Santander Holdings USA, Inc. - Annual Report: 2009 (Form 10-K)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

for the fiscal year ended December 31, 2009,

or

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

for the transition period from N/A to                     .

Commission File Number 001-16581

SANTANDER HOLDINGS USA, INC.

(Exact name of Registrant as specified in its charter)

Virginia		23-2453088
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
75 State Street, Boston, Massachusetts		02109
(Address of Principal Executive Offices)		(Zip Code)

(617) 346-7200

Securities registered pursuant to Section 12(b) of the Act:

Title		Name of Exchange on Which Registered
Depository Shares for Series C non-cumulative preferred stock		NYSE
7.75% Capital Securities (Sovereign Capital Trust V)		NYSE

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act Yes o No þ

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		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

No Common Stock of the Registrant was held by nonaffiliates of the Registrant at June 30, 2009. As of February 28, 2010, the Registrant had 511,107,043 shares of Common Stock outstanding.

 

 

Form 10-K Cross Reference Index

		Page
Forward-Looking Statements			3
PART I
Item 1 — Business			4-7
Item 1A — Risk Factors			8-10
Item 1B — Unresolved Staff Comments			10
Item 2 — Properties			10
Item 3 — Legal Proceedings			11
Item 4 — Submission of Matters to a Vote of Security Holders			11
Item 4A — Executive Officers of the Registrant			11-12
PART II
Item 5 — Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			12
Item 6 — Selected Financial Data			13
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			14-45
Item 7A — Quantitative and Qualitative Disclosures About Market Risk			45
Item 8 — Financial Statements and Supplementary Data			45-96
Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			97
Item 9A — Controls and Procedures			97
Item 9B — Other Information			97
PART III
Item 10 — Directors, Executive Officers and Corporate Governance			97-99
Item 11 — Executive Compensation			99-125
Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			126
Item 13 — Certain Relationships and Related Transactions, and Director Independence			126-129
Item 14 — Principal Accounting Fees and Services			129-130
PART IV
Item 15 — Exhibits and Financial Statement Schedules			131
Signatures			132
Exhibit 21
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Forward-Looking Statements

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

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

•

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

•

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

•

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

•

adverse movements and volatility in debt and equity capital markets;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

additional legislation and regulations or taxes, levies or other charges may be enacted or promulgated in the future, and we are unable to predict the form such legislation or regulation may take or to the degree which we need to modify our businesses or operations to comply with such legislation or regulation (for example, proposed legislation has been introduced in Congress that would amend the Bankruptcy Code to permit modifications of certain mortgages that are secured by a Chapter 13 debtor’s principal residence);

•

technological changes;

•

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

•

changes in consumer spending and savings habits;

•

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

•

regulatory or judicial proceedings;

•

changes in asset quality;

•

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

•

the integration of SHUSA into the existing businesses of Santander or the integration may be more difficult, time consuming or costly than expected;

•

the combined company may not realize, to the extent or at the time we expect, revenue synergies and cost savings from the transaction; and

•

deposit attrition, operating costs, customer losses and business disruptions following the acquisition of SHUSA by Santander, including difficulties in maintaining relationships with employees, could be greater than expected.

•

SHUSA’s success in managing the risks involved in the foregoing;

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

PART I

Item 1 — Business

General

SHUSA is the parent company of Sovereign Bank (“Sovereign Bank” or “the Bank”), a federally chartered savings bank. Sovereign Bank had approximately 700 community banking offices, over 2,400 ATMs and 10,596 team members as of December 31, 2009 with principal markets in the Northeastern United States. Sovereign Bank’s primary business consists of attracting deposits from its network of community banking offices, and originating small business and middle market commercial loans, multi-family loans, residential mortgage loans, home equity loans and lines of credit, and auto and other consumer loans in the communities served by those offices. We use our deposits, as well as other financing sources, to fund our loan and investment portfolios. We earn interest income on our loans and investments. In addition, we generate non-interest income from a number of sources including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance. Our principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. Our volumes, and accordingly our financial results, are affected by the economic environment, including interest rates, consumer and business confidence and spending, as well as the competitive conditions within our geographic footprint.

In July 2009, Santander contributed Santander Consumer USA, Inc (“SCUSA”), a majority owned subsidiary into SHUSA Bancorp. SCUSA is a specialized consumer finance company engaged in the purchase, securitization, and servicing of retail installment contracts originated by automobile dealers. SCUSA acquires retail installment contracts principally from manufacturer franchised dealers in connection with their sale of used and new automobiles and trucks primarily to nonprime customers with limited credit histories or past credit problems. SHUSA also purchases retail installment contracts from other companies.

SHUSA is a Virginia business corporation and its principal executive offices are located at 75 State Street, Boston, Massachusetts. Sovereign Bank is headquartered in Wyomissing, Pennsylvania, a suburb of Reading, Pennsylvania.

SHUSA was incorporated in 1987 as a holding company for Sovereign Bank. Sovereign Bank was created in 1984 under the name Penn Savings Bank, F.S.B. through the merger of two financial institutions with market areas primarily in Berks and Lancaster counties, Pennsylvania. Sovereign Bank assumed its current name on December 31, 1991. SHUSA has acquired 28 financial institutions, branch networks and/or related businesses since 1990. Eighteen of these acquisitions, with assets totaling approximately $52 billion, have been completed since 1995. The Company’s latest acquisition was Independence Community Bank Corp. (“Independence”) effective June 1, 2006 for $42 per share in cash, representing an aggregate transaction value of $3.6 billion. This acquisition was funded using the proceeds from a $2.4 billion equity offering to Banco Santander S.A. (“Santander”), net proceeds from issuances of perpetual preferred securities and cash on hand. The Company issued 88.7 million shares to Santander, in connection with the equity offering, which made Santander Sovereign’s largest shareholder at the time.

On January 30, 2009, Sovereign became a wholly owned subsidiary of Santander. Pursuant to a Transaction Agreement, dated October 13, 2008, between Sovereign and Santander (the “Transaction Agreement”), Santander acquired all of the outstanding shares of the Company’s common stock that it did not already own in exchange for the right to receive 0.3206 Santander American Depository Shares, or ADSs, for each share of Company common stock. As a result of the Santander transaction, the Company’s state of incorporation changed from Pennsylvania to Virginia.

Subsidiaries

SHUSA had four direct consolidated wholly-owned subsidiaries at December 31, 2009: Sovereign Bank, SCUSA, Independence and Sovereign Delaware Investment Corporation (“SDIC”).

Employees

At December 31, 2009, SHUSA had 9,391 full-time and 1, 205 part-time employees. None of these employees are represented by a collective bargaining agreement, and SHUSA believes it enjoys good relations with its personnel.

Competition

Sovereign Bank is subject to substantial competition in attracting and retaining deposits and in lending funds. The primary factors in competing for deposits include the ability to offer attractive rates, the convenience of office locations, and the availability of alternate channels of distribution. Direct competition for deposits comes primarily from national and state banks, thrift institutions, and broker dealers. Competition for deposits also comes from money market mutual funds, corporate and government securities, and credit unions. The primary factors driving commercial and consumer competition for loans are interest rates, loan origination fees, service levels and the range of products and services offered. Competition for origination of loans normally comes from other thrift institutions, national and state banks, mortgage bankers, mortgage brokers, finance companies, and insurance companies.

Environmental Laws

Environmentally related hazards have become a source of high risk and potentially significant liability for financial institutions relative to their loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental clean up costs to the borrower affecting its ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs, and liability to the institution for clean up costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. To minimize this risk, Sovereign Bank may require an environmental examination of, and report with respect to, the property of any borrower or prospective borrower if circumstances affecting the property indicate a potential for contamination, taking into consideration the potential loss to the institution in relation to the burdens to the borrower. Such examination must be performed by an engineering firm experienced in environmental risk studies and acceptable to the institution, and the costs of such examinations and reports are the responsibility of the borrower. These costs may be substantial and may deter a prospective borrower from entering into a loan transaction with Sovereign Bank. Sovereign Bank is not aware of any borrower who is currently subject to any environmental investigation or clean up proceeding that is likely to have a material adverse effect on the financial condition or results of operations of SHUSA.

Supervision and Regulation

General. Sovereign Bank is chartered as a federal savings bank, and is highly regulated by the OTS as to all its activities, and subject to extensive OTS examination, supervision, and reporting.

Sovereign Bank is required to file reports with the OTS describing its activities and financial condition and is periodically examined to test compliance with various regulatory requirements. The deposits of Sovereign Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”). Sovereign Bank is also subject to examination by the FDIC. Such examinations are conducted for the purpose of protecting depositors and the insurance fund and not for the purpose of protecting holders of equity or debt securities of SHUSA or Sovereign Bank. Sovereign Bank is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh, Boston and New York, which are part of the twelve regional banks comprising the FHLB system. Sovereign Bank is also subject to regulation by the Board of Governors of the Federal Reserve System with respect to reserves maintained against deposits and certain other matters.

SHUSA is a non-bank subsidiary of a bank holding company for purposes of the Bank Holding Company Act of 1956, as amended. As such, SHUSA is prohibited from engaging in any activity, directly or through a subsidiary, that is not permissible for subsidiaries of bank holding companies. Generally, financial activities are permissible, while commercial and industrial activities are not.

Holding Company Regulation. Because SHUSA is a subsidiary of Santander, Santander may be required to obtain approval from the Federal Reserve if SHUSA were to acquire shares of any depository institution (bank or savings institution) or any holding company of a depository institution. In addition, Santander may have to provide notice to the Federal Reserve if SHUA acquires any financial entity that is not a depository institution, such as a lending company.

Control of Sovereign. Under the Change in Bank Control Act (the “Control Act”), individuals, corporations or other entities acquiring SHUSA common stock may, alone or together with other investors, be deemed to control SHUSA and thereby Sovereign Bank. If deemed to control SHUSA, such person or group will be required to obtain OTS approval to acquire the Company’s common stock and could be subject to certain ongoing reporting procedures and restrictions under federal law and regulations. Ownership of more than 10% of the capital stock may be deemed to constitute “control” if certain other control factors are present.

On October 13, 2008, the Company and Santander entered into the Transaction Agreement whereby Santander agreed to acquire all the outstanding shares of the Company not currently owned by it. SHUSA merged with and into a wholly owned subsidiary of Sovereign organized under the laws of the Commonwealth of Virginia and immediately thereafter, pursuant to a share exchange under Virginia law, become a wholly owned subsidiary of Santander.

In late January 2009, stockholders of both Santander and the Company agreed to the terms of the transaction agreement. On January 30, 2009, the Company was acquired by Santander. On February 3, 2010, Sovereign’s holding company name was changed to SHUSA.

Banco Santander (SAN.MC, STD.N, BNC.LN) is a retail and commercial bank, based in Spain, with presence in 10 main markets. At the end of 2009, Santander was the largest bank in the euro zone by market capitalization. In December 2009, Santander has 90 million customers, 13,660 branches -more than any other international bank- and around 170,000 employees. It is the largest financial group in Spain and Latin America, with leading positions in the United Kingdom and Portugal and a broad presence in Europe through its Santander Consumer Finance arm. Santander’s attributable profit in 2009, with no extraordinary gains, came to €8,943 million, 1% more than in 2008.

Regulatory Capital Requirements. OTS regulations require savings associations to maintain minimum capital ratios. These standards are the same as the capital standards that are applicable to other insured depository institutions, such as banks. OTS regulations do not require savings and loan holding companies to maintain minimum capital ratios.

Under the Federal Deposit Insurance Act (“FDIA”), insured depository institutions must be classified in one of five defined categories (well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Under OTS regulations, an institution will be considered “well-capitalized” if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a Tier 1 leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level. A savings institution’s capital category is determined with respect to its most recent thrift financial report filed with the OTS. In the event an institution’s capital deteriorates to the undercapitalized category or below, the FDIA and OTS regulations prescribe an increasing amount of regulatory intervention, including the adoption by the institution of a capital restoration plan, a guarantee of the plan by its parent holding company and the placement of a hold on increases in assets, number of branches and lines of business.

If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver or conservator. Critically undercapitalized institutions generally may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt. All but well-capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Pursuant to the FDIA and OTS regulations, savings associations which are not categorized as well capitalized or adequately-capitalized are restricted from making capital distributions which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of a savings association. At December 31, 2009, Sovereign Bank met the criteria to be classified as “well-capitalized.”

Standards for Safety and Soundness. The federal banking agencies adopted certain operational and managerial standards for depository institutions, including internal audit system components, loan documentation requirements, asset growth parameters, information technology and data security practices, and compensation standards for officers, directors and employees. The implementation or enforcement of these guidelines has not had a material adverse effect on the Company’s results of operations.

Insurance of Accounts and Regulation by the FDIC. Sovereign Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposits are insured up to the applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the Deposit Insurance Fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OTS an opportunity to take such action, and may terminate an institution’s deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

In February 2006, the Federal Deposit Insurance Reform Act (the “Reform Act”) was enacted. The new law merged the old Bank Insurance Fund and Savings Insurance Fund into the single Deposit Insurance Fund, increased deposit insurance coverage for IRAs to $250,000, provided for the further increase of deposit insurance on all accounts by indexing the coverage to the rate of inflation, authorized the FDIC to set the reserve ratio of the combined Deposit Insurance Fund at a level between 1.15% and 1.50%, and permitted the FDIC to establish assessments to be paid by insured banks to maintain the minimum ratios.

The FDIC charges financial institutions deposit premium assessments to ensure it has reserves to cover deposits that are under FDIC insured limits, which in early October 2008, the U.S. government increased to $250,000 per depositor per ownership category. In October of 2008, the FDIC announced a program that provided unlimited insurance on non-interest bearing accounts for covered institutions through December 31, 2009, which was subsequently extended through June 30, 2010. Sovereign Bank participated in the unlimited coverage program through December 31, 2009 but determined not to participate in the extension. The FDIC Board of Directors has established a reserve ratio target percentage of 1.25%. This means that their “target” balance for the reserves is 1.25% of estimated insured deposits. Due to recent bank failures, the reserve ratio is currently significantly below its target balance. In December 2008, the FDIC published a final rule that raised the current deposit assessment rates uniformly for all institutions by 7 basis points in the first quarter of 2009. In the second quarter of 2009, the FDIC assessed additional fees to institutions who have secured borrowings in excess of 15% of their deposits. Additionally, the FDIC approved a special assessment charge of 5 cents per $100 of an institution’s assets minus its Tier 1 capital on June 30, 2009 to help bolster the reserve fund, which was payable on September 30, 2009. This resulted in a $35.3 million charge in our results for the second quarter of 2009. As a result of these two events, SHUSA’s deposit insurance expense increased to $137.4 million compared to $37.5 million for the prior year.

During the fourth quarter of 2009, the FDIC announced that all depository institutions would be required to prepay three years of assessments in order to quickly raise funds and replenish the reserve ratio while not immediately impacting banks’ earnings. Sovereign Bank paid $347.9 million on December 31, 2009 to the FDIC based on an estimate of what our deposit assessments would be over the next three years. This amount was accounted for as a prepaid asset and will be expensed based on our actual deposit assessments in future years until it is depleted.

In addition to deposit insurance premiums, all insured institutions are required to pay a Financing Corporation assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. In 2009, Sovereign Bank paid Finance Corporation Assessments of $4.9 million. The annual rate (as of the first quarter of 2010) for all insured institutions is $0.106 for every $1,000 in domestic deposits which is consistent with what was paid in 2009. These assessments are revised quarterly and will continue until the bonds mature in the year 2017.

Federal Restrictions on Transactions with Affiliates and Insiders. All savings institutions are subject to affiliate and insider transaction rules applicable to member banks of the Federal Reserve System set forth in the Federal Reserve Act or the Home Owners Loan Act (HOLA), as well as such additional limitations as the institutions’ primary federal regulator may adopt. These provisions prohibit or limit a savings institution from extending credit to, or entering into certain transactions with, affiliates, principal shareholders, directors and executive officers of the savings institution and its affiliates. For these purposes, the term “affiliate” generally includes a holding company such as SHUSA and any company under common control with the savings institution. In addition, the federal law governing unitary savings and loan holding companies prohibits Sovereign Bank from making any loan to any affiliate whose activity is not permitted for a subsidiary of a bank holding company. This law also prohibits Sovereign Bank from making any equity investment in any affiliate that is not its subsidiary.

Restrictions on Subsidiary Savings Institution Capital Distributions. SHUSA’s principal sources of funds are cash dividends paid to it by Sovereign Bank, investment income and borrowings. OTS regulations limit the ability of savings associations such as Sovereign Bank to pay dividends and make other capital distributions. Associations that are subsidiaries of a savings and loan holding company must file a notice with the OTS at least 30 days before the proposed declaration of a dividend or approval of the proposed capital distribution by its board of directors. In addition, a savings association must obtain prior approval from the OTS if it fails to meet certain regulatory conditions, or if, after giving effect to the proposed distribution, the association’s capital distributions in a calendar year would exceed its year-to-date net income plus retained net income for the preceding two years or the association would not be at least adequately capitalized or if the distribution would violate a statute, regulation, regulatory agreement or a regulatory condition to which the association is subject.

Qualified Thrift Lender. The Qualified Thrift Lender Test, under HOLA, specifies that a savings institution have at least 65% of its portfolio assets, as defined by regulation, in qualified thrift investments. As an alternative, the savings institution under HOLA may maintain 60% of its assets in those assets specified in Section 7701(a) (19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing related loans, certain consumer and small business loans, as defined by the regulations, and mortgage related investments. At December 31, 2009, Sovereign Bank satisfied the QTL test.

Other Loan Limitations. Federal law limits the amount of non-residential mortgage loans a savings institution, such as Sovereign Bank, may make. Separate from the qualified thrift lender test, 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), with another 10% of assets permissible in “small business loans.” Commercial loans secured by real estate can be made in an amount up to four times an institution’s total risk-based capital. An institution can also have commercial leases, in addition to the above items, up to 10% of its assets. Commercial paper, corporate bonds, and consumer loans taken together cannot exceed 35% of an institution’s assets. For this purpose, however, residential mortgage loans and credit card loans are not considered consumer loans, and are both unlimited in amount. The foregoing limitations are established by statute, and cannot be waived by the OTS. At December 31, 2009, Sovereign Bank was in compliance with all these limits.

Federal Reserve Regulation. Under Federal Reserve Board regulations, Sovereign Bank is required to maintain a reserve against its transaction accounts (primarily interest-bearing and non interest-bearing checking accounts). Because reserves must generally be maintained in cash or in low-interest-bearing accounts, the effect of the reserve requirements is to reduce an institution’s asset yields.

Numerous other regulations promulgated by the Federal Reserve Board affect the business operations of Sovereign Bank. These include regulations relating to equal credit opportunity, electronic fund transfers, collection of checks, truth in lending, truth in savings, availability of funds, home mortgage disclosure and margin credit.

Federal Home Loan Bank System. The FHLB System was created in 1932 and consists of twelve regional FHLBs. The FHLBs are federally chartered but privately owned institutions created by U.S. Congress. The Federal Housing Finance Board is an agency of the federal government and is generally responsible for regulating the FHLB System. Each FHLB is owned by its member institutions. The primary purpose of the FHLBs is to provide funding to their members for making housing loans as well as for affordable housing and community development lending. FHLBs are generally able to make advances to their member institutions at interest rates that are lower than could otherwise be obtained by such institutions. As a member, Sovereign Bank is required to make minimum investments in FHLB stock based on the level of borrowings from the FHLB. Sovereign Bank is a member of FHLB Pittsburgh, Boston, and New York and has investments of $644.4 million, $4.2 million and $21.4 million, respectively. Sovereign Bank utilized advances from the FHLB to fund balance sheet growth and provide liquidity. SHUSA had access to advances with the FHLB of up to $15.6 billion at December 31, 2009 and had outstanding advances of $11.7 billion at December 31, 2009. The level of borrowings capacity Sovereign Bank has with the FHLB is contingent upon the level of qualified collateral the Bank holds at a given time.

In December 2008, the FHLB of Pittsburgh announced it was suspending dividends on its stock and that it would not repurchase any excess capital stock in order to maintain their liquidity and capital position. We considered this and concluded that our investment in FHLB Pittsburgh is not impaired at December 31, 2009 and 2008. However we will continue to closely monitor this investment in future periods.

Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires financial institutions regulated by the federal financial supervisory agencies to ascertain and help meet the credit needs of their delineated communities, including low to moderate-income neighborhoods within those communities, while maintaining safe and sound banking practices. A bank’s performance under the CRA is important in determining whether the bank may obtain approval for, or utilize streamlined procedures in, certain applications for acquisitions or to engage in new activities. Sovereign Bank’s lending activities are in compliance with applicable CRA requirements, and Sovereign Bank’s current CRA rating is “outstanding,” the highest category.

Other Legislation. The Fair and Accurate Credit Transactions Act (“FACTA”) was signed into law on December 4, 2003. This law extends the previously existing Fair Credit Reporting Act. New provisions added by FACTA address the growing problem of identity theft. Consumers are able to initiate a fraud alert when they are victims of identity theft, and credit reporting agencies will have additional duties. Consumers are also entitled to obtain free credit reports, and will be granted certain additional privacy rights. The Check 21 Act was enacted in late 2003. This Act affects the way checks are processed in the banking system, allowing payments to be processed electronically rather than as traditional paper checks.

Congress is often considering some financial industry legislation, and the federal banking agencies routinely propose new regulations. New legislation and regulation may include dramatic changes with respect to the federal deposit insurance system, consumer financial protection measures, compensation and systematic risk oversight authority. There can be no assurances that new legislation and regulations will not adversely affect us.

Corporate Information. All reports filed electronically by SHUSA with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those reports are accessible on the SEC’s Web site at www.sec.gov.

Item 1A — Risk Factors

The following list describes several risk factors that are applicable to our Company:

•

The Current Economic Downturn May Continue to Cause A Deterioration In Our Asset Quality and Adversely Affect Our Earnings and Cash Flow.

Our business faces various material risks, including credit risk and the risk that the demand for our products will decrease. In a recession or other economic downturn, these risks would probably become more acute. In an economic downturn, our credit risk and associated provision for credit losses and legal expense will increase. Also, decreases in consumer confidence, real estate values, and interest rates, usually associated with a downturn, could combine to make the types of loans we originate less profitable and could cause elevated levels of losses on our commercial and consumer loans. Current economic conditions may continue to deteriorate which would likely continue to adversely impact our results.

•

Disruptions in the Global Financial Markets have Affected, and May Continue to Adversely Affect, SHUSA’s Business and Results of Operations.

Dramatic declines in the housing market during the past two years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivatives, have caused many financial institutions to seek additional capital and to merge with other financial institutions. Disruptions in the global financial markets have also adversely affected the corporate bond markets, debt and equity underwriting and other elements of the financial markets. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, some lenders and institutional investors have reduced and, in some cases, ceased to provide funding to certain borrowers, including other financial institutions. The impact on available credit, increased volatility in the financial markets and reduced business activity has adversely affected, and may continue to adversely affect, SHUSA’s businesses, capital, liquidity or other financial condition and results of operations, access to credit and the trading price of SHUSA’s preferred stock or debt securities.

Although market conditions improved in the second half of 2009, unemployment in the United States remains near a 26 year high, and conditions are expected to remain challenging for financial institutions in 2010.

•

SHUSA May Experience Further Write-Downs of its Financial Instruments and Other Losses Related to Volatile and Illiquid Market Conditions.

Market volatility, illiquid market conditions and disruptions in the credit markets have made it extremely difficult to value certain of SHUSA’s assets. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these assets in future periods. In addition, at the time of any sales of these assets, the price SHUSA ultimately realizes will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of these factors could require the Company to take further write-downs in respect of these assets, which may have an adverse effect on the Company’s results of operations and financial condition in future periods.

•

Liquidity is Essential to SHUSA’s Businesses, and the Company Relies on External Sources, Including Government Agencies to Finance a Significant Portion of its Operations.

Adequate liquidity is essential to SHUSA’s businesses. Sovereign Bank primarily relies on the Federal Home Loan Bank, deposits and other third party sources of funding for its liquidity needs. However, SCUSA obtains a significant portion of its liquidity through its Parent Company, Santander. SCUSA’s liquidity could be materially adversely affected by factors SHUSA cannot control, such as negative events impacting Santander, as well as the continued general disruption of the financial markets or negative views about the financial services industry in general. In addition, SCUSA’s ability to raise funding could be impaired if lenders develop a negative perception of Santander or SCUSA’s short-term or long-term financial prospects, or a perception that Santander or the Company is experiencing greater liquidity risk. SHUSA’s credit ratings are also important to its liquidity. A reduction in SHUSA’s credit ratings could adversely affect its liquidity, widen its credit spreads or otherwise increase its borrowing costs.

•

Impact of Future Regulation Changes May Have an Adverse Impact on Our Profitability.

Congress is often considering some financial industry legislation, and the federal banking agencies routinely propose new regulations. New legislation and regulation may include dramatic changes with respect to the federal deposit insurance system, consumer financial protection measures, compensation and systematic risk oversight authority. There can be no assurances that new legislation and regulations will not adversely affect us.

Additionally, it is possible that additional fees may be assessed on large financial institutions that received TARP funds (which SHUSA did not receive), participated in the FDIC temporary guarantee of debt issuances (in which SHUSA did participate in) or participated in its temporary Transaction Account Guarantee Program on non-interest bearing deposits (which Sovereign Bank initially participated in but no longer participates). A proposal has been put forth to levy fees of 15 basis points on certain liabilities of financial institutions with assets in excess of $50 billion. If this proposal becomes law and is determined to be applicable to SHUSA, it would result in payments of approximately $50 million per year over the next ten years. However, it is not known at this time whether this proposal or one similar to it (including one that imposes a larger or smaller fee), will be signed into law and what form, if any, of it will be applicable to SHUSA.

•

The Preparation of SHUSA’s Financial Statements Requires the Use of Estimates That May Vary From Actual Results.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. One example of a significant critical estimate is the level of the allowance for credit losses. Due to the inherent nature of this estimate, SHUSA cannot provide absolute assurance that it will not significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than the provided allowance.

•

The Preparation of SHUSA’s Tax Returns Requires the Use of Estimates & Interpretations of Complex Tax Laws and Regulations and Are Subject to Review By Taxing Authorities.

SHUSA 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 subject to different interpretations by the taxpayer and the relevant Governmental taxing authorities. In establishing a provision for income tax expense and filing returns, 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. SHUSA reviews its tax balances quarterly and as new information becomes available, the balances are adjusted, as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions. In late 2008, the Internal Revenue Service (the “IRS”) completed its examination of the Company’s federal income tax returns for the years 2002 through 2005. Included in this examination cycle are two separate financing transactions with an international bank totaling $1.2 billion. As a result of these transactions, SHUSA was subject to foreign taxes of $154.0 million during the years 2003 through 2005 and claimed a corresponding foreign tax credit for foreign taxes paid during those years. In 2006 and 2007, SHUSA 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. The IRS issued a notification of adjustment disallowing the foreign tax credits taken in 2003-2005 in the amount of $154.0 million related to these transactions; disallowing deductions for issuance costs and interest expense related to the transaction which would result in an additional tax liability of $24.9 million and assessed interest and potential penalties, the combined amount of which totaled approximately $70.8 million. SHUSA has paid the additional tax due resulting from the IRS’ adjustments, as well as the assessed interest and penalties and has filed a lawsuit against the government seeking the refund of those amounts in Federal District Court. In addition, the IRS has commenced its audit for the years 2006 and 2007. We expect that in the future the IRS will propose to disallow the foreign tax credits and deductions taken in 2006 and 2007 of $87.6 million and $22.5 million, respectively; disallow deductions for issuance costs and interest expense which would result in an additional tax liability of $37.1 million; and to assess interest and penalties. SHUSA continues to believe that it is entitled to claim these foreign tax credits taken with respect to the transactions and also continues to believe it is entitled to tax deductions for the related issuance costs and interest deductions based on tax law. SHUSA also believes that its recorded tax reserves for its position of $57.7 million adequately provides for any potential exposure to the IRS related to these items. However, as the Company continues to go through the litigation process, we will continue to evaluate the appropriate tax reserve levels for this position and any changes made to the tax reserves may materially affect SHUSA’s income tax provision, net income and regulatory capital in future periods.

•

Changing Interest Rates May Adversely Affect Our Profits.

To be profitable, we must earn more money from interest on loans and investments and fee-based revenues than the interest we pay to our depositors and creditors and the amount necessary to cover the cost of our operations. Rising interest rates may hurt our income because they may reduce the demand for loans and the value of our investment securities and our loans, and increase the amount that we must pay to attract deposits and borrow funds. If interest rates decrease, our net interest income could be negatively affected if interest earned on interest-earning assets, such as loans, mortgage-related securities, and other investment securities, decreases more quickly than interest paid on interest-bearing liabilities, such as deposits and borrowings. This would cause our net interest income to go down. In addition, if interest rates decline, our loans and investments may prepay earlier than expected, which may also lower our income. Interest rates do and will continue to fluctuate, and we cannot predict future Federal Reserve Board actions or other factors that will cause rates to change. If the yield curve steepens or flattens, it could impact our net interest income in ways management may not accurately predict.

•

We Experience Intense Competition for Loans and Deposits.

Competition among financial institutions in attracting and retaining deposits and making loans is intense. Our most direct competition for deposits has come from commercial banks, savings and loan associations and credit unions doing business in our areas of operation, as well as from nonbanking sources, such as money market mutual funds and corporate and government debt securities. Competition for loans comes primarily from commercial banks, savings and loan associations, consumer finance companies, insurance companies and other institutional lenders. We compete primarily on the basis of products offered, customer service and price. A number of institutions with which we compete have greater assets and capital than we do and, thus, may have a competitive advantage.

•

We Are Subject to Substantial Regulation Which Could Adversely Affect Our Business and Operations.

As a financial institution, we are subject to extensive regulation, which materially affects our business. Statutes, regulations and policies to which we and Sovereign Bank are subject may be changed at any time, and the interpretation and the application of those laws and regulations by our regulators is also subject to change. There can be no assurance that future changes in regulations or in their interpretation or application will not adversely affect us.

The regulatory agencies having jurisdiction over banks and thrifts have under consideration a number of possible rulemaking initiatives which impact bank and thrift and bank and thrift holding company capital requirements. Adoption of one or more of these proposed rules could have an adverse effect on us and Sovereign Bank.

Existing federal regulations limit our ability to increase our commercial loans. We are required to maintain 65% of our assets in residential mortgage loans and certain other loans, including small business loans. We also cannot have more than 20% of our total assets in commercial loans that are not secured by real estate, however, only 10% can be large commercial loans not secured by real estate, more than 10% in small business loans, or more than four times our risk based capital in commercial real estate loans. A small business loan is one with an original amount of $2 million or less, and a large commercial loan is a loan with an original loan amount of more than $2 million. Our existing strategy is to focus loan growth on commercial loans which generally have higher yields and profitability. We may be limited in the amount of commercial loan growth that we can achieve based on the above regulations.

•

Changes in Accounting Standards Could Impact Reported Earnings.

The accounting standard setters, including the FASB, SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of SHUSA’s consolidated financial statements. These changes can be hard to predict and can materially impact how it records and reports its financial condition and results of operations. In some cases, SHUSA could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

•

We Rely on Third Parties for Important Products and Services.

Third party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delays and expense.

•

Our Framework for Managing Risks May Not be Effective in Mitigating Risk and Loss to Our Company.

Our risk management framework is made up of various processes and strategies to manage our risk exposure. Types of risks to which we are subject include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal risk, compliance risk and reputation risk, among others. Our framework to manage risk, including the framework’s underlying assumptions, may not be effective under all conditions and circumstances. If our risk management framework proves ineffective, we could suffer unexpected losses and could be materially adversely affected.

•

Our Disclosure Controls and Procedures Over Financial Reporting May Not Prevent or Detect All Errors or Acts of Fraud.

Our disclosure controls and procedures over financial reporting are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Any disclosure controls and procedures over financial reporting or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by any unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

•

Integration Risks Exist Related to the Acquisition of the Company by Santander.

On January 30, 2009, the Company was acquired by Santander. SHUSA may not be integrated successfully into the existing businesses of Santander or the integration may be more difficult, time-consuming or costly than expected. The combined company may not realize, to the extent or at the time we expect, revenue synergies and cost savings from the transaction. Deposit attrition, operating costs, customer losses and business disruptions following the transaction, including difficulties in maintaining relationships with employees and successfully completing system conversions, could be greater than expected.

Item 1B- Unresolved Staff Comments

None.

Item 2 — Properties

SHUSA utilizes 812 buildings that occupy a total of 6.5 million square feet, including 234 owned properties with 1.8 million square feet and 454 leased properties with 2.9 million square feet. Nine major buildings contain 1.4 million square feet, which serve as the headquarters or house significant operational and administrative functions:

Columbia Park Operations Center — Dorchester, Massachusetts

195 Montague Street Regional Headquarters for New York Metro — Brooklyn, New York

East Providence Call Center and Operations and Loan Processing Center — East Providence, Rhode Island

75 State Street Bank Headquarters for SHUSA and Sovereign Bank of New England — Boston, Massachusetts

405 Penn Street Sovereign Bank Plaza Call Center and Operations and Loan Processing Center — Reading, Pennsylvania

601 Penn Street Loan Processing Center — Reading, Pennsylvania

1130 Berkshire Boulevard Administrative Offices — Wyomissing, Pennsylvania

SCUSA Corporate Headquarters and Call Center- Dallas, Texas

SCUSA Call Center- Richland Hills, Texas

The majority of the nine properties of SHUSA outlined above are utilized by our Specialized Business segment and for general corporate purposes by our Other segment (with the exception of the SCUSA locations). The remaining 803 properties consist primarily of bank branches and lending offices used by our Retail Banking segments.

Item 3 — Legal Proceedings

Reference should be made to Footnote 18 for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service. Besides this item, SHUSA is not involved in any pending material legal proceeding other than routine litigation occurring in the ordinary course of business. SHUSA does not expect that any amounts that it may be required to pay in connection with routine litigation occurring in the ordinary course of business would have a material adverse effect on its financial position or statement of operations.

Item 4 — Submission of Matters to a Vote of Security Holders

None.

Item 4A — Executive Officers of the Registrant

Certain information, including principal occupation during the past five years, relating to the principal executive officers of SHUSA, as of the date of this filing are set forth below:

Gabriel S. Jaramillo — Age 60. Mr. Jaramillo became Chairman of the Board, President and Chief Executive Officer of the Company on January 30, 2009 and also currently serves as Chairman of each of the Executive and Risk Management Committees of the Board and as a member of the Compensation Committee of the Board. He has served as a Director of SHUSA since July 16, 2008. Mr. Jaramillo has 34 years of experience within the financial sector and served in various executive positions with Grupo Santander since 1996. Prior to his appointment to the Company, he most recently served as Advisor to the Chairman of Grupo Santander and was President of Banco Santander Brazil.

Edvaldo Morata — Age 46. Mr. Morata was appointed Chief of Staff to the CEO at Sovereign Bank in 2010. He is also a member of the SHUSA Management Executive Committee. Mr. Morata has more than 20 years experience in financial services. He joined the Santander Group in 1996. Most recently, he was Santander’s Chief Executive for Asia in Hong Kong. Previously, he held a number of executive management positions, including head of Asset Management and Private Banking in Brazil and head of Banespa’s International Department when it was acquired by Santander in 2001. Mr. Morata was also a member of the Executive Committee of Santander Brazil. Before joining Santander, Mr. Morata worked for a number of financial institutions including American Express, ING and Citibank.

Juan Guillermo Sabater — Age 41. Mr. Sabater was appointed Chief Financial Officer of the Company in May of 2009. He is also a member of SHUSA Management Executive Committee. Mr. Sabater has 18 years of experience in the banking industry, all of them with Santander. Prior to joining Sovereign Bank, Mr. Sabater worked as a Chief Financial Officer as well in Grupo Santander Chile since September 2006. From 2003 — 2006 Mr. Sabater was the Controller for Grupo Santander’s Consumer Finance Division in Madrid, Spain.

Nuno G. Matos — Age 42. Mr. Matos was appointed as Managing Director of Retail Business Development and SME Banking in 2009. Prior to joining SHUSA, Mr. Matos held a number of senior executive management positions for the Grupo in Europe and South America since joining Santander in 1994. Since 2002, Mr. Matos had worked for Grupo Santander Brazil, where he headed operations and control for the wholesale bank and most recently led the credit and debit card business for both Banco Real and Santander.

Juan Dávila — Age 40. Mr. Dávila was appointed Chief Risk Management Officer for Sovereign Bank in 2009. Prior to his appointment as Chief Risk Management Officer, Mr. Dávila held an executive position in the Bank’s Risk Management Group since he joined the Bank in 2007. From 2004 — 2007, Mr. Dávila served as Chief Risk Officer at Banco Santander, Puerto Rico, responsible for all credit and market risk exposure of the holding company and subsidiaries and was head of the Credit Committee and led a team of more than 125 employees comprising areas of credit, monitoring, market risk, credit policy and risk infrastructure. Mr. Dávila has also held various other senior executive management positions with Banesto, Grupo Santander, including the role of risk manager for the Andalucia Region and manager of the risk analysis center for small businesses.

Kirk W. Walters — Age 54. Mr. Walters is Senior Executive Vice President of SHUSA. Mr. Walters served as interim President and Chief Executive Officer from October 2008 until Sovereign Bank was acquired by Banco Santander on January 30, 2009. Mr. Walters joined Sovereign Bank in February 2008 as Executive Vice President and Chief Financial Officer from Chittenden Corporation. At Chittenden, Mr. Walters served as Executive Vice President and Chief Financial Officer for 12 years. Prior to joining Chittenden, he worked at Northeast Federal Corporation in Hartford, Connecticut, from 1989 to 1995 in a series of executive positions, including Senior Executive Vice President and Chief Financial Officer; and Chairman, President and Chief Executive Officer.

Roy J. Lever — Age 58. Mr. Lever was appointed Managing Director of Retail Banking in 2008. Prior to joining Sovereign, Mr. Lever served nearly 33 years in a variety of senior positions with Bank of America and Fleet Bank. Most recently, from 2003 — 2007, he was a Senior Vice President for Global Consumer and Small Business Banking at Bank of America and where he had responsibility for the Bank of America compliance, risk and operations at more than 6,000 branches.

Patrick J. Sullivan — Age 54. Mr. Sullivan was appointed Managing Director of Commercial Banking in 2008. Prior to being promoted to Managing Director of Commercial Banking, Mr. Sullivan was President and CEO of Massachusetts and New Hampshire. Mr. Sullivan has 30 years of experience in the banking industry and has held a variety of executive and management positions. He joined Sovereign in June of 2000 as Executive Vice President, Managing Director of Commercial Banking and Specialized Lending. Previously, he was President and Chief Executive Officer of Howard Bank.

Jose Castello Orta — Age 48. Mr. Castello was appointed Managing Director of Global Banking and Markets in November of 2009. He is also a member of the SHUSA Management Executive Committee. Mr. Castello has 20 years experience in the financial services industry. He has held a number of executive management positions with the Santander Group. Most recently, he was Head of U.S. Global Corporate Banking for Santander. In 2003 Mr. Castello was the head of Santander’s European and American Multinational Group, and from 2005 — 2009 he was the Head of Corporate and Investment Banking USA.

Eduardo J. Stock — Age 48. Mr. Stock was appointed Managing Director of the Manufacturing Group in March of 2009. He is also a member of the SHUSA Management Executive Committee. Mr. Stock joined Banco Santander in 1993 as head of Treasury and Research for Santander Negócios Portugal. During his tenure at Santander, he held a number of senior executive management positions in the Group’s Portuguese business. Most recently, he served as Chief Financial Officer and head of IT and Operations for Santander Totta, as well as President of Isban Portugal.

Francisco J. Simon — Age 39. Mr. Simon was appointed Managing Director of Human Resources in January of 2009. Prior to joining Sovereign Bank, Mr. Simon worked in the human resources areas of other Santander affiliates. From 2000 — 2003 he served as Coordinator of Human Resources for Santander International Private Banking Groups; from 2003 — 2008 he was Director of Human Resources for Banco Santander Swiss; and from 2008 — 2009 he was Director of Human Resources for Banco Santander, New York. Mr. Simon received his law degree from San Pablo University, where he specialized in Finance, Labor Law and Criminology.

Richard A. Toomey, Jr. — Age 65. Mr. Toomey was appointed General Counsel in 2006. He is also a member of the SHUSA Management Executive Committee. He served as Assistant General Counsel of Sovereign Bank from 2000 to 2006. Prior to joining Sovereign Bank, Mr. Toomey served as General Counsel of Sovereign Bank and Group Senior Counsel of Fleet Financial Group.

PART II

Item 5 — Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

During the 2008 fiscal year through January 29, 2009, SHUSA’s common stock was traded on the New York Stock Exchange (“NYSE”) under the symbol “SOV.” On January 30, 2009, all shares of the Company common stock were acquired by Santander and delisted from the NYSE. Following such delisting, there has not been, and there currently is not, an established public trading market in shares of SHUSA’s common stock. As of the date of this filing, Santander was the sole holder of SHUSA’s common stock.

Item 6 — Selected Financial Data

		SELECTED FINANCIAL DATA
		AT OR FOR THE YEAR ENDED DECEMBER 31,
(Dollars in thousands, except per share data)		2009(1)				2008				2007				2006				2005
Balance Sheet Data
Total assets		$	82,953,215			$	77,093,668			$	84,746,396			$	89,641,849			$	63,678,726
Loans held for investment, net of allowance			55,733,953				54,439,146				56,729,982				54,648,310				43,204,701
Loans held for sale			118,994				327,332				547,760				7,611,921				311,578
Investment securities			14,301,638				10,020,110				15,142,392				14,877,640				12,557,328
Deposits and other customer accounts			44,428,065				48,438,573				49,915,905				52,384,554				37,977,706
Borrowings and other debt obligations			27,235,151				20,964,185				26,272,512				27,006,102				18,926,557
Stockholders’ equity		$	9,387,535			$	5,596,714			$	6,992,325			$	8,644,399			$	5,810,699
Summary Statement of Operations
Total interest income		$	4,423,586			$	3,923,164			$	4,656,256			$	4,326,404			$	2,962,587
Total interest expense			1,780,082				2,040,722				2,813,013				2,528,814				1,353,706
Net interest income			2,643,504				1,882,442				1,843,243				1,797,590				1,608,881
Provision for credit losses (2)			1,984,537				911,000				407,692				484,461				90,000
Net interest income after provision for credit losses			658,967				971,442				1,435,551				1,313,129				1,518,881
Total non-interest income (2)			342,297				(818,743	)			354,396				285,574				602,664
General and administrative expenses			1,520,460				1,484,306				1,336,865				1,284,329				1,084,390
Other expenses (3)			603,703				302,027				1,862,794				295,243				145,035
(Loss)/Income before income taxes			(1,122,899	)			(1,633,634	)			(1,409,712	)			19,131				892,120
Income tax (benefit)/provision (4)			(1,284,464	)			723,576				(60,450	)			(117,780	)			215,960
Net (Loss)/Income		$	161,565			$	(2,357,210	)		$	(1,349,262	)		$	136,911			$	676,160
Selected Financial Ratios
Return on average assets (5)			0.20	%			(2.99	)%			(1.62	)%			0.17	%			1.11	%
Return on average equity (6)			1.98	%			(31.27	)%			(15.40	)%			1.82	%			11.92	%
Average equity to average assets (7)			9.89	%			9.55	%			10.52	%			9.46	%			9.34	%

Management’s Discussion and Analysis

Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

EXECUTIVE SUMMARY

Sovereign Bank is a $73.8 billion financial institution as of December 31, 2009 with community banking offices, operations and team members located principally in Pennsylvania, Massachusetts, New Jersey, Connecticut, New Hampshire, New York, Rhode Island, and Maryland. Sovereign Bank gathers substantially all of its deposits in these market areas. On January 30, 2009, the Company was acquired by Banco Santander, N.A. (“Santander”). We use our deposits, as well as other financing sources, to fund our loan and investment portfolios. We earn interest income on our loans and investments. In addition, we generate non-interest income from a number of sources including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance. Our principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. Our volumes, and accordingly our financial results, are affected by the economic environment, including interest rates, consumer and business confidence and spending, as well as the competitive conditions within our geographic footprint. Additionally, in July 2009, Santander contributed SCUSA, a majority owned subsidiary into SHUSA, which had total assets of $9.1 billion at December 31, 2009. SCUSA is a specialized consumer finance company engaged in the purchase, securitization, and servicing of retail installment contracts originated by automobile dealers. SCUSA acquires retail installment contracts principally from manufacturer franchised dealers in connection with their sale of used and new automobiles and trucks primarily to nonprime customers with limited credit histories or past credit problems. SCUSA also purchases retail installment contracts from other companies.

Our customers select SHUSA for banking and other financial services based on our ability to assist customers by understanding and anticipating their individual financial needs and providing customized solutions. 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.

Following the acquisition by Santander, Sovereign Bank is focused on four objectives:

	1)		stabilizing our financial condition with respect to liquidity and capital;
	2)		improving risk management and collections;
	3)		improving our margins and efficiency; and
	4)		reorganizing to align to Santander business models with a strong commercial focus.

In order to enhance the Company’s capital position, on March 25, 2009, SHUSA issued 72,000 shares of preferred stock to Santander to raise proceeds of $1.8 billion. The Series D preferred stock pays non-cumulative dividends of 10% per year. Each share of Series D preferred stock is convertible into 100 shares of the Company’s common stock. SHUSA contributed the proceeds from this issuance to Sovereign Bank in order to strengthen the Bank’s regulatory capital ratios. On July 29, 2009, the outstanding Series D preferred stock was converted into common shares of SHUSA by Santander. This action further illustrates the commitment our Parent Company has made to the Company and eliminates the cash obligation of SHUSA with respect to the 10% Series D preferred stock dividend.

Our Tier 1 leverage ratio for SHUSA was 7.13% at December 31, 2009 compared to 5.73% at December 31, 2008, respectively. The Bank’s total risk based capital ratio was 12.46% compared to 10.20% at December 31, 2008. Our capital levels and ratios are in excess of the levels required to be considered well-capitalized. We continue to strengthen our balance sheet and position the Company for any further weakening in economic conditions by increasing the amount of loan loss reserves on our balance sheet. Reserves for credit losses as a percentage of total loans held for investment have increased to 3.61% at December 31, 2009 from 2.10% at December 31, 2008.

In order to further 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 services. In the first quarter of 2009, Sovereign Bank formed a new management team which is comprised of several executives from Santander and certain legacy Sovereign Bank executives. The new management team completed its review of Sovereign Bank’s operating procedures and cost structure. During 2009, management implemented certain pricing and fee assessment changes to our deposit portfolio and also initiated a reduction in workforce and instituted a hiring freeze with respect to certain open positions. This resulted in a reduction in our workforce of approximately 2,700 employees over the past year (24%). Many of the reductions came from consolidating certain back office functions or eliminating certain middle to senior management positions. As a result of these actions, severance charges of $152.2 million were recorded during the year-ended December 31, 2009.

In order to improve our risk management and collection efforts the Company has more than doubled its collection department headcount and certain additional senior management personnel have been placed at Sovereign Bank from Santander. Additionally, it has now formed certain specialized teams within its commercial workout area to focus on certain loan products. Finally, the servicing and collection activities related to our indirect auto portfolio have been transferred to SCUSA.

During the second quarter of 2009, the Company incorporated various elements of the Santander business model into its reporting structure. These included establishing a centralized and independent risk management function and the restructuring of our risk management function to more closely following our business lines. During the second quarter, the Company established a commercial credit group and has staffed this group with existing officers of the Company. Finally, a credit management information system was implemented in the latter half of 2009.

In order to further 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 services. In our Retail Banking segment, we have redesigned our employee incentive programs to encourage our workforce to generate loans and deposits at attractive spreads as defined by our risk management group. We have simplified our Middle Market segment organization and have instituted certain pricing changes on the loan portfolios to improve risk based pricing and enhance margins. In our Specialized Business segment, we are focused on managing our non-core loan portfolios as efficiently as possible with a particular emphasis on operations and capital.

RECENT INDUSTRY CONSOLIDATION IN OUR GEOGRAPHIC FOOTPRINT

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

We believe the acquisition with Santander will further strengthen our financial position and enable us to continue to execute our strategy of focusing on our core retail and commercial customers in our geographic footprint.

CURRENT INTEREST RATE ENVIRONMENT

Net interest income represents a significant portion of the Company’s revenues. Accordingly, the interest rate environment has a substantial impact on SHUSA’s earnings. The Company currently is in a mildly asset sensitive interest rate risk position. During 2009, our net interest margin increased to 3.76% from 2.87% in 2008. This increase in margin is attributable to the impact of the contribution of SCUSA by our Parent Company. SCUSA’s net interest margin for 2009 was 19.95%. The target customer of SCUSA is subprime in nature and as a result the customers pay high interest rates for access to credit. Additionally, SCUSA purchases these loans from automobile dealers at significant discounts at the time these loans are funded. These discounts are accreted into interest earnings over the life of the loans. Excluding the impact of SCUSA, SHUSA’s net interest margin has declined from 2.87% in 2008 to 2.18% in 2009 as decreasing interest rates have resulted in the yields decreasing on our variable rate commercial loans and a lower overall yield on our investment portfolio. However our funding costs have not decreased by a similar amount due to the growth in fixed rate time deposits and money market accounts that we experienced in the fourth quarter of 2008. Most of these high cost time deposits that were originated in this time period (that generally had terms of one year) ran-off in the fourth quarter of 2009. Additionally management implemented a number of strategies to improve loan yields and added certain investments to improve investment yields. The various strategies improved Sovereign Bank’s net interest margin from a low of 1.96% in the first quarter of 2009 to 2.63% in December of 2009. Net interest margin in future periods will be impacted by several factors such as but not limited to, our ability to grow and retain core deposits, the future interest rate environment, loan and investment prepayment rates, and changes in non-accrual loans. See our discussion of Asset and Liability Management practices in a later section of this MD&A, including the estimated impact of changes in interest rates on SHUSA’s net interest income.

CREDIT RISK ENVIRONMENT

The credit quality of our loan portfolio has a significant impact on our operating results. We have experienced significant deterioration in certain key credit quality performance indicators in 2008 and 2009. We had charge-offs of $1.4 billion in 2009 compared to $477.1 million in 2008. Charge-offs for 2009 include $683.8 million related to SCUSA. Our provision for credit losses was $2.0 billion in 2009 compared to $911.0 million in 2008. The provision for credit losses for 2009 includes $720.9 million related to SCUSA.

In 2009, conditions in the housing market continued to deteriorate and there was a significant tightening of available credit in the marketplace. Declining real estate values and financial stress on borrowers resulted in very elevated levels of delinquencies and charge-offs in both 2009 and 2008. The unprecedented steps taken by the U.S. Government in late 2008 and early 2009 under the Emergency Economic Stabilization Act of 2008 (“EESA”) and the American Recovery and Reinvestment Act of 2009 (“ARRA”) along with similar stimulative actions taken by governments around the world, resulted in improved liquidity in the capital markets in 2009. As a result, market conditions improved materially in the second half of 2009. However, significant challenges remain for the U.S. economy including reducing a 26-year high for unemployment which approximated 10% at the end of 2009. We expect to continue to see high levels of credit losses in 2010 given the current economic environment and the uncertainty of the economic recovery which, in 2009, was largely dependent on government stimulus efforts.

Conditions in the housing market have significantly impacted areas of our business. Certain segments of our consumer and commercial loan portfolios have exposure to the housing market. Sovereign Bank had residential real estate loans totaling $10.7 billion at December 31, 2009 of which $2.3 billion is comprised of Alt-A (also known as limited documentation) residential loans. Although losses have been increasing since the first quarter of 2008, actual credit losses on these loans have been modest and totaled $27.8 million for the year ended December 31, 2009. However, non-performing assets and past due loans have been increasing particularly for the Alt-A portion of the residential portfolio. The increased loss experience and asset quality trends led us to increase our allowances for our residential portfolio by $92.3 million during 2009. Future performance of our residential loan portfolio will continue to be significantly influenced by home prices in the residential real estate market, unemployment and general economic conditions. SHUSA has allowances of $198.2 million on its residential loan portfolio.

The homebuilder industry also has been impacted by a decline in new home sales and a reduction in the value of residential real estate which has decreased the profitability and liquidity of these companies. Declines in real estate prices in 2009 and 2008 have been the most pronounced in certain states where previous increases were the largest, such as California, Florida and Nevada. Additionally, foreclosures have increased sharply in various other areas due to increasing levels of unemployment. SHUSA provided financing to various homebuilder companies which is included in our commercial loan portfolio. The Company has been working on de-emphasizing this loan portfolio during 2009 which has resulted in it declining to $495.1 million at December 31, 2009 compared to $704.4 million a year ago. Approximately eighty five percent of these loans at December 31, 2009 are to builders in our geographic footprint which generally have had more stable economic conditions on a relative basis compared to the national economy. We continue to monitor this portfolio in future periods given recent market conditions and determine the impact, if any, on the allowance for loan losses related to these homebuilder loans.

Sovereign Bank also has $7.1 billion of home equity loans and lines of credit. Net charge-offs on these loans for the twelve-month period ended December 31, 2009 was $55.2 million compared with $40.7 million for the corresponding period in the prior year. The majority of this portfolio ($6.7 billion) consists of loans with an average FICO at origination of 780 and an average loan to value of 57.7%. We have total allowances of $137.1 million for this loan portfolio at December 31, 2009 compared to allowances of $87.6 million at December 31, 2008. This increase was due to increased losses and delinquencies experienced in 2009 as well as increases for future projected losses in 2010 based on the current economic and housing environment.

During 2009, we have continued to experience increases in non-performing assets in our commercial lending and commercial real estate portfolios as a result of worsening credit and economic conditions. Non-performing assets for these portfolios increased to $654.3 million and $823.8 million at December 31, 2009 from $244.8 million and $319.6 million at December 31, 2008. Charge-offs on these portfolios were $370.9 million and $71.9 million in 2009 compared to $169.0 million and $32.8 million in 2008. Given these changes, we increased our allowance for loan losses for these portfolios to $548.6 million and $315.4 million during 2009. This increase was a significant component of our provision for credit losses of $2.0 billion for the twelve-month period ended December 31, 2009. 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 FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

		YEAR ENDED DECEMBER 31,
(Dollars in thousands, except per share data)		2009				2008
Net interest income		$	2,643,504			$	1,882,442
Provision for credit losses			1,984,537				911,000
Total non-interest income/(losses)			342,297				(818,743	)
General and administrative expenses			1,520,460				1,484,306
Other expenses			603,703				302,027
Net income/(loss)		$	161,565			$	(2,357,210	)

Under US accounting regulations, since both SCUSA and the Company are controlled by the same Parent, SHUSA’s financial statements were required to be adjusted to account for the contribution as though it had occurred at the beginning of the year. The Company recorded the net assets of SCUSA at the carrying amount of those net assets on Santander’s books. The assets and liabilities of SCUSA were not fair valued again since the transfer is among entities under common control. However, since the Company was acquired by Santander in 2009, results prior to 2009 were not adjusted to include the results of SCUSA. The following tables disclose the impact of SCUSA’s results on our statement of operations for the three-month and twelve-month periods ended December 31, 2009 as well as the impact of our consolidated balance sheet at December 31, 2009.

		Three-Month												Three-Month
		Period Ended												Period Ended				Variance
		December 31, 2009												December 31, 2008				Increase/(Decrease)
										SHUSA								Q409 SHUSA
										excluding								excluding SCUSA vs
		Total				SCUSA				SCUSA				Total				Q408 SHUSA
Net interest income		$	679,757			$	291,162			$	388,595			$	418,610			$	(30,015	)
Provision for credit losses			434,788				124,488				310,300				340,000				(29,700	)
Fees and other income			66,504				9,619				56,885				(201,884	)			258,769
Compensation and benefits			167,380				28,532				138,848				184,700				(45,852	)
Occupancy and equipment expenses			79,040				4,586				74,454				80,930				(6,476	)
Technology expense			28,019				4,274				23,745				26,733				(2,988	)
Outside services			27,933				13,551				14,382				17,694				(3,312	)
Marketing expense			6,796				451				6,345				23,279				(16,934	)
Other administrative expenses			66,331				29,113				37,218				54,023				(16,805	)
General and administrative expense			375,499				80,507				294,992				387,359				(92,367	)
Other expenses			76,522				827				75,695				160,244				(84,549	)
Income before income taxes			(140,548	)			94,959				(235,507	)			(670,877	)			435,370
Income tax provision/(benefit)			(463	)			43,738				(44,201	)			932,316				(976,517	)
Net income		$	(140,085	)		$	51,221			$	(191,306	)		$	(1,603,193	)		$	1,411,887

		Twelve-Month												Twelve-Month
		Period Ended												Period Ended				Variance
		December 31, 2009												December 31, 2008				Increase/(Decrease)
										SHUSA								2009 SHUSA
										excluding								excluding SCUSA vs
		Total				SCUSA				SCUSA				Total				2008 SHUSA
Net interest income		$	2,643,504			$	1,277,358			$	1,366,146			$	1,882,442			$	(516,296	)
Provision for credit losses			1,984,537				720,937				1,263,600				911,000				352,600
Fees and other income			342,297				30,712				311,585				(818,743	)			1,130,328
Compensation and benefits			716,418				88,858				627,560				755,379				(127,819	)
Occupancy and equipment expenses			318,706				17,952				300,754				310,535				(9,781	)
Technology expense			107,100				10,400				96,700				102,591				(5,891	)
Outside services			119,238				57,461				61,777				64,474				(2,697	)
Marketing expense			36,318				1,116				35,202				78,995				(43,793	)
Other administrative expenses			222,680				77,244				145,436				172,332				(26,896	)
General and administrative expense			1,520,460				253,031				1,267,429				1,484,306				(216,877	)
Other expenses			603,703				1,907				601,796				302,027				299,769
Income before income taxes			(1,122,899	)			332,195				(1,455,094	)			(1,633,634	)			178,540
Income tax provision/(benefit)			(1,284,464	)			143,834				(1,428,298	)			723,576				(2,151,874	)
Net income		$	161,565			$	188,361			$	(26,796	)		$	(2,357,210	)		$	2,330,414

										SHUSA
										excluding
		Total				SCUSA				SCUSA
ASSETS
Cash and amounts due from depository institutions		$	2,323,290			$	34,932			$	2,288,358
Investment securities			14,301,638				437,151				13,864,487
Loans held for investment			57,552,177				7,850,666				49,701,511
Allowance for loan losses			(1,818,224	)			(384,399	)			(1,433,825	)
Net loans held for investment			55,733,953				7,466,267				48,267,686
Loans held for sale			118,994				—				118,994
Goodwill			4,135,540				704,059				3,431,481
Other intangibles			245,641				50,953				194,688
Other assets			6,094,159				415,111				5,679,048
Total assets		$	82,953,215			$	9,108,473			$	73,844,742
LIABILITIES
Deposits		$	44,428,065			$	—			$	44,428,065
Borrowings and other debt obligations			27,235,151				7,526,106				19,709,045
Other liabilities			1,902,464				276,988				1,625,476
Total liabilities			73,565,680				7,803,094				65,762,586
STOCKHOLDERS’ EQUITY
Preferred stock			195,445				—				195,445
Common stock			10,397,214				789,544				9,607,670
Warrants			285,435				—				285,435
Accumulated other comprehensive income			(349,869	)			(11,670	)			(338,199	)
Retained earnings			(1,140,690	)			527,505				(1,668,195	)
Total stockholder’s equity			9,387,535				1,305,379				8,082,156
Total liabilities and stockholder’s equity		$	82,953,215			$	9,108,473			$	73,844,742

As previously stated, SCUSA’s target customer base is focused on individuals with past credit problems. The current FICO distribution for its $7.9 billion loan portfolio at December 31, 2009 is as follows.

FICO Band		% of Portfolio
> 650			20	%
650-601			28	%
600-551			26	%
550-501			15	%
<=500			11	%

Although credit loss rates on this portfolio are elevated (8.7% for 2009), the pricing on the portfolios contemplates this as loan yields for SCUSA’s portfolio was 22.83% for the year ended December 31, 2009.

The major factors affecting comparison of earnings between 2009 and 2008 in addition to the inclusion of SCUSA in our 2009 results were:

	•		Net interest income increased 40.4% during 2009. Net interest income decreased $516.3 million excluding the impact of SCUSA as net interest margin decreased from 2.87% in 2008 to 2.18% in 2009 and due to the impact of the interest rate environment as previously discussed. Additionally, interest earning assets, excluding SCUSA, decreased approximately $3.1 billion as certain non-core assets ran-off and we experienced decreased loan demand in our commercial loan portfolio due to economic conditions.
	•		The increase in provision for credit losses in 2009 is related to the previously mentioned deterioration in our loan portfolios due to the current economic environment.
	•		An increase in fees and other income of $1.1 billion. Included in fees and other income:

	(1)		Net losses on investment securities of $157.8 million and $1.5 billion in 2009 and 2008, respectively. Our 2009 and 2008 results included OTTI charges of $143.3 million and $307.9 million, respectively, on non-agency mortgage backed securities. The deteriorating economic conditions have significantly impacted the fair value of certain non-agency mortgage backed securities. The collateral for these securities consists of residential loans originated by a diverse group of private label issuers. For the year ended December 31, 2009 and 2008, it was concluded that the Company would not recover all of its outstanding principal on certain bonds in our non-agency mortgage backed portfolio. Additionally, our 2009 and 2008 results included OTTI charges of $36.9 million and $575.3 million, respectively, on Fannie Mae (“FNMA”) and Freddie Mac (“FHLMC”) preferred stock. On September 7, 2008 the U.S. Treasury, the Federal Reserve and the Federal Housing Finance Agency (FHFA) announced that the FHFA was putting FNMA and FHLMC under conservatorship and giving management control to their regulator, the FHFA. In connection with this action, the dividends on our preferred shares were eliminated thereby significantly reducing the value of this investment. In the third quarter of 2009, SHUSA decided to sell its entire FHLMC/FNMA preferred stock portfolio and recorded a gain of $20.3 million since the market value of these securities had increased since our last write down on March 31, 2009. Net losses on investment securities in 2008 also included a $602.3 million loss on the sale of our CDO portfolio. See Note 7 for additional details.
	(2)		A decrease in capital markets revenues of $25.6 million due to charges of $19.3 million to increase reserves for uncollectible swap receivables from customers due to deterioration in the credit worthiness of these companies.
	(3)		A decrease in mortgage banking revenues in 2009 of $116.3 million due to an increase to recourse reserves on multi-family loan sales of $171.0 million due to worsening credit conditions for these loans, partially offset by higher residential mortgage gains of $52.1 million due to increased volumes form the low interest rate environment which resulted in a higher level of refinancings in 2009 compared to 2008.

•

Increases in general and administrative expenses in 2009 were due primarily to the contribution of SCUSA. Excluding SCUSA, the Company’s general and administrative expenses declined $216.9 million. This reduction has been primarily due to cost management initiatives put in place by Santander since the acquisition. Additionally, Sovereign Bank has reduced its employee base 24% from December 2008 to December 2009.

•

Increases of $335.5 million and $99.9 million in merger-related and restructuring charges and deposit insurance premiums have led to an increase in other expense. These increases were partially offset by an impairment charge of $95.0 million in the fourth quarter of 2008 recorded on an equity method investment in a multifamily loan broker. In connection with the acquisition by Santander, Sovereign Bank incurred merger-related and restructuring charges of $233.3 million during the three months ended March 31, 2009. The majority of these costs related to change in control payments to certain executives and severance charges of $152.2 million, debt extinguishment charges of $68.7 million as well as restricted stock acceleration charges of $45.0 million. The Company also incurred fees of approximately $26.4 million to third parties to successfully close the transaction. Subsequent to the acquisition, the Company decided to prepay $1.4 billion of higher cost FHLB advances to lower funding costs in future periods and as a result incurred a debt extinguishment charge of $68.7 million.

•

SHUSA recorded an income tax benefit of $1.3 billion in 2009 compared to an income tax provision of $723.6 million in 2008. As previously discussed 2008 results included a valuation allowance of $1.4 billion due to the conclusion that it was more likely than not that our deferred tax assets were not realizable on a stand alone basis. In 2009, SHUSA reversed $1.3 billion of valuation allowance due to the contribution of SCUSA. See a later section of the MD&A title income tax expense/(benefit) for further discussion.

Net Interest Income. Net interest income for 2009 was $2.6 billion compared to $1.9 billion for 2008, or an increase of 40.4%. The increase in net interest income in 2009 was due to the inclusion of SCUSA which added $1.3 billion of net interest income for the year ended December 31, 2009. Excluding this impact, net interest income declined $516.3 million due to several factors such as a reduction in market interest rates which has led to a significant reduction in interest income on our variable commercial loans indexed to LIBOR, a reduction in the yield of our investment portfolio due to certain investment restructurings executed at the end of the third quarter of 2008 to shorten the duration of our portfolio and increase liquidity in light of the uncertain economic environment, loan run-off on certain noncore assets of $3.1 billion, the cessation of dividends on our FHLB stock and FNMA/FHLMC preferred stock, and an increase in the amount of non-performing assets. Additionally, the recessionary environment has decreased both corporate and consumer loan demand which has negatively impacted our ability to grow our loan portfolios. Sovereign Bank’s average loan balance declined to $52.7 billion in 2009 from $57.7 billion in 2008.

Interest on investment securities and interest-earning deposits was $393.8 million for 2009 compared to $584.0 million for 2008. Our average investment portfolio increased by $2.6 billion during 2009 to 17.4% of our total average assets in 2009 compared to 14.9% in 2008. Additionally, the Company has been working on reducing the duration of its investment portfolio to reduce interest rate risk. The average life of our investment portfolio has declined to 3.86 years at December 31, 2009 compared to 4.62 years at December 31, 2008. Reducing the average life of our investment portfolio has negatively impacted the overall yield on this asset class as our yield decreased to 3.05% in 2009 from 5.56% in 2008; however, it reduces the impact that changes in interest rates have on the market value of our balance sheet. The low interest rate environment has also lowered yields on our portfolio compared to the prior year.

Interest on loans was $4.0 billion and $3.3 billion for 2009 and 2008, respectively. The average balance of loans was $59.3 billion with an average yield of 6.82% for 2009 compared to an average balance of $57.7 billion with an average yield of 5.82% for 2008. The increase in average yields and balances year to year is due primarily to the impact of SCUSA which added $7.9 billion of loans in 2009. Excluding the impact of SCUSA, interest on loans has declined by $810.1 million due to a $5.0 billion reduction in our average loan portfolio and the low interest rate environment which has negatively impacted yields on our variable rate loan products. At December 31, 2009, approximately 55% of our total loan portfolio reprices monthly or more frequently.

Interest on total deposits was $640.5 million for 2009 compared to $951.6 million for 2008. The average balance of deposits was $41.0 billion with an average cost of 1.56% for 2009 compared to an average balance of $40.3 billion with an average cost of 2.36% for 2008. Additionally, the average balance of non-interest bearing deposits increased to $6.8 billion in 2009 from $6.5 billion in 2008. The decrease in interest expense is due to the lower interest rate environment in 2009, as well as repricing efforts on promotional money market and time deposit accounts during 2009.

Interest on borrowings and other debt obligations was $1.1 billion for 2009 and 2008. The average balance of total borrowings and other debt obligations was $24.2 billion with an average cost of 4.71% for 2009 compared to an average balance of $22.9 billion with an average cost of 4.76% for 2008. The increase in borrowing levels due to the SCUSA contribution has been offset by a reduction in the use of FHLB advances as decreased loan demand has led to lower levels of wholesale borrowings.

Table 1 presents a summary on a tax equivalent basis of SHUSA’s average balances, the yields earned on average assets and the cost of average liabilities for the years indicated (in thousands):

Table 1: Net Interest Margin

		YEAR ENDED DECEMBER 31,
		2009												2008												2007
		Average								Yield/				Average								Yield/				Average								Yield/
		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
Interest-earning assets:
Interest-earning deposits		$	2,772,893			$	7,771				0.28	%		$	256,268			$	4,285				1.67	%		$	307,596			$	16,562				5.38	%
Investment securities(1)
Available for sale			10,855,257				428,161				3.94				10,498,218				621,906				5.92				12,971,273				804,025				6.20
Other			700,414				1,761				0.25				930,926				23,786				2.56				901,197				51,645				5.73
Total investments			14,328,564				437,693				3.05				11,685,412				649,977				5.56				14,180,066				872,232				6.15
Loans:
Commercial loan			26,192,894				1,153,341				4.40				27,501,518				1,560,936				5.68				25,422,607				1,823,144				7.17
Multi-family			4,530,207				253,687				5.60				4,628,080				275,500				5.95				4,657,978				296,126				6.36
Consumer:
Residential mortgage			11,001,667				574,454				5.22				12,234,402				687,691				5.62				14,525,467				825,685				5.68
Home equity loans and lines of credit			6,912,879				302,619				4.38				6,509,952				367,645				5.65				6,868,727				469,760				6.84
Total consumer loans secured by real estate			17,914,546				877,073				4.90				18,744,354				1,055,336				5.63				21,394,194				1,295,445				6.06
Auto loans			10,366,356				1,740,423				16.79				6,485,098				440,309				6.79				6,374,225				433,172				6.80
Other			275,388				19,105				6.94				303,131				23,136				7.63				360,486				31,248				8.67
Total Consumer			28,556,290				2,636,601				9.23				25,532,583				1,518,781				5.95				28,128,905				1,759,865				6.26
Total loans			59,279,391				4,043,629				6.82				57,662,181				3,355,217				5.82				58,209,490				3,879,135				6.66
Allowance for loan losses			(1,745,257	)			—				—				(836,217	)			—				—				(533,263	)			—				—
Net loans(1)(2)			57,534,134				4,043,629				7.03				56,825,964				3,355,217				5.90				57,676,227				3,879,135				6.73
Total interest-earning assets			71,862,698				4,481,322				6.24				68,511,376				4,005,194				5.85				71,856,293				4,751,367				6.61
Non-interest-earning assets			10,486,084				—				—				10,170,523				—				—				11,459,739				—				—
Total assets		$	82,348,782			$	4,481,322				5.44	%		$	78,681,899			$	4,005,194				5.09	%		$	83,316,032			$	4,751,367				5.70	%
Interest-bearing liabilities:
Deposits:
Retail and commercial deposits		$	33,161,719			$	545,766				1.65	%		$	31,253,414			$	744,856				2.38	%		$	31,228,313			$	968,509				3.10	%
Wholesale deposits			4,108,495				76,992				1.87				3,529,553				89,404				2.53				6,751,606				357,603				5.29
Government deposits			2,080,676				12,244				0.59				3,181,711				81,288				2.55				3,826,924				193,066				5.05
Customer repurchase agreements			1,675,575				5,547				0.33				2,346,152				36,040				1.54				2,545,304				108,137				4.25
Total deposits			41,026,465				640,549				1.56				40,310,830				951,588				2.36				44,352,147				1,627,315				3.67
Total borrowings and other debt obligations			24,193,790				1,139,533				4.71				22,887,793				1,089,134				4.76				22,397,019				1,185,698				5.39
Total interest bearing liabilities			65,220,255				1,780,082				2.73				63,198,623				2,040,722				3.23				66,749,166				2,813,013				4.25
Non-interest-bearing DDA			6,809,303				—				—				6,548,894				—				—				6,386,359				—				—
Non-interest-bearing liabilities			2,170,858				—				—				1,416,627				—				—				1,418,950				—				—
Total liabilities			74,200,416				1,780,082				2.40				71,164,144				2,040,722				2.87				74,554,475				2,813,013				3.80
Stockholders’ equity			8,148,366				—				—				7,517,755				—				—				8,761,557				—				—
Total liabilities and stockholders’ equity		$	82,348,782			$	1,780,082				2.16	%		$	78,681,899			$	2,040,722				2.59	%		$	83,316,032			$	2,813,013				3.40	%
Net interest spread(3)											3.51	%											2.62	%											2.37	%
Taxable equivalent interest income/net interest margin							2,701,240				3.76	%							1,964,472				2.87	%							1,938,354				2.67	%
Tax equivalent basis adjustment							(57,736	)											(82,030	)											(95,111	)
Net interest income						$	2,643,504											$	1,882,442											$	1,843,243
Ratio of interest-earning assets to interest-bearing liabilities											1.10	x											1.08	x											1.08	x

Table 2 presents, on a tax equivalent basis, the relative contribution of changes in volumes and in rates to changes in net interest income for the periods indicated. The change in interest income not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands):

Table 2: Volume/Rate Analysis

		YEAR ENDED DECEMBER 31,
		2009 VS. 2008												2008 VS. 2007
		INCREASE/(DECREASE)												INCREASE/(DECREASE)
		Volume				Rate				Total				Volume				Rate				Total
Interest-earning assets:
Interest-earning deposits		$	9,790			$	(6,304	)		$	3,486			$	(2,392	)		$	(9,885	)		$	(12,277	)
Investment securities available for sale			20,498				(214,243	)			(193,745	)			(147,782	)			(34,337	)			(182,119	)
Investment securities other			(4,746	)			(17,279	)			(22,025	)			1,651				(29,510	)			(27,859	)
Net loans(1)			42,302				646,110				688,412				(56,435	)			(467,483	)			(523,918	)
Total interest-earning assets											476,128												(746,173	)
Interest-bearing liabilities:
Deposits			16,608				(327,647	)			(311,039	)			(137,518	)			(538,209	)			(675,727	)
Borrowings			61,609				(11,210	)			50,399				25,968				(122,532	)			(96,564	)
Total interest-bearing liabilities											(260,640	)											(772,291	)
Net change in net interest income		$	(10,373	)		$	747,141			$	736,768			$	(93,408	)		$	119,526			$	26,118

Provision for Credit Losses. The provision for credit losses is based upon actual credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimation of losses inherent in the current loan portfolio. The provision for credit losses for 2009 was $2.0 billion compared to $911.0 million for 2008. Excluding SCUSA’s provision for credit losses of $720.9 million for the twelve-month period ended December 31, 2009, SHUSA’s provision for credit losses was $1.3 billion. Credit losses remain elevated given recent economic weakness and high unemployment levels which has negatively impacted the credit quality of our loan portfolios.

As a result of the deterioration in the credit quality of our loan portfolio, SHUSA has significantly increased its reserve levels on its loan portfolios. Our reserve for credit losses as a percentage of total loans held for investment has increased to 3.61% (3.41% excluding impact of SCUSA) from 2.10% at December 31, 2008. Although, we believe current levels of reserves are adequate to cover the incurred 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.

Weakening credit conditions increased charge-offs in 2009 to $1.4 billion, compared to $477.1 million for the corresponding period in the prior year. Even after excluding the impact of charge-offs from SCUSA’s loan portfolio of $683.8 million for the twelve-month period ended December 31, 2009, losses on Sovereign Bank’s loan portfolio are at elevated levels. Sovereign Bank’s annualized net loan charge-offs were 1.40% for the twelve-month period ended December 31, 2009 compared to 0.83% for the corresponding period in the prior year. We are hopeful that recent changes to our risk management and collections area that have been implemented subsequent to the acquisition of the Company by Santander as well as recent tentative signs of stabilization in the US economy will result in lower levels of losses in the latter half of 2010. However, we expect that worsening asset quality trends will continue to negatively impact our financial results in 2010.

Non-performing assets were $3.2 billion or 3.92% of total assets at December 31, 2009, compared to $985.4 million or 1.28% of total assets at December 31, 2008. The increase was primarily driven by our residential, commercial real estate, multi-family and commercial and industrial loan portfolios. We factored in these increases when establishing our loan loss reserves at December 31, 2009 and it was one of the factors that caused our provision for credit losses to be elevated over the past few quarters. Management regularly evaluates SHUSA’s loan portfolios, and its allowance for loan losses, and adjusts the loan loss allowance as deemed necessary.

The ratio of net loan charge-offs to average loans, including loans held for sale, was 2.40% for 2009 (1.40% excluding SCUSA), compared to 0.83% for 2008. The consumer loans secured by real estate net charge-off rate was 0.55% for 2009, compared to 0.36% for 2008. The consumer loans not secured by real estate (primarily auto loans) net charge-off rate was 7.68% for 2009 (2.84% excluding SCUSA) and 2.80% for 2008. Commercial loan net charge-offs as a percentage of average commercial loans were 1.65% for 2009, (1.68% excluding SCUSA) compared to 0.70% for 2008.

Table 3 presents the activity in the allowance for credit losses for the years indicated (in thousands):

Table 3: Reconciliation of the Allowance for Credit Losses

		2009				2008				2007				2006				2005
Allowance for loan losses, beginning of period		$	1,102,753			$	709,444			$	471,030			$	419,599			$	391,003
Allowance acquired in acquisitions			—				—				—				97,824				28,778
Acquired allowance for loan losses due to SCUSA contribution from Parent			347,302				—				—				—				—
Provision for loan losses (2)			1,790,559				874,140				394,646				487,418				89,501
Allowance released in connection with loan sales or securitizations			—				(3,745	)			(12,409	)			(4,728	)			(8,010	)
Charge-offs:
Commercial			518,468				238,470				65,670				56,916				40,935
Consumer secured by real estate			110,732				75,978				26,809				463,902				24,125
Consumer not secured by real estate			1,121,338				277,266				126,385				73,958				71,906
Total charge-offs (1)			1,750,538				591,714				218,864				594,776				136,966
Recoveries:
Commercial			11,288				13,378				15,187				14,097				13,100
Consumer secured by real estate			12,283				9,027				11,193				9,933				7,085
Consumer not secured by real estate			304,577				92,223				48,661				41,663				35,108
Total recoveries			328,148				114,628				75,041				65,693				55,293
Charge-offs, net of recoveries			1,422,390				477,086				143,823				529,083				81,673
Allowance for loan losses, end of period		$	1,818,224			$	1,102,753			$	709,444			$	471,030			$	419,599
Reserve for unfunded lending commitments, beginning of period			65,162				28,302				15,256				18,212				17,713
Provision for unfunded lending commitments (2)			193,978				36,860				13,046				(2,956	)			499
Reserve for unfunded lending commitments, end of period (3)			259,140				65,162				28,302				15,256				18,212
Total allowance for credit losses		$	2,077,364			$	1,167,915			$	737,746			$	486,285			$	437,811
Net charge-offs to average loans (1)			2.40	%			0.83	%			0.25	%			0.96	%			0.20	%