Santander Holdings USA, Inc. - Quarter Report: 2008 March (Form 10-Q)

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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, 2008


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

SOVEREIGN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania 23-2453088

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identification No.)

1500 Market Street, Philadelphia, Pennsylvania 19102

(Address of principal executive offices) (Zip Code)

(267) 256-8601
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. Yes þ. No o.

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o. No þ.

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, 2008

Common Stock (no par value) 482,538,997 shares

FORWARD LOOKING STATEMENTS

SOVEREIGN BANCORP, 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 Sovereign Bancorp, Inc. (“Sovereign” or the “Company”). Sovereign may from time to time make forward-looking statements in Sovereign’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 2007 Annual Report) and in other communications by Sovereign, which are made in good faith by Sovereign, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Some of the statements made by Sovereign, 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 Sovereign’s vision, mission, strategies, goals, beliefs, plans, objectives, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business of Sovereign. Although Sovereign 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 Sovereign’s control). Among the factors which would cause Sovereign’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 Sovereign conducts operations;

• the effects of, 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;

• 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;

• Sovereign’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 Sovereign and its third party vendors to convert and maintain Sovereign’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;

• technological changes;

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

1

FORWARD LOOKING STATEMENTS
(continued)

• 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 Sovereign as compared to what has been accrued or paid as of period end; and

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

     If one or more of the factors affecting Sovereign’s forward-looking information and statements proves incorrect, then Sovereign’s actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Therefore, Sovereign cautions you not to place undue reliance on any forward-looking information and statements. The effect of these factors is difficult to predict. 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. Sovereign does not intend to update any forward-looking information and statements, whether written or oral, to reflect any change. All forward-looking statements attributable to Sovereign are expressly qualified by these cautionary statements.

2

INDEX

Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets at March 31, 2008 and December 31, 2007
4

Consolidated Statements of Operations for the three-month periods ended March 31, 2008 and 2007
5-6

Consolidated Statement of Stockholders’ Equity for the three-month period ended March 31, 2008
7

Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2008 and 2007
8-9

Notes to Consolidated Financial Statements
10–28

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
29–52

Item 3. Quantitative and Qualitative Disclosures About Market Risk
53

Item 4. Controls and Procedures
53

PART II. OTHER INFORMATION

Item 1A. Risk Factors
54

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
54

Item 6. Exhibits
55

SIGNATURES
56

EXHIBITS INDEX
57

Ex-31.1 Certification

Ex-31.2 Certification

Ex-32.1 Certification

Ex-32.2 Certification

3

PART 1- FINANCIAL INFORMATION

Item 1. Financial Information

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

March 31, December 31,

2008 2007

(in thousands, except share data)

ASSETS

Cash and amounts due from depository institutions
$ 1,957,403 $ 3,130,770

Investment securities:

Available-for-sale
10,958,419 13,941,847

Other investments
1,134,805 1,200,545

Loans held for investment
58,132,454 57,232,019

Allowance for loan losses
(775,441 ) (709,444 )

Net loans held for investment
57,357,013 56,522,575

Loans held for sale
739,328 547,760

Premises and equipment
555,773 562,332

Accrued interest receivable
322,760 350,534

Goodwill
3,430,290 3,426,246

Core deposit intangibles and other intangibles, net of accumulated amortization of $784,057 and $754,935 at March 31, 2008 and December 31, 2007, respectively
342,994 372,116

Bank owned life insurance
1,806,631 1,794,099

Other assets
3,307,303 2,897,572

TOTAL ASSETS
$ 81,912,719 $ 84,746,396

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits and other customer accounts
$ 48,996,729 $ 49,915,905

Borrowings and other debt obligations
24,348,829 26,126,082

Advance payments by borrowers for taxes and insurance
105,136 83,091

Other liabilities
1,638,244 1,482,563

TOTAL LIABILITIES
75,088,938 77,607,641

Minority interests
146,784 146,430

STOCKHOLDERS’ EQUITY

Preferred stock; no par value; $50 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at March 31, 2008 and December 31, 2007
195,445 195,445

Common stock; no par value; 800,000,000 shares authorized; 483,540,976 shares issued at March 31, 2008 and 482,773,610 shares issued at December 31, 2007
6,298,254 6,295,572

Warrants and employee stock options issued
348,878 348,365

Treasury stock at cost; 1,097,995 shares at March 31, 2008 and 1,369,453 shares at December 31, 2007
(11,438 ) (19,853 )

Accumulated other comprehensive loss
(749,556 ) (326,133 )

Retained earnings
595,414 498,929

TOTAL STOCKHOLDERS’ EQUITY
6,676,997 6,992,325

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 81,912,719 $ 84,746,396

See accompanying notes to consolidated financial statements.

4

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three-Month Period

Ended March 31,

2008 2007

(in thousands, except per share data)

INTEREST INCOME:

Interest-earning deposits
$ 2,964 $ 6,236

Investment securities:

Available-for-sale
168,109 189,835

Other investments
9,820 14,301

Interest on loans
895,276 1,016,967

TOTAL INTEREST INCOME
1,076,169 1,227,339

INTEREST EXPENSE:

Deposits and customer accounts
315,103 413,251

Borrowings and other debt obligations
278,886 326,235

TOTAL INTEREST EXPENSE
593,989 739,486

NET INTEREST INCOME
482,180 487,853

Provision for credit losses
135,000 46,000

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
347,180 441,853

NON-INTEREST INCOME:

Consumer banking fees
73,219 68,014

Commercial banking fees
54,425 49,408

Mortgage banking losses
(5,133 ) (107,205 )

Capital markets revenue
10,393 5,689

Bank owned life insurance
19,424 20,509

Miscellaneous income
5,297 9,467

TOTAL FEES AND OTHER INCOME
157,625 45,882

Net gain on investment securities
14,135 970

TOTAL NON-INTEREST INCOME
171,760 46,852

GENERAL AND ADMINISTRATIVE EXPENSES:

Compensation and benefits
185,112 173,796

Occupancy and equipment expenses
78,013 80,519

Technology expense
24,498 23,336

Outside services
15,630 15,278

Marketing expense
16,246 8,832

Other administrative expenses
39,765 28,235

TOTAL GENERAL AND ADMINISTRATIVE EXPENSES
359,264 329,996

5

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(continued)

Three-Month Period

Ended March 31,

2008 2007

(in thousands, except per share data)

OTHER EXPENSES:

Amortization of intangibles
$ 29,122 $ 33,253

Minority interest expense
5,210 5,366

Merger-related and integration charges
— 2,076

Equity method investments
3,129 13,049

Restructuring, other employee severance and debt extinguishment charges
— 20,032

ESOP expense related to freezing of plan
— 43,385

Recoveries of proxy and related professional fees
— (391 )

TOTAL OTHER EXPENSES
37,461 116,770

INCOME BEFORE INCOME TAXES
122,215 41,939

Income tax provision/(benefit)
22,080 (6,120 )

NET INCOME
$ 100,135 $ 48,059

EARNINGS/ PER SHARE:

Basic
$ 0.20 $ 0.09

Diluted
$ 0.20 $ 0.09

DIVIDENDS DECLARED PER COMMON SHARE
$ 0.00 $ 0.08

See accompanying notes to consolidated financial statements.

6

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2008

(Unaudited)

(in thousands)

Common Accumulated Total

Shares Warrants Other Stock-

Out- Preferred Common & Stock Treasury Comprehensive Retained Holders’

Standing Stock Stock Options Stock Income/(Loss) Earnings Equity

Balance, December 31, 2007
481,404 $ 195,445 $ 6,295,572 $ 348,365 $ (19,853 ) $ (326,133 ) $ 498,929 $ 6,992,325

Comprehensive income:

Net income
— — — — — — 100,135 100,135

Change in unrealized gain/loss, net of tax:

Investment securities available for sale
— — — — — (301,531 ) — (301,531 )

Pension liabilities
— — — — — 125 — 125

Cash flow hedge derivative financial instruments
— — — — — (122,017 ) — (122,017 )

Total comprehensive income
(323,288 )

Stock issued in connection with employee benefit and incentive compensation plans
879 — (1,476 ) (1,008 ) 11,192 — — 8,708

Employee stock options earned
— — — 1,521 — — — 1,521

Dividends paid on preferred stock
— — — — — — (3,650 ) (3,650 )

Issuance of common stock
383 — 4,158 — — — — 4,158

Stock repurchased
(223 ) — — — (2,777 ) — — (2,777 )

Balance, March 31, 2008
482,443 $ 195,445 $ 6,298,254 $ 348,878 $ (11,438 ) $ (749,556 ) $ 595,414 $ 6,676,997

See accompanying notes to consolidated financial statements.

7

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three-Month Period

Ended March 31,

2008 2007

(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income
$ 100,135 $ 48,059

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for credit losses
135,000 46,000

Depreciation and amortization
58,853 67,241

Net amortization/accretion of investment securities and loan premiums and discounts
9,132 9,854

Net (gain)/loss on sale of loans
(13,227 ) 20,623

Net (gain)/loss on investment securities
(14,135 ) (970 )

Net loss on real estate owned and premises and equipment
2,739 333

Stock-based compensation
6,682 7,023

Origination and purchases of loans held for sale, net of repayments
(2,094,315 ) (929,634 )

Proceeds from sales of loans held for sale
1,917,030 938,488

Net change in:

Accrued interest receivable
27,774 59,888

Other assets and bank owned life insurance
(406,454 ) 172,124

Other liabilities
158,492 (13,016 )

Net cash provided by/(used in) operating activities
(112,294 ) 426,013

CASH FLOWS FROM INVESTING ACTIVITIES:

Adjustments to reconcile net cash used in investing activities:

Proceeds from sales of investment securities:

Available-for-sale
103,893 74,506

Proceeds from repayments and maturities of investment securities:

Available-for-sale
2,649,818 3,300,628

Net change in other investments
65,740 (34,245 )

Purchases of available-for-sale investment securities
(215,927 ) (2,783,048 )

Proceeds from sales of loans held for investment
20,281 7,847,497

Purchase of loans
(112,475 ) (4,020 )

Net change in loans other than purchases and sales
(885,892 ) (1,438,948 )

Proceeds from sales of premises and equipment
285 8,955

Purchases of premises and equipment
(15,210 ) (14,587 )

Proceeds from sales of real estate owned
10,445 3,667

Net cash (provided by)/used in investing activities
1,620,958 6,960,405

8

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Three-Month Period

Ended March 31,

2008 2007

(in thousands)

CASH FLOWS FROM FINANCING ACTIVITIES:

Adjustments to reconcile net cash provided by financing activities:

Net (decrease)/increase in deposits and other customer accounts
(920,463 ) 175,150

Net decrease in borrowings
(1,780,677 ) (7,888,686 )

Proceeds from senior notes and credit facility
— 400,000

Repayments of borrowings and other debt obligations
— (200,000 )

Net increase/(decrease) in advance payments by borrowers for taxes and insurance
22,045 21,437

Cash dividends paid to preferred stockholders
(3,650 ) (3,650 )

Cash dividends paid to common stockholders
— (37,992 )

Proceeds from issuance of common stock, net of transaction costs
3,110 6,868

Treasury stock repurchases, net of proceeds
(2,396 ) 5,961

Net cash (provided by)/used in financing activities
(2,682,031 ) (7,520,912 )

Net change in cash and cash equivalents
(1,173,367 ) (134,494 )

Cash and cash equivalents at beginning of period
3,130,770 1,804,117

Cash and cash equivalents at end of period
$ 1,957,403 $ 1,669,623

Three-Month Period

Ended March 31,

2008 2007

(in thousands)

Supplemental Disclosures:

Net income taxes (received)/paid
$ (35,325 ) $ 5,567

Interest paid
$ 631,833 $ 774,148

     Non cash transactions: In the first quarter of 2007, Sovereign reclassified $658 million of correspondent home equity loans that were previously classified as held for sale to its loans held for investment portfolio. See Note 4 for further discussion.

See accompanying notes to consolidated financial statements.

9

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

     The accompanying financial statements of Sovereign Bancorp, Inc. and Subsidiaries (“Sovereign” or the “Company”) include the accounts of the parent company, Sovereign Bancorp, Inc. and its subsidiaries, including the following wholly-owned subsidiaries: Sovereign Bank (the “Bank”), Independence Community Bank Corp. (“Independence”), and Sovereign Delaware Investment Corporation. All intercompany balances and transactions have been eliminated in consolidation.

     These 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 sheet, statements of operations, stockholders’ equity and 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 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.

(2) EARNINGS PER SHARE

     Basic earnings per share is calculated by dividing net income by the weighted average common shares outstanding, excluding options and warrants. The dilutive effect of our options is calculated using the treasury stock method and the dilutive effect of our warrants that were issued in connection with our contingently convertible debt issuance is calculated under the if-converted method.

     The following table presents the computation of earnings per share for the periods indicated (amounts in thousands, except per share):

Three-Month Period

Ended March 31,

2008 2007

CALCULATION OF INCOME FOR BASIC AND DILUTED EPS:

Net income as reported and for basic EPS
$ 100,135 $ 48,059

Less preferred dividend
(3,650 ) (3,650 )

Net income available to common stockholders
96,485 44,409

Contingently convertible trust preferred interest expense, net of tax (1)
— —

Net income for diluted EPS available to common stockholders
$ 96,485 $ 44,409

WEIGHTED AVERAGE SHARES OUTSTANDING:

Weighted average basic shares
482,163 475,115

Dilutive effect of:

Warrants (1)
— —

Stock options (1) (2)
— —

Weighted average diluted shares
482,163 475,115

EARNINGS PER SHARE:

Basic
$ 0.20 $ 0.09

Diluted
$ 0.20 $ 0.09

(1) These items were excluded from diluted earnings per share for the three-month periods ended March 31, 2008 and March 31, 2007 since the result would have been anti-dilutive.

(2) Based on Sovereign’s closing stock price on March 31, 2008 of $9.32, Sovereign had 8.8 million outstanding stock options that were out-of-the-money (exercise price of award exceeded $9.32) and an additional 2.4 million stock options that were in-the-money (exercise price was less than $9.32).

10

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(3) INVESTMENT SECURITIES

     The following table presents the composition and fair value of investment securities available-for-sale at the dates indicated (in thousands):

March 31, 2008

Amortized Unrealized Unrealized Fair

Cost Appreciation Depreciation Value

Investment Securities:

U.S. Treasury and government agency securities
$ 66,833 $ 424 $ — $ 67,257

Debentures of FHLB, FNMA, and FHLMC
139,603 3,502 19 143,086

Corporate debt and asset-backed securities
929,885 10 396,254 533,641

Equity securities (1)
638,884 4,412 16,840 626,456

State and municipal securities
2,504,221 15,311 130,117 2,389,415

Mortgage-backed securities:

U.S. government agencies
241,700 8,183 33 249,850

FHLMC and FNMA debt securities
3,879,424 82,289 991 3,960,722

Non-agency securities
3,251,488 5,782 269,278 2,987,992

Total investment securities available-for-sale
$ 11,652,038 $ 119,913 $ 813,532 $ 10,958,419

December 31, 2007

Amortized Unrealized Unrealized Fair

Cost Appreciation Depreciation Value

Investment Securities:

U.S. Treasury and government agency securities
$ 85,948 $ 480 $ — $ 86,428

Debentures of FHLB, FNMA, and FHLMC
186,482 5,918 1 192,399

Corporate debt and asset-backed securities
947,992 10 194,239 753,763

Equity securities (1)
638,881 4,282 1 643,162

State and municipal securities
2,505,772 23,055 26,403 2,502,424

Mortgage-backed securities:

U.S. government agencies
2,251,022 4,376 56 2,255,342

FHLMC and FNMA debt securities
4,099,515 46,484 1,597 4,144,402

Non-agency securities
3,459,284 2,797 98,154 3,363,927

Total investment securities available-for-sale
$ 14,174,896 $ 87,402 $ 320,451 $ 13,941,847

(1) Equity securities consist principally of preferred stock of FHLMC and FNMA.

     As discussed in Note 15 of our 2007 Form 10-K, Sovereign held $2 billion of investments (namely US government agency mortgage backed securities) and cash deposits of $2 billion at December 31, 2007 in order to comply with a loan limitation test required by the Home Owners Loan Act (HOLA). Sovereign was required to increase the amount of assets that were not considered large commercial loans in order to comply with the regulation at December 31, 2007 and funded this increase through an increase in short-term borrowings. Sovereign was able to significantly reduce the amount of assets that were required to be held to maintain compliance with this requirement at March 31, 2008 to $850 million of cash deposits.

     Investment securities available for sale with an estimated fair value of $5.7 billion and $6.4 billion were pledged as collateral for borrowings, standby letters of credit, interest rate agreements and certain public deposits at March 31, 2008 and December 31, 2007, respectively.

11

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(3) INVESTMENT SECURITIES (continued)

     The following table discloses the aggregate amount of unrealized losses as of March 31, 2008 and December 31, 2007 on securities in Sovereign’s investment portfolio classified according to the amount of time that those securities have been in a continuous loss position (in thousands):

At March 31, 2008

Less than 12 months 12 months or longer Total

Unrealized Unrealized Unrealized

Fair Value Losses Fair Value Losses Fair Value Losses

Investment Securities

Debentures of FHLB, FNMA and FHLMC
$ 99,868 $ (19 ) $ — $ — $ 99,868 $ (19 )

Corporate debt and asset-backed securities
108,229 (144,630 ) 312,113 (251,624 ) 420,342 (396,254 )

Equity securities
544,938 (16,840 ) — — 544,938 (16,840 )

State and municipal securities
1,373,704 (79,552 ) 523,526 (50,565 ) 1,897,230 (130,117 )

Mortgage-backed Securities:

U.S. government agencies
1,926 (1 ) 1,180 (32 ) 3,106 (33 )

FHLMC and FNMA debt securities
45,534 (412 ) 28,459 (579 ) 73,993 (991 )

Non-agency securities
1,168,845 (148,673 ) 1,615,993 (120,605 ) 2,784,838 (269,278 )

Total investment securities available-for-sale
$ 3,343,044 $ (390,127 ) $ 2,481,271 $ (423,405 ) $ 5,824,315 $ (813,532 )

At December 31, 2007

Less than 12 months 12 months or longer Total

Unrealized Unrealized Unrealized

Fair Value Losses Fair Value Losses Fair Value Losses

Investment Securities

Debentures of FHLB, FNMA and FHLMC
$ — $ — $ 1,009 $ (1 ) $ 1,009 $ (1 )

Corporate debt and asset-backed securities
223,813 (81,066 ) 398,924 (113,173 ) 622,737 (194,239 )

Equity securities
253 (1 ) — — 253 (1 )

State and municipal securities
1,510,114 (25,880 ) 18,697 (523 ) 1,528,811 (26,403 )

Mortgage-backed Securities:

U.S. government agencies
26 — 1,392 (56 ) 1,418 (56 )

FHLMC and FNMA debt securities
11,020 (46 ) 91,600 (1,551 ) 102,620 (1,597 )

Non-agency securities
1,511,132 (41,875 ) 1,475,522 (56,279 ) 2,986,654 (98,154 )

Total investment securities available-for-sale
$ 3,256,358 $ (148,868 ) $ 1,987,144 $ (171,583 ) $ 5,243,502 $ (320,451 )

     As of March 31, 2008, management has concluded that the unrealized losses above on its investment securities (which totaled 242 individual securities) are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for the time necessary to recover its cost and will ultimately recover its cost at maturity (i.e. these investments have contractual maturities that, absent credit default, ensure Sovereign will ultimately recover its cost). In making its other than temporary impairment evaluation, Sovereign considered the fact that the principal and interest on these securities are from U.S. Government and Government Agencies as well as issuers that are investment grade. The change in the unrealized losses on the U.S. Government and Government Agencies mortgage-backed securities, Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) securities and the non-agency mortgage-backed securities were caused by changes in credit spreads and liquidity issues in the marketplace.

12

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(3) INVESTMENT SECURITIES (continued)

     The unrealized losses on corporate debt and asset backed securities include $383.5 million of unrealized losses on $750 million of highly rated investments in collateralized debt obligations (“CDOs”) at March 31, 2008. These CDOs consist of interests in credit default swaps on investment grade corporate credits. These credits are primarily to companies based in North America and Europe. Additionally, the credits are to various industries with no specific industries exceeding 8.5% of the total investment pool. In all of the CDOs, Sovereign’s investment is senior to one or more subordinated tranche(s) which have first loss exposure. The Company believes that these losses are primarily related to market interest rates and credit spreads and not underlying credit issues associated with the issuers of the debt obligations. The CDOs were purchased in the second and third quarters of 2006 and have not experienced any losses to date. Sovereign does not believe it should have any loss of principal on these investments given its senior position and the protection that the subordinated classes provide. The weighted average contractual life of this portfolio is 8.6 years.

     The unrealized losses on the Company’s state and municipal bond portfolio increased to $130.1 million at March 31, 2008. 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-. The majority of the bonds are insured to AAA for extra credit protection. The unrealized losses on the portfolio are due to an increase in credit spreads and liquidity issues in the marketplace and concerns with respect to the financial strength of third party insurers. However, even if it was assumed that the insurers could not honor their obligation, our underlying portfolio is still investment grade and the Company believes that we will collect all scheduled principal and interest. The Company has concluded these unrealized losses are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its cost and will ultimately recover its cost at maturity (i.e. these investments have contractual maturities that, absent credit default, ensure Sovereign will ultimately recover its cost).

     The unrealized losses on the non-agency securities portfolio increased to $269.3 million at March 31, 2008. This portfolio consists primarily of AAA rated non-agency mortgage-backed securities from a diverse group of issuers in the private-label market. The unrealized losses on the portfolio are due to an increase in credit spreads and liquidity issues in the marketplace. The Company has concluded these unrealized losses are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its cost and will ultimately recover its cost at maturity (i.e. these investments have contractual maturities that, absent credit default, ensure Sovereign will ultimately recover its cost).

13

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(4) 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 (dollars in thousands):

March 31, 2008 December 31, 2007

Amount Percent Amount Percent

Commercial real estate loans
$ 12,882,292 22.2 % $ 12,306,914 21.5 %

Commercial and industrial loans
13,209,614 22.7 12,594,652 22.0

Multi-family loans
4,215,381 7.3 4,088,992 7.1

Other
1,758,611 3.0 1,765,036 3.1

Total commercial loans held for investment
32,065,898 55.2 30,755,594 53.7

Residential mortgages
12,654,274 21.8 12,950,811 22.7

Home equity loans and lines of credit
6,283,506 10.8 6,197,148 10.8

Total consumer loans secured by real estate
18,937,780 32.6 19,147,959 33.5

Auto loans
6,815,657 11.7 7,028,894 12.3

Other
313,119 0.5 299,572 0.5

Total consumer loans held for investment
26,066,556 44.8 26,476,425 46.3

Total loans held for investment (2)
$ 58,132,454 100.0 % $ 57,232,019 100.0 %

Total loans held for investment with:

Fixed rate
$ 32,585,161 56.1 % $ 32,903,007 57.5 %

Variable rate
25,547,293 43.9 24,329,012 42.5

Total loans held for investment (2)
$ 58,132,454 100.0 % $ 57,232,019 100.0 %

(1) Includes residential and commercial construction loans of $2.4 billion and $2.3 billion at March 31, 2008 and December 31, 2007, respectively.

(2) 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 loans of $2.5 million and $7.2 million at March 31, 2008 and December 31, 2007, respectively. Loans pledged as collateral totaled $31.6 billion and $32.0 billion at March 31, 2008 and December 31, 2007, respectively.

     The following table presents the composition of the loan held for sale portfolio by type of loan. Our entire loans held for sale portfolio have fixed rates (dollars in thousands):

March 31, 2008 December 31, 2007

Amount Percent Amount Percent

Multi-family
$ 115,694 15.6 % $ 157,378 28.7 %

Residential mortgages
623,634 84.4 390,382 71.3

Total loans held for sale
$ 739,328 100.0 % $ 547,760 100.0 %

14

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(5) BORROWINGS AND OTHER DEBT OBLIGATIONS

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

March 31, 2008 December 31, 2007

Effective Effective

Balance Rate Balance Rate

Sovereign Bank borrowings and other debt obligations:

Securities sold under repurchase agreements
$ 76,763 4.12 % $ 76,526 4.12 %

Fed funds purchased
1,062,800 2.40 2,720,000 4.22

FHLB advances
19,581,305 4.29 19,705,438 4.64

Subordinated notes
1,151,150 4.64 1,148,813 4.65

Holding company borrowings and other debt obligations:

Senior notes
1,043,242 4.14 1,042,527 5.14

Senior credit facility
180,000 3.40 180,000 5.55

Junior subordinated debentures due to Capital Trust Entities
1,253,569 7.01 1,252,778 7.30

Total borrowings and other debt obligations
$ 24,348,829 4.35 % $ 26,126,082 4.75 %

     Sovereign currently has a series of callable advances totaling $2.6 billion with the FHLB. These advances provide variable funding (currently at 4.88%) during the non-call period which ranges from 6 to 18 months. After the non-call period, the interest rates on these advances reset to a fixed rate of interest with certain caps (ranging from 4.95% to 5.50%) and floors of 0%. If these advances are not called by the FHLB, they would mature on various dates ranging from August 2012 to September 2016.

(6) DERIVATIVES

     One of Sovereign’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.

     Fair Value Hedges. Sovereign has entered into pay-variable, receive-fixed interest rate swaps to hedge changes in fair values of certain brokered certificates of deposits and certain debt obligations. For the three-month period ended March 31, 2008 and 2007, charges of $2.0 million and $0.6 million, respectively, were recorded in earnings associated with hedge ineffectiveness.

     Cash Flow Hedges. Sovereign 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. For the three months ended March 31, 2008 and 2007, no hedge ineffectiveness was required to be recognized in earnings associated with cash flow hedges. No gains or losses deferred in accumulated other comprehensive income were reclassified into earnings during the three months ended March 31, 2008 or 2007 as a result of discontinuance of cash flow hedges for which the forecasted transaction was not probable of occurring. As of March 31, 2008, Sovereign expects approximately $141.1 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.

     Other Derivative Activities. Sovereign’s derivative portfolio also includes derivative instruments not designated in SFAS No. 133 hedge relationships.

     Those derivatives include 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. The Company also enters into precious metals customer forward arrangements and forward sale agreements.

15

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(6) DERIVATIVES (continued)

     Shown below is a summary of the derivatives designated as hedges under SFAS No. 133 at March 31, 2008 and December 31, 2007 (dollars in thousands):

Notional Receive Pay Life

Amount Asset Liability Rate Rate (Years)

March 31, 2008

Fair value hedges:

Receive fixed — pay variable interest rate swaps
$ 425,000 $ 2,859 $ — 4.33 % 2.88 % 0.8

Cash flow hedges:

Pay fixed — receive floating interest rate swaps
8,100,000 — 405,381 3.21 % 5.15 % 2.2

Total derivatives used in SFAS 133 hedging relationships
$ 8,525,000 $ 2,859 $ 405,381 3.27 % 5.04 % 2.2

December 31, 2007

Fair value hedges:

Receive fixed — pay variable interest rate swaps
$ 925,000 $ 413 $ 2,220 4.29 % 4.87 % 0.9

Cash flow hedges:

Pay fixed — receive floating interest rate swaps
8,100,000 — 214,548 5.02 % 5.15 % 2.2

Total derivatives used in SFAS 133 hedging relationships
$ 9,025,000 $ 413 $ 216,768 4.94 % 5.12 % 2.1

Summary information regarding other derivative activities at March 31, 2008 and December 31, 2007 follows (in thousands):

March 31, December 31,

2008 2007

Net Asset Net Asset

(Liability) (Liability)

Mortgage banking derivatives:

Forward commitments to sell loans
$ (4,340 ) $ (4,711 )

Interest rate lock commitments
3,478 2,085

Total mortgage banking risk management
(862 ) (2,626 )

Swaps receive fixed
275,193 134,764

Swaps pay fixed
(238,018 ) (100,713 )

Market value hedge
794 740

Net customer related interest rate hedges
37,969 34,791

Precious metals forward sale agreements
13,818 (35,247 )

Precious metals forward purchase arrangements
(13,627 ) 34,234

Foreign exchange contracts
908 1,906

Total activity
$ 38,206 $ 33,058

16

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(6) DERIVATIVES (continued)

     The following financial statement line items were impacted by Sovereign’s derivative activity as of and for the three months ended March 31, 2008:

Balance Sheet Effect at Income Statement Effect For The Three Months Ended

Derivative Activity March 31, 2008 March 31, 2008

Fair value hedges:

Receive fixed-pay variable interest
rate swaps
Increase to CDs of $2.9 million and an increase to other assets of $2.9 million. Increase in net interest income of $4.0 million.

Cash flow hedges:

Pay fixed-receive floating interest
rate swaps
Increase to other liabilities and deferred taxes of $405.4 million and $141.9 million, respectively, and a decrease to stockholders’ equity of $263.5 million. Decrease in net interest income of $15.8 million.

Other hedges:

Forward commitments to sell loans
Increase to other liabilities of $4.3 million. Increase in mortgage banking revenues of $0.4 million.

Interest rate lock commitments
Increase to mortgage loans of $3.5 million. Increase in mortgage banking revenues of $1.4 million.

Net customer related hedges
Increase to other assets of $38.0 million. Increase in capital markets revenue of $3.4 million.

Forward commitments to sell precious metals inventory, net
Increase to other assets of $0.2 million. Increase in commercial banking fees of $1.2 million.

Foreign exchange
Increase to other assets of $0.9 million. Decrease in commercial banking revenues of $0.7 million.

     The following financial statement line items were impacted by Sovereign’s derivative activity as of December 31, 2007 and for the three months ended March 31, 2007:

Balance Sheet Effect at Income Statement Effect For The Three Months

Derivative Activity December 31, 2007 Ended March 31, 2007

Fair value hedges:

Receive fixed-pay variable
interest rate swaps
Decrease to CDs of $1.8 million and an increase to other assets and other liabilities of $0.4 million and $2.2 million, respectively. Decrease in net interest income of $3.5 million.

Cash flow hedges:

Pay fixed-receive floating
interest rate swaps
Increase to other liabilities and deferred taxes of $214.5 million and $75.1 million, respectively, and a decrease to stockholders’ equity of $139.5 million. Increase in net interest income of $4.5 million.

Other hedges:

Forward commitments to sell loans
Increase to other liabilities of $4.7 million. Decrease in mortgage banking revenues of $6.5 million.

Interest rate lock commitments
Increase to mortgage loans of $2.1 million. Increase in mortgage banking revenues of $0.4 million.

Net customer related hedges
Increase to other assets of $34.8 million. Decrease in capital markets revenue of $4.3 million.

Forward commitments and forward settlement arrangements on precious metals
Increase to other liabilities of $1.0 million. Decrease in commercial banking fees of $0.2 million.

Foreign exchange
Increase to other assets of $1.9 million. Increase in commercial banking revenues of $1.0 million.

17

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(7) COMPREHENSIVE INCOME

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

Three-Month Period

Ended March 31,

2008 2007

Net income
$ 100,135 $ 48,059

Change in accumulated losses on cash flow hedge derivative financial instruments, net of tax
(124,042 ) (8,715 )

Change in unrealized gains/(losses) on investment securities available-for-sale, net of tax
(292,343 ) 17,838

Less reclassification adjustment, net of tax:

Derivative instruments
(2,025 ) (2,947 )

Pensions
(125 ) (117 )

Investments available-for-sale
9,188 618

Comprehensive income
$ (323,288 ) $ 59,628

     Accumulated other comprehensive income, net of related tax, consisted of net unrealized losses on securities of $455.1 million, net accumulated losses on unfunded pension liabilities of $4.1 million and net accumulated losses on derivatives of $290.4 million at March 31, 2008 and net unrealized losses on securities of $153.5 million, net accumulated losses on unfunded pension liabilities of $4.2 million and net accumulated losses on derivatives of $168.4 million at December 31, 2007.

(8) MORTGAGE SERVICING RIGHTS

     At March 31, 2008 and December 31, 2007, Sovereign serviced residential real estate loans for the benefit of others totaling $11.5 billion and $11.2 billion, respectively. The fair value of the servicing portfolio at March 31, 2008 and December 31, 2007 was $128.9 million and $151.4 million, respectively. The following table presents a summary of the activity of the asset established for Sovereign’s residential mortgage servicing rights (in thousands).

Gross balance as of December 31, 2007
$ 141,076

Mortgage servicing assets recognized
13,390

Amortization
(6,419 )

Gross balance at March 31, 2008
148,047

Valuation allowance
(20,176 )

Balance as March 31, 2008
$ 127,871

     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 speed) and the positive spread we receive on 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, Sovereign must make 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 residential mortgage servicing rights is obtained annually and is used by management to evaluate the reasonableness of the discounted cash flow model.

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

March 31, 2008 December 31, 2007 March 31, 2007

CPR speed
20.64 % 14.70 % 14.81 %

Escrow credit spread
4.94 % 5.12 % 4.96 %

18

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(8) MORTGAGE SERVICING RIGHTS (continued)

     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, 2008 consisted of the following (in thousands):

Balance as of December 31, 2007
$ 1,473

Increase in valuation allowance for mortgage servicing rights
18,703

Balance as March 31, 2008
$ 20,176

     Due to the change in market CPR speeds and escrow credit spreads since year-end, Sovereign recorded a residential mortgage servicing right impairment charge of $18.7 million for the three-month period ended March 31, 2008.

     Sovereign had (losses)/gains on the sale of mortgage loans, multi-family loans and home equity loans of $13.2 million for the three-month period ended March 31, 2008, compared with $(107.1) million for the corresponding period ended March 31, 2007. The loss recorded in 2007 is a result of a $119.9 million charge recorded on the sale of $3.4 billion of correspondent home equity loans that were a part of our balance sheet restructuring.

     Sovereign also originates and sells multi-family loans in the secondary market to Fannie Mae while retaining servicing. At March 31, 2008 and December 31, 2007, Sovereign serviced $11.7 billion and $10.9 billion, respectively, of loans for Fannie Mae and as a result has recorded servicing assets of $17.3 million and $20.4 million, respectively. Sovereign recorded servicing asset amortization of $1.7 million related to the multi-family loans sold to Fannie Mae and recognized servicing assets of $3.4 million during the first three months of 2008. Additionally, due to lower escrow credit rate assumptions and increased prepayment speed assumptions since year-end, Sovereign recorded a multi-family servicing right impairment of $4.9 million for the three-month period ended March 31, 2008.

19

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(9) BUSINESS SEGMENT INFORMATION

The following tables present certain information regarding the Company’s segments (in thousands):

New Metro

Mid-Atlantic England New York Shared Shared

For the three-month period ended Banking Banking Banking Services Services

March 31, 2008 Division Division Division Consumer Commercial Other Total

Net interest income (expense)
$ 69,746 $ 137,081 $ 118,350 $ 73,463 $ 80,098 $ 3,442 $ 482,180

Fees and other income ⁽¹⁾
22,763 46,657 34,639 (8,043 ) 41,993 19,616 157,625

Provision for credit losses
13,529 14,525 14,905 65,757 26,284 — 135,000

General and administrative expenses
70,786 121,417 110,523 31,254 41,901 (16,617 ) 359,264

Depreciation/amortization
2,499 3,733 6,291 9,715 2,101 34,514 58,853

Income (loss) before income taxes
8,194 47,797 27,561 (37,818 ) 53,820 22,661 122,215

Intersegment revenues (expense) ⁽²⁾
39,445 137,985 51,847 (246,742 ) (120,484 ) 137,949 —

Total average assets
$ 5,292,486 $ 7,090,463 $ 11,473,899 $ 22,065,056 $ 14,523,024 $ 20,485,760 $ 80,930,688

New Metro

Mid-Atlantic England New York Shared Shared

For the three-month period ended Banking Banking Banking Services Services

March 31, 2007 Division Division Division Consumer Commercial Other Total

Net interest income (expense)
$ 75,454 $ 155,655 $ 153,127 $ 100,237 $ 61,836 $ (58,456 ) $ 487,853

Fees and other income
19,545 40,208 31,914 (112,355 ) 41,956 24,614 45,882

Provision for credit losses
3,454 3,907 3,758 18,683 16,198 — 46,000

General and administrative expenses
69,605 116,091 105,938 26,927 36,646 (25,211 ) 329,996

Depreciation/amortization
2,644 4,371 4,376 8,679 2,105 45,066 67,241

Income (loss) before income taxes
21,940 75,865 75,346 (63,291 ) 50,862 (118,783 ) 41,939

Intersegment revenues (expense) ⁽²⁾
46,443 167,073 50,925 (298,025 ) (147,059 ) 180,643 —

Total average assets
$ 4,871,903 $ 6,251,398 $ 13,236,795 $ 26,544,051 $ 12,638,966 $ 24,072,559 $ 87,615,672

(1) Included in fees and other income in the Shared Services Consumer segment is an $18.7 million residential mortgage servicing right impairment charge that was recorded in the first quarter of 2008.

(2) Intersegment revenues (expense) represent charges or credits for funds used or provided by each of the segments and are included in net interest income.

(10) RECENT ACCOUNTING PRONOUNCEMENTS

     On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

     SFAS No. 157 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, SFAS No. 157 establishes 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).

20

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(10) RECENT ACCOUNTING PRONOUNCEMENTS (continued)

     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.

     Sovereign’s adoption of SFAS No. 157 did not have a significant impact on its financial condition or results of operations. See further discussion and analysis of Sovereign’s adoption of SFAS No. 157 in Note 14.

     In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”), which allows entities, at specified election dates, to choose to measure certain financial instruments at fair value that are not currently required to be measured at fair value. The fair value option is applied on an instrument-by-instrument basis, is irrevocable and can only be applied to an entire instrument and not to specified risks, specific cash flows, or portions of that instrument. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings at each subsequent reporting date and upfront fees and costs related to those items will be recognized in earnings as incurred and not deferred. SFAS No. 159 is effective in fiscal years beginning after November 15, 2007 and may not be applied retrospectively. Effective January 1, 2008, Sovereign adopted SFAS No. 159 on residential mortgage loans classified as held for sale that were originated subsequent to January 1, 2008. See further discussion and analysis of Sovereign’s adoption of this standard at Note 14.

     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141R”). The new pronouncement requires the acquiring entity in a business combination to recognize only the assets acquired and liabilities assumed in a transaction (for example, acquisition costs must be expensed when incurred), establishes the fair value at the date of acquisition as the initial measurement for all assets acquired and liabilities assumed, including contingent consideration, and requires expanded disclosures, SFAS 141(R) will be effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, and Amendment of ARB No. 51” (“SFAS No. 160”) The new pronouncement requires all entities to report noncontrolling (minority) interests in subsidiaries as a component of shareholders’ equity. SFAS No. 160 will be effective for fiscal years beginning after December 15, 2008. Early adoption is prohibited. Management is evaluating the potential effect this statement will have on Sovereign’s financial condition and results of operations.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS 161”), which requires enhanced disclosures about an entity’s derivative and hedging activities intended to improve the transparency of financial reporting. Under SFAS 161, entities will be required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Sovereign will adopt SFAS 161 effective January 1, 2009, and adoption is not anticipated to have a material impact on the Consolidated Financial Statements.

21

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(11) INTERESTS THAT CONTINUE TO BE HELD BY SOVEREIGN IN ASSET SECURITIZATIONS

     As described more fully in its annual report filed on Form 10-K, Sovereign has securitized certain financial assets to qualified special purpose entities which were deconsolidated in accordance with FAS 140.

     During the first quarter of 2008, Sovereign exercised its cleanup call option on its securitized mortgage loan portfolio. This did not have a significant impact on our consolidated statement of operations or financial condition.

     Shown below are the types of assets underlying the securitizations for which Sovereign owns and continues to own an interest in and the related balances and delinquencies at March 31, 2008 and December 31, 2007, and the net credit losses for the three-month period ended March 31, 2008 and the year ended December 31, 2007 (in thousands):

March 31, 2008 December 31, 2007

Principal Net Principal Net

Total 90 Days Credit Total 90 Days Credit

Principal Past Due Losses Principal Past Due Losses

Mortgage Loans
$ 13,277,908 $ 145,155 $ 3,631 $ 13,397,822 $ 130,101 $ 7,498

Home Equity Loans and Lines of Credit
6,382,727 96,012 4,580 6,300,558 88,848 11,063

Commercial Real Estate and Multi-family Loans
18,181,282 73,162 13,647 17,526,885 57,623 15,540

Automotive Floor Plan Loans
1,272,822 8,881 2,359 1,255,729 — 335

Total Owned and Securitized
$ 39,114,739 $ 323,210 $ 24,217 $ 38,480,994 $ 276,572 $ 34,436

Less:

Securitized Mortgage Loans
$ — $ — $ — $ 56,629 $ 638 $ 30

Securitized Home Equity Loans
99,221 16,524 772 103,410 15,764 2,915

Securitized Commercial Real Estate and Multi-family Loans
967,915 — — 973,601 — —

Securitized Automotive Floor Plan Loans
855,000 — 2,359 855,000 — 335

Total Securitized Loans
$ 1,922,136 $ 16,524 $ 3,131 $ 1,988,640 $ 16,402 $ 3,280

Net Loans
$ 37,192,603 $ 306,686 $ 21,086 $ 36,492,354 $ 260,170 $ 31,156

22

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(11) INTERESTS THAT CONTINUE TO BE HELD BY SOVEREIGN IN ASSET SECURITIZATIONS (continued)

At March 31, 2008 and December 31, 2007, key economic assumptions and the sensitivity of the fair value of the retained interests to immediate 10 percent and 20 percent adverse changes in those assumptions are as follows (dollars in thousands):

Home

Equity Commercial

Loans & Auto Loans

Lines of Floor Secured by

Credit Plan Loans Real Estate Total

Interests that continue to be held by Sovereign:

Accrued interest receivable
$ — $ 4,697 $ — $ 4,697

Subordinated interest retained
— 43,996 7,829 51,825

Servicing rights
202 — — 202

Interest only strips
6,732 1,010 — 7,742

Cash reserve
— 4,381 — 4,381

Total Interests that continue to be held by Sovereign
$ 6,934 $ 54,084 $ 7,829 $ 68,847

Weighted-average life (in yrs)
1.59 0.43 8.34

Prepayment speed assumption (annual rate)

As of the date of the securitization
22 % 50 % 10 %

As of December 31, 2007
17 % 49 % 10 %

As of March 31, 2008
15 % 42 % 10 %

Impact on fair value of 10% adverse change
$ (766 ) $ (113 ) $ —

Impact on fair value of 20% adverse change
$ (871 ) $ (218 ) $ —

Expected credit losses (annual rate)

As of the date of the securitization
0.75 % .25 % .50 %

As of December 31, 2007
2.81 % .25 % .50 %

As of March 31, 2008
2.51 % .25 % .50 %

Impact on fair value of 10% adverse change
$ (862 ) $ (43 ) $ (77 )

Impact on fair value of 20% adverse change
$ (1,062 ) $ (86 ) $ (153 )

Residual cash flows discount rate (annual)

As of the date of the securitization
12 % 8 % 12 %

As of December 31, 2007
12 % 8 % 17 %

As of March 31, 2008
12 % 8 % 25 %

Impact on fair value of 10% adverse change
$ (791 ) $ (101 ) $ (95 )

Impact on fair value of 20% adverse change
$ (824 ) $ (201 ) $ (188 )

     These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

     Sovereign enters into partnerships, which are variable interest entities under FIN 46, 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 Sovereign as the limited partner. Sovereign 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 $161.1 million at March 31, 2008 and any future cash obligations that Sovereign has committed to the partnerships. Future cash obligations related to these partnerships totaled $25.5 million at March 31, 2008. Sovereign investments in these partnerships are accounted for under the equity method.

23

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(12) UNRECOGNIZED TAX BENEFITS

     At March 31, 2008, Sovereign had net unrecognized tax benefit reserves related to uncertain tax positions of $79.3 million. Of this amount, approximately $13.0 million related to reserves established for uncertain tax positions from the acquisition of Independence. Any adjustments to these reserves in future periods will be adjusted through goodwill. The remaining balance of $66.3 million represents the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(in thousands)

Gross unrecognized tax benefits at December 31, 2007
$ 87,461

Additions based on tax positions related to the current year
3,581

Additions based on tax positions related to prior years
3,841

Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations
(571 )

Gross unrecognized tax benefits at March 31, 2008
94,312

Less: Federal, state and local income tax benefits
14,983

Net unrecognized tax benefits at March 31, 2008
79,329

Less: Unrecognized tax benefits included above that relate to acquired entities that would impact goodwill if recognized
13,027

Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of March 31, 2008
$ 66,302

     Sovereign 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, 2008 and for the corresponding period in the prior year, Sovereign recognized approximately $1.3 million and $1.9 million, respectively, in interest and penalties. Included in gross unrecognized tax benefits at March 31, 2008 was approximately $11.4 million for the payment of interest and penalties.

     Sovereign is subject to the income tax laws of the U.S., 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.

     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. Sovereign 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. The Internal Revenue Service (the “IRS”) is currently examining the Company’s federal income tax returns for the years 2002 through 2005. The Company anticipates that the IRS will complete this review in the second half of 2008. Included in this examination cycle are two separate financing transactions with an international bank, totaling $1.2 billion which are discussed in Note 12 in the Company’s Form 10-K. As a result of these transactions, Sovereign 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. In 2006 and 2007, Sovereign was subject to an additional $87.6 million and $22.5 million, respectively, of foreign taxes related to these financing transactions and claimed a corresponding foreign tax credit. While the IRS audit is not complete, recent developments in our IRS audit leads us to expect that the IRS will propose to disallow the foreign tax credits taken in 2003-2005 in the amount of $154 million related to these transactions and to assess interest and potentially penalties, the combined amount of which totaled approximately $70.1 million as of March 31, 2008. In addition, while the IRS has not yet initiated an audit for the years 2006 and 2007, we expect that in the future the IRS will propose to disallow the foreign tax credits taken in 2006 and 2007 of $87.6 million and $22.5 million, respectively, and to assess interest and potentially penalties, the combined amount of which totals approximately $15.8 million as of March 31, 2008. Sovereign may need to litigate this matter with the IRS. Sovereign believes that it is entitled to claim these foreign tax credits and also believes that its recorded tax reserves for this position of $58 million adequately provides for any potential exposure to the IRS related to foreign tax credits and other tax assessments. However, as the Company continues to go through the IRS administrative process, and if necessary litigation, we will continue to evaluate the appropriate tax reserve levels for this position and any changes made to the tax reserves may materially affect Sovereign’s income tax provision, net income and regulatory capital in future periods.

24

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(13) RELATED PARTY TRANSACTIONS

     Loans to related parties include loans made to certain officers, directors and their affiliated interests. These loans were made on terms similar to non-related parties. The following table discloses the changes in Sovereign’s related party loan balances since December 31, 2007.

Related party loans at December 31, 2007
$ 13,963

Loan fundings
4,612

Loan repayments
(556 )

Related party loan balance at March 31, 2008
$ 18,019

     Related party loans at March 31, 2008 included commercial loans to affiliated businesses of directors of Sovereign Bancorp and the Bank totaling $14.9 million compared with $10.6 million at December 31, 2007. Related party loans at March 31, 2008 and December 31, 2007 also included consumer loans secured by residential real estate of $3.1 million and $3.4 million, respectively, to executive officers and directors of Sovereign Bancorp. Related party loans do not include undrawn commercial and consumer lines of credit that totaled $1.4 million and $1.3 million at March 31, 2008 and December 31, 2007, respectively.

     The Company is engaged in certain activities with Meridian Capital due to its acquisition of Independence. Meridian Capital is deemed to be a “related party” of the Company as such term is defined in SFAS No. 57 since Sovereign has a 35% minority equity investment in Meridian Capital, which is 65% owned by Meridian Funding, a New-York based mortgage firm. Meridian Capital refers and receives fees from borrowers seeking financing of their multi-family and/or commercial real estate loans to Sovereign as well as to numerous other financial institutions. Sovereign recognized $2.4 million and $1.6 million, respectively, of income due to its investment in Meridian Capital for the three-month period ended March 31, 2008 and March 31, 2007. Additionally, substantially all of Sovereign’s multi-family loan originations are obtained via our relationship with Meridian Capital. Sovereign recognized gains on the sale of multi-family loans of $9.2 million and $10.6 million for the three-month periods ended March 31, 2008 and 2007, respectively.

     As discussed in Note 3 in Sovereign’s 2007 Form 10-K, Sovereign raised $2.4 billion of equity by issuing 88.7 million shares to Banco Santander Central Hispano (“Santander”), which makes Santander the largest shareholder and a related party. Per the terms of Sovereign’s investment agreement with Santander, Sovereign is permitted to have at least three Santander employees on its payroll, and Santander is permitted to have at least three Sovereign employees on its payroll.

     In 2006, Santander extended a total of $425 million in unsecured lines of credit to the Bank for federal funds and Eurodollar borrowings and for the confirmation of standby letters of credit issued by the Bank. These lines are at a market rate and in the ordinary course of business and can be cancelled by either the Bank or Santander at any time and can be replaced by the Bank at any time. During the first quarter of 2008, the average balance outstanding was $98.7 million, which consisted entirely of standby letters of credit. As of March 31, 2008, there was no outstanding balance on the unsecured lines of credit for federal funds and Eurodollar borrowings. The Bank paid approximately $0.3 million in fees to Santander for the three-month period ended March 31, 2008 in connection with these commitments.

     In February 2007, Sovereign entered into an agreement with Isban U.K., Ltd. (“Isban”), an information technology subsidiary of Santander, under which Isban performed a review of, and recommended enhancements to, Sovereign’s banking information systems. Sovereign has paid Isban $475,000, excluding expenses, for this review. In June 2007, Sovereign and Isban entered into an agreement whereby Isban will provide Sovereign certain consulting services through December 31, 2008. Sovereign has agreed to pay Isban $2.2 million, excluding expenses for these services.

     As discussed in Note 12 of our 2007 Form 10-K, Sovereign issued $300 million of senior notes during the first quarter of 2007 and Santander was a co-issuer of this issuance. Santander received underwriting fees of $37,500 in connection with this transaction.

25

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(14) FAIR VALUE

     As discussed in Note 10, “Recent Accounting Pronouncements”, to the Consolidated Financial Statements Sovereign adopted SFAS No. 159 on its residential mortgage loans classified as held for sale that were originated subsequent to January 1, 2008. Sovereign hedges its residential held for sale portfolio with forward sale agreements which are reported at fair value under SFAS No. 133. We historically did not apply hedge accounting to this loan portfolio because of the complexity of these accounting provisions. Under our historical lower of cost or market accounting treatment, we were unable to record the excess of our fair market value over book value but were required to record the corresponding reduction in value on our hedges. Under SFAS No. 159, both the loans and related hedges are carried at fair value which reduces earnings volatility.

     Sovereign’s residential loan held for sale portfolio had an aggregate fair value of $623.6 million at March 31, 2008. The contractual principal amount of these loans totaled $623.9 million. The difference in fair value compared to principal balance of $0.3 million was recorded in mortgage banking revenues during the three-month period ended March 31, 2008. Substantially all of these loans are current and none are in non-accrual status. Interest income on these loans is credited to interest income as earned. The fair value of these loans is estimated based upon the anticipated exit price for these loans in the secondary market to agency buyers such as Fannie Mae and Freddie Mac. Practically all of our residential loan held for sale portfolio is sold to these two agencies.

     The most significant instruments that the Company fair values include investment securities, derivative instruments and loans. 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.

     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.

     To comply with the provisions of SFAS No. 157, 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, 2008, 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 its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The Company does not have any fair value measurements for derivatives using significant unobservable input (Level 3) as of March 31, 2008.

     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.

26

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, expect per share amounts)
(Unaudited)

(14) FAIR VALUE (continued)

     The following table presents the assets and liabilities that are measured at fair value on a recurring basis by level within the fair value hierarchy (see Note 10 for further information on the fair value hierarchy) as reported on the consolidated statements of financial condition at March 31, 2008. As required by SFAS No. 157, 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 Reporting Date Using:

Quoted Prices in

Active Markets for Significant Other Significant Balance at

Identical Assets Observable Inputs Unobservable March 31,

(Level 1) (Level 2) Inputs(Level 3) 2008

Assets:

US Treasury and government agency securities
$ — $ 67,257 $ — $ 67,257

Debentures of FHLB, FNMA and FHLMC
— 143,086 — 143,086

Corporate debt and asset-backed securities
— 54,290 479,351 533,641

Equity securities
— 20,716 605,740 626,456

State and municipal securities
— 2,389,415 — 2,389,415

Mortgage backed securities
— 5,976,898 1,221,666 7,198,564

Total investment securities available for sale
— 8,651,662 2,306,757 10,958,419

Loans held for sale
— 739,328 — 739,328

Derivatives
— (364,316 ) — (364,316 )

Mortgage servicing rights
— — 146,109 146,109

Other assets
— 46,582 4,899 51,481

Total
$ — $ 9,073,256 $ 2,457,765 $ 11,531,021

     Sovereign’s Level 3 assets are primarily comprised of CDO’s, FNMA/FHLMC preferred stock and certain non-agency mortgage backed securities. These investments are thinly traded and, in certain instances, Sovereign is the sole investor in these securities. Sovereign receives third party broker quotes for these securities to determine their estimated fair value. 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.

     The table below presents the changes in our Level 3 balances since year-end (in thousands).

Investments Mortgage

Available Servicing Other

for Sale Rights Assets Total

Balance at December 31, 2007
$ 2,700,513 $ 162,623 $ 7,104 $ 2,870,240

Gains or losses in other comprehensive income
(319,414 ) — — (319,414 )

Gains or losses in earnings
— (23,559 ) — (23,559 )

Purchases/Additions
79 16,735 — 16,814

Repayments
(74,421 ) — (533 ) (74,954 )

Sales/Amortization
— (9,690 ) (1,672 ) (11,362 )

Balance at March 31, 2008
$ 2,306,757 $ 146,109 $ 4,899 $ 2,457,765

27

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, expect per share amounts)
(Unaudited)

(15) LEGAL CONTINGENCIES

Except as discussed below, Sovereign is not involved in any pending material legal proceeding other than routine litigation occurring in the ordinary course of business. Sovereign does not expect that any amounts that it may be required to pay in connection with these routine litigation matters would have a material adverse effect on its financial position.

In January 2008, the Company received a letter from a purported shareholder demanding an investigation into the Board of Director’s oversight of several public disclosures made by the Company from June 2006 through January 2008, contending primarily that the Company inadequately disclosed its exposure to changes in the consumer credit market. The Board is currently analyzing the demand letter from the purported shareholder and will respond in due course after completing its consideration of the issues raised therein.

In the first quarter of 2008, a former employee filed a putative class action in Pennsylvania federal court alleging that the Company violated ERISA in connection with the management of certain plans. The plaintiff alleges that the Company knew or should have known that the Company’s stock was not a prudent investment for the Company’s retirement plan beginning on or about January 1, 2007. The complaint also alleges that the Company provided the putative class and the investing community with inadequate disclosure concerning the Company’s financial condition, resulting in the stock having an inflated value until the Company’s disclosures in January 2008. The Company believes that the claims are without merit and intends to vigorously defend the claims.

In the first quarter of 2008 a voluntary mediation was held in connection with a claim made against Sovereign related to an investment advisor in Massachusetts who defrauded numerous victims over a long period of time. The fraud reportedly amounted to tens of millions of dollars. The investment advisor’s companies had accounts at Sovereign. The court appointed an ancillary receiver to pursue claims against Sovereign and another bank, and the ancillary receiver filed a complaint against Sovereign. Some of the victims joined in the action as plaintiffs, and some of the claims are putative class action claims. The ancillary receiver recently filed a motion seeking class certification. Little progress was made towards a settlement at the voluntary mediation that was held in the first quarter of 2008 and a tentative trial date has been scheduled for July 2008. The Company believes the claims are without merit and intends to vigorously defend the claims.

28

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

EXECUTIVE SUMMARY

     Sovereign is a financial institution with community banking offices, operations and team members located principally in Pennsylvania, Massachusetts, New Jersey, Connecticut, New Hampshire, New York, Rhode Island, Maryland, and Delaware. Sovereign gathers substantially all of its deposits in these market areas. We use these 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 residential, home equity, and multi-family loans and investment securities, capital markets products, cash management 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 various factors including the economic environment, including interest rates, consumer and business confidence and spending, as well as competitive conditions within our geographic footprint.

     Our customers select Sovereign 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. Our major strengths include: a strong franchise value in terms of market share and demographics and diversified loan portfolio and products. Our weaknesses have included operating returns and capital ratios that are lower than certain of our peers. We have also not achieved our growth targets with respect to low cost core deposits.

     In order to improve our capital position, we plan on completing a comprehensive review of our business lines to ensure we are optimizing the use of capital. We anticipate that this review will result in a flat to declining balance sheet for the remainder of 2008 which, in turn, should help strengthen our capital ratios. Additionally, during 2007 Sovereign paid common stock dividends of $153 million. As discussed in our 2007 Form 10K, we suspended this dividend in light of the ongoing challenges facing the financial services industry to help bolster capital. Finally, we anticipate that internal equity generation through earnings will increase our capital ratios over the next several quarters. Sovereign earned $100 million of net income in the first quarter of 2008, despite a challenging credit environment which resulted in elevated provisions of credit losses compared to the corresponding period in the prior year. Our first quarter earnings added 18 basis points to Sovereign Bank’s total risk based capital ratio during the first quarter. However, our total risk based capital ratio declined to 10.24% at March 31, 2008 from 10.40% at December 31, 2007. This decline was due to an increase in regulatory risk weighted assets which was due to commercial loan growth as well as a $100 million decrease in the amount of subordinated debt issued by Sovereign Bank which qualified as Tier 2 regulatory capital. As previously discussed in our Form 10-K, Sovereign issued $500 million of 10-year subordinated debt in March 2003. Under current OTS rules, 5 years prior to maturity, 20% of the balance of these notes will no longer qualify as Tier 2 capital. In each successive year prior to maturity, an additional 20% of the subordinated notes will no longer qualify as Tier 2 capital.

     In order to improve our operating returns, we continue to focus on acquiring and retaining customers by demonstrating convenience through our locations, technology and business approach while offering innovative and easy-to-use products and service. We are focused on a number of initiatives to improve the customer experience. During 2007, customer service personnel received refresher service training and we migrated back to having all customer service functions being domestically based. We realigned our consumer and commercial infrastructure by consolidating our commercial and retail banking management structure. We also rationalized and simplified our retail deposit product set by reducing the number of retail checking products we offer.

     In the fourth quarter of 2007, we piloted a new retail deposit strategy called “Customer First” in certain markets within our footprint. The goal of Customer First is to increase deposit retention and growth rates and increase the number of products and services our customers maintain and use at Sovereign. The results of this initial rollout were positive and we implemented Customer First throughout our entire branch network in the first quarter of 2008. Additionally, in the first quarter of 2008, Sovereign hired a senior level executive who reports to our Chief Executive Officer to lead our Retail Banking Divisions. We believe these two steps helped stabilize our deposit base in the first quarter of 2008, as average retail and commercial deposits increased to $38.4 billion, compared to $38.1 billion at year-end and $37.3 billion a year ago.

RECENT INDUSTRY CONSOLIDATION IN OUR GEOGRAPHIC FOOTPRINT

     The Banking industry has experienced significant consolidation in recent years. Consolidation may affect the markets in which Sovereign 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 Sovereign, as well as the practices and strategies of our competition, including loan and deposit pricing, customer expectations and the capital markets.

29

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

CURRENT INTEREST RATE ENVIRONMENT

     Net interest income represents a substantial portion of the Company’s revenues. Accordingly, the interest rate environment has a substantial impact on Sovereign’s earnings. Sovereign currently has a mildly liability sensitive interest rate risk position. Sovereign restructured its balance sheet and sold approximately $8.0 billion of low margin and/or high credit risk assets in early 2007. We utilized the proceeds to pay off higher cost borrowings. The impact of this balance sheet restructuring and our liability sensitive interest rate position helped increase our net interest margin during the first quarter of 2008 to 2.88% from 2.77% in the fourth quarter of 2007. 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, and loan and investment prepayment rates. 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 Sovereign’s net interest income.

CREDIT RISK ENVIRONMENT

     The credit quality of our loan portfolio has a significant impact on our operating results. We have experienced a deterioration in certain key credit quality performance indicators in the first quarter of 2008 and the second half of 2007 which has resulted in higher levels of charge-offs and provision for credit losses. For the first quarter of 2008, the provision for credit losses and charge-offs were $135.0 million and $74.3 million, respectively, compared to $46.0 million and $24.1 million in the first quarter of 2007, respectively. The increases in charge-offs have been driven primarily by our consumer businesses including auto, residential and home equity lending.

     During the first quarter of 2007, Sovereign sold $3.4 billion of correspondent home equity loans but decided to retain $658 million due to adverse market conditions. Sovereign had previously stopped originating this loan product in the first quarter of 2006. We wrote the loans that we retained down to fair value. This write-down included an estimate of future credit losses associated with the loans based on current market conditions at that time. However, declining real estate values and limited availability of credit in the marketplace reduced refinancing options for these customers. As a result, Sovereign recorded additional provisions of $47 million in the third quarter of 2007. As of March 31, 2008, Sovereign has $321.5 million of first lien loans and $117.6 million of second lien correspondent home equity loans, which have total credit reserves of $11.6 million and $47.8 million, respectively.

     Additionally, during 2007, Sovereign expanded its indirect auto loan portfolio into the Southeastern and Southwestern United States (“the out-of-market loans”). Sovereign originated $2.8 billion of out-of-market loans in 2007 at a weighted average yield of 8.04%. However credit losses were higher than our expectations for those new originations. Effective January 31, 2008, Sovereign ceased originating new auto loans from this market. We also strengthened our underwriting standards in the second half of 2007 on our entire auto loan portfolio. We believe these two decisions will lower loss rates in future periods, however losses are anticipated to remain at elevated levels during the first half of 2008 as the newly originated loans continue to season. In the first quarter of 2008, losses were in line with our forecast. However, deterioration in the economy of the regions where we extended these loans could have a significant adverse impact on the amount of credit losses we experience in 2008. The remaining balance of our auto out-of-market loan portfolio at March 31, 2008 was $2.4 billion with reserves for credit losses of $91.4 million.

     As discussed previously, conditions in the housing market significantly impacted certain areas of our business. Certain segments of our consumer and commercial loan portfolios have exposure to the housing market. Sovereign has residential real estate loans totaling $13.3 billion at March 31, 2008. However, actual credit losses on these loans have been modest and totaled $4.9 million during the three-month period ended March 31, 2008. Our first quarter loss rate did increase to 15 basis points which would equate to annualized 2008 losses of $19.4 million. We believe these amounts are quite favorable compared to the industry. We believe this can be attributed to Sovereign’s conservative underwriting approach for this portfolio as we did not originate any negative amortization loans nor did we offer any adjustable rate mortgages with below market rates during an introductory period (i.e. teaser rate loans). Although we do have Alt-A loans, (loans that provide customers with reduced documentation requirements in return for a quicker decisioning and higher interest rates) these loans are generally of a high quality and have a weighted average FICO at origination of 719 and average loan to values of 66%. Future losses in our residential loan portfolio will continue to be significantly influenced by home prices in the residential real estate market. Sovereign also has $5.9 billion of home equity loans and lines of credit (excluding the correspondent home equity loans mentioned above). Credit losses on these loans for the three-month period ended March 31, 2008 were $5.4 million. This portfolio consists of loans with an average FICO at origination of 791 and an average loan to value of 63%. We have total reserves of $30.8 million for our home equity loan portfolio at March 31, 2008.

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SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

     During the first quarter of 2008, we continued to experience increases in non-performing assets in our commercial lending and commercial real estate portfolios. Non-performing assets for these portfolios increased to $140.3 million and $95.4 million at March 31, 2008 from $85.4 million and $61.8 million at December 31, 2007. Given these changes, we increased our allowance for loan losses for these portfolios by approximately $57.7 million during the first quarter. This increase was a significant component of our provision for credit losses of $135.0 million during the first quarter of 2008. A large portion of these increases is tied to companies that are in housing related industries. We expect that the difficult housing environment as well as deteriorating economic conditions will continue to impact our commercial lending and commercial real estate portfolios which may result in elevated levels of provisions for credit losses in future periods.

RESULTS OF OPERATIONS

General

     Net income was $100.1 million, or $0.20 per diluted share for the three-month period ended March 31, 2008 as compared to $48.1 million, or $0.09 per diluted share for the three-month period ended March 31, 2007. Net income in the first quarter of 2007 included charges of $183.3 million ($119.2 million after-tax or $0.25 per share) related to our 2007 balance sheet restructuring and an expense saving initiative. The first quarter 2008 results included an elevated provision for credit losses compared with the corresponding period in the prior year. Due to the slowing economic conditions and the deterioration in most categories of our loan portfolios, the provision for credit losses has increased to $135 million in the three-month period ended March 31, 2008 compared to $46 million for the three-month period ended March 31, 2007.

31

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT NET INTEREST MARGIN ANALYSIS
THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(in thousands)

2008 2007

Tax Tax

Average Equivalent Yield/ Average Equivalent Yield/

Balance Interest Rate Balance Interest Rate

EARNING ASSETS

INVESTMENTS
$ 13,034,150 $ 200,922 6.17 % $ 15,175,372 $ 230,601 6.09 %

LOANS:

Commercial loans
27,108,494 422,410 6.26 % 24,599,792 438,157 7.21 %

Multi-Family
4,316,489 65,907 6.12 % 5,890,879 98,783 6.72 %

Consumer loans

Residential mortgages
13,272,189 187,088 5.64 % 15,592,954 223,023 5.72 %

Home equity loans and lines of credit
6,217,574 96,072 6.21 % 9,497,940 165,351 7.04 %

Total consumer loans secured by real estate
19,489,763 283,160 5.82 % 25,090,894 388,374 6.22 %

Auto loans
6,967,076 121,196 7.00 % 5,186,143 86,142 6.74 %

Other
314,006 6,404 8.20 % 422,161 8,821 8.47 %

Total consumer
26,770,845 410,760 6.16 % 30,699,198 483,337 6.34 %

Total loans
58,195,828 899,077 6.20 % 61,189,869 1,020,277 6.72 %

Allowance for loan losses
(721,543 ) — — (474,518 ) — —

NET LOANS
57,474,285 899,077 6.28 % 60,715,351 1,020,277 6.78 %

TOTAL EARNING ASSETS
70,508,435 1,099,999 6.26 % 75,890,723 1,250,878 6.64 %

Other assets
10,422,253 — — 11,724,949 — —

TOTAL ASSETS
$ 80,930,688 $ 1,099,999 5.45 % $ 87,615,672 $ 1,250,878 5.75 %

FUNDING LIABILITIES

Deposits and other customer related accounts:

Core deposits and other related accounts
$ 28,145,395 $ 160,529 2.29 % $ 29,722,658 $ 225,503 3.08 %

Time deposits
14,334,371 154,574 4.34 % 15,747,878 187,748 4.84 %

TOTAL DEPOSITS
42,479,766 315,103 2.98 % 45,470,536 413,251 3.69 %

BORROWED FUNDS:

FHLB advances
18,685,052 214,819 4.61 % 18,099,582 226,035 5.04 %

Fed funds and repurchase agreements
1,131,202 9,417 3.35 % 1,743,010 23,229 5.40 %

Other borrowings
3,625,668 54,650 6.04 % 5,412,697 76,971 5.71 %

TOTAL BORROWED FUNDS
23,441,922 278,886 4.77 % 25,255,289 326,235 5.21 %

TOTAL FUNDING LIABILITIES
65,921,688 593,989 3.62 % 70,725,825 739,486 4.23 %

Demand deposit accounts
6,342,945 — — 6,335,301 — —

Other liabilities
1,722,005 — — 1,819,565 — —

TOTAL LIABILITIES
73,986,638 593,989 3.22 % 78,880,691 739,486 3.79 %

STOCKHOLDERS’ EQUITY
6,944,050 — — 8,734,981 — —

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 80,930,688 593,989 2.95 % $ 87,615,672 739,486 3.41 %

NET INTEREST INCOME
$ 506,010 $ 511,392

NET INTEREST SPREAD (1)
2.64 % 2.41 %

NET INTEREST MARGIN (2)
2.88 % 2.70 %

(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.

32

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Net Interest Income

     Net interest income for the three-month period ended March 31, 2008 was $482.2 million compared to $487.9 million for the same period in 2007. The decrease in net interest income was due to a decrease in average interest earning assets to $70.5 billion for the three-month period ending March 31, 2008 compared to $75.9 billion for the three-month period ending March 31, 2007 as a result of the sale of $3.4 billion, $2.9 billion and $1.2 billion of correspondent home equity, residential mortgage loans and multi-family loans, respectively, in connection with our balance sheet restructuring in the first quarter of 2007. Partially offsetting this decrease was an increase in net interest margin for the three-month period ended March 31, 2008 to 2.88%, compared to the corresponding period in the prior year of 2.70%. The reason for the increase has been due to the recent steepening of the yield curve, the balance sheet restructuring we executed in the first quarter of 2007 and reductions in short-term interest rates which has benefited us given our mildly liability sensitive interest rate position.

     Interest on investment securities and interest earning deposits was $180.9 million for the three-month period ended March 31, 2008, compared to $210.4 million for the same period in 2007. The average balance of investment securities was $13.0 billion with an average tax equivalent yield of 6.17% for the three-month period ended March 31, 2008 compared to an average balance of $15.2 billion with an average yield of 6.09% for the same period in 2007. The increase in yield is primarily due to purchase mark amortization on certain investment securities that were acquired from the Independence acquisition which benefited investment yields by 7 basis points in the first quarter of 2008.

     Interest on loans was $895.3 million for the three-month period ended March 31, 2008, compared to $1.0 billion for the three-month period in 2007. The average balance of loans was $58.2 billion with an average yield of 6.20% for the three-month period ended March 31, 2008 compared to an average balance of $61.2 billion with an average yield of 6.72% for the same period in 2007. Average balances of commercial loans in 2008 increased $2.5 billion, as compared to 2007 primarily due to strong organic growth in our commercial loan portfolio. Commercial loan yields have decreased 95 basis points due to the decline in short-term interest rates which has decreased the yields on our variable rate loan products. Average residential mortgages decreased $2.3 billion due to the sale of $2.9 billion of residential loans in the first quarter of 2007. Average home equity loans and lines of credit decreased $3.3 billion from the prior year due to the sale of $3.4 billion of correspondent home equity loans in connection with the previously mentioned balance sheet restructuring at the end of the first quarter of 2007. Average multi-family loans decreased $1.6 billion from the prior year due to the sale of $1.3 billion of multi-family loans in the first quarter of 2007 and approximately $688 million in the second quarter of 2007 as a part of a commercial mortgage backed securitization. Average balances of auto loans increased to $7.0 billion from $5.2 billion due to organic in-market growth and a decision towards the middle of 2006 to expand out-of-market loans. The out of market loans have significantly contributed to the growth in auto loans. However, as previously discussed, losses on these loans have been higher than our expectations and effective January 31, 2008, management ceased originating loans from these channels.

     Interest on deposits and related customer accounts was $315.1 million for the three-month period ended March 31, 2008, compared to $413.3 million for the same period in 2007. The average balance of deposits was $42.5 billion with an average cost of 2.98% for the three-month period ended March 31, 2008 compared to an average balance of $45.5 billion with an average cost of 3.69% for the same period in 2007. The average balance of non-interest bearing demand deposits has remained constant with $6.3 billion in both periods. The decrease in the balance of total deposits is primarily due to decreases in costlier wholesale deposit categories. The decrease in average cost is due primarily to decreases in costlier wholesale deposit categories as well as a reduction in short-term interest rates.

     Interest on borrowed funds was $278.9 million for the three-month period ended March 31, 2008, compared to $326.2 million for the same period in 2007. The average balance of borrowings was $23.4 billion with an average cost of 4.77% for the three-month period ended March 31, 2008 compared to an average balance of $25.3 billion with an average cost of 5.21% for the same period in 2007. The decline in average borrowings is due to our 2007 balance sheet restructuring and the decline in average cost is due to reductions in short-term interest rates.

     Sovereign currently has a series of callable advances totaling $2.6 billion with the FHLB. These advances provide variable rate funding (currently at 4.88%) during the non-call period which ranges from 6 to 18 months. After the non-call period, the interest rates on these advances resets to a fixed rate of interest with certain caps (ranging from 4.95% to 5.50%) and floors of 0%. If these advances are not called by the FHLB, they would mature on various dates ranging from August 2012 to September 2016.

33

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

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, 2008 was $135.0 million, compared to $46.0 million for the same period in 2007. The provision for credit losses for the three months ended March 31, 2008 includes a higher level of provision versus 2007 due to several factors as discussed below.

     Sovereign experienced further deterioration in the credit quality of certain commercial loans due to weakening market conditions. As a result of an increase in criticized and non-accrual loans and growth of $2.9 billion in our commercial real estate loans and commercial industrial loans, Sovereign increased the provision for credit losses by approximately $57.7 million for our commercial portfolio since year-end. Although we believe current levels of reserves are adequate to cover the inherent losses for these loans, future changes in housing values, interest rates and economic conditions could impact the provision for credit losses for these loans in future periods.

     Finally, weakening credit conditions increased charge-offs in the first quarter of 2008 to $74.3 million compared to $24.1 million for the corresponding period in the prior year. This equates to an annualized net loan charge-off to average loan ratio of 0.51% for the three months ended March 31, 2008 compared to 0.16% for the comparable period in the prior year. The majority of the increase was related to our consumer loan portfolio including auto, residential mortgages and home equity loans. Approximately $28.3 million of the charge-offs in the first quarter of 2008 compared to $1.2 million in the first quarter of 2007 relate to auto loans in the Southeast and Southwest markets. We ceased originating new auto loans in the Southeast and Southwest markets effective January 31, 2008.

     Non-performing assets were $484.4 million or 0.59% of total assets at March 31, 2008, compared to $361.6 million or 0.43% of total assets at December 31, 2007 and $278.4 million or 0.34% of total assets at March 31, 2007. The reason for the increase since year-end is due to an increase in non-performing commercial loans, a significant portion of which relates to the housing industry. We factored in this increase when establishing our loan loss reserves at March 31, 2008 and it was one of the factors that led to the aforementioned increase of $57.7 million of provisions during the first quarter of 2008 on our commercial loan portfolio. Management regularly evaluates Sovereign’s loan portfolios, and its allowance for loan losses, and adjusts the loan loss allowance as deemed necessary.

34

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

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

Three-Month Period Ended

March 31,

2008 2007

Allowance for loan losses, beginning of period
$ 709,444 $ 471,030

Charge-offs:

Commercial
17,523 16,032

Consumer secured by real estate
16,119 5,792

Consumer not secured by real estate
66,586 19,580

Total Charge-offs
100,228 41,404

Recoveries:

Commercial
2,395 4,161

Consumer secured by real estate
1,901 3,705

Consumer not secured by real estate
21,636 9,448

Total Recoveries
25,932 17,314

Charge-offs, net of recoveries
74,296 24,090

Provision for loan losses (1)
140,293 45,239

Allowance released in connection with loan sales
— 4,893

Allowance for loan losses, end of period
775,441 487,286

Reserve for unfunded lending commitments, beginning of period
28,301 15,255

Provision/(benefit) for unfunded lending commitments (1)
(5,293 ) 761

Reserve for unfunded lending commitments, end of period
23,008 16,016

Total Allowance for credit losses
$ 798,449 $ 503,302

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

Non-Interest Income

     Total non-interest income was $171.8 million for the three-month period ended March 31, 2008, compared to $46.9 million for the same period in 2007. The first quarter of 2007 includes a $119.9 million charge on the correspondent home equity loan portfolio that was sold in connection with the balance sheet restructuring.

     Consumer banking fees were $73.2 million for the three-month period ended March 31, 2008, compared to $68.0 million for the same period in 2007, representing an 8% increase. The increase for the three months ended March 31, 2008 is due primarily to growth in deposit fees to $57.0 million for the three-month period ended March 31, 2008 compared to $54.8 million for the corresponding period in the prior year due to certain pricing changes on deposit products.

     Commercial banking fees were $54.4 million for the three-month period ended March 31, 2008, compared to $49.4 million for the same period in 2007, representing an increase of 10%. The increase for the three-months ended March 31, 2008 is due primarily to growth in deposit fees to $19.9 million for the three-month period ended March 31, 2008 compared to $13.6 million for the corresponding period in the prior year due to an increase in cash management fees.

35

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Net mortgage banking income was composed of the following components (in thousands):

Three months ended

March 31,

2008 2007

Sales of mortgage loans and related securities
3,977 5,547

Sale of correspondent home equity loans
— (119,892 )

Net gains/(loss) under SFAS 133
1,370 (388 )

Mortgage servicing fees
11,917 9,729

Amortization of mortgage servicing rights
(8,069 ) (9,482 )

Impairments to residential mortgage servicing rights
(18,703 ) —

Sales of multi-family loans
9,231 10,557

Impairments to multi-family mortgage servicing rights
(4,856 ) —

Net loss recorded on commercial mortgage backed securitization
— (3,276 )

Total mortgage banking income
$ (5,133 ) $ (107,205 )

     Mortgage banking results consist of fees associated with servicing loans not held by Sovereign, as well as amortization and changes in the fair value of mortgage servicing rights. 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 Sovereign, 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.

     In the first quarter of 2008, Sovereign recorded gains on the sale of multi-family loans of $9.2 million on $1.0 billion of multi-family loans compared to gains of $10.6 million on the sale of $1.8 billion of loans for the corresponding period in the prior year. The first quarter of 2007 had a higher level of sales due to the previously discussed balance sheet restructuring. In the first quarter of 2008, Sovereign recorded gains on the sale of mortgage loans of $4.0 million on $909.1 million of mortgage loans compared to gains of $5.5 million on $793.2 million of loans for the corresponding period in the prior year. The first quarter of 2007 included the previously discussed $119.9 million charge on the correspondent home equity portfolio.

     At March 31, 2008, Sovereign serviced approximately $11.5 billion of residential mortgage loans for others and our net mortgage servicing asset was $127.9 million, compared to $11.2 billion of loans serviced for others and a net mortgage servicing asset of $141.1 million, at December 31, 2007. The most important assumptions in the valuation of mortgage servicing rights are anticipated loan prepayment rates (CPR speed) and the positive spread we receive on 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, Sovereign 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 at least annually and is used by management to evaluate the reasonableness of our discounted cash flow model. For the three-month period ended March 31, 2008, Sovereign recorded $18.7 million of mortgage servicing right impairment reserves due to an increase in prepayment speed assumptions at March 31, 2008 compared to December 31, 2007 as shown below. 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 Sovereign in its evaluation of mortgage servicing rights for the periods presented.

March 31, 2008 December 31, 2007 March 31, 2007

CPR speed
20.64 % 14.70 % 14.81 %

Escrow credit spread
4.94 % 5.12 % 4.96 %

36

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

     Sovereign will periodically sell qualifying mortgage loans to FHLMC, GNMA, and FNMA (“Fannie Mae”) in return for mortgage-backed securities issued by those agencies. Sovereign 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 Sovereign retains servicing rights, Sovereign allocates the net book balance transferred between servicing rights and investment securities based on their relative fair values. If Sovereign sells the mortgage-backed securities which relate to underlying loans previously held by the Company, the gain or loss on the sale is recorded in mortgage banking income in the accompanying consolidated statement of operations. The gain or loss on the sale of all other mortgage-backed securities is recorded in gains on sales of investment securities on the consolidated statement of operations.

     Sovereign originates and sells multi-family loans in the secondary market to Fannie Mae while retaining servicing. Generally, the Company can originate and sell loans to Fannie Mae for not more than $20.0 million per loan. 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, Sovereign 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 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.

     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, 2008 and December 31, 2007, Sovereign had a $26.0 million and $23.5 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, 2008 and December 31, 2007, Sovereign serviced $11.7 billion and $10.9 billion of loans for Fannie Mae sold to it pursuant to this program with a maximum potential loss exposure of $222.8 million and $206.8 million, respectively. As a result of this retained servicing on multi-family loans sold to Fannie Mae, the Company had loan servicing assets of $17.3 million and $20.4 million at March 31, 2008 and December 31, 2007, respectively. During the three-month period ended March 31, 2008 and the corresponding period in the prior year, Sovereign recorded servicing asset amortization of $1.7 million and $1.5 million, respectively. Additionally, during the first quarter of 2008, Sovereign recorded a $4.9 million servicing right asset impairment charge due to lower escrow rate reinvestment yield assumptions due to recent interest rate cuts by the Federal Reserve.

     Capital markets revenues increased to $10.4 million for the three-month period ended March 31, 2008, compared to $5.7 million for the same period in 2007. The reason for this increase was due to the recent declining interest rate environment which has allowed us to sell more interest rate derivative products to our customers.

     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 decrease in BOLI income to $19.4 million for the three-month period ended March 31, 2008, compared to $20.5 million for the comparable period in the prior year is primarily due to decreased death benefits in 2008.

     Net gains on sales of investment securities were $14.1 million for the three-month period ended March 31, 2008, compared to $1.0 million for the same period in 2007. In the first quarter of 2008, we recorded net cash proceeds of $14.1 million on the mandatory redemption of approximately half of our Visa Initial Public Offering (IPO) shares. Our remaining shares are required to be held for 3 years pending settlement of other possible litigation that Visa and its member banks are exposed to. These shares are required to be valued at their historical cost of $0. In March 2011, we will no longer have any restrictions on these shares.

37

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

General and Administrative Expenses

     General and administrative expenses for the three-month period ended March 31, 2008 were $359.3 billion, compared to $330.0 million for the same period in 2007. General and administrative expenses increased for the three-month period ended March 31, 2008 primarily due to increased deposit insurance premiums and an increase in compensation costs. Higher deposit premium assessment rates were established in 2007 by the FDIC; however, Sovereign received a $29 million credit to be applied against future assessments, which was exhausted in the fourth quarter of 2007. As a result, we incurred higher deposit premiums of $7.6 million in the first quarter of 2008 compared to the corresponding period in the prior year. Additionally, compensation and benefit costs increased $11.3 million from the same period in the prior year primarily due to merit increases. Average full time equivalents during the first quarter of 2008 declined to 11,206 from 11,435 for the comparable prior year period due to the reduction in workforce as part of our restructuring plan in 2007. As previously discussed, Sovereign received proceeds from the mandatory redemption of our Visa IPO shares. This amount was net of proceeds Visa funded to an escrow account to provide for possible costs associated with pending litigation against Visa and its member banks. This funding allowed member banks of Visa to reverse litigation related accruals made in 2007. Sovereign had accrued $7.8 million in 2007 for this exposure and reversed $6.4 million of this amount in the three-month period ended March 31, 2008.

Other Expenses

     Other expenses consist primarily of amortization of intangibles, minority interest expense, merger related and integration charges, equity method investment expense, employee severance and other restructuring and proxy and related professional fees. Other expenses were $37.5 million for the three-month period ended March 31, 2008, compared to $116.8 million for the same period in 2007. The reason for the variance is discussed below.

     Sovereign recorded charges of $20.0 million and $43.4 million for the three-month period ended March 31, 2007 associated with restructuring charges and freezing its ESOP, respectively. Additionally, the first quarter of 2007 included $6.2 million of expense related to an equity method investment Sovereign had in a synthetic fuel partnership that generated Section 29 tax credits for the production of fuel from a non-conventional source. We amortized this through December 31, 2007 since this is the period through which we received the tax credits. Therefore, we did not incur any expense in the first quarter of 2008 related to this investment.

     Sovereign recorded intangible amortization expense of $29.1 million for the three-month period ended March 31, 2008, compared to $33.3 million for the corresponding period in the prior year. The decrease in the three-month period is due primarily to decreased core deposit intangible amortization expense on previous acquisitions.

Income Tax Provision/(Benefit)

     An income tax provision of $22.1 million was recorded for the three-month period ended March 31, 2008, compared to an income tax benefit of $(6.1) million for the same period in 2007. The effective tax rate for the three-month period ended March 31, 2008 was 18.1%, compared to (14.6)% for the same period in 2007. The effective tax rate differs from the statutory rate of 35% primarily due to income from tax-exempt investments, income related to bank-owned life insurance, and tax credits associated with low income housing investment partnerships. The lower effective tax rate for the three-month period ended March 31, 2007 results from the lower amount of pre-tax income of the Company for that time period. Additionally, as discussed above, the three-month period ended March 31, 2008 did not have any tax credits associated with the synthetic fuel partnership.

     Sovereign is subject to the income tax laws of the U.S., 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.

38

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (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. Sovereign 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. The Internal Revenue Service (the “IRS”) is currently examining the Company’s federal income tax returns for the years 2002 through 2005. The Company anticipates that the IRS will complete this review in the second half of 2008. Included in this examination cycle are two separate financing transactions with an international bank, totaling $1.2 billion which are discussed in Note 12 in the Company’s Form 10-K. As a result of these transactions, Sovereign 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. In 2006 and 2007, Sovereign was subject to an additional $87.6 million and $22.5 million, respectively, of foreign taxes related to these financing transactions and claimed a corresponding foreign tax credit. While the IRS audit is not complete, recent developments in the IRS audit leads us to expect that the IRS will propose to disallow the foreign tax credits taken in 2003-2005 in the amount of $154 million related to these transactions and to assess interest and potentially penalties, the combined amount of which totaled approximately $70.1 million as of March 31, 2008. In addition, while the IRS has not yet initiated an audit for the years 2006 and 2007, we expect that in the future the IRS will propose to disallow the foreign tax credits taken in 2006 and 2007 of $87.6 million and $22.5 million, respectively, and to assess interest and potentially penalties, the combined amount of which totals approximately $15.8 million as of March 31, 2008. Sovereign may need to litigate this matter with the IRS. Sovereign believes that it is entitled to claim these foreign tax credits and also believes that its recorded tax reserves for this position of $58 million adequately provides for any potential exposure to the IRS related to foreign tax credits and other tax assessments. However, as the Company continues to go through the IRS administrative process, and if necessary litigation, we will continue to evaluate the appropriate tax reserve levels for this position and any changes made to the tax reserves may materially affect Sovereign’s income tax provision, net income, and regulatory capital in future periods.

Line of Business Results

     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 the difference between the provision for credit losses recognized by the Company on a consolidated basis and the provision recorded by the business line at the time of charge-off is allocated to each business line based on the risk profile of their loan portfolio. 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. Where practical, the results are adjusted to present consistent methodologies for the segments. 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. During the first quarter of 2008, certain changes to our executive management team were announced such as the hiring of a new head of Retail Banking and a new Chief Financial Officer. These events are anticipated to impact how our executive management team will measure and assess our business performance in future periods. We are in the process of updating our business unit profitability system and once these reporting changes have been finalized, we expect that this will reduce our reportable segments in future periods.

     The Mid-Atlantic Banking Division’s net interest income decreased $5.7 million to $69.7 million for the three-month period ended March 31, 2008 compared to the corresponding period in the preceding year. The decrease in net interest income was due to margin compression on a matched funded basis due to the recent Federal Reserve interest rate cuts which have reduced the spreads that our Banking Divisions receive credit for on their deposits. The net spread on a match funded basis for this segment was 2.10% for the first three months of 2008 compared to 2.43% for the same period. The average balance of loans was $5.3 billion for the three months ended March 31, 2008 compared to an average balance of $4.8 billion for the corresponding period in the preceding year. The average balance of deposits was $8.3 billion for the three months ended March 31, 2008, compared to $8.1 billion for the same period a year ago. The provision for credit losses increased $10.1 million for the three months ended March 31, 2008, and is driven by the charge-offs in the division’s loan portfolio. General and administrative expenses totaled $70.8 million for the three months ended March 31, 2008, compared to $69.6 million for the three months ended March 31, 2007.

39

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

     The New England Banking Division’s net interest income decreased $18.6 million to $137.1 million for the three-month period ended March 31, 2008, compared to the corresponding period in the preceding year. The decrease in net interest income was principally due to margin compression on a matched funded basis due to the recent Federal Reserve interest rate cuts which have reduced the spreads that our Banking Divisions receive credit for on their deposits. The net spread on a match funded basis for this segment was 2.20% for the first three months of 2008 compared to 2.71% for the same period in the prior year. The average balance of loans was $7.0 billion for the three months ended March 31, 2008 compared to an average balance of $6.0 billion for the corresponding period in the preceding year. The average balance of deposits was $18.7 billion for the three months ended March 31, 2008, compared to $17.9 billion for the same period a year ago. The provision for credit losses increased $10.6 million to $14.5 million for the three-month period ended March 31, 2008, and is driven by the charge-offs in the division’s loan portfolio. General and administrative expenses (including allocated corporate and direct support costs) increased from $116.1 million for the three months ended March 31, 2007, to $121.4 million for the three months ended March 31, 2008 or an increase of 4.6%. The increase in general and administrative expenses is due to increased deposit insurance premiums of $3.0 million due to new FDIC assessments on deposits that Sovereign began to be assessed in 2008 as previously discussed.

     The Metro New York Banking Division’s net interest income decreased $34.8 million to $118.4 million for the three-month period ended March 31, 2008, compared to the corresponding period in the preceding year. The decline in net interest income for the three-month period ended March 31, 2008 is due to spread compression due to the recent Federal Reserve interest rate cuts which have reduced the spreads that our Banking Divisions receive credit for on their deposits. The net spread on a match funded basis for this segment was 1.76% for the first three months of 2008 compared to 2.16% for the same period in the prior year reflecting the difficult interest rate environment. The average balance of loans was $11.4 billion for the three months ended March 31, 2008 compared to an average balance of $13.1 billion for the corresponding period in the preceding year. The average balance of deposits was $16.2 billion for the three months ended March 31, 2008, compared to $16.3 billion for the same period a year ago. The increase in fees and other income of $2.8 million for the three-month period ended March 31, 2008 compared to the corresponding period in the preceding year was primarily due to increases in commercial and consumer deposit fees, offset by a $3.0 million decrease in mortgage banking fees which was the result of the previously discussed multi-family servicing right impairment charge. The provision for credit losses increased $11.1 million to $14.9 million for the three-month period ended March 31, 2008, and is driven by higher reserve allocations for the division’s commercial loans. General and administrative expenses (including allocated corporate and direct support costs) increased from $105.9 million for the three months ended March 31, 2007, to $110.5 million for the three months ended March 31, 2008. The increase in general and administrative expenses is due to increased deposit insurance premiums of $2.6 million due to new FDIC assessments on deposits that Sovereign began to be assessed in 2008 as previously discussed.

     The Shared Services Consumer segment net interest income decreased $26.8 million to $73.5 million for the three-month period ended March 31, 2008 compared to the corresponding period in the preceding year. The decrease in net interest income was due to margin compression on a matched funded basis and a decrease in average loans due to the sale of $3.4 billion of correspondent home equity loans and $2.9 billion of residential mortgage loans as part of the balance sheet restructuring executed in early 2007. The net spread on a match funded basis for this segment was 1.52% for the first three months of 2008 compared to 1.63% for the same period in the prior year. The average balance of loans for the three-month period ended March 31, 2008 was $21.0 billion compared with $25.5 billion for the corresponding period in the prior year. Fees and other income was a net loss of $8.0 million for the three-month period ended March 31, 2008 compared to a loss of $112.4 million for the corresponding period in the prior year. The prior year results included a charge of $119.9 million on the correspondent home equity loan portfolio. The provision for credit losses increased $47.1 million to $65.8 million at March 31, 2008 due to a higher level of losses on our indirect auto portfolio particularly related to out-of-market auto loans. Charge-offs on out-of-market auto loans increased to $28.3 million during the first quarter of 2008 compared to $1.2 million during the first quarter of 2007. General and administrative expenses totaled $31.3 million for the three months ended March 31, 2008, compared to $26.9 million for the three months ended March 31, 2007. The increase in expenses for the three-month period ended March 31, 2008 is a result of increased marketing expenses of $6.1 million.

     The Shared Services Commercial segment net interest income increased $18.3 million to $80.1 million for the three-month period ended March 31, 2008 compared to the corresponding period in the preceding year due to growth in our commercial loan portfolios due to our emphasis on this asset class and a de-emphasis on wholesale residential loans, investment securities and other lower yielding asset classes. The net spread on a match funded basis for this segment was 2.24% for the first three months of 2008 compared to 2.23% for the same period in the prior year. The average balance of loans for the three months ended March 31, 2008 was $13.6 billion compared with $11.7 billion for the corresponding period in the prior year. The provision for credit losses increased $10.1 million to $26.3 million for the three months ended March 31, 2008 due to higher reserve allocations on certain segments within our commercial loan portfolio, particularly those related to the residential real estate industry. General and administrative expenses (including allocated corporate and direct support costs) were $41.9 million for the three months ended March 31, 2008 compared with $36.6 million for the corresponding period in the prior year. The reason for the increase is due to investments needed to support the growth of this reporting segment.

40

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

     The net income before income taxes for Other increased $141.5 million to $22.7 million for the three months ended March 31, 2008 compared to a loss of $118.8 million in the corresponding period in the preceding year. Results for the three months ended March 31, 2007 included charges of $43.4 million and $20.0 million related to freezing our ESOP plan and certain restructuring charges, respectively. Net interest income increased $61.9 million to $3.4 million for the three months ended March 31, 2008 compared to the corresponding period in the preceding year due primarily to investment yields increasing 8 basis points while borrowings decreased 44 basis points for the three-month period ended March 31, 2008. Average borrowings for the three-month period ended March 31, 2008 and 2007 were $23.4 billion and $25.3 billion, respectively, with an average cost of 4.77% and 5.21%. Average investments for the three-month period ended March 31, 2008 and 2007 was $13.0 billion and $15.2 billion respectively, at an average yield of 6.17% and 6.09%.

     The Other segment also included restructuring and severance charges of $20.0 million as well as $43.4 million expense related to freezing our ESOP plan for the three-months ended March 31, 2007.

Critical Accounting Policies

     The Company’s significant accounting policies are described in Note 1 to the December 31, 2007 consolidated financial statements filed on 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, securitizations, 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, 2007 Management’s Discussion and Analysis filed on Form 10-K.

     A discussion of the impact of new accounting standards issued by the FASB and other standard setters are included in Note 10 to the consolidated financial statements.

41

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

FINANCIAL CONDITION

Loan Portfolio

     At March 31, 2008, commercial loans totaled $27.9 billion representing 47.3% of Sovereign’s loan portfolio, compared to $26.7 billion or 46.2% of the loan portfolio at December 31, 2007 and $25.0 billion or 44.6% of the loan portfolio at March 31, 2007. At both March 31, 2008 and December 31, 2007, only 7% of our total commercial portfolio was unsecured. The increase in commercial loans since December 31, 2007 has been driven by organic loan growth. The increase in commercial loans as a percentage of the total loan portfolio is consistent with management’s 2007 restructuring plan to deemphasize lower yielding residential and multi-family loans.

     At March 31, 2008, multi-family loans totaled $4.3 billion representing 7.4% of Sovereign’s loan portfolio, compared to $4.2 billion or 7.3% of the loan portfolio at December 31, 2007 and $4.8 billion or 8.6% of the loan portfolio at March 31, 2007. The decrease from the prior year is due to our strategy to reduce the percentage of this asset class that is held on balance sheet and increase the amount that can be sold to Fannie Mae or other third parties via the secondary markets. In the second quarter of 2007, Sovereign sold $687.7 million of this loan portfolio as part of a commercial mortgage backed securitization.

     The consumer loan portfolio secured by real estate (consisting of home equity loans and lines of credit of $6.3 billion and residential loans of $13.3 billion) totaled $19.6 billion at March 31, 2008, representing 33.2% of Sovereign’s loan portfolio, compared to $19.5 billion, or 33.8%, of the loan portfolio at December 31, 2007 and $20.3 billion or 36.2% of the loan portfolio at March 31, 2007.

     The consumer loan portfolio not secured by real estate (consisting of automobile loans of $6.8 billion and other consumer loans of $0.3 million) totaled $7.1 billion at March 31, 2008, representing 12.1% of Sovereign’s loan portfolio, compared to $7.3 billion, or 12.7%, of the loan portfolio at December 31, 2007 and $5.9 billion or 10.6% of the loan portfolio at March 31, 2007. The increase in the consumer loan portfolio not secured by real estate from prior year is primarily due to organic in-market growth and out-of-market auto loans during 2007. However, as previously discussed, effective January 31, 2008, management ceased originating out-of-market auto loans.

Non-Performing Assets

     At March 31, 2008, Sovereign’s non-performing assets increased by $122.8 million to $484.4 million compared to $361.6 million at December 31, 2007. This increase is due primarily to commercial real estate loans and commercial and industrial loans. Non-performing assets as a percentage of total loans, real estate owned and repossessed assets weakened to 0.82% at March 31, 2008 from 0.63% at December 31, 2007. This was one of the factors that led Sovereign to increase its reserves for credit losses on this portfolio to 1.53% at March 31, 2008 compared to 1.40% at December 31, 2007. Sovereign generally places all commercial 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). All other consumer and residential loans continue to accrue interest until they are 120 days delinquent, at which point they are either charged-off or placed on non-accrual status and anticipated losses are reserved for. Loans secured by residential real estate with loan to values of 50% or less, based on current valuations, are considered well secured and in the process of collection and therefore continue to accrue interest. At 180 days delinquent, anticipated losses on residential real estate loans are fully reserved for or charged off.

42

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

     The following table presents the composition of non-performing assets at the dates indicated (amounts in thousands):

March 31, December 31,

2008 2007

Non-accrual loans:

Consumer:

Residential mortgages
$ 108,802 $ 90,881

Home equity loans and lines of credit
60,287 56,099

Auto loans and other consumer loans
2,417 3,446

Total consumer loans
171,506 150,426

Commercial
140,270 85,406

Commercial real estate
95,363 61,750

Multi-family
10,367 6,336

Total non-accrual loans
417,506 303,918

Restructured loans
324 370

Total non-performing loans
417,830 304,288

Other real estate owned
49,668 43,226

Other repossessed assets
16,888 14,062

Total other real estate owned and other repossessed assets
66,556 57,288

Total non-performing assets
$ 484,386 $ 361,576

Past due 90 days or more as to interest or principal and accruing interest
$ 64,869 $ 68,770

Annualized net loan charge-offs to average loans
.51 % .25 %

Non-performing assets as a percentage of total assets
.59 % .43 %

Non-performing loans as a percentage of total loans
.71 % .53 %

Non-performing assets as a percentage of total loans, real estate owned and repossessed assets
.82 % .63 %

Allowance for credit losses as a percentage of total non-performing assets ⁽¹⁾
164.8 % 204.0 %

Allowance for credit losses as a percentage of total non-performing loans ⁽¹⁾
191.1 % 242.4 %

(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 $3.9 million from December 31, 2007 to March 31, 2008, mostly attributable to decreases of $3.4 million and $2.2 million in auto loans and residential loans, respectively, offset by a $2.2 million increase in correspondent home equity loans. 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 $138.9 million and $140.3 million at March 31, 2008 and December 31, 2007, respectively.

43

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

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 (amounts in thousands):

March 31, 2008 December 31, 2007

% of % of

Loans Loans

to to

Total Total

Amount Loans Amount Loans

Allocated allowance:

Commercial loans
$ 491,637 55 % $ 433,951 54 %

Consumer loans secured by real estate
129,801 33 117,380 34

Consumer loans not secured by real estate
144,560 12 149,768 12

Unallocated allowance
9,443 n/a 8,345 n/a

Total allowance for loan losses
$ 775,441 100 % $ 709,444 100 %

Reserve for unfunded lending commitments
23,008 28,301

Total allowance for credit losses
$ 798,449 $ 737,745

     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 class allowances 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.

     The specific allowance element is calculated in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118 “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosure” and is based on a regular analysis of criticized commercial loans where internal credit ratings are below a predetermined quality level. This analysis is performed by the Managed Assets Division, and periodically reviewed by other parties, including the Commercial Asset Review Department. The specific allowance established for these criticized loans is based on a careful analysis of related collateral value, cash flow considerations and, if applicable, guarantor capacity.

     The class allowance element is determined by an internal loan grading process in conjunction with associated allowance factors. These class allowance factors are evaluated at least quarterly and are the result of detailed analysis to estimate loan losses. The loss analysis is based on actual historical loss experience and considers: levels and trends in delinquencies and charge-offs, trends in loan volume and terms, changes in risk composition and underwriting standards, experience and ability of staff, economic and industry conditions, and effects of any credit concentrations.

     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 class 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.

44

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

     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 on at least an annual basis.

     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.

     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.

     Commercial Portfolio. The portion of the allowance for loan losses related to the commercial portfolio has increased from $434.0 million at December 31, 2007 (1.40% of commercial loans) to $491.6 million at March 31, 2008 (1.53% of commercial loans). This is a result of an increase in non-performing assets at March 31, 2008 and loan growth which required additional reserves. Additionally, Sovereign increased its reserve allocations in the first quarter of 2008 in anticipation of continued deteriorating in these loan portfolios in the near term. A large portion of this increase was related to loans to companies that are in housing related industries. We expect that the difficult housing environment as well as economic conditions will continue to impact our commercial lending and commercial real estate portfolios which may result in increased reserve allocations in future periods.

     Consumer Secured by Real Estate Portfolio. The allowance for the consumer loans secured by real estate portfolio increased to $129.8 million at March 31, 2008 from $117.4 million at December 31, 2007. The increase is primarily the result of increased reserves allocated to our residential loan portfolio due to continued weaknesses in residential real estate prices. As a percentage of consumer loans secured by real estate the allowance was 0.68% at March 31, 2008 compared with 0.60% at December 31, 2007.

     Sovereign 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, Sovereign is responsible for the first $5.2 million of losses on the remaining loans in the structure which totaled $3.2 billion at March 31, 2008. Sovereign is reimbursed to the next $55 million of losses under the terms of the credit default swap. Losses above $60.2 million are borne by Sovereign. This credit default swap term is equal to the term of the loan portfolio.

     Consumer Not Secured by Real Estate Portfolio. The allowance for the consumer not secured by real estate portfolio decreased from $149.8 million at December 31, 2007 to $144.6 million at March 31, 2008 primarily due to a decrease in auto loans of $213.2 million. This decline was due to our decision to stop originating out of market loans effective January 31, 2008 as well as a reduction in the amount of auto loan originations in the first quarter of 2008 compared to prior quarters within our geographic footprint, as we have strengthened our underwriting standards. First quarter 2008 auto loan originations totaled $503 million with an average FICO score of 749 compared to fourth quarter 2007 originations of $549 million with an average FICO score of 708. The allowance as a percentage of consumer loans not secured by real estate was 2.04% at December 31, 2007 and 2.03% at March 31, 2008.

     Unallocated Allowance. The unallocated allowance for loan losses increased to $9.4 million at March 31, 2008 from $8.3 million at December 31, 2007. Management continuously evaluates its class allowance reserving methodology; however the unallocated allowance is subject to changes each reporting period due to a level of imprecision in management’s estimation process.

     Reserve for unfunded lending commitments. The reserve for unfunded lending commitments has decreased from $28.3 million at December 31, 2007 to $23.0 million at March 31, 2008 due to changes in the amounts of unfunded commitments during these time periods.

45

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Investment Securities

     Investment securities consist primarily of mortgage-backed securities, tax-free municipal securities, U.S. Treasury and government agency securities, corporate debt securities, collateralized debt obligations and stock in the Federal Home Loan Bank of Pittsburgh (“FHLB”), Freddie Mac and Fannie Mae. Mortgage-backed securities consist of pass-throughs and collateralized mortgage obligations issued by federal agencies or private label issuers. Sovereign’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. Sovereign 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 effective duration of the available for sale investment portfolio at March 31, 2008 was 5.6 years.

     Total investment securities available-for-sale were $11.0 billion at March 31, 2008 and $13.9 billion at December 31, 2007. For additional information with respect to Sovereign’s investment securities, see Note 3 in the Notes to Consolidated Financial Statements.

     Other investments, which consists of FHLB stock and repurchase agreements, decreased slightly to $1.1 billion at March 31, 2008 from $1.2 billion at December 31, 2007.

Goodwill and Other Intangible Assets

     Goodwill was $3.4 billion at both March 31, 2008 and December 31, 2007. Other intangibles decreased by $29.1 million at March 31, 2008 compared to December 31, 2007 due to year-to-date amortization expense.

     The Company follows SFAS No. 142, “Goodwill and Other Intangible Assets,” to account for its goodwill. This statement provides that goodwill and other indefinite lived intangible assets will not be amortized on a recurring basis, but rather will be subject to periodic impairment testing. There were no goodwill or core deposit intangible asset impairment charges recorded in the three months ended March 31, 2008 or March 31, 2007.

     The estimated aggregate amortization expense related to core deposit intangibles for each of the five succeeding calendar years ending December 31 is (in thousands):

Calendar Remaining

Year Recorded Amount

Year Amount To Date To Record

2008
$ 100,467 $ 28,258 $ 72,209

2009
71,341 — 71,341

2010
56,617 — 56,617

2011
44,963 — 44,963

2012
33,108 — 33,108

Deposits and Other Customer Accounts

     Sovereign 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, 2008 were $49.0 billion compared to $49.9 billion at December 31, 2007.

Borrowings and Other Debt Obligations

     Sovereign 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. Sovereign 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. Total borrowings at March 31, 2008 and December 31, 2007 were $24.3 billion and $26.1 billion, respectively. The reason for this decline is due to the reduction in short-term assets that Sovereign needed to acquire to maintain compliance with HOLA (See Note 3). See Note 5 for further discussion and details on our borrowings and other debt obligations.

46

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Off Balance Sheet Arrangements

     Securitization transactions contribute to Sovereign’s overall funding and regulatory capital management. These transactions involve periodic transfers of loans or other financial assets to special purpose entities (“SPEs”). The SPEs are either consolidated in or excluded from Sovereign’s consolidated financial statements depending on whether the transactions qualify as a sale of assets in accordance with SFAS No. 140, “Transfers of Financial Assets and Liabilities” (“SFAS No. 140”).

     In certain transactions, Sovereign has transferred assets to SPEs qualifying for non-consolidation (“QSPE”) and has accounted for the transaction as a sale in accordance with SFAS No. 140. Sovereign also has interests that continue to be held in the QSPEs. Off-balance sheet QSPEs had $1.9 billion of assets that Sovereign sold to the QSPEs which are not included in Sovereign’s Consolidated Balance Sheet at March 31, 2008. Sovereign’s interests that continue to be held and servicing assets in such QSPEs was $68.8 million at March 31, 2008 and this amount represents Sovereign’s maximum exposure to credit losses related to these unconsolidated securitizations. Sovereign does not provide contractual legal recourse to third party investors that purchase debt or equity securities issued by the QSPEs beyond the credit enhancement inherent in Sovereign’s subordinated interests in the QSPEs. At March 31, 2008, there are no known events or uncertainties that would result in or are reasonably likely to result in the termination or material reduction in availability to Sovereign’s access to off-balance sheet markets. See Note 11 for a description of Sovereign’s interests that continue to be held in its off-balance sheet asset securitizations.

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, 2008 and December 31, 2007, Sovereign Bank had met all quantitative thresholds necessary to be classified as well-capitalized under regulatory guidelines.

47

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

     Federal banking laws, regulations and policies also limit Sovereign Bank’s ability to pay dividends and make other distributions to Sovereign Bancorp. 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 Sovereign 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, 2008 and December 31, 2007 (in thousands):

TIER 1 TIER 1 TOTAL

LEVERAGE RISK-BASED RISK-BASED

CAPITAL CAPITAL CAPITAL

       REGULATORY CAPITAL RATIO RATIO RATIO

Sovereign Bank at March 31, 2008:

Regulatory capital
$ 5,385,579 $ 5,117,905 $ 6,989,491

Minimum capital requirement (1)
3,144,146 2,731,578 5,463,157

Excess
$ 2,241,433 $ 2,386,327 $ 1,526,334

Sovereign Bank capital ratio
6.85 % 7.49 % 10.24 %

Sovereign Bank at December 31, 2007:

Regulatory capital
$ 5,289,889 $ 5,030,620 $ 6,939,602

Minimum capital requirement (1)
3,237,187 2,668,712 5,337,424

Excess
$ 2,052,702 $ 2,361,908 $ 1,602,178

Sovereign Bank capital ratio
6.54 % 7.54 % 10.40 %

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

     Listed below are capital ratios for Sovereign Bancorp.

TANGIBLE TANGIBLE

COMMON COMMON TANGIBLE TANGIBLE

EQUITY TO EQUITY TO EQUITY TO EQUITY TO

TANGIBLE TANGIBLE TANGIBLE TANGIBLE TIER 1

ASSETS ASSETS ASSETS ASSETS LEVERAGE

EXCLUDING INCLUDING EXCLUDING INCLUDING CAPITAL

REGULATORY CAPITAL OCI (2) OCI (2) OCI (2) OCI (2) RATIO

Capital ratio at March 31, 2008 (1)
4.72 % 3.81 % 4.97 % 4.06 % 6.21 %

Capital ratio at December 31, 2007 (1)
4.43 % 4.04 % 4.67 % 4.28 % 5.89 %

(1) OTS capital regulations do not apply to savings and loan holding companies. These ratios are computed as if those regulations did apply to Sovereign Bancorp, Inc.

(2) Tangible equity and tangible assets are defined as total equity and total assets less goodwill and other intangibles, net of any deferred tax liabilities.

     The Sovereign Bancorp capital ratios at March 31, 2008 and December 31, 2007 were negativity impacted 0 basis points to 7 basis points at March 31, 2008 and 0 basis points to 33 basis points at December 31, 2007 depending on the ratio due to balance sheet gross ups of $850 million and $4 billion, respectively, of investments and cash deposits in order to comply with a loan limitation test required by HOLA. As discussed in our Form 10-K, HOLA limits the amount of non-residential mortgage loans a savings institution, such as Sovereign Bank, may make. The law limits a savings institution to a maximum of 20% of its total assets in commercial loans not secured by real estate, however, only 10% can be large commercial loans not secured by real estate (defined as loans in excess of $2 million). Commercial loans secured by real estate can be made in an amount up to four times an institutions total risk-based capital. Due to Sovereign’s decreased emphasis of lower yielding asset classes since year-end (primarily investment securities, multi-family loans and residential loans) and increased emphasis on higher yielding commercial loans, Sovereign was required to increase the amount of assets that were not considered large commercial loans in order to comply with the regulation at March 31, 2008. The Company is working on a more permanent solution to maintain compliance with this regulation in future periods.

48

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources

     Liquidity represents the ability of Sovereign to obtain cost effective funding to meet the needs of customers, as well as Sovereign’s financial obligations. Sovereign’s primary sources of liquidity include retail and commercial deposit gathering, FHLB borrowings, federal funds purchases, reverse repurchase agreements and wholesale deposit purchases. Other sources of liquidity include asset securitizations, loan sales, and periodic cash flows from amortizing mortgage backed securities.

     Factors which impact the liquidity position of Sovereign Bank include loan origination volumes, loan prepayment rates, maturity structure of existing loans, core deposit growth levels, CD maturity structure and retention, Sovereign’s credit ratings, general market conditions, investment portfolio cash flows and 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, 2008, Sovereign had $16.6 billion in available overnight liquidity in the form of unused federal funds purchased lines, unused FHLB borrowing capacity and unencumbered investments to be pledged as collateral for additional borrowings. Sovereign also forecasts future liquidity needs and develops strategies to ensure that adequate liquidity is available at all times.

     Sovereign Bancorp has the following major sources of funding to meet its liquidity requirements: dividends and returns of investment from its subsidiaries, a revolving credit agreement and access to the capital markets. Sovereign Bank may pay dividends to its parent subject to approval of the OTS, as discussed above. Sovereign also has approximately $1.8 billion of availability under a shelf registration statement on file with the Securities and Exchange Commission permitting access to the public debt and equity markets.

     As previously mentioned Sovereign adopted FAS 157 on January 1, 2008. Sovereign’s level 3 investments are comprised of certain non-agency mortgage backed securities, collateralized debt obligations and FNMA/FHLMC preferred stock, which are not actively traded. In certain instances, Sovereign is the sole investor of the issued security. Sovereign receives third party broker quotes to determine their estimated fair value. The prices of our securities are benchmarked against similar securities that are more actively traded to validate the reasonableness of their fair value. Our fair value estimates assume liquidation in an orderly market and not under distressed circumstances. If Sovereign was required to sell these securities in an unorderly fashion, actual proceeds received could potentially be significantly less than their estimated fair values.

     Cash and cash equivalents decreased $1.2 billion from December 31, 2007. Net cash used by operating activities was $112.3 million for 2008. Net cash provided by investing activities for 2008 was $1.6 billion and consisted primarily of proceeds from the maturity and repayments of investments of $2.7 billion, offset by originations in excess of repayments of loans of $885.9 million. Net cash used by financing activities for 2008 was $2.7 billion, which was primarily due to a reduction in wholesale borrowings $1.8 billion and a decrease in deposits of $920.4 million. See the Consolidated Statement of Cash Flows for further details on our sources and uses of cash.

     Sovereign’s debt agreements impose customary limitations on dividends, other payments and transactions. These limits are not expected to affect dividend payments at current levels, or if declared, reasonably anticipated increases.

49

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Contractual Obligations and Commercial Commitments

     Sovereign 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 Sovereign to make cash payments over time as detailed in the table below.

Contractual Obligations (in thousands of dollars):

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)
$ 21,655,318 $ 13,040,112 $ 2,848,822 $ 1,400,324 $ 4,366,060

Securities sold under repurchase agreements (1)
78,075 78,075 — — —

Fed Funds (1)
1,062,888 1,062,888 — — —

Other debt obligations (1)
2,810,953 476,574 1,004,379 606,750 723,250

Junior subordinated debentures due to Capital Trust entities (1)(2)
4,013,735 86,999 172,586 178,810 3,575,340

Certificates of deposit (1)
14,295,765 12,653,255 1,158,497 312,421 171,592

Investment partnership commitments (3)
25,469 20,205 5,166 26 72

Operating leases
809,240 97,254 176,586 155,403 379,997

Total contractual cash obligations
$ 44,751,443 $ 27,515,362 $ 5,366,036 $ 2,653,734 $ 9,216,311

(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 March 31, 2008. 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) Excludes unamortized premiums or discounts.

(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 $35.1 billion that are due on demand by customers. Additionally, $79.3 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.

     Sovereign’s senior credit facility requires Sovereign to maintain certain financial ratios and to maintain a “well capitalized” regulatory status. Sovereign has complied with these covenants as of March 31, 2008 and expects to be in compliance with these covenants for the foreseeable future. However, if in the future Sovereign is not in compliance with these ratios or is deemed to be other than well capitalized by the OTS, and is unable to obtain a waiver from its lenders, Sovereign would be in default under this credit facility and the lenders could terminate the facility and accelerate the maturity of any outstanding borrowings thereunder. Due to cross-default provisions in such senior credit facility, if more than $5 million of Sovereign’s debt is in default, Sovereign will be in default under this credit facility and the lenders could terminate the facility and accelerate the maturity of any borrowings thereunder.

     Sovereign 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 Sovereign 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.

     Sovereign’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. Sovereign 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. Sovereign controls the credit risk of its interest rate swaps, caps and floors and forward contracts through credit approvals, limits and monitoring procedures.

50

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

Amount of Commitment Expiration per Period (in thousands of dollars):

Total

Other Commercial Amounts Less than Over 1 yr Over 3 yrs

Commitments Committed 1 year to 3 yrs to 5 yrs Over 5 yrs

Commitments to extend credit
$ 22,227,588 $ 9,218,956 $ 4,087,582 $ 3,926,053 $ 4,994,997

Standby letters of credit
2,982,799 460,462 848,719 1,207,223 466,395

Loans sold with recourse
286,938 6,080 30,569 51,986 198,303

Forward buy commitments
1,034,889 895,178 139,711 — —

Total commercial commitments
$ 26,532,214 $ 10,580,676 $ 5,106,581 $ 5,185,262 $ 5,659,695

     Sovereign’s standby letters of credit meet the definition of a guarantee under FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. These transactions are conditional commitments issued by Sovereign 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 3.5 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, Sovereign would be required to honor the commitment. Sovereign 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, 2008 was $3.0 billion, and the approximate value of the underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $2.5 billion. The fees related to standby letters of credit are deferred and amortized over the life of the commitment. These fees are immaterial to Sovereign’s financial statements at March 31, 2008. We believe that the utilization rate of these letters of credit will continue to be substantially less than the amount of these commitments, as has been our experience to date.

See Note 15 for a description of pending litigation against the Company.

Asset and Liability Management

     Interest rate risk arises primarily through Sovereign’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. 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 is managed centrally by the treasury group with oversight by the Asset and Liability Committee. Management reviews various forms of analysis to monitor interest rate risk including net interest income sensitivity, market value sensitivity, repricing frequency of assets versus liabilities and scenario analysis. 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.

     Sovereign 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 up to twelve different stress scenarios. These scenarios shift interest rates up and down. Certain other scenarios shift short-term rates up while holding longer-term rates constant and vice versa. These shocks are instantaneous and the analysis helps management to better understand its short-term interest rate risk. Actual rate shifts do not occur in an instantaneous manner but these stress scenarios help to better highlight imbalances. This information is then used to develop proactive strategies to ensure that the Company is not overly sensitive to the future direction of interest rates.

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

The following estimated percentage

If interest rates changed in parallel by the increase/(decrease) to net interest

amounts below at March 31, 2008 income would result

Up 100 basis points
(3.54 )%

Down 100 basis points
4.81 %

51

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

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

     The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring a bank’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time frame if it will mature or reprice within that period of time. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time frame and the amount of interest-bearing liabilities maturing or repricing within that same period of time. In a rising interest rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a greater increase in the cost of its interest-bearing liabilities than it would in the yield on its interest-earning assets, thus producing a decline in its net interest income. Conversely, in a declining rate environment, an institution with a negative gap would generally be expected to experience a lesser reduction in the yield on its interest-earning assets than it would in the cost of its interest-bearing liabilities, thus producing an increase in its net interest income. As of March 31, 2008, the one year cumulative gap was (0.11)%, compared to (1.58)% at December 31, 2007.

     Finally, Sovereign calculates the market value of its balance sheet including all assets, liabilities and hedges. This market value analysis is very useful because it measures the present value of all estimated future interest income and interest expense cash flows of the Company. Management calculates a Net Portfolio Value (NPV) which is the market value of assets minus the market value of liabilities and is used to assess long-term interest rate risk. A higher NPV ratio indicates lower long-term interest rate risk and a more valuable franchise. The table below discloses Sovereign’s estimated net portfolio value based on interest rate changes:

If interest rates changed in parallel by the Estimated NPV Ratio

amounts below at March 31, 2008 March 31, 2008 December 31, 2007

Base
9.13 % 9.60 %

Up 200 basis points
8.99 % 8.90 %

Up 100 basis points
9.10 % 9.30 %

Down 100 basis points
8.95 % 9.69 %

     Because the assumptions used are inherently uncertain, Sovereign 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.

     Pursuant to its interest rate risk management strategy, Sovereign enters into hedging transactions that involve interest rate exchange agreements (swaps, caps, and floors) and forward sale or purchase commitments for interest rate risk management purposes. Sovereign’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. Sovereign utilizes interest rate swaps that have a high degree of correlation to the related financial instrument.

     As part of its overall business strategy, Sovereign 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 Sovereign from the interest rate risk associated with these fixed rate assets. Sovereign 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, Sovereign 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, mortgage-banking and precious metals 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.

52

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, 2008. 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, 2008 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. There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2008, that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

53

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1A — Risk Factors

     There has been no material change in the Corporation’s risk factors as previously disclosed in our Form 10-K for the fiscal year ended December 31, 2007 in response to Item 1A to Part I of such Form 10-K. Such risk factors are incorporated herein by reference.

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

The table below summarizes the Company’s repurchases of common equity securities during the quarter ended March 31, 2008:

Maximum Number

Total Number of of Shares

Total Average Shares Purchased that may be

Number of Price Paid as Part of Publicly Purchased Under

Shares Per Announced Plans the Plans or

Period Purchased Share or Programs (1) Programs (1)

1/1/08 through 1/31/08
1,260 $ 11.69 N/A 19,500,000

2/1/08 through 2/29/08
189,918 12.36 N/A 19,500,000

3/1/08 through 3/31/08
32,117 12.43 N/A 19,500,000

(1) Sovereign has three stock repurchase programs in effect that would allow the Company to repurchase up to 40,500,000 shares of common stock as of March 31, 2008 of which approximately twenty one million shares have been purchased under these repurchase programs as of March 31, 2008. All of Sovereign’s stock repurchase programs have no prescribed time limit in which to fill the authorized repurchase amount.

Sovereign does occasionally repurchase its common securities on the open market to fund equity compensation plans for its employees. Additionally, Sovereign repurchases its shares from employees who surrender a portion of their shares received through the Company’s stock based compensation plans to cover their associated minimum income tax liabilities. Sovereign repurchased 223,295 shares outside of publicly announced repurchase programs during the first quarter of 2008.

54

Item 6 — Exhibits

     (a) Exhibits

(3.1)
Amended and Restated Articles of Incorporation of Sovereign Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 of Sovereign Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).

(3.2)
Bylaws of Sovereign Bancorp, Inc., as amended and restated (Incorporated by reference to Exhibit 3.2 to Sovereign Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).

(10.1)
Separation Agreement, dated February 20, 2008, between Sovereign Bancorp, Inc. and Mark R. McCollom (Incorporated by reference to Exhibit 10.1 to Sovereign’s Current Report on Form 8-K, SEC File No. 001-16581, filed February 21, 2008).

(10.2)
Employment Agreement, dated February 20, 2008, effective March 3, 2008, between Sovereign Bancorp, Inc. and Kirk W. Walters (Incorporated by reference to Exhibit 10.2 to Sovereign’s Current Report on Form 8-K, SEC File No. 001-16581, filed February 21, 2008).

(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.

55

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.

SOVEREIGN BANCORP, INC.

(Registrant)

Date: May 8, 2008
/s/ Joseph P. Campanelli

Joseph P. Campanelli,

Chief Executive Officer and President

(Authorized Officer)

Date: May 8, 2008
/s/ Kirk W. Walters

Kirk W. Walters

Chief Financial Officer

(Principal Financial Officer)

56

SOVEREIGN BANCORP, INC. AND SUBSIDIARIES

EXHIBITS INDEX

(3.1)
Amended and Restated Articles of Incorporation of Sovereign Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 of Sovereign Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).

(3.2)
Bylaws of Sovereign Bancorp, Inc., as amended and restated (Incorporated by reference to Exhibit 3.2 to Sovereign Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).

(10.1)
Separation Agreement, dated February 20, 2008, between Sovereign Bancorp, Inc. and Mark R. McCollom (Incorporated by reference to Exhibit 10.1 to Sovereign’s Current Report on Form 8-K, SEC File No. 001-16581, filed February 21, 2008).

(10.2)
Employment Agreement, dated February 20, 2008, effective March 3, 2008, between Sovereign Bancorp, Inc. and Kirk W. Walters (Incorporated by reference to Exhibit 10.2 to Sovereign’s Current Report on Form 8-K, SEC File No. 001-16581, filed February 21, 2008).

(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.

57


Pennsylvania		23-2453088

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

1500 Market Street, Philadelphia, Pennsylvania		19102
(Address of principal executive offices)		(Zip Code)


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o


Class		Outstanding at April 30, 2008

Common Stock (no par value)		482,538,997 shares

	•		the strength of the United States economy in general and the strength of the regional and local economies in which Sovereign conducts operations;

	•		the effects of, 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;

	•		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;

	•		Sovereign’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 Sovereign and its third party vendors to convert and maintain Sovereign’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;

	•		technological changes;

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

	•		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 Sovereign as compared to what has been accrued or paid as of period end; and

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


	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2008 and December 31, 2007		4
Consolidated Statements of Operations for the three-month periods ended March 31, 2008 and 2007		5-6
Consolidated Statement of Stockholders’ Equity for the three-month period ended March 31, 2008		7
Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2008 and 2007		8-9
Notes to Consolidated Financial Statements		10–28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29–52
Item 3. Quantitative and Qualitative Disclosures About Market Risk		53
Item 4. Controls and Procedures		53
PART II. OTHER INFORMATION
Item 1A. Risk Factors		54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		54
Item 6. Exhibits		55
SIGNATURES		56
EXHIBITS INDEX		57
Ex-31.1 Certification
Ex-31.2 Certification
Ex-32.1 Certification
Ex-32.2 Certification


	March 31,			December 31,
	2008			2007
	(in thousands, except share data)
ASSETS
Cash and amounts due from depository institutions	$	1,957,403		$	3,130,770
Investment securities:
Available-for-sale		10,958,419			13,941,847
Other investments		1,134,805			1,200,545
Loans held for investment		58,132,454			57,232,019
Allowance for loan losses		(775,441	)		(709,444	)


Net loans held for investment		57,357,013			56,522,575


Loans held for sale		739,328			547,760
Premises and equipment		555,773			562,332
Accrued interest receivable		322,760			350,534
Goodwill		3,430,290			3,426,246
Core deposit intangibles and other intangibles, net of accumulated amortization of $784,057 and $754,935 at March 31, 2008 and December 31, 2007, respectively		342,994			372,116
Bank owned life insurance		1,806,631			1,794,099
Other assets		3,307,303			2,897,572


TOTAL ASSETS	$	81,912,719		$	84,746,396


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits and other customer accounts	$	48,996,729		$	49,915,905
Borrowings and other debt obligations		24,348,829			26,126,082
Advance payments by borrowers for taxes and insurance		105,136			83,091
Other liabilities		1,638,244			1,482,563


TOTAL LIABILITIES		75,088,938			77,607,641


Minority interests		146,784			146,430


STOCKHOLDERS’ EQUITY
Preferred stock; no par value; $50 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at March 31, 2008 and December 31, 2007		195,445			195,445
Common stock; no par value; 800,000,000 shares authorized; 483,540,976 shares issued at March 31, 2008 and 482,773,610 shares issued at December 31, 2007		6,298,254			6,295,572
Warrants and employee stock options issued		348,878			348,365
Treasury stock at cost; 1,097,995 shares at March 31, 2008 and 1,369,453 shares at December 31, 2007		(11,438	)		(19,853	)
Accumulated other comprehensive loss		(749,556	)		(326,133	)
Retained earnings		595,414			498,929


TOTAL STOCKHOLDERS’ EQUITY		6,676,997			6,992,325


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	81,912,719		$	84,746,396


	Three-Month Period
	Ended March 31,
	2008			2007
	(in thousands, except per share data)
INTEREST INCOME:
Interest-earning deposits	$	2,964		$	6,236
Investment securities:
Available-for-sale		168,109			189,835
Other investments		9,820			14,301
Interest on loans		895,276			1,016,967


TOTAL INTEREST INCOME		1,076,169			1,227,339


INTEREST EXPENSE:
Deposits and customer accounts		315,103			413,251
Borrowings and other debt obligations		278,886			326,235


TOTAL INTEREST EXPENSE		593,989			739,486


NET INTEREST INCOME		482,180			487,853
Provision for credit losses		135,000			46,000


NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		347,180			441,853


NON-INTEREST INCOME:
Consumer banking fees		73,219			68,014
Commercial banking fees		54,425			49,408
Mortgage banking losses		(5,133	)		(107,205	)
Capital markets revenue		10,393			5,689
Bank owned life insurance		19,424			20,509
Miscellaneous income		5,297			9,467


TOTAL FEES AND OTHER INCOME		157,625			45,882
Net gain on investment securities		14,135			970


TOTAL NON-INTEREST INCOME		171,760			46,852


GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits		185,112			173,796
Occupancy and equipment expenses		78,013			80,519
Technology expense		24,498			23,336
Outside services		15,630			15,278
Marketing expense		16,246			8,832
Other administrative expenses		39,765			28,235


TOTAL GENERAL AND ADMINISTRATIVE EXPENSES		359,264			329,996


	Common														Accumulated						Total
	Shares								Warrants						Other						Stock-
	Out-			Preferred		Common			& Stock			Treasury			Comprehensive			Retained			Holders’
	Standing			Stock		Stock			Options			Stock			Income/(Loss)			Earnings			Equity
Balance, December 31, 2007		481,404		$	195,445	$	6,295,572		$	348,365		$	(19,853	)	$	(326,133	)	$	498,929		$	6,992,325
Comprehensive income:
Net income		—			—		—			—			—			—			100,135			100,135
Change in unrealized gain/loss, net of tax:
Investment securities available for sale		—			—		—			—			—			(301,531	)		—			(301,531	)
Pension liabilities		—			—		—			—			—			125			—			125
Cash flow hedge derivative financial instruments		—			—		—			—			—			(122,017	)		—			(122,017	)

Total comprehensive income																						(323,288	)

Stock issued in connection with employee benefit and incentive compensation plans		879			—		(1,476	)		(1,008	)		11,192			—			—			8,708
Employee stock options earned		—			—		—			1,521			—			—			—			1,521
Dividends paid on preferred stock		—			—		—			—			—			—			(3,650	)		(3,650	)
Issuance of common stock		383			—		4,158			—			—			—			—			4,158
Stock repurchased		(223	)		—		—			—			(2,777	)		—			—			(2,777	)


Balance, March 31, 2008		482,443		$	195,445	$	6,298,254		$	348,878		$	(11,438	)	$	(749,556	)	$	595,414		$	6,676,997


(1)		These items were excluded from diluted earnings per share for the three-month periods ended March 31, 2008 and March 31, 2007 since the result would have been anti-dilutive.

(2)		Based on Sovereign’s closing stock price on March 31, 2008 of $9.32, Sovereign had 8.8 million outstanding stock options that were out-of-the-money (exercise price of award exceeded $9.32) and an additional 2.4 million stock options that were in-the-money (exercise price was less than $9.32).


	March 31, 2008
	Amortized		Unrealized		Unrealized		Fair
	Cost		Appreciation		Depreciation		Value
Investment Securities:
U.S. Treasury and government agency securities	$	66,833	$	424	$	—	$	67,257
Debentures of FHLB, FNMA, and FHLMC		139,603		3,502		19		143,086
Corporate debt and asset-backed securities		929,885		10		396,254		533,641
Equity securities (1)		638,884		4,412		16,840		626,456
State and municipal securities		2,504,221		15,311		130,117		2,389,415
Mortgage-backed securities:
U.S. government agencies		241,700		8,183		33		249,850
FHLMC and FNMA debt securities		3,879,424		82,289		991		3,960,722
Non-agency securities		3,251,488		5,782		269,278		2,987,992


Total investment securities available-for-sale	$	11,652,038	$	119,913	$	813,532	$	10,958,419


	December 31, 2007
	Amortized		Unrealized		Unrealized		Fair
	Cost		Appreciation		Depreciation		Value
Investment Securities:
U.S. Treasury and government agency securities	$	85,948	$	480	$	—	$	86,428
Debentures of FHLB, FNMA, and FHLMC		186,482		5,918		1		192,399
Corporate debt and asset-backed securities		947,992		10		194,239		753,763
Equity securities (1)		638,881		4,282		1		643,162
State and municipal securities		2,505,772		23,055		26,403		2,502,424
Mortgage-backed securities:
U.S. government agencies		2,251,022		4,376		56		2,255,342
FHLMC and FNMA debt securities		4,099,515		46,484		1,597		4,144,402
Non-agency securities		3,459,284		2,797		98,154		3,363,927


Total investment securities available-for-sale	$	14,174,896	$	87,402	$	320,451	$	13,941,847


(1)		Equity securities consist principally of preferred stock of FHLMC and FNMA.


	At March 31, 2008
	Less than 12 months					12 months or longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Investment Securities
Debentures of FHLB, FNMA and FHLMC	$	99,868	$	(19	)	$	—	$	—		$	99,868	$	(19	)
Corporate debt and asset-backed securities		108,229		(144,630	)		312,113		(251,624	)		420,342		(396,254	)
Equity securities		544,938		(16,840	)		—		—			544,938		(16,840	)
State and municipal securities		1,373,704		(79,552	)		523,526		(50,565	)		1,897,230		(130,117	)
Mortgage-backed Securities:
U.S. government agencies		1,926		(1	)		1,180		(32	)		3,106		(33	)
FHLMC and FNMA debt securities		45,534		(412	)		28,459		(579	)		73,993		(991	)
Non-agency securities		1,168,845		(148,673	)		1,615,993		(120,605	)		2,784,838		(269,278	)


Total investment securities available-for-sale	$	3,343,044	$	(390,127	)	$	2,481,271	$	(423,405	)	$	5,824,315	$	(813,532	)


	At December 31, 2007
	Less than 12 months					12 months or longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Investment Securities
Debentures of FHLB, FNMA and FHLMC	$	—	$	—		$	1,009	$	(1	)	$	1,009	$	(1	)
Corporate debt and asset-backed securities		223,813		(81,066	)		398,924		(113,173	)		622,737		(194,239	)
Equity securities		253		(1	)		—		—			253		(1	)
State and municipal securities		1,510,114		(25,880	)		18,697		(523	)		1,528,811		(26,403	)
Mortgage-backed Securities:
U.S. government agencies		26		—			1,392		(56	)		1,418		(56	)
FHLMC and FNMA debt securities		11,020		(46	)		91,600		(1,551	)		102,620		(1,597	)
Non-agency securities		1,511,132		(41,875	)		1,475,522		(56,279	)		2,986,654		(98,154	)


Total investment securities available-for-sale	$	3,256,358	$	(148,868	)	$	1,987,144	$	(171,583	)	$	5,243,502	$	(320,451	)


	March 31, 2008					December 31, 2007
	Amount		Percent			Amount		Percent
Commercial real estate loans	$	12,882,292		22.2	%	$	12,306,914		21.5	%
Commercial and industrial loans		13,209,614		22.7			12,594,652		22.0
Multi-family loans		4,215,381		7.3			4,088,992		7.1
Other		1,758,611		3.0			1,765,036		3.1


Total commercial loans held for investment		32,065,898		55.2			30,755,594		53.7


Residential mortgages		12,654,274		21.8			12,950,811		22.7
Home equity loans and lines of credit		6,283,506		10.8			6,197,148		10.8


Total consumer loans secured by real estate		18,937,780		32.6			19,147,959		33.5

Auto loans		6,815,657		11.7			7,028,894		12.3
Other		313,119		0.5			299,572		0.5


Total consumer loans held for investment		26,066,556		44.8			26,476,425		46.3


Total loans held for investment (2)	$	58,132,454		100.0	%	$	57,232,019		100.0	%


Total loans held for investment with:
Fixed rate	$	32,585,161		56.1	%	$	32,903,007		57.5	%
Variable rate		25,547,293		43.9			24,329,012		42.5


Total loans held for investment (2)	$	58,132,454		100.0	%	$	57,232,019		100.0	%


(1)		Includes residential and commercial construction loans of $2.4 billion and $2.3 billion at March 31, 2008 and December 31, 2007, respectively.

(2)		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 loans of $2.5 million and $7.2 million at March 31, 2008 and December 31, 2007, respectively. Loans pledged as collateral totaled $31.6 billion and $32.0 billion at March 31, 2008 and December 31, 2007, respectively.


	March 31, 2008					December 31, 2007
			Effective					Effective
	Balance		Rate			Balance		Rate
Sovereign Bank borrowings and other debt obligations:
Securities sold under repurchase agreements	$	76,763		4.12	%	$	76,526		4.12	%
Fed funds purchased		1,062,800		2.40			2,720,000		4.22
FHLB advances		19,581,305		4.29			19,705,438		4.64
Subordinated notes		1,151,150		4.64			1,148,813		4.65
Holding company borrowings and other debt obligations:
Senior notes		1,043,242		4.14			1,042,527		5.14
Senior credit facility		180,000		3.40			180,000		5.55
Junior subordinated debentures due to Capital Trust Entities		1,253,569		7.01			1,252,778		7.30


Total borrowings and other debt obligations	$	24,348,829		4.35	%	$	26,126,082		4.75	%


	Notional						Receive			Pay			Life
	Amount		Asset		Liability		Rate			Rate			(Years)
March 31, 2008
Fair value hedges:
Receive fixed — pay variable interest rate swaps	$	425,000	$	2,859	$	—		4.33	%		2.88	%		0.8
Cash flow hedges:
Pay fixed — receive floating interest rate swaps		8,100,000		—		405,381		3.21	%		5.15	%		2.2


Total derivatives used in SFAS 133 hedging relationships	$	8,525,000	$	2,859	$	405,381		3.27	%		5.04	%		2.2


December 31, 2007
Fair value hedges:
Receive fixed — pay variable interest rate swaps	$	925,000	$	413	$	2,220		4.29	%		4.87	%		0.9
Cash flow hedges:
Pay fixed — receive floating interest rate swaps		8,100,000		—		214,548		5.02	%		5.15	%		2.2


Total derivatives used in SFAS 133 hedging relationships	$	9,025,000	$	413	$	216,768		4.94	%		5.12	%		2.1


	Balance Sheet Effect at	Income Statement Effect For The Three Months Ended
Derivative Activity	March 31, 2008	March 31, 2008
Fair value hedges:
Receive fixed-pay variable interest rate swaps	Increase to CDs of $2.9 million and an increase to other assets of $2.9 million.	Increase in net interest income of $4.0 million.

Cash flow hedges:
Pay fixed-receive floating interest rate swaps	Increase to other liabilities and deferred taxes of $405.4 million and $141.9 million, respectively, and a decrease to stockholders’ equity of $263.5 million.	Decrease in net interest income of $15.8 million.

Other hedges:
Forward commitments to sell loans	Increase to other liabilities of $4.3 million.	Increase in mortgage banking revenues of $0.4 million.

Interest rate lock commitments	Increase to mortgage loans of $3.5 million.	Increase in mortgage banking revenues of $1.4 million.

Net customer related hedges	Increase to other assets of $38.0 million.	Increase in capital markets revenue of $3.4 million.

Forward commitments to sell precious metals inventory, net	Increase to other assets of $0.2 million.	Increase in commercial banking fees of $1.2 million.

Foreign exchange	Increase to other assets of $0.9 million.	Decrease in commercial banking revenues of $0.7 million.


Gross balance as of December 31, 2007	$	141,076
Mortgage servicing assets recognized		13,390
Amortization		(6,419	)

Gross balance at March 31, 2008		148,047
Valuation allowance		(20,176	)

Balance as March 31, 2008	$	127,871


	March 31, 2008			December 31, 2007			March 31, 2007
CPR speed		20.64	%		14.70	%		14.81	%
Escrow credit spread		4.94	%		5.12	%		4.96	%


Balance as of December 31, 2007	$	1,473
Increase in valuation allowance for mortgage servicing rights		18,703

Balance as March 31, 2008	$	20,176


			New		Metro
	Mid-Atlantic		England		New York		Shared			Shared
For the three-month period ended	Banking		Banking		Banking		Services			Services
March 31, 2008	Division		Division		Division		Consumer			Commercial			Other			Total

Net interest income (expense)	$	69,746	$	137,081	$	118,350	$	73,463		$	80,098		$	3,442		$	482,180
Fees and other income ⁽¹⁾		22,763		46,657		34,639		(8,043	)		41,993			19,616			157,625
Provision for credit losses		13,529		14,525		14,905		65,757			26,284			—			135,000
General and administrative expenses		70,786		121,417		110,523		31,254			41,901			(16,617	)		359,264
Depreciation/amortization		2,499		3,733		6,291		9,715			2,101			34,514			58,853
Income (loss) before income taxes		8,194		47,797		27,561		(37,818	)		53,820			22,661			122,215
Intersegment revenues (expense) ⁽²⁾		39,445		137,985		51,847		(246,742	)		(120,484	)		137,949			—
Total average assets	$	5,292,486	$	7,090,463	$	11,473,899	$	22,065,056		$	14,523,024		$	20,485,760		$	80,930,688


(1)		Included in fees and other income in the Shared Services Consumer segment is an $18.7 million residential mortgage servicing right impairment charge that was recorded in the first quarter of 2008.

(2)		Intersegment revenues (expense) represent charges or credits for funds used or provided by each of the segments and are included in net interest income.


	March 31, 2008						December 31, 2007
			Principal		Net				Principal		Net
	Total		90 Days		Credit		Total		90 Days		Credit
	Principal		Past Due		Losses		Principal		Past Due		Losses
Mortgage Loans	$	13,277,908	$	145,155	$	3,631	$	13,397,822	$	130,101	$	7,498
Home Equity Loans and Lines of Credit		6,382,727		96,012		4,580		6,300,558		88,848		11,063
Commercial Real Estate and Multi-family Loans		18,181,282		73,162		13,647		17,526,885		57,623		15,540
Automotive Floor Plan Loans		1,272,822		8,881		2,359		1,255,729		—		335


Total Owned and Securitized	$	39,114,739	$	323,210	$	24,217	$	38,480,994	$	276,572	$	34,436


Less:
Securitized Mortgage Loans	$	—	$	—	$	—	$	56,629	$	638	$	30
Securitized Home Equity Loans		99,221		16,524		772		103,410		15,764		2,915
Securitized Commercial Real Estate and Multi-family Loans		967,915		—		—		973,601		—		—
Securitized Automotive Floor Plan Loans		855,000		—		2,359		855,000		—		335


Total Securitized Loans	$	1,922,136	$	16,524	$	3,131	$	1,988,640	$	16,402	$	3,280


Net Loans	$	37,192,603	$	306,686	$	21,086	$	36,492,354	$	260,170	$	31,156


	Home
	Equity						Commercial
	Loans &			Auto			Loans
	Lines of			Floor			Secured by
	Credit			Plan Loans			Real Estate			Total
Interests that continue to be held by Sovereign:
Accrued interest receivable	$	—		$	4,697		$	—		$	4,697
Subordinated interest retained		—			43,996			7,829			51,825
Servicing rights		202			—			—			202
Interest only strips		6,732			1,010			—			7,742
Cash reserve		—			4,381			—			4,381


Total Interests that continue to be held by Sovereign	$	6,934		$	54,084		$	7,829		$	68,847


Weighted-average life (in yrs)		1.59			0.43			8.34
Prepayment speed assumption (annual rate)
As of the date of the securitization		22	%		50	%		10	%
As of December 31, 2007		17	%		49	%		10	%
As of March 31, 2008		15	%		42	%		10	%
Impact on fair value of 10% adverse change	$	(766	)	$	(113	)	$	—
Impact on fair value of 20% adverse change	$	(871	)	$	(218	)	$	—
Expected credit losses (annual rate)
As of the date of the securitization		0.75	%		.25	%		.50	%
As of December 31, 2007		2.81	%		.25	%		.50	%
As of March 31, 2008		2.51	%		.25	%		.50	%
Impact on fair value of 10% adverse change	$	(862	)	$	(43	)	$	(77	)
Impact on fair value of 20% adverse change	$	(1,062	)	$	(86	)	$	(153	)
Residual cash flows discount rate (annual)
As of the date of the securitization		12	%		8	%		12	%
As of December 31, 2007		12	%		8	%		17	%
As of March 31, 2008		12	%		8	%		25	%
Impact on fair value of 10% adverse change	$	(791	)	$	(101	)	$	(95	)
Impact on fair value of 20% adverse change	$	(824	)	$	(201	)	$	(188	)


	(in thousands)
Gross unrecognized tax benefits at December 31, 2007	$	87,461
Additions based on tax positions related to the current year		3,581
Additions based on tax positions related to prior years		3,841
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations		(571	)

Gross unrecognized tax benefits at March 31, 2008		94,312
Less: Federal, state and local income tax benefits		14,983

Net unrecognized tax benefits at March 31, 2008		79,329
Less: Unrecognized tax benefits included above that relate to acquired entities that would impact goodwill if recognized		13,027

Total unrecognized tax benefits that, if recognized, would impact the effective income tax rate as of March 31, 2008	$	66,302


Related party loans at December 31, 2007	$	13,963
Loan fundings		4,612
Loan repayments		(556	)


Related party loan balance at March 31, 2008	$	18,019


	Fair Value Measurements at Reporting Date Using:
	Quoted Prices in
	Active Markets for		Significant Other			Significant		Balance at
	Identical Assets		Observable Inputs			Unobservable		March 31,
	(Level 1)		(Level 2)			Inputs(Level 3)		2008
Assets:
US Treasury and government agency securities	$	—	$	67,257		$	—	$	67,257
Debentures of FHLB, FNMA and FHLMC		—		143,086			—		143,086
Corporate debt and asset-backed securities		—		54,290			479,351		533,641
Equity securities		—		20,716			605,740		626,456
State and municipal securities		—		2,389,415			—		2,389,415
Mortgage backed securities		—		5,976,898			1,221,666		7,198,564

Total investment securities available for sale		—		8,651,662			2,306,757		10,958,419
Loans held for sale		—		739,328			—		739,328
Derivatives		—		(364,316	)		—		(364,316	)
Mortgage servicing rights		—		—			146,109		146,109
Other assets		—		46,582			4,899		51,481

Total	$	—	$	9,073,256		$	2,457,765	$	11,531,021