating pricing information from a combination of sources such as third party pricing services, third party broker quotes for certain securities and from other independent third party valuation sources. These quotes are benchmarked against similar securities that are more actively traded in order to assess the reasonableness of the estimated fair values. The fair market value estimates we assign to these securities assume liquidation in an orderly fashion and not under distressed circumstances. Due to the continued illiquidity and credit risk of certain securities, the market value of these securities is highly sensitive to assumption changes and market volatility.

36

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(12) FAIR VALUE (continued)

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at quarter end.

	Quoted Prices in Active		Significant Other		Significant
	Markets for		Observable Inputs		Unobservable
	Identical Assets (Level 1)		(Level 2)		Inputs (Level 3)		Total
March 31, 2011
Loans (1)	$	—	$	1,968,976	$	—	$	1,968,976
Foreclosed assets (2)		—		27,152		—		27,152
Mortgage servicing rights (3)		—		—		150,136		150,136
December 31, 2010
Loans (1)	$	—	$	2,148,261	$	—	$	2,148,261
Foreclosed assets (2)		—		114,198		—		114,198
Mortgage servicing rights (3)		—		—		146,028		146,028

(1)	These balances are measured at fair value on a non-recurring basis using the fair value of the underlying collateral.
(2)	Represents the fair value of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets, based on periodic updates of appraisals and estimated selling costs.
(3)	These balances are measured at fair value on a non-recurring basis. Mortgage servicing rights are stratified for purposes of the impairment testing.

The following table presents the increase/(decrease) in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the income statement, relating to assets held at period end.

	Three Months Ended March 31,
	2011			2010
Loans	$	2,619		$	15,503
Foreclosed assets		(2,462	)		(1,499	)
Mortgage servicing rights		6,168			15,091
	$	6,325		$	29,095

The table below presents the changes in our Level 3 balances for the three-month period ended March 31, 2011.

	Investments			Mortgage
	Available-for-Sale			Servicing Rights			Derivatives			Total
Balance at December 31, 2010	$	1,511,847		$	146,028		$	(7,951	)	$	1,649,924
Gains/(losses) in other comprehensive income		45,328			—			257			45,585
Gains/(losses) in earnings		—			6,168			864			7,032
Additions		—			9,101			—			9,101
Repayments		(132,774	)		—			1,441			(131,333	)
Sales/Amortization		—			(11,161	)		—			(11,161	)
Balance at March 31, 2011	$	1,424,401		$	150,136		$	(5,389	)	$	1,569,148

37

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(12) FAIR VALUE (continued)

The following table presents disclosures about the fair value of financial instruments. These fair values for certain instruments are presented based upon subjective estimates of relevant market conditions at a specific point in time and information about each financial instrument. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties resulting in variability in estimates affected by changes in assumptions and risks of the financial instruments at a certain point in time. Therefore, the derived fair value estimates presented below for certain instruments cannot be substantiated by comparison to independent markets. In addition, the fair values do not reflect any premium or discount that could result from offering for sale at one time an entity’s entire holdings of a particular financial instrument nor does it reflect potential taxes and the expenses that would be incurred in an actual sale or settlement. Accordingly, the aggregate fair value amounts presented below do not represent the underlying value to SHUSA (in thousands):

	March 31, 2011						December 31, 2010
	Carrying						Carrying
	Value			Fair Value			Value		Fair Value
Financial Assets:
Cash and amounts due from depository institutions	$	3,289,957		$	3,289,957		$	1,705,895	$	1,705,895
Available-for-sale investment securities		13,393,767			13,393,767			13,371,848		13,371,848
Loans held for investment, net		64,256,068			62,305,840			62,820,434		61,453,371
Loans held for sale		100,706			100,706			150,063		150,063
Mortgage servicing rights		150,136			156,473			146,028		148,746
Mortgage interest rate lock commitments		1,250			1,250			734		734
Financial Liabilities:
Deposits		46,995,157			45,145,510			42,673,293		42,592,642
Borrowings and other debt obligations		31,523,489			32,697,618			33,630,117		34,764,709
Interest rate derivative instruments		145,823			145,823			190,038		190,038
Total return swap		4,081			4,081			4,081		4,081
Mortgage banking forward commitments		(834	)		(834	)		3,488		3,488
Unrecognized financial instruments:(1)
Commitments to extend credit		97,896			97,818			110,705		110,617

(1) The amounts shown under “carrying value” represent accruals or deferred income arising from those unrecognized financial instruments.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and amounts due from depository institutions and interest-earning deposits. For these short-term instruments, the carrying amount equals the fair value.

Investment securities available-for-sale. Generally, the fair value of investment securities available-for-sale is based on a third party pricing service which utilizes matrix pricing on securities that actively trade in the marketplace. For investment securities that do not actively trade in the marketplace, fair value is obtained from third party broker quotes. For certain non-agency mortgage backed securities, SHUSA determines the estimated fair value for these securities by evaluating pricing information from a combination of sources such as third party pricing services, third party broker quotes for certain securities and from another independent third party valuation source. These quotes are benchmarked against similar securities that are more actively traded in order to assess the reasonableness of the estimated fair values. The fair market value estimates we assign to these securities assume liquidation in an orderly fashion and not under distressed circumstances. Changes in fair value are reflected in the carrying value of the asset and are shown as a separate component of stockholder’s equity.

Loans. Fair value is estimated by discounting cash flows using estimated market discount rates at which similar loans would be made to borrowers and reflect similar credit ratings and interest rate risk for the same remaining maturities.

Mortgage servicing rights. The fair value of mortgage servicing rights is estimated using internal cash flow models. For additional discussion see Note 8.

Mortgage interest rate lock commitments. Fair value is estimated based on a net present value analysis of the anticipated cash flows associated with the rate lock commitments.

38

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(12) FAIR VALUE (continued)

Deposits. The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, NOW accounts, savings accounts and certain money market accounts, is equal to the amount payable on demand as of the balance sheet date. The fair value of fixed-maturity certificates of deposit is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities.

Borrowings and other debt obligations. Fair value is estimated by discounting cash flows using rates currently available to SHUSA for other borrowings with similar terms and remaining maturities. Certain other debt obligations instruments are valued using available market quotes which contemplates issuer default risk.

Commitments to extend credit. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

Total return swap. Under the terms of the total return swap, SHUSA will make or receive payments based on subsequent changes in the conversion rate of the Visa Class B shares into Class A shares. The fair value of the total return swap was calculated using a discounted cash flow model based on unobservable inputs consisting of management’s estimate of the probability of certain litigation scenarios, timing of litigation settlements and payments related to the swap.

Interest rate derivative instruments. The fair value of interest rate swaps, caps and floors that represent the estimated amount SHUSA would receive or pay to terminate the contracts or agreements, taking into account current interest rates and when appropriate, the current creditworthiness of the counterparties are obtained from dealer quotes.

(13) RECENT ACCOUNTING DEVELOPMENTS

In December 2010, the FASB issued ASU 2010-28, an update to Topic 350, “Intangibles — Goodwill and Other: When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining this, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The amendments in this update are effective for the Company on January 1, 2011. The implementation of this guidance did not have an impact on SHUSA’s financial position or results of operations.

In April 2011, the FASB issued ASU 2011-02, an update to ASC 310-40, “Receivables — Troubled Debt Restructurings by Creditors.” The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011 for the Company, and should be applied retrospectively to the beginning of the annual period of adoption. In evaluating whether a restructuring constitutes a troubled debt restructuring, the Company must separately conclude that the restructuring constitutes a concession as well as the debtor must be experiencing financial difficulties. The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. The impact of the amendments on SHUSA’s financial position and results of operations are still being evaluated.

In April 2011, the FASB issued ASU 2011-03, an update to ASC 860, “Transfers and Servicing” to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this update are effective for the Company beginning January 1, 2012. The implementation of this guidance is not expected to have an impact on SHUSA’s financial position or results of operations.

39

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(14) TRANSACTION RELATED AND INTEGRATION CHARGES AND OTHER RESTRUCTURING COSTS, NET

SHUSA recorded charges against its earnings during 2009 for transaction related and integration charges and other restructuring costs. A rollforward of the three-month periods ending March 31, 2011 and 2010 of the transaction related and integration charges and other restructuring cost accruals are summarized below:

	Contract
	Termination			Severance			Total
Reserve balance at December 31, 2010	$	17,239		$	15,205		$	32,444
Charge recorded in earnings		—			—			—
Payments		(1,897	)		(3,414	)		(5,311	)
Reserve balance at March 31, 2011	$	15,342		$	11,791		$	27,133

	Contract
	Termination			Severance			Total
Reserve balance at December 31, 2009	$	27,805		$	46,900		$	74,705
Charge recorded in earnings		—			—			—
Payments		(2,036	)		(11,336	)		(13,372	)
Reserve balance at March 31, 2010	$	25,769		$	35,564		$	61,333

(15) COMMITMENTS AND CONTINGENIES

Litigation.In the ordinary course of business, SHUSA and its subsidiaries are routinely defendants in or parties to many pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of consumer protection, securities, environmental, banking, employment and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against SHUSA and its subsidiaries. In the ordinary course of business, SHUSA and its subsidiaries are also subject to regulatory examinations, information gathering requests, inquiries and investigations.

In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, SHUSA generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

In accordance with applicable accounting guidance, SHUSA establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, SHUSA does not establish an accrued liability. As a litigation or regulatory matter develops, SHUSA, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable at which time an accrued liability is established with respect to such loss contingency. SHUSA continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established.

Complaint from Trustee for the Trust PIERS

On December 17, 2010, The Bank of New York Mellon Trust Company, National Association (the “Trustee”) filed a complaint in the U.S. District Court for the Southern District of New York solely as the Trustee for the Trust PIERS under an Indenture dated September 1, 1999, as amended, against SHUSA. The complaint asserts that the acquisition by Santander of SHUSA on January 31, 2009, constituted a “change of control” under the Trust PIERS.

If the acquisition constituted a “change of control” under the definitions applicable to the Trust PIERS, SHUSA would be required to pay a significantly higher rate of interest on subordinated debentures of SHUSA held in trust for the holders of Trust PIERS and the principal amount of the debentures would accrete to $50 per debenture as of the effective date of the “change of control”. There is no “change in control” under the Trust PIERS, among other reasons, if the consideration in the acquisition consisted of shares of common stock traded on a national securities exchange. Santander issued American Depositary Shares in connection with the acquisition which were and are listed on the New York Stock Exchange.

40

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)

(15) COMMITMENTS AND CONTINGENIES (continued)

The complaint asks the court to declare that the acquisition of SHUSA was a “change of control” under the Indenture and seeks damages equal to the interest that the complaint alleges should have been paid by SHUSA for the benefit of holders of Trust PIERS. If the Trustee prevails in the lawsuit, the potential impact on SHUSA as of March 31, 2011, would be a reduction of pre-tax income up to approximately $329 million, of which approximately $277 million relates to the difference in the current carrying amount of the subordinated debentures and the principal amount due at maturity.

SHUSA believes the acquisition by Santander was not a “change of control” and intends to vigorously defend its position against any claims by the Trustee or any holder of Trust PIERS. As we believe no loss is probable, no accrual has been recorded.

Fabrikant & Sons Bankruptcy Adversary Proceeding

In October 2007, the official committee of unsecured creditors of the debtors, M. Fabrikant & Sons (“MFS”) and a related company, Fabrikant-Leer International, Ltd. (“FLI”), filed an adversary proceeding against Sovereign Precious Metals, LLC (“SPM”), a wholly owned subsidiary of Sovereign Bank, and Sovereign Bank in the United States Bankruptcy Court for the Southern District of New York. The proceeding seeks to avoid $22 million in obligations otherwise due to Sovereign (and formerly SPM) with respect to gold previously consigned to debtor by Sovereign. In addition, the adversary proceeding seeks to recover over $9.8 million in payments made to Sovereign by an affiliate of the debtors. Several other financial institutions were named as defendants based upon other alleged fraudulent transfers. Defendants’ motions to dismiss were denied in part and allowed in part. Claims remain against Sovereign for approximately $33 million. As we believe no loss is probable, no accrual has been recorded.

Other

Reference should be made to Note 10 for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service/United States. In addition to the proceedings described above and the litigation described in Note 10 above, SHUSA in the normal course of business is subject to various other pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. We do not anticipate, at the present time, that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material adverse effect on our financial position. However, we cannot now determine whether or not any claims asserted against us, whether in the proceedings specifically described above, the matter described in Note 10 above, or otherwise, will have a material adverse effect on our results of operations in any future reporting period, which will depend on, among other things, the amount of any loss resulting from the claim and the amount of income otherwise reported for the reporting period.

On April 13, 2011, Sovereign Bank consented to the issuance of a Consent Order (the “Order”) by the OTS, its primary federal banking regulator, as part of an interagency horizontal review of foreclosure practices at 14 mortgage servicers. The Order, requires the Bank to take a number of actions, including designating a committee to monitor and coordinate the Bank’s compliance with the provisions of the Order, developing and implementing plans to improve the Bank’s mortgage servicing and foreclosure practices and taking certain other remedial actions. The Bank must also retain an independent consultant to conduct a review of certain foreclosure actions or proceedings for loans serviced by the Bank. The Order will remain in effect until modified or terminated by the OTS, or its successor agencies. The Bank may also be subject to civil money penalties, however the Bank is unable to determine the likelihood or amount of such penalties at this time and accordingly, no accrual has been recorded.

(16) SUBSEQUENT EVENTS

The Company evaluated events from the date of the consolidated financial statements on March 31, 2011 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q.

The Consent Order issued by the OTS on April 13, 2011 is disclosed in Note 15 to the consolidated financial statements.

The public offer and sale of $500 million aggregate principal amount of its 4.625% Senior Notes due in 2016 is disclosed in Note 5 to the consolidated financial statements.

No additional events were identified requiring recognition in and/or disclosure in the consolidated financial statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE SUMMARY

SHUSA provides customers with a broad range of financial products and services through its two primary subsidiaries, Sovereign Bank and Santander Consumer USA (“SCUSA”).

Sovereign Bank is a $76 billion financial institution as of March 31, 2011 with community banking offices, operations and team members located principally in Pennsylvania, Massachusetts, New Jersey, Connecticut, New Hampshire, New York, Rhode Island, and Maryland. Sovereign Bank gathers substantially all of its deposits in these market areas. We use our deposits, as well as other financing sources, to fund our loan and investment portfolios. We earn interest income on our loans and investments. In addition, we generate non-interest income from a number of sources including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance. Our principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. Our volumes, and accordingly our financial results, are affected by the economic environment, including interest rates, consumer and business confidence and spending, as well as the competitive conditions within our geographic footprint.

SCUSA is a specialized consumer finance company engaged in the purchase, securitization, and servicing of retail installment contracts originated by automobile dealers. SCUSA acquires retail installment contracts from manufacturer franchised dealers in connection with their sale of used and new automobiles and trucks primarily to nonprime customers with limited credit histories or past credit problems. SCUSA also purchases retail installment contracts from other companies.

On January 30, 2009, the Company was acquired by Santander. In July 2009, Santander contributed SCUSA, a majority owned subsidiary, into SHUSA.

Our customers select SHUSA for banking and other financial services based on our ability to assist customers by understanding and anticipating their individual financial needs and providing customized solutions. Following the acquisition by Santander, Sovereign Bank began to change its strategy substantially. During 2009 and much of 2010 our primary emphasis was stabilization, a turnaround of the Company and its operating results, by re-aligning various elements of the Santander business model into its reporting structure. The second phase, transformation, has already begun and focuses on creating a sound, sustainable, and competitive franchise.

Successful stabilization efforts included improving risk management and collections, improving our margins and efficiency, and reorganizing to align to Santander business models. Noteworthy accomplishments include a return to positive operating cash flows and profitability in 2010, establishment of a centralized and independent risk management function, implementation of certain pricing and fee assessment changes to our deposit portfolio, implementation of a new sales process across the network while introducing several new products in connection with our Better Banking campaigns, and completion of a significant reduction in workforce, in large part, from consolidating certain back office functions or eliminating certain middle to senior management positions.

Moving forward into the transformation phase, we are focused on longer-term initiatives to continue to build a solid banking franchise.

Growing Corporate Banking is a key priority for Sovereign. Management plans to take a measured and gradual approach to building a strong franchise. Significant Corporate Banking initiatives include strengthening our Large Corporate unit as a competitive provider for large corporate customers, balancing penetration of different Corporate Banking units within Sovereign’s footprint in New England, Metro New York, and the Mid-Atlantic, increasing participation in syndicated and club loans to in-footprint companies, upgrading the technology platform and operational capabilities, and taking advantage of Santander’s global presence by seeking U.S. Transaction Banking business from non-U.S. Santander clients and by offering Santander’s support in other jurisdictions as an enticement to U.S. customers.

Retail Banking efforts will focus on increasing market share in the existing primary service area, cross-selling to existing and new customers, and reducing dependence on third-party service providers. Significant initiatives in Retail Banking will include migrating to Santander’s retail banking platform and subsequent implementation of more robust product applications and MIS, enhancing the online, ATM, and call center platforms, introducing mobile banking and enhanced functionality in the existing electronic banking platform, and developing the capability to issue and service credit cards directly.

42

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CURRENT REGULATORY ENVIRONMENT

On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act”, which is a significant development for the industry. The elements of the act addressing financial stability are largely focused on issues related to systemic risks and capital markets-related activities. The act includes a number of specific provisions designed to promote enhanced supervision and regulation of financial firms and financial markets, protect consumers and investors from financial abuse and provide the government with tools to manage a financial crisis and raise international regulatory standards. The act also introduces a substantial number of reforms that reshape the structure of the regulation of the financial services industry, requiring more than 60 studies to be conducted and more than 200 regulations to be written over the next two years.

The true impact of this legislation to SHUSA and the industry will be unknown until these reforms are complete, although they will involve higher compliance costs. Certain elements, such as the debit interchange legislation, will negatively affect our revenue and earnings; while certain other elements, such as the “Collins Amendment”, will phase in the heightened capital standards by eliminating trust preferred securities as tier 1 regulatory capital for certain financial institutions. Other impacts include increases to the levels of deposit insurance assessments on large insured depository institutions, impacts to the nature and levels of fees charged to consumers, consolidation of regulatory agencies that would impact our primary regulator (the Office of Thrift Supervision), changes to the types of derivative activities that Sovereign Bank and other insured depository institutions may conduct, and other increases to capital, leverage and liquidity requirements for banks and bank holding companies. Financial institutions deemed to be systemically important (generally defined as financial institutions, similar to SHUSA, with greater than $50 billion in total assets) will be subject to additional supervision and requirements to develop resolution plans for potential economic and market events that could have a significant negative impact on their business. These changes could impact the future profitability and growth of SHUSA.

In the fourth quarter of 2009, The Federal Reserve Board (FRB) announced regulatory changes to debit card and ATM overdraft practices that were effective July 1, 2010. These changes prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. These changes will continue to have an impact that could be material to our consumer banking fee revenue. The actual impact could vary due to a variety of factors, including changes in customer behavior.

On December 16, 2010, the Basel Committee on Banking Supervision issued “Basel III: A global regulatory framework for more resilient banks and banking systems” (Basel III). Basel III is a comprehensive set of reform measures designed to strengthen the regulation, supervision and risk management of the banking sector. The Basel III rules do not apply to U.S. banks or holding companies automatically. If implemented by U.S. regulators as proposed, Basel III would significantly increase the capital required to be held by the Company and narrow the types of instruments which would qualify as providing appropriate capital.

FORECLOSURE MATTERS

On April 13, 2011, Sovereign Bank consented to the issuance of a Consent Order (the “Order”) by the OTS, its primary federal banking regulator, as part of an interagency horizontal review of foreclosure practices at 14 mortgage servicers. The Order, requires the Bank to take a number of actions, including designating a committee to monitor and coordinate the Bank’s compliance with the provisions of the Order, developing and implementing plans to improve the Bank’s mortgage servicing and foreclosure practices and taking certain other remedial actions. The Bank must also retain an independent consultant to conduct a review of certain foreclosure actions or proceedings for loans serviced by the Bank. On its own initiative in October 2010, the Bank began a comprehensive review of its foreclosure processes. Based on the results of that review, the Bank took corrective action to address deficiencies in its mortgage foreclosure practices and is in the process of implementing additional measures to address the issues raised in the Order. The Company estimates that it and the Bank will incur costs of approximately $12 million relating to compliance with the Order, including expenses for consultants, additional staffing and legal expenses. The Company and the Bank may incur further expenses related to compliance with the Order.

The Order will remain in effect until modified or terminated by the OTS, or its successor agencies. Any material failure to comply with the provisions of the Order could result in enforcement actions by the OTS, or its successor agencies. While the Bank intends to take such actions as may be necessary to enable the Bank to comply fully with the provisions of the Order, and the Bank is currently aware of no impediment to achieving full compliance with the Order, there can be no assurance that the Bank will be able to comply fully with the provisions of the Order, or to do so within the timeframes required, or that compliance with the Order will not be more time consuming, more expensive, or require more managerial time than anticipated. The Bank may also be subject to civil money penalties, however the Bank is unable to determine the likelihood or amount of such penalties at this time, and accordingly, no accrual has been recorded.

43

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We considered the potential impact on future servicing costs to our mortgage servicing rights (MSR) valuations in connection with the Order and determined that no further impairment currently exists.

CREDIT RISK ENVIRONMENT

Although market conditions have steadily improved since the second half of 2009, unemployment in the United States continues to remain near historically high levels, and conditions are expected to remain challenging for financial institutions in 2011. Conditions in the housing market have been difficult over the past few years and there was a significant tightening of available credit in the marketplace. Declining real estate values and financial stress on borrowers resulted in elevated levels of delinquencies and charge-offs. The unprecedented steps taken by the U.S. Government in late 2008 and early 2009 along with similar stimulative actions taken by governments around the world, resulted in improved liquidity in the capital markets and market conditions improved materially in the second half of 2009.

The credit quality of our loan portfolio has a significant impact on our operating results. We continue to experience overall credit quality improvement including signs of improvement in our commercial and consumer portfolios beginning in 2010 and continuing into 2011. We had net charge-offs of $246.7 million during the three months ended March 31, 2011 compared to $343.7 million during the corresponding period in the prior year. Net charge-offs related to SCUSA for three-month period ended March 31, 2011 were $97.5 million compared to $125.5 million for the three-month period ended March 31, 2010. Our provision for credit losses was $307.8 million during the three months ended March 31, 2011 compared to $412.7 million during the corresponding period in the prior year.

The allowance for loan losses remained steady at $2.2 billion at March 31, 2011 and December 31, 2010 while total loans held for investment increased to $66.5 billion from $65.0 billion for the same respective periods. The increase in loans held for investment is primarily attributable to a $1.7 billion loan acquisition during the first quarter of 2011.

Conditions in the housing market have significantly impacted areas of our business. Certain segments of our consumer and commercial loan portfolios have exposure to the housing market. Total residential real estate loans increased to $11.6 billion at March 31, 2011 from $11.2 billion at December 31, 2010, while Alt-A residential real estate loans (also known as limited documentation) decreased to $1.8 billion from $2.1 billion over the same respective period. Credit losses on our Alt-A residential real estate loans have decreased year-over-year and totaled $7.5 million during the three-month period ended March 31, 2011 compared to $9.0 million for the corresponding period in the prior year. Future performance of our residential loan portfolio will continue to be significantly influenced by home prices in the residential real estate market, unemployment and general economic conditions.

The homebuilder industry also has been impacted by difficult new home sales volumes and values of residential real estate which has impacted the profitability and liquidity of these companies. Declines in real estate prices have been the most pronounced in certain states where previous increases were the largest, such as California, Florida and Nevada. Additionally, heightened foreclosure volumes have continued in various other areas due to the generally challenging economic environment and levels of unemployment. SHUSA provided financing to various homebuilder companies which is included in our commercial loan portfolio. The Company has been working on reducing its exposure to this loan portfolio which has resulted in it declining to $151.7 million at March 31, 2011 compared to $439.6 million a year ago. At March 31, 2011, the entire homebuilder loan portfolio lies in our geographic footprint which generally has had more stable economic conditions on a relative basis compared to the national economy. We will continue to monitor the credit quality of this portfolio in future periods given the recent market conditions and determine the impact, if any, on the allowance for loan losses related to these homebuilder loans.

We have seen signs of stabilization in non-performing assets in our residential loan portfolio. Non-performing assets for this portfolio decreased for the fourth consecutive quarter to $578.9 million at March 31, 2011, and are comparable to December 31, 2010 levels of $602.0 million. We expect that the difficult housing environment as well as the overall challenging economic conditions will continue to impact our residential portfolio.

Sovereign Bank also has $6.9 billion of home equity loans and lines of credit at March 31, 2011 compared to $7.0 billion at December 31, 2010. The majority of this portfolio consists of loans with an average FICO at origination of 782 and an average loan to value of 55.1%. We have total non-performing loans of $121.8 million for this loan portfolio at March 31, 2011 compared to non-performing loans of $125.3 million at December 31, 2010.

44

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SHUSA has $18.9 billion of auto and other consumer loans at March 31, 2011, compared to $17.8 billion at December 31, 2010, of which approximately $1.7 billion were purchased by Sovereign Bank from third parties during the three months ended March 31, 2011. Our non-performing auto and other consumer loans decreased to $400.0 million at March 31, 2011 from $592.7 million at December 31, 2010.

As previously stated, SCUSA’s target customer base is focused on individuals with past credit problems. The current FICO distribution for its $15.5 billion loan portfolio is as follows.

FICO Band	% of Portfolio
> 650		20	%
650-601		28	%
600-551		28	%
550-501		16	%
<=500		8	%

Although credit loss rates on this portfolio are elevated (3.86% during 2010 and 2.49% for the three-month period ended March 31, 2011), the pricing on the portfolios contemplates this as gross loan yields for SCUSA’s portfolio were 16.44% for the three-month period ended March 31, 2011.

In the three-month period ended March 31, 2011 non-performing asset loans in each of our commercial portfolios declined. Commercial real estate non-performing loans decreased to $569.2 million at March 31, 2011 from $653.2 million at December 31, 2010. Non-performing multi-family loans decreased to $199.7 million at March 31, 2011 from $224.7 million at December 31, 2010, and non-performing other commercial loans decreased to $461.4 million at March 31, 2011 from $528.3 million at December 31, 2010.

CURRENT INTEREST RATE ENVIRONMENT

Net interest income represents a significant portion of the Company’s revenues. Accordingly, the interest rate environment has a substantial impact on SHUSA’s earnings. The Company currently is in an asset sensitive interest rate risk position. During the first three months of 2011, our net interest margin increased to 5.02% from 4.35% in the three months ended March 31, 2010. This increase in margin is primarily attributable to the changing interest rate environment combined with a mix shift from higher cost wholesale deposits to lower cost retail deposits. These actions have improved Sovereign Bank’s net interest margin from 2.81% in the first quarter of 2010 to 2.99% in the first quarter of 2011. Net interest margin in future periods will be impacted by several factors such as but not limited to, our ability to grow and retain core deposits, the future interest rate environment, loan and investment prepayment rates, and changes in non-accrual loans. See our discussion of Asset and Liability Management practices in a later section of this MD&A, including the estimated impact of changes in interest rates on SHUSA’s net interest income.

RECENT INDUSTRY CONSOLIDATION

We believe the acquisition by Santander strengthened our financial position and enabled us to execute our strategy of focusing on our core retail and commercial customers in our geographic footprint. The banking industry has experienced significant consolidation in recent years, which is likely to continue in future periods. Consolidation may affect the markets in which SHUSA operates as new or restructured competitors integrate acquired businesses, adopt new business practices or change product pricing as they attempt to maintain or grow market share. Recent merger activity involving national, regional and community banks and specialty finance companies in the Northeastern United States, have affected the competitive landscape in the markets we serve. Management continually monitors the environment in which it operates to assess the impact of the industry consolidation on SHUSA, as well as the practices and strategies of our competitors, including loan and deposit pricing, customer expectations and the capital markets.

RESULTS OF OPERATIONS

General

SHUSA reported pre-tax income of $493.8 million for the three months ended March 31, 2011, compared to $134.8 million for the three months ended March 31, 2010. Results for the three months ended March 31, 2011 were favorably impacted by $61.9 million of investments security gains and residential and multi-family servicing right recoveries of $6.2 million. Results for the three months ended March 31, 2010 included $26.3 million of investment security gains and residential and multi-family servicing right recoveries of $15.1 million. Additionally, interest on loans and consumer fee income increased $192.2 million and $81.2 million, respectively, from the same period one year ago due to $8.0 billion of loans acquired by SCUSA during the latter half of 2010 and $1.7 billion of loans acquired by Sovereign Bank during the first quarter of 2011.

45

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT NET INTEREST MARGIN ANALYSIS
THREE-MONTH PERIOD ENDED MARCH 31, 2011 AND 2010
(in thousands)

	2011								2010
				Tax								Tax
	Average			Equivalent		Yield/			Average			Equivalent		Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
EARNING ASSETS									��
INVESTMENTS	$	15,700,896		$	125,453		3.20	%	$	15,265,030		$	126,021		3.30	%
LOANS:
Commercial loans		22,264,938			227,006		4.12	%		24,168,740			266,408		4.46	%
Multi-family		6,811,248			87,912		5.20	%		5,260,750			72,707		5.55	%
Consumer loans
Residential mortgages		11,493,726			131,352		4.57	%		11,079,683			139,626		5.04	%
Home equity loans and lines of credit		6,971,252			67,092		3.90	%		7,047,618			72,905		4.19	%
Total consumer loans secured by real estate		18,464,978			198,444		4.32	%		18,127,301			212,531		4.71	%
Auto loans		17,223,851			638,872		15.04	%		10,527,066			458,496		17.66	%
Other		1,881,391			53,834		11.60	%		259,986			4,450		6.94	%
Total consumer		37,570,220			891,150		9.60	%		28,914,353			675,477		9.45	%
Total loans		66,646,406			1,206,068		7.32	%		58,343,843			1,014,592		7.03	%
Allowance for loan losses		(2,202,809	)		—		—			(1,849,661	)		—		—
NET LOANS		64,443,597			1,206,068		7.57	%		56,494,182			1,014,592		7.26	%
TOTAL EARNING ASSETS		80,144,493			1,331,521		6.71	%		71,759,212			1,140,613		6.42	%
Other assets		11,538,626			—		—			11,300,784			—		—
TOTAL ASSETS	$	91,683,119		$	1,331,521		5.87	%	$	83,059,996		$	1,140,613		5.54	%
FUNDING LIABILITIES
Deposits and other customer related accounts:
Retail and commercial deposits	$	31,771,246		$	53,048		0.68	%	$	30,332,643		$	58,936		0.79	%
Wholesale deposits		1,867,003			2,162		0.47	%		1,801,404			6,539		1.47	%
Government deposits		1,945,388			1,804		0.38	%		2,164,142			1,870		0.35	%
Customer repurchase agreements		1,694,662			1,268		0.30	%		1,711,910			947		0.22	%
TOTAL DEPOSITS		37,278,299			58,282		0.63	%		36,010,099			68,292		0.77	%
BORROWED FUNDS:
FHLB advances		10,582,628			111,549		4.26	%		11,619,886			141,057		4.90	%
Fed funds and repurchase agreements		3,202,961			3,399		0.43	%		1,606,921			781		0.20	%
Other borrowings		18,573,440			163,966		3.56	%		15,024,072			158,373		4.24	%
TOTAL BORROWED FUNDS		32,359,029			278,914		3.48	%		28,250,879			300,211		4.28	%
TOTAL FUNDING LIABILITIES		69,637,328			337,196		1.96	%		64,260,978			368,503		2.31	%
Demand deposit accounts		7,149,476			—		—			7,071,465			—		—
Other liabilities		3,422,329			—		—			1,949,995			—		—
TOTAL LIABILITIES		80,209,133			337,196		1.70	%		73,282,438			368,503		2.03	%
STOCKHOLDER’S EQUITY		11,473,986			—		—			9,777,558			—		—
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	91,683,119			337,196		1.49	%	$	83,059,996			368,503		1.79	%
NET INTEREST INCOME				$	994,325							$	772,110
NET INTEREST SPREAD (1)							4.76	%							4.10	%
NET INTEREST MARGIN (2)							5.02	%							4.35	%

(1)	Represents the difference between the yield on total earning assets and the cost of total funding liabilities.
(2)	Represents annualized, taxable equivalent net interest income divided by average interest-earning assets.

46

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net Interest Income

Net interest income for the three-month period ended March 31, 2011 was $982.4 million compared to $757.8 million for the same period in 2010. SCUSA generated net interest income of $546.6 million for the three-month period ended March 31, 2011 compared to $359.2 million for the same period in the corresponding year, due primarily to growth in average earning assets at SCUSA. Excluding SCUSA, net interest income increased to $435.8 million for the three-month period ended March 31, 2011, compared to $398.5 million for the same period in the corresponding period in the prior year.

Interest on investment securities and interest earning deposits was $116.2 million for the three-month period ended March 31, 2011, compared to $115.0 million for the same period in 2010. The average balance of investment securities was $15.7 billion with an average tax equivalent yield of 3.20% for the three-month period ended March 31, 2011 compared to an average balance of $15.3 billion with an average yield of 3.30% for the same period in 2010.

Interest on loans was $1,203.4 million for the three-month period ended March 31, 2011, compared to $1,011.2 million for the three-month period in 2010. Average loan balances for the three-month period ended March 31, 2011 increased to $66.6 billion from $58.3 billion for the same period in the corresponding year and yields increased to 7.32% for the three-month period ended March 31, 2011 compared to 7.03% for the corresponding period in the prior year. These increases are driven by $8.0 billion of loans acquired by SCUSA during the latter half of 2010 and $1.7 billion of loans acquired by Sovereign Bank during the first quarter of 2011.

Interest on deposits and related customer accounts was $58.3 million for the three-month period ended March 31, 2011, compared to $68.3 million for the same period in 2010. The average balance of deposits was $37.3 billion with an average cost of 0.63% for the three-month period ended March 31, 2011 compared to an average balance of $36.0 billion with an average cost of 0.77% for the same period in 2010. The reduction in yields has been due to repricing efforts on promotional time deposit accounts from the prior year and decreases in market interest rates. The average balance of non-interest bearing demand deposits remained steady at $7.1 billion for the three-month period ended March 31, 2011 and for the corresponding period in 2010.

Interest on borrowed funds was $278.9 million for the three-month period ended March 31, 2011, compared to $300.2 million for the same period in 2010. The average balance of borrowings was $32.4 billion with an average cost of 3.48% for the three-month period ended March 31, 2011 compared to an average balance of $28.3 billion with an average cost of 4.28% for the same period in 2010. The increase in borrowing levels is due to SCUSA asset earning growth which has been funded with increased borrowings.

Provision for Credit Losses

The provision for credit losses is based upon credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the current loan portfolio. The provision for credit losses for the three-month period ended March 31, 2011 was $307.8 million, compared to $412.7 million for the same period in 2010. Credit losses, while showing signs of stabilizing, remain elevated given recent economic weakness and high unemployment levels which has negatively impacted the credit quality of our loan portfolios.

Non-performing assets were $2.5 billion or 2.75% of total assets at March 31, 2011, compared to $2.9 billion or 3.29% of total assets at December 31, 2010 and $3.1 billion or 3.74% of total assets at March 31, 2010. The decreases from the December 2010 period were primarily driven by our commercial and auto loan portfolios. The decreases from the March 2010 period were primarily driven by our commercial loan portfolios. Future changes to delinquency and non performing assets levels will have a significant impact on our financial results. Management regularly evaluates SHUSA’s loan portfolios, and its allowance for loan losses, and adjusts the loan loss allowance as deemed necessary.

47

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table presents the activity in the allowance for credit losses for the periods indicated:

	Three-Month Period
	Ended March 31,
	2011		2010
Allowance for loan losses, beginning of period	$	2,197,450	$	1,818,224
Allowance established in connection with reconsolidation of previously unconsolidated securitized assets		—		25,644
Charge-offs:
Commercial		112,339		174,604
Consumer		218,045		258,373
Total Charge-offs		330,384		432,977
Recoveries:
Commercial		6,900		9,880
Consumer		76,834		79,393
Total Recoveries		83,734		89,273
Charge-offs, net of recoveries		246,650		343,704
Provision for loan losses (1)		256,547		432,196
Allowance for loan losses, end of period		2,207,347		1,932,360
Reserve for unfunded lending commitments, beginning of period		300,621		259,140
Provision for unfunded lending commitments (1)		51,225		(19,489	)
Reserve for unfunded lending commitments, end of period		351,846		239,651
Total allowance for credit losses, end of period	$	2,559,193	$	2,172,011

(1) The provision for credit losses on the consolidated statement of operations is the sum of the total provision for loan losses and provision for unfunded lending commitments.

Non-Interest Income

Total non-interest income was $312.2 million for the three-month period ended March 31, 2011, compared to $202.6 million for the same period in 2010. The three-month period ended March 31, 2011 includes $61.9 million of gains on the sale of investment securities and $6.2 million gain from changes in residential and multi-family MSR impairment reserves.

Consumer banking fees were $172.9 million for the three-month period ended March 31, 2011, compared to $91.6 million for the same period in 2010, representing an increase of 88.7%. The increase for the three-month period ended March 31, 2011 is due to growth in consumer loan fees which increased $86.0 million during the twelve-month period ended March 31, 2011 due to growth in the SCUSA loan portfolio. Consumer banking fees for the three-month period ended March 31, 2011 also reflect the impact of reduced overdraft fee revenues due to regulatory changes that took effect on August 15, 2010.

Commercial banking fees were $44.6 million for the three-month period ended March 31, 2011, compared to $45.6 million for the same period in 2010, representing a decrease of 2.2%. The Company has been able to maintain its commercial fee levels in spite of declining commercial loan balances due to pricing changes on its commercial deposit and loan portfolios.

Net mortgage banking income was composed of the following components:

	Three Months Ended
	March 31,
	2011			2010
Sales of mortgage loans and related securities	$	5,682		$	8,325
Net losses on hedging activities		(3,489	)		(1,433	)
Mortgage servicing fees		12,843			13,539
Amortization of mortgage servicing rights		(11,161	)		(15,306	)
Residential mortgage servicing rights recoveries		1,682			14,689
Sales and changes to recourse reserves of multi-family loans		(449	)		(542	)
Multi-family mortgage servicing rights recoveries		4,486			401
Total mortgage banking income	$	9,594		$	19,673

48

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Mortgage banking income/(losses) consists of fees associated with servicing loans not held by SHUSA, as well as amortization and changes in the fair value of mortgage servicing rights and recourse reserves. Mortgage banking results also include gains or losses on the sales of mortgage, home equity loans and lines of credit and multi-family loans and mortgage-backed securities that were related to loans originated or purchased and held by SHUSA, as well as gains or losses on mortgage banking derivative and hedging transactions. Mortgage banking derivative instruments include principally interest rate lock commitments and forward sale commitments.

Sales of mortgage loans have increased for the three-month period ended March 31, 2011 compared to March 31, 2010. Although the percentage of production being sold was consistent in both periods, new loan volumes were 33% higher in 2011 than in 2010. For the three-month period ended March 31, 2011, SHUSA sold $333.7 million of loans at a gain of $5.7 million, compared to $251.1 million of loans at a gain of $8.3 million in the corresponding period in the prior year.

As of March 31, 2011, Sovereign Bank services approximately 157,000 residential mortgage loans and has approximately 3,200 residential mortgage loans in the process of foreclosure. The average number of mortgage and home equity foreclosures initiated monthly for loans serviced by Sovereign Bank and third parties is approximately 280 and 340, of approximately 289,000 and 290,000 total mortgage and home equity loans serviced by Sovereign Bank and third parties for the twelve-month periods ended March 31, 2011 and December 31, 2010, respectively.

At March 31, 2011 and December 31, 2010, SHUSA serviced residential real estate loans for the benefit of others totaling $14.5 billion for and $14.7 billion, respectively. The fair value of the servicing portfolio at March 31, 2011 and December 31, 2010 was $147.8 million and $148.7 million, respectively. For the three months ended March 31, 2011, SHUSA recorded recoveries of $1.7 million on our mortgage servicing rights resulting from slower than expected prepayments on our residential mortgage portfolio. The most important assumptions in the valuation of mortgage servicing rights are anticipated loan prepayment rates (CPR) and the positive spread received for holding escrow related balances. Increases in prepayment speeds (which are generally driven by lower long term interest rates) result in lower valuations of mortgage servicing rights, while lower prepayment speeds result in higher valuations. The escrow related credit spread is the estimated reinvestment yield earned on the serviced loan escrow deposits. Increases in escrow related credit spreads result in higher valuations of mortgage servicing rights while lower spreads result in lower valuations. For each of these items, SHUSA must make market assumptions based on future expectations. All of the assumptions are based on standards that we believe would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources. Additionally, an independent appraisal of the fair value of our mortgage servicing rights is obtained annually and is used by management to evaluate the reasonableness of our discounted cash flow model. Future changes to prepayment speeds may cause significant future charges or recoveries of previous impairments in future periods.

Listed below are the most significant assumptions that were utilized by SHUSA in its evaluation of mortgage servicing rights for the periods presented.

	March 31, 2011			December 31, 2010			March 31, 2010			December 31, 2009
CPR		16.49	%		16.82	%		21.56	%		24.44	%
Escrow credit spread		2.40	%		2.41	%		3.06	%		3.17	%

SHUSA will periodically sell qualifying mortgage loans to FHLMC, Government National Mortgage Association (“GNMA”) and FNMA in return for mortgage-backed securities issued by those agencies. The Company reclassifies the net book balance of the loans sold to such agencies from loans to investment securities available for sale. For those loans sold to the agencies in which SHUSA retains servicing rights, the Company allocates the net book balance transferred between servicing rights and investment securities based on their relative fair values.

SHUSA previously sold multi-family loans in the secondary market to Fannie Mae while retaining servicing. Under the terms of the sales program with Fannie Mae, we retain a portion of the credit risk associated with such loans. As a result of this agreement with Fannie Mae, SHUSA retains a 100% first loss position on each multi-family loan sold to Fannie Mae under such program until the earlier to occur of (i) the aggregate losses on the multi-family loans sold to Fannie Mae reaching the maximum loss exposure for the portfolio as a whole ($217.7 million as of March 31, 2011) or (ii) until all of the loans sold to Fannie Mae under this program are fully paid off. The maximum loss exposure is available to satisfy any losses on loans sold in the program subject to the foregoing limitations. In September 2009, the Bank elected to stop selling multi-family loans to Fannie Mae and since that time has retained all production for the loan portfolio.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company has established a liability related to the fair value of the retained credit exposure for loans sold to Fannie Mae. This liability represents the amount that the Company estimates that it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses that the portfolio is projected to incur based upon an industry-based default curve with a range of estimated losses. At March 31, 2011 and December 31, 2010, SHUSA had a $150.6 million and $171.7 million liability related to the fair value of the retained credit exposure for loans sold to Fannie Mae under this sales program.

At March 31, 2011 and December 31, 2010, SHUSA serviced $10.8 billion and $11.2 billion, respectively, of loans for Fannie Mae that had been sold to Fannie Mae pursuant to this program with a maximum potential loss exposure of $217.7 million and $217.9 million, respectively. As a result of this retained servicing on multi-family loans sold to Fannie Mae, the Company had loan servicing assets of $2.4 million and $3.7 thousand at March 31, 2011 and December 31, 2010, respectively. During the three-month period ended March 31, 2011 and the corresponding period in the prior year, SHUSA recorded servicing asset amortization of $2.1 million and $2.4 million, respectively. Additionally, during the first three months of 2011, SHUSA recorded a net servicing right asset recovery of $4.5 million, compared to a net recovery of $0.4 million in the corresponding period in the prior year.

Capital markets revenues were $6.4 million for the three-month period ended March 31, 2011, compared to $4.4 million for the same period in 2010.

Bank owned life insurance (BOLI) income represents the increase in the cash surrender value of life insurance policies for certain employees where the Bank is the beneficiary of the policies, as well as the receipt of insurance proceeds. The increase in BOLI income to $13.9 million for the three-month period ended March 31, 2011, compared to $13.5 million for the comparable period in the prior year is due primarily to increased death benefits as well as lower returns on certain polices.

Net gains on investment securities were $61.9 million for the three-month period ended March 31, 2011, compared to net gains of $26.3 million for the same period in 2010. See Note 2 for further discussion.

General and Administrative Expenses

General and administrative expenses for the three-month period ended March 31, 2011 were $452.8 million, compared to $362.9 million for the same period in 2010. This increase was due primarily to increased compensation and benefit expenses and increased loan expenses at SCUSA due to additional employee count and additional servicing fees resulting from 2010 acquisition activity. Additional increases relate to additional employee count and the reinstatement of personnel benefits at Sovereign Bank. From June 2009 to June 2010, the Company ceased matching employee contributions. In July 2010, the Company resumed matching 100% of employee contributions up to 3% of their compensation and then 50% of employee contributions between 3% and 5%.

Other Expenses

Other expenses consist primarily of amortization of intangibles, deposit insurance expense, merger related and integration charges, equity method investment expense and other restructuring and proxy and related professional fees. Other expenses were $40.3 million for the three-month period ended March 31, 2011, compared to $49.9 million for the same period in 2010.

SHUSA recorded intangible amortization expense of $13.8 million for the three-month period ended March 31, 2011, compared to $16.8 million for the corresponding period in the prior year. The decrease in the current year period is due primarily to decreased core deposit intangible amortization expense on previous acquisitions.

Income Tax Provision/(Benefit)

An income tax provision of $176.7 million was recorded for the three-month period ended March 31, 2011, compared to $41.7 million for the same period in 2010 resulting in an effective tax rate of 35.79% in the three-months ended March 31, 2011 compared to 30.91% in 2010.

The Company is subject to the income tax laws of the United States, its states and municipalities as well as certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws.

50

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. SHUSA reviews its tax balances quarterly and as new information becomes available, the balances are adjusted, as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions. On June 17, 2009, SHUSA filed a lawsuit against the United States in Federal District Court seeking a refund of assessed taxes paid for tax years 2003-2005 related to two separate financing transactions with an international bank totaling $1.2 billion. As a result of these two financing transactions, SHUSA was subject to foreign taxes of $154.0 million during the years 2003 through 2005 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the IRS disallowed. The IRS also disallowed SHUSA’s deductions for interest expense and transaction costs, totaling $24.9 million in tax liability, and assessed interest and penalties totaling approximately $70.8 million. In 2006 and 2007, SHUSA was subject to an additional $87.6 million and $22.5 million of foreign taxes, respectively, as a result of the two financing transactions, and SHUSA’s entitlement to foreign tax credits in these amounts will be determined by the outcome of the 2003-2005 litigation. In addition, the outcome of the litigation will determine whether SHUSA is subject to additional tax liability of $37.1 million related to interest expense and transaction cost deductions, and whether SHUSA will be subject to interest and penalties for 2006 and 2007. The audit for 2006-2007 is currently winding up and is expected to close this year. SHUSA continues to believe that it is entitled to claim these foreign tax credits taken with respect to the transactions and also continues to believe it is entitled to tax deductions for the related issuance costs and interest deductions based on tax law. SHUSA maintains its tax reserve at $96.7 million as of March 31, 2011. SHUSA believes this reserve amount adequately provides for any potential exposure to the IRS related to these items. However, as the Company continues to go through the litigation process, we will continue to evaluate the appropriate tax reserve levels for this position and any changes made to the tax reserves may materially affect SHUSA’s income tax provision, net income and regulatory capital in future periods.

Line of Business Results

The Company’s segments are focused principally around the customers SHUSA serves. The Retail Banking segment is primarily comprised of our branch locations and our residential mortgage business. Our branches offer a wide range of products and services to customers and each attracts deposits by offering a variety of deposit instruments including demand and NOW accounts, money market and savings accounts, certificates of deposits and retirement savings products. Our branches also offer certain consumer loans such as home equity loans and other consumer loan products. It also provides business banking loans and small business loans to individuals. Finally our residential mortgage business reports into our head of Retail Banking. Our Specialized Business segment is primarily comprised of leases to commercial customers, our New York multi-family and national commercial real estate lending group, our automobile dealer floor plan lending group and our indirect automobile lending group. The Corporate segment (formerly known as Middle Market) provides the majority of Sovereign Bank’s commercial lending platforms such as commercial real estate loans and commercial industrial loans and also contains the Company’s related commercial deposits. SCUSA is a specialized consumer finance company engaged in the purchase, securitization, and servicing of retail installment contracts originated by automobile dealers and direct origination of retail installment contracts over the internet. The Global Banking segment (included in the Other category prior to the third quarter of 2010) includes business with large corporate domestic and foreign clients which have larger loan sizes than commercial clients of Sovereign prior to 2009. The Other category includes earnings from the investment portfolio (excluding any investments purchased by SCUSA), interest expense on Sovereign Bank’s borrowings and other debt obligations (excluding any borrowings held by SCUSA), amortization of intangible assets and certain unallocated corporate income and expenses.

For segment reporting purposes, SCUSA continues to be managed as a separate business unit with its own systems and processes. With the exception of this segment, SHUSA’s segment results are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense to each of our segments. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept. The provision for credit losses recorded by each segment is based on the net charge-offs of each line of business and changes in specific reserve levels for loans in the segment and the difference between the provision for credit losses recognized by the Company on a consolidated basis and the provision recorded by the business line recorded in the Other category. Other income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct expenses as well as certain allocated corporate expenses are accounted for within each segment’s financial results. Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Where practical, the results are adjusted to present consistent methodologies for the segments.

51

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Retail Banking segment net interest income increased $12.3 million to $191.4 million for the three-month period ended March 31, 2011 compared to the corresponding period in the preceding year, due to increased earnings resulting from the $1.7 billion of loans acquired during the first quarter of 2011. The average balance of loans was $23.4 billion for the three months ended March 31, 2011 compared to an average balance of $21.8 billion for the corresponding period in the preceding year. The average balance of deposits was $35.8 billion for the three months ended March 31, 2011, compared to $35.0 billion for the same period a year ago. The provision for credit losses increased $1.4 million for the three months ended March 31, 2011 and is driven by increased allowance allocations for the division’s loan portfolio. Provision levels have been at elevated levels since the third quarter of 2008 due to increasing high levels of unemployment. General and administrative expenses totaled $254.4 million for the three months ended March 31, 2011, compared to $238.9 million for the three months ended March 31, 2010. The increase in general and administrative expenses is due to increased compensation and benefit expense within the retail banking division resulting from higher headcount and the reinstatement of personnel benefits at Sovereign Bank during July 2010.

The Specialized Business segment net interest income increased $10.3 million to $73.6 million for the three-month period ended March 31, 2011 compared to the corresponding period in the preceding year. The net spread on a match funded basis for this segment was 1.8% for the first three months of 2011 compared to 1.52% for the same period in the prior year. The average balance of loans for the three-month period ended March 31, 2011 was $14.5 billion compared with $14.4 billion for the corresponding period in the prior year. Fees and other income/(losses) were $14.0 million for the three-month period ended March 31, 2011 compared to $9.1 million for the corresponding period in the prior year. The provision for credit losses increased $4.2 million to $83.4 million for the three months ended March 31, 2011 due to a higher level of specific reserves. General and administrative expenses totaled $10.4 million for the three months ended March 31, 2011, compared to $9.2 million for the three months ended March 31, 2010.

The Corporate segment net interest income decreased $12.5 million to $77.1 million for the three-month period ended March 31, 2011 compared to the corresponding period in the preceding year. The net spread on a match funded basis for this segment was 1.9% for the first three months of 2011 compared to 2.0% for the same period in the prior year. The average balance of loans for the three months ended March 31, 2011 was $10.9 billion compared with $12.8 billion for the corresponding period in the prior year. The provision for credit losses decreased $20.1 million to $35.8 million for the three months ended March 31, 2011 due to a decrease in specific reserve allocations on certain segments within our commercial loan portfolio. General and administrative expenses (including allocated corporate and direct support costs) were $35.8 million for the three months ended March 31, 2011 compared with $35.2 million for the corresponding period in the prior year.

The Global Banking segment net interest income increased $8.7 million to $11.8 million for the three-month period ended March 31, 2011 compared to the corresponding period in the preceding year. The net spread on a match funded basis for this segment was 1.75% for the first three months of 2011 compared to 2.1% for the same period in the prior year. The average balance of loans for the three months ended March 31, 2011 was $2.1 billion compared with $377.2 million for the corresponding period in the prior year. General and administrative expenses (including allocated corporate and direct support costs) were $3.5 million for the three months ended March 31, 2011 compared with $3.7 million for the corresponding period in the prior year.

The SCUSA segment net interest income increased $187.4 million to $546.6 million for the three-month period ended March 31 2011, compared to the corresponding period in the preceding year, due to increased earnings resulting from the 2010 acquisitions. The average balance of loans for the three months ended March 31, 2011 was $15.6 billion compared with $8.1 billion for the corresponding period in the prior year and the yield on the loan portfolio for the three month period ended March 31, 2011 was 16.44% compared to 21.28% for the corresponding period in the prior year. Average borrowings for the three-month period ended March 31, 2011 were $13.6 billion with an average cost of 2.72%, compared to $7.7 billion with an average cost of 3.62% in the preceding year. The provision for credit losses was $121.7 million for the three months ended March 31, 2011 compared to $205.7 million for the three months ended March 31, 2010. General and administrative expenses totaled $144.9 million for the three months ended March 31, 2011, compared to $73.1 million for the three months ended March 31, 2010. SCUSA continues to remain profitable due to aggressive pricing on its loan portfolio, favorable financing costs and adequate sources of liquidity which in a large part is attributable to its relationship with Santander. Additionally, SCUSA’s successful servicing and collection practices have enabled them to maximize cash collections on their portfolio. Future profitability levels will depend on controlling credit losses and continuing to be able to effectively price its portfolio. SCUSA’s business has also been favorably impacted by the fact that certain competitors have exited the subprime auto market.

Income before income taxes for Other increased $39.5 million to $116.1 million for the three months ended March 31, 2011 compared to the corresponding periods in the preceding year. Net interest income increased $18.6 million to $82.0 million for the three months ended March 31, 2011 compared to the corresponding period in the preceding year due primarily to borrowing yields decreasing 51 basis points for the three-month period ended March 31, 2011. Average borrowings for the three-month period ended March 31, 2011 and 2010 were $18.8 billion and $20.6 billion, respectively, with an average cost of 4.02% and 4.53%.

52

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the December 31, 2010 consolidated financial statements filed on 2010 Form 10-K. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. We have identified accounting for the allowance for loan losses, derivatives, income taxes and goodwill as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis and the December 31, 2010 Management’s Discussion and Analysis filed in our 2010 Form 10-K.

A discussion of the impact of new accounting standards issued by the FASB and other standard setters are included in Note 13 to the consolidated financial statements.

FINANCIAL CONDITION

Loan Portfolio

At March 31, 2011, commercial loans totaled $22.2 billion representing 33.4% of SHUSA’s loan portfolio, compared to $22.4 billion, or 34.4% of the loan portfolio, at December 31, 2010 and $23.7 billion, or 40.4% of the loan portfolio, at March 31, 2010. At March 31, 2011 and December 31, 2010, only 15% and 13%, respectively, of our total commercial portfolio was unsecured. The ability for SHUSA to originate commercial loans to credit worthy customers in recent quarters has been limited due to challenging economic conditions which has resulted in reduced loan demand as corporate borrowers are being more cautious about increasing their Company’s debt obligations.

At March 31, 2011, multi-family loans totaled $6.9 billion representing 10.4% of SHUSA’s loan portfolio, compared to $6.7 billion, or 10.3% of the loan portfolio, at December 31, 2010 and $5.4 billion or 9.2% of the loan portfolio at March 31, 2010. The increase in multi-family loans is due to the Company’s decision not to sell any multi-family loan production during 2010 in order to increase the percentage of our assets in this lower risk asset class.

The consumer loan portfolio secured by real estate (consisting of home equity loans and lines of credit of $6.9 billion and residential loans of $11.6 billion) totaled $18.6 billion at March 31, 2011, representing 27.9% of SHUSA’s loan portfolio, compared to $18.2 billion, or 27.9%, of the loan portfolio at December 31, 2010 and $18.1 billion or 30.8% of the loan portfolio at March 31, 2010. SHUSA entered into a credit default swap in 2006 on a portion of its residential real estate loan portfolio through a synthetic securitization structure. Under the terms of the credit default swap, SHUSA has fulfilled the first loss exposure of $5.2 million as the Protected Party to the transaction. The Company is reimbursed for the next $45.8 million of losses on the remaining loans in the structure, which totaled $1.6 billion at March 31, 2011. Losses above $45.8 million are the responsibility of SHUSA. This credit default swap term is equal to the term of the loan portfolio.

The consumer loan portfolio not secured by real estate (consisting of automobile loans of $16.3 billion and other consumer loans of $2.5 billion) totaled $18.9 billion at March 31, 2011, representing 28.3% of SHUSA’s loan portfolio, compared to $17.8 billion, or 27.4%, of the loan portfolio at December 31, 2010 and $11.5 billion or 19.6% of the loan portfolio at March 31, 2010. Excluding SCUSA, auto loans have declined to $1.6 billion at March 31, 2011 compared to $1.9 billion at December 31, 2010 and $3.0 billion at March 31, 2010 due to run-off in Sovereign Bank’s indirect auto loan portfolio. Sovereign Bank ceased originating all indirect auto loans as of January 2009.

Non-Performing Assets

At March 31, 2011, SHUSA’s non-performing assets decreased by $406.5 million to $2.5 billion compared to $2.9 billion at December 31, 2010. Non-performing assets as a percentage of total loans, real estate owned and repossessed assets decreased to 3.81% at March 31, 2011 from 4.51% at December 31, 2010.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SHUSA generally places all commercial and residential loans on non-performing status at 90 days delinquent or sooner if management believes the loan has become impaired (unless return to current status is expected imminently). A loan is considered to be impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g. less than ninety days) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired. For auto loans, the accrual of interest is discontinued and reversed once an account becomes past due 60 days or more. Auto loans are charged off when an account becomes 121 days delinquent if the company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. All other consumer loans continue to accrue interest until they are 90 days delinquent, at which point they are either charged-off or placed on non-accrual status and anticipated losses are reserved for. At 180 days delinquent, anticipated losses on residential real estate loans are fully reserved for or charged off.

SHUSA reserve levels due to nonperforming asset levels and our allowance for credit losses as a percentage of total loans has increased to 3.84% at March 31, 2011 compared to 3.83% at December 31, 2010 and 3.70% at March 31, 2010. Although non-performing assets remain at elevated levels, we have seen improvements from December 31, 2010 levels in the three-month period ended March 31, 2011. Excluding loans that are classified as non-accrual, our loans past due have declined from $2.2 billion at year end to $1.6 billion at March 31, 2011.

The following table presents the composition of non-performing assets at the dates indicated:

	March 31,			December 31,
	2011			2010
Non-accrual loans:
Consumer:
Residential mortgages	$	578,850		$	602,027
Home equity loans and lines of credit		121,806			125,310
Auto loans and other consumer loans		399,958			592,650
Total consumer loans		1,100,614			1,319,987
Commercial		461,357			528,333
Commercial real estate		569,165			653,221
Multi-family		199,668			224,728
Total commercial loans		1,230,190			1,406,282
Total non-performing loans		2,330,804			2,726,269
Other real estate owned		153,799			143,149
Other repossessed assets		58,216			79,854
Total other real estate owned and other repossessed assets		212,015			223,003
Total non-performing assets	$	2,542,819		$	2,949,272
Past due 90 days or more as to interest or principal and accruing interest	$	—		$	169
Annualized net loan charge-offs to average loans		1.48	%		2.01	%
Non-performing assets as a percentage of total assets		2.75	%		3.29	%
Non-performing loans as a percentage of total loans		3.50	%		4.18	%
Non-performing assets as a percentage of total loans, real estate owned and repossessed assets		3.81	%		4.51	%
Allowance for credit losses as a percentage of total non-performing assets (1)		94.7	%		84.7	%
Allowance for credit losses as a percentage of total non-performing loans (1)		109.8	%		91.6	%

(1) Allowance for credit losses is comprised of the allowance for loan losses and the reserve for unfunded commitments, which is included in other liabilities.

Loans ninety (90) days or more past due and still accruing interest decreased by $0.2 million from December 31, 2010 to March 31, 2011. Potential problem loans (commercial loans delinquent more than 30 days but less than 90 days, although not currently classified as non-performing loans) amounted to approximately $163.1 million and $268.4 million at March 31, 2011 and December 31, 2010, respectively.

In response to higher levels of other real estate owned, SHUSA has updated and enhanced existing policies and governance, and streamlined and enhanced procedures to manage reporting and sales.

54

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Troubled Debt Restructurings

Troubled debt restructurings (“TDRs”) are loans that have been modified whereby SHUSA has agreed to make certain concessions to the customer (reduction of interest rate, extension of term or forgiveness of a portion of the loan) to maximize the ultimate recovery of a loan. TDRs remain in non-accrual status until SHUSA believes repayment under the revised terms are reasonably assured and a sustained period of repayment performance was achieved (typically defined as six months for a monthly amortizing loan). Loan restructurings generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term. Consequently, a modification that would otherwise not be considered is granted to the borrower.

The following table summarizes TDRs at the dates indicated (in thousands):

	March 31,		December 31,
	2011		2010
Accruing:
Commercial	$	81,007	$	35,629
Residential		266,719		220,382
Consumer		169,339		200,033
Subtotal accruing	$	517,065	$	456,044
Non-accruing:
Commercial	$	22,795	$	68,517
Residential		136,708		131,807
Consumer		39,948		44,790
Subtotal non-accruing	$	199,451	$	245,114
Total	$	716,516	$	701,158

Allowance for Credit Losses

The following table presents the allocation of the allowance for loan losses and the percentage of each loan type to total loans at the dates indicated:

	March 31, 2011					December 31, 2010
			% of					% of
			Loans to					Loans to
			Total					Total
	Amount		Loans			Amount		Loans
Allocated allowance:
Commercial loans	$	879,989		44	%	$	905,786		45	%
Consumer loans		1,301,907		56			1,275,982		55
Unallocated allowance		25,451		n/a			15,682		n/a
Total allowance for loan losses	$	2,207,347		100	%	$	2,197,450		100	%
Reserve for unfunded lending commitments		351,846					300,621
Total allowance for credit losses	$	2,559,193				$	2,498,071

The allowance for loan losses and reserve for unfunded lending commitments are maintained at levels that management considers adequate to provide for losses based upon an evaluation of known and inherent risks in the loan portfolio. Management’s evaluation takes into consideration the risks inherent in the loan portfolio, past loan loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic conditions, the level of originations and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the allowance for credit losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations.

The allowance for loan losses consists of two elements: (i) an allocated allowance, which is comprised of allowances established on specific loans, and allowances for each loan category based on historical loan loss experience adjusted for current trends and adjusted for both general economic conditions and other risk factors in the Company’s loan portfolios, and (ii) an unallocated allowance to account for a level of imprecision in management’s estimation process.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management regularly monitors the condition of the portfolio, considering factors such as historical loss experience, trends in delinquency and nonperforming loans, changes in risk composition and underwriting standards, experience and ability of staff and regional and national economic conditions and trends.

For our commercial loan portfolios excluding small business loans (businesses with sales of up to $3 million), we have specialized credit officers, a monitoring unit and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and additional analysis is needed. For our commercial loan portfolios, risk ratings are assigned to each individual loan to differentiate risk within the portfolio and are reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrowers’ current risk profiles and the related collateral positions. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Workout officers reassess the most adversely rated borrowers on a quarterly basis, and credit officers review all other borrowers on a regular basis no less often than once per year. SHUSA’s Internal Asset Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When a credit’s risk rating is downgraded to a certain level, the relationship must be reviewed more frequently and detailed reports completed that document risk management strategies for the credit going forward. When credits are downgraded beyond a certain level, SHUSA’s workout department becomes responsible for managing the credit risk.

Risk rating actions are generally reviewed formally by one or more Credit Committees depending on the size of the loan and the type of risk rating action being taken.

Our consumer loans and small business loans are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, loan to value, and credit scores. We evaluate our consumer portfolios throughout their life cycle on a portfolio basis.

When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral supporting the loans. Management documents the collateral type, date of the most recent valuation, and whether any liens exist, to determine the value to compare against the committed loan amount.

If a loan is identified as impaired and is collateral dependent, an initial appraisal is obtained to provide a baseline in determining the property’s fair market value. The frequency of appraisals depends on the type of collateral being appraised. If the collateral value is subject to significant volatility (due to location of asset, obsolescence, etc.) an appraisal is obtained more frequently. At a minimum, updated appraisals are obtained within a 12 month period, if the loan remains outstanding for that period of time.

When we determine that the value of an impaired loan is less than its carrying amount, we recognize impairment through a provision estimate or a charge-off to the allowance. We perform these assessments on at least a quarterly basis. For commercial loans, a charge-off is recorded when management determines we will not collect 100% of a loan based on the fair value of the collateral, less costs to sell the property, or the net present value of expected future cash flows. Charge-offs are recorded on a quarterly basis and partial charged-off loans continue to be evaluated on a quarterly basis and additional charge-offs or loan loss provisions may be taken on the remaining loan balance utilizing the same criteria.

Consumer loans and any portion of a consumer loan secured by real estate and mortgage loans not adequately secured are generally charged-off when deemed to be uncollectible or delinquent 180 days or more (120 days for closed-end consumer loans not secured by real estate), whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment include; a loan that is secured by adequate collateral and is in the process of collection; a loan supported by a valid guarantee or insurance; or a loan supported by a valid claim against a solvent estate.

As of March 31, 2011, approximately 18% and 17% of our residential mortgage loan portfolio and home equity loan portfolio had loan-to-value ratios above 100% compared with approximately 19% and 18%, respectively, at December 31, 2010. No loans were originated with LTVs in excess of 100%.

For both residential and home equity loans, loss severity assumptions are incorporated into the loan loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience for six loan-to-value bands within the portfolios. Current loan-to-value ratios are updated based on movements in the state level Federal Housing Finance Agency House Pricing Indexes.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

For nonperforming loans, current loan-to-value ratios are generated by obtaining broker price opinions which are refreshed every six months. Values obtained are used to estimate ultimate losses.

For Home Equity Lines of Credit (HELOC), if the value of the property decreases by greater than 50% of the homes equity from the time the HELOC was issued, the bank will review the line of credit and the borrower’s full relationship with the Bank to determine if it is appropriate to close the line to mitigate the risk associated with further collateral devaluation.

Additionally, the Company reserves for certain inherent, but undetected, losses that are probable within the loan portfolio. This is due to several factors, such as, but not limited to, inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions and the interpretation of economic trends. While this analysis is conducted at least quarterly, the Company has the ability to revise the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a given loan pool classification.

Regardless of the extent of the Company’s analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains an unallocated allowance to recognize the existence of these exposures.

In addition to the allowance for loan losses, we also estimate probable losses related to unfunded lending commitments. Unfunded lending commitments are subject to individual reviews, and are analyzed and segregated by risk according to the Corporation’s internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions and performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for unfunded lending commitments. Additions to the reserve for unfunded lending commitments are made by charges to the provision for credit losses.

These risk factors are continuously reviewed and revised by management where conditions indicate that the estimates initially applied are different from actual results. A comprehensive analysis of the allowance for loan losses and reserve for unfunded lending commitments is performed by the Company on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted quarterly.

The factors supporting the allowance for loan losses and the reserve for unfunded lending commitments do not diminish the fact that the entire allowance for loan losses and the reserve for unfunded lending commitments are available to absorb losses in the loan portfolio and related commitment portfolio, respectively. The Company’s principal focus, therefore, is on the adequacy of the total allowance for loan losses and reserve for unfunded lending commitments.

The allowance for loan losses and the reserve for unfunded lending commitments are subject to review by banking regulators. The Company’s primary bank regulators regularly conduct examinations of the allowance for loan losses and reserve for unfunded lending commitments and make assessments regarding their adequacy and the methodology employed in their determination.

As mentioned previously, SHUSA, through its SCUSA subsidiary, acquires loans at a substantial discount from certain companies. Part of this discount is attributable in part to future expected credit losses. Upon acquisition of a portfolio of loans, SCUSA will project future credit losses on the pool and will not amortize this discount to interest income in accordance with Accounting Standard Codification 310-30. The amount of nonaccretable loan discount at March 31, 2011 totaled $835.6 million compared to $966.5 million at December 31, 2010. The reason for the decrease is due primarily to charge-offs during the three months ended March 31, 2011.

Commercial Portfolio. The portion of the allowance for loan losses related to the commercial portfolio has decreased from $905.8 million at December 31, 2010 (3.11% of commercial loans) to $880.0 billion at March 31, 2011 (3.02% of commercial loans).

Consumer Portfolio. The allowance for the consumer loans was $1.3 billion at March 31, 2011 and December 31, 2010. The allowance as a percentage of consumer loans was 3.48% at March 31, 2011 and 3.54% at December 31, 2010. This increase is due primarily to SCUSA loan acquisitions during 2010.

Unallocated Allowance. The unallocated allowance for loan losses was $25.5 million at March 31, 2011 and $15.7 million at December 31, 2010. Management continuously evaluates its allowance methodology; however the unallocated allowance is subject to changes each reporting period due to certain inherent but undetected losses; which are probable of being realized within the loan portfolio.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Reserve for unfunded lending commitments. The reserve for unfunded lending commitments has increased from $300.6 million at December 31, 2010 to $351.8 million at March 31, 2011.

Investment Securities

Investment securities consist primarily of mortgage-backed securities, tax-free municipal securities, U.S. Treasury and government agency securities, corporate debt securities, asset backed securities and stock in the Federal Home Loan Bank of Pittsburgh (“FHLB”). Mortgage-backed securities consist of pass-throughs and collateralized mortgage obligations issued by federal agencies or private label issuers. SHUSA’s mortgage-backed securities are generally either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by Standard and Poor’s and Moody’s at the date of issuance. The Company purchases classes which are senior positions backed by subordinate classes. The subordinate classes absorb the losses and must be completely eliminated before any losses flow through the senior positions. The average life of the available-for-sale investment portfolio at March 31, 2011 was 6.04 years compared to 6.06 years at December 31, 2010.

Total investment securities available-for-sale remained steady at $13.4 billion at March 31, 2011 and December 31, 2010. For additional information with respect to SHUSA’s investment securities, see Note 2 in the Notes to Consolidated Financial Statements.

Other investments, which consists of FHLB stock and repurchase agreements, remained stable at $0.6 billion at March 31, 2011 and December 31, 2010.

Goodwill and Other Intangible Assets

Goodwill was $4.1 billion at March 31, 2011 and December 31, 2010. Other intangibles decreased by $13.8 million at March 31, 2011 compared to December 31, 2010 due to year-to-date amortization expense of $13.8 million.

Goodwill and other indefinite lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. This testing is required annually, or more frequently if events or circumstances indicate there may be impairment. Impairment testing is performed at the reporting unit level, and not on an individual acquisition basis and is a two-step process. The first step is to compare the fair value of the reporting unit to its carrying value (including its allocated goodwill). If the fair value of the reporting unit is in excess of its carrying value then no impairment charge is recorded. If the carrying value of a reporting unit is in excess of its fair value then a second step needs to be performed. The second step entails calculating the implied fair value of goodwill as if a reporting unit is purchased at its step 1 fair value. This is determined in the same manner as goodwill in a business combination. If the implied fair value of goodwill is in excess of the reporting units allocated goodwill amount then no impairment charge is required. We evaluated our goodwill at December 31, 2010 and determined that it was not impaired. No impairment indicators have been noted since December 31, 2010 and as such, no impairment test has been performed since then. The Company will perform its annual goodwill impairment test at December 31, 2011.

The estimated aggregate amortization expense related to core deposit and other intangibles for each of the five succeeding calendar years ending December 31 is:

	Calendar				Remaining
	Year		Recorded		Amount
Year	Amount		To Date		To Record
2011	$	50,973	$	13,800	$	37,173
2012		38,101		—		38,101
2013		26,293		—		26,293
2014		17,350		—		17,350
2015		9,582		—		9,582

Deposits and Other Customer Accounts

SHUSA attracts deposits within its primary market area with an offering of deposit instruments including demand accounts, NOW accounts, money market accounts, savings accounts, certificates of deposit and retirement savings plans. Total deposits and other customer accounts at March 31, 2011 were $47.0 billion compared to $42.7 billion at December 31, 2010.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Borrowings and Other Debt Obligations

SHUSA utilizes borrowings and other debt obligations as a source of funds for its asset growth and its asset/liability management. Collateralized advances are available from the FHLB provided certain standards related to creditworthiness have been met. Funding is also available from the Federal Reserve discount window through the pledging of certain assets. SHUSA also utilizes reverse repurchase agreements, which are short-term obligations collateralized by securities fully guaranteed as to principal and interest by the U.S. Government or an agency thereof, and federal funds lines with other financial institutions. The Company, through its SCUSA subsidiary, has warehouse lines of credit agreements with Santander, our Parent, as well as other financial institutions. SCUSA also securitizes some of its retail automotive installment contracts which are structured as secured financings. These transactions are paid using the cash flows from the underlying retail automotive installment contracts which serve as collateral. During 2010, SHUSA has initiated a holding company level commercial paper issuance program, which is backed by committed lines from Santander, to take advantage of attractive yields given the market appetite for top tier issuers of money market solutions. As of March 31, 2011 there was $550 million of outstanding commercial paper with an effective rate of 1%. Total borrowings at March 31, 2011 and December 31, 2010 were $31.5 billion and $33.6 billion, respectively. The reason for this increase is due to loan growth at SCUSA (via a portfolio acquisition) which was funded with borrowings. See Note 5 for further discussion and details on our borrowings and other debt obligations.

Off Balance Sheet Arrangements

Securitization transactions contribute to SHUSA’s overall funding and regulatory capital management. These transactions involve periodic transfers of loans or other financial assets to special purpose entities (“SPE’s”). The vast majority of SHUSA’s SPE’s are consolidated on the Company’s balance sheet at March 31, 2011. The balance of loans in unconsolidated SPE’s totaled $61.2 million at March 31, 2011.

SHUSA enters into partnerships, which are variable interest entities, with real estate developers for the construction and development of low-income housing. The partnerships are structured with the real estate developer as the general partner and SHUSA as the limited partner. SHUSA is not the primary beneficiary of these variable interest entities. The Company’s risk of loss is limited to its investment in the partnerships, which totaled $111.7 million at March 31, 2011 and any future cash obligations that SHUSA has committed to the partnerships. Future cash obligations related to these partnerships totaled $1.0 million at March 31, 2011. SHUSA investments in these partnerships are accounted for under the equity method.

Bank Regulatory Capital

The Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”) requires institutions regulated by the Office of Thrift Supervision (OTS) to have a minimum tangible capital ratio equal to 1.5% of tangible assets, and a minimum leverage ratio equal to 4% of tangible assets, and a risk-based capital ratio equal to 8% as defined. The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires OTS regulated institutions to have minimum tangible capital equal to 2% of total tangible assets.

The FDICIA established five capital tiers: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution’s capital tier depends upon its capital levels in relation to various relevant capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized or adequately-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities. At March 31, 2011 and December 31, 2010, Sovereign Bank had met all quantitative thresholds necessary to be classified as well-capitalized under regulatory guidelines.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Federal banking laws, regulations and policies also limit Sovereign Bank’s ability to pay dividends and make other distributions to SHUSA. Sovereign Bank is required to give prior notice to the OTS before paying any dividend. In addition, Sovereign Bank must obtain prior OTS approval to declare a dividend or make any other capital distribution if, after such dividend or distribution, Sovereign Bank’s total distributions to SHUSA within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years, or if Sovereign Bank is not adequately capitalized at the time. In addition, OTS prior approval would be required if Sovereign Bank’s examination or CRA ratings fall below certain levels or Sovereign Bank is notified by the OTS that it is a problem association or an association in troubled condition. The following schedule summarizes the actual capital balances of Sovereign Bank at March 31, 2011 and December 31, 2010:

	TIER 1			TIER 1			TOTAL
	LEVERAGE			RISK-BASED			RISK-BASED
	CAPITAL			CAPITAL			CAPITAL
REGULATORY CAPITAL	RATIO			RATIO			RATIO
Sovereign Bank at March 31, 2011:
Regulatory capital	$	7,809,006		$	7,739,629		$	9,047,961
Minimum capital requirement (1)		1,421,960			2,269,082			4,538,165
Excess	$	6,387,046		$	5,470,547		$	4,509,796
Sovereign Bank capital ratio		10.98	%		13.64	%		15.95	%
Sovereign Bank at December 31, 2010:
Regulatory capital	$	7,736,164		$	7,680,472		$	9,092,918
Minimum capital requirement (1)		2,707,475			2,283,372			4,566,745
Excess	$	5,028,689		$	5,397,100		$	4,526,173
Sovereign Bank capital ratio		11.43	%		13.45	%		15.93	%

(1) Minimum capital requirement as defined by OTS Regulations.

Liquidity and Capital Resources

Liquidity represents the ability of SHUSA to obtain cost effective funding to meet the needs of customers, as well as SHUSA’s financial obligations. Factors that impact the liquidity position of SHUSA include loan origination volumes, loan prepayment rates, maturity structure of existing loans, core deposit growth levels, certificate of deposit maturity structure and retention, SHUSA’s credit ratings, investment portfolio cash flows, maturity structure of wholesale funding, etc. These risks are monitored and centrally managed. This process includes reviewing all available wholesale liquidity sources. As of March 31, 2011, SHUSA had $15.0 billion in unused available overnight liquidity in the form of unused federal funds purchased lines, unused FHLB borrowing capacity, unused borrowing lines with the Federal Reserve Bank and unencumbered investment portfolio securities. SHUSA also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times.

Sovereign Bank has several sources of funding to meet its liquidity requirements, including the liquid investment securities portfolio, the core deposit base, the ability to acquire large deposits, FHLB borrowings, Federal Reserve borrowings, wholesale deposit purchases, federal funds purchased and reverse repurchase agreements.

SHUSA has the following major sources of funding to meet its liquidity requirements: dividends and returns of investment from its subsidiaries, short-term investments held by nonbank affiliates and access to the capital markets. Additionally, the Company has the ability to raise funds via our Parent Company and certain subsidiaries of our Parent Company.

As of March 31, 2011, SHUSA had over $24.9 billion in committed liquidity from the FHLB and the Federal Reserve Bank. Of this amount, $15.0 billion is unused and therefore provides additional borrowing capacity and liquidity for the Company. The Company also has available liquidity from unencumbered securities and other market sources of $10.1 billion, as well as cash deposits at March 31, 2011 of $3.3 billion. We believe that we have ample liquidity to fund our operations.

SHUSA’s investment portfolio contains certain non-agency mortgage backed securities which are not actively traded. In certain instances, SHUSA is the sole investor of the issued security. The Company evaluates prices from a third party pricing service, third party broker quotes for certain securities and from another independent third party valuation source to determine their estimated fair value. Our fair value estimates assume liquidation in an orderly market and not under distressed circumstances. If the Company was required to sell these securities in an unorderly fashion, actual proceeds received could potentially be significantly less than their estimated fair values.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net cash provided by operating activities was $1.0 billion for 2011. Net cash used by investing activities for 2011 was $1.7 billion and due primarily to the purchases of $3.0 billion of investments and $1.9 billion of loans, offset by $3.4 billion of investment sales, maturities and repayments. Net cash provided by financing activities for 2011 was $2.2 billion, which consisted primarily of a $4.3 billion increase in deposits and $4.3 billion of proceeds from debt offset by repayments of debt of $6.4 billion. See the Consolidated Statement of Cash Flows for further details on our sources and uses of cash.

SHUSA’s debt agreements impose customary limitations on dividends, other payments and transactions.

On July 15, 2010, SHUSA entered into a commercial paper program under which SHUSA may issue unsecured commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of $2 billion. The proceeds of the commercial paper issuances will be used for general corporate purposes. Amounts available under the program may be reborrowed.

Contractual Obligations and Commitments

SHUSA enters into contractual obligations in the normal course of business as a source of funds for its asset growth and its asset/liability management, to fund acquisitions, and to meet required capital needs. These obligations require the Company to make cash payments over time as detailed in the table below.

	Payments Due by Period
			Less than		Over 1 yr		Over 3 yrs		Over
	Total		1 year		to 3 yrs		to 5 yrs		5 yrs
FHLB advances (1)	$	11,487,176	$	1,578,569	$	1,999,595	$	5,046,276	$	2,862,736
Securities sold under repurchase agreements (1)		969,591		969,591		—		—		—
Fed Funds (1)		1,444,005		1,444,005		—		—		—
Other debt obligations (1) (2)		19,310,794		8,078,041		4,032,873		2,427,719		4,772,161
Junior subordinated debentures due to Capital Trust entities (1) (2)		2,408,550		399,071		117,766		117,766		1,773,947
Certificates of deposit (1)		11,882,591		8,847,378		1,982,039		1,040,554		12,620
Investment partnership commitments (3)		996		890		26		26		54
Operating leases		732,165		109,113		187,469		148,543		287,040
Total contractual cash obligations	$	48,235,868	$	21,426,658	$	8,319,768	$	8,780,884	$	9,708,558

(1)	Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based upon interest rates in effect at September 30, 2010. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.
(2)	Includes all carrying value adjustments, such as unamortized premiums or discounts and hedge basis adjustments.
(3)	The commitments to fund investment partnerships represent future cash outlays for the construction and development of properties for low-income housing, and historic tax credit projects. The timing and amounts of these commitments are projected based upon the financing arrangements provided in each project’s partnership or operating agreement, and could change due to variances in the construction schedule, project revisions, or the cancellation of the project.

Excluded from the above table are deposits of $35.3 billion that are due on demand by customers. Additionally, $119.9 million of tax liabilities associated with unrecognized tax benefits under FIN 48 have been excluded due to the high degree of uncertainty regarding the timing of future cash outflows associated with such obligations.

SHUSA is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, loans sold with recourse, forward contracts and interest rate swaps, caps and floors. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these financial instruments reflect the extent of involvement SHUSA has in particular classes of financial instruments. Commitments to extend credit, including standby letters of credit, do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

SHUSA’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and loans sold with recourse is represented by the contractual amount of those instruments. SHUSA uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate swaps, caps and floors and forward contracts, the contract or notional amounts do not represent exposure to credit loss. SHUSA controls the credit risk of its interest rate swaps, caps and floors and forward contracts through credit approvals, limits and monitoring procedures.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Amount of Commitment Expiration per Period:

	Total
	Amounts		Less than		Over 1 yr		Over 3 yrs
Other Commitments	Committed		1 year		to 3 yrs		to 5 yrs		Over 5 yrs
Commitments to extend credit	$	15,287,634	$	5,130,261	$	3,219,297	$	1,822,547	$	5,115,529
Standby letters of credit		3,208,927		1,422,923		1,384,758		240,911		160,335
Loans sold with recourse		259,684		7,048		65,832		48,759		138,045
Forward buy commitments		615,716		562,386		53,330		—		—
Total commitments	$	19,371,961	$	7,122,618	$	4,723,217	$	2,112,217	$	5,413,909

SHUSA’s standby letters of credit meet the definition of a guarantee under the guarantees topic of the FASB Accounting Standards Codification. These transactions are conditional commitments issued by SHUSA to guarantee the performance of a customer to a third party. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments is 1.7 years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. SHUSA has various forms of collateral, such as real estate assets and customer business assets. The maximum undiscounted exposure related to these commitments at March 31, 2011 was $3.2 billion, and the approximate value of the underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $2.6 billion. The fees related to standby letters of credit are deferred and amortized over the life of the commitment. These fees are immaterial to SHUSA’s financial statements at March 31, 2011. We believe that the utilization rate of these standby letters of credit will continue to be substantially less than the amount of these commitments, as has been our experience to date.

Asset and Liability Management

Interest rate risk arises primarily through SHUSA’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Interest rate risk is managed centrally by our risk management group with oversight by the Asset and Liability Committee. In managing its interest rate risk, the Company seeks to minimize the variability of net interest income across various likely scenarios while at the same time maximizing its net interest income and net interest margin. To achieve these objectives, the treasury group works closely with each business line in the Company and guides new business. The treasury group also uses various other tools to manage interest rate risk including wholesale funding maturity targeting, investment portfolio purchase strategies, asset securitization/sale and financial derivatives.

Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in fed funds compared with three month LIBOR. Repricing risk stems from the different timing of contractual repricing such as, one month versus three month reset dates. Yield curve risk stems from the impact on earnings and market value due to different shapes and levels of yield curves. Optionality risk stems from prepayment or early withdrawal risk embedded in various products. These four elements of risk are analyzed through a combination of net interest income simulations, shocks to the net interest income simulations, scenarios and market value analysis and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses including, but not limited to, assumptions on new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.

The Company simulates the impact of changing interest rates on its expected future interest income and interest expense (net interest income sensitivity). This simulation is run monthly and it includes various scenarios that help management understand the potential risks in net interest income sensitivity. These scenarios include both parallel and non-parallel rate shocks as well as other scenarios that are consistent with quantifying the four elements of risk. This information is then used to develop proactive strategies to ensure that SHUSA’s risk position remains close to neutral so that future earnings are not significantly adversely affected by future interest rates.

The table below discloses the estimated sensitivity to SHUSA’s net interest income based on interest rate changes:

	The following estimated percentage
If interest rates changed in parallel by the	increase/(decrease) to
amounts below at March 31, 2011	net interest income would result
Up 100 basis points		2.09	%
Up 200 basis points		4.05	%
Down 100 basis points		(1.36	)%

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Because the assumptions used are inherently uncertain, SHUSA cannot precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume and characteristics of new business and behavior of existing positions, and changes in market conditions and management strategies, among other factors.

SHUSA also focuses on calculating the market value of equity (“MVE”). This analysis is very useful as it measures the present value of all estimated future interest income and interest expense cash flows of the Company over the estimated remaining life of the balance sheet. MVE is calculated as the difference between the market value of assets and liabilities. The MVE calculation utilizes only the current balance sheet and therefore does not factor in any future changes in balance sheet size, balance sheet mix, yield curve relationships and product spreads which may mitigate the impact of any interest rate changes.

Management then looks at the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk and also highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to SHUSA’s MVE at March 31, 2011 and December 31, 2010:

	The following estimated percentage
	increase/(decrease) to MVE would result
If interest rates changed in parallel by	March 31, 2011			December 31, 2010
Base (in thousands)	$	8,449,477		$	6,910,151
Up 200 basis points		(7.59	)%		(8.43	)%
Up 100 basis points		(3.55	)%		(3.86	)%

Neither the net interest income sensitivity analysis nor the MVE analysis contemplate changes in credit risk of our loan and investment portfolio from changes in interest rates. The amounts above are the estimated impact due solely to a parallel change in interest rates.

Pursuant to its interest rate risk management strategy, SHUSA enters into derivative relationships such as interest rate exchange agreements (swaps, caps, and floors) and forward sale or purchase commitments. SHUSA’s objective in managing its interest rate risk is to provide sustainable levels of net interest income while limiting the impact that changes in interest rates have on net interest income.

Interest rate swaps are generally used to convert fixed rate assets and liabilities to variable rate assets and liabilities and vice versa. SHUSA utilizes interest rate swaps that have a high degree of correlation to the related financial instrument.

As part of its overall business strategy, SHUSA originates fixed rate residential mortgages. It sells a portion of this production to FHLMC, FNMA, and private investors. The loans are exchanged for cash or marketable fixed rate mortgage-backed securities which are generally sold. This helps insulate the Company from the interest rate risk associated with these fixed rate assets. SHUSA uses forward sales, cash sales and options on mortgage-backed securities as a means of hedging against changes in interest rate on the mortgages that are originated for sale and on interest rate lock commitments.

To accommodate customer needs, the Company enters into customer-related financial derivative transactions primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers.

Through the Company’s capital markets and mortgage-banking activities, it is subject to trading risk. The Company employs various tools to measure and manage price risk in its trading portfolios. In addition, the Board of Directors has established certain limits relative to positions and activities. The level of price risk exposure at any given point in time depends on the market environment and expectations of future price and market movements, and will vary from period to period.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Incorporated by reference from Part I, Item 2. “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Asset and Liability Management” hereof.

Item 4. Controls and Procedures

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of March 31, 2011. Based on this evaluation, our principal executive officer and our principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2011 to ensure that information required to be disclosed by the Company in reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

Reference should be made to Note 10 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service and Note 15 to the Consolidated Financial Statements for SHUSA’s litigation disclosure which is incorporated herein by reference.

Item 1A — Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. Risk Factors, in the Corporation’s 2010 Annual Report on Form 10-K, other than modification of the “Reputational and Compliance Risk Exists Related to the Company’s Foreclosure Activities” risk factor as described in “Foreclosure Matters” in Part I, Item 2 of this Quarterly Report on Form 10-Q.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds.

No shares of the Company’s common stock were repurchased during the three-month period ended March 31, 2011.

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Item 6 — Exhibits

(a) Exhibits

(3.1	)	Amended and Restated Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA’s Current Report on Form 8-K filed January 30, 2009).
(3.2	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA’s Current Report on Form 8-K filed February 5, 2010).
(3.3	)	Certificate of Designations for the Series D Preferred Stock (Incorporated by reference to Exhibit 3.1 of Santander Holdings USA’s Current Report on Form 8-K filed on March 27, 2009).
(3.4	)	Amended and Restated Bylaws of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.4 of Santander Holdings USA’s Amendment No. 1 to Annual Report on Form 10-K filed March 14, 2011).
(4.1	)	In accordance with Regulation S-K Item No. 601(b)(4)(iii), Santander Holdings USA is not filing copies of instruments defining the rights of holders of long-term debt because none of those instruments authorizes debt in excess of 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Santander Holdings USA agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
(31.1	)	Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2	)	Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1	)	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2	)	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	SANTANDER HOLDINGS USA, INC. (Registrant)
Date: May 12, 2011	/s/ Jorge Morán
	Jorge Morán
	President and Chief Executive Officer (Authorized Officer)
Date: May 12, 2011	/s/ Guillermo Sabater
	Guillermo Sabater
	Chief Financial Officer and Executive Vice President (Principal Financial Officer)

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

EXHIBITS INDEX

(3.1	)	Amended and Restated Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA’s Current Report on Form 8-K filed January 30, 2009).
(3.2	)	Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA’s Current Report on Form 8-K filed February 5, 2010).
(3.3	)	Certificate of Designations for the Series D Preferred Stock (Incorporated by reference to Exhibit 3.1 of Santander Holdings USA’s Current Report on Form 8-K filed on March 27, 2009).
(3.4	)	Amended and Restated Bylaws of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.4 of Santander Holdings USA’s Amendment No. 1 to Annual Report on Form 10-K filed March 14, 2011).
(4.1	)	In accordance with Regulation S-K Item No. 601(b)(4)(iii), Santander Holdings USA is not filing copies of instruments defining the rights of holders of long-term debt because none of those instruments authorizes debt in excess of 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Santander Holdings USA agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
(31.1	)	Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2	)	Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1	)	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2	)	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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