Santander Holdings USA, Inc. - Annual Report: 2010 (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, 2010,

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

(617) 346-7200

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

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 o		Accelerated filer o		Non-accelerated filer þ		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, 2010. As of February 28, 2011, the Registrant had 517,107,043 shares of Common Stock outstanding.

 

 

Form 10-K Cross Reference Index

		Page
Forward-Looking Statements			3
PART I
Item 1 — Business			4-8
Item 1A — Risk Factors			8-10
Item 1B — Unresolved Staff Comments			11
Item 2 — Properties			11
Item 3 — Legal Proceedings			11
Item 4 — Submission of Matters to a Vote of Security Holders			11
Item 4A — Executive Officers of the Registrant			12
PART II
Item 5 — Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			13
Item 6 — Selected Financial Data			13
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			14-43
Item 7A — Quantitative and Qualitative Disclosures About Market Risk			43
Item 8 — Financial Statements and Supplementary Data			43-96
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			99-124
Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			124
Item 13 — Certain Relationships and Related Transactions, and Director Independence			125
Item 14 — Principal Accounting Fees and Services			128
PART IV
Item 15 — Exhibits and Financial Statement Schedules			129
Signatures			130
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;
	•		the “Dodd-Frank Wall Street Reform and Consumer Protection Act” enacted in July 2010 is a significant development for the industry. The full impact of this legislation to SHUSA and the industry will be unknown until the rulemaking processes mandated by the legislation are complete, although the impact will involve higher compliance costs and certain elements, such as the debit interchange legislation, will negatively affect our revenue and earnings;
	•		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 Banco Santander S.A. (“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;
	•		operating costs and business disruptions following the acquisition of SHUSA by Santander, could be greater than expected; and
	•		SHUSA’s success in managing the risks involved in the foregoing.

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

PART I

Item 1		— Business

General

SHUSA is the parent company of Sovereign Bank (“Sovereign Bank” or “the Bank”), a federally chartered savings bank. SHUSA had approximately 700 community banking offices, over 2,300 ATMs and 11,714 team members as of December 31, 2010 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.

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 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, SHUSA 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.

In July 2009, Santander contributed Santander Consumer USA, Inc (“SCUSA”), a majority owned subsidiary into SHUSA. 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.

Subsidiaries

SHUSA had four principal consolidated majority-owned subsidiaries at December 31, 2010: Sovereign Bank, SCUSA, Independence and Sovereign Delaware Investment Corporation (“SDIC”).

Employees

At December 31, 2010, SHUSA had 10,515 full-time and 1,199 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.

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, which is 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.

Legislative and Regulatory Developments. On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act”, which instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. The act includes a number of specific provisions designated to promote enhanced supervision and regulation of financials firms and financial markets, protect consumers and investors from financial abuse and provide the government with tools to manage a financial crisis and raise international regulatory standards. The act also introduces a substantial number of reforms that reshape the structure of the regulation of the financial services industry, requiring more than 60 studies to be conducted and more than 200 regulations to be written over the next two years.

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 SHUSA 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 a presence in 10 main markets. At the end of 2010, Santander was the largest bank in the euro zone and 10th in the world by market capitalization. Founded in 1857, Santander had at year-end €1,362 billion in managed funds, more than 95 million customers, 14,082 branches — more than any other international bank — and 179,000 employees. It is the largest financial group in Spain and Latin America. Furthermore, it has relevant positions in the United Kingdom, Portugal, the Northeast U.S. and, through its Santander Consumer Finance arm, in Germany and Poland. Santander registered €8,181 million in net attributable profit in 2010.

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, 2010, 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.

Foreclosures. Representatives of federal and state government regulators and agencies have announced investigations into procedures followed by mortgage servicing companies and banks in connection with mortgage foreclosures practices. Sovereign Bank (the “Bank”) currently services approximately 155,000 residential mortgage loans and currently has approximately 3,000 residential mortgage loans in the process of foreclosure. In early October 2010, Sovereign Bank became aware of press reports regarding deficiencies in bank foreclosure processes. On its own initiative, the Bank began a comprehensive review of its own foreclosure processes. In order to provide the time needed to properly assess and address potential issues, on October 7, 2010 the Bank voluntarily instituted a foreclosure moratorium for all residential mortgage loans that it was servicing, including both judicial and non-judicial foreclosures. Following that review, the Bank strengthened its process and resumed foreclosures on a state by state basis beginning November 10, 2010. In addition, the Bank has cooperated in an examination by the Office of Thrift Supervision (“OTS”), its primary federal banking regulator, as part of an interagency horizontal review of foreclosure practices at 14 mortgage servicers. Based on the results of this review, the Bank has implemented corrective action to address deficiencies in its mortgage servicing practices. In addition, the Bank is engaged in discussions with the OTS regarding possible further supervisory action which would require additional measures to address areas that the regulators have identified as needing improvement. While the impact of any supervisory action depends on its final terms, we expect that such action will require significant managerial resources, and additional expenses. In addition, we may also be subject to civil money penalties. We are unable to determine the amount of such penalties or the likelihood of any further action that might be taken by regulators or agencies.

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 in 2010 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 February 2011, the FDIC amended 12 CFR 327 to implement revisions to the Federal Deposit Insurance Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) by modifying the definition of an institution’s deposit insurance assessment base; to change the assessment rate adjustments; to revise the deposit insurance assessment rate schedules in light of the new assessment base and altered adjustments; to implement Dodd-Frank’s dividend provisions; to revise the large insured depository institution assessment system to better differentiate for risk and better take into account losses from large institution failures that the FDIC may incur; and to make technical and other changes to the FDIC’s assessment rules. This amendment has an effective date of April 1, 2011. Please refer to the section Current Regulatory Environment for further discussion on Dodd-Frank.

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 2010, Sovereign Bank paid Finance Corporation Assessments of $4.3 million. The annual rate (as of the first quarter of 2011) for all insured institutions is $0.102 for every $1,000 in domestic deposits which is consistent with what was paid in 2010. 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 (“QTL Test”), 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, 2010, 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 to one obligor), 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, 2010, 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 and New York and has investments of $612.2 million and $2.0 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 $17.5 billion at December 31, 2010 and had outstanding advances of $9.9 billion at December 31, 2010. 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, 2010 and 2009. On October 29, 2010, FHLB Pittsburgh repurchased approximately $200.0 million of excess shares of capital stock. The amount of excess capital stock repurchased from any member was the lesser of 5 percent of the member’s total capital stock outstanding or its excess capital stock outstanding through October 28, 2010, which amounted to 332,219 shares held by SHUSA. 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 communities, including low to moderate-income neighborhoods within those communities, while maintaining safe and sound banking practices. The OTS periodically assesses Sovereign Bank’s record in meeting the credit needs of the communities it serves. 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.

Anti-Money Laundering and the Patriot Act. Several federal laws, including the Bank Secrecy Act, the Money Laundering Control Act, and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) require all financial institutions to, among other things, implement policies and procedures relating to anti-money laundering, compliance, suspicious activities, and currency transaction reporting and due diligence on customers. The Patriot Act substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the U.S.; imposes compliance and due diligence obligations; creates crimes and penalties; compels the production of documents located both inside and outside the U.S., including those of non-U.S. institutions that have a correspondent relationship in the U.S.; and clarifies the safe harbor from civil liability to clients. The U.S. Treasury has issued a number of regulations that further clarify the Patriot Act’s requirements or provide more specific guidance on their application.

Financial Privacy. Under the Gramm-Leach-Bliley Act, financial institutions are required to disclose to their retail customers its policies and practices with respect to sharing nonpublic customer information with its affiliates and non-affiliates, how it maintains customer confidentiality, and how it secures customer information. Customers are required under GLBA to be provided with the opportunity to “opt out” of information sharing with non-affilaites, subject to certain exceptions.

Other Legislation. The activities of financial institutions are subject to regulation under various U.S. federal laws, including the Truth-in-Lending, Truth-in-Savings, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt Collection Practices Servicemembers Civil Relief, Unfair and Deceptive Practices, Real Estate Settlement Procedures, and Electronic Funds Transfer Acts, as well as various state laws.

On July 21, 2010, the banking regulatory agencies jointly published final guidance for structuring incentive compensation arrangements at financial institutions. While the guidance does not set forth any specific formula or pay cap, it contains principles financial insitutions would be required to follow with respect to compensation to employees who can expose the institution to material amounts of risk. The guidance’s primary principles include: (i) providing incentives that balance risk and rewards, (ii) having effective controls and risk management, and (iii) instituting strong corporate governance. The OTS monitors Sovereign Bank’s compliance with this guidance.

The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”), which is separated into five units: Research, Community Affairs, Complaint Tracking and Collection, Office of Fair Lending and Equal Opportunity, and Office of Financial Literacy. The CFPB has broad power to adopt new regulations to protect consumers, which power it may exercise at its discretion as long as it advances the protection of consumers. Such regulations may further restrict Sovereign Bank from collecting certain fees, require changes to policies and procedures, and provide additional disclosures to consumers.

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.

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 Environment May Deteriorate Adversely Affecting Our Asset Quality, 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. While economic conditions in the United States and worldwide have begun to improve, there can be no assurance that this improvement will continue. Such conditions could adversely affect the credit quality of the Company’s loans, results of operations and financial condition.
	•		Disruptions in the Global Financial Markets have Affected, and May Continue to Adversely Affect, SHUSA’s Business and Results of Operations.
			Although market conditions have improved since the second half of 2009, unemployment in the United States continues to remain near historically high levels, and conditions are expected to remain challenging for financial institutions in 2011. Dramatic declines in the housing market during the most recent recession, with falling home prices and increasing foreclosures and unemployment, 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 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 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.
	•		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 continue to present difficulties in valuing 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 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 often considers new 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.
			On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act”, which instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. The act includes a number of specific provisions designated to promote enhanced supervision and regulation of financials firms and financial markets, protect consumers and investors from financial abuse and provide the government with tools to manage a financial crisis and raise international regulatory standards. The act also introduces a substantial number of reforms that reshape the structure of the regulation of the financial services industry, requiring more than 60 studies to be conducted and more than 200 regulations to be written over the next two years. Although the true impact of this legislation to SHUSA and the industry will be unknown until these are complete, they will involve higher compliance costs and certain elements, such as the debit interchange legislation, will negatively affect our revenue and earnings.
			These and other changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect SHUSA in substantial and unpredictable ways. Such changes present the risk of financial loss due to regulatory fines or penalties, restriction or suspension of business, or cost of mandatory corrective action as a result of failing to adhere to applicable laws, regulations, and supervisory guidance.
	•		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 relevant Governmental taxing authorities which is sometimes subject to prolonged evaluation periods until a final resolution is reached. 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.
	•		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. Small business loans are ones with an original amount of $2 million or less to one obligor, and large commercial loans are ones with an original loan amount of more than $2 million to one obligor. 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.
	•		System Integration Risks Exist Related to the Acquisition of the Company by Santander.
			On January 30, 2009, the Company was acquired by Santander. Successful integration into existing businesses of Santander depends upon the integration of key systems to fully realize revenue synergies and cost savings from the transaction. By its nature, SHUSA’s businesses depend upon automated systems to record and process high volumes of transactions. Accordingly, performing system conversions may lead to business disruptions or certain errors being repeated or compounded before they are discovered and successfully rectified.
	•		Reputational and Compliance Risk Exist Related to the Company’s Foreclosure Activities
			Please refer to Foreclosures section within Item 1 — Business for further discussion.
	•		Adverse Economic Conditions in Europe and Latin America May Negatively Impact the Company
			As a wholly-owned subsidiary of Santander, significant aspects of the Company’s strategy, infrastructure and capital funding are dependent on its parent, Santander. Although Santander has a significant presence in various markets around the world, Santander’s results of operations are materially affected by conditions in the capital markets and the economy generally in Europe and Latin America. Accordingly, a significant decline in general economic conditions in Europe or Latin America, whether caused by recession, inflation, unemployment, changes in securities markets, acts of terrorism, or other occurrences could impact Santander, and, in turn, have a material adverse effect on the Company’s financial condition and results of operations.

Item 1B		— Unresolved Staff Comments

None.

Item 2		— Properties

SHUSA utilizes 796 buildings that occupy a total of 6.6 million square feet, including 231 owned properties with 1.8 million square feet and 441 leased properties with 3.1 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 787 properties consist primarily of bank branches and lending offices used by our Retail Banking segments.

Item 3		— Legal Proceedings

Reference should be made to Note 17 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service/United States and “Litigation” in Note 18 — “Commitments and Contingencies” for SHUSA’s litigation disclosure which is incorporated herein by reference.

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 is set forth below:

Jorge Morán — Age 46. Mr. Morán was appointed President and Chief Executive Officer of the Company on January 27, 2011, effective February 1, 2011 and also 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 is also chairman of the SHUSA Management Executive Committee. Mr. Morán joined the Santander Group in 2002. Prior to joining SHUSA, Mr. Morán was a Senior Executive Vice President of Banco Santander, head of its Global Insurance Division and a member of the Group’s management committee. Previously he held a number of executive management positions, including Chief Operating Officer of Abbey, Santander’s business in the U.K. and, from 2005 until 2008, a member of its Board of Directors. Before joining Santander, Mr. Morán was Chief Executive Officer of Morgan Stanley for Spain and Portugal and a partner of AB Asesores, a brokerage and asset management company. Mr. Morán also worked as a director of marketing for Natwest (now a unit of the Royal Bank of Scotland) and with Citibank in Spain.

Edvaldo Morata — Age 47. Mr. Morata was appointed Chief of Staff to the CEO at Sovereign Bank in 2009 and also as Managing Director of Corporate Banking in 2010. He is 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 42. 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 19 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 43. Mr. Matos has served as Managing Director of Retail Business Development and SME Banking since 2009 and was appointed as Managing Director of Retail Banking in 2011. He has served on the Board of Directors since March of 2009 and is also a member of the Risk and CRA Committees of the Board. He is also a member of the SHUSA Management Executive Committee. 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 41. Mr. Dávila was appointed Chief Risk Management Officer for Sovereign Bank in 2009. He is also a member of the SHUSA Management Executive Committee. 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 55. Mr. Walters is Senior Executive Vice President of SHUSA, served on the Board from January of 2009 to March 2, 2011 and served as a member of the Executive and Risk Committees of the Board and as a member of the SHUSA Management Executive Committee. Mr. Walters has announced that he is resigning as an officer and employee of the Company effective as of March 16, 2011. 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.

Jose Castello Orta — Age 49. 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 over 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 49. 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. He is also a member of the SHUSA Management Executive Committee. 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.

PART II

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

SHUSA’s common stock was traded on the New York Stock Exchange (“NYSE”) under the symbol “SOV” through January 29, 2009. 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
		FOR THE YEAR ENDED DECEMBER 31,
(Dollars in thousands)		2010(1)				2009(1)				2008				2007				2006
Balance Sheet Data
Total assets		$	89,651,815			$	82,953,215			$	77,093,668			$	84,746,396			$	89,641,849
Loans held for investment, net of allowance			62,820,434				55,733,953				54,439,146				56,729,982				54,648,310
Loans held for sale			150,063				118,994				327,332				547,760				7,611,921
Investment securities			15,691,984				14,301,638				10,020,110				15,142,392				14,877,640
Deposits and other customer accounts			42,673,293				44,428,065				48,438,573				49,915,905				52,384,554
Borrowings and other debt obligations			33,630,117				27,235,151				20,964,185				26,272,512				27,006,102
Stockholders’ equity			11,260,670				9,387,535				5,596,714				6,992,325				8,644,399
Summary Statement of Operations
Total interest income		$	4,784,489			$	4,423,586			$	3,923,164			$	4,656,256			$	4,326,404
Total interest expense			1,385,850				1,780,082				2,040,722				2,813,013				2,528,814
Net interest income			3,398,639				2,643,504				1,882,442				1,843,243				1,797,590
Provision for credit losses (2)			1,627,026				1,984,537				911,000				407,692				484,461
Net interest income after provision for credit losses			1,771,613				658,967				971,442				1,435,551				1,313,129
Total non-interest income (2)			1,029,469				342,297				(818,743	)			354,396				285,574
General and administrative expenses			1,573,100				1,520,460				1,484,306				1,336,865				1,284,329
Other expenses (3)			208,997				603,703				302,027				1,862,794				295,243
Income/(loss) before income taxes			1,018,985				(1,122,899	)			(1,633,634	)			(1,409,712	)			19,131
Income tax (benefit)/provision (4)			(40,390	)			(1,284,464	)			723,576				(60,450	)			(117,780	)
Net income/(loss)		$	1,059,375			$	161,565			$	(2,357,210	)		$	(1,349,262	)		$	136,911
Selected Financial Ratios
Return on average assets (5)			1.25	%			0.20	%			(2.99	)%			(1.62	)%			0.17	%
Return on average equity (6)			10.12	%			1.98	%			(31.27	)%			(15.40	)%			1.82	%
Average equity to average assets (7)			12.34	%			9.89	%			9.55	%			10.52	%			9.46	%

Management’s Discussion and Analysis

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

EXECUTIVE SUMMARY

SHUSA is comprised of two major subsidiaries, Sovereign Bank and SCUSA. Sovereign Bank is a $72 billion financial institution as of December 31, 2010 with community banking offices, operations and team members located principally in Pennsylvania, Massachusetts, New Jersey, Connecticut, New Hampshire, New York, Rhode Island, and Maryland. Sovereign Bank gathers substantially all of its deposits in these market areas. We use our deposits, as well as other financing sources, to fund our loan and investment portfolios. We earn interest income on our loans and investments. In addition, we generate non-interest income from a number of sources including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance. Our principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. Our volumes, and accordingly our financial results, are affected by the economic environment, including interest rates, consumer and business confidence and spending, as well as the competitive conditions within our geographic footprint. On January 30, 2009, the Company was acquired by Santander. In July 2009, Santander contributed SCUSA, a majority owned subsidiary, into SHUSA. SCUSA is a specialized consumer finance company engaged in the purchase, securitization, and servicing of retail installment contracts originated by automobile dealers. SCUSA acquires retail installment contracts from manufacturer franchised dealers in connection with their sale of used and new automobiles and trucks primarily to nonprime customers with limited credit histories or past credit problems. SCUSA also purchases retail installment contracts from other companies.

During 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. The Company established a commercial credit group staffed with existing officers of the Company, and a credit management information system was implemented in the latter half of 2009.

SHUSA has focused on increasing profitability, specifically by expanding net interest margin, while at the same time reducing our risk profile and growing non-specialized loan balances in a systemically weak loan demand environment, while reducing and controlling our costs.

Moving forward, our priorities to transform the franchise include the following key initiatives:

	•		Strengthening the core retail business by building up a multi-product and multi-segment banking proposition for retail consumer and small and medium sized business enterprises;
	•		Revitalizing the corporate banking business, through an enlarged product penetration of the existing client base and through the Global Banking segment, by combining Sovereign’s local market knowledge and Santander’s product capabilities, talent and financial strength, to deliver an efficient and scalable model for corporate business. The Global Banking segment includes business with large corporate clients which have larger loan sizes than commercial clients of Sovereign prior to 2009;
	•		Refocusing specialized business priorities by focusing only on selected specialized business lines that add long term value to the franchise, particularly the multi-family lending operation based in Brooklyn, NY; and
	•		Integrating information technology and operations systems by building a reliable and sales-oriented technology infrastructure to drive efficiency across all areas of the bank. This allows leverage of Santander’s factories, technology expertise and cost management approach as appropriate to minimize costs while maintaining quality of service.

In order to improve our operating returns, we have continued 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. As a result, management implemented certain pricing and fee assessment changes to our deposit portfolio and also initiated a significant reduction in workforce. Many of the reductions came from consolidating certain back office functions or eliminating certain middle to senior management positions. In addition, the Company successfully implemented a new sales process across the network in 2010 and introduced several new products in connection with its Better Banking campaigns.

Our customers select SHUSA for banking and other financial services based on our ability to assist customers by understanding and anticipating their individual financial needs and providing customized solutions. Following the acquisition by Santander, Sovereign Bank focused on improving risk management and collections, improving our margins and efficiency, and reorganizing to align to Santander business models with a strong commercial focus.

To improve our risk management and collection efforts, the Company has more than tripled its collection department headcount and certain additional senior management personnel have been placed at Sovereign Bank from SHUSA’s parent company. 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.

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 Santander has made to the Company and eliminates the cash obligation of SHUSA with respect to the 10% Series D preferred stock dividend. On March 1, 2010, SHUSA issued 3 million shares of common stock for $750 million to Santander. On September 30, 2010, SHUSA contributed $1.874 billion of capital to Sovereign Bank, which included SHUSA’s consolidated interests in Capital Street Delaware LP and Capital Street S.A. Luxembourg to Sovereign Bank.

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

Our Tier 1 leverage ratio for SHUSA was 8.22% at December 31, 2010 compared to 7.13% at December 31, 2009. The Bank’s total risk based capital ratio at December 31, 2010 was 15.93% compared to 12.46% at December 31, 2009. 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 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 3.84% at December 31, 2010 from 3.61% at December 31, 2009.

RECENT INDUSTRY CONSOLIDATION IN OUR GEOGRAPHIC FOOTPRINT

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

CURRENT REGULATORY ENVIRONMENT

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

The true impact of this legislation to SHUSA and the industry will be unknown until these reforms are complete, although they will involve higher compliance costs and certain elements, such as the debit interchange legislation, will negatively affect our revenue and earnings. These impacts include increases to the levels of deposit insurance assessments on large insured depository institutions, impacts to the nature and levels of fees charged to consumers, consolidation of regulatory agencies that would impact our primary regulator (the Office of Thrift Supervision), and increases to capital, leverage and liquidity requirements for banks and bank holding companies. Financial institutions deemed to be systemically important will be subject to additional supervision and requirements to develop resolution plans for potential economic and market events that could have a significant negative impact on their business. These changes could impact the future profitability and growth of SHUSA.

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

CURRENT INTEREST RATE ENVIRONMENT

Net interest income represents a significant portion of the Company’s revenues. Accordingly, the interest rate environment has a substantial impact on SHUSA’s earnings. The Company currently is in an asset sensitive interest rate risk position. During 2010, our net interest margin increased to 4.69% from 3.76% in 2009. This increase in margin is primarily attributable to the changing interest rate environment combined with a mix shift from higher cost wholesale deposits to lower cost retail deposits. Excluding the impact of SCUSA, SHUSA’s net interest margin has increased from 2.18% in 2009 to 2.71% in 2010. 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 experienced significant deterioration in certain key credit quality performance indicators through 2009. Although the credit environment is still uncertain, we have seen continued signs of improvement in our commercial portfolios and stabilization in our consumer portfolio in 2010 from what was experienced in 2009. We had net charge-offs of $1.2 billion in 2010 compared to $1.4 billion in 2009. Net charge-offs related to SCUSA in 2010 were $432.0 million compared to $683.8 million in 2009. Our provision for credit losses was $1.6 billion in 2010 compared to $2.0 billion in 2009.

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

Conditions in the housing market have 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 $11.2 billion at December 31, 2010 of which $1.9 billion is comprised of Alt-A (also known as limited documentation) residential loans compared to $10.7 billion at December 31, 2009 (with $2.3 billion of Alt-A loans). Although losses have been increasing, actual credit losses on these Alt-A loans have been modest and totaled $45.3 million for the year ended December 31, 2010. Future performance of our residential loan portfolio will continue to be significantly influenced by home prices in the residential real estate market, unemployment and general economic conditions.

The homebuilder industry also has been impacted by 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 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 reducing its exposure to this loan portfolio which has resulted in it declining to $189.4 million at December 31, 2010 compared to $495.1 million a year ago. At December 31, 2010, the entire homebuilder loan portfolio lies in our geographic footprint which generally has had more stable economic conditions on a relative basis compared to the national economy. We will continue to monitor the credit quality of this portfolio in future periods given the recent market conditions and determine the impact, if any, on the allowance for loan losses related to these homebuilder loans.

We have seen signs of stabilization in non-performing assets in our residential loan portfolio. Non-performing assets for this portfolio decreased for the third consecutive quarter to $602.0 million at December 31, 2010, and are comparable to December 31, 2009 levels of $617.9 million. We expect that the difficult housing environment as well as deteriorating economic conditions will continue to impact our residential portfolio.

Sovereign Bank also has $7.0 billion of home equity loans and lines of credit. The majority of this portfolio ($6.7 billion) consists of loans with an average FICO at origination of 782 and an average loan to value of 58.1%. We have total non-performing loans of $125.3 million for this loan portfolio at December 31, 2010 compared to non-performing loans of $117.4 million at December 31, 2009.

SHUSA has $17.8 billion of auto and other consumer loans at December 31, 2010, compared to $10.8 billion at December 31, 2009, of which approximately $7.1 billion of auto loans and $858.2 million of other consumer loans were purchased by SCUSA from third parties during 2010. Our non-performing auto and other consumer loans increased to $592.7 million at December 31, 2010 from $535.9 million at December 31, 2009.

As previously stated, SCUSA’s target customer base is focused on individuals with past credit problems. The current FICO distribution for its $15.9 billion loan portfolio is as follows.

FICO Band		% of Portfolio
> 650			21	%
650-601			28	%
600-551			27	%
550-501			16	%
<=500			8	%

Although credit loss rates on this portfolio are elevated (3.86% during 2010 and 10.4% during 2009), the pricing model contemplates this as gross loan yields for SCUSA’s portfolio were 18.36% for the year ended December 31, 2010 compared to 22.83% for the year ended December 31, 2009.

In the twelve-month period ended December 31, 2010, non-performing asset loans in each of our commercial portfolios declined. Commercial real estate non-performing loans decreased to $653.2 million at December 31, 2010 from $823.8 million at December 31, 2009. Non-performing multi-family loans decreased to $224.7 million at December 31, 2010 from $382.0 million at December 31, 2009, and non-performing other commercial loans decreased to $528.3 million at December 31, 2010 from $654.3 million at December 31, 2009.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

		YEAR ENDED DECEMBER 31,
(Dollars in thousands)		2010				2009
Net interest income		$	3,398,639			$	2,643,504
Provision for credit losses			1,627,026				1,984,537
Total non-interest income/(losses)			1,029,469				342,297
General and administrative expenses			1,573,100				1,520,460
Other expenses			208,997				603,703
Net income/(loss)		$	1,059,375			$	161,565

The major factors affecting comparison of earnings between 2010 and 2009 were:

	•		Net interest income increased $755.1 million or 28.6% during 2010. Net interest income increased $277.1 million excluding the impact of SCUSA as net interest margin increased from 2.18% in 2009 to 2.71% in 2010.
	•		The decrease in provision for credit losses in 2010 is related to the improvement in credit metrics as compared to 2009 when we saw deterioration across our loan portfolio which led to elevated provisioning levels.
	•		An increase in fees and other income of $687.2 million. Included in fees and other income:

	(1)		Net gains/(losses) on investment securities of $200.6 million and $(157.8) million in 2010 and 2009, respectively. Our 2010 and 2009 results included OTTI charges of $4.8 million and $143.3 million, respectively, on non-agency mortgage backed securities. Our 2009 results also included OTTI charges of $36.9 million on Fannie Mae (“FNMA”) and Freddie Mac (“FHLMC”) preferred stock. and a gain of $20.3 million from the subsequent sale of those securities. See Note 6 for additional details.
	(2)		An increase in capital markets revenues of $9.7 million, due to higher charges in 2009 to increase reserves for uncollectible swap receivables from customers due to deterioration in the credit worthiness of these companies.
	(3)		An increase in mortgage banking revenues in 2010 of $177.5 million. Current year results include a $24.6 million mortgage servicing recovery, as compared to a $3.3 million mortgage servicing impairment in the prior year. Prior year results included charges of $188.9 million to increase our recourse reserves associated with the sales of multi-family loans to Fannie Mae due to worsening credit conditions for these loans.

	•		Increases in general and administrative expenses in 2010 were due primarily to an increase in loan expenses which was related to additional servicing fees from SCUSA acquisition activity. Excluding SCUSA, the Company’s general and administrative expenses declined $78.2 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 29% from December 2008 to December 2010.
	•		Other expenses were $209.0 million in 2010, as compared to $603.7 million in 2009. Prior year results included $299.1 million of transaction related and other restructuring charges and a $35.3 million FDIC one-time special assessment charge recorded in deposit insurance premiums.
	•		SHUSA recorded an income tax benefit of $40.4 million in 2010 compared to an income tax benefit of $1.3 billion in 2009. As previously discussed, SHUSA reversed $309.0 million in 2010 and $1.3 billion in 2009 of deferred tax valuation allowances. See “income tax expense/(benefit)” below and Note 17 for further discussion.

Net Interest Income. Net interest income for 2010 was $3.4 billion compared to $2.6 billion for 2009, or an increase of 28.6%. The increase in net interest income in 2010 was primarily due to increased earnings at SCUSA resulting from 2010 acquisitions. Additionally, Sovereign continues to focus on spreads, both in loans and deposits.

Interest on investment securities and interest-earning deposits was $470.7 million for 2010 compared to $393.8 million for 2009. Our average investment portfolio increased by $919.9 million during 2010 to 18.0% of our total average assets in 2010 compared to 17.4% in 2009. The average life of our investment portfolio has increased to 6.06 years at December 31, 2010 compared to 3.86 years at December 31, 2009. Increasing the average life of our investment portfolio has positively impacted the overall yield on this asset class as our yield increased to 3.36% in 2010 from 3.05% in 2009.

Interest on loans was $4.3 billion and $4.0 billion for 2010 and 2009, respectively. The average balance of loans was $60.4 billion with an average yield of 7.17% for 2010 compared to an average balance of $59.3 billion with an average yield of 6.82% for 2009. At December 31, 2010, approximately 34% of Sovereign Bank’s total loan portfolio reprices monthly or more frequently. SCUSA’s loans are generally fixed rate.

Interest on total deposits was $228.6 million for 2010 compared to $640.5 million for 2009. The average balance of deposits was $35.0 billion with an average cost of 0.65% for 2010 compared to an average balance of $41.0 billion with an average cost of 1.56% for 2009. Additionally, the average balance of non-interest bearing deposits increased to $7.1 billion in 2010 from $6.8 billion in 2009. The decrease in interest expense is due to the lower interest rate environment in 2010, as well as repricing efforts on promotional money market and time deposit accounts during 2010.

Interest on borrowings and other debt obligations was $1.2 billion and $1.1 billion for 2010 and 2009, respectively. The average balance of total borrowings and other debt obligations was $30.2 billion with an average cost of 3.84% for 2010 compared to an average balance of $24.2 billion with an average cost of 4.71% for 2009. The increase in borrowing levels is primarily due to increases at SCUSA. During 2010, the Company, through its SCUSA subsidiary, executed securitization transactions and entered into new lending agreements. The proceeds from these new financing arrangements were used to pay down other warehouse facilities and to fund loan growth.

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
		2010												2009												2008
		Average								Yield/				Average								Yield/				Average								Yield/
		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
Interest-earning assets:
Interest-earning deposits		$	1,250,666			$	3,320				0.27	%		$	2,772,893			$	7,771				0.28	%		$	256,268			$	4,285				1.67	%
Investment securities(1)
Available for sale			13,337,912				508,408				3.81				10,855,257				428,161				3.94				10,498,218				621,906				5.92
Other			659,845				1,235				0.19				700,414				1,761				0.25				930,926				23,786				2.56
Total investments			15,248,423				512,963				3.36				14,328,564				437,693				3.05				11,685,412				649,977				5.56
Loans:
Commercial loan			23,255,452				1,024,413				4.41				26,192,894				1,153,341				4.40				27,501,518				1,560,936				5.68
Multi-family			5,502,976				292,098				5.31				4,530,207				253,687				5.60				4,628,080				275,500				5.95
Consumer:
Residential mortgage			10,993,027				535,783				4.87				11,001,667				574,454				5.22				12,234,402				687,691				5.62
Home equity loans and lines of credit			7,031,078				282,760				4.02				6,912,879				302,619				4.38				6,509,952				367,645				5.65
Total consumer loans secured by real estate			18,024,105				818,543				4.54				17,914,546				877,073				4.90				18,744,354				1,055,336				5.63
Auto loans			13,325,555				2,173,337				16.31				10,366,356				1,740,423				16.79				6,485,098				440,309				6.79
Other			257,055				17,891				6.96				275,388				19,105				6.94				303,131				23,136				7.63
Total Consumer			31,606,715				3,009,771				9.52				28,556,290				2,636,601				9.23				25,532,583				1,518,781				5.95
Total loans			60,365,143				4,326,282				7.17				59,279,391				4,043,629				6.82				57,662,181				3,355,217				5.82
Allowance for loan losses			(2,035,040	)			—				—				(1,745,257	)			—				—				(836,217	)			—				—
Net loans(1)(2)			58,330,103				4,326,282				7.42				57,534,134				4,043,629				7.03				56,825,964				3,355,217				5.90
Total interest-earning assets			73,578,526				4,839,245				6.58				71,862,698				4,481,322				6.24				68,511,376				4,005,194				5.85
Non-interest-earning assets			11,264,845				—				—				10,486,084				—				—				10,170,523				—				—
Total assets		$	84,843,371			$	4,839,245				5.70	%		$	82,348,782			$	4,481,322				5.44	%		$	78,681,899			$	4,005,194				5.09	%
Interest-bearing liabilities:
Deposits:
Retail and commercial deposits		$	30,070,825			$	201,094				0.67	%		$	33,161,719			$	545,766				1.65	%		$	31,253,414			$	744,856				2.38	%
Wholesale deposits			1,066,009				16,327				1.53				4,108,495				76,992				1.87				3,529,553				89,404				2.53
Government deposits			2,195,651				7,355				0.33				2,080,676				12,244				0.59				3,181,711				81,288				2.55
Customer repurchase agreements			1,659,640				3,857				0.23				1,675,575				5,547				0.33				2,346,152				36,040				1.54
Total deposits			34,992,125				228,633				0.65				41,026,465				640,549				1.56				40,310,830				951,588				2.36
Total borrowings and other debt obligations			30,164,757				1,157,217				3.84				24,193,790				1,139,533				4.71				22,887,793				1,089,134				4.76
Total interest bearing liabilities			65,156,882				1,385,850				2.13				65,220,255				1,780,082				2.73				63,198,623				2,040,722				3.23
Non-interest-bearing DDA			7,097,506				—				—				6,809,303				—				—				6,548,894				—				—
Non-interest-bearing liabilities			2,119,883				—				—				2,170,858				—				—				1,416,627				—				—
Total liabilities			74,374,271				1,385,850				1.86				74,200,416				1,780,082				2.40				71,164,144				2,040,722				2.87
Stockholders’ equity			10,469,100				—				—				8,148,366				—				—				7,517,755				—				—
Total liabilities and stockholders’ equity		$	84,843,371			$	1,385,850				1.63	%		$	82,348,782			$	1,780,082				2.16	%		$	78,681,899			$	2,040,722				2.59	%
Net interest spread(3)											4.45	%											3.51	%											2.62	%
Taxable equivalent interest income/net interest margin							3,453,395				4.69	%							2,701,240				3.76	%							1,964,472				2.87	%
Tax equivalent basis adjustment							(54,756	)											(57,736	)											(82,030	)
Net interest income						$	3,398,639											$	2,643,504											$	1,882,442
Ratio of interest-earning assets to interest-bearing liabilities											1.13	x											1.10	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,
		2010 VS. 2009												2009 VS. 2008
		INCREASE/(DECREASE)												INCREASE/(DECREASE)
		Volume				Rate				Total				Volume				Rate				Total
Interest-earning assets:
Interest-earning deposits		$	(4,061	)		$	(390	)		$	(4,451	)		$	9,790			$	(6,304	)		$	3,486
Investment securities available for sale			95,054				(14,807	)			80,247				20,498				(214,243	)			(193,745	)
Investment securities other			(97	)			(429	)			(526	)			(4,746	)			(17,279	)			(22,025	)
Net loans(1)			56,561				226,092				282,653				42,302				646,110				688,412
Total interest-earning assets											357,923												476,128
Interest-bearing liabilities:
Deposits			(83,154	)			(328,762	)			(411,916	)			16,608				(327,647	)			(311,039	)
Borrowings			251,450				(233,766	)			17,684				61,609				(11,210	)			50,399
Total interest-bearing liabilities											(394,232	)											(260,640	)
Net change in net interest income		$	(20,839	)		$	772,994			$	752,155			$	(10,373	)		$	747,141			$	736,768

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 2010 was $1.6 billion compared to $2.0 billion for 2009. Excluding SCUSA’s provision for credit losses of $888.2 million for the twelve-month period ended December 31, 2010, SHUSA’s provision for credit losses was $738.8 million, compared to $1.3 billion in 2009. 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 3.84% from 3.61% at December 31, 2009. 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.

Net charge-offs decreased in 2010 to $1.2 billion, compared to $1.4 billion for the corresponding period in the prior year. Excluding the impact of charge-offs from SCUSA’s loan portfolio of $432.0 million for the twelve-month period ended December 31, 2010, losses on Sovereign Bank’s loan portfolio increased. Sovereign Bank’s annualized net loan charge-offs were 1.59% for the twelve-month period ended December 31, 2010 compared to 1.40% for the corresponding period in the prior year. Although annualized net loan charge-offs increased year over year, the rate has decreased to 1.44% in the second half of year, compared to 1.73% in the first half of 2010. 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 signs of stabilization in the US economy will result in lower levels of losses in 2011.

Non-performing assets were $2.9 billion or 3.29% of total assets at December 31, 2010, compared to $3.2 billion or 3.92% of total assets at December 31, 2009. The decrease was primarily driven by our commercial real estate, multi-family and commercial and industrial loan portfolios. 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 2.01% for 2010 (1.59% excluding SCUSA), compared to 2.40% (1.40% excluding SCUSA) for 2009. The consumer loans net charge-off rate was 1.95% for 2010 (0.88% excluding SCUSA) and 3.20% (1.02% excluding SCUSA) for 2009. Commercial loan net charge-offs as a percentage of average commercial loans were 2.07% for 2010 (2.11% excluding SCUSA) compared to 1.65% for 2009 (1.68% excluding SCUSA).

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

		2010				2009				2008				2007				2006
Allowance for loan losses, beginning of period		$	1,818,224			$	1,102,753			$	709,444			$	471,030			$	419,599
Allowance acquired in acquisitions			—				—				—				—				97,824
Allowance established in connection with reconsolidation of previously unconsolidated securitized assets			5,991				—				—				—				—
Acquired allowance for loan losses due to SCUSA contribution from Santander			—				347,302				—				—				—
Provision for loan losses (2)			1,585,545				1,790,559				874,140				394,646				487,418
Allowance released in connection with loan sales or securitizations			—				—				(3,745	)			(12,409	)			(4,728	)
Charge-offs:
Commercial			650,888				518,468				238,470				65,670				56,916
Consumer			861,269				1,232,070				353,244				153,194				537,860
Total charge-offs (1)			1,512,157				1,750,538				591,714				218,864				594,776
Recoveries:
Commercial			54,768				11,288				13,378				15,187				14,097
Consumer			245,079				316,860				101,250				59,854				51,596
Total recoveries			299,847				328,148				114,628				75,041				65,693
Charge-offs, net of recoveries			1,212,310				1,422,390				477,086				143,823				529,083
Allowance for loan losses, end of period		$	2,197,450			$	1,818,224			$	1,102,753			$	709,444			$	471,030
Reserve for unfunded lending commitments, beginning of period			259,140				65,162				28,302				15,256				18,212
Provision for unfunded lending commitments (2)			41,481				193,978				36,860				13,046				(2,957	)
Reserve for unfunded lending commitments, end of period (3)			300,621				259,140				65,162				28,302				15,255
Total allowance for credit losses		$	2,498,071			$	2,077,364			$	1,167,915			$	737,746			$	486,285
Net charge-offs to average loans (1)			2.01	%			2.40	%			0.83	%			0.25	%			0.96	%

See Note 1 for SHUSA’s charge-off policy with respect to its various loan types. See Note 7 for further breakout.

Non-interest Income/(Loss). Total non-interest income was $1.0 billion for 2010 compared to $342.3 million for 2009. Several factors contributed to this change as discussed below.

Consumer banking fees were $531.3 million for 2010 compared to $369.8 million in 2009. This increase was primarily due to an increase of $183.7 million in consumer loan fees principally due to higher servicing fees at SCUSA from acquisition volume. Commercial banking fees were $180.3 million for 2010 compared to $187.3 million in 2009.

Mortgage banking results consist of fees associated with servicing loans not held by SHUSA, as well as amortization and changes in the fair value of mortgage servicing rights. Mortgage banking results also include gains or losses on the sales of mortgage, home equity loans and lines of credit and multi-family loans and mortgage-backed securities that were related to loans originated or purchased and held by SHUSA, as well as gains or losses on mortgage banking derivative and hedging transactions. Mortgage banking revenues had a net gain of $48.0 million for 2010 compared to a net loss of $129.5 million for 2009. The 2009 net loss was driven by an increase in recourse reserves on multi-family loans that were sold to Fannie Mae. The increase in the recourse reserves in 2009 were related to deterioration particularly in multi-family loans sold to Fannie Mae that were originated outside of our geographic footprint.

The table below summarizes the components of net mortgage banking revenues (in thousands):

		Twelve-months ended December 31,
		2010				2009
Recoveries of/(Impairments to) mortgage servicing rights		$	24,564			$	(3,274	)
Recoveries/(impairments) to multi-family servicing rights			100				596
Residential mortgage and multi-family servicing fees			54,355				53,943
Amortization of residential mortgage and multi-family servicing rights			(57,350	)			(64,897	)
Net gains/losses on hedging activities			619				(3,863	)
Gain on sales of mortgages			35,909				71,120
Gain/loss on sales of multi-family loans			(10,242	)			(183,129	)
Total		$	47,955			$	(129,504	)

SHUSA previously sold multi-family loans in the secondary market to Fannie Mae while retaining servicing. In September 2009, the Bank elected to stop selling multi-family loans to Fannie Mae and since that time has retained all production for the loan portfolio. During 2009, SHUSA sold $566.0 million of multi-family loans and recorded gains of $5.8 million. These gains were reduced by increases to recourse reserve levels of $188.9 million in 2009. In 2009, SHUSA sold $5.7 billion of mortgage loans and recorded gains of $71.1 million. The increase in mortgage sales and related gains was due to the low interest rate environment which led to higher mortgage refinancings and improved execution of sales to Fannie Mae and Freddie Mac.

Under the terms of the multi-family sales program with Fannie Mae, we retain a portion of the credit risk associated with such loans. As a result of this agreement with Fannie Mae, SHUSA retains a 100% first loss position on each multi-family loan sold to Fannie Mae under such program until the earlier to occur of (i) the aggregate approved losses on the multi-family loans sold to Fannie Mae reaching the maximum loss exposure for the portfolio as a whole ($217.9 million as of December 31, 2010) or (ii) until all of the loans sold to Fannie Mae under this program are fully paid off.

At December 31, 2010 and December 31, 2009, SHUSA serviced $11.2 billion and $12.3 billion, respectively, of loans for Fannie Mae that had been sold to Fannie Mae pursuant to this program with a maximum potential loss exposure of $217.9 million and $245.7 million, respectively. As a result of retaining servicing, the Company had net loan servicing assets of $3.7 thousand at December 31, 2010. SHUSA recorded servicing asset amortization of $9.4 million and $9.0 million related to the multi-family loans sold to Fannie Mae for 2010 and 2009, respectively, and recognized servicing assets of $3.0 million during 2009.

The Company has established a liability related to the fair value of the retained credit exposure for loans sold to Fannie Mae. This liability represents the amount that the Company estimates that it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses that the portfolio is projected to incur based upon internal specific information an industry-based default curve with a range of estimated losses. At December 31, 2010 and December 31, 2009, SHUSA had a $171.7 million and $184.2 million liability related to the fair value of the retained credit exposure for loans sold to Fannie Mae under this sales program.

Representatives of federal and state government regulators and agencies have announced investigations into procedures followed by mortgage servicing companies and banks in connection with mortgage foreclosures practices. Sovereign Bank (the “Bank”) currently services approximately 155,000 residential mortgage loans and currently has approximately 3,000 residential mortgage loans in the process of foreclosure. The Bank has cooperated in an examination by the Office of Thrift Supervision (“OTS”), its primary federal banking regulator, as part of an interagency horizontal review of foreclosure practices at 14 mortgage servicers. Based on the results of this review, the Bank has implemented corrective action to address deficiencies in its mortgage servicing practices. In addition, the Bank is engaged in discussions with the OTS regarding possible further supervisory action which would require additional measures to address areas that the regulators have identified as needing improvement. While the impact of any supervisory action depends on its final terms, we expect that such action will require significant managerial resources, and additional expenses. In addition, we may also be subject to civil money penalties. We are unable to determine the amount of such penalties or the likelihood of any further action that might be taken by regulators or agencies.

The average number of mortgage and home equity foreclosures initiated monthly for loans serviced by Sovereign Bank and third parties in 2010 is slightly less than 300, of approximately 300,000 total mortgage and home equity loans serviced by Sovereign Bank and third parties as of December 31, 2010.

At December 31, 2010, SHUSA serviced approximately $14.7 billion of residential mortgage loans for others, and the fair value of our net mortgage servicing asset was $148.7 million. This compares to $14.8 billion of residential mortgage loans serviced for others with a fair value residential mortgage servicing asset of $127.9 million at December 31, 2009. The most important assumptions in the valuation of mortgage servicing rights are anticipated loan prepayment rates (CPR speed) and the positive spread we receive on holding escrow related balances. Increases in prepayment speeds (which are generally driven by lower long term interest rates) result in lower valuations of mortgage servicing rights, while lower prepayment speeds result in higher valuations. The escrow related credit spread is the estimated reinvestment yield earned on the serviced loan escrow deposits. Increases in escrow related credit spreads result in higher valuations of mortgage servicing rights while lower spreads result in lower valuations. For each of these items, SHUSA must make assumptions based on future expectations. All of the assumptions are based on standards that we believe would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources. Additionally, an independent appraisal of the fair value of our mortgage servicing rights is obtained annually and is used by management to evaluate the reasonableness of our discounted cash flow model. For 2010, SHUSA recorded mortgage servicing right recoveries of $24.6 million due to a decrease in prepayment speed assumptions and changes in interest rates compared to impairment charges of $3.3 million in 2009.

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

		December 31, 2010				December 31, 2009				December 31, 2008
CPR speed			16.82	%			24.44	%			29.65	%
Escrow credit spread			2.41	%			3.17	%			4.35	%

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

SHUSA had capital markets revenues of $8.0 million for 2010 compared to losses of $1.8 million in 2009. In 2009, we recorded charges of $19.3 million within capital markets revenue to increase reserves for uncollectible swap receivables from customers due to deterioration in the credit worthiness of these companies.

Income related to bank owned life insurance decreased to $54.1 million for 2010 compared to $58.8 million in 2009. This $4.7 million, or 8.0% decrease, was due to decreased death benefits in 2010.

Net gains/(losses) on investment securities and sale of VISA shares were $200.6 million for 2010, compared to $(157.8) million for 2009. The year ended December 31, 2010 included other-than-temporary impairment charges of $4.8 million on certain non-agency mortgage backed securities. The year ended December 31, 2009 results included other-than-temporary impairment charges of $180.2 million on non-agency mortgage backed securities and FNMA/FHLMC preferred stock as well as a gain of $20.3 million on the sale of our entire FNMA/FHLMC preferred stock portfolio.

General and Administrative Expenses. Total general and administrative expenses were $1.6 billion and $1.5 billion for 2010 and for 2009, respectively, or an increase of 3.5%. The increase in 2010 is primarily related to increased loan expense which was related to additional servicing fees from SCUSA acquisition activity.

Other Expenses. Total other expenses were $209.0 million for 2010 compared to $603.7 million for 2009. Other expenses included amortization expense of core deposit intangibles of $63.4 million for 2010 compared to $75.7 million for 2009. This decrease is due to decreased core deposit intangible amortization expense on previous acquisitions. In 2009, SHUSA recorded merger-related and restructuring charges of $299.1 million for costs associated with the Santander acquisition. The majority of these costs related to change in control payments to certain executives and severance charges of $152.2 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 and incurred branch consolidation charges of $32.2 million, write-offs of fixed assets and information technology platforms of $28.5 million. Finally, during the first quarter of 2009, SHUSA redeemed $1.4 billion of high cost FHLB advances incurring a debt extinguishment charge of $68.7 million. This decision was made to reduce interest expense in future periods since the advances were at above market interest rates due to the current low rate environment.

Deposit insurance expense and other costs decreased to $93.2 million in 2010 from $138.7 million in 2009, principally due to the special assessment in 2009 described below. The FDIC charges financial institutions deposit premium assessments to ensure it has reserves to cover deposits that are under FDIC insured limits. 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 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, effective in the first quarter of 2009. In 2009, the FDIC announced additional fees would be assessed to institutions who have secured borrowings in excess of 15% of their deposits. The FDIC approved a special assessment charge of 5 cents per $100 of an institution’s assets minus its Tier 1 capital at 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 three-month period ended June 30, 2009.

Income Tax Expense/(Benefit). SHUSA recorded a benefit of $40.4 million for 2010 compared to a benefit of $1.3 billion for 2009. The effective tax rate for 2010 was (4.0)% compared to (114.3)% for 2009. During the three years ended December 31, 2008, we had cumulative pretax losses and considered this factor in our analysis of deferred taxes. Additionally, based on the continued economic uncertainty that existed at the end of 2008, it was determined that it was probable that the Company would not generate significant pretax income in the near term on a standalone basis. As a result of these facts, SHUSA recorded a $1.4 billion valuation allowance in 2008 against its deferred tax assets. During 2009, Santander contributed the operation of SCUSA into SHUSA. As a result of this contribution, SHUSA updated its deferred tax realizability analysis in 2009 by incorporating future projections of taxable income that would be generated by SCUSA and reduced its deferred tax valuation allowance by $1.3 billion for the year ended December 31, 2009. Due to the profitability of SHUSA in 2010 and expected future growth in profits of SHUSA by the end of 2010, SHUSA considered the projected taxable income of SHUSA and all subsidiaries in its 2010 realizability analysis. As a result, the company reduced its deferred tax valuation allowance by $309.0 million for the year ended December 31, 2010. SHUSA continues to maintain a valuation allowance of $99.3 million related to deferred tax assets subject to carry forward periods where management has determined it is more likely than not these deferred tax assets will remain unused after the carry forward periods have expired. The future realizability of our deferred taxes will be dependent on the earnings generated by SHUSA and its subsidiaries, primarily SCUSA and Sovereign Bank. The actual earnings generated by these entities in the future could negatively impact the realizability of our deferred tax assets in future periods. See Note 17 for a reconciliation of our effective tax rate to the statutory federal rate of 35%.

The Company 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, the Company must make judgments and interpretations about the application of these inherently complex tax laws.

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

For segment reporting purposes, SCUSA continues to be managed as a separate business unit with its own systems and processes. With the exception of this segment, SHUSA’s segment results are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense to each of our segments. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept. The provision for credit losses recorded by each segment is based on the net charge-offs of each line of business and changes in specific reserve levels for loans in the segment and the difference between the provision for credit losses recognized by the Company on a consolidated basis and the provision recorded by the business line recorded in the Other category. Other income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct expenses as well as certain allocated corporate expenses are accounted for within each segment’s financial results. Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Where practical, the results are adjusted to present consistent methodologies for the segments. For example, during the first quarter of 2010, the Company reviewed its methodologies for allocating shared services and provision expenses. As a result of this review, certain of these methodologies were revised affecting all segments excluding SCUSA.

The Retail Banking segment’s net interest income increased $72.1 million to $681.1 million in 2010, primarily due to lower structural funding costs and pricing discipline in loans and customer deposits. The net spread on a match funded basis for this segment was 1.20% in 2010 compared to 1.03% in 2009. The average balance of Retail Banking segment’s loans was $21.5 billion and $22.0 billion during 2010 and 2009, respectively. The average balance of deposits was $34.8 billion in 2010 compared to $38.2 billion in 2009. The provision for credit losses increased in 2010 to $243.8 million from $194.7 million in 2009, as early 2010 charge-off levels continued to increase from 2009 levels before signs of stabilization later in 2010. Provisions have been at elevated levels since the third quarter of 2008 and will continue to be impacted by weak economic conditions and high levels of unemployment. General and administrative expenses (including allocated corporate and direct support costs) decreased from $988.2 million for 2009 to $920.4 million for 2010. The decrease in general and administrative expenses is due to tighter cost controls and a lower headcount within our retail banking segment.

The Specialized Business segment net interest income decreased $43.9 million to $267.2 million in 2010. The net spread on a match funded basis for this segment was 1.81% in 2010 compared to 1.80% in 2009. The average balance of loans was $14.5 billion and $17.0 billion during 2010 and 2009, respectively. The average balance of deposits was $172.2 million in 2010 compared to $322.0 million in 2009. The increase in fees and other income of $166.8 million to $31.0 million for 2010 was primarily generated by a $188.9 million charge in 2009 to increase our recourse reserves associated with the sales of multi-family loans to Fannie Mae. The provision for credit losses decreased $275.5 million in 2010 to $312.6 million due primarily to a lower level of specific reserves. In 2009 credit losses in this segment were much higher than anticipated due primarily to auto loans that were originated by our Southeast and Southwest production offices. General and administrative expenses (including allocated corporate and direct support costs) decreased from $108.4 million for 2009 to $101.6 million for 2010.

The Corporate segment net interest income increased $20.2 million to $339.8 million for 2010 compared to 2009. The average balance of loans was $11.8 billion in 2010 versus $13.3 billion during 2009. The net spread on a match funded basis for this segment was 1.95% in 2010 compared to 1.77% in 2009. The provision for credit losses decreased by $150.6 million in 2010 to $153.1 million due to a decrease in specific reserve allocations on certain segments within our commercial loan portfolio. The 2009 provisions included an increase in specific reserve levels due to conforming to Santander’s reserve allocation methodology. General and administrative expenses (including allocated corporate and direct support costs) decreased from $135.5 million for 2009 to $131.8 million in 2010 due to tighter expense management controls and lower headcount levels due to staff reductions.

The Global Banking segment net interest income increased $19.7 million to $26.4 million for 2010 compared to 2009 due to an increase in our commercial loan portfolio. The average balance of loans was $1.1 billion in 2010 versus $320.3 million during 2009. The net spread on a match funded basis for this segment was 1.90% in 2010 compared to 1.63% in 2009. General and administrative expenses (including allocated corporate and direct support costs) increased from $5.8 million for 2009 to $6.7 million in 2010.

The SCUSA segment net interest income increased $478.1 million to $1.8 billion in 2010 compared to 2009 due to increased earnings resulting from 2010 acquisitions. The average balance of loans was $11.2 billion in 2010 versus $6.6 billion in 2009. Average borrowings in 2010 were $10.7 billion with an average cost of 2.97% compared to $6.1 billion with an average cost of 3.84% in 2009. The increase in fees and other income of $193.7 million to $245.6 million for 2010 was primarily due to higher servicing fees at SCUSA from acquisition volume. The provision for credit losses increased in 2010 to $888.2 million from $720.9 million in 2009. General and administrative expenses increased from $253.0 million in 2009 to $391.8 million in 2010. SCUSA continues to remain profitable due to strong pricing on its loan portfolio, favorable financing costs and adequate sources of liquidity which in part is attributable to its relationship with Santander. Additionally, SCUSA’s successful servicing and collection practices have enabled them to maximize cash collections on their portfolio and generate servicing fee income. Future profitability levels will depend on controlling credit losses and continuing to be able to effectively price its portfolio. SCUSA’s business has also been favorably impacted by the fact that certain competitors have exited the subprime auto market.

The net loss before income taxes for the Other category decreased from $573.6 million in 2009 to income of $429.3 million in 2010. Net interest income increased from $119.7 million in 2009 to $328.8 million for 2010. The 2009 results included charges of $36.9 million and $143.3 million related to the OTTI charges on FNMA and FHLMC preferred stock and the non-agency mortgage backed securities portfolio, respectively. Additionally, 2009 results included charges of $299.1 million related to certain restructuring and merger charges. Finally, the Other category included deferred tax valuation allowance reversals of $309.0 million in 2010 and $1.3 billion in 2009.

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			342,297				(818,743	)
General and administrative expenses			1,520,460				1,484,306
Other expenses			603,703				302,027
Net (loss)/income		$	161,565			$	(2,357,210	)

The major factors affecting comparison of earnings and diluted earnings per share between 2009 and 2008 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 6 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 33% 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.

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.

Non-interest Income/(Loss). Total non-interest income/(loss) was $342.3 million for 2009 compared to $(818.7) million for 2008. Several factors contributed to this change as discussed below.

Consumer banking fees were $369.8 million for 2009 compared to $312.6 million in 2008. This increase was primarily due to an increase of $26.6 million in deposit fees as we were able to implement certain pricing changes. Additionally, consumer loan fees increased $29.8 million due to the inclusion of SCUSA. Commercial banking fees were $187.3 million for 2009 compared to $213.9 million in 2008. The Company has experienced a decline of $22.0 million on precious metal fees due to our decision to deemphasize this business to focus on relationships within our core markets. The remaining decline is due to a reduction in the size of Sovereign Bank’s commercial loan portfolio due to current economic conditions.

Mortgage banking results consist of fees associated with servicing loans not held by SHUSA, as well as amortization and changes in the fair value of mortgage servicing rights. Mortgage banking results also include gains or losses on the sales of mortgage, home equity loans and lines of credit and multi-family loans and mortgage-backed securities that were related to loans originated or purchased and held by SHUSA, as well as gains or losses on mortgage banking derivative and hedging transactions. Mortgage banking revenues had a net loss of $129.5 million for 2009 compared to a net loss of $13.2 million for 2008. The 2009 net loss was driven by an increase in recourse reserves on multi-family loans that were sold to Fannie Mae. The increase in the recourse reserves in 2009 were related to deterioration particularly in multi-family loans sold to Fannie Mae that were originated outside of our geographic footprint.

The table below summarizes the components of net mortgage banking revenues (in thousands):

		Twelve-months ended December 31,
		2009				2008
Impairments to mortgage servicing rights		$	(3,274	)		$	(47,342	)
Recoveries/(Impairments to) multi-family servicing rights			596				(5,916	)
Residential mortgage and multi-family servicing fees			53,943				50,002
Amortization of residential mortgage and multi-family servicing rights			(64,897	)			(36,259	)
Net gains on hedging activities			(3,863	)			6,205
Gain on sales of mortgages			71,120				18,985
Gain on sales of multi-family loans			(183,129	)			1,099
Total		$	(129,504	)		$	(13,226	)

During 2009, SHUSA sold $566.0 million of multi-family loans and recorded gains of $5.8 million in connection with the sales compared to $2.6 billion of multi-family loans and related gains of $20.8 million in 2008. These gains were reduced by increases to recourse reserve levels of $188.9 million in 2009 and $19.7 million in 2008. In 2009 and 2008, SHUSA sold $5.7 billion and $3.2 billion of mortgage loans and recorded gains of $71.1 million and $19.0 million, respectively. The increase in mortgage sales and related gains was due to the low interest rate environment which led to higher mortgage refinancings and improved execution of sales to Fannie Mae and Freddie Mac.

At December 31, 2009, SHUSA serviced approximately $14.8 billion of residential mortgage loans for others and our net mortgage servicing asset was $127.6 million, compared to $13.1 billion of loans serviced for others and a net residential mortgage servicing asset of $112.5 million, at December 31, 2008. The most important assumptions in the valuation of mortgage servicing rights are anticipated loan prepayment rates (CPR speed) and the positive spread we receive on holding escrow related balances. Increases in prepayment speeds (which are generally driven by lower long term interest rates) result in lower valuations of mortgage servicing rights, while lower prepayment speeds result in higher valuations. The escrow related credit spread is the estimated reinvestment yield earned on the serviced loan escrow deposits. Increases in escrow related credit spreads result in higher valuations of mortgage servicing rights while lower spreads result in lower valuations. For each of these items, SHUSA must make assumptions based on future expectations. All of the assumptions are based on standards that we believe would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources. Additionally, an independent appraisal of the fair value of our mortgage servicing rights is obtained annually and is used by management to evaluate the reasonableness of our discounted cash flow model. For 2009, SHUSA recorded mortgage servicing right impairment charges of $3.3 million due to an increase in prepayment speed assumptions and changes in interest rates compared to impairment charges of $47.3 million in 2008.

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

		December 31, 2009				December 31, 2008				December 31, 2007
CPR speed			24.44	%			29.65	%			14.70	%
Escrow credit spread			3.17	%			4.35	%			5.12	%

At December 31, 2009 and December 31, 2008, SHUSA serviced $12.3 billion and $13.0 billion, respectively, of loans for Fannie Mae that had been sold to Fannie Mae pursuant to this program with a maximum potential loss exposure of $245.7 million and $249.8 million, respectively. As a result of retaining servicing, the Company had loan servicing assets of $9.3 million and $14.7 million at December 31, 2009 and 2008, respectively. SHUSA recorded servicing asset amortization of $9.0 million and $7.7 million related to the multi-family loans sold to Fannie Mae for 2009 and 2008, respectively, and recognized servicing assets of $3.0 million and $5.7 million, respectively.

SHUSA had capital markets losses of $1.8 million for 2009 compared to revenues of $23.8 million in 2008. In 2009, we recorded charges of $19.3 million within capital markets revenue to increase reserves for uncollectible swap receivables from customers due to deterioration in the credit worthiness of these companies. The remaining decrease from 2009 is due to reduced sales of certain products to our commercial loan customer due to decreased demand given current economic conditions.

Income related to bank owned life insurance decreased to $58.8 million for 2009 compared to $76.0 million in 2008. This $17.2 million, or 22.6% decrease, was due to decreased death benefits in 2009 as well as lower interest rates received on certain insurance policies.

Net losses on investment securities were $157.8 million for 2009, compared to $1.5 billion for 2008. Included in 2009 were impairment charges of $143.3 million on certain non-agency mortgage backed securities due to increased credit loss assumptions throughout 2009 due to continued deteriorating economic conditions, including higher levels of impairment. Included in 2008 was an OTTI charge of $575.3 million on FNMA and FHLMC preferred stock, an OTTI charge of $307.9 million on certain non-agency mortgage backed securities and a $602.3 million loss on the sale of our CDO portfolio.

General and Administrative Expenses. Total general and administrative expenses were $1.5 billion for 2009 and for 2008, or an increase of 2.4%. The increase in 2009 is primarily related to $253.0 million of expenses attributable to the SCUSA contribution. Excluding SCUSA, general and administrative expense declined $216.9 million or 14.6% from 2008. These declines were due to cost management efforts implemented in 2009. At December 31, 2009, Sovereign Bank had total employees (excluding SCUSA) of 8,875 compared to 11,634 in 2008, a 23.7% decrease.

Other Expenses. Total other expenses were $603.7 million for 2009 compared to $302.0 million for 2008. Other expenses included amortization expense of core deposit intangibles of $75.7 million for 2009 compared to $103.6 million for 2008. This decrease is due to decreased core deposit intangible amortization expense on previous acquisitions. In 2009, SHUSA recorded merger-related and restructuring charges of $299.1 million for costs associated with the Santander acquisition. The majority of these costs related to change in control payments to certain executives and severance charges of $152.2 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 and incurred branch consolidation charges of $32.2 million, write-offs of fixed assets and information technology platforms of $28.5 million. Finally, during the first quarter of 2009, SHUSA redeemed $1.4 billion of high cost FHLB advances incurring a debt extinguishment charge of $68.7 million. This decision was made to reduce interest expense in future periods since the advances were at above market interest rates due to the current low rate environment. In 2008, the Company recorded legal and investment advisory fees of $12.8 million related to Santander’s acquisition of SHUSA.

Deposit insurance expense increased to $137.4 million in 2009. The FDIC charges financial institutions deposit premium assessments to ensure it has reserves to cover deposits that are under FDIC insured limits. 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 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, effective in the first quarter of 2009. The FDIC also has announced that in the second quarter of 2009, additional fees will be assessed to institutions who have secured borrowings in excess of 15% of their deposits. 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 three-month period ended June 30, 2009. As a result of these two events, deposit insurance expense increased to $137.4 million for the twelve-month period ended December 31, 2009 compared to $37.5 million for the corresponding periods in the prior year.

Other expense in 2008 includes a $95.0 million charge related to an equity interest in a mortgage loan broker as it was determined that this investment’s fair value was significantly below its cost.

Income Tax Expense/(Benefit). SHUSA recorded a benefit of $1.3 billion for 2009 compared to a provision of $723.6 million for 2008. The effective tax rate for 2009 was (114.3%) compared to 44.3% for 2008. During the three years ended December 31, 2008, we had cumulative pretax losses and considered this factor in our analysis of deferred taxes. Additionally, based on the continued economic uncertainty that existed at the end of 2008, it was determined that it was probable that the Company would not generate significant pretax income in the near term on a standalone basis. As a result of these facts, SHUSA recorded a $1.4 billion valuation allowance against its deferred tax assets. In 2009, Santander contributed the operation of SCUSA into SHUSA. SCUSA generated pre-tax income of $332.2 million for the year ended December 31, 2009. As a result of this contribution, SHUSA updated its deferred tax realizability analysis by incorporating the future projections of SCUSA taxable income. As a result of incorporating future taxable income projections of SCUSA, the Company reduced its deferred tax valuation allowance by $1.3 billion during 2009. At December 31, 2009, SHUSA maintained a valuation allowance of $408.3 million related to deferred tax assets. See Note 17 for a reconciliation of our effective tax rate to the statutory federal rate of 35%.

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

For segment reporting purposes, SCUSA continues to be managed as a separate business unit with its own systems and processes. With the exception of this segment, SHUSA’s segment results are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense to each of our segments. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept. The provision for credit losses recorded by each segment is based on the net charge-offs of each line of business and changes in specific reserve levels for loans in the segment and the difference between the provision for credit losses recognized by the Company on a consolidated basis and the provision recorded by the business line recorded in the Other category. Other income and expenses directly managed by each business line, including fees, service charges, salaries and benefits, and other direct expenses as well as certain allocated corporate expenses are accounted for within each segment’s financial results. Accounting policies for the lines of business are the same as those used in preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Where practical, the results are adjusted to present consistent methodologies for the segments. For example, during the first quarter 2010, the Company reviewed its methodologies for allocating shared services and provision expenses. As a result of this review, certain of these methodologies were revised affecting all segments excluding SCUSA.

The Retail Banking segment’s net interest income decreased $204.3 million to $609.0 million in 2009. The decrease in net interest income was principally due to margin compression on a matched funded basis due to the recent Federal Reserve interest rate cuts which have reduced the spreads that our Retail Banking segment receives on their deposits. The net spread on a match funded basis for this segment was 1.03% in 2009 compared to 1.40% in 2008. The average balance of Retail Banking segment’s loans was $22.0 billion and $23.2 billion during 2009 and 2008, respectively. The average balance of deposits was $38.2 billion in 2009 compared to $36.8 billion in 2008. In addition to the Federal Reserve rate cuts which negatively impacted deposit spreads, Sovereign Bank originated a high level of promotional money market and time deposit balances in late September and early October of 2008 prior to being acquired by Santander. These deposits helped stabilize our liquidity levels but were at above market rate costs and as a result have hurt the Retail Banking segments deposit spreads. We intend to reprice these deposits to market based terms when the promotional periods expire and we expect that deposit spreads in future periods will improve. The provision for credit losses decreased in 2009 to $194.7 million from $203.1 million in 2008. General and administrative expenses (including allocated corporate and direct support costs) decreased from $1.1 billion for 2008 to $988.2 million for 2009. The decrease in general and administrative expenses is due to tighter cost controls and a lower headcount within our retail banking segment.

The Specialized Business segment net interest income decreased $36.4 million to $311.2 million in 2009. The net spread on a match funded basis for this segment was 1.80% in 2009 compared to 1.88% in 2008. The average balance of loans was $17.0 billion and $20.6 billion during 2009 and 2008, respectively. The average balance of deposits was $322.0 million in 2009 compared to $435.9 million in 2008. The decrease in fees and other income of $228.6 million to $(135.8) million for 2009 was primarily generated by a $188.9 million charge to increase our recourse reserves associated with the sales of multi-family loans to Fannie Mae. The provision for credit losses increased in 2009 to $588.1 million from $456.1 million in 2008 due primarily to a higher level of allowances on our multi-family loan portfolio. Credit losses in this segment were much higher than anticipated due primarily to auto loans that were originated by our Southeast and Southwest production offices. General and administrative expenses (including allocated corporate and direct support costs) decreased from $125.6 million for 2008 to $108.4 million for 2009.

The Corporate segment net interest income decreased $87.5 million to $319.6 million for 2009 compared to 2008 due to a decrease in our commercial loan portfolios from reduced demand for these loan products due to the current economic environment. The average balance of loans was $13.3 billion in 2009 versus $13.8 billion during 2008. The net spread on a match funded basis for this segment was 1.77% in 2009 compared to 2.07% in 2008. The provision for credit losses increased by $45.5 million in 2009 to $303.7 million due to higher reserve allocations on certain segments within our commercial loan portfolio, particularly those related to the residential real estate industry. Provision levels have been at elevated levels since the third quarter of 2008 due to the weak economic environment. Future provision levels will continue to be significantly impacted by economic conditions. General and administrative expenses (including allocated corporate and direct support costs) decreased from $176.2 million for 2008 to $135.5 million in 2009 due to tighter expense management controls and lower headcount levels due to staff reductions.

The Global Banking segment net interest income was $6.7 million in 2009. The average balance of loans was $320.3 million in 2009. The net spread on a match funded basis for this segment was 1.63% in 2009. General and administrative expenses (including allocated corporate and direct support costs) were $5.8 million in 2009.

The SCUSA segment net interest income was $1.3 billion in 2009. The average balance of loans was $6.6 billion in 2009. Average borrowings were $6.1 billion with an average cost of 3.84% in 2009. Fees and other income were $51.9 million in 2009. The provision for credit losses was $720.9 million in 2009. General and administrative expenses were $253.0 million in 2009. SCUSA continues to remain profitable due to aggressive pricing on its loan portfolio, favorable financing costs and adequate sources of liquidity which in part is attributable to its relationship with Santander. Additionally, SCUSA’s successful servicing and collection practices have enabled them to maximize cash collections on their portfolio and generate servicing fee income. Future profitability levels will depend on controlling credit losses and continuing to be able to effectively price its portfolio. SCUSA’s business has also been favorably impacted by the fact that certain competitors have exited the subprime auto market.

The net loss before income taxes for the Other category decreased from $1.2 billion in 2008 to $573.6 million in 2009. Net interest income decreased from $315.5 million in 2008 to $119.7 million for 2009. The 2009 results included charges of $36.9 million and $143.3 million related to the OTTI charges on FNMA and FHLMC preferred stock and the non-agency mortgage backed securities portfolio, respectively. Additionally, 2009 results included charges of $299.1 million related to certain restructuring and merger charges. The 2008 loss resulted from the previously discussed $602.3 million loss on the sale of our CDO portfolio, $307.9 million OTTI charge on non-agency mortgage backed securities and $575.3 million OTTI charge on FNMA and FHLMC preferred stock. The 2008 results included charges associated with executive and other employee severance arrangements and certain other restructuring activities of $23.4 million. Finally, the Other category included a deferred tax asset valuation allowance of $1.4 billion and a $95.0 million impairment charge related to our equity method investments in 2008 whereas 2009 results include a deferred tax valuation reversal of $1.3 billion.

Critical Accounting Policies

MD&A is based on the consolidated financial statements and accompanying notes that have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Our significant accounting policies are described in Note 1 to the consolidated financial statements. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments, and, as such, have a greater possibility of producing results that could be materially different than originally reported. However, the Company is not currently aware of any reasonably likely events or circumstances that would result in materially different results. We have identified accounting for the allowance for loan losses and reserve for unfunded lending commitments, goodwill, derivatives and hedging activities and income taxes as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain.